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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 March 31, 2004
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 001-12749
HARTFORD LIFE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1470915
(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 April 30, 2004 there were outstanding 1,000 shares of Common Stock, $0.01
par value per share, of the registrant, all of which were directly owned by
Hartford Holdings, Inc., a direct wholly owned subsidiary of The Hartford
Financial Services Group, Inc.
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 - First Quarter
Ended March 31, 2004 and 2003 4
Condensed Consolidated Balance Sheets - March 31, 2004
and December 31, 2003 5
Condensed Consolidated Statements of Changes in
Stockholder's Equity - First Quarter Ended March 31, 2004 and 2003 6
Condensed Consolidated Statements of Cash Flows - First Quarter
Ended March 31, 2004 and 2003 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 37
ITEM 4. CONTROLS AND PROCEDURES 37
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 37
ITEM 2. EXHIBITS AND REPORTS ON FORM 8-K 38
Signature 39
Certifications 42
2
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholder
Hartford Life, Inc.
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of
Hartford Life, Inc and subsidiaries (the "Company") as of March 31, 2004, and
the related condensed consolidated statements of income, changes in
stockholder's equity, and cash flows for the first quarter ended March 31, 2004
and 2003. These interim financial statements are the responsibility of the
Company's management.
We conducted our reviews 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 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 interim 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, 2003, 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 25, 2004, 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, 2003 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
May 10, 2004
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FIRST QUARTER
ENDED
MARCH 31,
(In millions) (Unaudited) 2004 2003
- ------------------------------------------------------------------------------------ -------- --------
REVENUES
Fee income and other $ 786 644
Earned premiums 995 683
Net investment income 1,201 503
Net realized capital gains (losses) 76 (44)
-------- --------
TOTAL REVENUES 3,058 1,786
-------- --------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 1,877 1,083
Insurance expenses and other 514 340
Amortization of deferred policy acquisition costs and present value of future profits 233 163
Dividends to policyholders 13 15
Interest expense 35 29
-------- --------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,672 1,630
-------- --------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 386 156
Income tax expense 105 30
-------- --------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 281 126
-------- --------
Cumulative effect of accounting change, net of tax (23) --
-------- --------
NET INCOME $ 258 $ 126
-------- --------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(In millions, except for share data) 2004 2003
- ----------------------------------------------------------------------------- --------- ---------
(Unaudited)
ASSETS
Investments
Fixed maturities, available-for-sale, at fair value (amortized cost of
$46,386 and $35,569) $ 49,580 $ 37,462
Equity securities, available-for-sale, at fair value (cost of $389 and $335) 406 357
Equity securities, held for trading, at fair value 7,831 --
Policy loans, at outstanding balance 2,655 2,512
Other investments 1,167 823
--------- ---------
Total investments 61,639 41,154
Cash 460 265
Premiums receivable and agents' balances 338 335
Reinsurance recoverables 763 604
Deferred policy acquisition costs and present value of future profits 6,523 6,623
Deferred income taxes (927) (486)
Goodwill 796 796
Other assets 1,774 1,668
Separate account assets 127,141 136,633
--------- ---------
TOTAL ASSETS $ 198,507 $ 187,592
========= =========
LIABILITIES
Reserve for future policy benefits $ 11,666 $ 11,411
Other policyholder funds 45,322 26,186
Short-term debt 200 505
Long-term debt 1,050 1,300
Other liabilities 4,615 4,498
Separate account liabilities 127,141 136,633
--------- ---------
TOTAL LIABILITIES 189,994 180,533
========= =========
Commitments and Contingent Liabilities, Note 4
STOCKHOLDER'S EQUITY
Common Stock - 1,000 shares authorized, issued and outstanding;
par value $0.01 -- --
Capital surplus 2,994 2,489
Accumulated other comprehensive income
Net unrealized capital gains on securities, net of tax
Foreign currency translation adjustments
1,669 903
(44) (43)
Total accumulated other comprehensive income 1,625 860
Retained earnings 3,894 3,710
--------- ---------
TOTAL STOCKHOLDER'S EQUITY 8,513 7,059
========= =========
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 198,507 $ 187,592
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FIRST QUARTER ENDED MARCH 31, 2004
ACCUMULATED OTHER COMPREHENSIVE INCOME
---------------------------------------
NET NET GAIN
UNREALIZED (LOSS) ON
CAPITAL CASH FLOW FOREIGN
GAINS ON HEDGING CURRENCY TOTAL
COMMON CAPITAL SECURITIES, INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS NET OF TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- ------------------------------------------ ------ ------- ----------- ----------- ----------- -------- -------------
Balance, December 31, 2003 $ - $ 2,489 $ 928 $ (25) $ (43) $ 3,710 $ 7,059
Comprehensive income
Net income 258 258
-----------
Other comprehensive income, net of tax (1)
Cumulative effect of accounting change 292 292
Net change in unrealized capital gains on
securities (2) 422 422
Net gain on cash flow hedging
instruments 52 52
-----------
Cumulative translation adjustments (1) (1)
-----------
Total other comprehensive income 765
-----------
Total comprehensive income 1,023
-----------
Dividends declared (74) (74)
Capital contributions from parent 505 505
------ ------- ----------- ----------- ----------- -------- -----------
BALANCE, MARCH 31, 2004 $ - $ 2,994 $ 1,642 $ 27 $ (44) $ 3,894 $ 8,513
====== ======= =========== =========== =========== ======== ============
FIRST QUARTER ENDED MARCH 31, 2003
ACCUMULATED OTHER COMPREHENSIVE INCOME
---------------------------------------
NET NET GAIN
UNREALIZED (LOSS) ON
CAPITAL CASH FLOW FOREIGN
GAINS ON HEDGING CURRENCY TOTAL
COMMON CAPITAL SECURITIES, INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS NET OF TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- ------------------------------------------ ------ ------- ----------- ----------- ----------- -------- -------------
Balance, December 31, 2002 $ - $ 1,970 $ 621 $ 126 $ (39) $ 3,010 $ 5,688
Comprehensive income
Net income 126 126
-----------
Other comprehensive income, net of tax (1)
Net change in unrealized capital gains on 117 117
securities (2)
Net loss on cash flow hedging
instruments (22) (22)
-----------
Total other comprehensive income 95
-----------
Total comprehensive income 221
-----------
Dividends declared (18) (18)
------ ------- ----------- ----------- ----------- -------- -----------
BALANCE, MARCH 31, 2003 $ - $ 1,970 $ 738 $ 104 $ (39) $ 3,118 $ 5,891
====== ======= =========== =========== =========== ======== ============
(1) Unrealized gains on securities is net of tax and other items of $227 and
$63 for the first quarters ended March 31, 2004 and 2003, respectively.
Net gain (loss) on cash flow hedging instruments is net of tax provision
(benefit) of $28 and $(12) for the first quarters ended March 31, 2004 and
2003. There is no tax effect on cumulative translation adjustments.
(2) Net of reclassification adjustment for gains (losses) realized in net
income of $42 and $(28) for the first quarters ended March 31, 2004 and
2003, respectively.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST QUARTER ENDED
MARCH 31,
---------------------
(In millions) (Unaudited) 2004 2003
- ---------------------------------------------------------------------------------------- ------- -------
OPERATING ACTIVITIES
Net income $ 258 $ 126
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net realized capital (gains) losses (76) 44
Cumulative effect of adoption of SOP 03-1 23 --
Amortization of deferred policy acquisition costs and present value of future profits 233 163
Additions to deferred policy acquisition costs (494) (342)
Amortization of sales inducements 6 15
Additions to deferred sales inducements (33) (31)
Depreciation and amortization 24 34
(Increase) decrease in premiums receivable and agents' balances (3) 17
Increase in receivables (249) (37)
Increase in accrued liabilities and payables (197) (46)
(Decrease) increase in other liabilities (166) 90
Increase (decrease) in accrued taxes 16 (17)
Change in deferred income taxes 533 25
Increase in liabilities for future policy benefits 256 152
Net increase in equity securities, held for trading (1,611) --
Net receipts from investment contracts credited to policyholder accounts associated
with equity securities, held for trading 1,915 --
Decrease (increase) in reinsurance recoverables 2 (55)
Decrease (Increase) Other, net 270 (26)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 707 112
------- -------
INVESTING ACTIVITIES
Purchases of fixed maturity and equity security investments, available-for-sale (3,460) (4,159)
Sales of fixed maturity and equity security investments, available-for-sale 2,476 2,019
Maturity of fixed maturity and equity security investments, available-for-sale 749 888
Decrease (increase) in other assets 5 (12)
------- -------
NET CASH USED FOR INVESTING ACTIVITIES (230) (1,264)
------- -------
FINANCING ACTIVITIES
Capital contributions 505 --
Repayment of short-term debt (305) --
Repayment of company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely parent junior subordinated debentures (250) --
Dividends paid (67) (17)
Net (disbursements) receipts from investment and universal life-type contracts
credited to policyholder accounts (164) 1,279
------- -------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (281) 1,262
------- -------
Net increase in cash 196 110
Impact of foreign exchange (1) --
------- -------
Cash - beginning of period 265 179
------- -------
CASH - END OF PERIOD $ 460 $ 289
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID DURING THE PERIOD FOR
Income taxes $ 10 $ 16
Interest $ 28 $ 24
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
(Unaudited)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Hartford Life, Inc. (a Delaware corporation), together with its consolidated
subsidiaries ("Hartford Life" or the "Company"), is a leading financial services
and insurance organization which provides, primarily in the United States,
investment, retirement, estate planning and group benefits products. Hartford
Life, Inc. is a direct wholly-owned subsidiary of Hartford Holdings, Inc., a
direct wholly-owned subsidiary of The Hartford Financial Services Group, Inc.
("The Hartford").
On December 31, 2003, the Company acquired the group life and accident, and
short-term and long-term disability business of CNA Financial Corporation.
Accordingly, the Company's results of operations for the quarter ended March,
31, 2004 reflect the inclusion of this business. For further discussion of the
CNA Financial Corporation acquisition, see Note 17 of Notes to Consolidated
Financial Statements included in Hartford Life's 2003 Form 10-K Annual Report.
BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared on the basis
of accounting principles generally accepted in the United States, which differ
materially from the accounting prescribed by various insurance regulatory
authorities. The financial statements include the accounts of Hartford Life and
its wholly-owned as well as controlled majority owned subsidiaries. Subsidiaries
in which the Company has at least 20% interest, but less than a majority
ownership interest, are reported using the equity method. All intercompany
transactions and balances between Hartford Life, its subsidiaries and affiliates
have been eliminated.
The accompanying condensed, consolidated financial statements and notes as of
March 31, 2004, and for the first quarters ended March 31, 2004 and 2003 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 condensed
financial statements and notes should be read in conjunction with the
consolidated financial statements and notes thereto included in Hartford Life's
2003 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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial information to
conform to the current year classifications.
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 for
future policy benefits and other policyholder funds; deferred policy acquisition
costs and present value of future profits; investments; and commitments and
contingencies.
SIGNIFICANT ACCOUNTING POLICIES
For a description of accounting policies, see Note 2 of Notes to Consolidated
Financial Statements included in Hartford Life's 2003 Form 10-K Annual Report.
INVESTMENTS
As discussed in the "Adoption of New Accounting Standards" section below, on
January 1, 2004 the Company reclassified certain separate account assets to the
general account and classified a portion of these assets as trading securities.
Trading securities are recorded at fair value with periodic changes in fair
value recognized in net investment income.
8
STOCK-BASED COMPENSATION
In January 2003, The Hartford began expensing all stock-based compensation
awards granted or modified after January 1, 2003 under the fair value
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation". The fair value of these
awards will be recognized over the awards' vesting period, generally 3 years.
The allocated expense associated with stock-based compensation for the first
quarters ending March 31, 2004 and 2003, was immaterial. Prior to January 1,
2004, The Hartford used the Black-Scholes model to estimate the fair value of
The Hartford's stock-based compensation. For all awards granted or modified on
or after January 1, 2004, The Hartford used a binomial option-pricing model that
incorporates the possibility of early exercise of options into the valuation.
The binomial model also incorporates The Hartford's historical forfeiture and
exercise experience to determine the option value. For these reasons, The
Hartford believes the binomial model provides a fair value that is more
representative of actual historical experience than the value calculated under
the Black-Scholes model.
