UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2013
or
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-32293
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HARTFORD LIFE INSURANCE COMPANY |
| (Exact name of registrant as specified in its charter) | |
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Connecticut | | 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)
¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯
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Indicate by check mark: | | Yes | | No |
• 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. | | x | | | ¨ | |
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• whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). | | x | | | ¨ | |
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• whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer o | Accelerated filer o | Non Accelerated filer x | Smaller reporting company o |
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• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) | ¨ | | x |
As of October 28, 2013, 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) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.
HARTFORD LIFE INSURANCE COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013
TABLE OF CONTENTS
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Item | Description | Page |
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1A. | | |
6. | | |
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Forward-Looking Statements
Certain of the statements contained herein are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “projects,” and similar references to future periods.
Forward-looking statements are based on our current expectations and assumptions regarding economic, competitive, legislative and other developments. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. They have been made based upon management’s expectations and beliefs concerning future developments and their potential effect upon Hartford Life Insurance Company and its subsidiaries (collectively, the “Company”). Future developments may not be in line with management’s expectations or have unanticipated effects. Actual results could differ materially from expectations, depending on the evolution of various factors, including those set forth in Part I, Item 1A, Risk Factors in the Company’s 2012 Form 10-K Annual Report and Part II, Item IA, Risk Factors in The Hartford's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013. These important risks and uncertainties include:
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• | challenges related to the Company's current operating environment, including continuing uncertainty about the strength and speed of the recovery in the United States and other key economies and the impact of governmental stimulus and austerity initiatives, sovereign credit concerns, a sustained low interest rate environment, higher tax rates and other potentially adverse developments on financial, commodity and credit markets and consumer spending and investment and the effect of these events on the Company's returns in investment portfolios and the Company's hedging costs associated with the Company's variable annuities business; |
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• | the risks, challenges and uncertainties associated with the Company's capital management plan and the Company's strategic realignment to focus on the Company's property and casualty, group benefits and mutual fund businesses, place the Individual Annuity business into run-off and the sales of the Individual Life, Woodbury Financial Services, Retirement Plans and the U.K. variable annuity businesses; |
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• | the risks, challenges and uncertainties associated with actions beyond the capital management plan and strategic realignment, which may include acquisitions, divestitures or restructurings, and the potential that any such actions may negatively impact our business, financial condition, results of operations and liquidity; |
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• | execution risk related to the continued reinvestment of our investment portfolios and refinement of our hedge program for our run-off annuity block; |
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• | market risks associated with our business, including changes in interest rates, credit spreads, equity prices, market volatility and foreign exchange rates, and implied volatility levels, as well as continuing uncertainty in key sectors such as the global real estate market; |
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• | the impact on our investment portfolio if our investment portfolio is concentrated in any particular segment of the economy; |
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• | volatility in our earnings and potential material changes to our results resulting from our adjustment of our risk management program to emphasize protection of economic value; |
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• | the impact on our statutory capital of various factors, including many that are outside the Company’s control, which can in turn affect our credit and financial strength ratings, cost of capital, regulatory compliance and other aspects of our business and results; |
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• | risk associated with the use of analytical models in making decisions in key areas such as underwriting, capital, hedging, and reserving; |
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• | risks to our business, financial position, prospects and results associated with negative rating actions or downgrades in the Company's financial strength and credit ratings or negative rating actions or downgrades relating to our investments; |
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• | the potential for differing interpretations of the methodologies, estimations and assumptions that underlie the valuation of the Company’s financial instruments that could result in changes to investment valuations; |
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• | the subjective determinations that underlie the Company’s evaluation of other-than-temporary impairments on available-for-sale securities; |
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• | losses due to nonperformance or defaults by others; |
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• | the potential for further acceleration of deferred policy acquisition cost amortization; |
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• | the potential for further impairments of our goodwill or the potential for changes in valuation allowances against deferred tax assets; |
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• | the possible occurrence of terrorist attacks and the Company’s ability to contain its exposure, including the effect of the absence or insufficiency of applicable terrorism legislation on coverage; |
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• | the possibility of a pandemic, or other natural or man-made disaster that may adversely affect our businesses; |
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• | the response of reinsurance companies under reinsurance contracts and the availability, pricing and adequacy of reinsurance to protect the Company against losses; |
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• | the cost and other effects of increased regulation as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), which, among other effects, vests a Financial Services Oversight Council with the power to designate “systemically important” institutions, requires central clearing of, and/or imposes new margin and capital requirements on, derivatives transactions, and created a new “Federal Insurance Office” within the U.S. Department of the Treasury (“Treasury”); |
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• | unfavorable judicial or legislative developments; |
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• | the potential effect of other domestic and foreign regulatory developments, including those that could adversely impact the Company’s operating costs and required capital levels; |
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• | the Company’s ability to maintain the availability of its systems and safeguard the security of its data in the event of a disaster, cyber or other information security incident or other unanticipated event; |
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• | the risk that our framework for managing operational risks may not be effective in mitigating material risk and loss to the Company; |
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• | the potential for difficulties arising from outsourcing relationships; |
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• | the impact of changes in federal or state tax laws; |
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• | the impact of potential changes in accounting principles and related financial reporting requirements; |
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• | the impact of any future errors in financial reporting; |
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• | the Company’s ability to protect its intellectual property and defend against claims of infringement; |
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• | the Company's ability to implement its capital plan; and |
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• | other factors described in such forward-looking statements. |
Any forward-looking statement made by the Company in this document speaks only as of the date of the filing of this Form 10-Q. Factors or events that could cause the Company’s actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.
Part I. FINANCIAL INFORMATION
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Item 1. | Financial Statements |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Hartford Life Insurance Company
Simsbury, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of Hartford Life Insurance Company and subsidiaries (the "Company") as of September 30, 2013 and the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2013 and 2012 and statements of changes in stockholder’s equity and cash flows for the nine-month periods ended September 30, 2013 and 2012. These interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the 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 the 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. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2012, and the related consolidated statements of operations, comprehensive income, stockholder's equity, and cash flows for the year then ended (not presented herein); and in our report dated March 13, 2013 (September 13, 2013 as to the retrospective presentation of discontinued operations and the retrospective adoption of a change in disclosure of offsetting assets and liabilities)(which report includes an explanatory paragraph relating to the retrospective presentation of discontinued operations and the retrospective adoption of a change in disclosure of offsetting assets and liabilities), 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, 2012 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
October 28, 2013
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
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| | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
|
(In millions) | 2013 | 2012 | | 2013 | 2012 |
| (Unaudited) |
Revenues | | | | | |
Fee income and other | $ | 375 |
| $ | 739 |
| | $ | 1,085 |
| $ | 2,260 |
|
Earned premiums | 55 |
| 3 |
| | 135 |
| 76 |
|
Net investment income: | | | | | |
Securities available-for-sale and other | 415 |
| 620 |
| | 1,282 |
| 1,919 |
|
Equity securities, trading | — |
| — |
| | 1 |
| 1 |
|
Total net investment income | 415 |
| 620 |
| | 1,283 |
| 1,920 |
|
Net realized capital gains (losses): | | | | | |
Total other-than-temporary impairment (“OTTI”) losses | (19 | ) | (35 | ) | | (43 | ) | (113 | ) |
OTTI losses recognized in other comprehensive income | 3 |
| 22 |
| | 11 |
| 36 |
|
Net OTTI losses recognized in earnings | (16 | ) | (13 | ) | | (32 | ) | (77 | ) |
Net realized capital gains on business dispositions | — |
| — |
| | 1,561 |
| — |
|
Other net realized capital losses | (25 | ) | (179 | ) | | (732 | ) | (701 | ) |
Total net realized capital gains (losses) | (41 | ) | (192 | ) | | 797 |
| (778 | ) |
Total revenues | 804 |
| 1,170 |
| | 3,300 |
| 3,478 |
|
Benefits, losses and expenses | | | | | |
Benefits, loss and loss adjustment expenses | 435 |
| 762 |
| | 1,304 |
| 2,196 |
|
Amortization of deferred policy acquisition costs and present value of future profits | 147 |
| 83 |
| | 218 |
| 236 |
|
Insurance operating costs and other expenses | (36 | ) | 99 |
| | (450 | ) | 455 |
|
Reinsurance loss on dispositions | — |
| — |
| | 1,491 |
| — |
|
Dividends to policyholders | 4 |
| 4 |
| | 12 |
| 15 |
|
Total benefits, losses and expenses | 550 |
| 948 |
| | 2,575 |
| 2,902 |
|
Income from continuing operations before income taxes | 254 |
| 222 |
| | 725 |
| 576 |
|
Income tax expense | 52 |
| 49 |
| | 145 |
| 108 |
|
Income from continuing operations, net of tax | 202 |
| 173 |
| | 580 |
| 468 |
|
Income (loss) from discontinued operations, net of tax | (1 | ) | 30 |
| | (28 | ) | 110 |
|
Net income | 201 |
| 203 |
| | 552 |
| 578 |
|
Net income (loss) attributable to noncontrolling interest | — |
| — |
| | 6 |
| (1 | ) |
Net income attributable to Hartford Life Insurance Company | $ | 201 |
| $ | 203 |
| | $ | 546 |
| $ | 579 |
|
See Notes to Condensed Consolidated Financial Statements
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
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| | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
|
(In millions) | 2013 | 2012 | | 2013 | 2012 |
| (Unaudited) |
Comprehensive Income (Loss) | | | | | |
Net income | $ | 201 |
| $ | 203 |
| | $ | 552 |
| $ | 578 |
|
Other comprehensive income (loss): | | | | | |
Change in net unrealized gain/loss on securities | (84 | ) | 515 |
| | (1,373 | ) | 1,059 |
|
Change in net gain/loss on cash-flow hedging instruments | (11 | ) | (5 | ) | | (148 | ) | (7 | ) |
Change in foreign currency translation adjustments | 62 |
| 15 |
| | 21 |
| 21 |
|
Total other comprehensive income | (33 | ) | 525 |
| | (1,500 | ) | 1,073 |
|
Total comprehensive income (loss) | 168 |
| 728 |
| | (948 | ) | 1,651 |
|
Less: comprehensive income (loss) attributable to noncontrolling interest | — |
| — |
| | 6 |
| (1 | ) |
Total comprehensive income (loss) attributable to Hartford Life Insurance Company | $ | 168 |
| $ | 728 |
| | $ | (954 | ) | $ | 1,652 |
|
See Notes to Condensed Consolidated Financial Statements
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
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(In millions, except for share data) | September 30, 2013 | December 31, 2012 |
| (Unaudited) |
Assets | | |
Investments: | | |
Fixed maturities, available-for-sale, at fair value (amortized cost of $28,838 and $45,753) (includes variable interest entity assets, at fair value, of $33 and $89) | $ | 29,741 |
| $ | 49,404 |
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Fixed maturities, at fair value using the fair value option (includes variable interest entity assets, at fair value, of $118 and $132) | 949 |
| 1,010 |
|
Equity securities, trading, at fair value (cost of $10 and $1,614) | 11 |
| 1,847 |
|
Equity securities, available-for-sale, at fair value (cost of $388 and $408) (includes variable interest entity assets of $1 as of September 30, 2013) | 385 |
| 400 |
|
Mortgage loans (net of allowance for loan losses of $12 and $14) | 3,552 |
| 4,935 |
|
Policy loans, at outstanding balance | 1,410 |
| 1,951 |
|
Limited partnerships, and other alternative investments (includes variable interest entity assets of $4 and $6) | 1,328 |
| 1,372 |
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Other investments | 283 |
| 582 |
|
Short-term investments (includes variable interest entity assets of $8 as of September 30, 2013) | 2,262 |
| 2,354 |
|
Total investments | 39,921 |
| 63,855 |
|
Cash | 470 |
| 1,342 |
|
Premiums receivable and agents’ balances | 45 |
| 58 |
|
Reinsurance recoverable | 19,905 |
| 2,893 |
|
Deferred policy acquisition costs and present value of future profits | 724 |
| 3,072 |
|
Deferred income taxes, net | 2,188 |
| 1,557 |
|
Goodwill | — |
| 250 |
|
Other assets | 880 |
| 1,306 |
|
Assets held for sale | 2,002 |
| — |
|
Separate account assets | 139,864 |
| 141,558 |
|
Total assets | $ | 205,999 |
| $ | 215,891 |
|
Liabilities | | |
Reserve for future policy benefits and unpaid losses and loss adjustment expenses | $ | 12,902 |
| $ | 11,916 |
|
Other policyholder funds and benefits payable | 37,928 |
| 40,501 |
|
Other policyholder funds and benefits payable — international unit-linked bonds and pension products | — |
| 1,837 |
|
Consumer notes | 83 |
| 161 |
|
Other liabilities (including variable interest entity liabilities of $58 and $111) | 5,264 |
| 9,535 |
|
Liabilities held for sale | 1,723 |
|
|
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Separate account liabilities | 139,864 |
| 141,558 |
|
Total liabilities | 197,764 |
| 205,508 |
|
Commitments and Contingencies (Note 9) |
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Stockholder’s Equity | | |
Common stock—1,000 shares authorized, issued and outstanding, par value $5,690 | 6 |
| 6 |
|
Additional paid-in capital | 6,961 |
| 8,155 |
|
Accumulated other comprehensive income, net of tax | 487 |
| 1,987 |
|
Retained earnings (accumulated deficit) | 781 |
| 235 |
|
Total stockholder’s equity | 8,235 |
| 10,383 |
|
Total liabilities and stockholder’s equity | $ | 205,999 |
| $ | 215,891 |
|
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See Notes to Condensed Consolidated Financial Statements
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholder’s Equity
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(In millions) | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit) | Non- Controlling Interest | Total Stockholder’s Equity |
| (Unaudited) |
Nine Months Ended September 30, 2013 | | | | | | |
Balance, beginning of period | $ | 6 |
| $ | 8,155 |
| $ | 1,987 |
| $ | 235 |
| $ | — |
| $ | 10,383 |
|
Capital contributions (to) from parent [1] | — |
| (1,194 | ) | — |
| — |
| — |
| (1,194 | ) |
Dividends declared | — |
| — |
| — |
| — |
| — |
| — |
|
Net income (loss) | — |
| — |
| — |
| 546 |
| 6 |
| 552 |
|
Change in non-controlling interest ownership | — |
| — |
| — |
| — |
| (6 | ) | (6 | ) |
Total other comprehensive income | — |
| — |
| (1,500 | ) | — |
| — |
| (1,500 | ) |
Balance, end of period | $ | 6 |
| $ | 6,961 |
| $ | 487 |
| $ | 781 |
| $ | — |
| $ | 8,235 |
|
Nine Months Ended September 30, 2012 | | | | | | |
Balance, beginning of period | $ | 6 |
| $ | 8,271 |
| $ | 953 |
| $ | (319 | ) | $ | — |
| $ | 8,911 |
|
Capital contributions (to) from parent | — |
| 8 |
| — |
| — |
| — |
| 8 |
|
Dividends declared | — |
| — |
| — |
| 1 |
| — |
| 1 |
|
Net income | — |
| — |
| — |
| 579 |
| (1 | ) | 578 |
|
Change in non-controlling interest ownership | — |
| — |
| — |
| — |
| 1 |
| 1 |
|
Total other comprehensive income | — |
| — |
| 1,073 |
| — |
| — |
| 1,073 |
|
Balance, end of period | $ | 6 |
| $ | 8,279 |
| $ | 2,026 |
| $ | 261 |
| $ | — |
| $ | 10,572 |
|
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[1] | On February 5, 2013, the Company received approval from the State of Connecticut Insurance Department to pay a $1.2 billion extraordinary dividend to its parent company; which was distributed on February 22, 2013 and recorded as a return of capital. |
See Notes to Condensed Consolidated Financial Statements
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
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| | | | | | |
| Nine Months Ended September 30, |
(In millions) | 2013 | 2012 |
| (Unaudited) |
Operating Activities | | |
Net income | $ | 552 |
| $ | 578 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | |
Amortization of deferred policy acquisition costs and present value of future profits | 218 |
| 262 |
|
Additions to deferred policy acquisition costs and present value of future profits | (10 | ) | (253 | ) |
Change in: | | |
Reserve for future policy benefits and unpaid losses and loss adjustment expenses | 24 |
| 49 |
|
Reinsurance recoverables | (321 | ) | (49 | ) |
Receivables and other assets | (82 | ) | 41 |
|
Payables and accruals | (967 | ) | (252 | ) |
Accrued and deferred income taxes | 638 |
| 309 |
|
Net realized capital (gains) losses | (797 | ) | 705 |
|
Net disbursements from investment contracts related to policyholder funds — international unit-linked bonds and pension products | (105 | ) | (24 | ) |
Net decrease in equity securities, trading | 104 |
| 21 |
|
Reinsurance loss on dispositions | 1,491 |
| — |
|
Depreciation and amortization | 52 |
| 133 |
|
Other, net | (158 | ) | (10 | ) |
Net cash provided by operating activities | 639 |
| 1,510 |
|
Investing Activities | | |
Proceeds from the sale/maturity/prepayment of: | | |
Fixed maturities and short-term investments, available-for-sale | 12,189 |
| 22,657 |
|
Fixed maturities, fair value option | 60 |
| 191 |
|
Equity securities, available-for-sale | 63 |
| 73 |
|
Mortgage loans | 266 |
| 168 |
|
Partnerships | 98 |
| 64 |
|
Payments for the purchase of: | | |
Fixed maturities and short-term investments, available-for-sale | (9,318 | ) | (21,703 | ) |
Fixed maturities, fair value option | (95 | ) | (182 | ) |
Equity securities, available-for-sale | (66 | ) | (36 | ) |
Mortgage loans | (170 | ) | (1,039 | ) |
Partnerships | (59 | ) | (376 | ) |
Proceeds from business sold (excluding $485 of non-cash proceeds) | 460 |
| — |
|
Derivatives, net | (1,349 | ) | (1,282 | ) |
Change in policy loans, net | — |
| — |
|
Change in all other, net | (37 | ) | (3 | ) |
Net cash provided by (used for) investing activities | 2,042 |
| (1,468 | ) |
Financing Activities | | |
Deposits and other additions to investment and universal life-type contracts | 6,444 |
| 8,363 |
|
Withdrawals and other deductions from investment and universal life-type contracts | (19,778 | ) | (17,976 | ) |
Net transfers from separate accounts related to investment and universal life-type contracts | 12,242 |
| 8,480 |
|
Net (decrease) increase in securities loaned or sold under agreements to repurchase | (719 | ) | 1,585 |
|
Capital contributions | (1,200 | ) | (1 | ) |
Fee to recapture affiliate reinsurance | (347 | ) | — |
|
Net repayments at maturity or settlement of consumer notes | (78 | ) | (124 | ) |
Net cash (used for) provided by financing activities | (3,436 | ) | 327 |
|
Transfer of cash to held for sale | (115 | ) | — |
|
Foreign exchange rate effect on cash | (2 | ) | — |
|
Net (decrease) increase in cash | (872 | ) | 369 |
|
Cash — beginning of period | 1,342 |
| 1,183 |
|
Cash — end of period | $ | 470 |
| $ | 1,552 |
|
Supplemental Disclosure of Cash Flow Information: | | |
Net cash received during the period for income taxes | $ | (119 | ) | $ | (275 | ) |
Noncash capital contributions received | 6 |
| 8 |
|
Supplemental Disclosure of Non-Cash Investing Activity | | |
Conversion of fixed maturities, available-for-sale to equity securities, available-for-sale | — |
| 43 |
|
See Notes to Condensed Consolidated Financial Statements
10
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Hartford Life Insurance Company (together with its subsidiaries, “HLIC”, “Company”, “we” or “our”) is a provider of insurance and
investment products in the United States (“U.S.”) and is a wholly-owned subsidiary of Hartford Life and Accident Insurance Company
(“HLA”). Hartford Life, Inc., a Delaware corporation ("HLI") is the parent of HLA. The Hartford Financial Services Group, Inc. (“The
Hartford”) is the ultimate parent of the Company.
On January 1, 2013, HLI completed the sale of its Retirement Plans business to Massachusetts Mutual Life Insurance Company ("MassMutual") and on January 2, 2013 HLI completed the sale of its Individual Life insurance business to The Prudential Insurance Company of America, a subsidiary of Prudential Financial, Inc. ("Prudential"). For further discussion of these and other such transactions, see Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements.
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, which differ materially from the accounting practices prescribed by various insurance regulatory authorities. These Condensed Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2012 Form 10-K Annual Report. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year.
The accompanying Condensed Consolidated Financial Statements and Notes as of September 30, 2013, and for the three and nine months ended September 30, 2013 and 2012 are unaudited. These financial statements reflect all adjustments (generally 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. The Company's significant accounting policies are summarized in Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements included in the Company's 2012 Form 10-K Annual Report.
Consolidation
The Condensed Consolidated Financial Statements include the accounts of HLIC, companies in which the Company directly or indirectly has a controlling financial interest and those variable interest entities (“VIEs”) in which the Company is required to consolidate. Entities in which HLIC has significant influence over the operating and financing decisions but are not required to consolidate are reported using the equity method. For further discussions on VIEs, see Note 4 - Investments and Derivative Instruments of Notes to Condensed Consolidated Financial Statements. Material intercompany transactions and balances between HLIC and its subsidiaries have been eliminated.
Discontinued Operations
The results of operations of a component of the Company that either has been disposed of or is classified as held-for-sale are reported in
discontinued operations if the operations and cash flows of the component have been or will be eliminated from the ongoing operations
of the Company as a result of the disposal transaction and the Company will not have any significant continuing involvement in the
operations of the component after the disposal transaction.
The Company is presenting the operations of certain businesses that meet the criteria for reporting as discontinued operations. Amounts
for prior periods have been retrospectively reclassified. For information on the specific businesses and related impacts, see Note 13 -
Discontinued Operations of Notes to Condensed Consolidated Financial Statements
Use of Estimates
The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the 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 estimated gross profits used in the valuation and amortization of assets
and liabilities associated with variable annuity and other universal life-type contracts; evaluation of other-than-temporary impairments
on available-for-sale securities and valuation allowances on investments; living benefits required to be fair valued; valuation of investments and derivative instruments; valuation allowance on deferred tax assets; and contingencies relating to corporate
litigation and regulatory matters. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the Condensed Consolidated Financial Statements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
Income Taxes
A reconciliation of the tax provision at the U.S. Federal statutory rate to the provision for income taxes is as follows:
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2013 | 2012 | | 2013 | 2012 |
Tax expense at the U.S. federal statutory rate | $ | 89 |
| $ | 78 |
| | $ | 254 |
| $ | 202 |
|
Dividends received deduction | (35 | ) | (26 | ) | | (98 | ) | (87 | ) |
Foreign related investments | (2 | ) | (5 | ) | | (7 | ) | (11 | ) |
Valuation allowance | — |
| — |
| | — |
| — |
|
Other | — |
| 2 |
| | (4 | ) | 4 |
|
Income tax expense (benefit) | $ | 52 |
| $ | 49 |
| | $ | 145 |
| $ | 108 |
|
The separate account dividends-received deduction (“DRD”) is estimated for the current year using information from the most recent return, adjusted for current year equity market performance and other appropriate factors, including estimated levels of corporate dividend payments and level of policy owner equity account balances. The actual current year DRD can vary from estimates based on, but not limited to, changes in eligible dividends received in the mutual funds, amounts of distribution from these mutual funds, amounts of short-term capital gains at the mutual fund level and the Company’s taxable income before the DRD. The Company evaluates its DRD computations on a quarterly basis.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years prior to 2007. The audit of the years 2007-2009 commenced during 2010 and is expected to conclude in the second half of 2014. The 2010-2011 audit commenced in the fourth quarter of 2012 and is expected to conclude by the end of 2014. Management believes that adequate provision has been made in the financial statements for any potential assessments that may result from tax examinations and other tax-related matters for all open tax years.
