Back to GetFilings.com
===============================================================================
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 002-46577
HARTFORD LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 06-0974148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 HOPMEADOW STREET, SIMSBURY, CONNECTICUT 06089
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No[X]
As of April 30, 2004 there were outstanding 1,000 shares of Common Stock, $5,690
par value per share, of the registrant.
The registrant meets the conditions set forth in General Instruction H (1) (a)
and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
===============================================================================
INDEX
PAGE
----
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 - As of 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 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 34
ITEM 4. CONTROLS AND PROCEDURES 34
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 34
Signature 35
Certifications 37
2
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholder
Hartford Life Insurance Company
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of
Hartford Life Insurance Company and subsidiaries (the "Company") as of 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 INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FIRST QUARTER
ENDED
MARCH 31,
--------------------
(In millions) (Unaudited) 2004 2003
-------- --------
REVENUES
Fee income $ 618 $ 494
Earned premiums and other 103 131
Net investment income 609 431
Net realized capital gains (losses) 64 (38)
-------- --------
TOTAL REVENUES 1,394 1,018
-------- --------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims, and claim adjustment expenses 744 586
Insurance expenses and other 164 149
Amortization of deferred policy acquisition costs and
present value of future profits 199 138
Dividends to policyholders 14 15
-------- --------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,121 888
-------- --------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 273 130
Income tax expense 74 30
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
199 100
-------- --------
Cumulative effect of accounting change, net of tax (18) -
-------- --------
NET INCOME $ 181 $ 100
======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
HARTFORD LIFE INSURANCE COMPANY 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
$39,007 and $28,511) $ 41,770 $ 30,085
Equity securities, available for sale, at fair value (cost of $119 and $78) 123 85
Equity securities, held for trading, at fair value 1 -
Policy loans, at outstanding balance 2,612 2,470
Other investments 847 639
---------- ------------
Total investments 45,353 33,279
Cash 54 96
Premiums receivable and agents' balances 20 17
Reinsurance recoverables 1,342 1,297
Deferred policy acquisition costs and present value of future profits 5,919 6,088
Deferred income taxes (873) (486)
Goodwill 186 186
Other assets 1,299 1,238
Separate account assets 127,050 130,225
---------- ------------
TOTAL ASSETS $ 180,350 $ 171,940
========== ============
LIABILITIES
Reserve for future policy benefits $ 6,721 $ 6,518
Other policyholder funds 36,141 25,263
Other liabilities 3,267 3,330
Separate account liabilities 127,050 130,225
---------- ------------
TOTAL LIABILITIES 173,179 165,336
========== ============
STOCKHOLDER'S EQUITY
Common Stock - 1,000 shares authorized, issued and outstanding;
par value $5,690 6 6
Capital surplus 2,240 2,240
Accumulated other comprehensive income
Net unrealized capital gains on securities, net of tax 1,397 711
Foreign currency translation adjustments (1) (1)
---------- ------------
Total accumulated other comprehensive income 1,396 710
---------- ------------
Retained earnings 3,529 3,648
---------- ------------
TOTAL STOCKHOLDER'S EQUITY 7,171 6,604
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 180,350 $ 171,940
========== ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
HARTFORD LIFE INSURANCE COMPANY 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 $ 6 $ 2,240 $ 728 $ (17) $ (1) $ 3,648 $ 6,604
Comprehensive income
Net income 181 181
-------------
Other comprehensive income, net
of tax (1)
Cumulative effect of accounting
change 292 292
Net change in unrealized
capital gains on securities (2) 355 355
Net gain on cash flow hedging
instruments 39 39
-------------
Total other comprehensive income 686
-------------
Total comprehensive income 867
-------------
Dividends declared (300) (300)
------ ------- ----------- ------------ ----------- -------- -------------
BALANCE, MARCH 31, 2004 $ 6 $ 2,240 $ 1,375 $ 22 $ (1) $ 3,529 $ 7,171
------ ------- ----------- ------------ ----------- -------- -------------
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 $ 6 $ 2,041 $ 463 $ 111 $ (1) $ 3,197 $ 5,817
Comprehensive income
Net income 100 100
-------------
Other comprehensive income, net of
tax (1)
Net change in unrealized capital
gains on securities (2) 100 100
Net loss on cash flow hedging
instruments (17) (17)
Cumulative translation
adjustments -
-------------
Total other comprehensive income 83
-------------
Total comprehensive income 183
------ ------- ----------- ------------ ----------- -------- -------------
BALANCE, MARCH 31, 2003 $ 6 $ 2,041 $ 563 $ 94 $ (1) $ 3,297 $ 6,000
====== ======= =========== ============ =========== ======== =============
(1) Unrealized capital gains on securities is reflected net of tax and other
items of $191 and $54 for the three months ended March 31, 2004 and 2003,
respectively. Net gain (loss) on cash flow hedging instruments is net of
tax provision (benefit) of $21 and $(9) for the first quarters ended March
31, 2004 and 2003, respectively. There is no tax effect on cumulative
translation adjustments.
