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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 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.
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INDEX
PAGE
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Report of Independent Registered Public Accounting Firm 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income - Second Quarter and Six Months
Ended June 30, 2004 and 2003 4
Condensed Consolidated Balance Sheets - As of June 30, 2004
and December 31, 2003 5
Condensed Consolidated Statements of Changes in
Stockholder's Equity - Six Months Ended June 30, 2004 and 2003 6
Condensed Consolidated Statements of Cash Flows - Six Months Ended
June 30, 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 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 36
ITEM 4. CONTROLS AND PROCEDURES 36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 37
Signature 38
Certifications 41
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 June 30,
2004, and the related condensed consolidated statements of income for the second
quarter and six months ended June 30, 2004 and 2003, and changes in
stockholder's equity, and cash flows for the six months ended June 30, 2004 and
2003. These interim financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. According, 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 standards of the Public Company
Accounting Oversight Board (United States), 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
August 11, 2004
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SECOND QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(In millions) (Unaudited) 2004 2003 2004 2003
------------------------- ---- ---- ---- ----
REVENUES
Fee income $ 629 $ 522 $ 1,247 $ 1,016
Earned premiums and other 81 184 184 315
Net investment income 607 437 1,216 868
Net realized capital gains 23 43 87 5
----------- ----------- ------------ ----------
TOTAL REVENUES 1,340 1,186 2,734 2,204
----------- ----------- ------------ ----------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims, and claim adjustment expenses 728 629 1,472 1,215
Insurance expenses and other 167 166 331 315
Amortization of deferred policy acquisition costs and
present value of future profits 195 150 394 288
Dividends to policyholders 7 25 21 40
----------- ----------- ------------ ----------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,097 970 2,218 1,858
----------- ----------- ------------ ----------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 243 216 516 346
Income tax expense 63 27 137 57
----------- ----------- ------------ ----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 180 189 379 289
Cumulative effect of accounting change, net of tax - - (18) -
----------- ----------- ------------ ----------
NET INCOME $ 180 $ 189 $ 361 $ 289
=========== =========== ============ ==========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(In millions, except for share data) 2004 2003
------------------------------------ -------------- -------------
(Unaudited)
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of
$39,200 and $28,511) $ 40,421 $ 30,085
Equity securities, available for sale, at fair value (cost of $115 and $78) 114 85
Equity securities, held for trading, at fair value 1 -
Policy loans, at outstanding balance 2,607 2,470
Other investments 970 639
-------------- -------------
Total investments 44,113 33,279
Cash 68 96
Premiums receivable and agents' balances 22 17
Reinsurance recoverables 1,313 1,297
Deferred policy acquisition costs and present value of future profits 6,367 6,088
Deferred income taxes (469) (486)
Goodwill 186 186
Other assets 1,190 1,238
Separate account assets 130,705 130,225
-------------- -------------
TOTAL ASSETS $ 183,495 $ 171,940
============== =============
LIABILITIES
Reserve for future policy benefits $ 6,782 $ 6,518
Other policyholder funds 36,303 25,263
Other liabilities 3,406 3,330
Separate account liabilities 130,705 130,225
-------------- -------------
TOTAL LIABILITIES 177,196 165,336
============== =============
STOCKHOLDER'S EQUITY
Common Stock - 1,000 shares authorized, issued and outstanding;
par value $5,690 6 6
Capital surplus
Accumulated other comprehensive income 2,240 2,240
Net unrealized capital gains on securities, net of tax 494 711
Foreign currency translation adjustments (1) (1)
-------------- -------------
Total accumulated other comprehensive income 493 710
-------------- -------------
Retained earnings 3,560 3,648
-------------- -------------
TOTAL STOCKHOLDER'S EQUITY 6,299 6,604
============== =============
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 183,495 $ 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
SIX MONTHS ENDED JUNE 30, 2004
ACCUMULATED OTHER
COMPREHENSIVE INCOME
--------------------------------------------
NET UNREALIZED NET GAIN (LOSS)
CAPITAL ON 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 361 361
-------------
Other comprehensive income, net of tax (1)
Cumulative effect of accounting change 292 292
Net change in unrealized capital gains on
securities (2) (453) (453)
Net loss on cash flow hedging
instruments (56) (56)
-------------
Total other comprehensive income (217)
-------------
Total comprehensive income 144
-------------
Dividends declared (449) (449)
------ ------- ----------- -------------- ----------- -------- -------------
BALANCE, JUNE 30, 2004 $ 6 $ 2,240 $ 567 $ (73) $ (1) $ 3,560 $ 6,299
------ ------- ----------- -------------- ----------- -------- -------------
SIX MONTHS ENDED JUNE 30, 2003
ACCUMULATED OTHER
COMPREHENSIVE INCOME
--------------------------------------------
NET UNREALIZED NET GAIN
CAPITAL ON 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 289 289
-------------
Other comprehensive income, net of tax (1)
Net change in unrealized capital gains
on securities (2) 427 427
Net loss on cash flow hedging
instruments (34) (34)
Cumulative translation adjustments --
-------------
Total other comprehensive income 393
-------------
Total comprehensive income 682
-------------
Capital contribution 150 150
Dividends declared (100) (100)
------ ------- ----------- -------------- ----------- -------- -------------
BALANCE, JUNE 30, 2003 $ 6 $ 2,191 $ 890 $ 77 $ (1) $ 3,386 $ 6,549
------ ------- ----------- -------------- ----------- -------- -------------
(1) Unrealized capital (losses) gains on securities is reflected net of tax
(benefit) provision of $(244) and $230 for the six months ended June 30,
2004 and 2003, respectively. Net (loss) on cash flow hedging instruments
is net of tax benefit of $(30) and $(18) for the six months ended June 30,
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 $37 and $(16) for the six months ended June 30, 2004 and 2003,
respectively.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
(In millions) (Unaudited) 2004 2003
------------------------- ---- ----
OPERATING ACTIVITIES
Net income $ 361 $ 289
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net realized capital (gains) losses (87) (5)
Cumulative effect of adoption of SOP 03-1 18 -
Amortization of deferred policy acquisition costs and present value of future profits 394 288
Additions to deferred policy acquisition costs and present value of future profits (727) (611)
Depreciation and amortization 27 50
Decrease (increase) in premiums receivable and agents' balances (5) 1
(Decrease) increase in other liabilities (122) 162
Increase in receivables (145) (14)
(Decrease) increase in payables and accruals (147) 27
Decrease in accrued taxes payable (13) (26)
Increase in deferred income taxes 525 66
Amortization of sales inducements 12 30
Additions to deferred sales inducements (63) (66)
Increase in future policy benefits 264 287
Increase in reinsurance recoverables 2 (20)
Decrease (increase) in other assets 257 (123)
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 551 335
========== =========
INVESTING ACTIVITIES
Purchases of fixed maturity and equity security investments, available-for-sale (6,551) (7,266)
Sales of fixed maturity and equity security investments, available-for-sale 4,888 2,873
Maturities of fixed maturity and equity security investments, available-for-sale 1,750 1,685
Other 5 -
---------- ---------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 92 (2,708)
========== =========
FINANCING ACTIVITIES
Capital Contributions - 150
Dividends paid (449) (100)
Net receipts(disbursements) for investment and universal life-type contracts charged
against policyholder accounts (222) 2,289
---------- ---------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (671) 2,339
========== =========
Net (decrease) increase in cash (28) (34)
Cash - beginning of period 96 79
---------- ---------
CASH - END OF PERIOD $ 68 $ 45
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID) DURING THE PERIOD FOR
Income taxes $ 27 $ 26
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
BASIS OF PRESENTATION
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.
The condensed consolidated financial statements have been prepared on the basis
of accounting principles generally accepted in the United States of America,
which differ materially from the accounting prescribed by various insurance
regulatory authorities. The financial statements include the accounts of
Hartford Life Insurance Company and its wholly-owned as well as controlled
majority owned subsidiaries. All intercompany material 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
June 30, 2004, and for the second quarter and six months ended June 30, 2004 and
2003 are unaudited. These condensed consolidated financial statements reflect
all adjustments (consisting only of normal accruals) which are, in the opinion
of management, necessary for the fair presentation of the financial position,
results of operations, and cash flows for the interim periods. These condensed
financial statements and notes should be read in conjunction with the
consolidated financial statements and notes thereto included in Hartford Life
Insurance Company's 2003 Form 10-K Annual Report and Report on Form 8-K filed on
May 28, 2004. Hartford Life Insurance Company filed the Form 8-K on May 28, 2004
to report the Company's updating of certain historical segment information
included in its Annual Report on Form 10-K for the year ended December 31, 2003,
to give effect to the Company's new reportable operating segments. (For further
discussion of the new reportable operating segments, see Note 9.) The results of
operations for the interim periods should not be considered indicative of
results to be expected for the full year.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial information to
conform to the current year classifications.
USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The most significant estimates include those used in determining reserves for
future policy benefits and other policyholder funds; deferred policy acquisition
costs and present value of future profits; investments; and commitments and
contingencies.
SIGNIFICANT ACCOUNTING POLICIES
For a description of accounting policies, see Note 2 of Notes to Consolidated
Financial Statements included in Hartford Life Insurance Company's 2003 Form
10-K Annual Report.
8
INVESTMENTS
As discussed in the Note 4 below, on January 1, 2004, the Company reclassified
certain separate account assets to the general account and classified a portion
of these assets as trading securities. Trading securities are recorded at fair
value with subsequent changes in fair value recognized in net investment income.
