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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number 2-89516
HARTFORD LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 06-0974148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 HOPMEADOW STREET, SIMSBURY, CONNECTICUT 06089
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
As of October 31, 2003 there were outstanding 1,000 shares of Common Stock,
$5,690 par value per share, of the registrant.
The registrant meets the conditions set forth in General Instruction H (1) (a)
and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
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INDEX
PAGE
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Independent Accountants' Review Report 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income - Third Quarter and Nine Months
Ended September 30, 2003 and 2002 4
Condensed Consolidated Balance Sheets - September 30, 2003
and December 31, 2002 5
Condensed Consolidated Statements of Changes in
Stockholder's Equity - Nine Months Ended September 30, 2003 and 2002 6
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 2003 and 2002 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 31
ITEM 4. CONTROLS AND PROCEDURES 31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 32
Signature 33
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholder
Hartford Life Insurance Company
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of
Hartford Life Insurance Company and subsidiaries (the "Company") as of September
30, 2003, and the related condensed consolidated statements of income for the
third quarters and nine-month periods ended September 30, 2003 and 2002, and
changes in stockholder's equity, and cash flows for the nine-month periods ended
September 30, 2003 and 2002. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2002, and the related consolidated statements of
income, changes in stockholder's equity, and cash flows for the year then ended
(not presented herein); and in our report dated February 19, 2003, which
includes an explanatory paragraph relating to the Company's change in its method
of accounting for goodwill and indefinite-lived intangible assets in 2002, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2002 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
November 3, 2003
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THIRD QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions) (Unaudited) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
REVENUES
Fee income $ 556 $509 $1,572 $1,576
Earned premiums and other 448 139 763 443
Net investment income 453 396 1,336 1,156
Net realized capital gains (losses) (8) (92) (18) (230)
- --------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,449 952 3,653 2,945
--------------------------------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits and claims 895 572 2,110 1,697
Insurance expenses and other 145 156 460 490
Amortization of deferred policy acquisition costs and
present value of future profits 173 138 461 415
Dividends to policyholders 16 7 56 29
- --------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,229 873 3,087 2,631
-------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 220 79 566 314
Income tax expense (benefit) 53 (67) 110 (21)
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 167 $146 $ 456 $ 335
-------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(In millions, except for share data) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of
$28,658 and $23,675) $ 30,314 $ 24,786
Equity securities, available for sale, at fair value (cost of $73 and $137) 77 120
Policy loans, at outstanding balance 2,492 2,895
Other investments 677 918
- -------------------------------------------------------------------------------------------------------------------------
Total investments 33,560 28,719
Cash 86 79
Premiums receivable and agents' balances 20 15
Reinsurance recoverables 1,402 1,477
Deferred policy acquisition costs and present value of future profits 5,849 5,479
Deferred income taxes (471) (243)
Goodwill 186 186
Other assets 830 1,073
Separate account assets 120,246 105,316
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 161,708 $ 142,101
=================================================================================================================
LIABILITIES
Reserve for future policy benefits $ 6,427 $ 5,724
Other policyholder funds 25,282 23,037
Other liabilities 3,180 2,207
Separate account liabilities 120,246 105,316
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 155,135 136,284
=================================================================================================================
STOCKHOLDER'S EQUITY
Common Stock - 1,000 shares authorized, issued and outstanding;
par value $5,690 6 6
Capital surplus 2,240 2,041
Accumulated other comprehensive income
Net unrealized capital gains on securities, net of tax 775 574
Foreign currency translation adjustments (1) (1)
Total accumulated other comprehensive income 774 573
Retained earnings 3,553 3,197
- -------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 6,573 5,817
=================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 161,708 $ 142,101
============================================================================================================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003
ACCUMULATED OTHER
COMPREHENSIVE INCOME
-------------------------------------------
NET UNREALIZED NET GAINS ON
CAPITAL CASH FLOW FOREIGN
GAINS ON HEDGING CURRENCY TOTAL
COMMON CAPITAL SECURITIES, NET INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS OF TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 6 $ 2,041 $ 463 $ 111 $ (1) $ 3,197 $ 5,817
Comprehensive income
Net income 456 456
--------
Other comprehensive income, net of
tax (1)
Unrealized gain on securities (2) 268 268
Net loss on cash flow hedging
Instruments (67) (67)
Cumulative translation adjustments --
--------
Total other comprehensive income 201
--------
Total comprehensive income 657
--------
Capital contribution 199 199
Dividends declared (100) (100)
===========================================================================================================================
BALANCE, SEPTEMBER 30, 2003 $ 6 $ 2,240 $ 731 $ 44 $ (1) $ 3,553 $ 6,573
===========================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2002
ACCUMULATED OTHER
COMPREHENSIVE INCOME
-------------------------------------------
NET UNREALIZED NET GAINS ON
CAPITAL CASH FLOW FOREIGN
GAINS ON HEDGING CURRENCY TOTAL
COMMON CAPITAL SECURITIES, NET INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS OF TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 6 $ 1,806 $ 114 $ 63 $ (2) $ 2,771 $ 4,758
Comprehensive income
Net income 335 335
--------
Other comprehensive income, net of
tax (1)
Unrealized gain on securities (2) 436 436
Net gain on cash flow hedging
Instruments 66 66
Cumulative translation adjustments 2 2
--------
Total other comprehensive income 504
--------
Total comprehensive income 839
===========================================================================================================================
BALANCE, SEPTEMBER 30, 2002 $ 6 $ 1,806 $ 550 $ 129 $ - $ 3,106 $ 5,597
===========================================================================================================================
(1) Unrealized gain on securities is reflected net of tax provision of $144 and
$235 for the nine months ended September 30, 2003 and 2002, respectively.
Net (loss) gain on cash flow hedging instruments is net of tax (benefit)
provision of $(36) and $36 for the nine months ended September 30, 2003 and
2002. There is no tax effect on cumulative translation adjustments.
(2) There were reclassification adjustments for after-tax losses in the amount
of $(3) and $(148) realized in net income for the nine months ended
September 30, 2003 and 2002, respectively.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
(In millions) (Unaudited) 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 456 $ 335
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net realized capital losses 18 230
Amortization of deferred policy acquisition costs and present value of future profits 461 415
Additions to deferred policy acquisition costs and present value of future profits (954) (705)
Depreciation and amortization 92 4
Increase in premiums receivable and agents' balances (5) (6)
Increase (decrease) in other liabilities 185 (124)
Increase in receivables (41) (22)
Decrease in accrued liabilities and payables (42) (30)
(Decrease) increase in accrued tax (66) 134
Increase in deferred income tax 39 36
Increase in future policy benefits 703 393
Increase in reinsurance recoverables (41) (72)
Other, net 80 4
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 885 592
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investments (9,455) (9,257)
Sales of investments 3,609 4,230
Maturities and principal paydowns of fixed maturity investments 2,461 1,487
Other 48 1
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (3,337) (3,539)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Capital Contributions 199 -
Dividends Paid (100) -
Net receipts from investment and universal life-type contracts 2,360 2,949
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,459 2,949
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in cash 7 2
Impact of foreign exchange - 1
- ------------------------------------------------------------------------------------------------------------------------------
Cash - beginning of period 79 87
- ------------------------------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 86 $ 90
==============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID DURING THE PERIOD FOR
Income taxes $ 36 $ 2
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
(unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
These Condensed Consolidated Financial Statements include Hartford Life
Insurance Company and its wholly-owned subsidiaries ("Hartford Life Insurance
Company" or the "Company"), Hartford Life and Annuity Insurance Company
("HLAI"), Hartford International Life Reassurance Corporation ("HLRe") and
Servus Life Insurance Company, formerly Royal Life Insurance Company of America.
The Company is a wholly-owned subsidiary of Hartford Life and Accident Insurance
Company ("HLA"), a wholly-owned subsidiary of Hartford Life, Inc. ("Hartford
Life"). Hartford Life is a direct subsidiary of Hartford Holdings, Inc., a
direct subsidiary of The Hartford Financial Services Group, Inc. ("The
Hartford"), the Company's ultimate parent company. In November 1998, Hartford
Life Insurance Company transferred in the form of a dividend, Hartford Financial
Services, LLC and its subsidiaries to HLA.
Pursuant to an initial public offering (the "IPO") on May 22, 1997, Hartford
Life sold to the public 26 million shares of Class A Common Stock at $28.25 per
share and received proceeds, net of offering expenses, of $687. The 26 million
shares sold in the IPO represented approximately 18.6% of the equity ownership
in Hartford Life. On June 27, 2000, The Hartford acquired all of the outstanding
common shares of Hartford Life not already owned by The Hartford (The Hartford
Acquisition). As a result of The Hartford Acquisition, Hartford Life became a
direct subsidiary of Hartford Fire Insurance Company. During the third quarter
of 2002, Hartford Life became a direct subsidiary of Hartford Holdings, Inc., a
direct wholly owned subsidiary of The Hartford.
Along with its parent, HLA, the Company is a leading financial services and
insurance group which provides (a) investment products, such as individual
variable annuities and fixed market value adjusted annuities and retirement plan
services for savings and retirement needs; (b) individual life insurance for
income protection and estate planning; (c) group benefits products such as group
life and group disability insurance that is directly written by the Company and
is substantially ceded to its parent, HLA, and (d) corporate owned life
insurance.
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements have been prepared on the basis
of accounting principles generally accepted in the United States of America
("GAAP"), which differ materially from the accounting practices prescribed by
various insurance regulatory authorities. Less than majority-owned subsidiaries
in which the Company has at least a 20% interest are reported on the equity
basis. All intercompany transactions and balances between Hartford Life
Insurance Company, its subsidiaries and affiliates have been eliminated.
The accompanying condensed consolidated financial statements as of September 30,
2003, and for the third quarter and nine-month periods ended September 30, 2003
and 2002 are unaudited. These condensed consolidated financial statements
reflect all adjustments (consisting only of normal accruals) which are, in the
opinion of management, necessary for the fair presentation of the financial
position, results of operations, and cash flows for the interim periods. These
financial statements and condensed notes should be read in conjunction with the
consolidated financial statements and notes thereto included in Hartford Life
Insurance Company's 2002 Form 10-K Annual Report. The results of operations for
the interim periods should not be considered indicative of results to be
expected for the full year.
(b) RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial information to
conform to the current period classifications.
(c) USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The most significant estimates include those used in determining reserves,
deferred policy acquisition costs, valuation of investments and derivative
instruments, income taxes and contingencies.
(d) SIGNIFICANT ACCOUNTING POLICIES
For a description of accounting policies, see Note 2 of Notes to Consolidated
Financial Statements included in Hartford Life Insurance Company's 2002 Form
10-K Annual Report.
(e) ADOPTION OF NEW ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity". SFAS No. 150 establishes standards for classifying and
measuring as liabilities certain financial instruments that embody obligations
of the issuer and have characteristics of both liabilities and equity.
Generally, SFAS No. 150 requires liability classification for two broad classes
of financial instruments: (a) instruments that represent, or are indexed to, an
obligation to buy back the issuer's shares regardless whether the instrument is
settled on a net-cash or gross physical basis and (b) obligations that (i) can
be settled in shares but derive their value predominately from another
underlying instrument or index (e.g., security prices, interest rates, and
currency rates), (ii) have a fixed value, or (iii) have a value inversely
related to the issuer's shares. Mandatorily redeemable equity and written
options requiring the issuer to buy back shares are examples of financial
instruments that should be reported as liabilities under this new guidance.
SFAS No. 150 specifies accounting only for certain freestanding financial
instruments and does not affect whether an embedded derivative must be
bifurcated and accounted for in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
SFAS No. 150 is effective for instruments entered into or modified after May 31,
2003 and for all other instruments beginning with the first interim reporting
period beginning after June 15, 2003. Adoption of this statement did not have a
material impact on the Company's consolidated financial condition or results of
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133.
SFAS No. 149 amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group (DIG) process that effectively required amendments to SFAS
No. 133, in connection with other FASB projects dealing with financial
instruments. SFAS No. 149 also clarifies under what circumstances a contract
with an initial net investment and purchases and sales of when-issued securities
that do not yet exist meet the characteristic of a derivative as discussed in
SFAS No. 133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after June
30, 2003. The provisions of this statement should be applied prospectively,
except as stated below.
The provisions of this statement that relate to SFAS No. 133 DIG issues that
have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, the guidance in SFAS No. 149 related to forward purchases or
sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact
on the Company's financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46") which
requires an enterprise to assess whether consolidation of an entity is
appropriate based upon its interests in a variable interest entity ("VIE"). A
VIE is an entity in which the equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. The initial determination of whether an entity is a
VIE shall be made on the date at which an enterprise becomes involved with the
entity. An enterprise shall consolidate a VIE if it has a variable interest that
will absorb a majority of the VIEs expected losses if they occur, receive a
majority of the entity's expected residual returns if they occur or both. FIN 46
is effective immediately for new VIEs established or purchased subsequent to
January 31, 2003. For VIEs established or purchased subsequent to January 31,
2003, the adoption of FIN 46 did not have a material impact on the Company's
consolidated financial condition or results of operations as there were no
material VIEs identified which required consolidation.