The Company recorded a deferred tax asset valuation allowance that is adequate to reduce the total deferred tax asset to an amount that will be more likely than not realized. The deferred tax asset valuation allowance was $0 as of September 30, 2013 and $53 as of December 31, 2012, relating mostly to foreign net operating losses. In assessing the need for a valuation allowance, management considered future taxable temporary difference reversals, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in open carry back years, as well as other tax planning strategies. These tax planning strategies include holding a portion of debt securities with market value losses until recovery, altering the level of tax exempt securities, selling appreciated securities to offset capital losses, business considerations such as asset-liability matching, and the sales of certain corporate assets. Management views such tax planning strategies as prudent and feasible, and will implement them, if necessary, to realize the deferred tax asset. Future economic conditions and debt market volatility, including increases in interest rates, can adversely impact the Company's tax planning strategies and in particular the Company's ability to utilize tax benefits on previously recognized realized capital losses.
Reclassifications
Certain reclassifications have been made to prior period financial information to conform to the current year presentation.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Business Dispositions
Sale of Hartford Life International Limited ("HLIL")
On June 27, 2013, The Hartford announced the signing of a definitive agreement to sell HLIL, an indirect wholly-owned subsidiary of the Company, in a cash transaction to Columbia Insurance Company, a Berkshire Hathaway company, for approximately $285. At closing, HLIL’s sole asset will be its subsidiary, Hartford Life Limited ("HLL"), a Dublin-based company that sold variable annuities in the U.K. from 2005 to 2009. As the sale transaction is expected to result in a loss upon disposition, the Company recognized an estimated after-tax loss of approximately $51 for the nine months ended September 30, 2013 upon signing the agreement. The related loss accrual is included as a reduction of the carrying value of assets held for sale in the Company's Condensed Consolidated Balance Sheets as of September 30, 2013. The purchase price is based on HLIL's financial position as of March 31, 2013. Certain accounting results that occur after March 31, 2013 through the date of the closing of the transaction are passed to the buyer. The transaction, which is subject to customary closing conditions and regulatory approvals, is expected to close by the end of 2013. The operations of the Company's U.K. variable annuity business meet the criteria for reporting as discontinued operations as further discussed in Note 13 - Discontinued Operations.
Sale of Retirement Plans
On January 1, 2013, HLI completed the sale of its Retirement Plans business to MassMutual for a ceding commission of $355. The business sold included products and services to corporations pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), and products and services to municipalities and not-for-profit organizations under Sections 457 and 403(b) of the Code, collectively referred to as government plans. The sale was structured as a reinsurance transaction and resulted in an after-tax gain of $45 for the nine months ended September 30, 2013. The Company recognized $565 in reinsurance loss on disposition including a reduction in goodwill of $87, offset by $634 in realized capital gains for a $69 impact to income, pre-tax. These amounts are subject to change pending final determination of the value of net assets sold, transaction costs and other adjustments.
Upon closing the Company reinsured $9.2 billion of policyholder liabilities and $26.3 billion of separate account liabilities under an indemnity reinsurance arrangement. The reinsurance transaction does not extinguish the Company's primary liability on the insurance policies issued under the Retirement Plans business. The Company also transferred invested assets with a carrying value of $9.3 billion, net of the ceding commission, to MassMutual and recognized other non-cash decreases in assets totaling $100 relating to deferred acquisition costs, deferred income taxes, goodwill, and other assets associated with the disposition. The Company will continue to sell retirement plans during a transition period of 18-24 months and MassMutual will assume all expenses and risk for these sales through the reinsurance agreement.
For the three and nine months ended September 30, 2012, Retirement Plans total revenues were $193 and $592, respectively and net income was $(7) and $9, respectively.
Sale of Individual Life
On January 2, 2013 HLI completed the sale of its Individual Life insurance business to Prudential for consideration of $615, consisting primarily of a ceding commission, of which $590 is attributable to the Company. The business sold included variable universal life, universal life, and term life insurance.The sale was structured as a reinsurance transaction and resulted in a loss on business disposition consisting of a reinsurance loss partially offset by realized capital gains. In 2012, the Company recognized a reinsurance loss on business disposition of $61, pre-tax, which included a goodwill impairment of the same amount. See Notes 2 and 7 in the Company's 2012 Annual Report on Form 10-K for additional information. Upon closing the Company recognized an additional reinsurance loss on disposition of $927, including a reduction in goodwill of $163 offset by realized capital gains of $927 for a $0 impact on income, pre-tax. These amounts are subject to change pending final determination of the value of net assets sold, transaction costs and other adjustments.
Upon closing the Company reinsured $8.3 billion of policyholder liabilities and $5.3 billion of separate account liabilities under indemnity reinsurance arrangements. The reinsurance transaction does not extinguish the Company's primary liability under the Individual Life business. The Company also transferred invested assets with a carrying value of $7.6 billion, exclusive of $1.4 billion assets supporting the modified coinsurance agreement, net of cash transferred in place of short-term investments, to Prudential and recognized other non-cash decreases in assets totaling $1.8 billion relating to deferred acquisition costs, deferred income taxes, goodwill and other assets, and other non-cash decreases in liabilities totaling $1.9 billion relating to other liabilities associated with the disposition. The Company will continue to sell life insurance products and riders during a transition period of 18-24 months and Prudential will assume all expenses and risk for these sales through the reinsurance agreement.
For the three and nine months ended September 30, 2012, Individual Life total revenues were $306 and $983, respectively and net income was $1 and $43, respectively.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Business Dispositions (continued)
Composition of Invested Assets Transferred
The following table presents invested assets transferred by the Company in connection with the sale of the Retirement Plans and Individual Life businesses in January 2013.
|
| | | |
| Carrying Value |
| As of Closing |
Asset-backed securities ("ABS") | $ | 289 |
|
Collateralized debt obligations ("CDOs") [1] | 474 |
|
Commercial mortgage-backed securities ("CMBS") | 940 |
|
Corporate | 11,330 |
|
Foreign govt./govt. agencies | 263 |
|
States, municipalities and political subdivisions ("Municipal") | 899 |
|
Residential mortgage-backed securities ("RMBS") | 705 |
|
U.S. Treasuries | 115 |
|
Total fixed maturities, AFS, at fair value (amortized cost of $13,596) [2] | 15,015 |
|
Equity securities, AFS, at fair value (cost of $27) [3] | 28 |
|
Fixed maturities, at fair value using the FVO [4] | 16 |
|
Mortgage loans (net of allowances for loan losses of $1) | 1,288 |
|
Policy loans, at outstanding balance | 542 |
|
Total invested assets transferred | $ | 16,889 |
|
| |
[1] | The market value includes the fair value of bifurcated embedded derivative features of certain securities. Changes in fair value are recorded in the net realized capital gains (losses). |
| |
[2] | Includes $14.4 billion and $657 of securities in level 2 and 3 of the fair value hierarchy, respectively. |
| |
[3] | All equity securities transferred are included in level 2 of the fair value hierarchy. |
| |
[4] | All FVO securities transferred are included in level 3 of the fair value hierarchy. |
Purchase Agreement with Forethought Financial Group, Inc.
Effective May 1, 2012, all new U.S. annuity policies sold by the Company are reinsured to Forethought Life Insurance Company. The Company ceased the sale of such annuity policies in the second quarter of 2013. The reinsurance agreement has no impact on in-force policies issued on or before April 27, 2012 and the impact of this transaction was not material to the Company's results of operations, financial position or liquidity. On December 31, 2012, The Hartford completed the sale of its U.S. individual annuity new business capabilities to Forethought Financial Group.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements
The following section applies the fair value hierarchy and disclosure requirements for the Company’s financial instruments that are carried at fair value. The fair value hierarchy prioritizes the inputs in the valuation techniques used to measure fair value into three broad Levels (Level 1, 2 and 3).
| |
Level 1 | Observable inputs that reflect quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. Level 1 securities include highly liquid U.S. Treasuries, money market funds and exchange traded equity securities, open-ended mutual funds reported in separate account assets and exchange-traded derivative instruments. |
| |
Level 2 | Observable inputs, other than quoted prices included in Level 1, for the asset or liability or prices for similar assets and liabilities. Most fixed maturities and preferred stocks, including those reported in separate account assets, are model priced by vendors using observable inputs and are classified within Level 2. Also included are limited partnerships and other alternative assets measured at fair value where an investment can be redeemed, or substantially redeemed, at the NAV at the measurement date or in the near-term, not to exceed 90 days. |
| |
Level 3 | Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). Level 3 securities include less liquid securities, guaranteed product embedded and reinsurance derivatives and other complex derivative instruments, as well as limited partnerships and other alternative investments carried at fair value that cannot be redeemed in the near-term at the NAV. Because Level 3 fair values, by their nature, contain one or more significant unobservable inputs as there is little or no observable market for these assets and liabilities, considerable judgment is used to determine the Level 3 fair values. Level 3 fair values represent the Company’s best estimate of an amount that could be realized in a current market exchange absent actual market exchanges. |
In many situations, inputs used to measure the fair value of an asset or liability position may fall into different levels of the fair value hierarchy. In these situations, the Company will determine the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value. Transfers of securities among the levels occur at the beginning of the reporting period. The amount of transfers from Level 1 to Level 2 was $78 and $232, respectively, for the three and nine months ended September 30, 2013, and $600 and $1,248 for the three and nine months ended September 30, 2012, which represented previously on-the-run U.S. Treasury securities that are now off-the-run, and there were no transfers from Level 2 to Level 1. In most cases, both observable (e.g., changes in interest rates) and unobservable (e.g., changes in risk assumptions) inputs are used in the determination of fair values that the Company has classified within Level 3. Consequently, these values and the related gains and losses are based upon both observable and unobservable inputs. The Company’s fixed maturities included in Level 3 are classified as such because these securities are primarily priced by independent brokers and/or within illiquid markets.
The following tables present assets and (liabilities) carried at fair value by hierarchy level. These disclosures provide information as to the extent to which the Company uses fair value to measure financial instruments and information about the inputs used to value those financial instruments to allow users to assess the relative reliability of the measurements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued) |
| | | | | | | | | | | | |
| September 30, 2013 |
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
Assets accounted for at fair value on a recurring basis | | | | |
Fixed maturities, AFS | | | | |
ABS | $ | 1,115 |
| $ | — |
| $ | 942 |
| $ | 173 |
|
CDOs | 1,643 |
| — |
| 1,086 |
| 557 |
|
CMBS | 2,438 |
| — |
| 1,968 |
| 470 |
|
Corporate | 17,348 |
| — |
| 16,507 |
| 841 |
|
Foreign government/government agencies | 1,179 |
| — |
| 1,133 |
| 46 |
|
Municipal | 1,041 |
| — |
| 933 |
| 108 |
|
RMBS | 2,663 |
| — |
| 1,743 |
| 920 |
|
U.S. Treasuries | 2,314 |
| 55 |
| 2,259 |
| — |
|
Total fixed maturities | 29,741 |
| 55 |
| 26,571 |
| 3,115 |
|
Fixed maturities, FVO | 949 |
| — |
| 753 |
| 196 |
|
Equity securities, trading | 11 |
| 11 |
| — |
| — |
|
Equity securities, AFS | 385 |
| 200 |
| 127 |
| 58 |
|
Derivative assets | | | | |
Credit derivatives | 25 |
| — |
| 6 |
| 19 |
|
Equity derivatives | 6 |
| — |
| — |
| 6 |
|
Foreign exchange derivatives | (50 | ) | — |
| (50 | ) | — |
|
Interest rate derivatives | (27 | ) | — |
| (27 | ) | — |
|
U.S. guaranteed minimum withdrawal benefit ("GMWB") hedging instruments | 79 |
| — |
| (18 | ) | 97 |
|
U.S. macro hedge program | 160 |
| — |
| — |
| 160 |
|
International program hedging instruments | 84 |
| — |
| 91 |
| (7 | ) |
Other derivative contracts | — |
|
|
| — |
| — |
|
Total derivative assets [1] | 277 |
| — |
| 2 |
| 275 |
|
Short-term investments | 2,262 |
| 324 |
| 1,938 |
| — |
|
Limited partnerships and other alternatives [2] | 463 |
| — |
| 302 |
| 161 |
|
Reinsurance recoverable for U.S. GMWB and Japan GMWB, GMIB, and GMAB | (36 | ) | — |
| 61 |
| (97 | ) |
Separate account assets [3] | 136,447 |
| 98,149 |
| 37,563 |
| 735 |
|
Assets held for sale | 2,211 |
| 1,732 |
| 471 |
| 8 |
|
Total assets accounted for at fair value on a recurring basis | $ | 172,710 |
| $ | 100,471 |
| $ | 67,788 |
| $ | 4,451 |
|
Percentage of level to total | 100 | % | 58 | % | 39 | % | 3 | % |
Liabilities accounted for at fair value on a recurring basis | | | | |
Other policyholder funds and benefits payable | | | | |
Guaranteed living benefits | $ | (1,053 | ) | $ | — |
| $ | — |
| $ | (1,053 | ) |
Equity linked notes | (13 | ) | — |
| — |
| (13 | ) |
Total other policyholder funds and benefits payable | (1,066 | ) | — |
| — |
| (1,066 | ) |
Derivative liabilities | | | | |
Credit derivatives | (16 | ) | — |
| — |
| (16 | ) |
Equity derivatives | 13 |
| — |
| (1 | ) | 14 |
|
Foreign exchange derivatives | (206 | ) | — |
| (206 | ) | — |
|
Interest rate derivatives | (337 | ) | — |
| (311 | ) | (26 | ) |
U.S. GMWB hedging instruments | 79 |
| — |
| (43 | ) | 122 |
|
U.S. macro hedge program | 21 |
| — |
| — |
| 21 |
|
International program hedging instruments | (277 | ) | — |
| (113 | ) | (164 | ) |
Total derivative liabilities [4] | (723 | ) | — |
| (674 | ) | (49 | ) |
Consumer notes [5] | (1 | ) | — |
| — |
| (1 | ) |
Liabilities held for sale | (31 | ) | — |
| — |
| (31 | ) |
Total liabilities accounted for at fair value on a recurring basis | $ | (1,821 | ) | $ | — |
| $ | (674 | ) | $ | (1,147 | ) |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
|
| | | | | | | | | | | | |
| December 31, 2012 |
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
Assets accounted for at fair value on a recurring basis | | | | |
Fixed maturities, AFS | | | | |
ABS | $ | 1,673 |
| $ | — |
| $ | 1,435 |
| $ | 238 |
|
CDOs | 2,160 |
| — |
| 1,437 |
| 723 |
|
CMBS | 3,912 |
| — |
| 3,380 |
| 532 |
|
Corporate | 30,979 |
| — |
| 29,639 |
| 1,340 |
|
Foreign government/government agencies | 1,460 |
| — |
| 1,426 |
| 34 |
|
Municipal | 1,998 |
| — |
| 1,829 |
| 169 |
|
RMBS | 4,671 |
| — |
| 3,538 |
| 1,133 |
|
U.S. Treasuries | 2,551 |
| 78 |
| 2,473 |
| — |
|
Total fixed maturities | 49,404 |
| 78 |
| 45,157 |
| 4,169 |
|
Fixed maturities, FVO | 1,010 |
| 6 |
| 805 |
| 199 |
|
Equity securities, trading | 1,847 |
| 1,847 |
| — |
| — |
|
Equity securities, AFS | 400 |
| 203 |
| 142 |
| 55 |
|
Derivative assets | | | | |
Credit derivatives | (10 | ) | — |
| — |
| (10 | ) |
Equity derivatives | 30 |
| — |
| — |
| 30 |
|
Foreign exchange derivatives | 104 |
| — |
| 104 |
| — |
|
Interest rate derivatives | 108 |
| — |
| 144 |
| (36 | ) |
U.S. GMWB hedging instruments | 36 |
| — |
| (53 | ) | 89 |
|
U.S. macro hedge program | 186 |
| — |
| — |
| 186 |
|
International program hedging instruments | 127 |
| — |
| 142 |
| (15 | ) |
Total derivative assets [1] | 581 |
| — |
| 337 |
| 244 |
|
Short-term investments | 2,354 |
| 242 |
| 2,112 |
| — |
|
Limited partnerships and other alternative investments [2] | 414 |
| — |
| 264 |
| 150 |
|
Reinsurance recoverable for U.S. GMWB and Japan GMWB, GMIB, and GMAB | 1,081 |
| — |
| — |
| 1,081 |
|
Separate account assets [3] | 138,497 |
| 97,976 |
| 39,938 |
| 583 |
|
Total assets accounted for at fair value on a recurring basis | $ | 195,588 |
| $ | 100,352 |
| $ | 88,755 |
| $ | 6,481 |
|
Percentage of level to total | 100 | % | 52 | % | 45 | % | 3 | % |
Liabilities accounted for at fair value on a recurring basis | | | | |
Other policyholder funds and benefits payable | | | | |
Guaranteed living benefits | $ | (3,119 | ) | $ | — |
| $ | — |
| $ | (3,119 | ) |
Equity linked notes | (8 | ) | — |
| — |
| (8 | ) |
Total other policyholder funds and benefits payable | (3,127 | ) | — |
| — |
| (3,127 | ) |
Derivative liabilities | | | | |
Credit derivatives | (6 | ) | — |
| (20 | ) | 14 |
|
Equity derivatives | 15 |
| — |
| — |
| 15 |
|
Foreign exchange derivatives | (17 | ) | — |
| (17 | ) | — |
|
Interest rate derivatives | (359 | ) | — |
| (338 | ) | (21 | ) |
U.S. GMWB hedging instruments | 536 |
| — |
| 106 |
| 430 |
|
U.S. macro hedge program | 100 |
| — |
| — |
| 100 |
|
International program hedging instruments | (231 | ) | — |
| (171 | ) | (60 | ) |
Total derivative liabilities [4] | 38 |
| — |
| (440 | ) | 478 |
|
Consumer notes [5] | (2 | ) | — |
| — |
| (2 | ) |
Total liabilities accounted for at fair value on a recurring basis | $ | (3,091 | ) | $ | — |
| $ | (440 | ) | $ | (2,651 | ) |
| |
[1] | Includes over-the-counter("OTC") and OTC-cleared derivative instruments in a net asset value position after consideration of the impact of collateral posting requirements which may be imposed by agreements, clearing house rules and applicable law. At September 30, 2013 and December 31, 2012, $89 and $92, respectively, was the amount of cash collateral liability that was netted against the derivative asset value on the Condensed Consolidated Balance Sheet, and is excluded from the table above. For further information on derivative liabilities, see footnote 4 below. |
| |
[2] | Represents hedge funds where investment company accounting has been applied to a wholly-owned fund of funds measured at value. |
| |
[3] | As of September 30, 2013 and December 31, 2012, excludes approximately $3.4 billion and $3.1 billion, respectively, of investment sales receivable that are not subject to fair value accounting. |
| |
[4] | Includes over-the-counter derivative instruments in a net negative market value position (derivative liability). In the Level 3 roll forward table included below in this Note, the derivative asset and liability are referred to as “freestanding derivatives” and are presented on a net basis. |
| |
[5] | Represents embedded derivatives associated with non-funding agreement-backed consumer equity-linked notes. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
Determination of Fair Values
The valuation methodologies used to determine the fair values of assets and liabilities under the “exit price” notion, reflect market-participant objectives and are based on the application of the fair value hierarchy that prioritizes relevant observable market inputs over unobservable inputs. The Company determines the fair values of certain financial assets and financial liabilities based on quoted market prices where available and where prices represent a reasonable estimate of fair value. The Company also determines fair value based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s default spreads, liquidity and, where appropriate, risk margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for the financial instruments listed in the above tables.
The fair value process is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company that meets at least quarterly. The Valuation Committee is co-chaired by the Heads of Investment Operations and Accounting and has representation from various investment sector professionals, accounting, operations, legal, compliance and risk management. The purpose of the committee is to oversee the pricing policy and procedures by ensuring objective and reliable valuation practices and pricing of financial instruments, as well as addressing fair valuation issues and approving changes to valuation methodologies and pricing sources.
There is also a Fair Value Working Group (“Working Group”) which includes the Heads of Investment Operations and Accounting, as well as other investment, operations, accounting and risk management professionals that meet monthly to review market data trends, pricing and trading statistics and results, and any proposed pricing methodology changes. The Working Group performs ongoing analysis of the prices and credit spreads received from third parties to ensure that the prices represent a reasonable estimate of the fair value. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. As a part of this analysis, the Company considers trading volume, new issuance activity and other factors to determine whether the market activity is significantly different than normal activity in an active market, and if so, whether transactions may not be orderly considering the weight of available evidence. If the available evidence indicates that pricing is based upon transactions that are stale or not orderly, the Company places little, if any, weight on the transaction price and will estimate fair value utilizing an internal pricing model. In addition, the Company ensures that prices received from independent brokers represent a reasonable estimate of fair value through the use of internal and external cash flow models developed based on spreads, and when available, market indices. As a result of this analysis, if the Company determines that there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly and approved by the Valuation Committee.
AFS, Fixed Maturities, FVO, Equity Securities, Trading, and Short-term Investments
The fair value of AFS securities, fixed maturities, FVO, equity securities, trading, and short-term investments in an active and orderly market (e.g. not distressed or forced liquidation) are determined by management after considering one of three primary sources of information: third-party pricing services, independent broker quotations or pricing matrices. Security pricing is applied using a “waterfall” approach whereby publicly available prices are first sought from third-party pricing services, the remaining unpriced securities are submitted to independent brokers for prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these pricing methods include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flows, prepayments speeds and default rates. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third-party pricing services will normally derive the security prices from recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recently reported trades, the third-party pricing services and independent brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of ABS and RMBS are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. Actual prepayment experience may vary from these estimates.