STOCK BASED COMPENSATION
In January 2003, The Hartford began expensing all stock-based compensation
awards granted or modified after January 1, 2003 under the fair value
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation". The fair value of these
awards will be recognized over the awards' vesting period, generally 3 years.
Hartford Life Insurance Company's employees are included in The Hartford's stock
compensation plans, the allocated expense associated with stock-based
compensation for the second quarters ending June 30, 2004 and 2003, was
immaterial. Prior to January 1, 2004, The Hartford used the Black-Scholes model
to estimate the fair value of The Hartford's stock-based compensation. For all
awards granted or modified on or after January 1, 2004, The Hartford used a
binomial option-pricing model that incorporates the possibility of early
exercise of options into the valuation. The binomial model also incorporates The
Hartford's historical forfeiture and exercise experience to determine the option
value. For these reasons, The Hartford believes the binomial model provides a
fair value that is more representative of actual historical experience than the
value calculated under the Black-Scholes model.
All stock-based awards granted or modified prior to January 1, 2003, continue to
be valued using the intrinsic value-based provisions set forth in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock-Issued to
Employees". Under the intrinsic value method, compensation expense is determined
on the measurement date, which is the first date on which both the number of
shares the employee is entitled to receive and the exercise price are known.
Compensation expense, if any, is measured based on the award's intrinsic value,
which is the excess of the market price of the stock over the exercise price on
the measurement date. The expense related to stock-based employee compensation,
including non-option plans, included in the determination of net income for the
second quarters and six months ended June 30, 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
FSP 97-1
In June 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position ("FSP") FAS 97-1, "Situations in Which Paragraphs 17(b) and 20 of
FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments (SFAS No. 97), Permit or Require Accrual of an Unearned Revenue
Liability." The implementation of Statement of Position 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" ("SOP 03-1"), raised a question regarding
the interpretation of the requirements of SFAS No. 97 concerning when it is
appropriate to record an unearned revenue liability. This FSP clarifies that
SFAS No. 97 is clear in its intent and language; it is appropriate to recognize
an unearned revenue liability for amounts that have been assessed to compensate
the insurer for services to be performed over future periods. SOP 03-1 describes
one situation, when assessments result in profits followed by losses, where an
unearned revenue liability is required. SOP 03-1 does not amend SFAS No. 97 or
limit the recognition of an unearned revenue liability to the situation
described in SOP 03-1. The guidance in the FSP is effective for financial
statements for fiscal periods beginning after June 18, 2004. The adoption of
this FSP is not expected to have a material impact on the Company's consolidated
financial condition or results of operations. (For further discussion of SOP
03-1, see Note 3.)
SOP 03-1
In July 2003, Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants ("AICPA") issued SOP 03-1. SOP 03-1 addresses a
wide variety of topics, some of which have a significant impact on the Company.
The major provisions of SOP 03-1 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;
9
- 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").
SOP 03-1 was 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 SOP 03-1 on net income and other
comprehensive income was comprised of the following individual impacts:
Other
Net Comprehensive
Cumulative Effect of Adoption Income (Loss) Income (Loss)
----------------------------- ------------ -------------
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
------------ -------------
With the adoption of SOP 03-1, certain annuity products were accounted for in
the general account, including reporting of the spreads on the Company's MVA
fixed annuities on a gross basis in net investment income and benefits expense.
This change in accounting resulted in increases of $150 and $304 in net
investment income and increases of $149 and $297 in benefits, claims and claim
adjustment expenses for the second quarter and six months ended June 30, 2004,
respectively.
FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
EITF 02-14
In July 2004, the Emerging Issues Task Force ("EITF") reached a final consensus
on Issue 02-14, "Whether an Investor Should Apply the Equity Method of
Accounting to Investments Other Than Common Stock If the Investor Has the
Ability to Exercise Significant Influence Over the Operating and Financial
Policies of the Investee". The EITF concluded that an investor should only apply
the equity method of accounting when it has investments in either common stock
or in-substance common stock of a corporation, provided that the investor has
the ability to exercise significant influence over the operating and financial
policies of the investee. The EITF defined in-substance common stock as an
investment that has risk and reward characteristics that are substantially
similar to common stock.
EITF 02-14 is effective for reporting periods beginning after September 15,
2004. For investments that are in-substance common stock but that were not
accounted for under the equity method prior to the consensus, the effect of
adoption should be reported as a change in accounting principle. For investments
that are not common stock or in-substance common stock but that were accounted
for under the equity method of accounting prior to the consensus, the equity
method of accounting should be discontinued prospectively from the date of
adoption and the investor should evaluate whether the investment should be
prospectively accounted for under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", or the cost method under APB Opinion
No. 18, "The Equity Method of Accounting for Investments in Common Stock". The
adoption of this standard is not expected to have a material impact on the
Company's consolidated financial condition or results of operations.
FSP 106-2
In May 2004, the FASB issued FSP FAS No. 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FSP 106-2"), which provides guidance on accounting
for the effects of the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 ("the Act"). The Act introduces (1) a prescription drug benefit
under Medicare and (2) a federal subsidy to sponsors of retiree health care
benefit plans that provide a benefit that is at least "actuarially equivalent"
to Medicare Part D. The FASB concluded that the subsidy should be treated as an
actuarial gain pursuant to SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". FSP 106-2 is effective for the
first interim period or annual period beginning after June 15, 2004. If the
effect of the Act is not considered a significant event, the effects of the Act
should be incorporated in the next measurement of plan assets and obligations.
The Hartford has determined that it will be entitled to the subsidy. The
Hartford does not consider the impact of adoption of the Act to have a
significant impact on net periodic postretirement benefit cost or accumulated
postretirement benefit obligation and will include the effects of the Act in the
10
Hartford's next scheduled re-measurement, January 1, 2005. Hartford Life
Insurance Company's employees are included in The Hartford's postretirement
benefits plan, and as such, the postretirement benefits expenses are allocated
to the Company by The Hartford.
EITF 03-1
In March 2004, the 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 adopts a three-step impairment model for securities within its scope.
The three-step model must be applied on a security-by-security basis as follows:
Step 1: Determine whether an investment is impaired. An investment is impaired
if the fair value of the investment is less than its cost basis.
Step 2: Evaluate whether an impairment is other-than-temporary. For debt
securities that cannot be contractually prepaid or otherwise settled in
such a way that the investor would not recover substantially all of its
cost, an impairment is deemed other-than-temporary if the investor does
not have the ability and intent to hold the investment until a
forecasted market price recovery or it is probable that the investor
will be unable to collect all amounts due according to the contractual
terms of the debt security.
Step 3: If the impairment is other-than-temporary, recognize an impairment loss
equal to the difference between the investment's cost basis and its
fair value.
Subsequent to an other-than-temporary impairment loss, a debt security should be
accounted for in accordance with 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", however, investors will
be required to determine if a security is other-than-temporarily impaired under
EITF 03-1 if the security is determined not to be impaired under EITF 99-20. The
disclosure provisions of EITF 03-1 adopted by the Company effective December 31,
2003 and included in Note 3 of the 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.
In addition to the disclosure requirements adopted by the Company effective
December 31, 2003, the final consensus of EITF 03-1 included additional
disclosure requirements that are effective for fiscal years ending after June
15, 2004. The impairment evaluation and recognition guidance in EITF 03-1 will
be applied prospectively for all relevant current and future investments,
effective in reporting periods beginning after June 15, 2004. The Company
continues to assess the impact of the impairment evaluation and recognition
guidance in EITF 03-1 on the Company's consolidated financial condition and
results of operations. While certain provisions of EITF 03-1 require significant
judgment by management, the Company currently believes the most significant area
of potential impact will be related to certain asset-backed securities supported
by aircraft lease receivables that are currently accounted for under EITF 99-20.
The Company's gross unrealized loss related to these securities as of June 30,
2004 was approximately $55. The ultimate impairment recognized upon the adoption
of EITF 03-1, if any, will depend on market conditions and management's intent
and ability to hold securities with unrealized losses at the time of impairment
evaluation.
EITF 03-16
In March 2004, the EITF reached a final consensus on Issue 03-16, "Accounting
for Investments in Limited Liability Companies". EITF 03-16 will require
investors in limited liability corporations that have specific ownership
accounts to follow the equity method 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 No. D-46, "Accounting
for Limited Partnership Investments". Investors that do not have specific
ownership accounts or minor ownership interests should follow the significant
influence model prescribed in APB Opinion No. 18 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 No. 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 AND HEDGING ACTIVITY
DERIVATIVE INSTRUMENTS
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards, futures and options designed to achieve one of four
Company-approved objectives: to hedge risk arising from interest rate, price or
currency exchange rate volatility; to manage liquidity; to control transaction
costs; or to enter into replication transactions.
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.
The following table summarizes the notional amount and fair value of derivatives
by hedge designation as of June 30, 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 necessarily reflective of credit risk. The
fair value amounts of derivative assets and liabilities are presented on a net
basis in the following table.