(2) Net of reclassification adjustment for gains (losses) realized in net
income of $34 and $(23) for the first quarters ended March 31, 2004 and
2003, respectively.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST QUARTER ENDED
MARCH 31,
(In millions) (Unaudited) 2004 2003
-------- --------
OPERATING ACTIVITIES
Net income $ 181 $ 100
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net realized capital (gains) losses (64) 38
Cumulative effect of adoption of SOP 03-1 18 -
Amortization of deferred policy acquisition costs and present value of future profits 199 138
Additions to deferred policy acquisition costs and present value of future profits (381) (282)
Depreciation and amortization 25 17
Increase in premiums receivable and agents' balances (3) (1)
Decrease in other liabilities (50) (37)
Increase in receivables (185) (34)
Decrease in payables and accruals (227) (9)
Decrease in accrued tax (5) (27)
Increase in deferred income tax 506 25
Amortization of sales inducements 6 15
Additions to deferred sales inducements (33) (31)
Increase in future policy benefits 203 109
(Increase) decrease in reinsurance recoverables 12 (61)
Decrease in other assets 216 97
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 418 57
======== ========
INVESTING ACTIVITIES
Purchases of fixed maturity and equity security investments, available-for-sale (2,520) (4,463)
Sales of fixed maturity and equity security investments, available-for-sale 1,935 2,380
Maturities of fixed maturity and equity security investments, available-for-sale 575 810
Decrease in other assets 1 -
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES (9) (1,273)
======== ========
FINANCING ACTIVITIES
Dividends paid (300) -
Net (disbursements) receipts for investment and universal life-type contracts charged
against policyholder accounts (151) 1,265
-------- --------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (451) 1,265
-------- --------
Net (decrease) increase in cash (42) 49
Cash - beginning of period 96 79
-------- --------
CASH - END OF PERIOD $ 54 $ 128
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID (RECEIVED) DURING THE PERIOD FOR
Income taxes $ 10 $ (2)
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 Insurance Company, together with its consolidated subsidiaries
("Hartford Life Insurance Company" or the "Company"), is a leading financial
services and insurance organization which provides investment, retirement,
estate planning and group benefits products. The Company is a wholly-owned
subsidiary of Hartford Life and Accident Insurance Company ("HLA"), a
wholly-owned subsidiary of Hartford Life, Inc. ("Hartford Life"). Hartford Life
is a direct subsidiary of Hartford Holdings, Inc., a direct subsidiary of The
Hartford Financial Services Group, Inc. ("The Hartford"), the Company's ultimate
parent company.
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. All material intercompany transactions and balances between
Hartford Life Insurance Company, 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 financial statements reflect all adjustments (consisting only
of normal accruals) which are, in the opinion of management, necessary for the
fair presentation of the financial position, results of operations, and cash
flows for the interim periods. These financial statements and condensed notes
should be read in conjunction with the consolidated financial statements and
notes thereto included in Hartford Life Insurance Company's 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, 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 Insurance Company'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. In addition, also in connection with the SOP, the Company has
classified certain interests it holds in its separate accounts 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 Issued to Employees". 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 not material. 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 in
previous years 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, including non-option plans, related to
stock-based employee compensation 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 2 of Notes to Consolidated Financial
Statements included in Hartford Life Insurance Company'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 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 $ (50) $ --
Reclassifying certain separate accounts to general
accounts 30 294
Other 2 (2)
---------- -------------
Total cumulative effect of adoption $ (18) $ 292
========== =============
9
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 following
the contract anniversary. For certain variable annuity contracts sold beginning
in June of 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 $217 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 $206 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 contractholder, 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 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
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.
Interests in Separate Accounts
As of December 31, 2003, the Company had $20 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 $9 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 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 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 quarter 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 will 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
Notes to Consolidated Financial Statements included in Hartford Life Insurance
Company'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 that 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 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.
11
2. DERIVATIVE INSTRUMENTS 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 and replication transactions.
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 Insurance Company'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 FAIR
HEDGING STRATEGY AMOUNT 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)
===============================================================================================================================
12
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.