All stock-based awards granted or modified prior to January 1, 2003, 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 related to stock-based employee compensation,
including non-option plans, included in the determination of net income for the
first quarters ended March 31, 2004 and 2003 is less than that which would have
been recognized if the fair value method had been applied to all awards since
the effective date of SFAS No. 123. (For further discussion of the stock
compensation plans, see Note 10 of Notes to Consolidated Financial Statements
included in Hartford Life's 2003 Form 10-K Annual Report.)
ADOPTION OF NEW ACCOUNTING STANDARDS
In July 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued 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 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"),
certain death benefits on universal-life type contracts 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 the Company's interest in its 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, January 1, 2004, the
cumulative effect of the adoption of the SOP on net income and other
comprehensive income was comprised of the following individual impacts:
Other
Comprehensive
Cumulative Effect of Adoption Net Income Income
- ------------------------------------------------------------------ ---------- -------------
Establishing GMDB and other benefit reserves for annuity contracts $ (54) $ -
Reclassifying certain separate accounts to general accounts 30 294
Other 1 (2)
---------- -------------
Total cumulative effect of adoption $ (23) $ 292
========== =============
Death Benefits and Other Insurance Benefit Features
The Company sells variable annuity contracts that offer various guaranteed death
benefits. For certain guaranteed death benefits, the Company 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
9
following the contract anniversary. For certain guaranteed death benefits sold
with variable annuity contracts beginning in June 2003, the Company pays the
greater of (1) the account value at death; or (2) the maximum anniversary value;
not to exceed the account value plus the greater of (a) 25% of premium payments
or (b) 25% of the maximum anniversary value of the contract. The Company
currently reinsures a significant portion of these death benefit guarantees
associated with its in-force block of business. As of January 1, 2004, the
Company has recorded a liability for GMDB and other benefits sold with variable
annuity products of $225 and a related reinsurance recoverable asset of $108. As
of March 31, 2004, the liability from GMDB and other benefits sold with variable
annuity products was $218 with a related reinsurance recoverable asset of
$101.The determination of the GMDB liability and related reinsurance recoverable
is based on models that involve a range of scenarios and assumptions, including
those regarding expected market rates of return and volatility, contract
surrender rates and mortality experience. The assumptions used are consistent
with those used in determining estimated gross profits for purposes of
amortizing deferred acquisition costs.
The Individual Life segment sells universal life-type contracts with certain
secondary guarantees, such as a guarantee that the policy will not lapse, even
if the account value is reduced to zero, as long as the policyholder makes
scheduled premium payments. The cumulative effect on net income upon recording
liabilities for secondary guarantees was not material. Currently there is
diversity in industry practice and inconsistent guidance surrounding the
application of the SOP to universal life-type contracts. An AICPA task force has
been convened to develop guidance surrounding the methodology for determining
reserves for universal life-type contracts and the related secondary guarantees.
This may result in an adjustment to the cumulative effect of adopting the SOP
and could impact future earnings but is not expected to be material to the
Company's financial position or results of operations.
Separate Account Presentation
The Company had recorded certain market value adjusted ("MVA") fixed annuity
products and modified guarantee life insurance (primarily the Company's Compound
Rate Contract ("CRC") and associated assets) as separate account assets and
liabilities through December 31, 2003. Notwithstanding the market value
adjustment feature in this product, all of the investment performance of the
separate account assets is not being passed to the contract-holder, and it
therefore, does not meet the conditions for separate account reporting under the
SOP. On January 1, 2004, market value reserves included in separate account
liabilities for CRC of $10.8 billion, were revalued at current account value in
the general account to $10.1 billion. The related separate account assets of
$11.0 billion were also reclassified to the general account. Fixed maturities
and equity securities were reclassified to the general account, as
available-for- sale securities, and will continue to be recorded at fair value,
however, subsequent changes in fair value, net of amortization of deferred
policy acquisition costs and income taxes, will be recorded in other
comprehensive income rather than net income. On January 1, 2004, the Company
recorded a cumulative effect adjustment to earnings equal to the revaluation of
the liabilities from fair value to account value plus the adjustment to record
unrealized gains (losses) on available-for-sale invested assets, previously
recorded as a component of net income, as other comprehensive income. The
cumulative adjustments to earnings and other comprehensive income were recorded
net of amortization of deferred policy acquisition costs and income taxes.
Through December 31, 2003, the Company had recorded CRC assets and liabilities
on a market value basis with all changes in value (market value spread) included
in current earnings as a component of other revenues. Since adoption of the SOP,
the components of CRC spread on a book value basis are recorded in interest
income and interest credited. Realized gains and losses on investments and
market value adjustments on contract surrenders are recognized as incurred.
The Company had also recorded its variable annuity products offered in Japan in
separate account assets and liabilities through December 31, 2003. As the
separate account arrangement in Japan is not legally insulated from the general
account liabilities of the Company, it does not meet the conditions for separate
account reporting under the SOP. On January 1, 2004, separate account
liabilities in Japan of $6.2 billion recorded at account value in the separate
account, were reclassified to the general account with no change in value. The
related separate account assets of $6.2 billion were also reclassified to the
general account with no change in value. The investment assets were recorded at
fair value in a trading securities portfolio. As of March 31, 2004, due to
strong sales of Japan variable annuity products and positive performance of the
Japanese equity markets these assets had grown to $7.8 billion.
Interests in Separate Accounts
As of December 31, 2003, the Company had $24 representing unconsolidated
interests in its own separate accounts. These interests were recorded as
available-for-sale equity securities, with changes in fair value recorded
through other comprehensive income. On January 1, 2004, the Company reclassified
$11 to investment in trading securities, where the Company's proportionate
beneficial interest in the separate account was less than 20%. In instances
where the Company's proportionate beneficial interest was between 20-50%, the
Company reclassified $13 of its investment to reflect the Company's
proportionate interest in each of the underlying assets of the separate account.
The Company has designated its proportionate interest in these equity securities
and fixed maturity as available-for- sale. As of March 31, 2004, the Company had
$1 of interests in separate accounts recorded as equity trading securities and
$0 recorded as available-for-sale securities.
10
Sales Inducements
The Company currently offers enhanced crediting rates or bonus payments to
contract holders on certain of its individual and group annuity products.
Through December 31, 2003, the expense associated with offering certain of these
bonuses was deferred and amortized over the contingent deferred sales charge
period. Others were expensed as incurred. Effective January 1, 2004, upon
adopting the SOP, the expense associated with offering a bonus will be deferred
and amortized over the life of the related contract in a pattern consistent with
the amortization of deferred policy acquisition costs. Effective January 1,
2004, amortization expense associated with expenses previously deferred will be
recorded over the remaining life of the contract rather than over the contingent
deferred sales charge period. For the three months ended March 31, 2004,
amortization of sales inducements was $6.
FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus
on Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("EITF 03-1"). EITF 03-1 adopts a three-step
impairment model for securities within its scope. The three-step model must be
applied on a security-by-security basis as follows:
Step 1: Determine whether an investment is impaired. An investment is
impaired if the fair value of the investment is less than its cost
basis.
Step 2: Evaluate whether an impairment is other-than-temporary. For debt
securities that cannot be contractually prepaid or otherwise settled
in such a way that the investor would not recover substantially all
of its cost, an impairment is deemed other-than-temporary if the
investor does not have the ability and intent to hold the investment
until a forecasted market price recovery or it is probable that the
investor will be unable to collect all amounts due according to the
contractual terms of the debt security.
Step 3: If the impairment is other-than-temporary, recognize an impairment
loss equal to the difference between the investment's cost basis and
its fair value.
Subsequent to an other-than-temporary impairment loss, a debt security should be
accounted for in accordance with Statement of Position ("SOP") 03-3, "Accounting
for Loans and Certain Debt Securities Acquired in a Transfer". EITF 03-1 does
not replace the impairment guidance for investments accounted for under EITF
Issue 99-20, "Recognition of Interest Income and Impairments on Purchased and
Retained Beneficial Interests in Securitized Financial Assets" ("EITF 99-20"),
however investors will be required to determine if a security is
other-than-temporarily impaired under EITF 03-1 if the security is determined
not to be impaired under EITF 99-20. The disclosure provisions of EITF 03-1
adopted by the Company effective December 31, 2003 and included in Note 3 of the
Consolidated Financial Statements included in Hartford Life's 2003 Form 10-K
Annual Report will prospectively include securities subject to EITF 99-20.
The impairment evaluation and recognition guidance in EITF 03-1 should be
applied prospectively for all relevant current and future investments, effective
in reporting periods beginning after June 15, 2004. Besides the disclosure
requirements adopted by the Company effective December 31, 2003, the final
version of EITF 03-1 included, additional disclosure requirements of EITF 03-1
are effective for fiscal years ending after June 15, 2004. The adoption of this
standard is not expected to have a material impact on the Company's consolidated
financial condition or results of operations.
In March 2004, the EITF reached a final consensus on Issue 03-16, "Accounting
for Investments in Limited Liability Companies" ("EITF 03-16"). EITF 03-16 will
require investors in limited liability corporations that have specific ownership
accounts, to follow the equity method accounting for investments that are more
than minor (e.g. greater than 3% ownership interest) as prescribed in SOP 78-9,
"Accounting for Investments in Real Estate Ventures" and EITF Topic Number D-46,
"Accounting for Limited Partnership Investments". Investors that do not have
specific ownership accounts or minor ownership interests should follow the
significant influence model prescribed in APB Opinion No. 18, "Accounting for
Certain Investments in Debt and Equity Securities", for corporate investments.
EITF 03-16 excludes securities that are required to be accounted for as debt
securities based on the guidance in paragraph 14 of SFAS 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
and EITF 99-20. EITF 03-16 is effective for quarters beginning after June 15,
2004 and should be applied as a change in accounting principle. The adoption of
this standard is not expected to have a material impact on the Company's
consolidated financial condition or results of operations.
2. DERIVATIVES AND HEDGING ACTIVITY
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards, futures and options designed 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 replication transactions.
11
On the date the derivative contract is entered into, the Company designates the
derivative as (1) a hedge of the fair value of a recognized asset or liability
("fair value" hedge), (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized asset
or liability ("cash flow" hedge), (3) a foreign-currency fair value or cash flow
hedge ("foreign-currency" hedge), (4) a hedge of a net investment in a foreign
operation or (5) held for other investment and risk management activities, which
primarily involve managing asset or liability related risks which do not qualify
for hedge accounting under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities".
The Company's derivative transactions are permitted uses of derivatives under
the derivatives use plan filed and/or approved, as applicable, by the State of
Connecticut and the 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
Notes 2 and 3 of Notes to Consolidated Financial Statements included in Hartford
Life's 2003 Form 10-K Annual Report.
Due to the adoption of the SOP, derivatives previously included in separate
accounts were reclassified into various other balance sheet classifications. On
January 1, 2004, the notional amount and net fair value of derivative
instruments reclassified totaled $2.9 billion and $(71), respectively. As of
March 31, 2004, $50 of the derivatives were reported in other investments, $(93)
in other liabilities, and $6 in fixed maturities in the condensed consolidated
balance sheets. Management's objective with regard to the reclassified
derivatives along with the notional amount and net fair value as of March 31,
2004 are as follows:
NOTIONAL
HEDGING STRATEGY AMOUNT FAIR VALUE
- ------------------------------------------------------------------------------------------------------ ----------- -----------
CASH FLOW HEDGES
Interest rate swaps - Interest rate swaps are primarily used to convert interest receipts on
floating-rate fixed maturity investments to fixed rates. These derivatives are predominantly used
to better match cash receipts from assets with cash disbursements required to fund liabilities. $ 1,511 $ 68
Foreign currency swaps - Foreign currency swaps are used to convert foreign denominated cash flows
associated with certain foreign denominated fixed maturity investments to U.S. dollars. The
foreign fixed maturities are primarily denominated in Euros and are swapped to minimize cash flow
fluctuations due to changes in currency rates. 413 (98)
FAIR VALUE HEDGES
Interest rate caps and floors - Interest rate caps and floors are used to offset the changes in
fair value related to corresponding interest rate caps and floors that exist in certain of the
Company's variable-rate fixed maturity investments. 111 (3)
OTHER INVESTMENT AND RISK MANAGEMENT ACTIVITIES
Credit default and total return swaps - The Company enters into swap agreements in which the
Company assumes credit exposure or reduces credit exposure from an individual entity, referenced
index or asset pool. 234 1
Interest rate swaps - The Company enters into interest rate swaps to economically terminate
existing swaps in hedging relationships, and thereby offset the changes in value in the original
swap. In addition, the Company uses interest rate swaps to manage interest rate risk. 345 --
Options - The Company writes option contracts for a premium to monetize the
option embedded in certain of its fixed maturity investments. 417 --
Foreign currency swaps - The Company enters into foreign currency swaps to hedge the foreign
currency exposures in certain of its foreign fixed maturity investments. 13 (5)
----------- -----------
TOTAL $ 3,044 $ (37)
=========== ===========
In addition to the derivatives transferred to the general account as a result of
the adoption of the SOP, during the first quarter of 2004, the Company entered
into a series of interest rate swap agreements with a combined notional value of
$350, to hedge a portion of the Company's floating rate guaranteed investment
contracts. These swaps have been designated as cash flow hedges, with the
objective of hedging changes in the benchmark interest rate (i.e. LIBOR), and
were structured to offset the payments associated with the guaranteed investment
contracts. As of March 31, 2004, the notional amount and net fair value of these
swaps totaled $350 and $(7), respectively.