For VIEs entered into prior to February 1, 2003, FIN 46 was originally effective
for interim periods beginning after June 15, 2003. In October 2003, the FASB
deferred this effective date until interim or annual periods ending after
December 15, 2003. Early adoption is permitted. The Company has elected to defer
the adoption of FIN 46 for VIEs created before February 1, 2003 until the fourth
quarter of 2003. The adoption of FIN 46 for these VIEs is not expected to have a
material impact on the Company's financial condition or results of operations.
FIN 46 further requires the disclosure of certain information related to VIEs in
which the Company holds a significant variable interest. As of September 30,
2003, the Company did not own any such interests that required disclosure.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45" or "the Interpretation"). FIN 45 requires
certain guarantees to be recorded at fair value and also requires a guarantor to
make new disclosures, even when the likelihood of making payments under the
guarantee is remote. In general, the Interpretation applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying instrument or
indices (e.g., security prices, interest rates, or currency rates) that are
related to an asset, liability or an equity security of the guaranteed party.
The recognition provisions of FIN 45 are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim and annual
periods ending after December 15, 2002. For further discussion, see Note 2(h),
"Other Investment and Risk Management Activities-Specific Strategies", of Notes
to Consolidated Financial Statements included in Hartford Life's 2002 Form 10-K
Annual Report. Adoption of this statement did not have a material impact on the
Company's consolidated financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Action
(including Certain Costs Incurred in a Restructuring)" ("Issue 94-3"). The
principal difference between SFAS No. 146 and Issue 94-3 is that SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, rather than at the date
of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit
or disposal activities after December 31, 2002. Adoption of SFAS No. 146 will
result in a change in the timing of when a liability is recognized if the
Company has restructuring activities after December 31, 2002. Adoption of this
statement did not have a material impact on the Company's consolidated financial
condition or results of operations.
(f) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In July 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued a final Statement of Position
03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" (the "SOP").
The SOP addresses a wide variety of topics, some of which may have a significant
impact on the Company. The major provisions of the SOP require:
- Recognizing expenses for a variety of contracts and contract
features, including guaranteed minimum death benefits ("GMDB")
and annuitization options, on an accrual basis versus the
previous method of recognition upon payment;
- Reporting and measuring assets and liabilities of certain
separate account products as general account assets and
liabilities when specified criteria are not met;
- Reporting and measuring seed money in separate accounts as
general account assets based on the insurer's proportionate
beneficial interest in the separate account's underlying
assets; and
- Capitalizing sales inducements that meet specified criteria
and amortizing such amounts over the life of the contracts
using the same methodology as used for amortizing deferred
acquisition costs ("DAC").
The SOP is effective for financial statements for fiscal years beginning after
December 15, 2003. At the date of initial application of this SOP, the Company
will have to make various determinations, such as qualification for separate
account treatment, classification of securities in separate account arrangements
not meeting the criteria of the SOP, significance of mortality and morbidity
risk, adjustments to contract holder liabilities, and adjustments to estimated
gross profits, all of which may have a significant effect on the Company's
financial condition and results of operations.
Based on management's preliminary review of the SOP and market conditions as of
September 30, 2003, the requirement for recording a liability for variable
annuity products with a guaranteed minimum death benefit feature will have an
impact on the Company's results of operations. The determination of this
liability is based on models that involve numerous estimates and subjective
judgments, including those regarding expected market rates of return and
volatility, contract surrender rates and mortality experience. The unrecorded
GMDB liabilities, net of anticipated reinsurance recoverables of approximately
$270, are estimated to be between $50 and $60 at September 30, 2003. Net of
estimated DAC and income tax effects, the cumulative effect of establishing the
required GMDB reserves as of September 30, 2003 would result in an estimated
reduction of net income of between $25 and $35. The ultimate actual impact on
the Company's financial statements will differ from management's current
estimates and will depend in part on market conditions and other factors at the
date of adoption.
Through September 30, 2003, the Company has not recorded a liability for the
risks associated with GMDB offered on the Company's variable annuity business,
but has consistently recorded the related expenses in the period the benefits
are paid to contractholders. Net of reinsurance, the Company paid $12 and $43
for the third quarter and nine months ended September 30, 2003, respectively,
and $17 and $33 for the third quarter and nine months ended September 30, 2002,
respectively, in GMDB benefits to contractholders. Downturns in the equity
markets could increase these payments. At September 30, 2003, the Company held
$68.8 billion of variable annuities in its separate accounts. The Company
estimates its net amount at risk relating to these variable annuities (the
amount by which current account values of its variable annuity contracts are not
sufficient to meet its GMDB commitments) at $16.2 billion. However, at September
30, 2003, approximately 77% of the Company's net amount at risk was covered by
reinsurance, resulting in a retained net amount at risk of $3.7 billion.
In addition to the foregoing impact of the SOP, liabilities for certain of the
Company's fixed annuity products (primarily the Company's compound rate contract
("CRC")), of approximately $11 billion, which are currently recorded at fair
value as guaranteed separate account liabilities will be revalued at current
account value in the general account. The related guaranteed separate account
assets supporting CRC will also be reclassified to the general account as
available for sale securities and will continue to be recorded at fair value
with subsequent changes in fair value, net of amortization of deferred
acquisition costs and income taxes, recorded in other comprehensive income. Upon
adoption of the SOP, the Company will record a cumulative effect adjustment to
earnings equal to the revaluation of the liabilities from fair value to book
value plus adjustment to record unrealized gains (losses) on the invested
assets, previously recorded as a component of net income, as other comprehensive
income. The cumulative adjustment to earnings as well as the adjustment to other
comprehensive income will be recorded net of amortization of deferred
acquisition costs and income taxes. As of September 30, 2003, the Company is
still in the process of evaluating the impact of these changes on its
consolidated financial condition and results of operations. However, it is
expected that the impact to stockholder's equity (accumulated other
comprehensive income) will be positive and significant. Moreover, the interest
rate environment at the date of the adoption of the SOP will have a significant
impact on the cumulative effect change in earnings and other comprehensive
income.
The Company does not expect the impact of adopting the remaining provisions of
the SOP to be significant.
In April 2003, the FASB issued guidance in Statement 133 Implementation Issue
No. B36, "Embedded Derivatives: Modified Coinsurance Arrangements and Debt
Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only
Partially Related to the Creditworthiness of the Obligor of Those
Instruments", ("DIG B36") that addresses the instances in which bifurcation of
an instrument into a debt host contract and an embedded credit derivative is
required. The effective date of DIG B36 is October 1, 2003. DIG B36 indicates
that bifurcation is necessary in a modified coinsurance arrangement when the
yield on the receivable and payable is based on a specified proportion of the
ceding company's return on either its general account assets or a specified
block of those assets, rather than the overall creditworthiness of the ceding
company. The Company believes that the majority of its modified coinsurance and
funds withheld agreements are not impacted by DIG B36 as they were entered into
prior to the Company's "grandfather" date for embedded derivatives, without
substantive modifications, or the "modco" payable or receivable is recorded in
the separate account, and is already recorded at fair value with changes in fair
value recorded in net income. The Company has determined that one of its
modified coinsurance does contain an embedded derivative. The Company believes
the embedded derivative is akin to a total return swap and is in the process of
determining the fair value for the swap.
DIG B36 is also applicable to corporate issued debt securities that incorporate
credit risk exposures that are unrelated or only partially related to the
creditworthiness of the obligor. The Company is currently evaluating the impact
of DIG B36 on such corporate issued debt securities. The Company does not
believe the adoption of DIG B36 will have a material effect on the Company's
consolidated financial condition or results of operations.
(g) STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure an Amendment to FASB No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of SFAS No. 123. In January 2003, The Hartford adopted the fair
value recognition provisions of accounting for employee stock compensation and
used the prospective transition method. Under the prospective method,
stock-based compensation expense is recognized for awards granted or modified
after the beginning of the fiscal year in which the change is made. The Hartford
will expense all stock-based compensation awards granted after January 1, 2003.
The allocated expense to the Company from The Hartford associated with these
awards for the third quarter ending September 30, 2003, was immaterial.
All stock-based compensation awards granted or modified prior to January 1,
2003, will continue to be valued using the intrinsic value-based provisions set
forth in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock-Issued to Employees". Under the intrinsic value method, compensation
expense is determined on the measurement date, which is the first date on which
both the number of shares the employee is entitled to receive and the exercise
price are known. Compensation expense, if any, is measured based on the award's
intrinsic value, which is the excess of the market price of the stock over the
exercise price on the measurement date. The expense, including non-option plans,
related to stock-based employee compensation included in the determination of
net income for the third quarter and nine months ended September 30, 2003 is
less than that which would have been recognized if the fair value method had
been applied to all awards granted since the effective date of SFAS No. 123.
(For further discussion of the Company's stock compensation plans, see Note 11
of Notes to Consolidated Financial Statements included in The Hartford's 2002
Form 10-K Annual Report.)
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", and accordingly ceased all amortization of goodwill. The
carrying amount of goodwill is $186 as of September 30, 2003 and December 31,
2002.
The following table shows the Company's acquired intangible assets that continue
to be subject to amortization and aggregate amortization expense. Except for
goodwill, the Company has no intangible assets with indefinite useful lives.
AS OF SEPTEMBER 30, 2003
---------------------------
GROSS ACCUMULATED
CARRYING NET
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION
- ------------------------------------------------------------------------------------------------------------
Present value of future profits $ 501 $ 104
- -----------------------------------------------------------------------------------------------------------
TOTAL $ 501 $ 104
===========================================================================================================
Net amortization expense for the third quarter and nine months ended September
30, 2003 was $10 and $27, respectively. Net amortization expense for the third
quarter and nine months ended September 30, 2002 was $13 and $32, respectively.
Estimated future net amortization expense for the succeeding five years is as
follows:
FOR THE YEAR ENDING DECEMBER 31,
- --------------------------------
2003 $ 35
2004 $ 35
2005 $ 31
2006 $ 28
2007 $ 26
- --------------------------------
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS
(a) SECURITIES LENDING
The Company participates in a securities lending program, to generate additional
income, whereby certain domestic fixed income securities are loaned for a short
period of time from the Company's portfolio to qualifying third parties, via a
lending agent. Borrowers of these securities provide collateral of 102% of the
market value of the loaned securities. Acceptable collateral may be in the form
of cash or U.S. Government securities. The market value of the loaned securities
is monitored and additional collateral is obtained if the market value of the
collateral falls below 100% of the market value of the loaned securities. Under
the terms of the securities lending program, the lending agent indemnifies the
Company against borrower defaults. As of September 30, 2003, the fair value of
the loaned securities was approximately $797 and was included in fixed
maturities. The cash collateral received as of September 30, 2003 of
approximately $805 was invested in short-term securities and was also included
in fixed maturities, with a corresponding liability for the obligation to return
the collateral recorded in other liabilities. The Company retains a portion of
the income earned from the cash collateral or receives a fee from the borrower.
The Company recorded before-tax income from securities lending transactions, net
of lending fees, that was immaterial for the third quarter and nine months ended
September 30, 2003, which was included in net investment income.
(b) DERIVATIVE INSTRUMENTS
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards, futures and options, for one of four Company-approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; to control transaction costs; or to enter
into income enhancement and replication transactions.
All of the Company's derivative transactions are permitted uses of derivatives
under the derivatives use plan filed with and/or approved by, as applicable, by
the State of Connecticut and State of New York insurance departments. The
Company does not make a market or trade in these instruments for the express
purpose of earning short-term trading profits.
For a detailed discussion of the Company's use of derivative instruments, see
Note 1(h) of Notes to Consolidated Financial Statements included in The Hartford
Life Insurance Company's 2002 Form 10-K Annual Report.
As of September 30, 2003 and December 31, 2002, the Company carried $152 and
$179, respectively, of derivative assets in other investments and $126 and $78,
respectively, of derivative liabilities in other liabilities. In addition, the
Company recognized embedded derivative (assets) liabilities related to
guaranteed minimum withdrawal benefits ("GMWB") on certain of its variable
annuity contracts of $(39) and $48 at September 30, 2003 and December 31, 2002,
respectively, in other policyholder funds. The Company has entered into
offsetting reinsurance arrangements, which are recognized as derivatives. One of
these reinsurance arrangements is with a related party. See Note 6 "Related
Party Transactions" for information on this arrangement. The fair value of this
derivative (liability) asset, at September 30, 2003 and December 31, 2002 was
$(39) and $48, respectively, and was included in reinsurance recoverables. See
"Product Derivatives and Risk Management" section below for a discussion
concerning the Company's risk management strategies for the unreinsured GMWB
business.