June 30, 2004 December 31, 2003
----------------------------- ------------------------------
Notional Amount Fair Value Notional Amount Fair Value
--------------- ---------- --------------- ----------
Cash flow hedge $ 5,270 $ (203) $ 2,592 $ (49)
Fair value hedge 269 (11) 163 (6)
Other investment and risk management activities 46,293 (15) 33,745 (8)
--------------- ---------- --------------- ----------
TOTAL $ 51,832 $ (229) $ 36,500 $ (63)
=============== ========== =============== ==========
The increase in notional amount since December 31, 2003 is primarily due to an
increase in embedded derivatives associated with guaranteed minimum withdrawal
benefit ("GMWB") product sales, and, to a lesser extent, derivatives transferred
to the general account as a result of the adoption of SOP 03-1 and new hedging
strategies. The decrease in the net fair value of derivative instruments since
December 31, 2003 was primarily due to the rise in interest rates during the
second quarter of 2004 and derivatives transferred to the general account
pursuant to the adoption of SOP 03-1.
Due to the adoption of SOP 03-1, 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
June 30, 2004, $22 of the derivatives were reported in other investments, $103
in other liabilities, and $5 of embedded derivatives in fixed maturities in the
condensed consolidated balance sheets. Management's objectives with regard to
the reclassified derivatives along with the notional amount and net fair value
as of June 30, 2004 are as follows:
12
HEDGING STRATEGY NOTIONAL AMOUNT FAIR VALUE
---------------- --------------- ----------
CASH FLOW HEDGES
Interest rate swaps - Interest rate swaps are primarily used to convert
interest receipts on floating-rate fixed maturity investments to fixed
rates. These derivatives are predominantly used to better match cash
receipts from assets with cash disbursements required to fund liabilities. $ 1,596 $ 18
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 (103)
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 (2)
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. 444 --
Interest rate swaps - The Company uses interest rate swaps to manage interest
rate risk. 250 16
Options - The Company writes option contracts for a premium to monetize the
option embedded in certain of its fixed maturity investments. 162 --
Foreign currency swaps - The Company enters into foreign currency swaps to
hedge the foreign currency exposures in certain of its foreign fixed maturity
investments. 45 (5)
---------- ----------
TOTAL $ 3,021 $ (76)
========== ==========
In addition to the derivatives transferred to the general account as a result of
the adoption of SOP 03-1, 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 (LIBOR), and were
structured to offset the payments associated with the guaranteed investment
contracts. As of June 30, 2004, the notional amount and net fair value of these
swaps totaled $350 and $13, respectively.
During the six months ended June 30, 2004, the Company entered into credit
default swap agreements in which the Company pays a derivative counterparty a
periodic fee in exchange for compensation from the counterparty should a credit
event occur on the part of the referenced security issuer. The Company entered
into these agreements as an efficient means to reduce credit exposure to the
specified issuers. As of June 30, 2004, the notional amount and net fair value
of these swaps totaled $454 and less than $1, respectively.
Periodically the Company enters into interest rate swap agreements to terminate
existing swaps in hedging relationships, thereby offsetting the prospective
changes in value in the original swap. During the second quarter of 2004, the
Company cash settled both the original and offsetting swap agreements, resulting
in a reduction in notional amount of approximately $2.1 billion from December
31, 2003. No net realized gain or loss was recorded as a result of the
settlement.
Derivative instruments are recorded at fair value and presented in the condensed
consolidated balance sheets as follows:
June 30, 2004 December 31, 2003
--------------------------- ----------------------------
Liability Liability
Asset Values Values Asset Values Values
------------ ----------- ------------ -----------
Other investments $ 57 $ -- $ 116 $ --
Reinsurance recoverables -- 125 -- 115
Other policyholder funds 125 -- 115 --
Fixed maturities 5 -- 7 --
Other liabilities -- 291 -- 186
------------ ----------- ------------ -----------
TOTAL $ 187 $ 416 $ 238 $ 301
============ =========== ============ ===========
13
For the second quarter and six months ended June 30, 2004 and 2003, the
Company's gross gains and losses representing the total ineffectiveness of all
fair value and net investment hedges were less than $1, with the net impact
reported as net realized capital gains and losses. For the second quarter and
six months ended June 30, 2004, the Company recorded a net loss due to
ineffectiveness on cash flow hedges of $3, after-tax, primarily associated with
interest rate swap hedges, in net realized capital gains and losses. For the
second quarter and six months ended June 30, 2003, the cash flow hedge
ineffectiveness was less than $1.
The total change in value for other derivative-based strategies which do not
qualify for hedge accounting treatment, including the periodic net coupon
settlements, are reported as net realized capital gains and losses in the
condensed consolidated statements of income. For the second quarter and six
months ended June 30, 2004, the Company recognized an after-tax net gain of $10
and $18, respectively, for derivative-based strategies which do not qualify for
hedge accounting treatment. For the second quarter and six months ended June 30,
2003, the after-tax net gain was $1 and less than $1, respectively.
As of June 30, 2004, the after-tax deferred net gains on derivative instruments
in accumulated other comprehensive income ("AOCI") that are expected to be
reclassified to earnings during the next twelve months are $10. 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 or 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 second quarter
and six months ended June 30, 2004 and 2003, there were no reclassifications
from AOCI to earnings resulting from the discontinuance of cash flow hedges.
3. DEATH BENEFITS AND OTHER INSURANCE BENEFIT FEATURES
The Company sells variable annuity contracts, through separate accounts, that
offer various guaranteed death benefits. The Company currently reinsures a
significant portion of these death benefit guarantees associated with its
in-force block of business. Upon adoption of SOP 03-1, the Company 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 June 30, 2004,
the liability from GMDB and other benefits sold with variable annuity products
was $196 with a related reinsurance recoverable asset of $92. The net GMDB
liability is established by estimating the expected value of net reinsurance
costs and net death benefits in excess of the projected account balance and
recognizing the excess death benefits and net reinsurance costs ratably over the
accumulation period based on total expected assessments. 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 following table provides details concerning GMDB exposure for the Retail
Products Group which comprises substantially all of the GMDB exposure:
BREAKDOWN OF VARIABLE ANNUITY ACCOUNT VALUE BY NET AMOUNT AT RETAINED NET
GMDB TYPE ACCOUNT VALUE RISK AMOUNT AT RISK
------------- ------------- --------------
Maximum anniversary value (MAV) [1]
MAV only $ 61,264 $ 8,299 $ 913
With 5% rollup [2] 4,132 672 121
With Earnings Protection Benefit Rider (EPB) [3] 3,974 134 40
With 5% rollup & EPB 1,469 112 19
------------- ------------ ------------
Total MAV 70,839 9,217 1,093
Asset Protection Benefit (APB) [4] 11,627 17 10
Ratchet [5] (5 years) 43 3 --
Reset [6] (5 -7 years) 8,478 863 862
Return of Premium [7]/Other 1,517 11 11
------------- ------------ ------------
TOTAL $ 92,504 $ 10,111 $ 1,976
============= ============ ============
[1] MAV: the death benefit is the greatest of current account value, net
premiums paid and the highest account value on any anniversary before age
80 (adjusted for withdrawals).
[2] Rollup: the death benefit is the greatest of the MAV, current account
value, net premium paid and premiums (adjusted for withdrawals)
accumulated at generally 5% simple interest up to the earlier of age 80 or
100% of adjusted premiums.
[3] EPB: The death benefit is the greatest of the MAV, current account value,
or contract value plus a percentage of the contract's growth. The
contract's growth is account value less premiums net of withdrawals,
subject to a cap of 200% of premiums net of withdrawals.
[4] APB: the death benefit is the greater of current account value or MAV, not
to exceed current account value plus 25% times the greater of net premiums
and MAV (each adjusted for premiums in the past 12 months).
14
[5] Ratchet: the death benefit is the greatest of current account value, net
premiums paid and the highest account value on any specified anniversary
before age 85 (adjusted for withdrawals).
[6] Reset: the death benefit is the greatest of current account value, net
premiums paid and the most recent five to seven year anniversary account
value before age 80 (adjusted for withdrawals).
[7] Return of premium: the death benefit is the greater of current account
value and net premiums paid.
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, in accordance with SOP 03-1, was not
material. Currently there is diversity in industry practice and inconsistent
guidance surrounding the application of SOP 03-1 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 SOP 03-1 and could impact future earnings.
4. SEPARATE ACCOUNT PRESENTATION
Hartford Life Insurance Company maintains separate account assets and
liabilities, which are reported at fair value. Separate account assets are
segregated from other investments and investment income and gains and losses
accrue directly to the policyholder. See Note 3 for a discussion of death
benefit guarantees offered in variable annuity contracts sold through separate
accounts. The fees earned for administrative and contract holder maintenance
services performed for these separate accounts are included in fee income.
During 2004, there were no gains or losses on transfers of assets from the
general account to the separate account. The Company had recorded certain market
value adjusted ("MVA") fixed annuity products and modified guarantee life
insurance (primarily the Company's Compound Rate Contract ("CRC") and associated
assets) as separate account assets and liabilities through December 31, 2003.
Notwithstanding the market value adjustment feature in this product, all of the
investment performance of the separate account assets is not being passed to the
contract holder, and it therefore, does not meet the conditions for separate
account reporting under SOP 03-1. Separate account assets and liabilities
related to CRC of $11 billion were reclassified to, and revalued in, the general
account upon adoption of SOP 03-1.