Prices from third-party pricing services are often unavailable for securities that are rarely traded or are traded only in privately negotiated transactions. As a result, certain securities are priced via independent broker quotations which utilize inputs that may be difficult to corroborate with observable market based data. Additionally, the majority of these independent broker quotations are non-binding.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
The Company’s internal pricing model utilizes the Company’s best estimate of expected future cash flows discounted at a rate of return that a market participant would require. The significant inputs to the model include, but are not limited to, current market inputs, such as credit loss assumptions, estimated prepayment speeds and market risk premiums. A pricing matrix is used to price private placement securities for which the Company is unable to obtain a price from a third-party pricing service by discounting the expected future cash flows from the security by a developed market discount rate utilizing current credit spreads. Credit spreads are developed each month using market based data for public securities adjusted for credit spread differentials between public and private securities which are obtained from a survey of multiple private placement brokers. The appropriate credit spreads determined through this survey approach are based upon the issuer’s financial strength and term to maturity, utilizing an independent public security index and trade information and adjusting for the non-public nature of the securities.
The Company conducts other specific activities to monitor controls around pricing. Daily analyses identify price changes over 3-5%, sale trade prices that differ over 3% from the prior day’s price and purchase trade prices that differ more than 3% from the current day’s price. Weekly analyses identify prices that differ more than 5% from published bond prices of a corporate bond index. Monthly analyses identify price changes over 3%, prices that haven’t changed, and missing prices. Also on a monthly basis, a second source validation is performed on most sectors. Analyses are conducted by a dedicated pricing unit that follows up with trading and investment sector professionals and challenges prices with vendors when the estimated assumptions used differ from what the Company feels a market participant would use. Any changes from the identified pricing source are verified by further confirmation of assumptions used. Examples of other procedures performed include, but are not limited to, initial and on-going review of third-party pricing services’ methodologies, review of pricing statistics and trends and back testing recent trades.
The Company has analyzed the third-party pricing services’ valuation methodologies and related inputs, and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Most prices provided by third-party pricing services are classified into Level 2 because the inputs used in pricing the securities are market observable. Due to a general lack of transparency in the process that brokers use to develop prices, most valuations that are based on brokers’ prices are classified as Level 3. Some valuations may be classified as Level 2 if the price can be corroborated with observable market data.
Derivative Instruments, including embedded derivatives within investments
Derivative instruments are fair valued using pricing valuation models for OTC and OTC-cleared derivatives that utilize independent market data inputs, quoted market prices for exchange-traded derivatives, or independent broker quotations. Excluding embedded and reinsurance related derivatives, as of September 30, 2013 and December 31, 2012, 97% and 98%, respectively, of derivatives, based upon notional values, were priced by valuation models or quoted market prices. The remaining derivatives were priced by broker quotations.
The Company performs various controls on derivative valuations which includes both quantitative and qualitative analysis. Analyses are conducted by a dedicated derivative pricing team that works directly with investment sector professionals to analyze impacts of changes in the market environment and investigate variances. There is a monthly analysis to identify market value changes greater than predefined thresholds, stale prices, missing prices and zero prices. Also on a monthly basis, a second source validation, typically to broker quotations, is performed for certain of the more complex derivatives, as well as for all new deals during the month. A model validation review is performed on any new models, which typically includes detailed documentation and validation to a second source. The model validation documentation and results of validation are presented to the Valuation Committee for approval. There is a monthly control to review changes in pricing sources to ensure that new models are not moved to production until formally approved.
The Company utilizes derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instrument may not be classified with the same fair value hierarchy level as the associated assets and liabilities. Therefore the realized and unrealized gains and losses on derivatives reported in Level 3 may not reflect the offsetting impact of the realized and unrealized gains and losses of the associated assets and liabilities.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
Limited partnerships and other alternative investments
Limited partnerships and other alternative investments include hedge funds where investment company accounting has been applied to a wholly-owned fund of funds measured at fair value. These funds are fair valued using the net asset value per share or equivalent (“NAV”), as a practical expedient, calculated on a monthly basis and is the amount at which a unit or shareholder may redeem their investment, if redemption is allowed. Certain impediments to redemption include, but are not limited to the following: 1) redemption notice periods vary and may be as long as 90 days, 2) redemption may be restricted (e.g. only be allowed on a quarter-end), 3) a holding period referred to as a lock-up may be imposed whereby an investor must hold their investment for a specified period of time before they can make a notice for redemption, 4) gating provisions may limit all redemptions in a given period to a percentage of the entities' equity interests, or may only allow an investor to redeem a portion of their investment at one time and 5) early redemption penalties may be imposed that are expressed as a percentage of the amount redeemed. The Company will assess impediments to redemption and current market conditions that will restrict the redemption at the end of the notice period. Any funds that are subject to significant liquidity restrictions are reported in Level 3; all others are classified as Level 2.
Valuation Techniques and Inputs for Investments
Generally, the Company determines the estimated fair value of its AFS securities, fixed maturities, FVO, equity securities, trading, and short-term investments using the market approach. The income approach is used for securities priced using a pricing matrix, as well as for derivative instruments. Certain limited partnerships and other alternative investments are measured at fair value using a NAV as a practical expedient. For Level 1 investments, which are comprised of on-the-run U.S. Treasuries, exchange-traded equity securities, short-term investments, and exchange traded futures and option contracts, valuations are based on observable inputs that reflect quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date.
For most of the Company’s debt securities, the following inputs are typically used in the Company’s pricing methods: reported trades, benchmark yields, bids and/or estimated cash flows. For securities except U.S. Treasuries, inputs also include issuer spreads, which may consider credit default swaps. Derivative instruments are valued using mid-market inputs that are predominantly observable in the market.
A description of additional inputs used in the Company’s Level 2 and Level 3 measurements is listed below:
| |
Level 2 | The fair values of most of the Company’s Level 2 investments are determined by management after considering prices received from third party pricing services. These investments include most fixed maturities and preferred stocks, including those reported in separate account assets, as well as certain limited partnerships and other alternative investments and derivative instruments. |
| |
• | ABS, CDOs, CMBS and RMBS – Primary inputs also include monthly payment information, collateral performance, which varies by vintage year and includes delinquency rates, collateral valuation loss severity rates, collateral refinancing assumptions, credit default swap indices and, for ABS and RMBS, estimated prepayment rates. |
| |
• | Corporates, including investment grade private placements – Primary inputs also include observations of credit default swap curves related to the issuer. |
| |
• | Foreign government/government agencies—Primary inputs also include observations of credit default swap curves related to the issuer and political events in emerging markets. |
| |
• | Municipals – Primary inputs also include Municipal Securities Rulemaking Board reported trades and material event notices, and issuer financial statements. |
| |
• | Short-term investments – Primary inputs also include material event notices and new issue money market rates. |
| |
• | Equity securities, trading – Consist of investments in mutual funds. Primary inputs include net asset values obtained from third party pricing services. |
| |
• | Credit derivatives – Primary inputs include the swap yield curve and credit default swap curves. |
| |
• | Foreign exchange derivatives – Primary inputs include the swap yield curve, currency spot and forward rates, and cross currency basis curves. |
| |
• | Interest rate derivatives – Primary input is the swap yield curve. |
| |
• | Limited partnerships and other alternative investments — Primary inputs include a NAV for investment companies with no redemption restrictions as reported on their U.S. GAAP financial statements. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
| |
Level 3 | Most of the Company’s securities classified as Level 3 include less liquid securities such as lower quality ABS, CMBS, commercial real estate (“CRE”) CDOs and RMBS primarily backed by below-prime loans. Securities included in level 3 are primarily valued based on broker prices or broker spreads, without adjustments. Primary inputs for non-broker priced investments, including structured securities, are consistent with the typical inputs used in Level 2 measurements noted above, but are Level 3 due to their less liquid markets. Additionally, certain long-dated securities are priced based on third party pricing services, including municipal securities, foreign government/government agencies, bank loans and below investment grade private placement securities. Primary inputs for these long-dated securities are consistent with the typical inputs used in Level 1 and Level 2 measurements noted above, but include benchmark interest rate or credit spread assumptions that are not observable in the marketplace. Level 3 investments also include certain limited partnerships and other alternative investments measured at fair value where the Company does not have the ability to redeem the investment in the near-term at the NAV. Also included in Level 3 are certain derivative instruments that either have significant unobservable inputs or are valued based on broker quotations. Significant inputs for these derivative contracts primarily include the typical inputs used in the Level 1 and Level 2 measurements noted above; but also include equity and interest rate volatility and swap yield curves beyond observable limits. |
Significant Unobservable Inputs for Level 3 Assets Measured at Fair Values
The following tables present information about significant unobservable inputs used in Level 3 assets measured at fair value.
|
| | | | | | | | | | | | |
| As of September 30, 2013 |
Securities | | | | Unobservable Inputs | |
Assets accounted for at fair value on a recurring basis | Fair Value | Predominant Valuation Method | Significant Unobservable Input | Minimum | Maximum | Weighted Average [1] | Impact of Increase in Input on Fair Value [2] |
CMBS | $ | 470 |
| Discounted cash flows | Spread (encompasses prepayment, default risk and loss severity) | 67bps | 2,615bps | 624bps | Decrease |
Corporate [3] | 431 |
| Discounted cash flows | Spread | 175bps | 5,014bps | 388bps | Decrease |
Municipal | 108 |
| Discounted cash flows | Spread | 192bps | 290bps | 229bps | Decrease |
RMBS | 920 |
| Discounted cash flows | Spread | 64bps | 1,992bps | 284bps | Decrease |
| | | Constant prepayment rate | 0.0 | % | 10.0 | % | 2.0 | % | Decrease [4] |
| | | Constant default rate | 1.0 | % | 17.0 | % | 8.0 | % | Decrease |
| | | Loss severity | — | % | 100.0 | % | 79.0 | % | Decrease |
| As of December 31, 2012 |
CMBS | $ | 532 |
| Discounted cash flows | Spread (encompasses prepayment, default risk and loss severity) | 320bps | 3,615bps | 1,013bps | Decrease |
Corporate [3] | 888 |
| Discounted cash flows | Spread | 145bps | 900bps | 333bps | Decrease |
Municipal | 169 |
| Discounted cash flows | Spread | 227bps | 344bps | 254bps | Decrease |
RMBS | 1,133 |
| Discounted cash flows | Spread | 54bps | 1,689bps | 379bps | Decrease |
| | | Constant prepayment rate | 0.0 | % | 12.0 | % | 2.0 | % | Decrease [4] |
| | | Constant default rate | 1.0 | % | 24.0 | % | 8.0 | % | Decrease |
| | | Loss severity | — | % | 100.0 | % | 80.0 | % | Decrease |
| |
[1] | The weighted average is determined based on the fair value of the securities. |
| |
[2] | Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table above. |
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[3] | Level 3 corporate securities excludes those for which the Company bases fair value on broker quotations as discussed below. |
| |
[4] | Decrease for above market rate coupons and increase for below market rate coupons. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
Significant Unobservable Inputs for Level 3 Assets Measured at Fair Values (continued)
|
| | | | | | | | |
| As of September 30, 2013 |
Freestanding Derivatives | | | | Unobservable Inputs | |
| Fair Value | Predominant Valuation Method | Significant Unobservable Input | Minimum | Maximum | Impact of Increase in Input on Fair Value [1] |
Interest rate derivative | | | | | | |
Interest rate swaps | (26 | ) | Discounted cash flows | Swap curve beyond 30 years | 3.4% | 3.4% | Increase |
U.S. GMWB hedging instruments | | | | | | |
Equity options | 108 |
| Option model | Equity volatility | 21% | 36% | Increase |
Customized swaps | 111 |
| Discounted cash flows | Equity volatility | 10% | 50% | Increase |
U.S. macro hedge program | | | | | | |
Equity options | 181 |
| Option model | Equity volatility | 22% | 34% | Increase |
International hedging program | | | | | | |
Equity options | (171 | ) | Option model | Equity volatility | 29% | 39% | Increase |
| As of December 31, 2012 |
Equity derivatives | | | | | | |
Equity options | $ | 45 |
| Option model | Equity volatility | 13% | 24% | Increase |
Interest rate derivative | | | | | | |
Interest rate swaps | (57 | ) | Discounted cash flows | Swap curve beyond 30 years | 2.8% | 2.8% | Increase |
U.S. GMWB hedging instruments | | | | | | |
Equity options | 281 |
| Option model | Equity volatility | 10% | 31% | Increase |
Customized swaps | 238 |
| Discounted cash flows | Equity volatility | 10% | 50% | Increase |
U.S. macro hedge program | | | | | | |
Equity options | 286 |
| Option model | Equity volatility | 24% | 43% | Increase |
International hedging program | | | | | | |
Equity options | 44 |
| Option model | Equity volatility | 22% | 33% | Increase |
Long interest rate | (119 | ) | Option model | Interest rate volatility | —% | 1% | Increase |
| |
[1] | Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table. Changes are based on long positions, unless otherwise noted. Changes in fair value will be inversely impacted for short positions. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
Securities and derivatives for which the Company bases fair value on broker quotations predominately include ABS, CDOs, corporate, fixed maturities, FVO and certain credit derivatives. Due to the lack of transparency in the process brokers use to develop prices for these investments, the Company does not have access to the significant unobservable inputs brokers use to price these securities and derivatives. The Company believes however, the types of inputs brokers may use would likely be similar to those used to price securities and derivatives for which inputs are available to the Company, and therefore may include, but not be limited to, loss severity rates, constant prepayment rates, constant default rates and counterparty credit spreads. Therefore, similar to non broker priced securities and derivatives, generally, increases in these inputs would cause fair values to decrease. For the three months ended, September 30, 2013, no significant adjustments were made by the Company to broker prices received.
As of September 30, 2013 and December 31, 2012, excluded from the tables above are limited partnerships and other alternative investments which total $161 and $150, respectively, of level 3 assets measured at fair value. The predominant valuation method uses a NAV calculated on a monthly basis and represents funds where the Company does not have the ability to redeem the investment in the near-term at that NAV, including an assessment of the investee's liquidity.
Product Derivatives
The Company reinsures certain in-force variable annuity products with GMWB riders in the U.S., and GMWBs in the U.K. The Company has also assumed, through reinsurance from Hartford Life Insurance KK (“HLIKK”), a Japanese affiliate of the Company, guaranteed minimum income benefit (‘GMIB”), GMWB and guaranteed minimum accumulation benefit (“GMAB”) riders. The Company has subsequently ceded certain GMWB rider liabilities and the assumed reinsurance from HLIKK to an affiliated captive reinsurer. The GMWB represents an embedded derivative in the variable annuity contract. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host for measurement purposes. The embedded derivative, which is reported with the host instrument in the Condensed Consolidated Balance Sheets, is carried at fair value with changes in fair value reported in net realized capital gains and losses. The Company’s GMWB liability is carried at fair value and reported in other policyholder funds.
In valuing the embedded derivative, at contract initiation the Company attributed to the derivative a portion of the fees collected from the contract holder equal to the present value of future GMWB claims (the “Attributed Fees”). All changes in the fair value of the embedded derivative are recorded in net realized capital gains and losses. The excess of fees collected from the contract holder over the Attributed Fees are associated with the host variable annuity contract reported in fee income.
The reinsurance assumed on the HLIKK GMIB, GMWB, and GMAB and ceded to an affiliated captive reinsurer meets the characteristics of a free-standing derivative instrument. As a result, the derivative asset or liability is recorded at fair value with changes in the fair value reported in net realized capital gains and losses.
Living Benefits Required to be Fair Valued (in Other Policyholder Funds and Benefits Payable)
Living benefits required to be fair valued include U.S guaranteed withdrawal benefits, international guaranteed withdrawal benefits and international other guaranteed living benefits. Fair values for GMWB and GMAB contracts are calculated using the income approach based upon internally developed models because active, observable markets do not exist for those items. The fair value of the Company’s guaranteed benefit liabilities, classified as embedded derivatives, and the related reinsurance and customized freestanding derivatives is calculated as an aggregation of the following components: Best Estimate Claims Costs calculated based on actuarial and capital market assumptions related to projected cash flows over the lives of the contracts; Credit Standing Adjustment; and Margins representing an amount that market participants would require for the risk that the Company’s assumptions about policyholder behavior could differ from actual experience. The resulting aggregation is reconciled or calibrated, if necessary, to market information that is, or may be, available to the Company, but may not be observable by other market participants, including reinsurance discussions and transactions. The Company believes the aggregation of these components, as necessary and as reconciled or calibrated to the market information available to the Company, results in an amount that the Company would be required to transfer or receive, for an asset, to or from market participants in an active liquid market, if one existed, for those market participants to assume the risks associated with the guaranteed minimum benefits and the related reinsurance and customized derivatives. The fair value is likely to materially diverge from the ultimate settlement of the liability as the Company believes settlement will be based on our best estimate assumptions rather than those best estimate assumptions plus risk margins. In the absence of any transfer of the guaranteed benefit liability to a third party, the release of risk margins is likely to be reflected as realized gains in future periods’ net income. Each component described below is unobservable in the marketplace and requires subjectivity by the Company in determining their value.
Oversight of the Company’s valuation policies and processes for product and U.S. GMWB reinsurance derivatives is performed by a multidisciplinary group comprised of finance, actuarial and risk management professionals. This multidisciplinary group reviews and approves changes and enhancements to the Company’s valuation model as well as associated controls.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
Best Estimate Claims Costs
The Best Estimate Claims Costs is calculated based on actuarial and capital market assumptions related to projected cash flows, including the present value of benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning policyholder behavior such as lapses, fund selection, resets and withdrawal utilization (for the customized derivatives, policyholder behavior is prescribed in the derivative contract). Because of the dynamic and complex nature of these cash flows, best estimate assumptions and a Monte Carlo stochastic process involving the generation of thousands of scenarios that assume risk neutral returns consistent with swap rates and a blend of observable implied index volatility levels were used. Estimating these cash flows involves numerous estimates and subjective judgments including those regarding expected markets rates of return, market volatility, correlations of market index returns to funds, fund performance, discount rates and various actuarial assumptions for policyholder behavior which emerge over time.
At each valuation date, the Company assumes expected returns based on:
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• | risk-free rates as represented by the Eurodollar futures, LIBOR deposits and swap rates to derive forward curve rates; |
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• | market implied volatility assumptions for each underlying index based primarily on a blend of observed market “implied volatility” data; |
| |
• | correlations of historical returns across underlying well known market indices based on actual observed returns over the ten years preceding the valuation date; and |
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• | three years of history for fund regression. |
As many guaranteed benefit obligations are relatively new in the marketplace, actual policyholder behavior experience is limited. As a result, estimates of future policyholder behavior are subjective and based on analogous internal and external data. As markets change, mature and evolve and actual policyholder behavior emerges, management continually evaluates the appropriateness of its assumptions for this component of the fair value model.
On a daily basis, the Company updates capital market assumptions used in the GMWB liability model such as interest rates, equity indices and the blend of implied equity index volatilities. The Company monitors various aspects of policyholder behavior and may modify certain of its assumptions, including living benefit lapses and withdrawal rates, if credible emerging data indicates that changes are warranted. In addition, the Company will continue to evaluate policyholder behavior assumptions as we implemented initiatives to reduce the size of the variable annuity business. At a minimum, all policyholder behavior assumptions are reviewed and updated, as appropriate, in conjunction with the completion of the Company’s comprehensive study to refine its estimate of future gross profits during the third quarter of each year.
Credit Standing Adjustment
This assumption makes an adjustment that market participants would make, in determining fair value, to reflect the risk that guaranteed benefit obligations or the GMWB reinsurance recoverables will not be fulfilled (“nonperformance risk”). The Company incorporates a blend of observable Company and reinsurer credit default spreads from capital markets, adjusted for market recoverability. Prior to the first quarter of 2009, the Company calculated the Credit Standing Adjustment by using default rates published by rating agencies, adjusted for market recoverability. For the three and nine months ended September 30, 2013, the credit standing adjustment assumption, net of reinsurance and exclusive of the impact of the credit standing adjustment on other market sensitivities, resulted in pre-tax realized gains/(losses) of $215 and $430, respectively. For the three and nine months ended September 30, 2012, the the credit standing adjustment assumption, net of reinsurance and exclusive of the impact of the credit standing adjustment on other market sensitivities, resulted in pre-tax realized gains/(losses) of $192 and $398, respectively.
Margins
The behavior risk margin adds a margin that market participants would require for the risk that the Company’s assumptions about policyholder behavior could differ from actual experience. The behavior risk margin is calculated by taking the difference between adverse policyholder behavior assumptions and best estimate assumptions.
Assumption updates, including policyholder behavior assumptions, affected best estimates and margins for total pre-tax realized gains of $40 and $84 for the three and nine months ended September 30, 2013 and 2012. As of September 30, 2013 and December 31, 2012 the behavior risk margin was $40 and $77, respectively.
In addition to the non-market-based updates described above, the Company recognized non-market-based updates driven by the relative outperformance (underperformance) of the underlying actively managed funds as compared to their respective indices resulting in before-tax realized gains/(losses) of approximately $9 and $11 for the three and nine months ended September 30, 2013, respectively, and $7 and $9 for the three and nine months ended September 30, 2012.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
Significant unobservable inputs used in the fair value measurement of living benefits required to be fair valued and the U.S. GMWB reinsurance derivative are withdrawal utilization and withdrawal rates, lapse rates, reset elections and equity volatility. The following table provides quantitative information about the significant unobservable inputs and is applicable to all of the Living Benefits Required to be Fair Valued and the reinsurance recoverable for U.S. GMWB and Japan GMWB, GMIB and GMAB. Significant increases in any of the significant unobservable inputs, in isolation, will generally have an increase or decrease correlation with the fair value measurement, as shown in the following table.
|
| | | |
| Unobservable Inputs |
Significant Unobservable Input | Minimum | Maximum | Impact of Increase in Input on Fair Value Measurement [1] |
Withdrawal Utilization[2] | 20% | 100% | Increase |
Withdrawal Rates [2] | —% | 8% | Increase |
Annuitization utilization [3] | —% | 100% | Increase |
Lapse Rates [4] | —% | 75% | Decrease |
Reset Elections [5] | 20% | 75% | Increase |
Equity Volatility [6] | 10% | 50% | Increase |
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[1] | Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table. |
| |
[2] | Ranges represent assumed cumulative percentages of policyholders taking withdrawals and the annual amounts withdrawn. |
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[3] | For reinsurance associated with Japan GMIB, range represents assumed cumulative percentages of policyholders annuitizing variable annuity contracts. |
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[4] | Range represents assumed annual percentages of full surrender of the underlying variable annuity contracts across all policy durations for in force business. |
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[5] | Range represents assumed cumulative percentages of policyholders that would elect to reset their guaranteed benefit base. |
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[6] | Range represents implied market volatilities for equity indices based on multiple pricing sources. |
Generally a change in withdrawal utilization assumptions would be accompanied by a directionally opposite change in lapse rate assumptions, as the behavior of policyholders that utilize GMWB or GMAB riders is typically different from policyholders that do not utilize these riders.