Derivative instruments are recorded at fair value and presented in the condensed
consolidated balance sheets as follows:
March 31, 2004 December 31, 2003
----------------------------------------------------------------
Liability Liability
Asset Values Values Asset Values Values
- -------------------------------------------------------------------------------------------------------------------
Other investments $ 173 $ -- $ 116 $ --
Reinsurance recoverables -- 79 -- 115
Other policyholder funds and benefits payable 79 -- 115 --
Fixed maturities 15 -- 7 --
Other liabilities -- 241 -- 186
- -------------------------------------------------------------------------------------------------------------------
TOTAL $ 267 $ 320 $ 238 $ 301
===================================================================================================================
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 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 Value Fair Amount Fair Value
- -----------------------------------------------------------------------------------------------------
Cash flow hedge $ 5,227 $ (66) $ 2,592 $ (49)
Fair value hedge 259 (6) 163 (6)
Other investment and risk management activities 42,747 19 33,745 (8)
- -----------------------------------------------------------------------------------------------------
TOTAL $ 48,233 $ (53) $ 36,500 $ (63)
=====================================================================================================
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, and
fair value 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 $8 and $(2), 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 $13. 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.
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
$186.
The following table shows the Company's acquired intangible assets that continue
to be subject to amortization and aggregate amortization expense. Except for
goodwill, the Company has no intangible assets with indefinite useful lives.
AS OF 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 $ 608 $ 123 $ 605 $ 115
- ----------------------------------------------------------------------------------------------------------
Total $ 608 $ 123 $ 605 $ 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 $ 34
2005 $ 30
2006 $ 29
2007 $ 26
2008 $ 23
4. COMMITMENTS AND CONTINGENCIES
LITIGATION
Hartford Life Insurance Company 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 and its affiliate
International Corporate Marketing Group, LLC ("ICMG") settled their intellectual
property dispute with Bancorp Services, LLC ("Bancorp"). The dispute concerned,
among other things, Bancorp's claims for alleged patent infringement, breach of
a confidentiality agreement, and misappropriation of trade secrets related to
certain stable value corporate-owned life insurance products. The settlement
provided that the Company and ICMG 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 a $9 after-tax
benefit, in the third quarter of 2003, to reflect the Company's portion 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 and
ICMG each paid Bancorp an additional $5, constituting full and final
satisfaction of their 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.
14
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 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.
Hartford Life'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 12 of Notes to
Consolidated Financial Statements included in Hartford Life Insurance Company's
Form 10-K Annual Report.
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 12 of Notes to Consolidated
Financial Statements included in the Company's 2003 Form 10-K Annual Report)
5. TRANSACTIONS WITH AFFILIATES
For a description of transactions with affiliates, see Note 13 of Notes to
Consolidated Financial Statements included in Hartford Life Insurance Company's
Form 10-K Annual Report.
6. SEGMENT INFORMATION
With the recent change in Hartford Life Insurance Company's internal
organization, the Company has changed its reportable operating segments from
Investment Products, Individual Life and Corporate Owned Life Insurance ("COLI")
to Retail Products Group ("Retail"), Institutional Solutions Group
("Institutional") and Individual Life. Retail offers individual variable and
fixed annuities, 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 (formerly COLI). Individual Life sells a variety of life insurance
products, including variable universal life, universal life, interest sensitive
whole life and term life insurance. Hartford Life Insurance Company also
includes in an Other category 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 allocable to any of its reportable operating
segments, intersegment eliminations as well as certain group benefit products
including group life and group disability insurance that is directly written by
the Company and is substantially ceded to the parent HLA. 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.
15
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 Insurance Company
evaluates performance of its segments based on revenues, net income and the
segment's return on allocated capital. The Company charges direct operating
expenses to the appropriate segment and allocates the majority of indirect
expenses to the segments based on an intercompany expense arrangement.
Intersegment revenues 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.
Retail Institutional
Products Solutions Individual
MARCH 31, 2004 Group Group Life Other Total
- -----------------------------------------------------------------------------------------------------
FIRST QUARTER ENDED
Total revenues $ 628 $ 434 $ 230 $ 102 $ 1,394
Net income 76 18 32 55 181
- -----------------------------------------------------------------------------------------------------
Retail Institutional
Products Solutions Individual
MARCH 31, 2003 Group Group Life Other Total
- -----------------------------------------------------------------------------------------------------
FIRST QUARTER ENDED
Total revenues $ 392 $ 416 $ 220 $ (10) $ 1,018
Net income (loss) 61 28 29 (18) 100
- -----------------------------------------------------------------------------------------------------
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in millions, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of Hartford Life Insurance
Company and its subsidiaries ("Hartford Life Insurance Company" or the
"Company") as of 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 Hartford 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.
INDEX
Critical Accounting Estimates 17
Consolidated Results of Operations - Operating Summary 19
Retail Products Group 20
Institutional Solutions Group 21
Individual Life 22
Investments 22
Investment Credit Risk 25
Capital Markets Risk Management 31
Capital Resources and Liquidity 32
Accounting Standards 33
CRITICAL ACCOUNTING 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.
17
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 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 DAC was $5.9
billion and $6.1 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 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.