The Company offers certain variable annuity products with a guaranteed minimum
withdrawal benefit ("GMWB") rider. As of March 31, 2004 and December 31, 2003,
$9.7 billion or 46% and $6.2 billion or 36%, respectively, of account value with
the GMWB feature was unreinsured. In order to minimize the volatility associated
with the unreinsured GMWB liabilities, the Company has 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 options and futures contracts.
During the first quarter of 2004, the Company entered into Europe, Australasia
and Far East ("EAFE") Index swaps to hedge GMWB exposure to
12
international equity markets. For further discussion of the Company's other
investment and risk management activities, see "Other Investments and Risk
Management Activities" in Note 2 of Notes of Consolidated Financial Statements
included in Hartford Life's 2003 Form 10-K Annual Report.
The total notional amount of derivative contracts purchased to hedge the GMWB
exposure, as of March 31, 2004 and December 31, 2003, was $1.7 billion and $544,
respectively, and net fair value was $100 and $21, respectively. For the quarter
ended March 31, 2004, net realized capital gains and losses included the change
in market value of both the embedded derivative related to the GMWB liability
and the related derivative contracts that were purchased as economic hedges, the
net effect of which was a $2 loss before deferred policy acquisition costs and
tax effects.
Derivative instruments are recorded at fair value and presented in the condensed
consolidated balance sheets as follows:
March 31, 2004 December 31, 2003
------------------------------ --------------------------------
Asset Values Liability Values Asset Values Liability Values
------------ ---------------- ------------ ----------------
Other investments $ 344 $ -- $ 178 $ --
Reinsurance recoverables -- 73 -- 89
Other policyholder funds and benefits payable 79 -- 115 --
Fixed maturities 15 -- 7 --
Other liabilities -- 321 -- 257
------------ ----------- ------------ ------------
TOTAL $ 438 $ 394 $ 300 $ 346
============ =========== ============ ============
The increase in the asset values of derivative instruments since December 31,
2003 was primarily due to derivatives transferred to the general account
pursuant to the adoption of the SOP, the increase in derivatives used to hedge
GMWB exposure and market appreciation associated with interest rate swaps due to
a decrease in interest rates. The following table summarizes the notional amount
and fair value of derivatives by hedge designation as of March 31, 2004 and
December 31, 2003. The notional amount of derivative contracts represents the
basis upon which pay or receive amounts are calculated and are not reflective of
credit risk. The fair value amounts of derivative assets and liabilities are
presented on a net basis in the following table:
March 31, 2004 December 31, 2003
----------------------------- --------------------------
Notional Notional
Amount Fair Value Amount Fair Value
----------- ------------- ------------ ----------
Cash flow hedge $ 5,649 $ (64) $ 3,285 $ (58)
Fair value hedge 273 (5) 206 (5)
Net investment hedge 200 (9) 200 (4)
Other investment and risk management activities 37,308 122 29,927 21
----------- ------------- ------------ ----------
TOTAL $ 43,430 $ 44 $ 33,618 $ (46)
=========== ============= ============ ==========
For the quarters ended March 31, 2004 and March 31, 2003, the Company's gross
gains and losses representing the total ineffectiveness of all cash flow, fair
value and net investment hedges were immaterial, with the net impact reported as
net realized capital gains and losses.
For the quarters ended March 31, 2004 and 2003, the Company recognized an
after-tax net gain (loss) of $7 and $(1), respectively, (reported as net
realized capital gains and losses in the condensed consolidated statements of
operations), which represented the total change in value for other
derivative-based strategies which do not qualify for hedge accounting treatment,
including the periodic net coupon settlements.
As of March 31, 2004, the after-tax deferred net gains on derivative instruments
accumulated in accumulated other comprehensive income ("AOCI") that are expected
to be reclassified to earnings during the next twelve months are $15. 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 (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 fixed maturities) is twenty-four months. For the
quarters ended March 31, 2004 and 2003, the net reclassifications from AOCI to
earnings resulting from the discontinuance of cash flow hedges were immaterial.
The net investment hedge of the Japanese Life operation was established in the
fourth quarter of 2003. The after-tax amount of net gain (loss) included in the
foreign currency cumulative translation adjustment associated with the net
investment hedge was $(6) and $(3) as of March 31, 2004 and December 31, 2003,
respectively.
13
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. For the
three months ended March 31, 2004, no goodwill was acquired, impaired or written
off. As of March 31, 2004 and December 31, 2003, the carrying amount of goodwill
for the Company's Retail Products segment was $150 and the Company's Other
segment was $646.
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 material intangible assets with indefinite useful
lives.
AS OF MARCH 31, 2004 AS OF DECEMBER 31, 2003
-------------------------- -----------------------------
GROSS ACCUMULATED GROSS ACCUMULATED
CARRYING NET CARRYING NET
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- ------------------------------- ---------- ------------- ---------- --------------
Present value of future profits $ 658 $ 123 $ 658 $ 115
---------- ---------- ---------- ----------
TOTAL $ 658 $ 123 $ 658 $ 115
========== ========== ========== ==========
Net amortization expense for the three months ended March 31, 2004 and 2003 was
$8 and $5, respectively.
Assuming no future acquisitions, dispositions or impairments of intangible
assets, estimated future net amortization expense for the succeeding five years
is as follows:
FOR THE YEAR ENDING DECEMBER 31,
- --------------------------------
2004 $ 38
2005 $ 34
2006 $ 34
2007 $ 31
2008 $ 28
4. COMMITMENTS AND CONTINGENCIES
LITIGATION
Hartford Life is or may become involved in various legal actions, some of which
assert claims for substantial amounts. These actions may include, among others,
putative state and federal class actions seeking certification of a state or
national class. The Company also is involved in individual actions in which
punitive damages are sought, such as claims alleging bad faith in the handling
of insurance claims. Management expects that the ultimate liability, if any,
with respect to such lawsuits, after consideration of the provisions made for
potential losses and costs of defense, will not be material to the consolidated
financial position of the Company. Nonetheless, given the large or indeterminate
amounts sought in certain of these actions, and the inherent unpredictability of
litigation, it is possible that an adverse outcome in certain matters could,
from time to time, have a material adverse effect on the Company's consolidated
results of operations or cash flows in particular quarterly or annual periods.
In the third quarter of 2003, Hartford Life Insurance Company ("HLIC"), a wholly
owned subsidiary of Hartford Life Inc. and its affiliate International Corporate
Marketing Group, LLC 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 settlement provided that the
Company would 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
settlement resulted in the recording of an additional charge of $40, after-tax,
in the third quarter of 2003, reflecting the maximum amount payable under the
settlement, and in the fourth quarter of 2003, the Company paid the initial $70
of the settlement. On March 1, 2004, the Federal Circuit Court of Appeals
decided the patent appeal adversely to the Company, and on March 22, 2004, the
Company paid Bancorp an additional $10 in full and final satisfaction of its
obligations under the settlement. Because the charge taken in the third quarter
of 2003 reflected the maximum amount payable under the settlement, the amount
paid in the first quarter of 2004 had no effect on the Company's results of
operations.
REGULATORY DEVELOPMENTS
There continues to be significant federal and state regulatory activity relating
to financial services companies, particularly mutual funds companies. These
regulatory inquiries have focused on a number of mutual fund issues. The Company
has received requests for information and subpoenas from the Securities and
Exchange Commission ("SEC"), a subpoena from the New York Attorney General's
Office, and requests for information from the Connecticut Securities and
Investments Division of the Department of
14
Banking, in each case requesting documentation and other information regarding
various mutual fund regulatory issues. Representatives from the SEC's Office of
Compliance Inspections and Examinations continue to request documents and
information in connection with their ongoing compliance examination. In
addition, the SEC's Division of Enforcement has commenced an investigation of
the Company's variable annuity and mutual fund operations. The Company continues
to cooperate fully with the SEC and other regulatory agencies.
The Company's mutual funds are available for purchase by the separate accounts
of different variable life insurance policies, variable annuity products, and
funding agreements, and they are offered directly to certain qualified
retirement plans. Although existing products contain transfer restrictions
between subaccounts, some products, particularly older variable annuity
products, do not contain restrictions on the frequency of transfers. In
addition, as a result of the settlement of litigation against the Company with
respect to certain owners of older variable annuity products, the Company's
ability to restrict transfers by these owners is limited.
A number of companies have announced settlements of enforcement actions with
various regulatory agencies, primarily the SEC and the New York Attorney
General's Office. While no such action has been initiated against the Company,
it is possible that the SEC or one or more other regulatory agencies may pursue
action against the Company in the future. If such an action is brought, it could
have a material effect on the Company.
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. 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.
Although there has been no agreement reached between the Company and the IRS at
this time, the amount of tax related to the separate account dividends-received
deduction ("DRD") that is under the discussion for all open years could result
in a benefit to the Company's future results of operations. There can be no
assurances that such an agreement will be reached. (For further discussion of
the Company's separate account DRD, see Note 14 of Notes to Consolidated
Financial Statements included in the Company's 2003 Form 10-K Annual Report.)
5. DEBT
SHORT-TERM DEBT
March 31, December 31,
2004 2003
----------- ------------
Related Party Debt $ -- $ 305
Current maturities of long-term debt 200 200
----------- ------------
TOTAL SHORT-TERM DEBT $ 200 $ 505
=========== ============
LONG-TERM DEBT
March 31, December 31,
2004 2003
----------- ------------
7.10% Notes, due 2007 $ 200 $ 200
7.65% Notes, due 2027 250 250
7.375% Notes, due 2031 400 400
----------- ------------
JUNIOR SUBORDINATED DEBENTURES
7.20% Notes, due 2038 200 450
----------- ------------
TOTAL LONG-TERM DEBT $ 1,050 $ 1,300
=========== ============
On January 30, 2004, the Company received a capital contribution in the form of
cash of $305 from The Hartford which was used by the Company to fund the payment
and settlement of the related party note agreements totaling $305 with The
Hartford.
In March 2004, the Company received a capital contribution of $200 from The
Hartford which was used, with additional available cash, to redeem, at par, on
March 15, 2004, $250 million aggregate principal amount of its 7.20 percent
Junior Subordinated Deferrable Interest Debentures, due June 30, 2038,
underlying the 7.20 percent Trust Preferred Securities, Series A, originally
issued by Hartford Life Capital Trust I. The redemption price was $25 per share,
plus accumulated and unpaid distributions thereon to March 15, 2004, in the
amount of $0.30 per share. The Company recorded a $7, before-tax, expense for
the unamortized costs associated with these preferred securities in the quarter
ended March 31, 2004.
SHELF REGISTRATION
15
On May 15, 2001, the Company filed with the SEC a shelf registration statement
for the potential offering and sale of up to $1.0 billion in debt and preferred
securities. The registration statement was declared effective on May 29, 2001.
As of March 31, 2004, HLI had $1.0 billion remaining on its shelf.
JUNIOR SUBORDINATED DEBENTURES
The Hartford and the Company have formed statutory business trusts ("The
Hartford Trusts "), which exist for the exclusive purposes of (i) issuing Trust
Securities representing undivided beneficial interests in the assets of the
Trust; (ii) investing the gross proceeds of the Trust Securities in Junior
Subordinated Deferrable Interest Debentures ("Junior Subordinated Debentures")
of The Hartford or the Company; and (iii) engaging in only those activists
necessary or incidental thereto. The Hartford may enter into guarantees with
respect to the preferred securities of any of The Hartford Trusts.