5. 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 SOP 03-1, the expense associated with offering a bonus is deferred and
amortized over the life of the related contract in a pattern consistent with the
amortization of deferred policy acquisition costs. Also, effective January 1,
2004, amortization expense associated with expenses previously deferred is
recorded over the remaining life of the contract rather than over the contingent
deferred sales charge period. Changes in deferred sales inducement activity were
as follows:
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2004
-------------------- ----------------
Balance, beginning of period $ 225 $ 198
Sales inducements deferred 30 63
Amortization charged to income (6) (12)
-------------------- ----------------
Balance at June 30, 2004 $ 249 $ 249
==================== ================
6. 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
second quarter and six months ended June 30, 2004 no goodwill was acquired,
impaired or written off. As of June 30, 2004 and December 31, 2003, the carrying
amount of goodwill was $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.
15
AS OF JUNE 30, 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 $ 607 $ 134 $ 605 $ 115
------ ------ ------ -------
Total $ 607 $ 134 $ 605 $ 115
====== ====== ====== =======
Net amortization expense for the second quarters ended June 30, 2004 and 2003
was $11 and $9, respectively. Net amortization expense for the six months ended
June 30, 2004 and 2003 was $19 and $14, respectively.
The Company has agreed to offer over 40,000 London Pacific Life and Annuity
Company ("London Pacific") deferred annuity customers, representing
approximately $1.5 billion in account value, the opportunity to exchange to a
Hartford Life Insurance Company contract in the third quarter of 2004. The
Company will also assume approximately 6,000 immediate annuities and 2,000
universal life policies from London Pacific pursuant to orders entered by the
Wake County Superior Court of North Carolina. The transactions are expected to
be completed in three separate blocks between July 2004 and March 2005.
Estimated future net amortization expense for the succeeding five years is as
follows:
FOR THE YEAR ENDING DECEMBER 31,
2004 $ 37
2005 $ 30
2006 $ 28
2007 $ 26
2008 $ 23
7. 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.
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. The Company continues to respond to requests for documents and
information from representatives from the SEC's Office of Compliance Inspections
and Examinations in connection with their ongoing compliance examinations
regarding market timing and late trading, revenue sharing and directed
brokerage, fees, fund service providers and transfer agents, and other mutual
fund-related issues. In addition, the SEC's Division of Enforcement has
commenced an investigation of Hartford Life'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
16
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.
Like numerous other insurance carriers, The Hartford has received a subpoena
from the New York Attorney General's Office in connection with its inquiry into
compensation arrangements between brokers and carriers. The Hartford is
cooperating with the inquiry. Consistent with long-standing and wide-spread
industry practice, The Hartford makes incentive compensation payments to brokers
that may be based on the volume, growth and/or profitability of business placed
with The Hartford. The Hartford expects the independent brokers with whom we
work to comply with all applicable laws, including any concerning the disclosure
of compensation arrangements. At this early stage, it is too soon to tell what
impact, if any, the investigation will have on The Hartford.
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. 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 discussion for all open years
could result in a benefit to the Company's financial position and 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.) 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.
8. 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.
9. 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.
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.
17
RETAIL INSTITUTIONAL
PRODUCTS SOLUTIONS INDIVIDUAL
GROUP GROUP LIFE OTHER TOTAL
-------- ------------- ---------- ----- ------
SECOND QUARTER ENDED JUNE 30, 2004
Total revenues $ 627 $ 427 $ 230 $ 56 $1,340
Net income 95 25 35 25 180
------ ------- ------ ---- ------
SECOND QUARTER ENDED JUNE 30, 2003
Total revenues 438 463 219 66 1,186
Net income 101 25 34 29 189
------ ------- ------ ---- ------
SIX MONTHS ENDED JUNE 30, 2004
Total revenues 1,255 861 460 158 2,734
Net income 171 43 67 80 361
------ ------- ------ ---- ------
SIX MONTHS ENDED JUNE 30, 2003
Total revenues 830 879 439 56 2,204
Net income 162 53 63 11 289
------ ------- ------ ---- ------
18
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 June 30, 2004, compared with December 31, 2003, and its results
of operations for the second quarter and six months ended June 30, 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
and Report on Form 8-K filed on May 28, 2004. Hartford Life Insurance Company
filed the Form 8-K on May 28, 2004 to report the Company's updating of certain
historical segment information included in its Annual Report on Form 10-K for
the year ended December 31, 2003, to give effect to the Company's new reportable
operating segments. (For further discussion see Organizational Structure in the
Consolidated Results of Operations section.)
Certain of the statements contained herein are forward-looking statements. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and include estimates and
assumptions related to economic, competitive and legislative developments. These
forward-looking statements are subject to change and uncertainty which are, in
many instances, beyond the Company's control and have been made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon the Company. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on the Company will be those anticipated by
management. Actual results could differ materially from those expected by the
Company, depending on the outcome of various factors. These factors include: the
difficulty in predicting the Company's potential exposure for the possible
occurrence of terrorist attacks; the response of reinsurance companies under
reinsurance contracts and the availability, pricing and adequacy of reinsurance
to protect the Company against losses; changes in the stock markets, interest
rates or other financial markets, including the potential effect on the
Company's statutory capital levels; the inability to effectively mitigate the
impact of equity market volatility on the Company's financial position and
results of operations arising from obligations under annuity product guarantees;
the uncertain effect on the Company of the Jobs and Growth Tax Relief
Reconciliation Act of 2003, in particular the reduction in tax rates on
long-term capital gains and most dividend distributions; the possibility of more
unfavorable loss experience than anticipated; stronger than anticipated
competitive activity; unfavorable judicial or legislative developments,
including the possibility that the Terrorism Risk Insurance Act of 2002 is not
extended beyond 2005; the potential effect of regulatory developments, which
could increase the Company's business costs and required capital levels; the
possibility of general economic and business conditions that are less favorable
than anticipated; the Company's ability to distribute its products through
distribution channels, both current and future; the uncertain effects of
emerging claim and coverage issues; the effect of assessments and other
surcharges for guaranty funds; a downgrade in the Company's claims-paying,
financial strength or credit ratings; the ability of the Company's subsidiaries
to pay dividends to the Company; and other factors described in such
forward-looking statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
Critical Accounting Estimates 19
Consolidated Results of Operations - Operating Summary 21
Retail Products Group 22
Institutional Solutions Group 23
Individual Life 24
Investments 24
Investment Credit Risk 27
Capital Markets Risk Management 33
Capital Resources and Liquidity 34
Accounting Standards 36
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America ("GAAP"), requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and
19
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability: deferred policy acquisition costs and present value of future
profits; investments; 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 June
30, 2004 and December 31, 2003, the carrying value of the Company's Life
operations' DAC was $6.4 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 gross profits or "EGPs". This range was then compared to the present value of
EGPs currently utilized in the DAC amortization model. As of June 30, 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 June 30, 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 30% or
less from June 30 levels for the balance of 2004, or 20% or less over the next
twelve months, and if certain other assumptions that are implicit in the
computations of the EGPs are achieved. For further discussion of these
assumptions, see the Critical Accounting Estimates section of the Company's 2003
Form 10-K Annual Report under the heading "Deferred Policy Acquisition Costs and
Present Value of Future Profits".
Additionally, the Company continues to perform analyses with respect to the
potential impact of a revision to future EGPs. If such a revision to EGPs were
deemed necessary, the Company would adjust, as appropriate, all of its
assumptions for products accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments", and reproject its future EGPs based on
current account values at the end of the quarter in which a revision is deemed
to be necessary. To illustrate the effects of this process, assume the Company
had concluded that a revision of the Company's EGPs was required at June 30,
2004. If the Company assumed a 9% average long-term rate of growth from June 30,
2004 forward along with other appropriate assumption changes in determining the
revised EGPs, the Company estimates the cumulative increase to amortization
would be approximately $3-$7, 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 $32-$35, after-tax. Assuming that such an adjustment was
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 June 30, 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.
20
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.
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
OPERATING SUMMARY 2004 2003 CHANGE 2004 2003 CHANGE
----------------- ---- ---- ------ ---- ---- ------
Fee income $ 629 $ 522 21% $ 1,247 $1,016 23%
Earned premiums 81 151 (46%) 184 254 (28%)
Net investment income [1] 607 437 39% 1,216 868 40%
Other revenue -- 33 (100%) -- 61 (100%)
Net realized capital gains 23 43 (47%) 87 5 NM
------- ------- --- ------- ------ ---
TOTAL REVENUES 1,340 1,186 13% 2,734 2,204 24%
------- ------- --- ------- ------ ---
Benefits, claims, and claim adjustment expenses [1] 728 629 16% 1,472 1,215 21%
Insurance operating costs and expenses 175 190 (8%) 352 352 --
Amortization of deferred policy acquisition costs and
present value of future profits 195 150 30% 394 288 37%
Other expenses (1) 1 -- -- 3 (100%)
------- ------- --- ------- ------ ---
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,097 970 13% 2,218 1,858 19%
------- ------- --- ------- ------ ---
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 243 216 13% 516 346 49%
Income tax expense 63 27 133% 137 57 140%
------- ------- --- ------- ------ ---
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 180 189 (5%) 379 289 31%
Cumulative effect of accounting change, net of tax[2] -- -- -- (18) -- NM
------- ------- --- ------- ------ ---
NET INCOME $ 180 $ 189 (5%) $ 361 $ 289 25%
======= ======= === ======= ====== ===
[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 increases of $150 and $304 in net investment income and
increases of $149 and $297 in benefits, claims and claim adjustment
expenses for the second quarter and six months ended June 30, 2004,
respectively.