Cash-Flow Hedges
For the third quarter and nine months ended September 30, 2003, and 2002 the
Company's gross gain and loss representing the total ineffectiveness of all
cash-flow hedges was immaterial.
Gains and losses on derivative contracts that are reclassified from accumulated
other comprehensive income ("AOCI") to current period earnings are included in
the line item in the statement of income in which the hedged item is recorded.
As of September 30, 2003 and 2002, the after-tax deferred net gains on
derivative instruments accumulated in AOCI that are expected to be reclassified
to earnings during the next twelve months were $8 and $5, respectively. This
expectation is based on the anticipated interest payments on hedged investments
in fixed maturity securities that will occur over the next twelve months, at
which time the Company will recognize the deferred net gains and losses as an
adjustment to interest income over the term of the investment cash flows. The
maximum term over which the Company is hedging its exposure to the variability
of future cash flows (for all forecasted transactions, excluding interest
payments on variable-rate debt) is twenty-four months. As of September 30, 2003
and December 31, 2002, the Company held derivative notional value related to
strategies categorized as cash-flow hedges of $2.5 billion and $2.9 billion,
respectively. For the third quarter and nine months ended September 30, 2003 and
2002, the net reclassifications from AOCI to earnings resulting from the
discontinuance of cash-flow hedges were immaterial.
Fair-Value Hedges
For the third quarter and nine months ended September 30, 2003 and 2002, the
Company's gross gains and losses representing the total ineffectiveness of all
fair-value hedges were immaterial, with the net impact reported as net realized
capital gains and losses. All components of each derivative's gain or loss are
included in the assessment of hedge effectiveness. As of September 30, 2003 and
December 31, 2002, the Company held $193 and $159, respectively, in derivative
notional value related to strategies categorized as fair-value hedges.
Other Investment and Risk Management Activities
General
The Company's other investment and risk management activities primarily relate
to strategies used to reduce economic risk or enhance income, and do not receive
hedge accounting treatment. Swap agreements, interest rate cap and floor
agreements and option contracts are used to reduce economic risk. Income
enhancement and replication transactions include the use of written covered call
options, which offset embedded equity call options, total return swaps and
synthetic replication of cash market instruments. The change in the value of all
derivatives held for other investment and risk management purposes is reported
in current period earnings as net realized capital gains and losses. As of
September 30, 2003 and December 31, 2002, the Company held $4.5 billion and $3.4
billion, respectively, in derivative notional value related to strategies
categorized as Other Investment and Risk Management Activities, excluding
Product Derivatives and Risk Management Activities.
Product Derivatives and Risk Management
The Company offers certain variable annuity products with a GMWB rider. The GMWB
provides the policyholder with a guaranteed remaining balance ("GRB") if the
account value is reduced to zero through a combination of market declines and
withdrawals. The GRB is generally equal to premiums less withdrawals. However,
annual withdrawals that exceed 7% of the premiums paid may reduce the GRB by an
amount greater than the withdrawals and may also impact the guaranteed annual
withdrawal amount that subsequently applies after the excess annual withdrawals
occur. The policyholder also has the option, after a specified time period, to
reset the GRB to the then-current account value, if greater. The GMWB represents
an embedded derivative in the variable annuity contract that is required to be
reported separately from the host variable annuity contract. It is carried at
fair value and reported in other policyholder funds. The fair value of the GMWB
obligations is calculated based on actuarial assumptions related to the
projected cash flows, including benefits and related contract charges, over the
lives of the contracts, incorporating expectations concerning policyholder
behavior. Because of the dynamic and complex nature of these cash flows,
stochastic techniques under a variety of market return scenarios and other best
estimate assumptions are used. Estimating these cash flows involves numerous
estimates and subjective judgments including those regarding expected market
rates of return, market volatility, correlations of market returns and discount
rates. In valuing the embedded derivative, the Company attributes a portion of
the fees collected from the policyholder equal to the present value of future
GMWB claims (the "Attributed Fees"). All changes in the fair value of the
embedded derivative are recorded in net realized capital gains and losses. The
excess of fees collected from the policyholder for the GMWB over the Attributed
Fees are recorded in fee income.
For all contracts in effect through July 6, 2003, the Company entered into a
third party reinsurance arrangement to offset its exposure to the GMWB for the
lives of those contracts. This arrangement is recognized as a derivative and
carried at fair value in reinsurance recoverables. Changes in the fair value of
both the derivative assets and liabilities related to this reinsured GMWB are
recorded in net realized capital gains and losses. As of July 6, 2003, the
Company exhausted all but a small portion of the reinsurance capacity under this
current arrangement, as it relates to new business, and will be ceding only a
very small number of new contracts subsequent to July 6, 2003. Substantially all
new contracts with the GMWB are covered by a reinsurance arrangement with a
related party. See Note 6 "Related Party Transactions" for information on this
arrangement.
For further discussion of the Company's other investment and risk management
activities, see "Other Investments and Risk Management Activities" in Note 2(h)
of Notes of Consolidated Financial Statements included in the Company's 2002
Form 10-K Annual Report.
5. COMMITMENTS AND CONTINGENCIES
(a) LITIGATION
Hartford Life Insurance Company is or may become involved in various legal
actions, in the normal course of its business, in which claims for alleged
economic and punitive damages have been or may be asserted, some for substantial
amounts. Some of the pending litigation has been filed as purported class
actions and some actions have been filed in certain jurisdictions that permit
punitive damage awards that are disproportionate to the actual damages incurred.
Although there can be no assurances, at the present time, the Company does not
anticipate that the ultimate liability arising from potential, pending or
threatened legal actions, after consideration of provisions made for estimated
losses and costs of defense, will have a material adverse effect on the
financial condition or operating results of the Company.
In the third quarter of 2003, Hartford Life Insurance Company and its affiliate
International Corporate Marketing Group, LLC ("ICMG") settled their intellectual
property dispute with Bancorp Services, LLC ("Bancorp"). The dispute concerned,
among other things, Bancorp's claims for alleged patent infringement, breach of
a confidentiality agreement, and misappropriation of trade secrets related to
certain stable value corporate-owned life insurance ("COLI") products. The
dispute was the subject of litigation in the United States District Court for
the Eastern District of Missouri, in which Bancorp obtained in 2002 a
judgment exceeding $134 against the Company and ICMG after a jury trial on the
trade secret and breach of contract claims, and the Company and ICMG obtained
summary judgment on the patent infringement claim. Based on the advice of legal
counsel following entry of the judgment, the Company
recorded an $11 after-tax charge in the first quarter of 2002 to increase
litigation reserves. Both components of the judgment were appealed.
Under the terms of the settlement, the Company and ICMG will pay a minimum of
$70 and a maximum of $80, depending on the outcome of the patent appeal, to
resolve all disputes between the parties. The appeal from the trade secret and
breach of contract judgment will be dismissed. The settlement resulted in the
recording of a $9 after-tax benefit in the third quarter of 2003 to reflect the
Company's portion of the settlement.
(b) TAX MATTERS
The Company's Federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). The Company is currently under audit for the 1998-2001
tax years. No material issues have been raised to date by the IRS. Management
believes that adequate provision has been made in the financial statements for
any potential assessments that may result from tax examinations and other
tax-related matters for all open tax years.
The tax provision recorded during the nine months ended September 30, 2003,
reflects a benefit of $23, consisting primarily of a change in estimate of the
dividends-received deduction ("DRD") tax benefit reported during 2002. The
change in estimate was the result of actual 2002 investment performance on the
related separate accounts being unexpectedly out of pattern with past
performance, which had been the basis for the estimate. The total DRD benefit
relating to the 2003 tax year recorded during the nine months ended September
30, 2003 was $65.
6. RELATED PARTY TRANSACTIONS
In connection with a comprehensive evaluation of various capital maintenance and
allocation strategies by The Hartford, an intercompany asset sale transaction
was completed in April 2003. The transaction resulted in certain of The
Hartford's Property & Casualty subsidiaries selling ownership interests in
certain high quality fixed maturity securities to the Company for cash equal to
the fair value of the securities as of the effective date of the sale. For the
Property and Casualty subsidiaries, the transaction monetized the embedded gain
in certain securities on a tax deferred basis to The Hartford because no capital
gains tax will be paid until the securities are sold to unaffiliated third
parties. The transfer re-deployed to the Company desirable investments without
incurring substantial transaction costs that would have been payable in a
comparable open market transaction. The fair value of securities transferred was
$1.7 billion.
The Company's employees are included in The Hartford's non-contributory defined
benefit pension benefit plans and the Company is allocated expense for these
plans by The Hartford. On September 30, 2003, Hartford Life, Inc. assumed the
Company's intercompany payable of $49 for the reimbursement of costs associated
with the defined benefit pension plans. As a result, the Company reported $49 as
a capital contribution during the quarter ended September 30, 2003 to reflect
the extinguishment of the intercompany payable.
Effective July 7, 2003, the Company and its subsidiary, Hartford Life and
Annuity Insurance Company ("HLAI") entered into an indemnity reinsurance
arrangement with Hartford Life and Accident Company ("HLA"). Through this
arrangement, both the Company and HLAI will automatically cede 100% of the
GMWB's incurred on variable annuity contracts issued between July 7, 2003 and
December 31, 2003 that were otherwise not reinsured. For the three months ended
September 30, 2003, the Company and HLAI, in total, ceded an immaterial amount
of premiums to HLA. As of September 30, 2003, HLIC and HLAI, combined, have
recorded a reinsurance recoverable from HLA of $3.
7. SEPTEMBER 11 TERRORIST ATTACK
As a result of the September 11 terrorist attack, the Company recorded an
estimated loss amounting to $9, net of taxes and reinsurance, in the third
quarter of 2001. The Company based the loss estimate upon a review of insured
exposures using a variety of assumptions and actuarial techniques, including
estimated amounts for unknown and unreported policyholder losses. Also included
was an estimate of amounts recoverable under the Company's ceded reinsurance
programs, including the cost of additional reinsurance premiums. In the first
quarter of 2002, the Company recognized a $3 after-tax benefit related to
favorable development of reserves related to the September 11 terrorist attack.
8. REINSURANCE RECAPTURE
On June 30, 2003, the Company recaptured a block of business previously
reinsured with an unaffiliated reinsurer. Under this treaty, Hartford Life
reinsured a portion of the guaranteed minimum death benefit (GMDB) feature
associated with certain of its annuity contracts. As consideration for
recapturing the business and final settlement under the treaty, the Company has
received assets valued at approximately $32 and one million warrants exercisable
for the unaffiliated company's stock. This amount represents to the Company an
advance collection of its future recoveries under the reinsurance agreement and
will be recognized as future losses are incurred. Prospectively, as a result of
the recapture, Hartford Life will be responsible for all of the remaining and
ongoing risks associated with the GMDB's related to this block of business. The
recapture increased the net amount at risk retained by the Company, which is
included in the net amount at risk discussed in Note 2 (f).
9. SEGMENT INFORMATION
Hartford Life Insurance Company is organized into three reportable operating
segments: Investment Products, Individual Life and Corporate Owned Life
Insurance (COLI). Investment Products offers individual variable and fixed
annuities, retirement plan services and other investment products. Individual
Life sells a variety of life insurance products, including variable life,
universal life, interest sensitive whole life and term life insurance. COLI
primarily offers variable products used by employers to fund non-qualified
benefits or other postemployment benefit obligations as well as leveraged COLI.
The Company includes in "Other" realized capital gains and losses, corporate
items not directly allocable to any of its reportable operating segments, as
well as certain group benefit products including group life and group disability
insurance that is directly written by the Company and is substantially ceded to
its parent, HLA.
The accounting policies of the reportable operating segments are the same as
those described in "Basis of Presentation and Accounting Policies" in Note 2 in
the Company's 2002 Form 10-K Annual Report. Hartford Life Insurance Company
evaluates performance of its segments based on revenues, net income and the
segment's return on allocated capital. The Company charges direct operating
expenses to the appropriate segment and allocates the majority of indirect
expenses to the segments based on an intercompany expense arrangement.
Intersegment revenues are not significant and primarily occur between corporate
and the operating segments. These amounts include interest income on allocated
surplus and the allocation of net realized capital gains and losses through net
investment income utilizing the duration of the segment's investment portfolios.
The Company's revenues are primarily derived from customers within the United
States. The Company's long-lived assets primarily consist of deferred policy
acquisition costs and deferred tax assets from within the United States. The
following tables present summarized financial information concerning the
Company's segments.