18
CONSOLIDATED RESULTS OF OPERATIONS - OPERATING SUMMARY
ORGANIZATIONAL STRUCTURE
The Company has changed its reportable operating segments from Investment
Products, Individual Life and Corporate Owned Life Insurance (COLI) to Retail
Products Group ("Retail"), Institutional Solutions Group ("Institutional") and
Individual Life. Retail offers individual variable and fixed annuities,
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. The Company also includes, in an Other category, 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, as well as
certain group benefit products including group life and group disability
insurance that is directly written by the Company and is substantially ceded to
the parent HLA. 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
- ------------------------------------------------------------------------------------------------------
Fee income $ 618 $ 494 25%
Earned premiums 103 103 -
Net investment income [1] 609 431 41%
Other revenue - 28 (100%)
Net realized capital gains (losses) 64 (38) NM
- ------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,394 1,018 37%
- ------------------------------------------------------------------------------------------------------
Benefits, claims, and claim adjustment expenses [1] 744 586 27%
Insurance operating costs and expenses 177 162 9%
Amortization of deferred policy acquisition costs and present value
of future profits 199 138 44%
Other expenses 1 2 (50%)
- ------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,121 888 26%
- ------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING 273 130 110%
CHANGE
Income tax expense 74 30 147%
- ------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 199 100 99%
Cumulative effect of accounting change, net of tax[2] (18) - NM
- ------------------------------------------------------------------------------------------------------
NET INCOME $ 181 $ 100 81%
======================================================================================================
[1] With the adoption of SOP 03-1, certain annuity 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 was an increase in net income in the Retail segment. Net income
in the Retail segment increased principally driven by growth in the variable
annuity business as a result of increasing assets under management. Partially
offsetting this increase was lower spread income on market value adjusted
("MVA") fixed annuities due to the adoption of the 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 Separate Accounts" ("the
SOP"). Additionally, the adoption of the SOP results in certain changes in
presentation in the Company's financial statements, including reporting the
spreads on the Company's MVA fixed annuities on a gross basis in net investment
income and benefits expense. (For further discussion of the impact of the
Company's adoption of the SOP see Note 1 of Notes to Consolidated Financial
Statements).
19
RETAIL PRODUCTS GROUP
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
- -----------------------------------------------------------------------------------------------------------------
2004 2003 CHANGE
- -----------------------------------------------------------------------------------------------------------------
Fee income and other $ 377 $ 279 35%
Earned premiums (21) (9) (133%)
Net investment income 272 116 134%
Net realized capital gains - 6 (100%)
- ----------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 628 392 60%
- ----------------------------------------------------------------------------------------------------------------
Benefits, claims, and claim adjustment expenses 257 147 75%
Insurance operating costs and other expenses 101 85 19%
Amortization of deferred policy acquisition costs and present value
of future profits 154 89 73%
- ----------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 512 321 60%
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING 116 71 63%
CHANGE
Income tax expense 21 10 110%
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 95 61 56%
Cumulative effect of accounting change, net of tax[1] (19) - NM
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 76 $ 61 25%
================================================================================================================
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 5,162 3,216 61%
- ----------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES [2] $ 106,860 $ 77,865 37%
- ----------------------------------------------------------------------------------------------------------------
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 business as a
result of increasing assets under management. 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.
Partially offsetting the positive earnings drivers discussed above were the
cumulative effect of accounting changes 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.
20
INSTITUTIONAL SOLUTIONS GROUP
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
- ------------------------------------------------------------------------------------------------------------------
2004 2003 CHANGE
- ------------------------------------------------------------------------------------------------------------------
Fee income and other $ 71 $ 75 (5%)
Earned premiums 109 100 9%
Net investment income 253 240 5%
Net realized capital gains 1 1 -
- ----------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 434 416 4%
- ----------------------------------------------------------------------------------------------------------------
Benefits, claims, and claim adjustment expenses 361 329 10%
Insurance operating costs and other expenses 38 37 3%
Amortization of deferred policy acquisition costs and present value
of future profits 9 7 29%
- ----------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 408 373 9%
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 26 43 (40%)
Income tax expense 8 15 (47%)
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 18 $ 28 (36%)
================================================================================================================
Institutional account values $ 12,649 $ 9,658 31%
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 [1] $ 45,734 $ 39,879 15%
- ----------------------------------------------------------------------------------------------------------------
[1] 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 primarily the result of lower earnings from
the institutional business principally due to higher reserve levels associated
with institutional annuities in the first quarter of 2004 as compared to the
prior year period. Additionally, net income in private placement life insurance
decreased, primarily due 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. Partially offsetting
these declines was a small increase in the net income 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.