[2] For the six months ended June 30, 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 decreased for the second quarter of 2004 compared to
2003 due primarily to higher income tax expense, lower realized capital gains
and lower spread income on market value adjusted ("MVA") fixed annuities
reported in the Retail segment due to the adoption of SOP 03-1. Partially
offsetting the decrease in net income was growth in the variable annuity
business within the Retail segment as a result of increasing assets under
management.
For the six months ended June 30, 2004 compared to 2003, net income increased
largely due to a significant increase in net 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 principally driven by growth in the
variable annuity business as a result of increasing assets under management.
Partially offsetting the positive earnings drivers for the six
21
months ended June 30, 2004 was the cumulative effect of accounting change from
the Company's adoption of SOP 03-1. The adoption of SOP 03-1 also resulted in
certain changes in presentation in the Company's financial statements, including
reporting of the spreads on the Company's MVA fixed annuities on a gross basis
in net investment income and benefits expense. Exclusive of the cumulative
effect, overall application of SOP 03-1 resulted in an immaterial reduction in
net income. (For further discussion of the impact of the Company's adoption of
SOP 03-1 see Note 1 of Notes to Condensed Consolidated Financial Statements).
RETAIL PRODUCTS GROUP
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -----------------------------
OPERATING SUMMARY 2004 2003 CHANGE 2004 2003 CHANGE
----------------- ---- ---- ------ ---- ---- ------
Fee income and other $ 388 $ 306 27% $ 765 $ 585 31%
Earned premiums (27) 1 NM (48) (8) NM
Net investment income 267 129 107% 539 245 120%
Net realized capital (losses) gains (1) 2 (150%) (1) 8 (113%)
----- ----- --- -------- -------- ---
TOTAL REVENUES 627 438 43% 1,255 830 51%
----- ----- --- -------- -------- ---
Benefits, claims, and claim adjustment expenses 259 152 70% 516 299 73%
Insurance operating costs and other expenses 106 95 12% 207 180 15%
Amortization of deferred policy acquisition costs and
present value of future profits
147 104 41% 301 193 56%
----- ----- --- -------- -------- ---
TOTAL BENEFITS, CLAIMS AND EXPENSES 512 351 46% 1,024 672 52%
----- ----- --- -------- -------- ---
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
115 87 32% 231 158 46%
Income tax expense (benefit) 20 (14) NM 41 (4) NM
----- ----- --- -------- -------- ---
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
95 101 (6%) 190 162 17%
Cumulative effect of accounting change, net of tax[1] -- -- -- (19) -- NM
----- ----- --- -------- -------- ---
NET INCOME $ 95 $ 101 (6%) $ 171 $ 162 6%
===== ===== === ======== ======== ===
Individual variable annuity account values $ 92,504 $ 73,748 25%
Other individual annuity account values 11,372 10,587 7%
401K and Specialty product account values 5,489 3,705 48%
-------- -------- ---
TOTAL ACCOUNT VALUES [2] $109,365 $ 88,040 24%
-------- -------- ---
S&P 500 INDEX VALUE AT END OF PERIOD 1,141 975 17%
-------- -------- ---
[1] For the quarter and six months ended June 30, 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 for the six months ended June 30,
2004, principally driven by growth in the assets under management within the
variable annuity business, partially offset by higher income tax expense, higher
amortization of deferred policy acquisition costs and lower net income in the
individual fixed annuity business. Net income for the Retail segment decreased
for the second quarter ended June 30, 2004 primarily due to higher income tax
expense, higher amortization of deferred policy acquisition costs and lower net
income in the individual fixed annuity business, partially offset by growth in
the assets under management within the variable annuity business. The Company
uses assets under management as an internal performance measure. Relative
profitability of the Retail segment is highly correlated to the growth in assets
under management since the segment generally earns fee income on a daily basis
on its assets under management. Assets under management are driven by the
performance of the equity markets and net flows. Net flows are comprised of new
sales less surrenders, death benefits and annuitizations of variable annuity
contracts.
Fee income generated by the variable annuity operation increased, as average
account values were higher in the second quarter and six months ended June 30,
2004 compared to the respective prior year periods. The increase in average
account values can be attributed to equity market growth of $11.0 billion and
net flows of $7.8 billion over the past four quarters. The Company uses the S&P
500 Index as an indicator for evaluating market returns of the underlying
account portfolios, more specifically the average daily value of the S&P 500,
which rose by approximately 17% from June 30, 2003 to June 30, 2004.
Income tax expense was higher for the second quarter and the six months ended
June 30, 2004 due primarily to higher income earned by the segment and the $20
tax benefit recorded in the second quarter of 2003 related to the change in
estimate of the dividends received deduction reported during 2002. The decrease
in the individual fixed annuity business was attributed to a lower investment
22
spread from the market value adjusted fixed annuity product for the second
quarter and six months ended June 30, 2004 as compared to the respective prior
year periods. In addition, with the adoption of SOP 03-1, 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 claim
adjustment expenses line in 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 for the
second quarter and six months ended June 30, 2004 as compared to the comparable
prior year periods, which resulted in lower net income.
INSTITUTIONAL SOLUTIONS GROUP
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ----------------------------
OPERATING SUMMARY 2004 2003 CHANGE 2004 2003 CHANGE
----------------- ---- ---- ------ ---- ---- ------
Fee income and other $ 74 $ 77 (4%) $ 145 $ 152 (5%)
Earned premiums 95 143 (34%) 204 243 (16%)
Net investment income 256 238 8% 509 478 7%
Net realized capital gains 2 5 (60%) 3 6 (50%)
------ ------ -- ------- ------- --
TOTAL REVENUES 427 463 (8%) 861 879 (2%)
------ ------ -- ------- ------- --
Benefits, claims, and claim adjustment expenses 353 374 (6%) 714 703 2%
Insurance operating costs and other expenses 27 48 (44%) 65 85 24%
Amortization of deferred policy acquisition costs and
present value of future profits
9 5 80% 18 12 50%
------ ------ -- ------- ------- --
TOTAL BENEFITS, CLAIMS AND EXPENSES 389 427 (9%) 797 800 --
------ ------ -- ------- ------- --
INCOME BEFORE INCOME TAXES 38 36 6% 64 79 (19%)
Income tax expense 13 11 18% 21 26 (19%)
------ ------ -- ------- ------- --
NET INCOME $ 25 $ 25 -- $ 43 $ 53 (19%)
====== ====== == ======= ======= ==
Institutional account values $13,085 $10,919 20%
Governmental account values 9,445 7,811 21%
Private Placement Life Insurance account values
Variable Products 21,592 20,326 6%
Leveraged COLI 2,508 3,137 (20%)
------- ------- --
TOTAL ACCOUNT VALUES [1] $46,630 $42,193 11%
------- ------- --
[1] Includes policyholder balances for investment contracts and reserves for
future policy benefits for insurance contracts.
Net income remained the same for the second quarter and decreased for the six
months ended June 30, 2004. Net income for the six months ended June 30, 2004
decreased as a result of lower income from the institutional business, which
includes structured settlements and institutional annuities, and the private
placement life insurance business. Lower net income in the institutional
business was due primarily to lower spread income as a result of the lower
interest rates and slightly higher insurance operating costs for the second
quarter and six months ended June 30, 2004 as compared to the respective prior
year periods. In addition, the institutional business contributed lower earnings
for the six months ended June 30, 2004 compared to the same period in 2003 due
to favorable mortality experience in 2003. Private placement life insurance also
experienced lower net income for the second quarter and six months ended June
30, 2004 primarily as a result of lower revenues earned due to the 20% decline
in leveraged COLI account values, which resulted from surrenders that occurred
in 2003. Partially offsetting these declines was higher income from the
governmental business for the second quarter and six months ended June 30, 2004.
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 second quarter of 2003.
23
INDIVIDUAL LIFE
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------------
OPERATING SUMMARY 2004 2003 CHANGE 2004 2003 CHANGE
----------------- ---- ---- ------ ---- ---- ------
Fee income and other $164 $ 165 (1%) $ 329 $ 328 --
Net investment income 66 54 22% 131 111 18%
---- ----- -- ------- ------- ---
TOTAL REVENUES 230 219 5% 460 439 5%
---- ----- -- ------- ------- ---
Benefits, claims, and claim adjustment expenses 103 94 10% 211 192 10%
Insurance operating costs and other expenses 36 36 -- 72 72 --
Amortization of deferred policy acquisition costs and
present value of future profits
39 41 (5%) 76 83 (8%)
---- ----- -- ------- ------- ---
TOTAL BENEFITS, CLAIMS AND EXPENSES 178 171 4% 359 347 3%
---- ----- -- ------- ------- ---
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
52 48 8% 101 92 10%
Income tax expense 17 14 21% 33 29 14%
---- ----- -- ------- ------- ---
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 35 34 3% 68 63 8%
Cumulative effect of accounting change, net of tax[1] -- -- -- (1) -- 100%
---- ----- -- ------- ------- ---
NET INCOME $ 35 $ 34 3% $ 67 $ 63 6%
==== ===== == ======= ======= ===
Variable universal life account values $ 4,934 $ 4,140 19%
------- ------- ---
TOTAL ACCOUNT VALUES $ 8,476 $ 7,536 12%
======= ======= ===
[1] For the quarter and six months ended June 30, 2004, represents the
cumulative impact of the Company's adoption of SOP 03-1.