Separate Account Assets
Separate account assets are primarily invested in mutual funds. Other separate account assets include fixed maturities, limited partnerships, equity securities, short-term investments and derivatives that are valued in the same manner, and using the same pricing sources and inputs, as those investments held by the Company. Separate account assets classified as Level 3 primarily include limited partnerships in which fair value represents the separate account’s share of the fair value of the equity in the investment (“net asset value”) and are classified in level 3 based on the Company’s ability to redeem its investment.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The tables below provide a fair value roll forward for the three months ended September 30, 2013, for Level 3 financial instruments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed Maturities, AFS | Fixed Maturities, FVO |
Assets | ABS | CDOs | CMBS | Corporate | Foreign govt./govt. agencies | Municipal | RMBS | Total Fixed Maturities, AFS |
Fair value as of June 30, 2013 | $ | 169 |
| $ | 629 |
| $ | 485 |
| $ | 813 |
| $ | 44 |
| $ | 109 |
| $ | 971 |
| $ | 3,220 |
| $ | 197 |
|
Total realized/unrealized gains (losses) | | | | | | | | | |
Included in net income [1], [2] | — |
| — |
| (9 | ) | (2 | ) | — |
| — |
| (2 | ) | (13 | ) | (1 | ) |
Included in OCI [3] | 1 |
| 3 |
| 33 |
| 5 |
| — |
| (1 | ) | (3 | ) | 38 |
| — |
|
Purchases | 5 |
| 4 |
| 17 |
| 23 |
| 3 |
| — |
| 29 |
| 81 |
| 3 |
|
Settlements | (1 | ) | (50 | ) | (20 | ) | (2 | ) | (1 | ) | — |
| (36 | ) | (110 | ) | — |
|
Sales | — |
| — |
| (28 | ) | (3 | ) | — |
| — |
| (39 | ) | (70 | ) | (1 | ) |
Transfers into Level 3 [4] | — |
| — |
| 5 |
| 26 |
| — |
| — |
| — |
| 31 |
| — |
|
Transfers out of Level 3 [4] | (1 | ) | (29 | ) | (13 | ) | (19 | ) | — |
| — |
| — |
| (62 | ) | (2 | ) |
Fair value as of September 30, 2013 | $ | 173 |
| $ | 557 |
| $ | 470 |
| $ | 841 |
| $ | 46 |
| $ | 108 |
| $ | 920 |
| $ | 3,115 |
| $ | 196 |
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7] | $ | — |
| $ | — |
| $ | (4 | ) | $ | (2 | ) | $ | — |
| $ | — |
| $ | (4 | ) | $ | (10 | ) | $ | (1 | ) |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Freestanding Derivatives [5] |
Assets (Liabilities) | Equity Securities, AFS | Credit | Equity | Interest Rate | U.S. GMWB Hedging | U.S. Macro Hedge Program | Intl. Program Hedging | Other derivative contracts | Total Free- Standing Derivatives [5] |
Fair value as of June 30, 2013 | $ | 62 |
| $ | 3 |
| $ | 25 |
| $ | (51 | ) | $ | 329 |
| $ | 209 |
| $ | (116 | ) | $ | (20 | ) | $ | 379 |
|
Total realized/unrealized gains (losses) | | | | | | | |
| |
Included in net income [1], [2] | (4 | ) | — |
| (6 | ) | 1 |
| (109 | ) | (39 | ) | (65 | ) | — |
| (218 | ) |
Included in OCI [3] | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Purchases | — |
| — |
| 1 |
| — |
| — |
| 11 |
| (4 | ) | — |
| 8 |
|
Settlements | — |
| — |
| — |
| — |
| (1 | ) | — |
| 42 |
| — |
| 41 |
|
Sales | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Transfers into Level 3 [4] | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Transfers out of Level 3 [4] | — |
| — |
| — |
| 24 |
| — |
| — |
| (28 | ) | 20 |
| 16 |
|
Fair value as of September 30, 2013 | $ | 58 |
| $ | 3 |
| $ | 20 |
| $ | (26 | ) | $ | 219 |
| $ | 181 |
| $ | (171 | ) | $ | — |
| $ | 226 |
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7] | $ | (4 | ) | $ | — |
| $ | (5 | ) | $ | 1 |
| $ | (111 | ) | $ | (39 | ) | $ | (47 | ) | $ | — |
| $ | (201 | ) |
|
| | | | | | | | | | | | |
Assets | Limited Partnerships and Other Alternative Investments | Reinsurance Recoverable for U.S. GMWB and Japan GMWB, GMIB, and GMAB [6] | Assets held for Sale | Separate Accounts |
Fair value as of June 30, 2013 | $ | 174 |
| $ | 225 |
| $ | 5 |
| $ | 820 |
|
Transfers to assets held for sale | — |
| — |
| — |
| — |
|
Total realized/unrealized gains (losses) | | | | |
Included in net income [1], [2] | (10 | ) | (405 | ) | 5 |
| (9 | ) |
Included in OCI [3] | — |
| 6 |
| — |
| — |
|
Purchases | 17 |
| — |
| — |
| (19 | ) |
Settlements | — |
| 77 |
| (2 | ) | — |
|
Sales | — |
| — |
| — |
| (35 | ) |
Transfers into Level 3 [4] | — |
| — |
| — |
| 35 |
|
Transfers out of Level 3 [4] | (20 | ) | — |
| — |
| (57 | ) |
Fair value as of September 30, 2013 | $ | 161 |
| $ | (97 | ) | $ | 8 |
| $ | 735 |
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7] | $ | (10 | ) | $ | (405 | ) | $ | 5 |
| $ | 3 |
|
|
| | | | | | | | | | | | | | | |
| Other Policyholder Funds and Benefits Payable | | |
Liabilities | Guaranteed Living Benefits [7] | Equity Linked Notes | Total Other Policyholder Funds and Benefits Payable | Liabilities Held for Sale | Consumer Notes |
Fair value as of June 30, 2013 | $ | (1,676 | ) | $ | (12 | ) | $ | (1,688 | ) | $ | (28 | ) | $ | (1 | ) |
Transfers to liabilities held for sale | — |
| — |
| — |
| — |
| — |
|
Total realized/unrealized gains (losses) | | | | | |
Included in net income [1], [2] | 677 |
| (1 | ) | 676 |
| — |
| — |
|
Included in OCI [3] | (9 | ) | — |
| (9 | ) | (2 | ) | — |
|
Settlements | (45 | ) | — |
| (45 | ) | (1 | ) | — |
|
Fair value as of September 30, 2013 | $ | (1,053 | ) | $ | (13 | ) | $ | (1,066 | ) | $ | (31 | ) | $ | (1 | ) |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7] | $ | 677 |
| $ | (1 | ) | $ | 676 |
| $ | — |
| $ | — |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
The tables below provide a fair value roll forward for the nine months ended September 30, 2013, for Level 3 financial instruments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed Maturities, AFS | Fixed Maturities, FVO |
Assets | ABS | CDOs | CMBS | Corporate | Foreign govt./govt. agencies | Municipal | RMBS | Total Fixed Maturities, AFS |
Fair value as of January 1, 2013 | $ | 238 |
| $ | 723 |
| $ | 532 |
| $ | 1,340 |
| $ | 34 |
| $ | 169 |
| $ | 1,133 |
| $ | 4,169 |
| $ | 199 |
|
Total realized/unrealized gains (losses) | | | | | | | | | |
Included in net income [1], [2] | — |
| (11 | ) | (11 | ) | 12 |
| 1 |
| — |
| 27 |
| 18 |
| 8 |
|
Included in OCI [3] | 16 |
| 101 |
| 66 |
| (18 | ) | (5 | ) | (10 | ) | 34 |
| 184 |
| — |
|
Purchases | 21 |
| 30 |
| 30 |
| 68 |
| 27 |
| — |
| 61 |
| 237 |
| 12 |
|
Settlements | (5 | ) | (85 | ) | (65 | ) | (65 | ) | (3 | ) | — |
| (104 | ) | (327 | ) | (1 | ) |
Sales | (83 | ) | (195 | ) | (97 | ) | (300 | ) | (6 | ) | (51 | ) | (231 | ) | (963 | ) | (22 | ) |
Transfers into Level 3 [4] | — |
| 23 |
| 35 |
| 85 |
| — |
| — |
| — |
| 143 |
| 3 |
|
Transfers out of Level 3 [4] | (14 | ) | (29 | ) | (20 | ) | (281 | ) | (2 | ) | — |
| — |
| (346 | ) | (3 | ) |
Fair value as of September 30, 2013 | $ | 173 |
| $ | 557 |
| $ | 470 |
| $ | 841 |
| $ | 46 |
| $ | 108 |
| $ | 920 |
| $ | 3,115 |
| $ | 196 |
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7] | $ | (4 | ) | $ | — |
| $ | (5 | ) | $ | (4 | ) | $ | — |
| $ | — |
| $ | (5 | ) | $ | (18 | ) | $ | 28 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Freestanding Derivatives [5] |
Assets (Liabilities) | Equity Securities, AFS | Credit | Equity | Interest Rate | U.S. GMWB Hedging | U.S. Macro Hedge Program | Intl. Program Hedging | Other derivative contracts | Total Free- Standing Derivatives [5] |
Fair value as of January 1, 2013 | $ | 55 |
| $ | 4 |
| $ | 45 |
| $ | (57 | ) | $ | 519 |
| $ | 286 |
| $ | (75 | ) | $ | — |
| $ | 722 |
|
Total realized/unrealized gains (losses) | | | | | | | | | |
Included in net income [1], [2] | (8 | ) | — |
| (23 | ) | 5 |
| (299 | ) | (139 | ) | (149 | ) | — |
| (605 | ) |
Included in OCI [3] | 6 |
| | | | | | | — |
| |
Purchases | 7 |
| — |
| 1 |
| — |
| — |
| 34 |
| (29 | ) | — |
| 6 |
|
Settlements | — |
| (1 | ) | (3 | ) | — |
| (1 | ) | — |
| 54 |
| — |
| 49 |
|
Sales | (2 | ) | — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
Transfers into Level 3 [4] | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (20 | ) | (20 | ) |
Transfers out of Level 3 [4] | — |
| — |
| — |
| 26 |
| — |
| — |
| 28 |
| 20 |
| 74 |
|
Fair value as of September 30, 2013 | $ | 58 |
| $ | 3 |
| $ | 20 |
| $ | (26 | ) | $ | 219 |
| $ | 181 |
| $ | (171 | ) | $ | — |
| $ | 226 |
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7] | $ | (7 | ) | $ | — |
| $ | (21 | ) | $ | — |
| $ | (296 | ) | $ | (136 | ) | $ | (75 | ) | $ | — |
| $ | (528 | ) |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
|
| | | | | | | | | | | | |
Assets | Limited Partnerships and Other Alternative Investments | Reinsurance Recoverable for U.S. GMWB and Japan GMWB, GMIB, and GMAB [6] | Assets held for Sale | Separate Accounts |
Fair value as of January 1, 2013 | $ | 150 |
| $ | 1,081 |
| $ | — |
| $ | 583 |
|
Transfers to assets held for sale | — |
| (12 | ) | 12 |
| — |
|
Total realized/unrealized gains (losses) | | | | |
Included in net income [1], [2] | (8 | ) | (1,241 | ) | 3 |
| 7 |
|
Included in OCI [3] | — |
| (164 | ) | — |
| — |
|
Purchases | 59 |
| — |
| — |
| 240 |
|
Settlements | — |
| 239 |
| (7 | ) | (1 | ) |
Sales | (9 | ) | — |
|
|
| (66 | ) |
Transfers into Level 3 [4] | — |
| — |
| — |
| 39 |
|
Transfers out of Level 3 [4] | (31 | ) | — |
| — |
| (67 | ) |
Fair value as of September 30, 2013 | $ | 161 |
| $ | (97 | ) | $ | 8 |
| $ | 735 |
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7] | $ | (8 | ) | $ | (1,241 | ) | $ | 3 |
| $ | 15 |
|
|
| | | | | | | | | | | | | | | |
| Other Policyholder Funds and Benefits Payable | | |
Liabilities | Guaranteed Living Benefits [7] | Equity Linked Notes | Total Other Policyholder Funds and Benefits Payable | Liabilities Held for Sale | Consumer Notes |
Fair value as of January 1, 2013 | $ | (3,119 | ) | $ | (8 | ) | $ | (3,127 | ) | $ | — |
| $ | (2 | ) |
Transfers to liabilities held for sale | 43 |
| — |
| 43 |
| (43 | ) | — |
|
Total realized/unrealized gains (losses) | | | | | |
Included in net income [1], [2] | 1,936 |
| (5 | ) | 1,931 |
| 14 |
| 1 |
|
Included in OCI [3] | 197 |
| — |
| 197 |
| 1 |
| — |
|
Settlements [8] | (110 | ) | — |
| (110 | ) | (3 | ) | — |
|
Fair value as of September 30, 2013 | $ | (1,053 | ) | $ | (13 | ) | $ | (1,066 | ) | $ | (31 | ) | $ | (1 | ) |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7] | $ | 1,936 |
| $ | (5 | ) | $ | 1,931 |
| $ | 14 |
| $ | 1 |
|
The tables below provide a fair value roll forward for the three months ended September 30, 2012, for Level 3 financial instruments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed Maturities, AFS | |
Assets | ABS | CDOs | CMBS | Corporate | Foreign govt./govt. agencies | Municipal | RMBS | Total Fixed Maturities, AFS | Fixed Maturities, FVO |
Fair value as of June 30, 2012 | $ | 269 |
| $ | 685 |
| $ | 610 |
| $ | 1,221 |
| $ | 42 |
| $ | 506 |
| $ | 1,035 |
| $ | 4,368 |
| $ | 482 |
|
Total realized/unrealized gains (losses) | | | | | | | | | |
Included in net income [1], [2] | 1 |
| (6 | ) | (7 | ) | (5 | ) | — |
| (4 | ) | (17 | ) | (38 | ) | 32 |
|
Included in OCI [3] | 8 |
| 37 |
| 17 |
| (29 | ) | — |
| 13 |
| 145 |
| 191 |
| — |
|
Purchases | 6 |
| — |
| 7 |
| 15 |
| 2 |
| — |
| 41 |
| 71 |
| — |
|
Settlements | (4 | ) | (6 | ) | (22 | ) | (1 | ) | (1 | ) | — |
| (33 | ) | (67 | ) | — |
|
Sales | (9 | ) | — |
| (74 | ) | (6 | ) | (10 | ) | (22 | ) | (53 | ) | (174 | ) | — |
|
Transfers into Level 3 [4] | 9 |
| — |
| 11 |
| 179 |
| — |
| — |
| 2 |
| 201 |
| — |
|
Transfers out of Level 3 [4] | (12 | ) | — |
| — |
| (28 | ) | — |
| (303 | ) | (23 | ) | (366 | ) | — |
|
Fair value as of September 30, 2012 | $ | 268 |
| $ | 710 |
| $ | 542 |
| $ | 1,346 |
| $ | 33 |
| $ | 190 |
| $ | 1,097 |
| $ | 4,186 |
| $ | 514 |
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7] | $ | 1 |
| $ | (6 | ) | $ | (7 | ) | $ | (4 | ) | $ | — |
| $ | (4 | ) | $ | (17 | ) | $ | (37 | ) | $ | 32 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Freestanding Derivatives [5] |
Assets (Liabilities) | Equity Securities, AFS | Credit | Equity | Interest Rate | U.S. GMWB Hedging | U.S. Macro Hedge Program | Intl. Program Hedging | Total Free- Standing Derivatives [5] |
Fair value as of June 30, 2012 | $ | 57 |
| $ | (388 | ) | $ | 43 |
| $ | (91 | ) | $ | 756 |
| $ | 180 |
| $ | (55 | ) | $ | 445 |
|
Total realized/unrealized gains (losses) | | | | | | | | |
Included in net income [1], [2] | (2 | ) | 49 |
| (12 | ) | 1 |
| (159 | ) | (98 | ) | (79 | ) | (298 | ) |
Included in OCI [3] | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Purchases | 2 |
| — |
| 24 |
| 1 |
| 19 |
| — |
| 15 |
| 59 |
|
Settlements | — |
| 59 |
| — |
| — |
| — |
| — |
| 17 |
| 76 |
|
Sales | (1 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Transfers out of Level 3 [4] | — |
| — |
| — |
| 31 |
| — |
| — |
| — |
| 31 |
|
Fair value as of September 30, 2012 | $ | 56 |
| $ | (280 | ) | $ | 55 |
| $ | (58 | ) | $ | 616 |
| $ | 82 |
| $ | (102 | ) | $ | 313 |
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7] | $ | (2 | ) | $ | 25 |
| $ | (10 | ) | $ | 1 |
| $ | (159 | ) | $ | (98 | ) | $ | (51 | ) | $ | (292 | ) |
|
| | | | | | |
Assets | Reinsurance Recoverable for U.S. GMWB and Japan GMWB, GMIB, and GMAB [6] | Separate Accounts |
Fair value as of June 30, 2012 | $ | 2,662 |
| $ | 1,335 |
|
Total realized/unrealized gains (losses) | | |
Included in net income [1], [2] | (916 | ) | (2 | ) |
Included in OCI [3] | 67 |
| — |
|
Purchases | — |
| 97 |
|
Settlements | 98 |
| — |
|
Sales | — |
| (41 | ) |
Transfers into Level 3 [4] | — |
| (3 | ) |
Transfers out of Level 3 [4] | — |
| (7 | ) |
Fair value as of September 30, 2012 | $ | 1,911 |
| $ | 1,379 |
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7] | $ | (916 | ) | $ | 8 |
|
|
| | | | | | | | | | | | | | | |
| Other Policyholder Funds and Benefits Payable [1] | | |
Liabilities | Guaranteed Living Benefits [7] | Equity Linked Notes | Total Other Policyholder Funds and Benefits Payable | Other Liabilities | Consumer Notes |
Fair value as of June 30, 2012 | $ | (5,143 | ) | $ | (10 | ) | $ | (5,153 | ) | $ | (29 | ) | $ | (4 | ) |
Total realized/unrealized gains (losses) | | | | | |
Included in net income [1], [2] | 1,176 |
| — |
| 1,176 |
| (14 | ) | 2 |
|
Included in OCI [3] | (76 | ) | — |
| (76 | ) | — |
| — |
|
Settlements | (65 | ) | — |
| (65 | ) | — |
| — |
|
Fair value as of September 30, 2012 | $ | (4,108 | ) | $ | (10 | ) | $ | (4,118 | ) | $ | (43 | ) | $ | (2 | ) |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7] | $ | 1,176 |
| $ | — |
| $ | 1,176 |
| $ | (14 | ) | $ | 2 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
The tables below provide a fair value roll forward for the nine months ended September 30, 2012, for Level 3 financial instruments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed Maturities, AFS | |
Assets | ABS | CDOs | CMBS | Corporate | Foreign govt./govt. agencies | Municipal | RMBS | Total Fixed Maturities, AFS | Fixed Maturities, FVO |
Fair value as of January 1, 2012 | $ | 317 |
| $ | 328 |
| $ | 348 |
| $ | 1,497 |
| $ | 37 |
| $ | 382 |
| $ | 933 |
| $ | 3,842 |
| $ | 484 |
|
Total realized/unrealized gains (losses) | | | | | | | | | |
Included in net income [1], [2] | — |
| (8 | ) | (30 | ) | (8 | ) | — |
| (4 | ) | (6 | ) | (56 | ) | 53 |
|
Included in OCI [3] | 39 |
| 98 |
| 57 |
| (44 | ) | 1 |
| 31 |
| 193 |
| 375 |
| — |
|
Purchases | 18 |
| — |
| 18 |
| 141 |
| 8 |
| 174 |
| 253 |
| 612 |
| — |
|
Settlements | (40 | ) | (24 | ) | (66 | ) | (39 | ) | (3 | ) | — |
| (92 | ) | (264 | ) | — |
|
Sales | (21 | ) | (1 | ) | (108 | ) | (39 | ) | (10 | ) | (82 | ) | (163 | ) | (424 | ) | (23 | ) |
Transfers into Level 3 [4] | 9 |
| 317 |
| 398 |
| 438 |
| — |
| — |
| 2 |
| 1,164 |
| — |
|
Transfers out of Level 3 [4] | (54 | ) | — |
| (75 | ) | (600 | ) | — |
| (311 | ) | (23 | ) | (1,063 | ) | — |
|
Fair value as of September 30, 2012 | $ | 268 |
| $ | 710 |
| $ | 542 |
| $ | 1,346 |
| $ | 33 |
| $ | 190 |
| $ | 1,097 |
| $ | 4,186 |
| $ | 514 |
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7] | $ | (1 | ) | $ | (8 | ) | $ | (3 | ) | $ | (4 | ) | $ | — |
| $ | (4 | ) | $ | 1 |
| $ | (19 | ) | $ | 61 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Freestanding Derivatives [5] |
Assets (Liabilities) | Equity Securities, AFS | Credit | Equity | Interest Rate | U.S. GMWB Hedging | U.S. Macro Hedge Program | Intl. Program Hedging | Total Free- Standing Derivatives [5] |
Fair value as of January 1, 2012 | $ | 56 |
| $ | (489 | ) | $ | 36 |
| $ | (91 | ) | $ | 883 |
| $ | 357 |
| $ | (35 | ) | $ | 661 |
|
Total realized/unrealized gains (losses) | | | | | | | | |
Included in net income [1], [2] | 2 |
| 153 |
| (24 | ) | 1 |
| (332 | ) | (275 | ) | (64 | ) | (541 | ) |
Included in OCI [3] | (2 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Purchases | 10 |
| — |
| 59 |
| 1 |
| 42 |
| — |
| (64 | ) | 38 |
|
Settlements | — |
| 56 |
| (16 | ) | — |
| — |
| — |
| 53 |
| 93 |
|
Sales | (10 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Transfers out of Level 3 [4] | — |
| — |
| — |
| 31 |
| 23 |
| — |
| 8 |
| 62 |
|
Fair value as of September 30, 2012 | $ | 56 |
| $ | (280 | ) | $ | 55 |
| $ | (58 | ) | $ | 616 |
| $ | 82 |
| $ | (102 | ) | $ | 313 |
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7] | $ | 2 |
| $ | 122 |
| $ | (11 | ) | $ | 1 |
| $ | (332 | ) | $ | (274 | ) | $ | (37 | ) | $ | (531 | ) |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
|
| | | | | | |
Assets | Reinsurance Recoverable for U.S. GMWB and Japan GMWB, GMIB, and GMAB [6] | Separate Accounts |
Fair value as of January 1, 2012 | $ | 3,073 |
| $ | 1,031 |
|
Total realized/unrealized gains (losses) | | |
Included in net income [1], [2] | (1,429 | ) | 31 |
|
Included in OCI [3] | (23 | ) | — |
|
Purchases | — |
| 336 |
|
Settlements | 290 |
| (1 | ) |
Sales | — |
| (442 | ) |
Transfers into Level 3 [4] | — |
| 451 |
|
Transfers out of Level 3 [4] | — |
| (27 | ) |
Fair value as of September 30, 2012 | $ | 1,911 |
| $ | 1,379 |
|
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7] | $ | (1,429 | ) | $ | 18 |
|
|
| | | | | | | | | | | | | | | |
| Other Policyholder Funds and Benefits Payable [1] | | |
Liabilities | Guaranteed Living Benefits [7] | Equity Linked Notes | Total Other Policyholder Funds and Benefits Payable | Other Liabilities | Consumer Notes |
Fair value as of January 1, 2012 | $ | (5,776 | ) | $ | (9 | ) | $ | (5,785 | ) | $ | (9 | ) | $ | (4 | ) |
Total realized/unrealized gains (losses) | | | | | |
Included in net income [1], [2] | 1,847 |
| (1 | ) | 1,846 |
| (34 | ) | 2 |
|
Included in OCI [3] | 26 |
| — |
| 26 |
| — |
| — |
|
Settlements | (205 | ) | — |
| (205 | ) | — |
| — |
|
Fair value as of September 30, 2012 | $ | (4,108 | ) | $ | (10 | ) | $ | (4,118 | ) | $ | (43 | ) | $ | (2 | ) |
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7] | $ | 1,847 |
| $ | (1 | ) | $ | 1,846 |
| $ | (34 | ) | $ | 2 |
|
| |
[1] | The Company classifies gains and losses on GMWB reinsurance derivatives and Guaranteed Living Benefit embedded derivatives as unrealized gains (losses) for purposes of disclosure in this table because it is impracticable to track on a contract-by-contract basis the realized gains (losses) for these derivatives and embedded derivatives. |
| |
[2] | All amounts in these rows are reported in net realized capital gains (losses). The realized/unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on net income for the Company. All amounts are before income taxes and amortization of DAC. |
| |
[3] | All amounts are before income taxes and amortization of DAC. |
| |
[4] | Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs. |
| |
[5] | Derivative instruments are reported in this table on a net basis for asset/(liability) positions and reported in the Condensed Consolidated Balance Sheet in other investments and other liabilities. |
| |
[6] | Includes fair value of reinsurance recoverables of approximately $148 and $1.7 billion as of September 30, 2013 and 2012, respectively, related to a transaction entered into with an affiliated captive reinsurer. See Note 11 - Transactions with Affiliates of Notes to Condensed Consolidated Financial Statements for more information. |
| |
[7] | Includes both market and non-market impacts in deriving realized and unrealized gains (losses). |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
Fair Value Option
The Company holds fair value option investments that contain an embedded credit derivative with underlying credit risk primarily related to corporate bonds and commercial real estate. Also included are foreign government securities that align with the accounting for yen-based fixed annuity liabilities, which are adjusted for changes in spot rates through realized gains and losses. Similar to other fixed maturities, income earned from FVO securities is recorded in net investment income and changes in fair value are recorded in net realized capital gains and losses.