21
INDIVIDUAL LIFE
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
- ------------------------------------------------------------------------------------------------------------------
2004 2003 CHANGE
- ------------------------------------------------------------------------------------------------------------------
Fee income and other $ 165 $ 163 1%
Net investment income 65 57 14%
- ----------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 230 220 5%
- ----------------------------------------------------------------------------------------------------------------
Benefits, claims, and claim adjustment expenses 108 98 10%
Insurance operating costs and other expenses 37 36 3%
Amortization of deferred policy acquisition costs and present value
of future profits 36 42 (14%)
- ----------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 181 176 3%
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING 49 44 11%
CHANGE
Income tax expense 16 15 7%
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 33 29 14%
Cumulative effect of accounting change, net of tax[1] (1) - NM
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 32 $ 29 10%
================================================================================================================
Variable universal life account values $ 4,797 $ 3,672 31%
- ----------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $ 8,313 $ 7,051 18%
================================================================================================================
[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.
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 Insurance Company'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 $11.7 billion of separate account
assets, comprised of fixed maturity and equity securities, to the general
account as a result of adopting the SOP. The majority of these assets are
designated as available-for-sale securities with changes in fair value reported
in other comprehensive income.
Return on invested assets is an important element of Hartford Life Insurance
Company's financial results. Significant fluctuations in the fixed income or
equity markets could weaken the Company's financial condition or its results of
operations. Additionally, changes in market interest rates may impact the period
of time over which certain investments, such as mortgage-backed securities, are
repaid and whether certain investments are called by the issuers. Such changes
may, in turn, impact the yield on these investments and also may result in
reinvestment of funds received from calls and prepayments at rates below the
average portfolio yield. Net investment income and net realized capital gains
and losses accounted for approximately 48% and 39% of the Company's
22
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 92% and 90%
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 21% 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 Insurance Company'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 $ 41,770 92.1% $ 30,085 90.4%
Equity securities, available-for-sale, at fair value 123 0.3% 85 0.3%
Policy loans, at outstanding balance 2,612 5.7% 2,470 7.4%
Mortgage loans, at cost 483 1.1% 354 1.1%
Limited partnerships, at fair value 190 0.4% 169 0.5%
Other investments 175 0.4% 116 0.3%
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 45,353 100.0% $ 33,279 100.0%
==================================================================================================================
Fixed maturity investments increased 39% since December 31, 2003, primarily the
result of fixed maturities that were reclassified from separate accounts to the
general account as a result of the adoption of the SOP. Excluding the impact of
the reclassification, the fixed maturities balance remained materially unchanged
since December 31, 2003.
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] $ 565 $ 374
Policy loan income 44 57
-------------------------
Net investment income - total [1] $ 609 $ 431
Yield on average invested assets [2] 5.9% 6.2%
- ------------------------------------------------------------------------------------------------------------------
Gross gains on sale $ 85 $ 48
Gross losses on sale (15) (41)
Impairments (8) (51)
Periodic net coupon settlements on non-qualifying derivatives [1] 1 7
Other, net [3] 1 (1)
-------------------------
Net realized capital gains (losses) [1] [4] $ 64 $ (38)
- ------------------------------------------------------------------------------------------------------------------
23
[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 annualized net investment income 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 collateral received associated with the securities lending
program.
[3] 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
gains (losses).
[4] 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, increased $191, or 51%, 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. 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 5.2%, 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 $102 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.)
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 -- 3
- ----------------------------------------------------------------------------------------------------
Total ABS 4 25
Corporate
Consumer non-cyclical -- 7
Technology and communications -- 3
Transportation -- 7
Other corporate 3 1
- ----------------------------------------------------------------------------------------------------
Total corporate 3 18
Equity -- 8
Mortgage-backed securities ("MBS") - interest only securities 1 --
- ----------------------------------------------------------------------------------------------------
TOTAL OTHER-THAN-TEMPORARY IMPAIRMENTS $ 8 $ 51
====================================================================================================
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.
24
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 at a loss during the quarters ended March 31, 2004 and 2003
at totaled gross losses of $14 and $36, 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.
INVESTMENT CREDIT RISK
Hartford Life Insurance Company 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
Insurance Company'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 Insurance
Company is not exposed to any credit concentration risk of a single issuer
greater than 10% of the Company's stockholder's equity.