THIRD QUARTER ENDED Investment Individual
SEPTEMBER 30, 2003 Products Life COLI Other Total
- --------------------------------------------------------------------------------------------
Total revenues $ 1,068 $ 227 $ 117 $ 37 $ 1,449
Net income 103 36 19 9 167
- --------------------------------------------------------------------------------------------
THIRD QUARTER ENDED Investment Individual
SEPTEMBER 30, 2002 Products Life COLI Other Total
- --------------------------------------------------------------------------------------------
Total revenues $ 667 $ 216 $ 145 $ (76) $ 952
Net income 81 30 10 25 146
- --------------------------------------------------------------------------------------------
NINE MONTHS ENDED Investment Individual
SEPTEMBER 30, 2003 Products Life COLI Other Total
- --------------------------------------------------------------------------------------------
Total revenues $ 2,525 $ 666 $ 369 $ 93 $ 3,653
Net income 301 99 36 20 456
- --------------------------------------------------------------------------------------------
NINE MONTHS ENDED Investment Individual
SEPTEMBER 30, 2002 Products Life COLI Other Total
- --------------------------------------------------------------------------------------------
Total revenues $ 2,017 $ 644 $ 450 $ (166) $ 2,945
Net income 266 86 19 (36) 335
- --------------------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in millions, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of Hartford Life Insurance
Company and its subsidiaries ("Hartford Life Insurance Company" or the
"Company") as of September 30, 2003, compared with December 31, 2002, and its
results of operations for the third quarter and nine months ended September 30,
2003 compared with the equivalent periods in 2002. This discussion should be
read in conjunction with the MD&A included in the Company's 2002 Form 10-K
Annual Report.
Certain of the statements contained herein are forward-looking statements. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and include estimates and
assumptions related to economic, competitive and legislative developments. These
forward-looking statements are subject to change and uncertainty which are, in
many instances, beyond the Company's control and have been made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon the Company. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on Hartford Life will be those anticipated by
management. Actual results could differ materially from those expected by the
Company, depending on the outcome of various factors. These factors include: the
uncertain nature of damage theories and loss amounts and the development of
additional facts related to the September 11 terrorist attack ("September 11");
the uncertain effect on the Company of the Jobs and Growth Tax Relief
Reconciliation Act of 2003, in particular the reduction in tax rates on
long-term capital gains and most dividend distributions; the response of
reinsurance companies under reinsurance contracts, the impact of increasing
reinsurance rates, and the availability and adequacy of reinsurance to protect
the Company against losses; the ability to effectively mitigate the impact of
equity market volatility on the Company's financial position and results of
operations arising from obligations under annuity product guarantees; the
possibility of more unfavorable loss experience than anticipated; the
possibility of general economic and business conditions that are less favorable
than anticipated; the effect of changes in interest rates, the stock markets or
other financial markets; stronger than anticipated competitive activity;
unfavorable legislative, regulatory or judicial developments; the Company's
ability to distribute its products through distribution channels, both current
and future; the uncertain effects of emerging claim and coverage issues; the
effect of assessments and other surcharges for guaranty funds and second-injury
funds and other mandatory pooling arrangements; a downgrade in the Company's
claims-paying, financial strength or credit ratings; the ability of the
Company's subsidiaries to pay dividends to the Company; and other factors
described in such forward-looking statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
Critical Accounting Estimates 17
Consolidated Results of Operations - Operating Summary 19
Investment Products 20
Individual Life 21
Corporate Owned Life Insurance (COLI) 22
Investments 22
Capital Markets Risk Management 24
Accounting Standards 31
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability: valuation of investments and derivative instruments; deferred
policy acquisition costs; reserves and accounting for contingencies. In
developing these estimates management makes subjective and complex judgments
that are inherently uncertain and subject to material change as facts and
circumstances develop. Although variability is inherent in these estimates,
management believes the amounts provided are appropriate based upon the facts
available upon compilation of the financial statements. There have been no
significant changes to the Company's critical accounting estimates since
December 31, 2002 other than deferred policy acquisition costs and valuation of
derivatives as discussed below.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, which include commissions and certain other expenses
that vary with and are primarily associated with acquiring business, are
deferred and amortized over the estimated lives of the contracts, usually 20
years. These deferred costs, together with the present value of future profits
of acquired business, are recorded as an asset commonly referred to as
deferred policy acquisition costs and present value of future profits ("DAC").
At September 30, 2003 and December 31, 2002, the carrying value of the Company's
Life operations' DAC was $5.8 billion and $5.5 billion, respectively. For
statutory accounting purposes, such costs are expensed as incurred.
DAC related to traditional policies are amortized over the premium-paying period
in proportion to the present value of annual expected premium income. DAC
related to investment contracts and universal life-type contracts are deferred
and amortized using the retrospective deposit method. Under the retrospective
deposit method, acquisition costs are amortized in proportion to the present
value of the estimated gross profits ("EGPs") arising principally from projected
investment, mortality and expense margins and surrender charges. The
attributable portion of the DAC amortization is allocated to realized gains and
losses on investments. The DAC balance is also adjusted through other
comprehensive income by an amount that represents the amortization of deferred
policy acquisition costs that would have been required as a charge or credit to
operations had unrealized gains and losses on investments been realized. Actual
gross profits can vary from management's estimates, resulting in increases or
decreases in the rate of amortization.
The Company regularly evaluates its EGPs to determine if actual experience or
other evidence suggests that earlier estimates should be revised. In the event
that the Company were to revise its EGPs, the cumulative DAC amortization would
be adjusted to reflect such revised EGPs in the period the revision was
determined to be necessary. Several assumptions considered to be significant in
the development of EGPs include separate account fund performance, surrender and
lapse rates, estimated interest spread and estimated mortality. The separate
account fund performance assumption is critical to the development of the EGPs
related to the Company's variable annuity and variable life insurance
businesses. The average annual long-term rate of assumed separate account fund
performance (before mortality and expense charges) used in estimating gross
profits for the variable annuity and variable life business was 9% for the nine
months ended September 30, 2003 and September 30, 2002. For other products,
including fixed annuities and other universal life-type contracts, the average
assumed investment yield ranged from 5% to 8.5% for the periods ended September
30, 2003 and 2002.
Due to increased volatility and the decline experienced by the U.S. equity
markets in recent periods, the Company continues to enhance its DAC evaluation
process. The Company has developed sophisticated modeling capabilities, which
allowed it to run a large number of stochastically determined scenarios of
separate account fund performance. These scenarios were then utilized to
calculate a statistically significant range of reasonable estimates of EGPs.
This range was then compared to the present value of EGPs currently utilized in
the DAC amortization model. As of September 30, 2003, the present value of the
EGPs utilized in the DAC amortization model fall within a reasonable range of
statistically calculated present value of EGPs. As a result, the Company does
not believe there is sufficient evidence to suggest that a revision to the EGPs
(and therefore, a revision to the DAC) as of September 30, 2003 is necessary;
however, if in the future the EGPs utilized in the DAC amortization model were
to exceed the margin of the reasonable range of statistically calculated EGPs, a
revision could be necessary. Furthermore, the Company has estimated that the
present value of the EGPs is likely to remain within a reasonable range if
overall separate account returns decline by 10% or less for the remainder of
2003, and if overall separate account returns decline by 5% or less for the next
twelve months, and if certain other assumptions that are implicit in the
computations of the EGPs are achieved.
Additionally, the Company continues to perform analyses with respect to the
potential impact of a revision to future EGPs. If such a revision to EGPs were
deemed necessary, the Company would adjust, as appropriate, all of its
assumptions for products accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments", and reproject its future EGPs based on
current account values at the end of the quarter in which a revision is deemed
to be necessary. To illustrate the effects of this process, assume the Company
had concluded that a revision of the Company's EGPs was required at September
30, 2003. If the Company assumed a 9% average long-term rate of growth from
September 30, 2003 forward along with other appropriate assumption changes in
determining the revised EGPs, the Company estimates the cumulative increase to
amortization would be approximately $95-$105, after-tax. If instead the Company
were to assume a long-term growth rate of 8% in determining the revised EGPs,
the adjustment would be approximately $115-$130, after-tax. Assuming that such
an adjustment were to have been required, the Company anticipates that there
would have been immaterial impacts on its DAC amortization for the 2003 and 2004
years exclusive of the adjustment, and that there would have been positive
earnings effects in later years. Any such adjustment would not affect statutory
income or surplus, due to the prescribed accounting for such amounts that is
discussed above.
Aside from absolute levels and timing of market performance assumptions,
additional factors that will influence this determination include the degree of
volatility in separate account fund performance and shifts in asset allocation
within the separate account made by policyholders. The overall return generated
by the separate account is dependent on several factors, including the relative
mix of the underlying sub-accounts among bond funds and equity funds as well as
equity sector weightings. The Company's overall separate account fund
performance has been reasonably correlated to the overall performance of the S&P
500 Index (which closed at 996 on September 30, 2003), although no assurance can
be provided that this correlation will continue in the future.
The overall recoverability of the DAC asset is dependent on the future
profitability of the business. The Company tests the aggregate recoverability of
the DAC asset by comparing the amounts deferred to the present value of total
EGPs. In addition, the Company routinely stress tests its DAC asset for
recoverability against severe declines in its separate account assets, which
could occur if the equity markets experienced another significant selloff, as
the majority of policyholders' funds in the separate accounts is invested in the
equity market. As of September 30, 2003, the Company believed variable annuity
separate account assets could fall by at least 30% before portions of its DAC
asset would be unrecoverable.
VALUATION OF DERIVATIVES
A derivative instrument is reported at fair value based upon internally
established valuations that are consistent with external valuation models,
quotations furnished by dealers in such instrument or market quotations.
The Company has calculated the fair value of the GMWB liability based on
actuarial assumptions related to the projected cash flows, including benefits
and related contract charges, over the lives of the contracts, incorporating
expectations concerning policyholder behavior. Because of the dynamic and
complex nature of these cash flows, stochastic techniques under a variety of
market return scenarios and other best estimate assumptions are used. Estimating
these cash flows involves numerous estimates and subjective judgments including
those regarding expected market rates of return, market volatility, correlations
of market returns and discount rates. At each valuation date, the Company has
assumed expected returns based on risk-free rates as represented by the current
LIBOR forward curve rates; market volatility assumptions for each underlying
index will be based on a blend of observed market "implied volatility" data and
annualized standard deviations of monthly returns using the most recent 20 years
of observed market performance; correlations of market returns across underlying
indices shall be based on actual observed market returns and relationships over
the ten years preceding the valuation date; and current risk-free spot rates as
represented by the current LIBOR spot curve shall be used to determine the
present value of expected future cash flows produced in the stochastic
projection process.
CONSOLIDATED RESULTS OF OPERATIONS - OPERATING SUMMARY
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
OPERATING SUMMARY 2003 2002 CHANGE 2003 2002 CHANGE
- ---------------------------------------------------------------------------------------------------------------------------
Fee income $ 556 $ 509 9% $ 1,572 $ 1,576 -
Earned premiums 411 112 267% 665 352 89%
Net investment income 453 396 14% 1,336 1,156 16%
Other revenues 37 27 37% 98 91 8%
Net realized capital losses (8) (92) 91% (18) (230) 92%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,449 952 52% 3,653 2,945 24%
Benefits, claims and claim adjustment expenses 895 572 56% 2,110 1,697 24%
Amortization of deferred policy acquisition costs
and present value of future profits 173 138 25% 461 415 11%
Insurance operating costs and expenses 160 159 1% 512 495 3%
Other expenses 1 4 (75%) 4 24 (83%)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,229 873 41% 3,087 2,631 17%
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 220 79 178% 566 314 80%
Income tax expense 53 (67) NM 110 (21) NM
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 167 $ 146 14% $ 456 $ 335 36%
=========================================================================================================================
Hartford Life Insurance Company is organized into the following reportable
operating segments: Investment Products, Individual Life and Corporate Owned
Life Insurance ("COLI"). The Company also includes in "Other" realized capital
gains and losses, corporate items not directly allocated to any of its
reportable operating segments, as well as certain group benefits operations,
including group life and group disability insurance that is directly written by
the Company and is substantially ceded to its parent, Hartford Life and Accident
Insurance Company ("HLA"). The Company defines the following as "NM" or not
meaningful: increases or decreases greater than 200%, or changes from a net gain
to a net loss position, or vice versa.
Revenues increased for the third quarter and nine months ended September 30,
2003 as a result of higher revenues in the Investment Products segment and a
decrease in realized capital losses reported in the Other category compared to
the prior year comparable periods. Earned premiums in Investment Products
increased due to higher sales in the institutional investment products business.
Additionally, net investment income increased due to higher general account
assets in the individual annuity business and growth in assets in the
institutional investments business. Fee income in the Investment Products
segment was higher for the third quarter ended September 30, 2003 as a result of
higher average account values, specifically in individual annuities, due
primarily to the higher equity market values compared to the prior year period.
Partially offsetting these increases were lower fee income and net investment
income in the COLI segment. The decrease in COLI net investment income for the
third quarter and nine months ended September 30, 2003 was primarily due to
lower average leveraged COLI account values as compared to a year ago. In
addition, COLI had lower fee income due in part to lower sales in the third
quarter of 2003 and for the nine months ended September 30, 2003, as compared to
the prior year comparable periods.