Net income in the Individual Life segment increased slightly for the second
quarter and six months ended June 30, 2004 as compared to the respective prior
year periods. These increases were 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 in the current
year. However, the increased mortality costs reduced the amount of amortization
of deferred policy acquisition costs recorded during the second quarter and six
months ended June 30, 2004. Net investment income increased primarily due to the
adoption of SOP 03-1 in the first quarter of 2004, 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 operating segment'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. 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.
Pursuant to the adoption of SOP 03-1, as discussed in Notes 1 and 4 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. 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 the Company's financial
results. Significant fluctuations in the fixed income or equity markets could
weaken the Company's financial condition or its results of operations.
Additionally, changes in market interest rates may impact the period of time
over which certain investments, such as mortgage-backed securities, are repaid
and whether certain investments are called by the issuers. Such changes may, in
turn, impact the yield on these investments and also may result in reinvestment
of funds received from calls and prepayments at rates below the average
portfolio yield. Net investment income and net realized capital gains and losses
accounted for 47% and 40% of the Company's consolidated revenues for the second
quarter
24
ended June 30, 2004 and 2003, respectively. For the six months ended June 30,
2004 and 2003, net investment income and net realized capital gains and losses
accounted for 48% and 40%, respectively, of the Company's consolidated revenues.
The increase in the percentage of consolidated revenues for the second quarter
and six months ended June 30, 2004, as compared to the respective prior year
periods, is primarily due to income earned on separate account assets
reclassified to the general account as a result of the adoption of SOP 03-1.
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 June 30, 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 22% and 19% of the fair value of
its invested assets as of June 30, 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 June
30, 2004 and December 31, 2003.
COMPOSITION OF INVESTED ASSETS
JUNE 30, 2004 DECEMBER 31, 2003
------------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Fixed maturities, available-for-sale, at fair value $40,421 91.6% $30,085 90.4%
Equity securities, available-for-sale, at fair value 114 0.3% 85 0.3%
Policy loans, at outstanding balance 2,607 5.9% 2,470 7.4%
Mortgage loans, at cost 688 1.6% 354 1.1%
Limited partnerships, at fair value 225 0.5% 169 0.5%
Other investments 58 0.1% 116 0.3%
------- ----- ------- -----
TOTAL INVESTMENTS $44,113 100.0% $33,279 100.0%
======= ===== ======= =====
Fixed maturity investments increased 34% 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 SOP 03-1. The increase in fixed
maturity investments was partially offset by a decline in market prices
primarily due to an increase in long-term interest rates during the second
quarter of 2004.
Mortgage loans increased $334, or 94%, since December 31, 2003 as a result of a
decision to increase investment in this asset class primarily due to its
attractive yields and diversification opportunities.
INVESTMENT RESULTS
The following table summarizes the Company's investment results.
25
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
(before-tax) 2004 2003 2004 2003
- ------------ ------- ------ ------- ------
Net investment income - excluding income on policy loans [1] $ 565 $ 383 $ 1,130 $ 757
Policy loan income 42 54 86 111
----- ----- ------- -----
Net investment income - total [1] $ 607 $ 437 $ 1,216 $ 868
Yield on average invested assets [2] 5.8% 5.8% 5.8% 6.0%
----- ----- ------- -----
Gross gains on sale $ 71 $ 76 $ 156 $ 124
Gross losses on sale (54) (27) (69) (68)
Impairments (4) (15) (12) (66)
Periodic net coupon settlements on non-qualifying derivatives [1] 1 8 2 15
Other, net [3] 9 1 10 -
----- ----- ------- -----
Net realized capital gains [1] $ 23 $ 43 $ 87 $ 5
===== ===== ======= =====
[1] The prior periods reflect the reclassification of periodic net coupon
settlements on non-qualifying derivatives from net investment income to
net realized capital gains to conform to the current year presentation.
[2] Represents annualized net investment income divided by the monthly
weighted average invested assets at cost or amortized cost, as applicable,
for the second quarter and six months ended June 30, 2004 and 2003,
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 policy acquisition costs associated with
realized capital gains.
For the second quarter and six months ended June 30, 2004, net investment
income, excluding income on policy loans, increased $182, or 48%, and $373, or
49%, respectively, compared to the respective prior year periods. The increases
in net investment income were primarily due to income earned on a higher average
invested asset base, as compared to the respective prior year periods, partially
offset by lower investment yields. The increase in the average invested assets
base, as compared to the prior year periods, was primarily the result of
separate account assets reclassified to the general account pursuant to the
adoption of SOP 03-1. Income earned on separate account assets reclassified to
the general account was $150 and $304 for the second quarter and six months
ended June 30, 2004, respectively.
For the six months ended June 30, 2004, the yield on average invested assets
decreased from the respective prior year period 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 long-term 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 second quarter and six
months ended June 30, 2004 of approximately 4.7% and 4.9%, before-tax, continues
to be below the average portfolio yield.
Net realized capital gains for the second quarter ended June 30, 2004 decreased
by $20 compared to the respective prior year period, primarily the result of
lower net realized gains on sales of fixed maturity securities in 2004,
partially offset by lower other-than-temporary impairments. Net realized capital
gains for the six months ended June 30, 2004 improved by $82 compared to the
respective prior year period primarily due to lower other-than-temporary
impairments. (For further discussion of other-than-temporary impairments, see
the Other-Than-Temporary Impairments commentary in this section of the MD&A.)
Gross gains on sales for the second quarter and six months ended June 30, 2004
were primarily within fixed maturities and were the result of decisions to
reposition the portfolio primarily due to the spread tightening in certain
sectors and changes in interest rates. Gross gains on sales of fixed maturity
investments were concentrated in the corporate, foreign government and
asset-backed securities ("ABS") sectors. The majority of the gains on sales in
the corporate and ABS sectors were the result of divesting securities that had
appreciated in value due to a decline in interest rates and an improved
corporate credit environment. Foreign government securities were sold primarily
to realize gains associated with the decline in value of the U.S. Dollar against
foreign currencies.
Gross losses on sales for the second quarter ended June 30, 2004 resulted
predominantly from sales of U.S. government and government agencies securities,
corporate securities and commercial mortgage-backed securities ("CMBS") that
were in an unrealized loss position primarily due to changes in long-term
interest rates.
Realized gains on sales for the second quarter and six months ended June 30,
2003 primarily resulted from portfolio rebalancing of securities that had
appreciated in value due to historically low interest rates.
26
OTHER-THAN-TEMPORARY IMPAIRMENTS
For the second quarter and six months ended June 30, 2004, total
other-than-temporary impairments were $4 and $12, respectively, as compared with
$15 and $66, respectively, for the comparable periods in 2003.
The following table identifies the Company's other-than-temporary impairments by
type for the six months ended June 30, 2004 and 2003.
OTHER-THAN-TEMPORARY IMPAIRMENTS BY TYPE
SIX MONTHS ENDED
JUNE 30,
--------------------
2004 2003
(BEFORE-TAX) ---- ----
ABS
Corporate debt obligations ("CDOs") $ 4 $10
Credit card receivables -- 12
Other ABS -- 3
--- ---
Total ABS 4 25
Commercial mortgages 3 --
CMBS 1 4
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 11
--- ---
TOTAL OTHER-THAN-TEMPORARY IMPAIRMENTS $12 $66
=== ===
For the six months ended June 30, 2004, other-than-temporary impairments were
primarily comprised of ABS and commercial mortgages security types and were
recorded as a result of a deterioration of cash flows derived from the
underlying collateral of several securities.
The decrease in impairments in the second quarter and six months ended June 30,
2004, as compared to the respective prior year periods, is primarily a result of
an improvement in general economic conditions and operating fundamentals, and
improved pricing levels for ABS security types. In general, security issuers'
operating fundamentals have improved due to reduced company leverage, improved
liquidity and successfully implementing various cost cutting measures.
Improvement in pricing levels for ABS has been driven by a general stabilization
in the performance of the underlying collateral and an increase in demand for
these asset types due to improved economic and operating fundamentals of the
underlying security issuers, better market liquidity and attractive yields.
Impairments during the six months ended June 30, 2003 were primarily driven by
increasing default rates and lower recovery rates on collateral supporting
certain ABS security types and the decline in value of several corporate debt
securities as a result of deteriorating earnings forecasts, debt restructuring
issues and accounting irregularities. Impairments were also incurred as a result
of the deterioration in the transportation sector, specifically issuers of
airline debt, due to a significant decline in airline travel. Additionally,
other-than-temporary impairments were recorded on various diversified mutual
funds and interest only securities.
The favorable other-than-temporary impairments trend will depend on continued
strong economic fundamentals, political stability and collateral performance.
(For further discussion of risk factors associated with sectors with significant
unrealized loss positions, see the sector risk factor commentary under the Total
Available-for-Sale Securities with Unrealized Loss Greater than Six Months by
Type schedule in the Investment Credit Risk section of the MD&A.)
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.
27
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.
The following table identifies fixed maturity securities by type as of June 30,
2004 and December 31, 2003.