The Company elected the fair value option for consolidated VIE investment funds that were established in 2012. The Company elected the fair value option in order to report investments of consolidated investment companies at fair value with changes in the fair value of these securities recognized in net realized capital gains and losses, which is consistent with accounting requirements for investment companies. The investment funds hold fixed income securities and the Company has management and control of the funds as well as a significant ownership interest.
The following table presents the changes in fair value of those assets and liabilities accounted for using the fair value option reported in net realized capital gains and losses in the Company's Condensed Consolidated Statements of Operations.
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2013 | 2012 | 2013 | 2012 |
Assets | | | | |
Fixed maturities, FVO | | | | |
Corporate | $ | 1 |
| $ | 6 |
| $ | (12 | ) | $ | 6 |
|
CRE CDOs | — |
| 18 |
| 3 |
| 27 |
|
Foreign government | 8 |
| 13 |
| (77 | ) | (16 | ) |
Other liabilities | | | | |
Credit-linked notes | — |
| (14 | ) | — |
| (34 | ) |
Total realized capital gains (losses) | $ | 9 |
| $ | 23 |
| $ | (86 | ) | $ | (17 | ) |
The following table presents the fair value of assets and liabilities accounted for using the fair value option included in the Company's Condensed Consolidated Balance Sheets.
|
| | | | | | |
| As of |
| September 30, 2013 | December 31, 2012 |
Assets | | |
Fixed maturities, FVO | | |
ABS | $ | 3 |
| $ | — |
|
Corporate | 79 |
| 108 |
|
CDO | 186 |
| 193 |
|
CMBS | 8 |
| 4 |
|
Foreign government | 650 |
| 699 |
|
Municipals | 1 |
| 1 |
|
RMBS | 5 |
| 3 |
|
U.S. Government | 17 |
| 2 |
|
Total fixed maturities, FVO | $ | 949 |
| $ | 1,010 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
Financial Instruments Not Carried at Fair Value
The following presents carrying amounts and fair values of the Company's financial instruments not carried at fair value, and not included in the above fair value discussion as of September 30, 2013 and December 31, 2012 were as follows:
|
| | | | | | | | | |
| September 30, 2013 | December 31, 2012 |
| Fair Value Hierarchy Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value |
Assets | | | | | |
Policy loans | Level 3 | 1,410 |
| 1,478 |
| 1,951 |
| 2,112 |
|
Mortgage loans | Level 3 | 3,552 |
| 3,591 |
| 4,935 |
| 5,109 |
|
Liabilities | | | | | |
Other policyholder funds and benefits payable [1]
| Level 3 | 9,224 |
| 9,433 |
| 9,318 |
| 9,668 |
|
Consumer notes [2]
| Level 3 | 81 |
| 82 |
| 159 |
| 159 |
|
| |
[1] | Excludes group accident and health and universal life insurance contracts, including corporate owned life insurance. |
| |
[2] | Excludes amounts carried at fair value and included in disclosures above. |
The Company has not made any changes in its valuation methodologies for the following assets and liabilities since December 31, 2012.
| |
• | Fair value for policy loans and consumer notes were estimated using discounted cash flow calculations using current interest rates adjusted for estimated loan duration. |
| |
• | Fair values for mortgage loans were estimated using discounted cash flow calculations based on current lending rates for similar type loans. Current lending rates reflect changes in credit spreads and the remaining terms of the loans. |
| |
• | Other policyholder funds and benefits payable, not carried at fair value, is determined by estimating future cash flows, discounted at the current market rate. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments
Net Realized Capital Gains (Losses)
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(Before-tax) | 2013 | 2012 | 2013 | 2012 |
Gross gains on sales [1] | $ | 50 |
| $ | 120 |
| $ | 1,723 |
| $ | 402 |
|
Gross losses on sales | (47 | ) | (83 | ) | (145 | ) | (244 | ) |
Net OTTI losses recognized in earnings | (16 | ) | (13 | ) | (32 | ) | (77 | ) |
Valuation allowances on mortgage loans | — |
| — |
| — |
| — |
|
Japanese fixed annuity contract hedges, net [2] | (8 | ) | (24 | ) | (4 | ) | (42 | ) |
Periodic net coupon settlements on credit derivatives/Japan | 3 |
| 4 |
| (2 | ) | 4 |
|
Results of variable annuity hedge program | | | | |
U.S. GMWB derivatives, net | 203 |
| 381 |
| 219 |
| 451 |
|
U.S. macro hedge program | (50 | ) | (109 | ) | (182 | ) | (292 | ) |
Total U.S. program | 153 |
| 272 |
| 37 |
| 159 |
|
International Program | (72 | ) | (122 | ) | (671 | ) | (484 | ) |
Total results of variable annuity hedge program | 81 |
| 150 |
| (634 | ) | (325 | ) |
GMIB/GMAB/GMWB reinsurance | 226 |
| 348 |
| 837 |
| 599 |
|
Coinsurance and modified coinsurance reinsurance contracts | (322 | ) | (734 | ) | (1,023 | ) | (1,176 | ) |
Other, net [3] | (8 | ) | 40 |
| 77 |
| 81 |
|
Net realized capital gains (losses) | $ | (41 | ) | $ | (192 | ) | $ | 797 |
| $ | (778 | ) |
| |
[1] | Includes $1.5 billion of gross gains relating to the sales of the Retirement Plans and Individual Life businesses for the nine months ended September 30, 2013. |
| |
[2] | Relates to the Japanese fixed annuity product (adjustment of product liability for changes in spot currency exchange rates, related derivative hedging instruments, excluding net periodic coupon settlements, and Japan FVO securities). |
| |
[3] | Primarily consists of transactional foreign currency re-valuation associated with the internal reinsurance of the Japan variable annuity business, which is offset in AOCI, and changes in value of on non-qualifying derivatives and Japan 3Win related foreign currency swaps. Includes $71 of gains relating to the sales of the Retirement Plans and Individual Life businesses for the nine months ended September 30, 2013. |
Net realized capital gains and losses from investment sales, after deducting the life and pension policyholders’ share for certain products, are reported as a component of revenues and are determined on a specific identification basis. Before tax, net gains and losses on sales and impairments previously reported as unrealized gains in AOCI were $(13) and $1.5 billion for the three and nine months ended September 30, 2013 and $24 and $81 for the three and nine months ended September 30, 2012, respectively. Proceeds from sales of AFS securities totaled $3.5 billion and $12.3 billion, respectively, for the three and nine months ended September 30, 2013 and $7.1 billion and $21.3 billion for the three and nine months ended September 30, 2012, respectively.
Other-Than-Temporary Impairment Losses
The following table presents a roll-forward of the Company’s cumulative credit impairments on debt securities held.
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(Before-tax) | 2013 | 2012 | 2013 | 2012 |
Balance, beginning of period | $ | (699 | ) | $ | (1,158 | ) | $ | (813 | ) | $ | (1,319 | ) |
Additions for credit impairments recognized on [1]: | | | | |
Securities not previously impaired | — |
| (4 | ) | (8 | ) | (21 | ) |
Securities previously impaired | (3 | ) | (7 | ) | (3 | ) | (15 | ) |
Reductions for credit impairments previously recognized on: | | | | |
Securities that matured or were sold during the period | 34 |
| 96 |
| 152 |
| 279 |
|
Securities the Company made the decision to sell or more likely than not will be required to sell | 2 |
| — |
| 2 |
| — |
|
Securities due to an increase in expected cash flows | 7 |
| 1 |
| 11 |
| 4 |
|
Balance, end of period | $ | (659 | ) | $ | (1,072 | ) | $ | (659 | ) | $ | (1,072 | ) |
| |
[1] | These additions are included in the net OTTI losses recognized in earnings in the Condensed Consolidated Statements of Operations. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
Available-for-Sale Securities
The following table presents the Company’s AFS securities by type.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2013 | | December 31, 2012 |
| Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Non-Credit OTTI [1] | | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Non-Credit OTTI [1] |
ABS | $ | 1,202 |
| $ | 13 |
| $ | (100 | ) | $ | 1,115 |
| $ | (3 | ) | | $ | 1,807 |
| $ | 38 |
| $ | (172 | ) | $ | 1,673 |
| $ | (4 | ) |
CDOs [2] | 1,602 |
| 112 |
| (67 | ) | 1,643 |
| (1 | ) | | 2,236 |
| 61 |
| (117 | ) | 2,160 |
| (4 | ) |
CMBS | 2,350 |
| 138 |
| (50 | ) | 2,438 |
| (4 | ) | | 3,757 |
| 262 |
| (107 | ) | 3,912 |
| (7 | ) |
Corporate | 16,345 |
| 1,273 |
| (270 | ) | 17,348 |
| (8 | ) | | 27,774 |
| 3,426 |
| (221 | ) | 30,979 |
| (19 | ) |
Foreign govt./govt. agencies | 1,265 |
| 27 |
| (113 | ) | 1,179 |
| — |
| | 1,369 |
| 120 |
| (29 | ) | 1,460 |
| — |
|
Municipal | 1,056 |
| 31 |
| (46 | ) | 1,041 |
| — |
| | 1,808 |
| 204 |
| (14 | ) | 1,998 |
| — |
|
RMBS | 2,659 |
| 77 |
| (73 | ) | 2,663 |
| (9 | ) | | 4,590 |
| 196 |
| (115 | ) | 4,671 |
| (28 | ) |
U.S. Treasuries | 2,359 |
| 32 |
| (77 | ) | 2,314 |
| — |
| | 2,412 |
| 151 |
| (12 | ) | 2,551 |
| — |
|
Total fixed maturities, AFS | 28,838 |
| 1,703 |
| (796 | ) | 29,741 |
| (25 | ) | | 45,753 |
| 4,458 |
| (787 | ) | 49,404 |
| (62 | ) |
Equity securities, AFS | 388 |
| 30 |
| (33 | ) | 385 |
| — |
| | 408 |
| 28 |
| (36 | ) | 400 |
| — |
|
Total AFS securities [3] | $ | 29,226 |
| $ | 1,733 |
| $ | (829 | ) | $ | 30,126 |
| $ | (25 | ) | | $ | 46,161 |
| $ | 4,486 |
| $ | (823 | ) | $ | 49,804 |
| $ | (62 | ) |
| |
[1] | Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses as of September 30, 2013 and December 31, 2012. |
| |
[2] | Gross unrealized gains (losses) exclude the change in fair value of bifurcated embedded derivative features of certain securities. Changes in fair value are recorded in net realized capital gains (losses). |
| |
[3] | As of December 31, 2012, includes fixed maturities, AFS and equity securities, AFS relating to the sales of the Retirement Plans and Individual Life Businesses; see Note 2 - Business Disposition of Notes to Condensed Consolidated Financial Statements for further discussion of this transaction. |
The following table presents the Company’s fixed maturities, AFS, by contractual maturity year.
|
| | | | | | |
| September 30, 2013 |
Contractual Maturity | Amortized Cost | Fair Value |
One year or less | $ | 1,556 |
| $ | 1,585 |
|
Over one year through five years | 5,273 |
| 5,468 |
|
Over five years through ten years | 5,174 |
| 5,309 |
|
Over ten years | 9,022 |
| 9,520 |
|
Subtotal | 21,025 |
| 21,882 |
|
Mortgage-backed and asset-backed securities | 7,813 |
| 7,859 |
|
Total fixed maturities, AFS | $ | 28,838 |
| $ | 29,741 |
|
Estimated maturities may differ from contractual maturities due to security call or prepayment provisions. Due to the potential for variability in payment speeds (i.e. prepayments or extensions), mortgage-backed and asset-backed securities are not categorized by contractual maturity.
Concentration of Credit Risk
As of September 30, 2013, the Company's only exposure to any credit concentration risk of a single issuer greater than 10% of the Company’s stockholder’s equity, other than U.S. government and certain U.S. government securities, was the Government of Japan, which represented $881, or 11% of stockholders' equity and 2% of total invested assets. As of September 30, 2012, the Company's only exposure to any concentration of credit risk of a single issuer greater than 10% of the Company’s stockholder’s equity other than the U.S. government and certain U.S. government agencies, was the Government of Japan,which represented $1.1 billion, or 10.1% of stockholders' equity and 1.6% of total invested assets. For further discussion of concentration of credit risk, see the Concentration of Credit Risk section in Note 4 of Notes to Consolidated Financial Statements in the Company’s 2012 Form 10-K Annual Report.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
Securities Unrealized Loss Aging
The following tables present the Company’s unrealized loss aging for AFS securities by type and length of time the security was in a continuous unrealized loss position.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2013 |
| Less Than 12 Months | 12 Months or More | Total |
| Amortized Cost | Fair Value | Unrealized Losses | Amortized Cost | Fair Value | Unrealized Losses | Amortized Cost | Fair Value | Unrealized Losses |
ABS | $ | 226 |
| $ | 223 |
| $ | (3 | ) | $ | 561 |
| $ | 464 |
| $ | (97 | ) | $ | 787 |
| $ | 687 |
| $ | (100 | ) |
CDOs [1] | 101 |
| 100 |
| (1 | ) | 1,383 |
| 1,315 |
| (66 | ) | 1,484 |
| 1,415 |
| (67 | ) |
CMBS | 291 |
| 278 |
| (13 | ) | 495 |
| 458 |
| (37 | ) | 786 |
| 736 |
| (50 | ) |
Corporate | 2,791 |
| 2,658 |
| (133 | ) | 990 |
| 853 |
| (137 | ) | 3,781 |
| 3,511 |
| (270 | ) |
Foreign govt./govt. agencies | 874 |
| 763 |
| (111 | ) | 10 |
| 8 |
| (2 | ) | 884 |
| 771 |
| (113 | ) |
Municipal | 569 |
| 531 |
| (38 | ) | 110 |
| 102 |
| (8 | ) | 679 |
| 633 |
| (46 | ) |
RMBS | 741 |
| 718 |
| (23 | ) | 552 |
| 502 |
| (50 | ) | 1,293 |
| 1,220 |
| (73 | ) |
U.S. Treasuries | 1,593 |
| 1,545 |
| (48 | ) | 114 |
| 85 |
| (29 | ) | 1,707 |
| 1,630 |
| (77 | ) |
Total fixed maturities, AFS | 7,186 |
| 6,816 |
| (370 | ) | 4,215 |
| 3,787 |
| (426 | ) | 11,401 |
| 10,603 |
| (796 | ) |
Equity securities, AFS | 75 |
| 72 |
| (3 | ) | 156 |
| 126 |
| (30 | ) | 231 |
| 198 |
| (33 | ) |
Total securities in an unrealized loss | $ | 7,261 |
| $ | 6,888 |
| $ | (373 | ) | $ | 4,371 |
| $ | 3,913 |
| $ | (456 | ) | $ | 11,632 |
| $ | 10,801 |
| $ | (829 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2012 |
| Less Than 12 Months | 12 Months or More | Total |
| Amortized Cost | Fair Value | Unrealized Losses | Amortized Cost | Fair Value | Unrealized Losses | Amortized Cost | Fair Value | Unrealized Losses |
ABS | $ | 77 |
| $ | 76 |
| $ | (1 | ) | $ | 787 |
| $ | 616 |
| $ | (171 | ) | $ | 864 |
| $ | 692 |
| $ | (172 | ) |
CDOs [1] | 5 |
| 5 |
| — |
| 1,640 |
| 1,515 |
| (117 | ) | 1,645 |
| 1,520 |
| (117 | ) |
CMBS | 192 |
| 179 |
| (13 | ) | 795 |
| 701 |
| (94 | ) | 987 |
| 880 |
| (107 | ) |
Corporate | 614 |
| 578 |
| (36 | ) | 1,339 |
| 1,154 |
| (185 | ) | 1,953 |
| 1,732 |
| (221 | ) |
Foreign govt./govt. agencies | 318 |
| 290 |
| (28 | ) | 7 |
| 6 |
| (1 | ) | 325 |
| 296 |
| (29 | ) |
Municipal | 65 |
| 62 |
| (3 | ) | 98 |
| 87 |
| (11 | ) | 163 |
| 149 |
| (14 | ) |
RMBS | 322 |
| 321 |
| (1 | ) | 750 |
| 636 |
| (114 | ) | 1,072 |
| 957 |
| (115 | ) |
U.S. Treasuries | 384 |
| 372 |
| (12 | ) | — |
| — |
| — |
| 384 |
| 372 |
| (12 | ) |
Total fixed maturities, AFS | 1,977 |
| 1,883 |
| (94 | ) | 5,416 |
| 4,715 |
| (693 | ) | 7,393 |
| 6,598 |
| (787 | ) |
Equity securities, AFS | 9 |
| 9 |
| — |
| 172 |
| 136 |
| (36 | ) | 181 |
| 145 |
| (36 | ) |
Total securities in an unrealized loss | $ | 1,986 |
| $ | 1,892 |
| $ | (94 | ) | $ | 5,588 |
| $ | 4,851 |
| $ | (729 | ) | $ | 7,574 |
| $ | 6,743 |
| $ | (823 | ) |
| |
[1] | Unrealized losses exclude the change in fair value of bifurcated embedded derivative features of certain securities. Changes in fair value are recorded in net realized capital gains (losses). |
As of September 30, 2013, AFS securities in an unrealized loss position, consisted of 1,978 securities, primarily related to floating rate corporate securities within the financial services sector, foreign government and government agencies, and ABS, which are depressed due to an increase in interest rates since the securities were purchased. As of September 30, 2013, 94% of these securities were depressed less than 20% of cost or amortized cost. The increase in unrealized losses during 2013 was primarily attributable to an increase in interest rates.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
Most of the securities depressed for twelve months or more relate to structured securities with exposure to commercial and residential real estate, as well as certain floating rate corporate securities with greater than 10 years to maturity, concentrated in the financial services sector. Current market spreads continue to be wider than spreads at the security's respective purchase date for structured securities with exposure to commercial and residential real estate largely due to the economic and market uncertainties regarding future performance of certain commercial and residential real estate backed securities. The majority of these securities have a floating-rate coupon referenced to a market index that has declined substantially. In addition, equity securities include investment grade perpetual preferred securities that contain “debt-like” characteristics where the decline in fair value is not attributable to issuer-specific credit deterioration, none of which have, nor are expected to, miss a periodic dividend payment. These securities have been depressed due to the securities’ floating-rate coupon in the current low interest rate environment, general market credit spread widening since the date of purchase and the long-dated nature of the securities. The Company neither has an intention to sell nor does it expect to be required to sell the securities outlined above.
Mortgage Loans
|
| | | | | | | | | | | | | | | | | | |
| September 30, 2013 | December 31, 2012 |
| Amortized Cost [1] | Valuation Allowance | Carrying Value | Amortized Cost [1] | Valuation Allowance | Carrying Value |
Total commercial mortgage loans [2] | $ | 3,564 |
| $ | (12 | ) | $ | 3,552 |
| $ | 4,949 |
| $ | (14 | ) | $ | 4,935 |
|
| |
[1] | Amortized cost represents carrying value prior to valuation allowances, if any. |
| |
[2] | As of December 31, 2012, includes commercial mortgage loans relating to the sales of the Retirement Plans and Individual Life businesses; see Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements for further discussion of this transaction. |
As of September 30, 2013, and December 31, 2012, the carrying value of mortgage loans associated with the valuation allowance was $136 and $189, respectively . Included in the table above are mortgage loans held-for-sale with a carrying value and valuation allowance of $46 and $3, respectively, as of September 30, 2013 and $47 and $3, respectively, as of December 31, 2012. The carrying value of these loans is included in mortgage loans in the Company’s Condensed Consolidated Balance Sheets. As of September 30, 2013, loans within the Company’s mortgage loan portfolio that have had extensions or restructurings other than what is allowable under the original terms of the contract are immaterial.
The following table presents the activity within the Company’s valuation allowance for mortgage loans. These loans have been evaluated both individually and collectively for impairment. Loans evaluated collectively for impairment are immaterial.
|
| | | | | | |
| Six Months Ended June 30, |
| 2013 | 2012 |
Balance, beginning of period | $ | (14 | ) | $ | (23 | ) |
(Additions)/Reversals | — |
| — |
|
Deductions | 2 |
| 4 |
|
Balance, end of period | $ | (12 | ) | $ | (19 | ) |
The current weighted-average loan-to-value ("LTV") ratio of the Company’s commercial mortgage loan portfolio was 60% as of September 30, 2013, while the weighted-average LTV ratio at origination of these loans was 63%. LTV ratios compare the loan amount to the value of the underlying property collateralizing the loan. The loan values are updated no less than annually through property level reviews of the portfolio. Factors considered in the property valuation include, but are not limited to, actual and expected property cash flows, geographic market data and capitalization rates. Debt service coverage ratios ("DSCRs") compare a property’s net operating income to the borrower’s principal and interest payments. The current weighted average DSCR of the Company’s commercial mortgage loan portfolio was 2.27x as of September 30, 2013. The Company held only one delinquent commercial mortgage loan past due by 90 days or more. The total carrying value and valuation allowance of this loan totaled $4 and $1, respectively, as of September 30, 2013, and is not accruing income.