COMMERCIAL PAPER
Hartford Life has a commercial paper program, which allows it to borrow up to a
maximum amount of $250 in short-term commercial paper notes. As of March 31,
2004, the Company had no outstanding borrowings under the program.
6. TRANSACTIONS WITH AFFILIATES
For a description of transactions with affiliates, see Note 15 of Notes to
Consolidated Financial Statements included in Hartford Life's 2003 Form 10-K
Annual Report.
7. SEGMENT INFORMATION
The Company has changed its reportable operating segments from Investment
Products, Individual Life, Group Benefits and Corporate Owned Life Insurance
("COLI") to Retail Products Group ("Retail"), Institutional Solutions Group
("Institutional"), Individual Life and Group Benefits. Retail offers individual
variable and fixed annuities, mutual funds, retirement plan products and
services to corporations under Section 401(k) plans and other investment
products. Institutional primarily offers retirement plan products and services
to municipalities under Section 457 plans, other institutional investment
products and private placement life insurance. Individual Life sells a variety
of life insurance products, including variable universal life, universal life,
interest sensitive whole life and term life insurance. Group Benefits sells
group insurance products, including group life and group disability insurance as
well as other products, including medical stop loss and supplementary medical
coverages to employers and employer sponsored plans, accidental death and
dismemberment, travel accident and other special risk coverages to employers and
associations. Hartford Life also includes in an Other category its international
operations, which are primarily located in Japan and Brazil; net realized
capital gains and losses other than periodic net coupon settlements on
non-qualifying derivatives and net realized capital gains and losses related to
guaranteed minimum withdrawal benefits; corporate items not directly allocated
to any of its reportable operating segments and intersegment eliminations.
Periodic net coupon settlements on non-qualifying derivatives and net realized
capital gains and losses related to guaranteed minimum withdrawal benefits are
reflected in each applicable segment in net realized capital gains and losses.
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 2003 Form 10-K Annual Report. Hartford Life 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
primarily occur between corporate and the operating segments. These amounts
primarily include interest income on allocated surplus, interest charges on
excess separate account surplus, the allocation of net realized capital gains
and losses, and the allocation of credit risk charges. 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. Segment
information for the previous period has been restated to reflect the change in
composition of reportable operating segments.
16
Institutional
Retail Solutions Individual Group
MARCH 31, 2004 Products Group Group Life Benefits Other Total
- ------------------- -------------- ------------- ------------ ------------ ------------ ------------
FIRST QUARTER ENDED
Total revenues $ 763 $ 442 $ 254 $ 1,004 $ 595 $ 3,058
Net income 107 28 33 47 43 258
FIRST QUARTER ENDED
Total revenues $ 478 $ 422 $ 244 $ 667 $ (25) $ 1,786
Net income (loss) 77 31 32 34 (48) 126
17
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, Inc. and
its subsidiaries ("Hartford Life" or the "Company") as of March 31, 2004,
compared with December 31, 2003, and its results of operations for the three
months ended March 31, 2004 compared with the equivalent period in 2003. This
discussion should be read in conjunction with the MD&A included in the Company's
2003 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 the Company 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
difficulty in predicting the Company's potential exposure for the possible
occurrence of terrorist attacks; the response of reinsurance companies under
reinsurance contracts and the availability, pricing and adequacy of reinsurance
to protect the Company against losses; changes in the stock markets, interest
rates or other financial markets, including the potential effect on the
Company's statutory capital levels; the inability 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 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 possibility of more
unfavorable loss experience than anticipated; stronger than anticipated
competitive activity; unfavorable judicial or legislative developments,
including the possibility that the Terrorism Risk Insurance Act of 2002 is not
extended beyond 2005; the potential effect of domestic and foreign regulatory
developments, which could increase the Company's business costs and required
capital levels; the possibility of general economic and business conditions that
are less favorable than anticipated; 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; 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 18
Consolidated Results of Operations - Operating Summary 20
Retail Products Group 21
Institutional Solutions Group 22
Individual Life 23
Group Benefits 24
Investments 24
Investment Credit Risk 28
Capital Markets Risk Management 33
Capital Resources and Liquidity 34
Accounting Standards 37
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: deferred policy acquisition costs and present value of future
profits; valuation of investments; valuation of derivative instruments; reserves
and 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
18
variability is inherent in these estimates, management believes the amounts
provided are appropriate based upon the facts available upon compilation of the
financial statements.
DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
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 March
31, 2004 and December 31, 2003, the carrying value of the Company's operations'
DAC was $6.5 billion and $6.6 billion, respectively. For statutory accounting
purposes, such costs are expensed as incurred.
The Company has developed sophisticated modeling capabilities to evaluate its
DAC asset, 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 gross profits or "EGPs". This range was then compared to the present value of
EGPs currently utilized in the DAC amortization model. As of March 31, 2004, 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 March 31, 2004
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 15% or
less for 2004, 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 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 March 31, 2004. If the Company assumed a 9%
average long-term rate of growth from March 31, 2004 forward along with other
appropriate assumption changes in determining the revised EGPs, the Company
estimates the cumulative increase to amortization would be approximately
$15-$20, 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 $40-$50, 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 2004 and 2005 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.
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 sell-off, as
the majority of policyholders' funds in the separate accounts is invested in the
equity market. As of March 31, 2004, the Company believed variable annuity
separate account assets could fall by at least 45% before portions of its DAC
asset would be unrecoverable.
OTHER CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to the Company's critical accounting
estimates regarding reserves for future policy benefits and other policyholder
funds; investments; and commitments and contingencies since the filing of the
Company's 2003 Form 10-K Annual Report.
CONSOLIDATED RESULTS OF OPERATIONS
ORGANIZATIONAL STRUCTURE
The Company has changed its reportable operating segments from Investment
Products, Individual Life, Group Benefits and Corporate Owned Life Insurance
("COLI") to Retail Products Group ("Retail"), Institutional Solutions Group
("Institutional"), Individual Life and Group Benefits. Retail offers individual
variable and fixed annuities, mutual funds, retirement plan products and
services to corporations under Section 401(k) plans and other investment
products. Institutional primarily offers retirement plan products and services
to municipalities under Section 457 plans, other institutional investment
products and private placement life insurance. Individual Life sells a variety
of life insurance products, including variable universal life, universal life,
interest sensitive whole life and term life insurance. Group Benefits sells
group insurance products, including group life and group disability insurance
19
as well as other products, including medical stop loss and supplementary medical
coverages to employers and employer sponsored plans, accidental death and
dismemberment, travel accident and other special risk coverages to employers and
associations. The Company also includes, in an Other category, its international
operations, which are primarily located in Japan and Brazil; net realized
capital gains and losses other than periodic net coupon settlements on
non-qualifying derivatives and net realized capital gains and losses related to
guaranteed minimum withdrawal benefits; corporate items not directly allocated
to any of its reportable operating segments; and intersegment eliminations.
Periodic net coupon settlements on non-qualifying derivatives and net realized
capital gains and losses related to guaranteed minimum withdrawal benefits are
reflected in each applicable segment in net realized capital gains and losses.
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
---------------------------------
2004 2003 CHANGE
---------- ---------- ------
Earned premiums $ 995 $ 683 46%
Fee income 786 617 27%
Net investment income[1] 1,201 503 139%
Other revenue - 27 (100)%
Net realized capital gains (losses) 76 (44) NM
---------- ---------- ----
TOTAL REVENUES 3,058 1,786 71%
Benefits, claims and claim adjustment expenses [1] 1,877 1,083 73%
Amortization of deferred policy acquisition costs and present
value of future profits 233 163 43%
Insurance operating costs and expenses 527 355 48%
Interest expense 35 29 21%
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,672 1,630 64%
---------- ---------- ----
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 386 156 147%
Income tax expense 105 30 NM
---------- ---------- ----
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 281 126 123%
Cumulative effect of accounting change, net of tax [2] (23) - NM
---------- ---------- ----
NET INCOME $ 258 $ 126 105%
---------- ---------- ----
[1] With the adoption of SOP 03-1, certain annuity and life insurance products
were required to be accounted for in the general account. This change in
accounting resulted in an increase in net investment income and benefits,
claims and claim adjustment expenses.
[2] For the quarter ended March 31, 2004, represents the cumulative impact of
the Company's adoption of SOP 03-1.
The Company defines "NM" as not meaningful for increases or decreases greater
than 200%, or changes from a net gain to a net loss position, or vice versa.
The Company's net income increased, largely due to a significant increase in
realized capital gains. (See the Investments section for further discussion of
investment results and related realized capital gains.) Also contributing to the
earnings growth were increases in net income in the Retail and Group Benefits
segments. Net income in the Retail segment increased, principally driven by
growth in the variable annuity and mutual fund businesses as a result of
increasing assets under management. Partially offsetting these increases was
lower spread income on market value adjusted ("MVA") fixed annuities due to the
adoption of Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants Statement of Position 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" ("the SOP"). Net income in the Group
Benefits segment increased due to earned premiums and net investment income
growth, primarily resulting from the Company's acquisition of the group life and
accident, and short-term and long-term disability businesses of CNA Financial
Corporation ("CNA Acquisition"). Partially offsetting the positive earnings
drivers discussed above was the cumulative effect of accounting change from the
Company's adoption of the SOP. The adoption of the SOP also results in certain
changes in presentation in the Company's financial statements, including
reporting of the spreads on the Company's MVA fixed annuities and variable
annuity products offered in Japan on a gross basis in net investment income and
benefits expense. Exclusive of the cumulative effect, overall application of the
SOP resulted in an immaterial reduction in net income. (For further discussion
of the impact of the Company's adoption of the SOP see Note 1 of Notes to
Consolidated Financial Statements).
20
RETAIL PRODUCTS GROUP
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
---------------------------------
2004 2003 CHANGE
---------- ---------- ------
Fee income and other $ 506 $ 364 39%
Earned premiums (14) (9) (56%)
Net investment income 272 117 132%
---------- ---------- ---
Net realized capital gains and (losses) (1) 6 NM
---------- ---------- ---
TOTAL REVENUES 763 478 60%
Benefits, claims and claim adjustment expenses 257 147 75%
Insurance operating costs and other expenses 175 132 33%
Amortization of deferred policy acquisition costs and present
value of future profits 167 103 62%
---------- ---------- ---
TOTAL BENEFITS, CLAIMS AND EXPENSES 599 382 57%
---------- ---------- ---
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 164 96 71%
Income tax expense 38 19 100%
---------- ---------- ---
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 126 77 64%
Cumulative effect of accounting change, net of tax [1] (19) - NM
---------- ---------- ---
NET INCOME $ 107 $ 77 39%
---------- ---------- ---
Individual variable annuity account values $ 90,386 $ 64,047 41%
Other individual annuity account values 11,312 10,602 7%
401K and Specialty product - account values 5,230 3,219 62%
---------- ---------- ---
TOTAL ACCOUNT VALUES [2] 106,928 77,868 37%
Mutual fund assets under management 22,977 14,328 60%
---------- ---------- ---
TOTAL ASSETS UNDER MANAGEMENT $ 129,905 $ 92,196 41%
---------- ---------- ---
S&P 500 INDEX VALUE AT END OF PERIOD 1,126 848 33%
========== ========== ===
[1] For the quarter ended March 31, 2004, represents the cumulative impact of
the Company's adoption of SOP 03-1.
[2] Includes policyholder balances for investment contracts and reserves for
future policy benefits for insurance contracts.
Net income in the Retail segment increased, principally driven by significant
growth in the assets under management within the variable annuity and mutual
fund businesses. Assets under management is an internal performance measure used
by the segment as relative profitability is highly correlated to the growth in
assets under management which is driven by net flows and performance of the
equity markets. Fee income generated by the variable annuity operation
increased, as average account values increased in the first quarter as compared
to the prior year. The increase in average account values can be attributed to
approximately $8.6 billion of net flows over the past four quarters and growth
in the equity markets, more specifically the average daily value of the S&P 500,
which rose by approximately 31% in this time period. The Company uses the S&P
500 Index as an indicator for evaluating market returns of the underlying
account portfolios. Another contributing factor to the increase in fee income
was the mutual fund business. Mutual fund assets under management increased due
to equity market growth as well as higher net sales, which were $1.1 billion in
the first quarter as compared to $132 in the first quarter of 2003.