25
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 $ 4,948 $ 118 $ (64) $ 5,002 12.0%
CMBS 7,321 504 (9) 7,816 18.7%
Collateralized mortgage
obligation ("CMO") 634 12 (1) 645 1.5%
Corporate
Basic industry 2,201 200 (2) 2,399 5.7%
Capital goods 1,369 131 (1) 1,499 3.6%
Consumer cyclical 2,247 197 (2) 2,442 5.8%
Consumer non-cyclical 2,317 231 (3) 2,545 6.1%
Energy 1,380 151 -- 1,531 3.7%
Financial services 5,089 489 (20) 5,558 13.4%
Technology and
communications 3,368 403 (5) 3,766 9.0%
Transportation 529 49 (1) 577 1.4%
Utilities 1,880 195 (6) 2,069 5.0%
Other 577 42 -- 619 1.5%
Government/Government
agencies
Foreign 599 71 (1) 669 1.6%
United States 856 27 -- 883 2.1%
MBS - agency 1,671 39 -- 1,710 4.1%
Municipal
Taxable 491 25 (6) 510 1.2%
Redeemable preferred stock 15 -- -- 15 --
Short-term 1,515 -- -- 1,515 3.6%
- -----------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 39,007 $ 2,884 $ (121) $ 41,770 100.0%
=========================================================================================
Total general account fixed
maturities
Total guaranteed separate
account fixed maturities[1]
=========================================================================================
DECEMBER 31, 2003
-----------------------------------------------------------
PERCENT
OF TOTAL
AMORTIZED UNREALIZED UNREALIZED FAIR FAIR
COST GAINS LOSSES VALUE VALUE
- -------------------------------------------------------------------------------------------
ABS $ 5,118 $ 109 $ (96) $ 5,131 12.3%
CMBS 7,010 384 (21) 7,373 17.6%
Collateralized mortgage
obligation ("CMO") 681 12 (2) 691 1.7%
Corporate
Basic industry 2,680 208 (8) 2,880 6.9%
Capital goods 1,222 98 (5) 1,315 3.1%
Consumer cyclical 2,113 153 (5) 2,261 5.4%
Consumer non-cyclical 2,576 190 (8) 2,758 6.6%
Energy 1,389 116 (5) 1,500 3.6%
Financial services 4,995 385 (24) 5,356 12.9%
Technology and
communications 3,315 357 (10) 3,662 8.8%
Transportation 568 41 (3) 606 1.4%
Utilities 1,820 174 (11) 1,983 4.7%
Other 507 23 (1) 529 1.3%
Government/Government
agencies
Foreign 810 77 (1) 886 2.1%
United States 981 30 (4) 1,007 2.4%
MBS - agency 1,916 30 (2) 1,944 4.6%
Municipal
Taxable 374 14 (7) 381 0.9%
Redeemable preferred stock 1 -- -- 1 --
Short-term 1,555 1 -- 1,556 3.7%
- -----------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 39,631 $ 2,402 $ (213) $ 41,820 100.0%
=========================================================================================
Total general account fixed
maturities $ 28,511 $ 1,715 $ (141) $ 30,085 71.9%
Total guaranteed separate
account fixed maturities[1] $ 11,120 $ 687 $ (72) $ 11,735 28.1%
=========================================================================================
[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
$482 and $92, 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 pressures return.
Investment allocations as a percentage of total fixed maturities have remained
materially consistent since December 31, 2003, except for CMBS. 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.
(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.
26
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 $ 3,216 $ 3,295 7.9% $ 3,598 $ 3,661 8.8%
AAA 6,593 6,955 16.7% 6,652 6,922 16.5%
AA 3,474 3,709 8.9% 3,326 3,504 8.4%
A 11,266 12,267 29.3% 11,743 12,576 30.1%
BBB 11,137 12,081 28.9% 10,833 11,561 27.6%
BB & below 1,806 1,948 4.7% 1,925 2,040 4.9%
Short-term 1,515 1,515 3.6% 1,554 1,556 3.7%
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 39,007 $ 41,770 100.0% $ 39,631 $ 41,820 100.0%
- --------------------------------------------------------------------------------------------------------------------------
Total general account fixed maturities $ 28,511 $ 30,085 71.9%
Total guaranteed separate account fixed maturities [1] $ 11,120 $ 11,735 28.1%
- --------------------------------------------------------------------------------------------------------------------------
[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 $ 182 $ 182 9.3% $ 231 $ 210 10.3%
CMBS 111 116 6.0% 102 103 5.0%
Corporate
Basic industry 179 191 9.7% 183 192 9.4%
Capital goods 106 109 5.6% 103 106 5.3%
Consumer cyclical 244 267 13.7% 241 261 12.8%
Consumer non-cyclical 216 229 11.8% 256 268 13.1%
Energy 78 85 4.4% 78 85 4.2%
Financial services 19 20 1.0% 12 12 0.6%
Technology and communications 261 307 15.8% 274 326 16.0%
Transportation 8 11 0.6% 21 23 1.1%
Utilities 237 248 12.7% 268 278 13.6%
Foreign government 153 172 8.8% 145 164 8.0%
Other 12 11 0.6% 11 12 0.6%
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 1,806 $ 1,948 100.0% $ 1,925 $ 2,040 100.0%
===============================================================================================================================
Total general account fixed maturities $ 1,179 $ 1,258 61.7%
Total guaranteed separate account fixed maturities [1] $ 746 $ 782 38.3%
===============================================================================================================================
[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 4% and 3%, 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.