The following table presents the carrying value of the Company’s commercial mortgage loans by LTV and DSCR.
|
| | | | | | | | |
Commercial Mortgage Loans Credit Quality |
| September 30, 2013 | December 31, 2012 |
Loan-to-value | Carrying Value | Avg. Debt-Service Coverage Ratio | Carrying Value | Avg. Debt-Service Coverage Ratio |
Greater than 80% | $ | 76 |
| 1.32x | $ | 137 |
| 0.89x |
65% - 80% | 895 |
| 1.99x | 1,717 |
| 2.27x |
Less than 65% | 2,581 |
| 2.39x | 3,081 |
| 2.44x |
Total commercial mortgage loans | $ | 3,552 |
| 2.27x | $ | 4,935 |
| 2.34x |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
The following tables present the carrying value of the Company’s mortgage loans by region and property type.
|
| | | | | | | | |
Mortgage Loans by Region |
| September 30, 2013 | December 31, 2012 |
| Carrying Value | Percent of Total | Carrying Value | Percent of Total |
East North Central | $ | 80 |
| 2.3% | $ | 97 |
| 2.0% |
Middle Atlantic | 261 |
| 7.3% | 370 |
| 7.5% |
Mountain | 40 |
| 1.1% | 62 |
| 1.3% |
New England | 163 |
| 4.6% | 231 |
| 4.7% |
Pacific | 1,064 |
| 30.0% | 1,504 |
| 30.5% |
South Atlantic | 550 |
| 15.5% | 1,012 |
| 20.5% |
West North Central | 17 |
| 0.5% | 16 |
| 0.3% |
West South Central | 172 |
| 4.8% | 234 |
| 4.7% |
Other [1] | 1,205 |
| 33.9% | 1,409 |
| 28.5% |
Total mortgage loans | $ | 3,552 |
| 100.0% | $ | 4,935 |
| 100.0% |
| |
[1] | Primarily represents loans collateralized by multiple properties in various regions. |
|
| | | | | | | | | | |
Mortgage Loans by Property Type |
| September 30, 2013 | December 31, 2012 |
| Carrying Value | Percent of Total | Carrying Value | Percent of Total |
Commercial | | | | |
Agricultural | $ | 97 |
| 2.7 | % | $ | 109 |
| 2.2 | % |
Industrial | 1,189 |
| 33.5 | % | 1,519 |
| 30.8 | % |
Lodging | 27 |
| 0.8 | % | 81 |
| 1.6 | % |
Multifamily | 611 |
| 17.2 | % | 869 |
| 17.6 | % |
Office | 737 |
| 20.7 | % | 1,120 |
| 22.7 | % |
Retail | 766 |
| 21.6 | % | 1,047 |
| 21.2 | % |
Other | 125 |
| 3.5 | % | 190 |
| 3.9 | % |
Total mortgage loans | $ | 3,552 |
| 100.0 | % | $ | 4,935 |
| 100.0 | % |
Variable Interest Entities
The Company is involved with various special purpose entities and other entities that are deemed to be VIEs primarily as a collateral manager and as an investor through normal investment activities, as well as a means of accessing capital. A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest or lacks sufficient funds to finance its own activities without financial support provided by other entities.
The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in the VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. Based on the Company’s assessment, if it determines it is the primary beneficiary, the Company consolidates the VIE in the Company’s Condensed Consolidated Financial Statements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
Consolidated VIEs
The following table presents the carrying value of assets and liabilities, and the maximum exposure to loss relating to the VIEs for which the Company is the primary beneficiary. Creditors have no recourse against the Company in the event of default by these VIEs nor does the Company have any implied or unfunded commitments to these VIEs. The Company’s financial or other support provided to these VIEs is limited to its investment management services and original investment.
|
| | | | | | | | | | | | | | | | | | |
| September 30, 2013 | December 31, 2012 |
| Total Assets | Total Liabilities [1] | Maximum Exposure to Loss [2] | Total Assets | Total Liabilities [1] | Maximum Exposure to Loss [2] |
CDOs [3] | $ | 33 |
| $ | 36 |
| $ | — |
| $ | 89 |
| $ | 88 |
| $ | 7 |
|
Investment funds [4] | 126 |
| 20 |
| 112 |
| 132 |
| 20 |
| 110 |
|
Limited partnerships | 4 |
| 2 |
| 2 |
| 6 |
| 3 |
| 3 |
|
Total | $ | 163 |
| $ | 58 |
| $ | 114 |
| $ | 227 |
| $ | 111 |
| $ | 120 |
|
| |
[1] | Included in other liabilities in the Company’s Condensed Consolidated Balance Sheets. |
| |
[2] | The maximum exposure to loss represents the maximum loss amount that the Company could recognize as a reduction in net investment income or as a realized capital loss and is the cost basis of the Company’s investment. |
| |
[3] | Total assets included in fixed maturities, AFS in the Company’s Condensed Consolidated Balance |
Sheets.
| |
[4] | Total assets included in fixed maturities, FVO, and short-term investments in the Company’s Condensed Consolidated Balance Sheets. |
CDOs represent structured investment vehicles for which the Company has a controlling financial interest as it provides collateral management services, earns a fee for those services and also holds investments in the securities issued by these vehicles. Investment funds represents wholly-owned fixed income funds established in 2012 for which the Company has exclusive management and control including management of investment securities which is the activity that most significantly impacts its economic performance. Limited partnerships represent one hedge fund for which the Company holds a majority interest in the fund as an investment.
Non-Consolidated VIEs
The Company, through normal investment activities, makes passive investments in structured securities issued by VIEs for which the Company is not the manager which are included in ABS, CDOs, CMBS and RMBS in the Available-for-Sale Securities table and fixed maturities, FVO, in the Company’s Condensed Consolidated Balance Sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the relative size of the Company’s investment in comparison to the principal amount of the structured securities issued by the VIEs, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits and the Company’s inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of the Company’s investment.
Repurchase Agreements and Dollar Roll Agreements
The Company enters into repurchase agreements and dollar roll transactions to manage liquidity or to earn incremental spread income. A repurchase agreement is a transaction in which one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous agreement to repurchase the same securities at a specified price at a later date. A dollar roll is a type of repurchase transaction where a mortgage backed security is sold with an agreement to repurchase substantially the same security at a specified time in the future. These transactions are generally short-term in nature, and therefore, the carrying amounts of these instruments approximate fair value.
As part of repurchase agreements and dollar roll transactions, the Company transfers collateral of U.S. government and government agency securities and receives cash. For the repurchase agreements, the Company obtains cash in an amount equal to at least 95% of the fair value of the securities transferred. The agreements with third parties contain contractual provisions that require additional collateral to be transferred when necessary. The counterparty has the right to sell or re-pledge the securities transferred. The cash received from the repurchase program is typically invested in short-term investments or fixed maturities. The Company accounts for the repurchase agreements and dollar roll transactions as collateralized borrowings. The securities transferred under repurchase agreements and dollar roll transactions are included in fixed maturities, AFS with the obligation to repurchase those securities recorded in Other Liabilities on the Company's Condensed Consolidated Balance Sheets. The fair value of the securities transferred was $914 and $1.6 billion with a corresponding obligation to repurchase $897 and $1.6 billion as of September 30, 2013 and December 31, 2012, respectively.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
The Company's repurchase agreements include master netting provisions that provide the counterparties the right to set off claims and apply securities held by them in respect of their obligations in the event of a default. The Company reported gross amounts of recognized liabilities of $867 and $923 in Other Liabilities on the Condensed Consolidated Balance sheets as of September 30, 2013 and December 31, 2012, respectively. These amounts represent the Company's obligations to repurchase securities under master netting agreements. The Company reported financial collateral pledged of $883 and $923 in fixed maturities, AFS on the Condensed Consolidated Balance sheets as of September 30, 2013 and December 31, 2012, respectively. The fixed maturities are predominantly U.S. government/government agency securities and are disallowed for offsetting under U.S. GAAP.
Derivative Instruments
The Company utilizes a variety of OTC, OTC-cleared and exchange traded derivative instruments as a part of its overall risk management strategy; as well as, to enter into replication transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, credit spread, issuer default, price, and currency exchange rate risk or volatility. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that would be permissible investments under the Company’s investment policies. The Company also purchases and has previously issued financial instruments and products that either are accounted for as free-standing derivatives, such as certain reinsurance contracts, or may contain features that are deemed to be embedded derivative instruments, such as the GMWB rider included with certain variable annuity products.
Strategies that qualify for hedge accounting
Certain derivatives that the Company enters into satisfy the hedge accounting requirements as outlined in Note 1 of Notes to Consolidated Financial Statements included in the Company's 2012 Form 10-K Annual Report. Typically, these hedge relationships include interest rate and foreign currency swaps where the terms or expected cash flows of the hedged item closely match the terms of the swap. The swaps are typically used to manage interest rate duration of certain fixed maturity securities or liability contracts, or to convert securities or liabilities denominated in a foreign currency to U.S. dollars. The hedge strategies by hedge accounting designation include:
Cash flow hedges
Interest rate swaps are predominantly used to manage portfolio duration and better match cash receipts from assets with cash disbursements required to fund liabilities. These derivatives convert interest receipts on floating-rate fixed maturity securities or interest payments on floating-rate guaranteed investment contracts to fixed rates. The Company also enters into forward starting swap agreements primarily to hedge interest rate risk inherent in the assumptions used to price certain liabilities.
Foreign currency swaps are used to convert foreign currency-denominated cash flows related to certain investment receipts and liability payments to U.S. dollars in order to reduce cash flow fluctuations due to changes in currency rates.
Fair value hedges
Interest rate swaps are used to hedge the changes in fair value of certain fixed rate liabilities and fixed maturity securities due to fluctuations in interest rates. Foreign currency swaps are used to hedge the changes in fair value of certain foreign currency-denominated fixed rate liabilities due to changes in foreign currency rates by swapping the fixed foreign payments to floating rate U.S. dollar denominated payments.
Non-qualifying strategies
Derivative relationships that do not qualify for hedge accounting or “non-qualifying strategies” primarily include the hedge programs for our U.S. and international variable annuity products; as well as, the hedging and replication strategies that utilize credit default swaps. In addition, hedges of interest rate and foreign currency risk of certain fixed maturities and liabilities do not qualify for hedge accounting. The non-qualifying strategies include:
Interest rate swaps, swaptions, caps, floors, and futures
The Company uses interest rate swaps, swaptions, caps, floors, and futures to manage duration between assets and liabilities in certain investment portfolios. In addition, the Company enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap going forward. As of September 30, 2013 and December 31, 2012, the notional amount of interest rate swaps in offsetting relationships was $4.5 billion and $5.1 billion, respectively.
Foreign currency swaps
The Company enters into foreign currency swaps to convert the foreign currency exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars.
Japan 3Win foreign currency swaps
Hartford Life Insurance, KK ("HLIKK"), a Japanese affiliate, formerly offered certain variable annuity products with a guaranteed minimum income benefit ("GMIB") rider and subsequently reinsured these GMIB riders to the Company. The GMIB rider is reinsured to a wholly-owned U.S. subsidiary which invests in U.S. dollar denominated assets to support the liability. The U.S. subsidiary entered into pay U.S. dollar, receive yen swap contracts to hedge the currency and yen interest rate exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
Japanese fixed annuity hedging instruments
HLIKK formerly offered a yen denominated fixed annuity product and subsequently reinsured these to the Company. The Company invests in U.S. dollar denominated securities to support the yen denominated fixed liability payments and entered into currency rate swaps to hedge the foreign currency exchange rate and yen interest rate exposures that exist as a result of U.S. dollar assets backing the yen denominated liability.
Credit contracts
Credit default swaps are used to purchase credit protection on an individual entity or referenced index to economically hedge against default risk and credit-related changes in value on fixed maturity securities. Credit default swaps are also used to assume credit risk related to an individual entity, referenced index, or asset pool, as a part of replication transactions. These contracts require the Company to pay or receive a periodic fee in exchange for compensation from the counterparty should the referenced security issuers experience a credit event, as defined in the contract. The Company is also exposed to credit risk related to credit derivatives embedded within certain fixed maturity securities. These securities are primarily comprised of structured securities that contain credit derivatives that reference a standard index of corporate securities. In addition, the Company enters into credit default swaps to terminate existing credit default swaps, thereby offsetting the changes in value of the original swap going forward.
Equity index swaps and options
The Company formerly offered certain equity indexed products, which may contain an embedded derivative that requires bifurcation. The Company has entered into equity index swaps and options to economically hedge the equity volatility risk associated with these embedded derivatives. The Company also enters into equity index options and futures with the purpose of hedging the impact of an adverse equity market environment on the investment portfolio.
U.S. GMWB derivatives, net
The Company formerly offered certain variable annuity products with GMWB riders in the U.S. The GMWB product is a bifurcated embedded derivative (“U.S. GMWB product derivatives”) that has a notional value equal to the guaranteed remaining balance ("GRB"). The Company uses reinsurance contracts to transfer a portion of its risk of loss due to U.S GMWB. The reinsurance contracts covering U.S. GMWB (“U.S. GMWB reinsurance contracts”) are accounted for as free-standing derivatives with a notional amount equal to the GRB amount.
The Company utilizes derivatives (“ U.S. GMWB hedging instruments”) as part of an actively managed program designed to hedge a portion of the capital market risk exposures of the un-reinsured GMWB riders due to changes in interest rates, equity market levels, and equity volatility. These derivatives include customized swaps, interest rate swaps and futures, and equity swaps, options, and futures, on certain indices including the S&P 500 index, EAFE index, and NASDAQ index.
The following table presents notional and fair value for U.S. GMWB hedging instruments.
|
| | | | | | | | | | | | |
| Notional Amount | Fair Value |
| September 30, 2013 | December 31, 2012 | September 30, 2013 | December 31, 2012 |
Customized swaps | $ | 7,659 |
| $ | 7,787 |
| $ | 111 |
| $ | 238 |
|
Equity swaps, options, and futures | 4,548 |
| 5,130 |
| 107 |
| 267 |
|
Interest rate swaps and futures | 6,924 |
| 5,705 |
| (60 | ) | 67 |
|
Total | $ | 19,131 |
| $ | 18,622 |
| $ | 158 |
| $ | 572 |
|
U.S. macro hedge program
The Company utilizes equity options to partially hedge against a decline in the equity markets and the resulting statutory surplus and capital impact primarily arising from GMDB, GMIB and GMWB obligations.
The following table presents notional and fair value for the U.S. macro hedge program.
|
| | | | | | | | | | | | |
| Notional Amount | Fair Value |
| September 30, 2013 | December 31, 2012 | September 30, 2013 | December 31, 2012 |
Equity options | 6,599 |
| 7,442 |
| 181 |
| 286 |
|
Total | $ | 6,599 |
| $ | 7,442 |
| $ | 181 |
| $ | 286 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
International program
The Company formerly reinsured GMWB and GMAB riders from an affiliate in Japan, which are bifurcated embedded derivatives (“International program product derivatives”). The GMWB provides the policyholder with a 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. Certain contract provisions can increase the GRB at contractholder election or after the passage of time. The GMAB provides the policyholder with their initial deposit in a lump sum after a specified waiting period. The notional amount of the International program product derivatives are the foreign currency denominated GRBs converted to U.S. dollars at the current foreign spot exchange rate as of the reporting period date.
The Company enters into derivative contracts (“International program hedging instruments”) to hedge a portion of the capital market risk exposures associated with the guaranteed benefits associated with the international variable annuity contracts. The focus of the hedging program is on the underlying economics of the exposure to the Company, rather than the direct liability of the issuer of the related products which the Company believes is consistent with certain intercompany reinsurance and guarantee agreements. During 2013, the Company expanded its hedging program to effectively eliminate equity and foreign currency exchange risk. The hedging derivatives are comprised of equity futures, options, and swaps and currency forwards and options to hedge against a decline in the debt and equity markets or changes in foreign currency exchange rates and the resulting statutory surplus and capital impact primarily arising from GMDB, GMIB and GMWB obligations issued in Japan. The Company also enters into foreign currency denominated interest rate swaps and swaptions to hedge the interest rate exposure related to the potential annuitization of certain benefit obligations.
The following table represents notional and fair value for the international program hedging instruments. As of September 30, 2013 the table below does not include hedging instruments used to hedge certain variable annuity products issued in the U.K since the Company entered into a definitive agreement to sell HLIL. For further information, see the Sale of Hartford Life International Limited ("HLIL") section below.
|
| | | | | | | | | | | | |
| Notional Amount | Fair Value |
| September 30, 2013 | December 31, 2012 | September 30, 2013 | December 31, 2012 |
Credit derivatives | $ | 350 |
| $ | 350 |
| $ | 18 |
| $ | 28 |
|
Currency forwards [1] | 4,629 |
| 9,327 |
| (55 | ) | (87 | ) |
Currency options | 8,234 |
| 9,710 |
| (19 | ) | (49 | ) |
Equity futures | 1,876 |
| 1,206 |
| — |
| — |
|
Equity options | 2,347 |
| 2,621 |
| (200 | ) | (105 | ) |
Equity swaps | 3,840 |
| 2,683 |
| (8 | ) | (12 | ) |
Customized swaps | — |
| 899 |
| — |
| (11 | ) |
Interest rate futures | 406 |
| 634 |
| — |
| — |
|
Interest rate swaps and swaptions | 34,999 |
| 21,018 |
| 71 |
| 131 |
|
Total | $ | 56,681 |
| $ | 48,448 |
| $ | (193 | ) | $ | (105 | ) |
| |
[1] | As of September 30, 2013 and December 31, 2012 net notional amounts are $1.3 billion and $0.1 billion, respectively, which include $3.0 billion and $4.7 billion, respectively, related to long positions and $1.7 billion and $4.6 billion, respectively, related to short positions. |
GMAB, GMWB and GMIB assumed reinsurance contracts
The Company reinsures the GMAB, GMWB, and GMIB embedded derivatives for host variable annuity contracts written by HLIKK. The reinsurance contracts are accounted for as free-standing derivative contracts. The notional amount of the reinsurance contracts is the yen denominated GRB balance value converted at the period-end yen to U.S. dollar foreign spot exchange rate. For further information on this transaction, refer to Note 11 - Transactions with Affiliates of Notes to Condensed Consolidated Financial Statements.
Coinsurance and modified coinsurance reinsurance contracts
During 2010 a subsidiary entered into a coinsurance with funds withheld and modified coinsurance reinsurance agreement with an affiliated captive reinsurer, which creates an embedded derivative. In addition, provisions of this agreement include reinsurance to cede a portion of direct written U.S. GMWB riders, which is accounted for as an embedded derivative. Additional provisions of this agreement cede variable annuity contract GMAB, GMWB and GMIB riders reinsured by the Company that have been assumed from HLIKK and is accounted for as a free-standing derivative. For further information on this transaction, refer to Note 11 - Transactions with Affiliates of Notes to Condensed Consolidated Financial Statements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
As of September 30, 2013 the Company had approximately $1.3 billion of invested assets supporting other policyholder funds and benefits payable reinsured under a modified coinsurance arrangement in connection with the sale of the Individual Life business structured as a reinsurance transaction. The assets are held in a trust established by the Company. The Company pays or receives cash quarterly to settle the results of the reinsured business, including the investment results. As a result of this modified coinsurance arrangement, the Company has an embedded derivative that transfers to the reinsurer certain unrealized changes in fair value due to interest rate and credit risks of these assets. The notional amounts of the reinsurance contracts are the invested assets supporting the reinsured reserves that are carried at fair value.