Partially offsetting the positive earnings drivers discussed above were the
cumulative effect of accounting change from the Company's adoption of the SOP
and the resulting lower net income associated with the individual fixed annuity
business. The decrease in net income in the individual fixed annuity business
was attributed to a lower investment spread from the market value adjusted fixed
annuity product in the first quarter of 2004 as compared to prior year. With the
adoption of the SOP, the Company includes the investment return from the product
in net investment income and includes interest credited to contract holders in
the benefits, claims and expenses line on the income statement rather than
reporting the net spread in fee income and other. Additionally, the ratio of DAC
amortization to gross profits for the individual annuity business (defined as
amortization of deferred policy acquisition costs as a percentage of income
before taxes and amortization of deferred policy acquisition costs) was slightly
higher in the first quarter as compared to the prior year, which resulted in
lower net income.
21
INSTITUTIONAL SOLUTIONS GROUP
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
---------------------------------
2004 2003 CHANGE
---------- ---------- ------
Fee income and other $ 74 $ 77 (4%)
Earned premiums 109 100 9%
Net investment income 257 244 5%
Net realized capital gains 2 1 NM
---------- ---------- ---
TOTAL REVENUES 442 422 5%
---------- ---------- ---
Benefits, claims and claims adjustment expenses 355 335 6%
Insurance operating costs and expenses 37 36 3%
Amortization of deferred policy acquisition costs and present
value of future profits 9 6 50%
---------- ---------- ---
TOTAL BENEFITS, CLAIMS AND EXPENSES 401 377 6%
---------- ---------- ---
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 41 45 (9%)
Income tax expense 12 14 (14%)
---------- ---------- ---
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 29 31 (6%)
Cumulative effect of accounting change, net of tax [1] (1) - NM
---------- ---------- ---
NET INCOME $ 28 $ 31 (10%)
---------- ---------- ---
Institutional account values $ 12,941 $ 9,963 30%
Governmental account values 9,243 7,199 28%
---------- ---------- ---
Private Placement Life Insurance account values
Variable Products 21,305 19,863 7%
Leveraged COLI 2,537 3,159 (20%)
---------- ---------- ---
TOTAL ACCOUNT VALUES[2] 46,026 40,184 15%
Mutual fund assets under management 1,246 717 74%
---------- ---------- ---
TOTAL ASSETS UNDER MANAGEMENT $ 47,272 $ 40,901 16%
[1] For the quarter ended March 31, 2004, represents the cumulative impact of
the Company's adoption of SOP 03-1
[2] Includes policyholder balances for investment contracts and reserves for
future policy benefits for insurance contracts.
Net income for the Institutional segment decreased as compared to the comparable
prior year period. This decrease was the result of lower earnings from the
private placement life insurance business and the institutional business, which
includes structured settlements and institutional annuities. Lower net income in
private placement life insurance was due primarily to lower revenues earned as a
result of lower account values in the leveraged COLI product due primarily to
surrenders that occurred in 2003. The leveraged COLI product continues to
contribute favorably to the segment's profitability, although the contribution
may decline in the future depending on the surrender activity of these policies.
In addition, the institutional business contributed lower earnings in the first
quarter of 2004 compared to the same period in 2003. This decrease was primarily
the result of favorable mortality experience in 2003. Partially offsetting these
declines was a small increase in the net income before the cumulative effect of
accounting change of the Governmental business when compared to the same period
in 2003. This increase was primarily attributable to higher revenues earned from
the growth in the average account values as a result of positive net flows and
market appreciation since the first quarter of 2003.
22
INDIVIDUAL LIFE
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
--------------------------------------------
2004 2003 CHANGE
------------ ------------ ------------
Fee income and other $ 186 $ 182 2%
Earned premiums (5) (4) (25%)
Net investment income 73 66 11%
------------ ------------ ------------
TOTAL REVENUES 254 244 4%
Benefits, claims and claim adjustment expenses 125 112 12%
Amortization of deferred policy acquisition costs and present value
of future profits 39 46 (15%)
Insurance operating costs and other expenses 40 39 3%
------------ ------------ ------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 204 197 4%
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING 50 47 6%
CHANGE
Income tax expense 16 15 7%
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 34 32 6%
Cumulative effect of accounting change, net of tax[1] (1) - NM
------------ ------------ ------------
NET INCOME $ 33 $ 32 3%
------------ ------------ ------------
OPERATING SUMMARY
MARCH 31, MARCH 31,
2004 2003 CHANGE
------------ ------------ ------------
Variable universal life account values $ 4,797 $ 3,673 31%
Total account values $ 8,836 $ 7,583 17%
------------ ------------ ------------
Variable universal life insurance in force $ 67,101 $ 66,631 1%
Total life insurance in force $ 132,482 $ 127,029 4%
============ ============ ============
[1] For the quarter ended March 31, 2004, represents the cumulative impact of
the Company's adoption of SOP 03-1.
Net income in the Individual Life segment increased slightly as compared to the
comparable prior year period. This increase was primarily driven by growth in
account values and life insurance in force and favorable equity market
conditions. The impact of this growth was partially offset by higher mortality
costs than the prior year. However, the increased mortality costs reduced the
amount of amortization of deferred policy acquisition costs recorded during the
quarter. Net investment income increased partially due to the adoption of the
SOP, which resulted in increases in net investment income and benefits, claims
and claim adjustment expenses for the segment's Modified Guarantee Life
Insurance product, which was formerly classified as a separate account product.
23
GROUP BENEFITS
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
--------------------------------------------
2004 2003 CHANGE
------------ ------------ ------------
Earned premiums and other $ 915 $ 602 52%
Net investment income 89 68 31%
Net realized capital losses - (3) NM
------------ ------------ ------------
TOTAL REVENUES 1,004 667 51%
Benefits, claims and claim adjustment expenses 684 489 40%
Amortization of deferred policy acquisition costs and present value 5 4 25%
of future profits
Insurance operating costs and other expenses 252 131 92%
------------ ------------ ------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 941 624 51%
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 63 43 47%
Income tax expense 16 9 78%
------------ ------------ ------------
NET INCOME $ 47 $ 34 38%
------------ ------------ ------------
Fully insured - ongoing premiums $ 905 $ 568 59%
Buyout premiums - 28 (100%)
Other 10 6 67%
------------ ------------ ------------
Earned premiums and other $ 915 $ 602 52%
============ ============ ============
Net income in the Group Benefits segment increased due to earned premiums and
net investment income growth, both in the former Group Benefits business as well
as the result of the CNA Acquisition. The increase in earned premiums was driven
by sales of $341, a 54% increase over sales reported in the comparable prior
year period and favorable persistency. Although benefits, claims and claim
adjustment expenses increased, the segment's loss ratio (defined as benefits,
claims and claim adjustment expenses as a percentage of premiums and other
considerations excluding buyouts) was 75%, down from 80% in first quarter 2003,
which contributed favorably to net income. Partially offsetting these favorable
items were higher commissions due to higher sales and premiums previously
discussed and sales from the CNA Acquisition. Additionally, operating costs
increased due to the growth in the segment and the CNA acquisition. Consistent
with the increase in commissions and operating costs, the segment's ratio of
insurance operating costs and other expenses to premiums and other
considerations (excluding buyouts) increased to 28%, from 23% in 2003. As part
of the CNA Acquisition, a larger block of affinity business is now included in
the Group Benefits segment in 2004. This business typically has lower expected
loss ratios and higher expected commission ratios than other products within the
business. Due to this change in business mix, the segment, as expected, has a
lower loss ratio and a higher commission ratio than in 2003.
INVESTMENTS
GENERAL
The investment portfolios are managed based on the underlying characteristics
and nature of each operation's respective liabilities and within established
risk parameters. (For further discussion of Hartford Life's approach to managing
risks, see the Investment Credit Risk section.)
The investment portfolios are managed by Hartford Investment Management Company
and its affiliates ("Hartford Investment Management"), a wholly-owned subsidiary
of The Hartford Financial Services Group, Inc ("The Hartford"). Hartford
Investment Management is responsible for monitoring and managing the
asset/liability profile, establishing investment objectives and guidelines, and
determining, within specified risk tolerances and investment guidelines, the
appropriate asset allocation, duration, convexity and other characteristics of
the portfolios. Security selection and monitoring are performed by asset class
specialists working within dedicated portfolio management teams.
As discussed in Note 1 of Notes to Condensed Consolidated Financial Statements,
on January 1, 2004, the Company reclassified $17.9 billion of separate account
assets to the general account as a result of adopting the SOP. Of this amount,
$11.7 billion was associated with guaranteed separate accounts and was primarily
comprised of fixed maturities. These assets are designated as available-for-sale
securities with changes in fair value reported in other comprehensive income.
The remaining $6.2 billion is primarily comprised of equity securities related
to variable annuity products offered in Japan. These assets are classified as
trading securities with changes in fair value reported in net investment income.
Return on invested assets is an important element of Hartford Life's financial
results. Significant fluctuations in the fixed income or
24
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. Net investment income and net realized capital gains
and losses accounted for approximately 42% and 26% of the Company's consolidated
revenues for the quarters ended March 31, 2004 and 2003, respectively. The
increase in the percentage of consolidated revenues is primarily due to income
earned on separate account assets reclassified to the general account as a
result of the adoption of the SOP.
Fluctuations in interest rates affect the Company's return on, and the fair
value of, fixed maturity investments, which comprised approximately 80% and 91%
of the fair value of its invested assets as of March 31, 2004 and December 31,
2003, 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.
The Company invests in private placement securities, mortgage loans and limited
partnership arrangements in order to further diversify its investment portfolio.
These investment types comprised approximately 18% and 19% of the fair value of
its invested assets as of March 31, 2004 and December 31, 2003, respectively.
These security types are typically less liquid than direct investments in
publicly traded fixed income or equity investments. However, generally these
securities have higher yields to compensate for the liquidity risk.
A decrease in the fair value of any investment that is deemed
other-than-temporary would result in the Company's recognition of a net realized
capital loss in its financial results prior to the actual sale of the
investment. (For further discussion, see the Company's discussion of the
evaluation of other-than-temporary impairments in Critical Accounting Estimates
under the "Valuation of Investments and Derivative Instruments" section in
Hartford Life's 2003 Form 10-K Annual Report.)
The primary investment objective of the Company is to maximize after-tax returns
consistent with acceptable risk parameters, including the management of the
interest rate sensitivity of invested assets and the generation of sufficient
liquidity relative to that of policyholder and corporate obligations.
The following table identifies the Company's invested assets by type as of March
31, 2004 and December 31, 2003.
COMPOSITION OF INVESTED ASSETS
MARCH 31, 2004 DECEMBER 31, 2003
--------------------------- ---------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------------ ------------ ------------
Fixed maturities, available-for-sale, at fair value $ 49,580 80.4% $ 37,462 91.0%
Equity securities, available-for-sale, at fair value 406 0.7% 357 0.9%
Equity securities, held for trading, at fair value 7,831 12.7% -- --
Policy loans, at outstanding balance 2,655 4.3% 2,512 6.1%
Mortgage loans, at cost 620 1.0% 466 1.1%
Limited partnerships, at fair value 197 0.3% 177 0.4%
Other investments 350 0.6% 180 0.5%
------------ --------- ------------ ---------
TOTAL INVESTMENTS $ 61,639 100.0% $ 41,154 100.0%
============ ========= ============ =========
Fixed maturity investments and equity securities held for trading increased 32%
and 100%, respectively, since December 31, 2003, primarily the result of fixed
maturities and equity securities that were reclassified from separate accounts
to the general account as a result of the adoption of the SOP. The remaining
increase in fixed maturity investments was primarily due to an increase in
market prices driven by a decline in interest rates during the first quarter of
2004.
25
INVESTMENT RESULTS
The following table summarizes the Company's investment results.
FIRST QUARTER ENDED
MARCH 31,
-----------------------------
(Before-tax) 2004 2003
- ---------------------------------------------------------------------------------- ------------ ------------
Net investment income - excluding income on policy loan and trading securities [1] $ 661 $ 445
Policy loan income 45 58
Trading securities income [2] 495 --
------------ ------------
Net investment income - total [1] $ 1,201 $ 503
Yield on average invested assets [3] 5.7% 6.1%
------------ ------------
Gross gains on sale $ 100 $ 57
Gross losses on sale (18) (47)
Impairments (8) (67)
Periodic net coupon settlements on non-qualifying derivatives [1] 2 4
GMWB derivatives, net (2) --
Other, net [4] 2 9
------------ ------------
Net realized capital gains (losses) [1] [5] $ 76 $ (44)
============ ============
[1] The prior period reflects the reclassification of periodic net coupon
settlements on non-qualifying derivatives from net investment income to net
realized capital gains (losses) to conform to the current year
presentation.