Benefits, claims and expenses increased for the third quarter and nine months
ended September 30, 2003 primarily due to increases in the Investment Products
segment associated with the growth in the institutional investments business,
partially offset by lower benefit costs in COLI related to the decline in the
account values of the leveraged COLI business. For the third quarter ended
September 30, 2003, COLI other expenses decreased due to a $9 after-tax benefit,
associated with the settlement for the Bancorp Services, LLC ("Bancorp")
litigation.
(For further discussion of the Bancorp litigation, see Note 5(a) of Notes to
Condensed Consolidated Financial Statements.)
Net income increased for the third quarter and nine months ended September 30,
2003 as compared to the prior year comparable periods. Net income has been
favorably impacted by growth in the Investment Products segment and a decrease
in net realized capital losses compared to a year ago. Additionally, COLI net
income increased $9 and $7 for the third quarter and nine months ended September
30, 2003, respectively, as compared to the prior year periods, primarily due to
the benefit for the Bancorp litigation recorded in the third quarter of 2003
discussed above. Partially offsetting the increase for the nine-month period was
the positive $3 after-tax benefit recorded in the first quarter of 2002 related
to favorable development on the Company's estimated September 11 exposure.
The tax provision recorded during the nine months ended September 30, 2003,
reflects a benefit of $23, consisting primarily of a change in estimate of the
DRD tax benefit reported during 2002. The change in estimate was the result of
actual 2002 investment performance on the related separate accounts being
unexpectedly out of pattern with past performance, which had been the basis for
the estimate. The total DRD benefit related to the 2003 tax year for the nine
months ended September 30, 2003 was $65.
Future net income for the Company will be affected by the effectiveness of the
risk management strategies the Company has implemented to mitigate the net
income volatility associated with the unreinsured guaranteed minimum withdrawal
benefit ("GMWB") rider currently being sold with the majority of new variable
annuity contracts. The GMWB represents an embedded derivative in the variable
annuity contract that is required to be reported separately from the host
variable annuity contract. Beginning July 7, 2003, substantially all new
contracts with the GMWB have not been covered by reinsurance. These unreinsured
contracts are expected to generate volatility in net income as the underlying
embedded derivative liabilities are recorded at fair value each reporting
period, resulting in the recognition of net realized capital gains or losses in
response to changes in certain critical factors including capital market
conditions and policyholder behavior. In order to minimize the volatility
associated with the unreinsured GMWB liabilities, the Company established an
alternative risk management strategy. During the third quarter of 2003, the
Company began hedging its unreinsured GMWB exposure using interest rate futures,
Standard and Poor's (S&P) 500 and NASDAQ index put options and futures
contracts. The net impact to the Company's net income for the third quarter of
the change in value of the embedded derivative net of the results of the hedging
program was immaterial.
INVESTMENT PRODUCTS
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
OPERATING SUMMARY 2003 2002 CHANGE 2003 2002 CHANGE
- ---------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 349 $ 294 19% $ 950 $ 948 -
Earned premiums 392 97 NM 627 306 105%
Net investment income 327 276 18% 948 763 24%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,068 667 60% 2,525 2,017 25%
Benefits, claims and claim adjustment expenses 703 366 92% 1,541 1,058 46%
Insurance operating costs and other expenses 105 108 (3%) 309 324 (5%)
Amortization of deferred policy acquisition costs 133 92 45% 338 299 13%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 941 566 66% 2,188 1,681 30%
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 127 101 26% 337 336 -
Income tax expense 24 20 20% 36 70 (49%)
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 103 $ 81 27% $ 301 $ 266 13%
- -------------------------------------------------------------------------------------------------------------------------
Individual variable annuity account values $ 77,572 $ 59,618 30%
Other individual annuity account values 10,939 10,513 4%
Other investment products account values 23,992 19,062 26%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES [1] $ 112,503 $ 89,193 26%
=========================================================================================================================
[1] Includes policyholder balances for investment contracts and reserves for
future policy benefits for insurance contracts.
Revenues in the Investment Products segment increased for the third quarter and
nine months ended September 30, 2003. The increase in earned premiums is due to
higher sales of terminal funding products in the institutional investment
products business. Net investment income increased primarily due to higher
general account assets in the individual annuity business. General account
individual annuity assets were $9.8 billion as of September 30, 2003, an
increase of $2.2 billion, or 29%, from September 30, 2002, due to policyholders
transfer activity and increased sales of individual annuities. Additionally, net
investment income related to other investment products increased as a result of
the growth in average assets over the last twelve months in the institutional
investment business, where related assets under management increased $2.2
billion, or 22%, since September 30, 2002, to $11.9 billion as of September 30,
2003. Assets under management is an internal performance measure used by the
Company since a significant portion of the Company's revenue is based upon asset
values. These revenues increase or decrease with a rise or fall, respectively,
in the level of average assets under management. Fee income in the Investment
Products segment was higher for the third quarter and nine months ended
September 30, 2003
as a result of higher average account values, specifically in the individual
annuities business, due primarily to stronger variable annuity sales and the
higher equity market values compared to the prior year period.
Total benefits, claims and expenses increased for the third quarter and nine
months ended September 30, 2003, primarily driven by growth in the institutional
investment business. Additionally, amortization of deferred policy acquisition
costs increased for the third quarter and nine months ended September 30, 2003
due to higher gross profits.
Net income increased for the third quarter and nine months ended September 30,
2003. Net income was higher for the nine months ended September 30, 2003 due to
the favorable impact of $21, resulting from the Company's previously discussed
change in estimate of the DRD tax benefit reported during 2002. The change in
estimate was the result of 2002 actual investment performance on the related
separate accounts being unexpectedly out of pattern with past performance, which
had been the basis for the estimate. The total DRD benefit related to the 2003
tax year for the nine months ended September 30, 2003 was $60.
INDIVIDUAL LIFE
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
OPERATING SUMMARY 2003 2002 CHANGE 2003 2002 CHANGE
- ---------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 171 $ 160 7% $ 499 $ 476 5%
Net investment income 56 56 - 167 168 (1%)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 227 216 5% 666 644 3%
Benefits, claims and claim adjustment expenses 99 92 8% 291 293 (1%)
Insurance operating costs and other expenses 36 34 6% 108 106 2%
Amortization of deferred policy acquisition costs 40 45 (11%) 123 115 7%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 175 171 2% 522 514 2%
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 52 45 16% 144 130 11%
Income tax expense 16 15 7% 45 44 2%
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 36 $ 30 20% $ 99 $ 86 15%
=========================================================================================================================
Variable life account values $ 1,208 $ 1,093 11%
Total account values $ 3,087 $ 2,983 3%
- -------------------------------------------------------------------------------------------------------------------------
Revenues in the Individual Life segment increased for the third quarter and nine
months ended September 30, 2003 primarily driven by increases in fees and cost
of insurance charges as life insurance in force values grew, and variable life
account values increased 11% from the prior year.
Total benefits, claims and expenses increased for the third quarter and nine
months ended September 30, 2003 principally due to higher benefit costs when
compared to the prior year favorable results. Year-to-date mortality was higher
in 2003 largely due to the increased size and age of the inforce business.
Net income increased for the third quarter and nine months ended September 30,
2003 due to increases in fee income and growth in the in force business. These
increases were partially offset by mortality experience for the third quarter
and nine months ended September 30, 2003 compared to the equivalent prior year
periods. Additionally, net income for the nine months ended September 30, 2003
includes the favorable impact of $2 DRD benefit resulting from the Company's
previously discussed change in estimate of the DRD tax benefit reported during
2002. The total DRD benefit related to the 2003 tax year for the nine months
ended September 30, 2003 was $3.
CORPORATE OWNED LIFE INSURANCE (COLI)
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
OPERATING SUMMARY 2003 2002 CHANGE 2003 2002 CHANGE
- ---------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 64 $ 79 (19%) $ 200 $ 237 (16%)
Net investment income 53 66 (20%) 169 213 (21%)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 117 145 (19%) 369 450 (18%)
Benefits, claims and claim adjustment expenses 78 108 (28%) 242 324 (25%)
Insurance operating costs and expenses (3) 16 NM 19 72 (74%)
Dividends to policyholders 15 7 114% 54 27 100%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 90 131 (31%) 315 423 (26%)
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 27 14 93% 54 27 100%
Income tax expense 8 4 100% 18 8 125%
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 19 $ 10 90% $ 36 $ 19 89%
=========================================================================================================================
Variable COLI account values $ 20,557 $ 19,298 7%
Leveraged COLI account values 2,602 3,601 (28%)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $ 23,159 $ 22,899 1%
=========================================================================================================================
COLI revenues decreased for the third quarter and nine months ended September
30, 2003 due to lower net investment and fee income. Net investment income
decreased, primarily due to the decline in leveraged COLI account values as a
result of surrender activity. Fee income was reduced as the result of lower
sales for the third quarter and nine months ended September 30, 2003 as compared
to the equivalent prior year periods.
Total benefits, claims and expenses decreased for the third quarter and nine
months ended September 30, 2003 primarily due to a decline in interest credited
due to lower general account assets and policy loans compared to prior year
related to the decline in the leveraged COLI account values noted above.
Additionally, total benefits, claims and expenses decreased for the third
quarter and nine months ended September 30, 2003 as a result of a $9 after-tax
benefit recorded in insurance operating costs and expenses related to the
Bancorp litigation. (For further discussion of the Bancorp litigation, see Note
5(a) of Notes to Condensed Consolidated Financial Statements.) These decreases
were partially offset by an increase in dividends to policyholders for the third
quarter and nine months ended September 30, 2003 due to an increase in mortality
dividends on the leveraged COLI product related primarily to surrender activity.
In addition, total benefits, claims and expenses for the nine months ended
September 30, 2002 included an $11 after-tax expense related to the Bancorp
litigation accrued in the first quarter of 2002.
Net income increased for the third quarter and nine months ended September 30,
2003 as compared to the prior periods principally as a result of the Bancorp
litigation benefit of $9, after-tax, recorded in the third quarter of 2003.
Excluding the benefit (expense) associated with the Bancorp litigation discussed
above, net income was $10 for the third quarter ended September 30, 2003 and
2002, and was $27 and $30 for the nine months ended September 30, 2003 and 2002.
INVESTMENTS
Hartford Life Insurance Company's general account and guaranteed separate
account investment portfolios are managed based on the underlying
characteristics and nature of each operation's respective liabilities and within
established risk parameters. (For a further discussion on Hartford Life
Insurance Company's approach to managing risks, see the Capital Markets Risk
Management section.)
Please refer to the Investments section of the MD&A in Hartford Life Insurance
Company's 2002 Form 10-K Annual Report for a description of the Company's
investment objectives and policies.
Return on general account invested assets is an important element of the
Company's financial results. Significant fluctuations in the fixed income or
equity markets could weaken the Company's financial condition or its results of
operations. Additionally, changes in market interest rates may impact the period
of time over which certain investments, such as mortgage-backed securities, are
repaid and whether certain investments are called by the issuers. Such changes
may, in turn, impact the yield on these investments and also may result in
reinvestment of funds received from calls and prepayments at rates below the
average portfolio yield.
Fluctuations in interest rates affect the Company's return on, and the fair
value of, fixed maturity investments, which comprised approximately 90% and 86%
of the fair value of its general account invested assets as of September 30,
2003 and December 31, 2002, respectively. Other events beyond the Company's
control could also adversely impact the fair value of these investments.
Specifically, a downgrade of an issuer's credit rating or default of payment by
an issuer could reduce the Company's investment return.
A decrease in the fair value of any investment that is deemed other than
temporary would result in the Company's recognition of a realized loss in its
financial results prior to the actual sale of the investment.
The following table identifies invested assets by type held in the Company's
general account as of September 30, 2003 and December 31, 2002.
COMPOSITION OF INVESTED ASSETS
- ----------------------------------------------------------------------------------------------
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------- --------------------------
AMOUNT PERCENT AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------
Fixed maturities, at fair value $ 30,314 90.3% $ 24,786 86.3%
Equity securities, at fair value 77 0.2% 120 0.4%
Policy loans, at outstanding balance 2,492 7.4% 2,895 10.1%
Limited partnerships, at fair value 228 0.7% 486 1.7%
Other investments 449 1.4% 432 1.5%
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 33,560 100.0% $ 28,719 100.0%
=============================================================================================
Fixed maturity investments increased 22% since December 31, 2002, primarily the
result of investment and universal life contract sales and operating cash flows.
In March 2003, the Company decided to liquidate its hedge fund limited
partnership investments and reinvest the proceeds in fixed maturity investments.
Hedge fund liquidations have totaled approximately $297 since December 31, 2002.
As of September 30, 2003, Hartford Life Insurance Company owned approximately
$71 of hedge fund investments, all of which are expected to be liquidated by
March 31, 2004.