Sale of Hartford Life International Limited ("HLIL")
The Company formerly offered certain variable annuity products in the U.K. through HLIL, an indirect wholly-owned subsidiary. During 2012 the Company entered into a customized swap to hedge the capital markets impacts. The Company has since entered into a definitive agreement to sell HLIL which is expected to close by the end of 2013. Refer to Note 2 for additional information on the sale agreement. Upon executing the sale agreement in the second quarter of 2013, the Company entered into equity futures contracts to substantially offset the equity market impacts of the customized swap. As of September 30, 2013 the Company terminated the customized swap and equity futures.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
Derivative Balance Sheet Classification
The table below summarizes the balance sheet classification of the Company’s derivative related fair value amounts; as well as, the gross asset and liability fair value amounts. The fair value amounts presented below do not include income accruals or cash collateral held amounts, which are netted with derivative fair value amounts to determine balance sheet presentation. Derivatives in the Company’s separate accounts where the associated gains and losses accrue directly to policyholders are not included. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the table below. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of the Company’s derivative activity. Notional amounts are not necessarily reflective of credit risk.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Net Derivatives | Asset Derivatives | Liability Derivatives |
| Notional Amount | Fair Value | Fair Value | Fair Value |
Hedge Designation/ Derivative Type | Sep 30, 2013 | Dec 31, 2012 | Sep 30, 2013 | Dec 31, 2012 | Sep 30, 2013 | Dec 31, 2012 | Sep 30, 2013 | Dec 31, 2012 |
Cash flow hedges | | | | | | | | |
Interest rate swaps | $ | 3,372 |
| $ | 3,863 |
| $ | 47 |
| $ | 167 |
| $ | 63 |
| $ | 167 |
| $ | (16 | ) | $ | — |
|
Foreign currency swaps | 143 |
| 163 |
| (8 | ) | (17 | ) | 2 |
| 3 |
| (10 | ) | (20 | ) |
Total cash flow hedges | 3,515 |
| 4,026 |
| 39 |
| 150 |
| 65 |
| 170 |
| (26 | ) | (20 | ) |
Fair value hedges | | | | | | | | |
Interest rate swaps | 1,490 |
| 753 |
| (31 | ) | (55 | ) | 2 |
| — |
| (33 | ) | (55 | ) |
Foreign currency swaps | 40 |
| 40 |
| 15 |
| 16 |
| 15 |
| 16 |
| — |
| — |
|
Total fair value hedges | 1,530 |
| 793 |
| (16 | ) | (39 | ) | 17 |
| 16 |
| (33 | ) | (55 | ) |
Non-qualifying strategies | | | | | | | | |
Interest rate contracts | | | | | | | | |
Interest rate swaps, swaptions, caps, floors, and futures | 4,624 |
| 13,432 |
| (380 | ) | (363 | ) | 174 |
| 436 |
| (554 | ) | (799 | ) |
Foreign exchange contracts | | | | | | | | |
Foreign currency swaps and forwards | 110 |
| 182 |
| (5 | ) | (9 | ) | 6 |
| 5 |
| (11 | ) | (14 | ) |
Japan 3Win foreign currency swaps | 1,816 |
| 1,816 |
| (311 | ) | (127 | ) | — |
| — |
| (311 | ) | (127 | ) |
Japanese fixed annuity hedging instruments | 1,503 |
| 1,652 |
| 52 |
| 224 |
| 114 |
| 228 |
| (62 | ) | (4 | ) |
Credit contracts | | | | | | | | |
Credit derivatives that purchase credit protection | 584 |
| 1,539 |
| (2 | ) | (5 | ) | 3 |
| 3 |
| (5 | ) | (8 | ) |
Credit derivatives that assume credit risk [1] | 1,624 |
| 1,981 |
| 15 |
| (8 | ) | 18 |
| 17 |
| (3 | ) | (25 | ) |
Credit derivatives in offsetting positions | 3,874 |
| 5,341 |
| (5 | ) | (22 | ) | 44 |
| 56 |
| (49 | ) | (78 | ) |
Equity contracts | | | | | | | | |
Equity index swaps and options | 750 |
| 791 |
| 5 |
| 35 |
| 19 |
| 45 |
| (14 | ) | (10 | ) |
Variable annuity hedge program | | | | | | | | |
U.S. GMWB product derivatives [2] | 26,532 |
| 28,868 |
| (210 | ) | (1,249 | ) | — |
| — |
| (210 | ) | (1,249 | ) |
U.S. GMWB reinsurance contracts | 4,795 |
| 5,773 |
| 46 |
| 191 |
| 46 |
| 191 |
| — |
| — |
|
U.S. GMWB hedging instruments | 19,131 |
| 18,622 |
| 158 |
| 572 |
| 408 |
| 743 |
| (250 | ) | (171 | ) |
U.S. macro hedge program | 6,599 |
| 7,442 |
| 181 |
| 286 |
| 228 |
| 356 |
| (47 | ) | (70 | ) |
International program product derivatives [2] | — |
| 1,876 |
| — |
| (42 | ) | — |
| — |
| — |
| (42 | ) |
International program hedging instruments | 56,681 |
| 48,448 |
| (193 | ) | (105 | ) | 407 |
| 657 |
| (600 | ) | (762 | ) |
Other | | | | | | | | |
GMAB, GMWB, and GMIB reinsurance contracts | 14,192 |
| 18,287 |
| (843 | ) | (1,827 | ) | — |
| — |
| (843 | ) | (1,827 | ) |
Coinsurance and modified coinsurance reinsurance contracts | 35,418 |
| 44,985 |
| (82 | ) | 890 |
| 664 |
| 1,566 |
| (746 | ) | (676 | ) |
Total non-qualifying strategies | 178,233 |
| 201,035 |
| (1,574 | ) | (1,559 | ) | 2,131 |
| 4,303 |
| (3,705 | ) | (5,862 | ) |
Total cash flow hedges, fair value hedges, and non-qualifying strategies | $ | 183,278 |
| $ | 205,854 |
| $ | (1,551 | ) | $ | (1,448 | ) | $ | 2,213 |
| $ | 4,489 |
| $ | (3,764 | ) | $ | (5,937 | ) |
Balance Sheet Location | | | | | | | | |
Fixed maturities, available-for-sale | $ | 192 |
| $ | 416 |
| $ | (2 | ) | $ | (20 | ) | $ | — |
| $ | — |
| $ | (2 | ) | $ | (20 | ) |
Other investments | 47,590 |
| 37,809 |
| 277 |
| 581 |
| 773 |
| 1,049 |
| (496 | ) | (468 | ) |
Other liabilities | 54,500 |
| 67,765 |
| (723 | ) | 38 |
| 730 |
| 1,683 |
| (1,453 | ) | (1,645 | ) |
Consumer notes | 9 |
| 26 |
| (1 | ) | (2 | ) | — |
| — |
| (1 | ) | (2 | ) |
Reinsurance recoverable | 40,213 |
| 47,430 |
| (36 | ) | 1,081 |
| 710 |
| 1,757 |
| (746 | ) | (676 | ) |
Other policyholder funds and benefits payable | 40,774 |
| 52,408 |
| (1,066 | ) | (3,126 | ) | — |
| — |
| (1,066 | ) | (3,126 | ) |
Total derivatives | $ | 183,278 |
| $ | 205,854 |
| $ | (1,551 | ) | $ | (1,448 | ) | $ | 2,213 |
| $ | 4,489 |
| $ | (3,764 | ) | $ | (5,937 | ) |
| |
[1] | The derivative instruments related to this strategy are held for other investment purposes. |
| |
[2] | These derivatives are embedded within liabilities and are not held for risk management purposes. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
Change in Notional Amount
The net decrease in notional amount of derivatives since December 31, 2012 was primarily due to the following:
| |
• | The decrease in notional amount of non-qualifying interest rate contracts primarily resulted from the termination of interest rate swaptions purchased during the third quarter of 2012 designed to hedge the interest rate risk of the securities being transferred related to the sale of the Retirement Plan business segment. |
| |
• | The decrease in notional amount related to the international program product derivatives was due to the announced sale of HLIL and the subsequent termination of the customized swap. Also related to the sale were certain derivatives included in international program hedging instruments that were reclassified to discontinued operations. For additional information on the sale agreement, refer to Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements. |
| |
• | The decrease in notional amount related to the U.S. GMWB product derivatives was primarily driven by lapses and partial withdrawals. |
| |
• | The decrease in notional amount of coinsurance and modified coinsurance reinsurance contracts primarily resulted from the embedded derivatives terminated as part Individual Life and Retirement Plans business dispositions. |
| |
• | The decrease in notional amount of GMAB, GMWB, and GMIB reinsurance contracts was primarily driven by policyholder surrender activity. |
| |
• | The increase in notional amount related to the international program hedging instruments resulted from the Company expanding its hedging program to effectively eliminate equity and foreign currency exchange risk related to international product program guarantees from the business reinsured from HLIKK. |
Change in Fair Value
The net decrease in the total fair value of derivative instruments since December 31, 2012 was primarily related to the following:
| |
• | The fair value related to the Japanese fixed annuity hedging instruments and Japan 3Win foreign currency swaps decreased primarily due to a depreciation of the Japanese yen in relation to the U.S. dollar. |
| |
• | GMAB, GMWB and GMIB reinsurance contracts represent the guarantees that are internally reinsured from HLIKK. The fair value of these liabilities has improved as a result of a sustained recovery in the equity markets, exchange rates, interest rates, and volatility. For a discussion related to the reinsurance agreement refer to Note 11 - Transactions with Affiliates of Notes to Condensed Consolidated Financial Statements for more information on this transaction. |
| |
• | The Coinsurance and modified coinsurance reinsurance contracts represents U.S. and International guarantees that are ceded to an affiliate. The primary driver of the decline in the fair value of these derivatives is a result of changes in the unrealized gains/losses of the underlying portfolios associated with these contracts. For a discussion related to the reinsurance agreement refer to Note 11 - Transactions with Affiliates of Notes to Condensed Consolidated Financial Statements for more information on this transaction. |
| |
• | The fair value associated with the international program hedging instruments decreased primarily due to an improvement in global equity markets and depreciation of the Japanese yen in relation to the euro and the U.S. dollar. |
| |
• | The increase in fair value related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily due to favorable policyholder behavior largely related to increased surrenders, liability assumption updates for lapses and withdrawal rates, and the passage of time. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
Offsetting of Derivative Assets/Liabilities
The following tables present the gross fair value amounts, the amounts offset, and net position of derivative instruments eligible for offset in the Company's Condensed Consolidated Balance Sheets. Amounts offset include fair value amounts, income accruals and cash collateral held related to derivative instruments that are traded under a common master netting agreement, as described above. Also included in the tables are financial collateral received and pledged, which is contractually permitted to be offset upon an event of default, although is disallowed for offsetting under U.S. GAAP.
As of September 30, 2013 |
| | | | | | | | | | | | | | | | | | | | | | | |
| (i) | | (ii) | | (iii) = (i) - (ii) | (iv) | | (v) = (iii) - (iv) |
| | | | | Net Amounts Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position | | |
| Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Statement of Financial Position | | Derivative Assets [1] | | Accrued Interest and Cash Collateral Received [2] | | Financial Collateral Received [4] | | Net Amount |
Description | | | | | | | | | | | |
Other investments | $ | 1,503 |
| | $ | 1,207 |
| | $ | 277 |
| | $ | 19 |
| | $ | 179 |
| | $ | 117 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Statement of Financial Position | | Derivative Liabilities [3] | | Accrued Interest and Cash Collateral Pledged [3] | | Financial Collateral Pledged [4] | | Net Amount |
Description | | | | | | | | | | | |
Other liabilities | $ | (1,949 | ) | | $ | (1,242 | ) | | $ | (723 | ) | | $ | 16 |
| | $ | (844 | ) | | $ | 137 |
|
As of December 31, 2012
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (i) | | (ii) | | (iii) = (i) - (ii) | (iv) | | (v) = (iii) - (iv) |
| | | | | Net Amounts Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position | | |
| Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Statement of Financial Position | | Derivative Assets [1] | | Accrued Interest and Cash Collateral Received [2] | | Financial Collateral Received [4] | | Net Amount |
Description | | | | | | | | | | | |
Other investments | $ | 2,732 |
| | $ | 2,238 |
| | $ | 581 |
| | $ | (87 | ) | | $ | 490 |
| | $ | 4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Statement of Financial Position | | Derivative Liabilities [3] | | Accrued Interest and Cash Collateral Pledged [3] | | Financial Collateral Pledged [4] | | Net Amount |
Description | | | | | | | | | | | |
Other liabilities | $ | (2,113 | ) | | $ | (1,759 | ) | | $ | 38 |
| | $ | (392 | ) | | $ | (300 | ) | | $ | (54 | ) |
| |
[1] | Included in other invested assets in the Company's Condensed Consolidated Balance Sheets. |
| |
[2] | Included in other assets in the Company's Condensed Consolidated Balance Sheets. |
| |
[3] | Included in other liabilities in the Company's Condensed Consolidated Balance Sheets. |
| |
[4] | Excludes exchange-traded futures which are settled daily. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current period earnings. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
The following tables presents the components of the gain or loss on derivatives that qualify as cash flow hedges:
Derivatives in Cash Flow Hedging Relationships
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gain (Loss) Recognized in OCI on Derivative (Effective Portion) | | Net Realized Capital Gains(Losses) Recognized in Income on Derivative (Ineffective Portion) |
| Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
| 2013 | 2012 | | 2013 | 2012 | | 2013 | 2012 | | 2013 | 2012 |
Interest rate swaps | $ | (2 | ) | $ | 21 |
| | $ | (128 | ) | $ | 82 |
| | $ | — |
| $ | — |
| | $ | (2 | ) | $ | — |
|
Foreign currency swaps | 3 |
| (1 | ) | | 9 |
| (18 | ) | | — |
| — |
| | — |
| — |
|
Total | $ | 1 |
| $ | 20 |
| | $ | (119 | ) | $ | 64 |
| | $ | — |
| $ | — |
| | $ | (2 | ) | $ | — |
|
|
| | | | | | | | | | | | | | |
| | Gain or (Loss) Reclassified from AOCI into Income (Effective Portion) |
| | Three months ended September 30, | | Nine months ended September 30, |
| Location | 2013 | 2012 | | 2013 | 2012 |
Interest rate swaps | Net realized capital gain/(loss) | $ | — |
| $ | 1 |
| | $ | 66 |
| $ | 5 |
|
Interest rate swaps | Net investment income | 14 |
| 26 |
| | 43 |
| 77 |
|
Foreign currency swaps | Net realized capital gain/(loss) | 4 |
| 1 |
| | 2 |
| (7 | ) |
Total | | $ | 18 |
| $ | 28 |
| | $ | 111 |
| $ | 75 |
|
As of September 30, 2013 the before-tax deferred net gains on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are $49. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains (losses) as an adjustment to interest income over the term of the investment cash flows.
During the three months and nine months ended September 30, 2013 the Company had no net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring. During the three months ended September 30, 2012 the Company had no net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring. During the nine months ended September 30, 2012 the Company had $7 of net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring.
Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative; as well as, the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The Company includes the gain or loss on the derivative in the same line item as the offsetting loss or gain on the hedged item. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
The Company recognized in income gains (losses) representing the ineffective portion of fair value hedges as follows:
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
Derivatives in Fair-Value Hedging Relationships |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gain or (Loss) Recognized in Income [1] |
| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| Derivative | Hedge Item | | Derivative | Hedge Item | | Derivative | Hedge Item | | Derivative | Hedge Item |
Interest rate swaps | | | | | | | | | | | |
Net realized capital gain/(loss) | $ | — |
| $ | 9 |
| | $ | (2 | ) | $ | 1 |
| | $ | 22 |
| $ | (21 | ) | | $ | (8 | ) | $ | 4 |
|
Foreign currency swaps | | | | | | | | | | | |
Net realized capital gain/(loss) | 2 |
| (2 | ) | | (6 | ) | 6 |
| | — |
| — |
| | (8 | ) | 8 |
|
Benefits, losses and loss adjustment expenses | (1 | ) | 1 |
| | — |
| — |
| | (2 | ) | 2 |
| | (6 | ) | 6 |
|
Total | $ | 1 |
| $ | 8 |
| | $ | (8 | ) | $ | 7 |
| | $ | 20 |
| $ | (19 | ) | | $ | (22 | ) | $ | 18 |
|
| |
[1] | The amounts presented do not include the periodic net coupon settlements of the derivative or the coupon income (expense) related to the hedged item. The net of the amounts presented represents the ineffective portion of the hedge. |
Non-qualifying Strategies
For non-qualifying strategies, including embedded derivatives that are required to be bifurcated from their host contracts and accounted for as derivatives, the gain or loss on the derivative is recognized currently in earnings within net realized capital gains (losses). The following table presents the gain or loss recognized in income on non-qualifying strategies:
Gain or (Loss) Recognized within Net Realized Capital Gains and Losses |
| | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | 2012 | | 2013 | 2012 |
Interest rate contracts | | | | | |
Interest rate swaps, caps, floors, and forwards | $ | 2 |
| $ | (4 | ) | | $ | (6 | ) | $ | (6 | ) |
Foreign exchange contracts | | | | | |
Foreign currency swaps and forwards | (1 | ) | (1 | ) | | 4 |
| 12 |
|
Japan 3Win foreign currency swaps [1] | — |
| 15 |
| | (184 | ) | (106 | ) |
Japanese fixed annuity hedging instruments [2] | 6 |
| 24 |
| | (150 | ) | (46 | ) |
Credit contracts | | | | | |
Credit derivatives that purchase credit protection | (1 | ) | 4 |
| | (10 | ) | (15 | ) |
Credit derivatives that assume credit risk | 12 |
| 61 |
| | 32 |
| 194 |
|
Equity contracts | | | | | |
Equity index swaps and options | (5 | ) | (9 | ) | | (21 | ) | (22 | ) |
Variable annuity hedge program | | | | | |
U.S. GMWB product derivatives | 451 |
| 823 |
| | 1,099 |
| 1,235 |
|
U.S. GMWB reinsurance contracts | (74 | ) | (184 | ) | | (166 | ) | (265 | ) |
U.S. GMWB hedging instruments | (174 | ) | (258 | ) | | (714 | ) | (519 | ) |
U.S. macro hedge program | (50 | ) | (109 | ) | | (182 | ) | (292 | ) |
International program product derivatives | — |
| — |
| | — |
| — |
|
International program hedging instruments | (72 | ) | (122 | ) | | (671 | ) | (483 | ) |
Other | | | | | |
GMAB, GMWB, and GMIB reinsurance contracts | 226 |
| 348 |
| | 837 |
| 599 |
|
Coinsurance and modified coinsurance reinsurance contracts | (322 | ) | (734 | ) | | (1,023 | ) | (1,176 | ) |
Total | $ | (2 | ) | $ | (146 | ) | | $ | (1,155 | ) | $ | (890 | ) |
| |
[1] | The associated liability is adjusted for changes in spot rates through realized capital gains and was $(16) and $(46) for the three months ended September 30, 2013 and 2012, respectively, and $173 and $19 for the nine months ended September 30, 2013 and 2012, respectively. |
| |
[2] | The associated liability is adjusted for changes in spot rates through realized capital gains and was $(19) and $(54) for the three months ended September 30, 2013 and 2012, respectively, and $222 and $33 for the nine months ended September 30, 2013 and 2012, respectively. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
For the three and nine months ended September 30, 2013 the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:
| |
• | For the three and nine months ended September 30, 2013 the net losses associated with the international program hedging instruments were primarily driven by an improvement in global equity markets and depreciation of the Japanese yen in relation to the euro. |
| |
• | The net gain for the three and nine months ended September 30, 2013 on derivatives associated with GMAB, GMWB, and GMIB reinsurance contracts, which are reinsured to an affiliated captive reinsurer, was primarily due to an improvement in global and domestic equity markets and a depreciation of the Japanese yen. |
| |
• | The net loss for the three and nine months ended September 30, 2013 on the coinsurance and modified coinsurance reinsurance agreement, which is accounted for as a derivative instrument, primarily offsets the net gain on GMAB, GMWB, and GMIB reinsurance contracts. For a discussion related to the reinsurance agreement refer to Note 11 - Transactions with Affiliates for more information on this transaction. |
| |
• | For the three and nine months ended September 30, 2013 the net gain related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily due to favorable policyholder behavior largely related to increased surrenders, liability assumption updates for lapses and withdrawal rates, and the passage of time. |
| |
• | For the nine months ended September 30, 2013 the net loss related to the Japanese fixed annuity hedging instruments and the Japan 3Win foreign currency swaps was primarily due to a depreciation of the Japanese yen in relation to the U.S. dollar. |
For the three and nine months ended September 30, 2012 the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:
| |
• | The net loss for the three months ended September 30, 2012 associated with the international program hedging instruments was primarily driven by an improvement in global and domestic equity markets, partially offset by appreciation of the Japanese yen in relation to the euro and the U.S. dollar. The net loss for the nine months ended September 30, 2012 associated with the international program hedging instruments was primarily driven by an improvement in global and domestic equity markets and depreciation of the Japanese yen in relation to the euro and the U.S. dollar, partially offset by a decrease in interest rates. |
| |
• | The net gain for the three and nine months ended September 30, 2012 on derivatives associated with GMAB, GMWB, and GMIB reinsurance contracts, which are reinsured to an affiliated captive reinsurer, was primarily due to an improvement in global and domestic equity markets and a decrease in currency volatility. |
| |
• | The net loss for the three and nine months ended September 30, 2012 on the coinsurance and modified coinsurance reinsurance agreement, which is accounted for as a derivative instrument, primarily offsets the net gain on GMAB, GMWB, and GMIB reinsurance contracts. For a discussion related to the reinsurance agreement refer to Note 11 - Transactions with Affiliates for more information on this transaction. |
| |
• | For the nine months ended September 30, 2012 the net loss related to the Japan 3Win foreign currency swaps was primarily due to a decline in U.S. interest rates, depreciation of the Japanese yen in relation to the U.S. dollar, and strengthening of the currency basis swap spread between U.S. dollar and Japanese yen. |
| |
• | For the three and nine months ended September 30, 2012 the net gain related to credit derivatives that assume credit risk was primarily due to credit spread tightening. |
| |
• | For the three and nine months ended September 30, 2012 the net gain related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily a result of a liability model assumption update, a decrease in equity volatility, and outperformance of the underlying actively managed funds as compared to their respective indices. |
Refer to Note 9 for additional disclosures regarding contingent credit related features in derivative agreements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivative Instruments (continued)
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk of a single entity, referenced index, or asset pool in order to synthetically replicate investment transactions. The Company will receive periodic payments based on an agreed upon rate and notional amount and will only make a payment if there is a credit event. A credit event payment will typically be equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation after the occurrence of the credit event. A credit event is generally defined as a default on contractually obligated interest or principal payments or bankruptcy of the referenced entity. The credit default swaps in which the Company assumes credit risk primarily reference investment grade single corporate issuers and baskets, which include standard and customized diversified portfolios of corporate issuers. The diversified portfolios of corporate issuers are established within sector concentration limits and may be divided into tranches that possess different credit ratings.
The following tables present the notional amount, fair value, weighted average years to maturity, underlying referenced credit obligation type and average credit ratings, and offsetting notional amounts and fair value for credit derivatives in which the Company is assuming credit risk.
As of September 30, 2013 |
| | | | | | | | | | | | | | | |
| | | | Underlying Referenced Credit Obligation(s) [1] | | |
Credit Derivative type by derivative risk exposure | Notional Amount [2] | Fair Value | Weighted Average Years to Maturity | Type | Average Credit Rating | Offsetting Notional Amount [3] | Offsetting Fair Value [3] |
Single name credit default swaps | | | | | | | |
Investment grade risk exposure | $ | 1,316 |
| $ | 11 |
| 2 years | Corporate Credit/ Foreign Gov. | A | $ | 754 |
| $ | (7 | ) |
Below investment grade risk exposure | 57 |
| — |
| 1 year | Corporate Credit | CCC+ | 58 |
| — |
|
Basket credit default swaps [4] | | | | | | | |
Investment grade risk exposure | 1,656 |
| 14 |
| 2 years | Corporate Credit | BBB+ | 774 |
| (6 | ) |
Below investment grade risk exposure | 31 |
| 3 |
| 5 years | Corporate Credit | BB+ | — |
| — |
|
Investment grade risk exposure | 236 |
| (10 | ) | 3 years | CMBS Credit | A | 236 |
| 10 |
|
Below investment grade risk exposure | 115 |
| (23 | ) | 3 years | CMBS Credit | B | 115 |
| 23 |
|
Embedded credit derivatives | | | | | | | |
Investment grade risk exposure | 150 |
| 144 |
| 4 years | Corporate Credit | BBB+ | — |
| — |
|
Total | $ | 3,561 |
| $ | 139 |
| | | | $ | 1,937 |
| $ | 20 |
|
As of December 31, 2012 |
| | | | | | | | | | | | | | | |
| | | | Underlying Referenced Credit Obligation(s) [1] | | |
Credit Derivative type by derivative risk exposure | Notional Amount [2] | Fair Value | Weighted Average Years to Maturity | Type | Average Credit Rating | Offsetting Notional Amount [3] | Offsetting Fair Value [3] |
Single name credit default swaps | | | | | | | |
Investment grade risk exposure | $ | 1,787 |
| $ | 8 |
| 3 years | Corporate Credit/ Foreign Gov. | A | $ | 878 |
| $ | (19 | ) |
Below investment grade risk exposure | 114 |
| (1 | ) | 1 year | Corporate Credit | B+ | 114 |
| (3 | ) |
Basket credit default swaps [4] | | | | | | | |
Investment grade risk exposure | 2,074 |
| 11 |
| 2 years | Corporate Credit | BBB+ | 1,326 |
| (6 | ) |
Investment grade risk exposure | 237 |
| (12 | ) | 4 years | CMBS Credit | A | 238 |
| 12 |
|
Below investment grade risk exposure | 115 |
| (27 | ) | 4 years | CMBS Credit | B+ | 115 |
| 27 |
|
Embedded credit derivatives | | | | | | | |
Investment grade risk exposure | 325 |
| 296 |
| 4 years | Corporate Credit | BBB- | — |
| — |
|
Total | $ | 4,652 |
| $ | 275 |
| | | | $ | 2,671 |
| $ | 11 |
|
| |
[1] | The average credit ratings are based on availability and the midpoint of the applicable ratings among Moody’s, S&P, and Fitch. If no rating is available from a rating agency, then an internally developed rating is used. |
| |
[2] | Notional amount is equal to the maximum potential future loss amount. These derivatives are governed by agreements and clearing house rules and applicable law which include collateral posting requirements. There is no additional specific collateral related to these contracts or recourse provisions included in the contracts to offset losses going forward. |
| |
[3] | The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid related to, the original swap. |
| |
[4] | Includes $2.0 billion and $2.4 billion as of September 30, 2013 and December 31, 2012, respectively, of standard market indices of diversified portfolios of corporate issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Reinsurance
The Company cedes insurance to affiliated and unaffiliated insurers to enable the Company to manage capital and risk exposure. Such arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company's procedures include careful initial selection of its reinsurers, structuring agreements to provide collateral funds where necessary, and regularly monitoring the financial condition and ratings of its reinsurers. The Company entered into two reinsurance transactions in connection with the sales of its Retirement Plans and Individual Life businesses in January 2013. For further discussion of these transactions, see Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements.