FIXED MATURITIES BY TYPE
JUNE 30, 2004
-----------------------------------------------------------
PERCENT
OF TOTAL
AMORTIZED UNREALIZED UNREALIZED FAIR FAIR
COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- ------- --------
ABS $ 5,175 $ 82 $ (81) $ 5,176 12.8%
CMBS 7,362 275 (69) 7,568 18.7%
Collateralized mortgage obligation ("CMO") 706 8 (2) 712 1.8%
Corporate
Basic industry 2,179 113 (21) 2,271 5.6%
Capital goods 1,388 71 (15) 1,444 3.6%
Consumer cyclical 2,182 94 (20) 2,256 5.6%
Consumer non-cyclical 2,256 127 (19) 2,364 5.8%
Energy 1,271 78 (8) 1,341 3.3%
Financial services 5,319 309 (42) 5,586 13.8%
Technology and communications 3,280 232 (37) 3,475 8.6%
Transportation 538 25 (4) 559 1.4%
Utilities 1,918 130 (24) 2,024 5.0%
Other 586 23 (4) 605 1.5%
Government/Government agencies
Foreign 560 38 (7) 591 1.5%
United States 674 5 (18) 661 1.6%
MBS - agency 1,469 12 (12) 1,469 3.6%
Municipal
Taxable 606 10 (28) 588 1.5%
Redeemable preferred stock 1 -- -- 1 --
Short-term 1,730 -- -- 1,730 4.3%
------- ------- ------- ------- -----
TOTAL FIXED MATURITIES $39,200 $ 1,632 $ (411) $40,421 100.0%
======= ======= ======= ======= =====
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 2,227 160 (9) 2,378 5.7%
Capital goods 1,343 106 (5) 1,444 3.5%
Consumer cyclical 2,225 159 (5) 2,379 5.7%
Consumer non-cyclical 2,533 188 (8) 2,713 6.5%
Energy 1,374 115 (5) 1,484 3.5%
Financial services 5,101 413 (24) 5,490 13.2%
Technology and communications 3,383 363 (10) 3,736 9.0%
Transportation 568 41 (3) 606 1.4%
Utilities 1,861 167 (10) 2,018 4.8%
Other 570 33 (1) 602 1.4%
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 SOP 03-1.
The Company's fixed maturity gross unrealized gains decreased $770 and gross
unrealized losses increased $198 from December 31, 2003 to June 30, 2004,
primarily due to an increase in long-term interest rates and, to a lesser
extent, credit spread widening and sales of securities in a gain position.
During the six months ended June 30, 2004, the ten year U.S. treasury rate
increased approximately 35 basis points and to more than 100 basis points from
its low in June 2003, largely the result of continued economic growth evidenced
by an increase in capacity utilization, employment growth and continued strong
consumer spending. At the June 30, 2004 Federal Open Market Committee policy
meeting, the overnight funds rate was raised a quarter point to 1.25%. The Fed
members signaled that interest rates will continue to rise at a measured pace as
long as inflation risks remain stable.
Investment allocations as a percentage of total fixed maturities have remained
materially consistent since December 31, 2003, except for CMBS and MBS-agency.
CMBS increased as a result of a decision to increase the Company's investment in
the asset class due to its stable spreads, high quality and attractive yields.
The decrease in MBS-agency holdings was the result of an effort to reduce
exposure to prepayment risk resulting from the decline in interest rates during
the first quarter of 2004.
28
(For further discussion of risk factors associated with sectors with significant
unrealized loss positions, see the sector risk factor commentary under the Total
Available-for-Sale 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 June
30, 2004 and December 31, 2003. The ratings referenced below are based on the
ratings of a nationally recognized rating organization or, if not rated,
assigned based on the Company's internal analysis of such securities.
FIXED MATURITIES BY CREDIT QUALITY
JUNE 30, 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 $ 2,851 $ 2,847 7.1% $ 3,598 $ 3,661 8.8%
AAA 7,348 7,450 18.4% 6,652 6,922 16.5%
AA 3,431 3,559 8.8% 3,326 3,504 8.4%
A 11,212 11,762 29.1% 11,742 12,576 30.1%
BBB 10,995 11,407 28.2% 10,833 11,561 27.6%
BB & below 1,633 1,666 4.1% 1,925 2,040 4.9%
Short-term 1,730 1,730 4.3% 1,555 1,556 3.7%
------- ------ ----- ------- ------- -----
TOTAL FIXED MATURITIES $39,200 $40,421 100.0% $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 SOP 03-1.
As of June 30, 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 June 30, 2004 and December 31, 2003.
BIG FIXED MATURITIES BY TYPE
JUNE 30, 2004 DECEMBER 31, 2003
------------------------------------ ----------------------------------
PERCENT OF PERCENT OF
AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
--------- ---------- ---------- --------- ---------- ----------
ABS $ 178 $ 165 9.9% $ 231 $ 210 10.3%
CMBS 78 81 4.9% 102 103 5.0%
Corporate
Basic industry 188 194 11.6% 201 211 10.3%
Capital goods 93 93 5.6% 103 106 5.3%
Consumer cyclical 191 201 12.1% 250 270 13.2%
Consumer non-cyclical 166 168 10.1% 250 261 12.8%
Energy 71 72 4.3% 61 67 3.3%
Financial services 23 22 1.3% 20 21 1.0%
Technology and communications 222 234 14.0% 274 326 16.0%
Transportation 3 4 0.2% 21 23 1.1%
Utilities 245 246 14.8% 256 266 13.1%
Foreign government 161 172 10.3% 145 164 8.0%
Other 14 14 0.9% 11 12 0.6%
------ ------ ----- ------ ------ -----
TOTAL FIXED MATURITIES $1,633 $1,666 100.0% $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 SOP 03-1.
29
As of June 30, 2004 and December 31, 2003, the Company held no issuer of a BIG
security with a fair value in excess of 4% of the total fair value for BIG
securities. Total BIG securities decreased since December 31, 2003 as a result
of 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 June 30,
2004 and December 31, 2003, by length of time the security was in an unrealized
loss position.
UNREALIZED LOSS AGING OF TOTAL AVAILABLE-FOR-SALE SECURITIES
JUNE 30, 2004 DECEMBER 31, 2003
------------------------------------ ----------------------------------
AMORTIZED UNREALIZED AMORTIZED UNREALIZED
COST FAIR VALUE LOSS COST FAIR VALUE LOSS
--------- ----------- ---------- --------- ---------- ----------
Three months or less $10,940 $10,690 $(250) $2,636 $2,615 $ (21)
Greater than three months to six months 541 497 (44) 1,795 1,739 (56)
Greater than six months to nine months 73 71 (2) 230 216 (14)
Greater than nine months to twelve months 585 555 (30) 133 126 (7)
Greater than twelve months 906 816 (90) 1,450 1,331 (119)
------- ------- ----- ------ ------ -----
TOTAL $13,045 $12,629 $(416) $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 SOP 03-1.
The increase in the unrealized loss amount since December 31, 2003 is primarily
the result of an increase in long-term interest rates, partially offset by
slightly improved pricing levels for ABS securities 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 June 30, 2004 and December 31, 2003, fixed maturities represented $411, or
99%, 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 June 30, 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 June 30, 2004 and
December 31, 2003, for which management's best estimate of future cash flows
adversely changed during the reporting period. As of June 30, 2004 and December
31, 2003, no asset-backed or commercial mortgage-backed securities had an
unrealized loss in excess of $14 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 5% and 7% of the total unrealized loss amount as of
June 30, 2004 and December 31, 2003, respectively.
The total securities classified as available-for-sale in an unrealized loss
position for longer than six months by type as of June 30, 2004 and December 31,
2003 are presented in the following table.
30
TOTAL AVAILABLE-FOR-SALE SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX
MONTHS BY TYPE
JUNE 30, 2004 DECEMBER 31, 2003
---------------------------------------------- -------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMORTIZED UNREALIZED UNREALIZED AMORTIZED UNREALIZED UNREALIZED
COST FAIR VALUE LOSS LOSS COST FAIR VALUE LOSS LOSS
--------- ----------- ---------- ---------- --------- ----------- ---------- ----------
ABS and CMBS
Aircraft lease receivables $ 150 $ 95 $ (55) 45.1% $ 153 $ 99 $ (54) 38.6%
CDOs 49 46 (3) 2.5% 132 113 (19) 13.6%
Credit card receivables 44 42 (2) 1.6% 118 108 (10) 7.1%
Other ABS and CMBS 362 349 (13) 10.7% 569 555 (14) 10.0%
Corporate
Financial services 464 444 (20) 16.3% 524 502 (22) 15.7%
Utilities 85 78 (7) 5.7% 80 74 (6) 4.3%
Other 281 264 (17) 14.0% 226 211 (15) 10.7%
Other securities 129 124 (5) 4.1% 11 11 -- --
------ ------ ----- ----- ------- ------- ----- -----
TOTAL $1,564 $1,442 $(122) 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 SOP 03-1.
The securities in an unrealized loss position for six months or more as of June
30, 2004 and December 31, 2003, were primarily ABS securities supported by
aircraft lease receivables and 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 -- The increase in the unrealized loss position from
December 31, 2003 to June 30, 2004 was primarily the result of recent rating
agency downgrades for certain issuers in this sector, partially offset by an
upward trend and stabilization of prices of other aircraft lease receivables
securities. This trend 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
2004, any additional price recovery will depend on continued improvement in
economic fundamentals, political stability and airline operating performance.
FINANCIAL SERVICES -- As of June 30, 2004, the Company held approximately forty
different securities in the financial services sector that had been in an
unrealized loss position for greater than six months. These securities are
primarily investment grade with the majority priced at or greater than 90% of
amortized cost as of June 30, 2004. These positions are primarily variable rate
securities with extended maturity dates, which have been adversely impacted by
the reduction in forward interest rates, since the time of purchase, resulting
in lower expected cash flows. Unrealized loss amounts for these securities have
declined during the year as interest rates have risen. Additional changes in
fair value of these securities are primarily dependent on future changes in
interest rates.