[2] Represents the change in value of securities classified as trading.
[3] Represents annualized net investment income (excluding the change in fair
value of trading securities) divided by average invested assets at cost or
amortized cost, as applicable, for the first quarter ended March 31, 2004
and 2003. Average invested assets are calculated by dividing the sum of the
beginning and ending period amounts by two, excluding trading securities
and collateral received associated with the securities lending program.
[4] Primarily consists of changes in fair value on non-qualifying derivatives
and hedge ineffectiveness on qualifying derivative instruments as well as
the amortization of deferred acquisition costs associated with realized
capital gains and (losses).
[5] First quarter 2004 includes $5 of net realized gains (losses) associated
with guaranteed separate accounts classified within the general account
amounts pursuant to the adoption of the SOP.
For the quarter ended March 31, 2004, net investment income, excluding policy
loans and trading securities, increased $216, or 49%, compared to the same
period in 2003. Approximately $154 of the increase related to income earned on
separate account assets reclassified to the general account as a result of the
adoption of the SOP and approximately $26 of the increase related to income
earned on assets acquired in the CNA acquisition which was consummated on
December 31, 2003. The remaining increase was primarily due to income earned on
a higher invested asset base, as compared to the first quarter 2003, 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. Since the Company invests primarily in long-term fixed rate debt
securities, current period changes in interest rates impact the yield on new
asset purchases and, therefore, have a gradual impact on the overall portfolio
yield. The weighted average yield on new invested asset purchases in the first
quarter of 2004 of approximately 4.8%, before-tax, continues to be below the
average portfolio yield.
Net realized capital gains (losses) for the first quarter ended March 31, 2004
improved by $120 compared to the same period in 2003, primarily the result of
higher realized gains on sales of fixed maturity and equity securities and lower
other-than-temporary impairments. Realized gains on sales of fixed maturity
investments were concentrated in the corporate, foreign government and
asset-backed securities ("ABS") sectors. The majority of the sales in the
corporate and ABS sectors were the result of portfolio rebalancing that resulted
in divesting of securities that had appreciated in value due to a decline in
interest rates and an improved corporate credit environment. Foreign government
securities were sold in the first quarter of 2004 primarily to realize gains
associated with the decline in value of the U.S. Dollar against foreign
currencies. (For further discussion of other-than-temporary impairments, see the
Other-Than-Temporary Impairments commentary in this section of the MD&A.)
26
OTHER-THAN-TEMPORARY IMPAIRMENTS
The following table identifies the Company's other-than-temporary impairments by
type.
OTHER-THAN-TEMPORARY IMPAIRMENTS BY TYPE
FIRST QUARTER ENDED
MARCH 31,
---------------------------
Before-tax 2004 2003
- ---------------------------------------------------------------------- ------------ ------------
ABS
Corporate debt obligations ("CDO") $ 4 $ 10
Credit card receivables -- 12
Other ABS -- 4
------------ ------------
Total ABS 4 26
Corporate
Consumer non-cyclical -- 7
Technology and communications -- 3
Transportation -- 7
Other corporate 3 3
------------ ------------
Total corporate 3 20
Equity -- 21
Mortgage-backed securities ("MBS") - interest only securities 1 --
------------ ------------
TOTAL OTHER-THAN-TEMPORARY IMPAIRMENTS $ 8 $ 67
============ ============
ABS -- During the first quarter of 2004, other-than-temporary impairments in the
ABS sector were recorded as a result of a deterioration of cash flows derived
from the underlying collateral of several securities. The decrease in
impairments compared to the prior year period is primarily the result of a
general stabilization in the performance of the underlying collateral, which has
resulted in improved pricing levels. Pricing levels for CDOs recovered modestly
during the first quarter of 2004 due to an increase in demand for these asset
types, driven by improved economic and operating fundamentals of the underlying
security issuers, better market liquidity and attractive yields. The increase in
pricing levels for credit card receivables was primarily driven by improvement
in collateral performance.
Impairments of ABS during the first quarter of 2003 were driven by a
deterioration of collateral cash flows. CDO impairments were primarily the
result of increasing default rates and lower recovery rates on the collateral.
Impairments on ABS backed by credit card receivables were a result of issuers
extending credit to sub-prime borrowers and the higher default rates on these
loans.
CORPORATE -- The decline in corporate bankruptcies and improvement in general
economic conditions have contributed to lower corporate impairment levels in the
first quarter of 2004 compared to the first quarter of 2003.
A significant portion of corporate impairments during the quarter ended March
31, 2003 was 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. Additional impairments were incurred as a result of the
deterioration in the transportation sector, specifically issuers of airline
debt, as a result of a decline in airline travel.
OTHER -- Other-than-temporary impairments were also recorded in the first
quarter of 2003 on various diversified mutual funds and preferred stock
investments.
In addition to the impairments described above, fixed maturity and equity
securities were sold during the quarters ended March 31, 2004 and 2003 at total
gross losses of $17 and $39, respectively. No single security was sold at a loss
in excess of $5 and $8 during the quarters ended March 31, 2004 and 2003,
respectively.
27
INVESTMENT CREDIT RISK
Hartford Life has established investment credit policies that focus on the
credit quality of obligors and counterparties, limit credit concentrations,
encourage diversification and require frequent creditworthiness reviews.
Investment activity, including setting of policy and defining acceptable risk
levels, is subject to regular review and approval by senior management and by
the Finance Committee of The Hartford's Board of Directors.
Please refer to the Investment Credit Risk section of the MD&A in Hartford
Life's 2003 Form 10-K Annual Report for a description of the Company's
objectives, policies and strategies, including the use of derivative
instruments.
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 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, as of March
31, 2004 and December 31, 2003.
FIXED MATURITIES BY TYPE
MARCH 31, 2004
---------------------------------------------------------------
PERCENT
OF
TOTAL
AMORTIZED UNREALIZED UNREALIZED FAIR FAIR
COST GAINS LOSSES VALUE VALUE
---------- ---------- ---------- ---------- ----------
ABS $ 5,306 $ 125 $ (66) $ 5,365 10.8%
CMBS 8,262 566 (11) 8,817 17.8%
Collateralized mortgage
obligation ("CMO") 849 18 (1) 866 1.7%
Corporate
Basic industry 2,572 223 (4) 2,791 5.6%
Capital goods 1,590 143 (2) 1,731 3.5%
Consumer cyclical 2,518 208 (2) 2,724 5.5%
Consumer non-cyclical 2,570 247 (4) 2,813 5.7%
Energy 1,475 158 -- 1,633 3.3%
Financial services 5,882 538 (23) 6,397 12.9%
Technology and
communications 3,796 431 (6) 4,221 8.5%
Transportation 594 52 (2) 644 1.3%
Utilities 2,115 208 (7) 2,316 4.7%
Other 649 46 -- 695 1.4%
Government/Government
agencies
Foreign 665 80 (1) 744 1.5%
United States 1,016 32 -- 1,048 2.1%
MBS - agency 1,828 43 -- 1,871 3.8%
Municipal
Taxable 517 25 (6) 536 1.1%
Tax-exempt 2,053 186 (1) 2,238 4.5%
Redeemable preferred stock 46 1 -- 47 0.1%
Short-term 2,083 -- -- 2,083 4.2%
---------- ---------- ---------- ---------- -----
TOTAL FIXED MATURITIES $ 46,386 $ 3,330 $ (136) $ 49,580 100.0%
========== ========== ========== ========== =====
Total general account fixed
maturities
Total guaranteed separate
account fixed maturities
[1]
DECEMBER 31, 2003
----------------------------------------------------------------
PERCENT OF
AMORTIZED UNREALIZED UNREALIZED FAIR TOTAL FAIR
COST GAINS LOSSES VALUE VALUE
---------- ---------- ---------- ---------- ----------
ABS $ 5,397 $ 113 $ (101) $ 5,409 11.0%
CMBS 7,757 432 (21) 8,168 16.6%
Collateralized mortgage
obligation ("CMO") 1,023 15 (3) 1,035 2.1%
Corporate
Basic industry 2,985 223 (9) 3,199 6.5%
Capital goods 1,422 104 (6) 1,520 3.1%
Consumer cyclical 2,406 160 (7) 2,559 5.2%
Consumer non-cyclical 2,779 199 (10) 2,968 6.0%
Energy 1,499 119 (5) 1,613 3.3%
Financial services 5,742 416 (28) 6,130 12.5%
Technology and
communications 3,682 375 (10) 4,047 8.2%
Transportation 632 43 (3) 672 1.4%
Utilities 2,077 179 (11) 2,245 4.6%
Other 575 26 (1) 600 1.2%
Government/Government
agencies
Foreign 866 87 (1) 952 1.9%
United States 1,100 30 (4) 1,126 2.3%
MBS - agency 2,145 32 (2) 2,175 4.4%
Municipal
Taxable 401 14 (7) 408 0.8%
Tax-exempt 1,850 168 (1) 2,017 4.1%
Redeemable preferred stock 32 1 -- 33 0.1%
Short-term 2,319 2 -- 2,321 4.7%
---------- ---------- ---------- ---------- -----
TOTAL FIXED MATURITIES $ 46,689 $ 2,738 $ (230) $ 49,197 100.0%
========== ========== ========== ========== =====
Total general account fixed
maturities $ 35,569 $ 2,051 $ (158) $ 37,462 76.1%
Total guaranteed separate
account fixed maturities
[1] $ 11,120 $ 687 $ (72) $ 11,735 23.9%
[1] Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting the SOP.
The Company's fixed maturity gross unrealized gains and losses have improved by
$592 and $94, respectively, from December 31, 2003 to March 31, 2004, primarily
due to a decline in long-term interest rates and, to a lesser extent, credit
spread tightening associated with ABS, partially offset by sales of securities
in a gain position. During the quarter ended March 31, 2004, the ten year U.S.
treasury rate declined approximately 40 basis points since December 31, 2003,
largely due to disappointing new job creation and a capacity utilization
percentage. The Company expects U.S. fiscal and monetary policy to remain
stimulative until inflationary
28
pressures return.
Investment allocations as a percentage of total fixed maturities have remained
materially consistent since December 31, 2003, except for CMBS, CMOs and
MBS-agency. CMBS increased as a result of a tactical decision to increase the
Company's investment in the asset class due to its stable spreads, high quality
and attractive yields. The decrease in CMO and MBS-agency holdings was the
result of an effort to reduce exposure to prepayment risk resulting from the
decline in interest rates during the first quarter of 2004.
(For further discussion of risk factors associated with sectors with significant
unrealized loss positions, 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, as of March
31, 2004 and December 31, 2003. 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
MARCH 31, 2004 DECEMBER 31, 2003
------------------------------------ ------------------------------------
PERCENT OF PERCENT OF
AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
---------- ---------- ---------- ---------- ---------- ----------
United States Government/Government agencies $ 3,767 $ 3,860 7.8% $ 4,291 $ 4,361 8.9%
AAA 8,543 9,058 18.3% 8,285 8,681 17.7%
AA 4,413 4,719 9.4% 4,243 4,486 9.1%
A 12,582 13,661 27.6% 13,015 13,901 28.3%
BBB 12,878 13,920 28.1% 12,277 13,061 26.5%
BB & below 2,120 2,279 4.6% 2,259 2,386 4.8%
Short-term 2,083 2,083 4.2% 2,319 2,321 4.7%
---------- ---------- ----- ---------- ---------- -----
TOTAL FIXED MATURITIES $ 46,386 $ 49,580 100.0% $ 46,689 $ 49,197 100.0%
========== ========== ===== ========== ========== =====
Total general account fixed maturities $ 35,569 $ 37,462 76.1%
Total guaranteed separate account fixed
maturities [1] $ 11,120 $ 11,735 23.9%
========== ========== =====
[1] Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting the SOP.
As of March 31, 2004 and December 31, 2003, greater than 95% of the fixed
maturity portfolio was invested in short-term securities or securities rated
investment grade (BBB and above).
The following table presents the Below Investment Grade ("BIG") fixed maturities
by type, as of March 31, 2004 and December 31, 2003.