INVESTMENT RESULTS
The table below summarizes the Company's investment results.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
(Before-tax) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 403 $ 336 $ 1,175 $ 962
Policy loan income 50 60 161 194
---------------------------------------------------------
Net investment income - total $ 453 $ 396 $ 1,336 $ 1,156
Yield on average invested assets [1] 5.8% 6.1% 6.0% 6.2%
- ---------------------------------------------------------------------------------------------------------------
Gross gains on sale $ 44 $ 34 $ 168 $ 89
Gross losses on sale (15) (25) (83) (60)
Impairments (27) (101) (93) (253)
Other, net [2] (10) -- (10) (6)
---------------------------------------------------------
Net realized capital gains (losses) $ (8) $ (92) $ (18) $ (230)
===============================================================================================================
[1] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost or amortized
cost, as applicable, for the third quarter and nine months ended September
30, 2003 and 2002. Average invested assets are calculated by dividing the
sum of the beginning and ending period amounts by two.
[2] Primarily consists of changes in fair value and hedge ineffectiveness on
derivative instruments.
For the third quarter and nine months ended September 30, 2003, net investment
income, excluding policy loan income, increased $67, or 20%, and $213, or 22%,
compared to the respective prior year periods. The increases in net investment
income were primarily due to income earned on a higher invested asset base
partially offset by lower investment yields. Yields on average invested assets
decreased as a result of lower rates on new investment purchases and decreased
policy loan income.
Net realized capital gains (losses) for the third quarter and nine months ended
September 30, 2003 improved by $84 and $212, respectively, compared to the prior
year periods, primarily as a result of a decrease in other than temporary
impairments on fixed maturities.
The table below and following discussion identify the Company's other than
temporary impairments by type.
OTHER THAN TEMPORARY IMPAIRMENTS BY TYPE
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Asset-backed securities ("ABS")
Aircraft lease receivables $ 15 $ 50 $ 15 $ 64
Corporate debt obligations ("CDO") -- 10 10 17
Credit card receivables -- -- 12 --
Interest only securities -- 3 5 3
Manufacturing housing ("MH") receivables 9 12 9 12
Mutual fund fee receivables -- 7 2 14
Other ABS 2 2 2 4
Commercial mortgage-backed securities ("CMBS") -- -- 4 --
Corporate
Basic industry 1 -- 1 --
Consumer non-cyclical -- -- 7 --
Financial services -- 1 2 1
Technology and communications -- 10 3 125
Transportation -- -- 7 1
Utilities -- 6 -- 12
Equity -- -- 8 --
Mortgage-backed securities ("MBS") - interest only securities -- -- 6 --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL IMPAIRMENTS $ 27 $ 101 $ 93 $ 253
===================================================================================================================================
ABS
During 2003, impairments were recorded for various ABS security types as a
result of a continued deterioration of cash flows derived from the underlying
collateral. The ABS securities supported by aircraft lease and enhanced
equipment trust certificates (together, "aircraft lease receivables") have
continued to decline primarily due to a reduction in lease payments and aircraft
values driven by a decline in airline travel. CDO impairments were primarily the
result of increasing default rates and lower recovery rates on the collateral.
Impairments on securities supported by MH receivables were primarily the result
of repossessed units liquidated at depressed levels. Interest only security
impairments recorded during 2003 and 2002 were due to the flattening of the
forward yield curve.
Impairments of ABS during the nine months ended September 30, 2002 were driven
by deterioration of collateral cash flows. Numerous bankruptcies, collateral
defaults, weak economic conditions and reduced airline travel were all factors
contributing to lower collateral cash flows and broker quoted market prices of
ABS in 2002.
Corporate
The decline in corporate bankruptcies and improvement in general economic
conditions have contributed to much lower corporate impairment levels in 2003
compared to 2002.
Corporate impairments recorded during the third quarter of 2003 were
concentrated in the United States steel industry and resulted from a decision to
dispose of securities, which were in an unrealized loss position. A significant
portion of corporate impairments during the nine months ended September 30, 2003
were driven by a deterioration in the transportation sector, specifically
issuers of airline debt as the result of a decline in airline travel.
Impairments during the nine months ended September 30, 2003 were also the result
of one consumer non-cyclical issuer in the healthcare industry stemming from its
decline in value due to accounting fraud, and one communications sector issuer
in the cable television industry due to deteriorating earnings forecasts, debt
restructuring issues and accounting irregularities.
For the third quarter and nine months ended September 30, 2002, impairments of
corporate securities were concentrated in the technology and communications
sector and for the nine months ended September 30, 2002 included a $74
before-tax loss related to securities issued by WorldCom.
Other
Other than temporary impairments were also recorded in 2003 and 2002, on various
diversified seeded equity and mutual fund investments that had experienced
declines in fair value for an extended period of time.
CAPITAL MARKETS RISK MANAGEMENT
Hartford Life Insurance Company has a disciplined approach to managing risks
associated with its capital markets and asset/liability management activities.
Investment portfolio management is organized to focus investment management
expertise on specific classes of investments, while asset/liability management
is the responsibility of dedicated risk management units supporting Hartford
Life Insurance Company, including the Company's guaranteed separate accounts.
Derivative instruments are utilized in compliance with established Company
policy and regulatory requirements and are monitored internally and reviewed by
senior management.
The Company is exposed to two primary sources of investment and asset/liability
management risk: credit risk, relating to the uncertainty associated with the
ability of an obligor or counterparty to make timely payments of principal
and/or interest, and market risk, relating to the market price and/or cash flow
variability associated with changes in interest rates, securities prices, market
indices, yield curves or currency exchange rates. The Company does not hold any
financial instruments purchased for trading purposes.
Please refer to the Capital Markets Risk Management section of the MD&A in
Hartford Life Insurance Company's 2002 Form 10-K Annual Report for a description
of the Company's objectives, policies and strategies.
CREDIT RISK
The Company invests primarily in securities that are rated investment grade, and
has established exposure limits, diversification standards and review procedures
for all credit risks including borrower, issuer and counterparty.
Creditworthiness of specific obligors is determined by an internal credit
evaluation supplemented by consideration of external determinants of
creditworthiness, typically ratings assigned by nationally recognized ratings
agencies. Obligor, asset sector and industry concentrations are subject to
established limits and are monitored on a regular basis. Hartford Life Insurance
Company is not exposed to any credit concentration risk of a single issuer
greater than 10% of the Company's stockholders' equity.
The following table identifies fixed maturity securities by type, including
guaranteed separate accounts, as of September 30, 2003 and December 31, 2002.
FIXED MATURITIES BY TYPE
SEPTEMBER 30, 2003
------------------------------------------------------
PERCENT
OF
TOTAL
AMORTIZED UNREALIZED UNREALIZED FAIR FAIR
COST GAINS LOSSES VALUE VALUE
- ----------------------------------------------------------------------------------
ABS $ 5,158 $ 106 $ (123) $ 5,141 12.2%
CMBS 6,587 452 (16) 7,023 16.8%
Collateralized mortgage
obligation ("CMO") 830 20 (1) 849 2.0%
Corporate
Basic industry 2,456 178 (8) 2,626 6.3%
Capital goods 1,311 101 (5) 1,407 3.3%
Consumer cyclical 1,997 143 (6) 2,134 5.1%
Consumer non-cyclical 2,664 209 (6) 2,867 6.8%
Energy 1,423 132 (5) 1,550 3.7%
Financial services 4,921 416 (35) 5,302 12.7%
Technology and
communications 3,292 380 (9) 3,663 8.7%
Transportation 574 46 (6) 614 1.5%
Utilities 1,820 168 (18) 1,970 4.7%
Other 481 28 (1) 508 1.2%
Government/Government
agencies
Foreign 527 65 (1) 591 1.4%
United States 832 46 (1) 877 2.1%
MBS - agency 1,867 37 (1) 1,903 4.5%
Municipal
Taxable 261 14 (5) 270 0.6%
Redeemable preferred stock 1 -- -- 1 --
Short-term 2,694 2 -- 2,696 6.4%
- ---------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 39,696 $ 2,543 $ (247) $ 41,992 100.0%
=================================================================================
Total general account
fixed maturities $ 28,658 $ 1,822 $ (166) $ 30,314 72.2%
Total guaranteed separate
account fixed maturities $ 11,038 $ 721 $ (81) $ 11,678 27.8%
=================================================================================
DECEMBER 31, 2002
-------------------------------------------------------
PERCENT
OF
TOTAL
AMORTIZED UNREALIZED UNREALIZED FAIR FAIR
COST GAINS LOSSES VALUE VALUE
- --------------------------------------------------------------------------------------
ABS $ 5,115 $ 109 $ (143) $ 5,081 14.2%
CMBS 4,979 416 (9) 5,386 15.0%
Collateralized mortgage
obligation ("CMO") 752 33 (2) 783 2.2%
Corporate
Basic industry 2,000 129 (7) 2,122 5.9%
Capital goods 1,048 68 (7) 1,109 3.1%
Consumer cyclical 1,425 88 (3) 1,510 4.2%
Consumer non-cyclical 2,462 176 (16) 2,622 7.3%
Energy 1,446 110 (8) 1,548 4.3%
Financial services 4,956 307 (81) 5,182 14.4%
Technology and
communications 2,911 247 (68) 3,090 8.6%
Transportation 571 45 (11) 605 1.7%
Utilities 1,757 114 (41) 1,830 5.1%
Other 404 18 -- 422 1.2%
Government/Government
agencies
Foreign 720 68 (5) 783 2.2%
United States 553 44 -- 597 1.7%
MBS - agency 2,035 58 -- 2,093 5.8%
Municipal
Taxable 98 16 (1) 113 0.3%
Redeemable preferred stock 1 -- -- 1 --
Short-term 993 1 -- 994 2.8%
- -------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 34,226 $ 2,047 $ (402) $ 35,871 100.0%
=====================================================================================
Total general account
fixed maturities $ 23,675 $ 1,389 $ (278) $ 24,786 69.1%
Total guaranteed separate
account fixed maturities $ 10,551 $ 658 $ (124) $ 11,085 30.9%
=====================================================================================
The Company's fixed maturity gross unrealized gains and losses have improved by
$496 and $155, respectively, from December 31, 2002 to September 30, 2003,
primarily the result improved corporate credit quality and to a lesser extent
asset sales, partially offset by an increase in interest rates. The improvement
in corporate credit quality was largely due to the security issuers' renewed
emphasis on improving liquidity, reducing leverage and various cost cutting
measures. Throughout 2003, the general economic outlook has continued to
rebound, the result of improved profitability supported by improved
manufacturing demand, a continued strong housing market and robust consumer and
government spending. The apparent economic acceleration has resulted in the
increase of the 10-year Treasury rate since December 2002, including an 80 basis
point increase from its low in June 2003 of 3.1%. In recent months, there has
been a considerable amount of volatility in the Treasury market. Speculation
over the possibility of the Federal Reserve purchasing Treasuries combined with
talk of deflation on the part of the Federal Reserve pushed the yield on 10-year
Treasuries down to its June low. However, signs of a rebound in the economy and
the Federal Reserve's comments downplaying the prospects for both deflation and
market intervention have caused the price of 10-year Treasuries to fall by
almost 9% between mid-June and the end of July, as the yield rose to nearly
4.5%. As of September 30, 2003, the 10-year Treasury yield dipped down to 3.94%.
Except for CMBS and short-term securities, the investment allocations as a
percentage of total fixed maturities have remained materially consistent since
December 31, 2002.
Portfolio allocations to CMBS increased due to the asset class's stable spreads
and high quality. CMBS securities have lower prepayment risk than MBS due to
contractual penalties. Short-term securities have increased primarily due to the
receipt of operating cash flows awaiting investment in longer term securities
and from the collateral obtained related to the Company's securities lending
program.
For a discussion of risk factors associated with sectors with significant
unrealized loss positions, please see the sector risk factor commentary under
the Total Securities with Unrealized Loss Greater than Six Months by Type
schedule in this section of the MD&A.
The following table identifies fixed maturities by credit quality, including
guaranteed separate accounts, as of September 30, 2003 and December 31, 2002.
The ratings referenced below are based on the ratings of a nationally recognized
rating organization or, if not rated, assigned based on the Company's internal
analysis of such securities.
FIXED MATURITIES BY CREDIT QUALITY
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------- ------------------------------------
PERCENT OF PERCENT OF
AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
United States Government/Government agencies $ 3,493 $ 3,590 8.6% $ 3,213 $ 3,341 9.3%
AAA 5,905 6,215 14.9% 5,077 5,399 15.1%
AA 3,271 3,456 8.2% 3,334 3,507 9.8%
A 11,872 12,777 30.4% 11,019 11,687 32.5%
BBB 10,420 11,145 26.5% 8,662 9,081 25.3%
BB & below 2,041 2,113 5.0% 1,928 1,862 5.2%
Short-term 2,694 2,696 6.4% 993 994 2.8%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 39,696 $ 41,992 100.0% $ 34,226 $ 35,871 100.0%
=================================================================================================================================
Total general account fixed maturities $ 28,658 $ 30,314 72.2% $ 23,675 $ 24,786 69.1%
Total guaranteed separate account fixed maturities $ 11,038 $ 11,678 27.8% $ 10,551 $ 11,085 30.9%
=================================================================================================================================
As of September 30, 2003 and December 31, 2002, over 95% and 94%, respectively,
of the fixed maturity portfolio was invested in securities rated investment
grade (BBB and above).