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 June 30, 2004 and December 31, 2003. Due to the issuers'
continued satisfaction of the securities' obligations in accordance with their
contractual terms and the expectation that they will continue to do so,
management's intent and ability to hold these securities, as well as the
evaluation of the fundamentals of the issuers' financial condition and other
objective evidence, the Company believes that the prices of the securities in
the sectors identified above were temporarily depressed.
The evaluation for other-than-temporary impairments is a quantitative and
qualitative process, which is subject to risks and uncertainties in the
determination of whether declines in the fair value of investments are
other-than-temporary. The risks and uncertainties include changes in general
economic conditions, the issuer's financial condition or near term recovery
prospects and the effects of changes in interest rates. In addition, for
securitized financial assets with contractual cash flows (e.g. ABS and CMBS),
projections of expected future cash flows may change based upon new information
regarding the performance of the underlying collateral. As of June 30, 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.)
31
The following table presents the Company's unrealized loss aging for BIG and
equity securities classified as available-for-sale, as of June 30, 2004 and
December 31, 2003.
UNREALIZED LOSS AGING OF AVAILABLE-FOR-SALE BIG AND EQUITY SECURITIES
JUNE 30, 2004 DECEMBER 31, 2003
------------------------------------ ----------------------------------
AMORTIZED UNREALIZED AMORTIZED UNREALIZED
COST FAIR VALUE LOSS COST FAIR VALUE LOSS
--------- ---------- ---------- --------- ---------- ----------
Three months or less $358 $339 $(19) $ 47 $ 46 $ (1)
Greater than three months to six months 99 89 (10) 90 86 (4)
Greater than six months to nine months 5 5 -- 50 44 (6)
Greater than nine months to twelve months 31 30 (1) 17 16 (1)
Greater than twelve months 162 130 (32) 266 217 (49)
---- ---- ---- ---- ---- ----
TOTAL $655 $593 $(62) $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 SOP 03-1.
Similar to the increase in the Unrealized Loss Aging of Total Available-for-Sale
Securities table from December 31, 2003 to June 30, 2004, the increase in the
BIG and equity security unrealized loss amount for securities classified as
available-for-sale was primarily the result of an increase in long-term interest
rates, partially offset by slightly improved pricing levels for ABS securities
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 June 30, 2004 and
December 31, 2003 are presented in the following table.
AVAILABLE-FOR-SALE BIG AND EQUITY SECURITIES WITH UNREALIZED LOSS GREATER THAN
SIX MONTHS BY TYPE
JUNE 30, 2004 DECEMBER 31, 2003
---------------------------------------------- -------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMORTIZED UNREALIZED UNREALIZED AMORTIZED UNREALIZED UNREALIZED
COST FAIR VALUE LOSS LOSS COST FAIR VALUE LOSS LOSS
--------- ----------- ---------- ---------- --------- ----------- ---------- ----------
ABS and CMBS
Aircraft lease receivables $ 35 $ 17 $(18) 54.6% $ 45 $ 28 $(17) 30.4%
CDOs 17 16 (1) 3.0% 37 28 (9) 16.1%
Credit card receivables 29 28 (1) 3.0% 40 30 (10) 17.9%
Other ABS and CMBS 11 8 (3) 9.1% 45 38 (7) 12.5%
Corporate
Financial services 39 34 (5) 15.2% 39 35 (4) 7.1%
Utilities 37 33 (4) 12.1% 66 61 (5) 8.9%
Other 28 27 (1) 3.0% 57 53 (4) 7.1%
Other securities 2 2 -- -- 4 4 -- --
---- ---- ---- ----- ---- ---- ---- -----
TOTAL $198 $165 $(33) 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 SOP 03-1.
The decrease in the available-for-sale BIG and equity securities greater than
six months unrealized loss amount since December 31, 2003 was primarily the
result of improved pricing levels for ABS securities supported by CDOs and
credit card receivables and, to a lesser extent, asset sales.
For additional discussion of the Company's current view of risk factors relative
to certain security types listed above, please refer to the Total
Available-for-Sale Securities with Unrealized Loss Greater Than Six Months by
Type table in this section of the MD&A.
32
CAPITAL MARKETS RISK MANAGEMENT
Hartford Life 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 and Institutional Solutions Group
and, to a lesser extent, 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 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 Group 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 the death benefit costs, net of
reinsurance, of $104, as of June 30, 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 June 30, 2004 is $10.1
billion. Due to the fact that 80% of this amount is reinsured, the net exposure
is $2.0 billion. This amount is often
33
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.
INTEREST RATE RISK
The Company believes that the moderate increase in interest rates from the
levels prevailing in the first quarter of 2004 is generally a favorable
development for the Company. The rate increases are expected to provide
additional net investment income, increased sales of fixed rate investment
products, reduce the cost of the GMWB hedging program, limit the potential risk
of margin erosion due to minimum guaranteed crediting rates in certain products
and, if sustained through the end of 2004, could reduce the Company's
prospective pension expense. Conversely, a rise in interest rates will reduce
the net unrealized gain position of the investment portfolio, increase interest
expense on the Company's variable rate debt obligations and, if long-term
interest rates rise dramatically within a six to twelve month time period,
certain businesses may be exposed to disintermediation risk. Disintermediation
risk refers to the risk that policyholders will surrender their contracts in a
rising interest rate environment requiring the Company to liquidate assets in an
unrealized loss position. To help mitigate disintermediation risk, the Company
analyzes interest rate risk using various models including multi-scenario cash
flow projections that forecast cash flows of the liabilities and their
supporting investments, including derivative instruments. Measures used by the
Company to quantify its exposure to interest rate risk inherent in its invested
assets and interest rate sensitive liabilities are duration and key rate
duration. In conjunction with the interest rate risk measurement and management
techniques, significant portions of fixed income product offerings have market
value adjustment provisions at contract surrender.
The Company believes that a gradual rise in interest rates should increase net
investment income and sales of fixed rate investment products while the
potential adverse consequences of increased rates, primarily the reduction of
the investment portfolio's net unrealized gain and disintermediation risk, is
mitigated by the Company's disciplined asset liability management techniques and
product design.
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 $449 in dividends to HLA for the six months ended June 30,
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 Contingencies below.
34
CASH FLOW
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2004 2003
----------- -----------
Net Cash provided by operating activities $ 551 $ 335
Net Cash provided by (used for) investing activities 92 (2,708)
Net Cash (used for) provided by financing activities (671) 2,339
----------- -----------
CASH - END OF PERIOD 68 45
----------- -----------
The increase in cash provided by operating activities was primarily the result
of the timing of funds received for policyholder accounts, offset by timing of
the settlement of receivables and payables for the six months ended June 30,
2004. The decrease in cash used for investing activities for the six months
ended June 30, 2004 as compared to the prior year period was primarily due to
higher sales and lower purchases of investments. Net cash used for financing
activities reflects net disbursements from policyholders accounts related to
investment and universal life contracts and increased dividends to shareholders.
Operating cash flows in both periods have been more than adequate to meet
liquidity requirements.
EQUITY MARKETS
For a discussion of equity markets impact to capital and liquidity, see the
Capital Markets Risk Management section.
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 July 30, 2004:
A.M. BEST FITCH STANDARD & 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. The Company continues to respond to requests for
documents and information from representatives from the SEC's Office of
Compliance Inspections and Examinations in connection with their ongoing
compliance examinations regarding market timing and late trading, revenue
sharing and directed brokerage, fees, fund service providers and transfer
agents, and other mutual fund-related issues. In addition, the SEC's Division of
Enforcement has commenced an investigation of Hartford Life's variable annuity
and mutual fund operations. The Company continues to cooperate fully with the
SEC and other regulatory agencies.
35
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.
Like numerous other insurance carriers, The Hartford has received a subpoena
from the New York Attorney General's Office in connection with its inquiry into
compensation arrangements between brokers and carriers. The Hartford is
cooperating with the inquiry. Consistent with long-standing and wide-spread
industry practice, The Hartford makes incentive compensation payments to brokers
that may be based on the volume, growth and/or profitability of business placed
with The Hartford. The Hartford expects the independent brokers with whom we
work to comply with all applicable laws, including any concerning the disclosure
of compensation arrangements. At this early stage, it is too soon to tell what
impact, if any, the investigation will have on The Hartford.
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 1 of Notes to Condensed
Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Capital Markets Risk Management section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Company's principal executive officer and its principal financial officer,
based on their evaluation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)) have concluded that the Company's
disclosure controls and procedures are adequate and effective for the purposes
set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of June
30, 2004.
CHANGE IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in the Company's internal control over financial reporting
that occurred during the second 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. 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.
36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K: Filed on May 28, 2004, Item 5, Other Events, to report
the Company's updating of certain historical segment information included in its
Annual Report on Form 10-K for the year ended December 31, 2003, to give effect
to the Company's new reportable operating segments, which were disclosed in the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
37
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
August 11, 2004
38
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004
EXHIBITS INDEX
EXHIBIT #
- ---------
15.01 Deloitte & Touche LLP Letter of Awareness
31.01 Section 302 Certification of Thomas M. Marra
31.02 Section 302 Certification of Lizabeth H. Zlatkus
32.01 Section 906 Certification of Thomas M. Marra
32.02 Section 906 Certification of Lizabeth H. Zlatkus
39