BIG FIXED MATURITIES BY TYPE
MARCH 31, 2004 DECEMBER 31, 2003
------------------------------------ ------------------------------------
PERCENT OF PERCENT OF
AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
---------- ---------- ---------- ---------- ---------- ----------
ABS $ 212 $ 212 9.2% $ 259 $ 234 9.9%
CMBS 125 132 5.8% 117 120 5.0%
Corporate
Basic industry 221 235 10.2% 225 237 9.9%
Capital goods 106 109 4.8% 102 106 4.4%
Consumer cyclical 273 298 13.1% 264 285 11.9%
Consumer non-cyclical 258 271 11.9% 311 324 13.6%
Energy 86 93 4.1% 79 87 3.6%
Financial services 19 20 0.9% 12 12 0.5%
Technology and communications 277 326 14.3% 291 346 14.5%
Transportation 25 29 1.3% 38 40 1.7%
Utilities 309 323 14.2% 369 380 16.0%
Foreign government 187 209 9.2% 173 195 8.2%
Other 22 22 1.0% 19 20 0.8%
---------- ---------- ---------- ---------- ---------- ----------
TOTAL FIXED MATURITIES $ 2,120 $ 2,279 100.0% $ 2,259 $ 2,386 100.0%
========== ========== ========== ========== ========== ==========
Total general account fixed maturities $ 1,513 $ 1,604 67.2%
29
Total guaranteed separate account fixed maturities [1] $ 746 $ 782 32.8%
========== ========== ==========
[1] Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting the SOP.
As of March 31, 2004 and December 31, 2003, the Company held no issuer of a BIG
security with a fair value in excess of 3% and 4%, respectively, of the total
fair value for BIG securities. Total BIG securities decreased since December 31,
2003 as a result of tactical decisions to reduce exposure to lower credit
quality assets and re-invest in investment grade securities.
The following table presents the Company's unrealized loss aging for total fixed
maturity and equity securities classified as available-for-sale, as of March 31,
2004 and December 31, 2003, by length of time the security was in an unrealized
loss position.
UNREALIZED LOSS AGING OF TOTAL SECURITIES
MARCH 31, 2004 DECEMBER 31, 2003
------------------------------------ ------------------------------------
AMORTIZED FAIR UNREALIZED AMORTIZED FAIR UNREALIZED
COST VALUE LOSS COST VALUE LOSS
---------- ---------- ---------- ---------- ---------- ----------
Three months or less $ 2,710 $ 2,676 $ (34) $ 2,903 $ 2,878 $ (25)
Greater than three months to six months 158 155 (3) 1,943 1,882 (61)
Greater than six months to nine months 742 732 (10) 265 250 (15)
Greater than nine months to twelve months 145 138 (7) 138 130 (8)
Greater than twelve months 1,287 1,190 (97) 1,661 1,528 (133)
---------- ---------- ---------- ---------- ---------- ----------
TOTAL $ 5,042 $ 4,891 $ (151) $ 6,910 $ 6,668 $ (242)
========== ========== ========== ========== ========== ==========
Total general account $ 4,887 $ 4,717 $ (170)
Total guaranteed separate accounts [1] $ 2,023 $ 1,951 $ (72)
========== ========== ==========
[1] Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting the SOP.
The decrease in the unrealized loss amount since December 31, 2003 is primarily
the result of slightly improved pricing levels for ABS securities, a decline in
long-term interest rates and, to a lesser extent, asset sales. (For further
discussion, see the economic commentary under the Fixed Maturities by Type table
in this section of the MD&A.)
As of March 31, 2004 and December 31, 2003, fixed maturities represented $136,
or 90%, and $230, or 95%, of the Company's total unrealized loss associated with
securities classified as available-for-sale, respectively. There were no fixed
maturities as of March 31, 2004 or December 31, 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 March 31, 2004 and
December 31, 2003, for which management's best estimate of future cash flows
adversely changed during the reporting period. As of March 31, 2004 and December
31, 2003, no asset-backed or commercial mortgage-backed securities had an
unrealized loss in excess of $13 and $15, respectively. (For further discussion
of the other-than-temporary impairments criteria, see "Valuation of Investments
and Derivative Instruments" included in the Critical Accounting Estimates
section of the MD&A and in Note 2 of Notes to Consolidated Financial Statements
both of which are included in Hartford Life's 2003 Form 10-K Annual Report.)
The Company held no securities of a single issuer that were at an unrealized
loss position in excess of 10% and 7% of the total unrealized loss amount as of
March 31, 2004 and December 31, 2003, respectively.
The total securities classified as available-for-sale in an unrealized loss
position for longer than six months by type as of March 31, 2004 and December
31, 2003 are presented in the following table.
30
TOTAL SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS BY TYPE
MARCH 31, 2004 DECEMBER 31, 2003
-------------------------------------------- ------------------------------------------
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 $ 138 $ 89 $ (49) 43.0% $ 163 $ 108 $ (55) 35.3%
CDOs 72 69 (3) 2.6% 140 120 (20) 12.8%
Credit card receivables 57 53 (4) 3.5% 123 111 (12) 7.7%
Other ABS and CMBS 577 564 (13) 11.4% 616 602 (14) 9.0%
Corporate
Financial services 727 693 (34) 29.8% 678 646 (32) 20.5%
Technology and communications 46 45 (1) 0.9% 39 37 (2) 1.3%
Transportation 37 36 (1) 0.9% 25 22 (3) 1.9%
Utilities 99 94 (5) 4.4% 85 79 (6) 3.8%
Other 287 283 (4) 3.5% 181 169 (12) 7.7%
Other securities 134 134 -- -- 14 14 -- --
---------- -------- --------- ------- --------- ------- -------- -------
TOTAL $ 2,174 $ 2,060 $ (114) 100.0% $ 2,064 $ 1,908 $ (156) 100.0%
========== ======== ========= ======= ========= ======= ======== =======
Total general accounts $ 1,425 $ 1,315 $ (110) 70.5%
Total guaranteed separate accounts [1] $ 639 $ 593 $ (46) 29.5%
========= ======= ======== =======
[1] Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting the SOP.
The ABS securities in an unrealized loss position for six months or more as of
March 31, 2004 and December 31, 2003, were primarily supported by aircraft lease
receivables. As of March 31, 2004 and December 31, 2003, security types other
than ABS and CMBS that were in a significant unrealized loss position for
greater than six months were corporate fixed maturities primarily within the
financial services sector. The Company's current view of risk factors relative
to these fixed maturity types is as follows:
AIRCRAFT LEASE RECEIVABLES -- During the first quarter of 2004, securities
supported by aircraft lease receivables sustained a modest increase in value,
continuing an upward trend that began in the fourth quarter of 2003. This
increase is primarily due to a modest improvement on certain aircraft lease
rates, driven by greater demand for aircraft as a result of increased airline
travel. In prior periods, these securities had suffered a considerable decrease
in value as a result of a prolonged decline in airline travel and the
uncertainty of a potential industry recovery. While the Company has seen modest
price increases and greater liquidity in this sector during the first quarter of
2004 and fourth quarter of 2003, any additional price recovery will depend on
continued improvement in economic fundamentals, political stability and airline
operating performance.
FINANCIAL SERVICES -- As of March 31, 2004, the securities in the financial
services sector unrealized loss position for greater than six months were
comprised of approximately 50 different securities. The securities in this
category are primarily investment grade and the majority of these securities are
priced at or greater than 90% of amortized cost as of March 31, 2004. These
positions 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 increased during the first quarter of 2004 as interest rates
have declined. 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.
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 March 31, 2004 and December 31, 2003. 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,
management's intent and ability to hold these securities, as well as the
evaluation of the fundamentals of the issuers' financial condition and other
objective evidence, the Company believes that the prices of the securities in
the sectors identified above were temporarily depressed.
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. As of March 31, 2004 and
December 31, 2003, management's expectation of the discounted future cash flows
on
31
these securities was in excess of the associated securities' amortized cost.
(For further discussion, see "Valuation of Investments and Derivative
Instruments" included in the Critical Accounting Estimates section of MD&A and
in Note 2 of Notes to Consolidated Financial Statements both of which are
included in Hartford Life's 2003 Form 10-K Annual Report.)
The following table presents the Company's unrealized loss aging for BIG and
equity securities classified as available-for-sale, as of March 31, 2004 and
December 31, 2003.
UNREALIZED LOSS AGING OF BIG AND EQUITY SECURITIES
MARCH 31, 2004 DECEMBER 31, 2003
---------------------------- ----------------------------
AMORTIZED FAIR UNREALIZED AMORTIZED FAIR UNREALIZED
COST VALUE LOSS COST VALUE LOSS
--------- ----- ---------- --------- ----- ----------
Three months or less $ 227 $ 220 $ (7) $ 57 $ 55 $ (2)
Greater than three months to six months 12 11 (1) 91 87 (4)
Greater than six months to nine months 38 36 (2) 60 54 (6)
Greater than nine months to twelve months 56 50 (6) 18 17 (1)
Greater than twelve months 231 197 (34) 361 302 (59)
--------- ----- -------- -------- ----- --------
TOTAL $ 564 $ 514 $ (50) $ 587 $ 515 $ (72)
========= ===== ======== ======== ===== ========
Total general accounts $ 467 $ 411 $ (56)
Total guaranteed separate accounts [1] $ 120 $ 104 $ (16)
======== ===== ========
[1] Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting the SOP.
Similar to the decrease in the Unrealized Loss Aging of Total Securities table
from December 31, 2003 to March 31, 2004, the decrease in the BIG and equity
security unrealized loss amount for securities classified as available-for-sale
was primarily the result of slightly improved pricing levels for ABS securities,
a decline in long-term interest rates and, to a lesser extent, asset sales. (For
further discussion, see the economic commentary under the Fixed Maturities by
Type table in this section of the MD&A.)
The BIG and equity securities classified as available-for-sale in an unrealized
loss position for longer than six months by type as of March 31, 2004 and
December 31, 2003 are presented in the following table.
BIG AND EQUITY SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS BY TYPE
MARCH 31, 2004 DECEMBER 31, 2003
---------------------------------------- ----------------------------------------
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 $ 28 $ 15 $ (13) 31.0% $ 52 $ 34 $ (18) 27.3%
CDOs 22 21 (1) 2.4% 42 32 (10) 15.1%
Credit card receivables 42 38 (4) 9.5% 45 34 (11) 16.7%
Other ABS and CMBS 29 23 (6) 14.2% 49 42 (7) 10.6%
Corporate
Financial services 113 100 (13) 31.0% 113 101 (12) 18.2%
Transportation -- -- -- -- 8 8 -- --
Utilities 51 47 (4) 9.5% 71 65 (6) 9.1%
Other 36 35 (1) 2.4% 49 47 (2) 3.0%
Other securities 4 4 -- -- 10 10 -- --
--------- ----- -------- ----- --------- ----- --------- --------
TOTAL $ 325 $ 283 $ (42) 100.0% $ 439 $ 373 $ (66) 100.0%
========= ===== ======== ===== ========= ===== ========= ========
Total general accounts $ 340 $ 289 $ (51) 77.3%
Total guaranteed separate accounts [1] $ 99 $ 84 $ (15) 22.7%
========= ===== ========= ========
[1] Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting the SOP.
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.
32
CAPITAL MARKETS RISK MANAGEMENT
Hartford Life 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 the Company. Derivative
instruments are utilized in compliance with established Company policy and
regulatory requirements and are monitored internally and reviewed by senior
management.
MARKET RISK
Hartford Life 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.
(For further discussion of market risk see the Capital Markets Risk Management
section of MD&A in Hartford Life's 2003 Form 10-K Annual Report.) There have
been no material changes in market risk exposures from December 31, 2003.
DERIVATIVE INSTRUMENTS
Hartford Life 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 designed 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 replication transactions. The Company does not make a
market or trade in these instruments for the express purpose of earning short
term trading profits. (For further discussion on Hartford Life's use of
derivative instruments, refer to Note 2 of Notes to Condensed Consolidated
Financial Statements.)
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, as 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 Retail Products Group, the Institutional Solutions Group,
and, to a lesser extent, the 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 Retail Products segment sells variable annuity contracts that
offer various guaranteed death benefits. For certain guaranteed death benefits,
The Company 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. For certain guaranteed
death benefits sold with variable annuity contracts beginning in June 2003, the
Company pays the greater of (1) the account value at death; or (2) the maximum
anniversary value; not to exceed the account value plus the greater of (a) 25%
of premium payments or (b) 25% of the maximum anniversary value of the contract.
The Company currently reinsures a significant portion of these death benefit
guarantees associated with its in-force block of business. The Company maintains
a liability for death benefit costs net of reinsurance, of $117 as of March 31,
2004. Declines in the equity market may increase the Company's net exposure to
death benefits under these contracts.