27
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 $ 1,939 $ 1,913 $ (26) $ 2,636 $ 2,615 $ (21)
Greater than three months to six months 145 144 (1) 1,795 1,739 (56)
Greater than six months to nine months 668 659 (9) 230 216 (14)
Greater than nine months to twelve months 115 109 (6) 133 126 (7)
Greater than twelve months 1,101 1,017 (84) 1,450 1,331 (119)
------------------------------------------------------------------------------
TOTAL $ 3,968 $ 3,842 $ (126) $ 6,244 $ 6,027 $ (217)
------------------------------------------------------------------------------
Total general account $ 4,221 $ 4,076 $ (145)
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 $121,
or 96%, and $213, or 98%, 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 $12, 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 Insurance Company'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 12% and 7% of the total unrealized loss amount as of
March 31, 2004 and December 31, 2003, respectively.
28
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.
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 $ 135 $ 86 $ (49) 49.6% $ 153 $ 99 $ (54) 38.6%
CDOs 67 64 (3) 3.0% 132 113 (19) 13.6%
Credit card receivables 52 48 (4) 4.0% 118 108 (10) 7.1%
Other ABS and CMBS 531 520 (11) 11.1% 569 555 (14) 10.0%
Corporate
Financial services 573 551 (22) 22.3% 524 502 (22) 15.7%
Technology and communications 41 41 -- -- 37 36 (1) 0.7%
Transportation 34 32 (2) 2.0% 25 22 (3) 2.1%
Utilities 94 90 (4) 4.0% 80 74 (6) 4.3%
Other 223 220 (3) 3.0% 164 153 (11) 7.9%
Other securities 134 133 (1) 1.0% 11 11 -- --
------------------------------------------------------------------------------------------
TOTAL $ 1,884 $ 1,785 $ (99) 100.0% $ 1,813 $ 1,673 $ (140) 100.0%
------------------------------------------------------------------------------------------
Total general accounts $ 1,174 $ 1,080 $ (94) 67.1%
Total guaranteed separate accounts [1] $ 639 $ 593 $ (46) 32.9%
------------------------------------------------------------------------------------------
[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 40 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
29
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 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 Insurance Company'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 $ 169 $ 163 $ (6) $ 47 $ 46 $ (1)
Greater than three months to six months 5 5 -- 90 86 (4)
Greater than six months to nine months 38 36 (2) 50 44 (6)
Greater than nine months to twelve months 47 42 (5) 17 16 (1)
Greater than twelve months 146 122 (24) 266 217 (49)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL $ 405 $ 368 $ (37) $ 470 $ 409 $ (61)
- --------------------------------------------------------------------------------------------------------------------------
Total general accounts $ 350 $ 305 $ (45)
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) 41.9% $ 45 $ 28 $ (17) 30.3%
CDOs 17 16 (1) 3.2% 37 28 (9) 16.1%
Credit card receivables 37 33 (4) 12.9% 40 30 (10) 17.9%
Other ABS and CMBS 29 23 (6) 19.4% 45 38 (7) 12.5%
Corporate
Financial services 39 35 (4) 12.9% 39 35 (4) 7.1%
Transportation -- -- -- -- 9 8 (1) 1.8%
Utilities 45 43 (2) 6.5% 66 61 (5) 8.9%
Other 32 31 (1) 3.2% 44 42 (2) 3.6%
Other securities 4 4 -- -- 8 7 (1) 1.8%
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $ 231 $ 200 $ (31) 100.0% $ 333 $ 277 $ (56) 100.0%
- ---------------------------------------------------------------------------------------------------------------------------
Total general accounts $ 234 $ 193 $ (41) 73.2%
Total guaranteed separate accounts [1] $ 99 $ 84 $ (15) 26.8%
- ---------------------------------------------------------------------------------------------------------------------------
[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.
30
CAPITAL MARKETS RISK MANAGEMENT
Hartford Life Insurance Company has a disciplined approach to managing risks
associated with its capital markets and asset/liability management activities.
Investment portfolio management is organized to focus investment management
expertise on specific classes of investments, while asset/liability management
is the responsibility of dedicated risk management units supporting 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 Insurance Company has material exposure to both interest rate and
equity market risk. The Company analyzes interest rate risk using various models
including multi-scenario cash flow projection models that forecast cash flows of
the liabilities and their supporting investments, including derivative
instruments. (For further discussion of market risk see the Capital Markets Risk
Management section of MD&A in Hartford Life Insurance Company'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 Insurance Company utilizes a variety of derivative instruments,
including swaps, caps, floors, forwards and exchange traded futures and options,
in compliance with Company policy and regulatory requirements 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 Insurance Company'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 of 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 $106 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
31
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. .