The following table presents the Below Investment Grade ("BIG") fixed maturities
by type including guaranteed separate accounts, as of September 30, 2003 and
December 31, 2002.
BIG FIXED MATURITIES BY TYPE
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------- -------------------------------------
PERCENT OF PERCENT OF
AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
ABS $ 239 $ 197 9.3% $ 149 $ 132 7.1%
CMBS 112 113 5.3% 102 108 5.8%
Corporate
Basic industry 187 190 9.1% 197 198 10.6%
Capital goods 112 113 5.3% 131 131 7.0%
Consumer cyclical 239 254 12.0% 213 218 11.7%
Consumer non-cyclical 261 268 12.8% 181 173 9.3%
Energy 76 83 3.9% 80 81 4.4%
Financial services 11 12 0.6% 25 18 1.0%
Technology and communications 291 338 16.0% 383 345 18.5%
Transportation 23 24 1.1% 19 18 1.0%
Utilities 321 324 15.3% 287 261 14.0%
Foreign government 158 185 8.8% 145 162 8.7%
Other [1] 11 12 0.5% 16 17 0.9%
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 2,041 $ 2,113 100.0% $ 1,928 $ 1,862 100.0%
================================================================================================================================
Total general account fixed maturities $ 1,254 $ 1,293 61.2% $ 1,239 $ 1,178 63.3%
Total guaranteed separate account fixed maturities $ 787 $ 820 38.8% $ 689 $ 684 36.7%
================================================================================================================================
[1] Other represents redeemable preferred stocks and real estate investment
trusts.
As of September 30, 2003 and December 31, 2002, the Company held no issuer of a
BIG security with a fair value in excess of 3% and 2%, respectively, of the
total fair value for BIG securities. The following table presents the Company's
unrealized loss aging for total fixed maturity and equity securities, including
guaranteed separate accounts, as of September 30, 2003 and December 31, 2002, by
length of time the security was in an unrealized loss position.
UNREALIZED LOSS AGING OF TOTAL SECURITIES
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------ ------------------------------------
AMORTIZED FAIR UNREALIZED AMORTIZED FAIR UNREALIZED
COST VALUE LOSS COST VALUE LOSS
- ------------------------------------------------------------------------------------------------------------------------------------
Three months or less $ 2,753 $ 2,693 $ (60) $ 1,382 $ 1,316 $ (66)
Greater than three months to six months 338 323 (15) 1,211 1,158 (53)
Greater than six months to nine months 247 239 (8) 519 465 (54)
Greater than nine months to twelve months 311 287 (24) 1,247 1,181 (66)
Greater than twelve months 1,619 1,475 (144) 1,873 1,693 (180)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 5,268 $ 5,017 $ (251) $ 6,232 $ 5,813 $ (419)
===================================================================================================================================
Total general account $ 3,484 $ 3,314 $ (170) $ 4,113 $ 3,820 $ (293)
Total guaranteed separate account $ 1,784 $ 1,703 $ (81) $ 2,119 $ 1,993 $ (126)
===================================================================================================================================
The decrease in the unrealized loss amount since December 31, 2002 is primarily
the result of improved corporate fixed maturity credit quality and to a lesser
extent asset sales, partially offset by an increase in interest rates. For
further discussion, please see the economic commentary under the Fixed
Maturities by Type table in this section of the MD&A.
As of September 30, 2003, fixed maturities represented $247, or 98%, of the
Company's total unrealized loss. There were no fixed maturities as of September
30, 2003 with a fair value less than 80% of the security's amortized cost basis
for six continuous months other than certain asset-backed and commercial
mortgage-backed securities. Other than temporary impairments for certain
asset-backed and commercial mortgage-backed securities are recognized if the
fair value of the security, as determined by external pricing sources, is less
than its carrying amount and there has been a decrease in the present value of
the expected cash flows since the last reporting period. There were no
asset-backed or commercial mortgage-backed securities included in the table
above, as of September 30, 2003 and December 31, 2002, for which management's
best estimate of future cash flows adversely changed during the reporting
period. As of September 30, 2003, no asset-backed securities had an unrealized
loss in excess of $20. For a detailed discussion of the other than temporary
impairment criteria, see "Valuation of Investments and Derivative Instruments"
included in the Critical Accounting Estimates section of the MD&A and in Note
1(g) of Notes to Consolidated Financial Statements, both of which are included
in Hartford Life Insurance Company's 2002 Form 10-K Annual Report.
As of September 30, 2003 and December 31, 2002, the Company held no securities
of a single issuer that were at an unrealized loss position in excess of 8% and
4%, respectively, of the total period ended unrealized loss amount.
The total securities in an unrealized loss position for longer than six months
by type as of September 30, 2003 and December 31, 2002 are presented in the
following table.
TOTAL SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS BY TYPE
SEPTEMBER 30, 2003 DECEMBER 31, 2002
--------------------------------------------- ---------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMORTIZED FAIR UNREALIZED UNREALIZED AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE LOSS LOSS COST VALUE LOSS LOSS
- ------------------------------------------------------------------------------------------------------------------------------------
ABS and CMBS
Aircraft lease receivables $ 160 $ 101 $ (59) 33.5% $ 90 $ 77 $ (13) 4.3%
CDOs 156 132 (24) 13.6% 204 172 (32) 10.7%
Credit card receivables 243 224 (19) 10.8% 358 317 (41) 13.7%
MH receivables 27 25 (2) 1.1% 21 20 (1) 0.3%
Other ABS and CMBS 714 702 (12) 6.8% 668 655 (13) 4.3%
Corporate
Financial services 543 511 (32) 18.3% 614 557 (57) 19.0%
Technology and communications 18 17 (1) 0.6% 427 380 (47) 15.7%
Transportation 26 21 (5) 2.8% 60 50 (10) 3.3%
Utilities 132 119 (13) 7.4% 256 233 (23) 7.7%
Other 144 136 (8) 4.5% 585 563 (22) 7.3%
Diversified equity mutual funds 4 3 (1) 0.6% 64 48 (16) 5.3%
Other securities 10 10 -- -- 292 267 (25) 8.4%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,177 $ 2,001 $ (176) 100.0% $ 3,639 $ 3,339 $ (300) 100.0%
- ---------------------------------------------------------------------------------------------------------------------------------
Total general account $ 1,392 $ 1,276 $ (116) 65.9% $ 2,362 $ 2,164 $ (198) 66.0%
Total guaranteed separate account $ 785 $ 725 $ (60) 34.1% $ 1,277 $ 1,175 $ (102) 34.0%
=================================================================================================================================
The ABS in an unrealized loss position for six months or more as of September
30, 2003, were primarily supported by aircraft lease receivables, CDOs and
credit card receivables. The Company's current view of risk factors relative to
these fixed maturity types is as follows:
Aircraft lease receivables - The securities supported by aircraft, aircraft
lease payments and enhanced equipment trust certificates (together, "aircraft
lease receivables") have continued to decline in value due to a reduction in
lease payments and aircraft values driven by a decline in airline travel, which
resulted in bankruptcies and other financial difficulties of airline carriers.
As a result of these factors, significant risk premiums have been required by
the market for securities in this sector, resulting in reduced liquidity and
lower broker quoted prices. The level of recovery will depend on economic
fundamentals and airline operating performance. Aircraft lease receivables will
be further stressed if passenger air traffic declines or airlines liquidate
rather than emerge from bankruptcy protection.
CDOs - Adverse CDO experience can be attributed to higher than expected default
rates on the collateral, particularly in the technology and utilities sectors,
and lower than expected recovery rates. Improved economic and operating
fundamentals of the underlying security issuers should lead to improved pricing
levels.
Credit card receivables - The unrealized loss position in credit card securities
has primarily been caused by exposure to companies originating loans to
sub-prime borrowers. While the unrealized loss position improved for these
holdings during the year, the Company believes that this sub-sector will
continue to be under stress and expects holdings to be very sensitive to changes
in collateral performance.
As of September 30, 2003, security types other than ABS and CMBS that were in a
significant unrealized loss position were corporate fixed maturities primarily
within the financial services and utilities sectors.
Financial Services - The financial services securities in an unrealized loss
position are primarily variable rate securities with extended maturity dates,
which have been adversely impacted by the reduction in forward interest rates
resulting in lower expected cash flows. Unrealized loss amounts for these
securities have declined during the year as interest rates have risen.
Additional changes in fair value of these securities are primarily dependent on
future changes in forward interest rates. A substantial percentage of these
securities are currently hedged with interest rate swaps, which convert the
variable rate earned on the securities to a fixed amount. The swaps receive cash
flow hedge accounting treatment and are currently in an unrealized gain
position.
Utilities - The utilities sector remains adversely impacted by several events
that primarily occurred in 2001 including the bankruptcy of Enron Corp., the
decline in the energy trading industry and the regulatory, political and legal
affect of the California Utility Crisis. These events led to credit downgrades,
which continue to negatively impact security price levels. Companies have begun
to reduce leverage, selling various non-core businesses and have secured
liquidity sources either through capital market issuances or bank lines to
support cash flow needs. Improved credit fundamentals coupled with increased
energy prices and demand should allow the price of these companies' securities
to improve.
As part of the Company's ongoing security monitoring process by a committee of
investment and accounting professionals, the Company has reviewed its investment
portfolio and concluded that there were no additional other than temporary
impairments as of September 30, 2003 and December 31, 2002. Due to the issuers'
continued satisfaction of the securities' obligations in accordance with their
contractual terms and the expectation that they will continue to do so, as well
as the evaluation of the fundamentals of the issuers' financial condition, the
Company believes that the prices of the securities in the sectors identified
above were temporarily depressed primarily as a result of a market dislocation
and generally poor cyclical economic conditions and sentiment. See "Valuation of
Investments and Derivative Instruments" included in the Critical Accounting
Estimates section of MD&A and in Note 1(g) of Notes to Consolidated Financial
Statements both included in Hartford Life Insurance Company's 2002 Form 10-K
Annual Report.
The evaluation for other than temporary impairments is a quantitative and
qualitative process, which is subject to risks and uncertainties in the
determination of whether declines in the fair value of investments are other
than temporary. The risks and uncertainties include changes in general economic
conditions, the issuer's financial condition or near term recovery prospects and
the effects of changes in interest rates. In addition, for securitized financial
assets with contractual cash flows (e.g. ABS and CMBS), projections of expected
future cash flows may change based upon new information regarding the
performance of the underlying collateral.
The following table presents the Company's unrealized loss aging for BIG and
equity securities, including guaranteed separate accounts, as of September 30,
2003 and December 31, 2002.
UNREALIZED LOSS AGING OF BIG AND EQUITY SECURITIES
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------ ------------------------------------
AMORTIZED FAIR UNREALIZED AMORTIZED FAIR UNREALIZED
COST VALUE LOSS COST VALUE LOSS
- ------------------------------------------------------------------------------------------------------------------------------------
Three months or less $ 229 $ 218 $ (11) $ 131 $ 104 $ (27)
Greater than three months to six months 72 65 (7) 188 165 (23)
Greater than six months to nine months 51 49 (2) 160 134 (26)
Greater than nine months to twelve months 60 53 (7) 299 264 (35)
Greater than twelve months 300 241 (59) 354 299 (55)
TOTAL $ 712 $ 626 $ (86) $ 1,132 $ 966 $ (166)
===================================================================================================================================
Total general account $ 531 $ 462 $ (69) $ 800 $ 669 $ (131)
Total guaranteed separate account $ 181 $ 164 $ (17) $ 332 $ 297 $ (35)
===================================================================================================================================
Similar to the decrease in the Unrealized Loss Aging of Total Securities table
from December 31, 2002 to September 30, 2003, the decrease in the BIG and equity
security unrealized loss amount was primarily the result of improved corporate
fixed maturity credit quality and to a lesser extent asset sales, partially
offset by an increase in interest rates. For further discussion, please see the
economic commentary under the Fixed Maturities by Type table in this section of
the MD&A.
The BIG and equity securities in an unrealized loss position for longer than six
months by type as of September 30, 2003 and December 31, 2002 are presented in
the following table.