The Retail Products Group segment's total gross exposure (i.e. before
reinsurance) to these guaranteed death benefits as of March 31, 2004 is $10.5
billion. Due to the fact that 80% of this amount is reinsured, the Company's net
exposure is $2.0 billion. This amount is often referred to as the 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.
33
In addition the Company offers certain variable annuity products with a GMWB
rider. Declines in the equity market may increase the Company's exposure to
benefits under the GMWB contracts. For all contracts in effect through July 6,
2003, the Company entered into a 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 the 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 not 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 options and futures contracts.
During the first quarter of 2004, the Company entered into Europe, Australasia
and Far East ("EAFE") Index swaps to hedge GMWB exposure to international equity
markets.
The net impact of the change in value of the embedded derivative, net of the
results of the hedging program, was a $2 loss before deferred policy acquisition
costs and tax effects for the three months ended March 31, 2004.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of the
Company and its ability to generate strong cash flows from each of the business
segments, borrow funds at competitive rates and raise new capital to meet
operating and growth needs.
LIQUIDITY REQUIREMENTS
The liquidity requirements of the Company have been and will continue to be met
by funds from operations as well as the issuance of commercial paper, debt
securities and borrowings from its credit facilities. The principal sources of
operating funds are premiums and investment income, while investing cash flows
originate from maturities and sales of invested assets.
The Company endeavors to maintain a capital structure that provides financial
and operational flexibility to its insurance subsidiaries, ratings that support
its competitive position in the financial services marketplace (see the Ratings
section below for further discussion), and strong shareholder returns. As a
result, the Company may from time to time raise capital from the issuance of
debt or other capital securities. The issuance of debt or other capital
securities could result in the dilution of shareholder interests or reduced net
income due to additional interest expense.
Hartford Life is a holding company which relies upon operating cash flow in the
form of dividends from its subsidiaries, which enables the Company to service
debt, pay dividends to its parent, and pay certain business expenses.
Dividends to Hartford Life, Inc. from its direct subsidiary, Hartford Life and
Accident Insurance Company ("HLA"), are restricted. The payment of dividends by
Connecticut-domiciled insurers is limited under the insurance holding company
laws of Connecticut. Under these laws, the insurance subsidiaries may only make
their dividend payments out of unassigned surplus. These laws require notice to
and approval by the state insurance commissioner for the declaration or payment
of any dividend, which, together with other dividends or distributions made
within the preceding twelve months, exceeds the greater of (i) 10% of the
insurer's policyholder surplus as of December 31 of the preceding year or (ii)
net income (or net gain from operations, if such company is a life insurance
company) for the twelve-month period ending on the thirty-first day of December
last preceding, in each case determined under statutory insurance accounting
policies. In addition, if any dividend of a Connecticut-domiciled insurer
exceeds the insurer's earned surplus, it requires the prior approval of the
Connecticut Insurance Commissioner. The insurance holding company laws of the
other jurisdictions in which the Company's insurance subsidiaries are
incorporated (or deemed commercially domiciled) generally contain similar
(although in certain instances somewhat more restrictive) limitations on the
payment of dividends. As of April 30, 2004, HLA had paid $164 to the Company and
is permitted to pay up to a maximum of approximately $283 in dividends to the
Company for the remainder of 2004 without prior approval from the applicable
insurance commissioner.
The primary uses of funds are to pay claims, policy benefits, operating expenses
and commissions and to purchase new investments. The Company has a policy of
carrying a significant short-term investment position and accordingly does not
anticipate selling intermediate and long-term fixed maturity investments to meet
its liquidity needs. (For a discussion of the Company's investment objectives
and strategies, see the Investments and Capital Markets Risk Management
sections.)
SOURCES OF LIQUIDITY
Shelf Registrations
On May 15, 2001, the Company filed with the SEC a shelf registration statement
for the potential offering and sale of up to $1.0 billion in debt and preferred
securities. The registration statement was declared effective on May 29, 2001.
As of March 31, 2004, the Company had $1.0 billion remaining on its shelf.
34
Commercial Paper
Hartford Life has a commercial paper program, which allows it to borrow up to a
maximum amount of $250 in short term commercial paper notes. In addition, the
Company's Japanese operation, Hartford Life Insurance KK, has a $19.2 line of
credit with a Japanese bank. As of March 31, 2004, the Company had no
outstanding borrowings under either facility.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
There have been no material changes to the Company's off-balance sheet
arrangements and aggregate contractual obligations since the filing of the
Company's 2003 Form 10-K Annual Report.
Capitalization
The capital structure of Hartford Life as of March 31, 2004 and December 31,
2003 consisted of debt and equity, summarized as follows:
March 31, 2004 December 31, 2003
-------------- -----------------
Short-term debt $ 200 $ 505
Long-term debt [1] 1,050 1,300
-------------- ---------------
Total debt $ 1,250 $ 1,805
-------------- ---------------
Equity excluding net unrealized gains (losses) on securities, net of tax $ 6,844 $ 6,156
Net unrealized capital gains (losses) on securities, net of tax 1,669 903
-------------- ---------------
Total stockholder's equity $ 8,513 $ 7,059
-------------- ---------------
Total capitalization $ 9,763 $ 8,864
-------------- ---------------
Debt to equity 15% 26%
Debt to capitalization 13% 20%
[1] Includes junior subordinated debentures.
The Company's total capitalization increased $899, or 10%, as of March 31, 2004,
as compared to December 31, 2003. The increase was primarily the result of an
increase in stockholder's equity partially offset by a decrease in debt. The
increase in stockholder's equity, excluding net unrealized gains on securities,
was primarily due to capital contributions of $505 and net income of $258,
partially offset by dividends of $74. Net unrealized capital gains on
securities, net of tax, increased $766, or 85%, as of March 31, 2004 as compared
to December 31, 2003. The increase in unrealized gains is due primarily to a
decline in interest rates and credit spreads as well as to the Company's
adoption of SOP 03-1, which resulted in a $292 cumulative effect on unrealized
gains on securities in the first quarter of 2004 related to the reclassification
of investments from separate account assets to general account assets and
appreciation in the fixed maturities from lower interest rates.
DEBT
The following discussion describes the Company's debt financing activities for
the first quarter of 2004.
On March 15, 2004, the Company redeemed its 7.2% junior subordinated debentures
underlying the trust preferred securities issued by Hartford Life Capital I.
On January 30, 2004, the Company paid and settled the related party note
agreements totaling $305 with The Hartford.
For additional information regarding debt, see Note 8 of Notes to Consolidated
Financial Statements in Hartford Life's 2003 Form 10-K Annual Report.
DIVIDENDS
The Company declared $74 in dividends to Hartford Holdings, Inc. for the first
quarter ended March 31, 2004. Future dividend decisions will be based on, and
affected by, a number of factors, including the operating results and financial
requirements of the Company on a stand-alone basis and the impact of regulatory
restrictions.
35
CASH FLOWS
FIRST QUARTER ENDED
MARCH 31,
2004 2003
--------- -------
Net Cash provided by operating activities $ 707 $ 112
Net Cash used for investing activities (230) (1,264)
Net Cash used for financing activities (281) 1,262
Cash - end of period 460 289
The increase in cash provided by operating activities was primarily the result
of the timing of funds received for policyholder accounts, net of the activity
in the equity securities, held for trading purposes, and timing of the
settlement of receivables and payables in the first quarter of 2004. The
decrease in cash used for investing activities was due to lower purchases of
investments and higher sales of investments in the first quarter of 2004 as
compared to the prior year period. Net cash used for financing activities
reflects net disbursements from policyholders accounts related to investment and
universal life contracts, the shift in capital structure associated with debt
repayments, and increased dividends to shareholders. Operating cash flows in
both periods have been more than adequate to meet liquidity requirements.
EQUITY MARKETS
For a discussion of the equity markets impact to capital and liquidity, see the
Capital Markets Risk Management.
RATINGS
Ratings are an important factor in establishing the competitive position in the
insurance and financial services marketplace. There can be no assurance that the
Company's ratings will continue for any given period of time or that they will
not be changed. In the event the Company's ratings are downgraded, the level of
revenues or the persistency of the Company's business may be adversely impacted.
The following table summarizes Hartford Life's significant United States member
companies' financial ratings from the major independent rating organizations as
of April 30, 2004:
STANDARD &
A.M. BEST FITCH POOR'S MOODY'S
--------- ----- ------ -------
INSURANCE RATINGS
Hartford Life Insurance Company A+ AA AA- Aa3
Hartford Life and Accident A+ AA AA- Aa3
Hartford Life Group Insurance Company A+ AA AA- --
------ ---- ---- ------
Hartford Life and Annuity A+ AA AA- Aa3
Hartford Life Insurance KK (Japan) -- -- AA- --
OTHER RATINGS
Hartford Life, Inc.
Senior debt a- A A- A3
Commercial paper -- F1 A-2 P-2
Hartford Life, Inc.
Capital II Trust preferred securities bbb A- BBB Baa1
Hartford Life Insurance Company:
Short Term Rating -- -- A-1+ P-1
The agencies consider many factors in determining the final rating of an
insurance company. One consideration is the relative level of statutory surplus
necessary to support the business written. Statutory surplus represents the
capital of the insurance company reported in accordance with accounting
practices prescribed by the applicable state insurance department.
CONTINGENCIES
Regulatory Developments
There continues to be significant federal and state regulatory activity relating
to financial services companies, particularly mutual
36
funds companies. These regulatory inquiries have focused on a number of mutual
fund issues. The Company has received requests for information and subpoenas
from the Securities and Exchange Commission ("SEC"), a subpoena from the New
York Attorney General's Office, and requests for information from the
Connecticut Securities and Investments Division of the Department of Banking, in
each case requesting documentation and other information regarding various
mutual fund regulatory issues. Representatives from the SEC's Office of
Compliance Inspections and Examinations continue to request documents and
information in connection with their ongoing compliance examination. In
addition, the SEC's Division of Enforcement has commenced an investigation of
the Company's variable annuity and mutual fund operations. The Company continues
to cooperate fully with the SEC and other regulatory agencies.
The Company's mutual funds are available for purchase by the separate accounts
of different variable life insurance policies, variable annuity products, and
funding agreements, and they are offered directly to certain qualified
retirement plans. Although existing products contain transfer restrictions
between subaccounts, some products, particularly older variable annuity
products, do not contain restrictions on the frequency of transfers. In
addition, as a result of the settlement of litigation against the Company with
respect to certain owners of older variable annuity products, the Company's
ability to restrict transfers by these owners is limited.
A number of companies have announced settlements of enforcement actions with
various regulatory agencies, primarily the SEC and the New York Attorney
General's Office. While no such action has been initiated against the Company,
it is possible that the SEC or one or more other regulatory agencies may pursue
action against the Company in the future. If such an action is brought, it could
have a material effect on the Company.
For further information on other contingencies, see Note 4 of Notes to
Consolidated Financial Statements included in the Company's 2003 Form 10-K
Annual Report.
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 March
31, 2004.
Change in internal control over financial reporting
There was no change in the Company's internal control over financial reporting
that occurred during the first quarter of 2004 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 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 settled their intellectual property
dispute with Bancorp Services, LLC ("Bancorp"). The dispute concerned, among
other things, Bancorp's
37
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 settlement provided that the
Company would 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
settlement resulted in the recording of an additional charge of $40, after-tax,
in the third quarter of 2003, reflecting the maximum amount payable under the
settlement, and in the fourth quarter of 2003, the Company paid the initial $70
of the settlement. On March 1, 2004, the Federal Circuit Court of Appeals
decided the patent appeal adversely to the Company, and on March 22, 2004, the
Company paid Bancorp an additional $10 in full and final satisfaction of its
obligations under the settlement. Because the charge taken in the third quarter
of 2003 reflected the maximum amount payable under the settlement, the amount
paid in the first quarter of 2004 had no effect on the Company's results of
operations.
ITEM 2. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K: None.
38
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, INC.
/s/ Ernest M. McNeill Jr.
-------------------------------------
Ernest M. McNeill Jr.
Vice President and Chief Accounting
Officer
May 11, 2004
39
HARTFORD LIFE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
EXHIBITS INDEX
EXHIBIT #
- ---------
15.01 Deloitte & Touche LLP Letter of Awareness
31.01 Section 302 Certification of Thomas M. Marra
31.02 Section 302 Certification of Lizabeth H. Zlatkus
32.01 Section 906 Certification of Thomas M. Marra
32.02 Section 906 Certification of Lizabeth H. Zlatkus
40