In addition, the Company offers certain variable annuity products with a GMWB
rider. The GMWB provides the policyholder with a guaranteed remaining balance
("GRB") if the account value is reduced to zero through a combination of market
declines and withdrawals. The GRB is generally equal to premiums less
withdrawals. However, annual withdrawals that exceed 7% of the premiums paid may
reduce the GRB by an amount greater than the withdrawals and may also impact
that guaranteed annual withdrawal amount that subsequently applies after the
excess annual withdrawals occur. The policyholder also has the option, after a
specified time period, to reset the GRB to the then-current account value, if
greater. The GMWB represents an embedded derivative liability in the variable
annuity contract that is required to be reported separately from the host
variable annuity contract. It is carried at fair value and reported in other
policyholder funds. The fair value of the GMWB obligations are calculated based
on actuarial assumptions related to the projected cash flows, including benefits
and related contract charges, over the lives of the contracts, incorporating
expectations concerning policyholder behavior. Because of the dynamic and
complex nature of these cash flows, stochastic techniques under a variety of
market return scenarios and other best estimate assumptions are used. Estimating
cash flows involves numerous estimates and subjective judgments including those
regarding expected market rates of return, market volatility, correlations of
market returns and discount rates.
Declines in the equity market may increase the Company's exposure to benefits
under these contracts. For all contracts in effect through July 6, 2003, the
Company entered into a third party reinsurance arrangement to offset its
exposure to the GMWB for the remaining lives of those contracts. As of July 6,
2003, the Company exhausted all but a small portion of the reinsurance capacity
for new business under this current arrangement and will be ceding only a very
small number of new contracts subsequent to July 6, 2003. Substantially all new
contracts with the GMWB are covered by a reinsurance arrangement with a related
party. For further discussion of this arrangement, see Note 13 of Notes to
Consolidated Financial Statements included in Hartford Life Insurance Company's
2003 Form 10-K Annual Report.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall strength of Hartford Life
Insurance 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.
DIVIDENDS
The Company declared $300 in dividends to HLA 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
discussed in Liquidity Requirements below.
CASH FLOW
FIRST QUARTER ENDED
MARCH 31,
- ------------------------------------------------------------------------------------------------------
2004 2003
- ------------------------------------------------------------------------------------------------------
Net Cash provided by operating activities $ 418 $ 57
Net Cash used for investing activities (9) (1,273)
Net Cash (used for) provided by financing activities (451) 1,265
CASH - END OF PERIOD $ 54 $ 128
The increase in cash provided by operating activities was primarily the result
of the timing of the settlement of receivables and payables in the first three
months of 2003. The decrease in cash used for investing activities was primarily
due to lower purchases of investments partially offset by a decrease in sales of
investments in the first three months of 2004. The decrease in cash provided by
financing activities primarily relates to the payment of dividends in the first
three months of 2004, as well as the decrease in net general account receipts
from investment and universal-life type contracts. Operating cash flows in both
periods have been more than adequate to meet liquidity requirements.
EQUITY MARKETS
For a discussion of equity markets impact to capital and liquidity, see the
Capital Markets Risk Management section under "Market Risk".
32
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 Insurance Company'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 Annuity A+ AA AA- Aa3
- ------------------------------------------------------------------------------------------------------------------------------
OTHER RATINGS
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 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.
Hartford Life'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 12 of Notes to
Consolidated Financial Statements included in Hartford Life Insurance 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.
33
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.
CHANGES IN INTERNAL CONTROLS 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 Insurance Company is or may become involved in various legal
actions, in the normal course of its business, in which claims for alleged
economic and punitive damages have been or may be asserted, some for substantial
amounts. Some of the pending litigation has been filed as purported class
actions and some actions have been filed in certain jurisdictions that permit
punitive damage awards that are disproportionate to the actual damages incurred.
Although there can be no assurances, at the present time, the Company does not
anticipate that the ultimate liability arising from potential, pending or
threatened legal actions, after consideration of provisions made for estimated
losses and costs of defense, will have a material adverse effect on the
financial condition or operating results of the Company.
In the third quarter of 2003, Hartford Life Insurance Company and its affiliate
International Corporate Marketing Group, LLC ("ICMG") settled their intellectual
property dispute with Bancorp Services, LLC ("Bancorp"). The dispute concerned,
among other things, Bancorp's claims for alleged patent infringement, breach of
a confidentiality agreement, and misappropriation of trade secrets related to
certain stable value corporate-owned life insurance products. The settlement
provided that the Company and ICMG 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 a $9 after-tax
benefit, in the third quarter of 2003, to reflect the Company's portion 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 and
ICMG each paid Bancorp an additional $5, constituting full and final
satisfaction of their 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K: None.
34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTFORD LIFE INSURANCE COMPANY
/s/ Ernest M. McNeill Jr.
-------------------------------------------
Ernest M. McNeill Jr.
Vice President and Chief Accounting Officer
May 11, 2004
35
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
EXHIBITS INDEX
EXHIBIT #
- ---------
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
36