BIG AND EQUITY SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS BY TYPE
SEPTEMBER 30, 2003 DECEMBER 31, 2002
---------------------------------------------- ----------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMORTIZED FAIR UNREALIZED UNREALIZED AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE LOSS LOSS COST VALUE LOSS LOSS
- ------------------------------------------------------------------------------------------------------------------------------------
ABS and CMBS
Aircraft lease receivables $ 52 $ 32 $ (20) 29.4% $ -- $ -- $ -- --
CDOs 37 29 (8) 11.8% 2 1 (1) 0.9%
Credit card receivables 48 32 (16) 23.5% 26 17 (9) 7.8%
Other ABS and CMBS 41 37 (4) 5.9% 37 32 (5) 4.3%
Corporate
Financial Services -- -- -- -- 9 8 (1) 0.9%
Technology and communications 14 12 (2) 2.9% 211 177 (34) 29.3%
Transportation 9 7 (2) 2.9% 13 10 (3) 2.6%
Utilities 117 106 (11) 16.2% 123 107 (16) 13.8%
Other 89 85 (4) 5.9% 226 210 (16) 13.8%
Diversified equity mutual funds 4 3 (1) 1.5% 64 48 (16) 13.8%
Other securities -- -- -- -- 102 87 (15) 12.8%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 411 $ 343 $ (68) 100.0 $ 813 $ 697 $ (116) 100.0%
- ---------------------------------------------------------------------------------------------------------------------------------
Total general account $ 290 $ 239 $ (51) 75.0% $ 552 $ 464 $ (88) 75.9%
Total guaranteed separate account $ 121 $ 104 $ (17) 25.0% $ 261 $ 233 $ (28) 24.1%
=================================================================================================================================
For a discussion of the Company's current view of risk factors relative to
certain security types listed above, please refer to the Total Securities with
Unrealized Loss Greater Than Six Months by Type table in this section of the
MD&A.
EQUITY RISK
The Company's operations are significantly influenced by changes in the equity
markets. The Company's profitability depends largely on the amount of assets
under management, which is primarily driven by the level of sales, equity market
appreciation and depreciation and the persistency of the in-force block of
business. Prolonged and precipitous declines in the equity markets can have a
significant impact on the Company's operations, as sales of variable products
may decline and surrender activity may increase, if customer sentiment towards
the equity market turns negative. Lower assets under management will have a
negative impact on the Company's financial results, primarily due to lower fee
income related to the Investment Products and Individual Life segments, where a
heavy concentration of equity-linked products are administered and sold.
Furthermore, the Company may experience a reduction in profit margins if a
significant portion of the assets held in the variable annuity separate accounts
move to the general account and the Company is unable to earn an acceptable
investment spread, particularly in light of the low interest rate environment
and the presence of contractually guaranteed minimum interest credited rates,
which for the most part are at a 3% rate.
In addition, prolonged declines in the equity market may also decrease the
Company's expectations of future gross profits, which are utilized to determine
the amount of DAC to be amortized in a given financial statement period. A
significant decrease in the Company's estimated gross profits would require the
Company to accelerate the amount of DAC amortization in a given period,
potentially causing a material adverse deviation in that period's net income.
Although an acceleration of DAC amortization would have a negative impact on the
Company's earnings, it would not affect the Company's cash flow or liquidity
position.
Additionally, the Investment Products segment sells variable annuity contracts
that offer various guaranteed death benefits. For certain guaranteed death
benefits, The Hartford pays the greater of (1) the account value at death; (2)
the sum of all premium payments less prior withdrawals; or (3) the maximum
anniversary value of the contract, plus any premium payments since the contract
anniversary, minus any withdrawals following the contract anniversary. The
Company currently reinsures a significant portion of the death benefit
guarantees associated with its in-force block of business. The Company currently
records the death benefit costs, net of reinsurance, as they are incurred.
Declines in the equity market may increase the Company's net exposure to death
benefits under these contracts.
The Company's total gross exposure (i.e. before reinsurance) to these guaranteed
death benefits as of September 30, 2003 was $16.2 billion. Due to the fact that
77% of this amount is reinsured, the Company's net exposure is $3.7 billion.
This amount is often referred to as the retained net amount at risk. However,
the Company will incur these guaranteed death benefit payments in the future
only if the policyholder has an in-the-money guaranteed death benefit at their
time of death. In order to analyze the total costs that the Company may incur in
the future related to these guaranteed death benefits, the Company performed an
actuarial present value analysis. This analysis included developing a model
utilizing stochastically generated scenarios and best estimate assumptions
related to mortality and lapse rates. A range of projected costs was developed
and discounted back to the financial statement date utilizing the Company's cost
of capital, which for this purpose was assumed to be 9.25%. Based on this
analysis, the Company estimated a 95% confidence interval of the present value
of the retained death benefit costs to be incurred in the future to be a range
of $110 to $368 for these contracts. The median of the stochastically generated
investment performance scenarios was $176.
On June 30, 2003, the Company recaptured a block of business previously
reinsured with an unaffiliated reinsurer. Under this treaty, Hartford Life
reinsured a portion of the guaranteed minimum death benefit (GMDB) feature
associated with certain of its annuity contracts. As consideration for
recapturing the business and final settlement under the treaty, the Company has
received assets valued at approximately $32 and one million warrants exercisable
for the unaffiliated company's stock. This amount represents to the Company an
advance collection of its future recoveries under the reinsurance agreement and
will be recognized as future losses are incurred. Prospectively, as a result of
the recapture, Hartford Life will be responsible for all of the remaining and
ongoing risks associated with the GMDB's related to this block of business. The
recapture increased the net amount at risk retained by the Company, which is
included in the net amount at risk discussed in Note 2 (f).
In the first quarter of 2004, the Company will adopt the provisions of Statement
of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts", (the "SOP").
The provisions of the SOP include a requirement for recording a liability for
variable annuity products with a guaranteed minimum death benefit feature. The
determination of this liability is also based on models that involve numerous
estimates and subjective judgments, including those regarding expected market
rates of return and volatility, contract surrender rates and mortality
experience. Based on management's preliminary review of the SOP and current
market conditions, the unrecorded GMDB liabilities, net of reinsurance, are
estimated to be between $50 and $60 at September 30, 2003. Net of estimated DAC
and income tax effects, the cumulative effect of establishing the required GMDB
reserves is expected to result in a reduction of net income of between $25 and
$35. The ultimate actual impact on the Company's financial statements will
differ from management's current estimates and will depend in part on market
conditions and other factors at the date of adoption.
In addition, the Company offers certain variable annuity products with a GMWB
rider. The GMWB provides the policyholder with a guaranteed remaining balance
("GRB") if the account value is reduced to zero through a combination of market
declines and withdrawals. The GRB is generally equal to premiums less
withdrawals. However, annual withdrawals that exceed 7% of the premiums paid may
reduce the GRB by an amount greater than the withdrawals and may also impact
that guaranteed annual withdrawal amount that subsequently applies after the
excess annual withdrawals occur. The policyholder also has the option, after a
specified time period, to reset the GRB to the then-current account value, if
greater. The GMWB represents an embedded derivative liability in the variable
annuity contract that is required to be reported separately from the host
variable annuity contract. It is carried at fair value and reported in other
policyholder funds. The fair value of the GMWB obligations are calculated based
on actuarial assumptions related to the projected cash flows, including benefits
and related contract charges, over the lives of the contracts, incorporating
expectations concerning policyholder behavior. Because of the dynamic and
complex nature of these cash flows, stochastic techniques under a variety of
market return scenarios and other best estimate assumptions are used. Estimating
cash flows involves numerous estimates and subjective judgments including those
regarding expected market rates of return, market volatility, correlations of
market returns and discount rates.
Declines in the equity market may increase the Company's exposure to benefits
under these contracts. For all contracts in effect through July 6, 2003, the
Company entered into a third party reinsurance arrangement to offset its
exposure to the GMWB for the remaining lives of those contracts. As of July 6,
2003, the Company exhausted all but a small portion of the reinsurance capacity
for new business under this current arrangement and will be ceding only a very
small number of new contracts subsequent to July 6, 2003. Substantially all new
contracts with the GMWB are covered by a reinsurance arrangement with a related
party. See Note 6 "Related Party Transactions" for information on this
arrangement.
MARKET RISK
Hartford Life Insurance Company has material exposure to both interest rate and
equity market risk. The Company analyzes interest rate risk using various models
including multi-scenario cash flow projection models that forecast cash flows of
the liabilities and their supporting investments, including derivative
instruments. There have been no material changes in market risk exposures from
December 31, 2002.
DERIVATIVE INSTRUMENTS
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded futures and options, in compliance with
Company policy and regulatory requirements in order to achieve one of four
Company approved objectives: to hedge risk arising from interest rate, price
or currency exchange rate volatility; to manage liquidity; to control
transaction costs; or to enter into income enhancement and replication
transactions. The Company does not make a market or trade derivatives for the
express purpose of earning short term trading profits. (For further discussion
on the Company's use of derivative instruments, refer to Note 4 of Notes to
Condensed Consolidated Financial Statements.)
REGULATORY INITIATIVES AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is or may become involved in various legal actions, in the normal
course of its business, in which claims for alleged economic and punitive
damages have been or may be asserted, some for substantial amounts. Some of the
pending litigation has been filed as purported class actions and some actions
have been filed in certain jurisdictions that permit punitive damage awards that
are disproportionate to the actual damages incurred. Although there can be no
assurances, at the present time, the Company does not anticipate that the
ultimate liability arising from potential, pending or threatened legal actions,
after consideration of provisions made for estimated losses and costs of
defense, will have a material adverse effect on the financial condition or
operating results of the Company.
LEGISLATIVE INITIATIVES
Certain elements of the Jobs and Growth Tax Relief Reconciliation Act of 2003,
in particular the reduction in tax rates on long-term capital gains and most
dividend distributions, could have a material effect on the Company's sales of
variable annuities and other investment products. In addition, other tax
proposals and regulatory initiatives which have been or are being considered by
Congress could have a material effect on the insurance business. These proposals
and initiatives include changes pertaining to the tax treatment of insurance
companies and life insurance products and annuities, reductions in certain
individual tax rates and the estate tax, reductions in benefits currently
received by the Company stemming from the dividends received deduction, changes
to the tax treatment of deferred compensation arrangements, and changes to
investment vehicles and retirement savings plans and incentives. Prospects for
enactment and the ultimate market effect of these proposals are uncertain. Any
potential effect to the Company's financial condition or results of operations
from the Jobs and Growth Act of 2003 or future tax proposals cannot be
reasonably estimated at this time.
On August 15, 2003, the Treasury Department announced that it would not use its
legislatively-granted authority to include group life insurance under the
Federal backstop for terrorism losses in the Terrorism Risk Insurance Act of
2002. In announcing this decision, the Treasury stated that they would continue
to monitor the group life situation.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 2 of Notes to Condensed
Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Capital Markets Risk Management section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
The Company's principal executive officer and its principal financial officer,
based on their evaluation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)), have concluded that the Company's
disclosure controls and procedures are adequate and effective for the purposes
set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of
September 30, 2003.
Change in internal controls over financial reporting.
There was no change in the Company's internal control over financial reporting
that occurred during the second quarter of 2003 that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Hartford Life Insurance Company is or may become involved in various legal
actions, in the normal course of its business, in which claims for alleged
economic and punitive damages have been or may be asserted, some for substantial
amounts. Some of the pending litigation has been filed as purported class
actions and some actions have been filed in certain jurisdictions that permit
punitive damage awards that are disproportionate to the actual damages incurred.
Although there can be no assurances, at the present time, the Company does not
anticipate that the ultimate liability arising from potential, pending or
threatened legal actions, after consideration of provisions made for estimated
losses and costs of defense, will have a material adverse effect on the
financial condition or operating results of the Company.
In the third quarter of 2003, Hartford Life Insurance Company and its affiliate
International Corporate Marketing Group, LLC ("ICMG") settled their intellectual
property dispute with Bancorp Services, LLC ("Bancorp"). The dispute concerned,
among other things, Bancorp's claims for alleged patent infringement, breach of
a confidentiality agreement, and misappropriation of trade secrets related to
certain stable value corporate-owned life insurance products. The dispute was
the subject of litigation in the United States District Court for the Eastern
District of Missouri, in which Bancorp obtained in 2002 a judgment exceeding
$134 against HLIC and ICMG after a jury trial on the trade secret and breach of
contract claims, and HLIC and ICMG obtained summary judgment on the patent
infringement claim. Based on the advice of legal counsel following entry of the
judgment, the Company recorded an $11 after-tax charge in the first quarter of
2002 to increase litigation reserves. Both components of the judgment were
appealed.
Under the terms of the settlement, Hartford will pay a minimum of $70 and a
maximum of $80, depending on the outcome of the patent appeal, to resolve all
disputes between the parties. The appeal from the trade secret and breach of
contract judgment will be dismissed. The settlement resulted in the recording of
a $9 after-tax benefit in the third quarter of 2003 to reflect the Company's
portion of the settlement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K: None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTFORD LIFE INSURANCE COMPANY
/s/ Ernest M. McNeill Jr.
--------------------------------------------------
Ernest M. McNeill Jr.
Vice President and Chief Accounting Officer
November 5, 2003
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
FORM 10-Q
EXHIBITS INDEX
EXHIBIT #
- ---------
31.1 Certificate of Thomas M. Marra pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Lizabeth H. Zlatkus pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of Thomas M. Marra pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of Lizabeth H. Zlatkus pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.