The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. Insurance recoveries on ceded reinsurance agreements, which reduce death and other benefits, were $212 and $681 for the three and nine months ended September 30, 2013, respectively, and $95 and $226 for the three months and nine months ended September 30, 2012. In addition, the Company has reinsured a portion of the risk associated with U.S. variable annuities and the associated GMDB and GMWB riders.
The Company also maintains reinsurance agreements with HLA, whereby the Company cedes both group life and group accident and health risk. Under these treaties, the Company ceded group life premium of $32 and $56 for the three and nine months ended September 30, 2013, respectively, and $23 and $72 for the three and nine months ended September 30, 2012. The Company ceded accident and health premiums to HLA of $44 and $127 for the three and nine months ended September 30, 2013, respectively, and $49 and $139, for the three and nine months ended September 30, 2012.
A subsidiary of the Company, Hartford Life and Annuity Insurance Company (“HLAI”) has a modified coinsurance ("modco") and coinsurance with funds withheld reinsurance agreement with an affiliated captive reinsurer, White River Life Reinsurance (“WRR”). Under this transaction, the Company ceded $7 and $25 for the three and nine months ended September 30, 2013, respectively, and $15 and $45 for the three and nine months ended September 30, 2012. For further information regarding the WRR reinsurance agreement, see Note 11 - Transactions with Affiliates of Notes to Condensed Consolidated Financial Statements.
Concentration of Credit Risk
As of September 30, 2013, the Company has reinsurance recoverables from MassMutual and Prudential of $9.5 billion and $9.2 billion, respectively. These reinsurance recoverables are secured by invested assets held in trust for the benefit of the Company in the event of a default by the reinsurers. As of September 30, 2013, the fair value of assets held in trust securing the reinsurance recoverables from MassMutual and Prudential were $9.4 billion and $7 billion, respectively. As of September 30, 2013, the net reinsurance recoverables from Prudential represents approximately 27% of the Company's consolidated stockholders' equity. As of September 30, 2013, the Company has no other reinsurance-related concentrations of credit risk greater than 10% of the Company’s consolidated stockholder's equity.
Fee income, earned premiums and other are comprised of the following:
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2013 | 2012 | 2013 | 2012 |
Gross fee income, earned premiums and other | $ | 828 |
| $ | 908 |
| $ | 2,401 |
| $ | 2,816 |
|
Reinsurance assumed | 18 |
| 15 |
| 53 |
| 50 |
|
Reinsurance ceded | (420 | ) | (181 | ) | (1,234 | ) | (530 | ) |
Fee income, earned premiums and other | $ | 426 |
| $ | 742 |
| $ | 1,220 |
| $ | 2,336 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Deferred Policy Acquisition Costs and Present Value of Future Profits
Changes in the DAC balance are as follows:
|
| | | | | | |
| Nine Months Ended September 30, |
| 2013 | 2012 |
Balance, beginning of period | $ | 3,072 |
| $ | 3,448 |
|
Deferred costs | 10 |
| 253 |
|
Amortization — DAC | (109 | ) | (234 | ) |
Amortization — Unlock benefit (charge), pre-tax | (109 | ) | (2 | ) |
Amortization — DAC from discontinued operations | — |
| (26 | ) |
Amortization — DAC related to business dispositions [1] [2] | (2,229 | ) | — |
|
Adjustments to unrealized gains and losses on securities available-for-sale and other | 89 |
| (345 | ) |
Balance, end of period | $ | 724 |
| $ | 3,094 |
|
| |
[1] | Includes accelerated amortization of $352 and $2,374 recognized upon the sale of the Retirement Plans and Individual Life businesses, respectively, in the first quarter of 2013. For further information, see Note 2 - Business Dispositions of Notes to Consolidated Financial Statements. |
| |
[2] | Includes previously unrealized gains on securities AFS of $148 and $349 recognized upon the sale of the Retirement Plans and Individual Life businesses, respectively, in the first quarter of 2013. |
7. Separate Accounts, Death Benefits and Other Insurance Benefit Features
Changes in the gross GMDB and UL secondary guarantee benefits are as follows:
|
| | | | | | |
| GMDB | UL Secondary Guarantees |
Liability balance as of January 1, 2013 | $ | 944 |
| $ | 363 |
|
Incurred | 150 |
| 240 |
|
Paid | (125 | ) | — |
|
Unlock | (120 | ) | — |
|
Impact of Reinsurance Transaction | — |
| 1,143 |
|
Currency Translation Adjustment | (5 | ) | — |
|
Liability balance as of September 30, 2013 | $ | 844 |
| $ | 1,746 |
|
Reinsurance recoverable asset, as of January 1, 2013 | $ | 608 |
| $ | 21 |
|
Incurred | 79 |
| 240 |
|
Paid | (76 | ) | — |
|
Unlock | (73 | ) | — |
|
Impact of Reinsurance Transaction | — |
| 1,485 |
|
Reinsurance recoverable asset, as of September 30, 2013 | $ | 538 |
| $ | 1,746 |
|
|
| | | | | | |
| GMDB | UL Secondary Guarantees |
Liability balance as of January 1, 2012 | $ | 1,158 |
| $ | 228 |
|
Incurred | 162 |
| 84 |
|
Paid | (196 | ) | — |
|
Unlock | (165 | ) | 21 |
|
Currency Translation Adjustment | (1 | ) | — |
|
Liability balance as of September 30, 2012 | $ | 958 |
| $ | 333 |
|
Reinsurance recoverable asset, as of January 1, 2012 | $ | 724 |
| $ | 22 |
|
Incurred | 90 |
| (2 | ) |
Paid | (90 | ) | — |
|
Unlock | (108 | ) | — |
|
Reinsurance recoverable asset, as of September 30, 2012 | $ | 616 |
| $ | 20 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Separate Accounts, Death Benefits and Other Insurance Benefit Features (continued)
The following table presents details concerning GMDB and GMIB exposure as of September 30, 2013:
|
| | | | | | | | | | |
Individual Variable and Group Annuity Account Value by GMDB/GMIB Type |
Maximum anniversary value (“MAV”) [1] | Account Value (“AV”) [8] | Net amount at Risk (“NAR”) [9] | Retained Net Amount at Risk (“RNAR”) [9] | Weighted Average Attained Age of Annuitant |
MAV only | $ | 19,367 |
| $ | 3,112 |
| $ | 191 |
| 69 |
With 5% rollup [2] | 1,579 |
| 271 |
| 18 |
| 69 |
With Earnings Protection Benefit Rider (“EPB”) [3] | 4,828 |
| 582 |
| 18 |
| 67 |
With 5% rollup & EPB | 573 |
| 117 |
| 5 |
| 70 |
Total MAV | 26,347 |
| 4,082 |
| 232 |
| |
Asset Protection Benefit (APB) [4] | 18,669 |
| 383 |
| 77 |
| 67 |
Lifetime Income Benefit (LIB) – Death Benefit [5] | 878 |
| 11 |
| 3 |
| 66 |
Reset [6] (5-7 years) | 3,205 |
| 84 |
| 39 |
| 69 |
Return of Premium [7] /Other | 20,733 |
| 108 |
| 23 |
| 67 |
Subtotal U.S. GMDB | 69,832 |
| 4,668 |
| 374 |
| 68 |
Less: General Account Value with U.S. GMDB | 7,412 |
| | | |
Subtotal Separate Account Liabilities with GMDB | 62,420 |
| | | |
Separate Account Liabilities without U.S. GMDB | 77,444 |
| | | |
Total Separate Account Liabilities | $ | 139,864 |
| | | |
Japan GMDB [10], [11] | $ | 14,161 |
| $ | 575 |
| $ | — |
| 69 |
Japan GMIB [10], [11] | $ | 13,951 |
| $ | 448 |
| $ | — |
| 69 |
| |
[1] | MAV: the GMDB is the greatest of current AV, net premiums paid and the highest AV on any anniversary before age 80 (adjusted for withdrawals). |
| |
[2] | Rollup: the GMDB is the greatest of the MAV, current AV, 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 GMDB is the greatest of the MAV, current AV, or contract value plus a percentage of a contract’s growth. A contract’s growth is AV less premiums net of withdrawals, subject to a cap of 200% of premiums net of withdrawals. |
| |
[4] | APB GMDB is the greater of current AV or MAV, not to exceed current AV plus 25% times the greater of net premiums and MAV (each adjusted for premiums in the past 12 months). |
| |
[5] | LIB GMDB is the greatest of current AV, net premiums paid, or for certain contracts a benefit amount that ratchets over time, generally based on market performance. |
| |
[6] | Reset GMDB is the greatest of current AV, net premiums paid and the most recent five to seven year anniversary AV before age 80 (adjusted for withdrawals). |
| |
[7] | ROP: the GMDB is the greater of current AV and net premiums paid. |
| |
[8] | AV includes the contract holder’s investment in the separate account and the general account. |
| |
[9] | NAR is defined as the guaranteed benefit in excess of the current AV. RNAR is NAR reduced for reinsurances. NAR and RNAR are highly sensitive to equity market movements and increase when equity markets decline. |
| |
[10] | Assumed GMDB includes a ROP and MAV (before age 80) paid in a single lump sum. GMIB is a guarantee to return initial investment, adjusted for earnings liquidity, paid through a fixed annuity, after a minimum deferral period of 10, 15 or 20 years. The guaranteed remaining balance (“GRB”) related to the Japan GMIB was $13.8 billion and $17.8 billion as of September 30, 2013 and December 31, 2012, respectively. The GRB related to the Japan GMAB and GMWB was $361 and $470 as of September 30, 2013 and December 31, 2012, respectively. These liabilities are not included in the Separate Account as they are not legally insulated from the general account liabilities of the insurance enterprise. As of September 30, 2013, 100% of RNAR is reinsured to an affiliate. See Note 11 - Transactions with Affiliates of Notes to Condensed Consolidated Financial statements. |
| |
[11] | Policies with a guaranteed living benefit (a GMWB in the US or a GMIB in Japan) also have a guaranteed death benefit. The NAR for each benefit is shown, however these benefits are not additive. When a policy terminates due to death, any NAR related to GMWB or GMIB is released. Similarly, when a policy goes into benefit status on a GMWB or GMIB, its GMDB NAR is released. |
For a description of the Company’s guaranteed living benefits that are accounted for at fair value, see Note 3 - Fair Value Measurements of Notes to Condensed Consolidated Financial Statements.
Account balances of contracts with death benefit guarantees were invested in variable separate accounts as follows:
|
| | | | | | |
Asset type | September 30, 2013 | December 31, 2012 |
Equity securities (including mutual funds) | $ | 56,808 |
| $ | 58,208 |
|
Cash and cash equivalents | 5,612 |
| 6,940 |
|
Total | $ | 62,420 |
| $ | 65,148 |
|
As of September 30, 2013 and December 31, 2012, approximately 15% and 16%, respectively, of the equity securities above were invested in fixed income securities through these funds and approximately 85% and 84%, respectively, were invested in equity securities through these funds.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Sales Inducements
Changes in sales inducement activity are as follows:
|
| | | | | | |
| Nine Months Ended September 30, |
| 2013 | 2012 |
Balance, beginning of period | $ | 118 |
| $ | 186 |
|
Sales inducements deferred | — |
| 3 |
|
Amortization — Unlock | (3 | ) | (57 | ) |
Amortization charged to income | (6 | ) | (11 | ) |
Amortization related to business dispositions [1] | (71 | ) | — |
|
Balance, end of period | $ | 38 |
| $ | 121 |
|
| |
[1] | Includes $22 and $49, related to sale of the Company's Retirement Plans and Individual Life businesses, respectively, in the first quarter of 2013. For further information, see Note 2 - Business Dispositions of Notes to Consolidated Financial Statements. |
9. Commitments and Contingencies
Litigation
The Company is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending or providing indemnity for third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The Company accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. Management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition, results of operations or cash flows of the Company.
The Company is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. These actions include, among others, individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims or other allegedly unfair or improper business practices. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to the consolidated financial condition of the Company. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, the outcome in certain matters could, from time to time, have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows in particular quarterly or annual periods.
Derivative Commitments
Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings of the individual legal entity that entered into the derivative agreement as set by nationally recognized statistical rating agencies. If the legal entity’s financial strength were to fall below certain ratings, the counterparties to the derivative agreements could demand immediate and ongoing full collateralization and in certain instances demand immediate settlement of all outstanding derivative positions traded under each impacted bilateral agreement. The settlement amount is determined by netting the derivative positions transacted under each agreement. If the termination rights were to be exercised by the counterparties, it could impact the legal entity’s ability to conduct hedging activities by increasing the associated costs and decreasing the willingness of counterparties to transact with the legal entity. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position as of September 30, 2013, is $740. Of this $740 the legal entities have posted collateral of $889 in the normal course of business. In addition, the Company has posted collateral of $44 associated with a customized GMWB derivative. Based on derivative market values as of September 30, 2013, a downgrade of one or two levels below the current financial strength ratings by either Moody’s or S&P would not require additional assets to be posted as collateral. These collateral amounts could change as derivative market values change, as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the collateral that we would post, if required, would be primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agencies.
On June 17, 2013, S&P lowered its counterparty credit and insurer financial strength ratings on Hartford Life Insurance Company to BBB+. Given this downgrade action, termination rating triggers of one derivative counterparty relationship was impacted. This counterparty has the right to terminate this relationship and would have to settle the outstanding derivatives prior to exercising its termination right. The Company is in the process of re-negotiating the rating trigger which it expects to successfully complete. Accordingly, the Company's hedging programs have not been adversely impacted by the announcement of the downgrade of Hartford Life Insurance Company. As of September 30, 2013, the notional amount and fair value related to this counterparty is $1.3 billion and $(6), respectively.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Stock Compensation Plans
The Hartford has three primary stock-based compensation plans. The Company is included in these plans and has been allocated the following compensation expense and income tax benefit.
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2013 | 2012 | 2013 | 2012 |
Stock-based compensation plans (benefit)/expense | $ | 3 |
| $ | 7 |
| $ | 8 |
| $ | 24 |
|
Income tax (benefit)/expense | (1 | ) | (2 | ) | (3 | ) | (8 | ) |
Total stock-based compensation plans (benefit)/expense, net of tax | $ | 2 |
| $ | 5 |
| $ | 5 |
| $ | 16 |
|
The Company did not capitalize any cost of stock-based compensation.
11. Transactions with Affiliates
Parent Company Transactions
Transactions of the Company with Hartford Fire Insurance Company, Hartford Holdings and its affiliates relate principally to tax settlements, reinsurance, insurance coverage, rental and service fees, payment of dividends and capital contributions. In addition, an affiliated entity purchased group annuity contracts from the Company to fund structured settlement periodic payment obligations assumed by the affiliated entity as part of claims settlements with property casualty insurance companies and self-insured entities. As of September 30, 2013 and December 31, 2012, the Company had $54 and $53, respectively of reserves for claim annuities purchased by affiliated entities. For the nine months ended September 30, 2013 and 2012 the Company recorded earned premiums of $8 and $26, respectively, for these intercompany claim annuities. In 2008, the Company issued a payout annuity to an affiliate for $2.2 billion of consideration. The Company will pay the benefits associated with this payout annuity over 12 years.
Substantially all general insurance expenses related to the Company, including rent and employee benefit plan expenses are initially paid by The Hartford. Direct expenses are allocated to the Company using specific identification, and indirect expenses are allocated using other applicable methods. Indirect expenses include those for corporate areas which, depending on type, are allocated based on either a percentage of direct expenses or on utilization.
Investment advisory agreements between the Company's Mutual Funds subsidiaries and HL Investment Advisors, LLC, an indirect subsidiary of the Company, were terminated effective December 31, 2012 in connection with HLA's reorganization of its Mutual Funds business. The Company no longer has any significant continuing involvement in HLI's Mutual Funds business.
The Company has issued a guarantee to retirees and vested terminated employees (“Retirees”) of The Hartford Retirement Plan for U.S. Employees (“the Plan”) who retired or terminated prior to January 1, 2004. The Plan is sponsored by The Hartford. The guarantee is an irrevocable commitment to pay all accrued benefits which the Retiree or the Retiree’s designated beneficiary is entitled to receive under the Plan in the event the Plan assets are insufficient to fund those benefits and The Hartford is unable to provide sufficient assets to fund those benefits. The Company believes that the likelihood that payments will be required under this guarantee is remote.
In 1990, Hartford Fire guaranteed the obligations of the Company with respect to life, accident and health insurance and annuity contracts issued after January 1, 1990. The guarantee was issued to provide an increased level of security to potential purchasers of the Company’s products. Although the guarantee was terminated in 1997, it still covers policies that were issued from 1990 to 1997. As of September 30, 2013 and September 30, 2012, no recoverables have been recorded for this guarantee, as the Company was able to meet these policyholder obligations.
Reinsurance Assumed from Affiliates
Prior to June 1, 2009, yen and U.S. dollar based fixed market value adjusted (“MVA”) annuity products, written by HLIKK, were sold to customers in Japan. HLIKK subsequently reinsured in-force and prospective MVA annuities to the Company effective September 1, 2004. As of September 30, 2013 and December 31, 2012, $1.7 billion and $2.1 billion, respectively, of the account value had been assumed by the Company.
HLAI assumed GMDB on covered contracts that have an associated GMIB rider in force on or after July 31, 2006 and GMIB riders issued on or after April 1, 2005. HLAI assumed certain in-force and prospective GMAB, GMIB and GMDB riders issued on or after February 5, 2007 by HLIKK. HLAI assumed certain in-force and prospective GMIB and GMDB riders issued on or after February 1, 2008 by HLIKK. HLAI assumed certain in-force and prospective GMDB riders issued on or after April 1, 2005 by HLIKK.
The GMDB reinsurance is accounted for as a Death Benefit and Other Insurance Benefit Reserve which is not reported at fair value. The liability for the assumed GMDB reinsurance was $0 and $22 and the net amount at risk for the assumed GMDB reinsurance was $0.6 billion and $2.7 billion at September 30, 2013 and December 31, 2012, respectively.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Transactions with Affiliates (continued)
While the form of the agreement between HLAI and HLIKK for the GMIB business is reinsurance, in substance and for accounting purposes the agreement is a free standing derivative. As such, the reinsurance agreement for the GMIB business is recorded at fair value on the Company’s balance sheet, with prospective changes in fair value recorded in net realized capital gains (losses) in net income (loss). The fair value of the GMIB liability was $0.8 billion and $1.8 billion at September 30, 2013 and December 31, 2012, respectively.
HLAI has a reinsurance agreement with Hartford Life Limited, (“HLL”), a wholly owned UK subsidiary of HLAI. HLAI assumes 100% of the risks associated with GMDB and GMWB written by and in-force with HLL as of November 1, 2010. The GMDB reinsurance is accounted for as a Death Benefit and Other Insurance Benefit Reserves which is not reported at fair value. The liability for the assumed GMDB reinsurance was $5 and $4 September 30, 2013 and December 31, 2012, respectively and the net amount at risk for the assumed GMDB reinsurance was $26 and $42 at September 30, 2013 and December 31, 2012, respectively. On June 27, 2013, the Company announced the signing of a definitive agreement to sell Hartford Life International Limited, HLL's parent. For further discussion of this transaction, see Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements.
While the form of the agreements between HLAI and HLIKK and HLAI and HLL for the GMAB/GMWB business is reinsurance, in substance and for accounting purposes these agreements are free standing derivatives. As such, the reinsurance agreements for the GMAB/GMWB business are recorded at fair value on the Company’s Consolidated Balance Sheets, with prospective changes in fair value recorded in net realized capital gains (losses) in net income (loss). The fair value of the GMAB/GMWB liability/(asset) was $(1) and $0 at September 30, 2013 and December 31, 2012, respectively.
Reinsurance Ceded to Affiliates
HLAI has a modified coinsurance (“modco”) and coinsurance with funds withheld reinsurance agreement with WRR. HLAI cedes to WRR variable annuity contracts, associated riders, and payout annuities written by HLAI; annuity contracts and associated riders assumed by HLAI under unaffiliated reinsurance agreements; GMAB, GMIB riders and GMDB risks assumed by HLAI from HLIKK; and, as of November 1, 2010, GMDB and GMWB riders assumed by HLAI from HLL.
Under modco, the assets and the liabilities, and under coinsurance with funds withheld, the assets, associated with the reinsured business will remain on the consolidated balance sheet of the Company in segregated portfolios, and WRR will receive the economic risks and rewards related to the reinsured business through modco and funds withheld adjustments. These adjustments are recorded as an adjustment to the Company's operating expenses.
The impact of this transaction on the Company’s Condensed Consolidated Statements of Operations is as follows:
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
|
| 2013 | 2012 | 2013 | 2012 |
Earned premiums | $ | (7 | ) | $ | (15 | ) | $ | (25 | ) | $ | (45 | ) |
Net realized gains (losses) [1] | (323 | ) | (666 | ) | (1,250 | ) | (1,198 | ) |
Total revenues | (330 | ) | (681 | ) | (1,275 | ) | (1,243 | ) |
Benefits, losses and loss adjustment expenses | (2 | ) | (14 | ) | (7 | ) | (42 | ) |
Insurance operating costs and other expenses | (194 | ) | (317 | ) | (1,016 | ) | (821 | ) |
Total expenses | (196 | ) | (331 | ) | (1,023 | ) | (863 | ) |
Income (loss) before income taxes | (134 | ) | (350 | ) | (252 | ) | (380 | ) |
Income tax expense (benefit) | (47 | ) | (122 | ) | (88 | ) | (133 | ) |
Income from continuing operations, net of tax | $ | (87 | ) | $ | (228 | ) | $ | (164 | ) | $ | (247 | ) |
Income from discontinued operations, net of tax | 3 |
| 1 |
| 1 |
| 1 |
|
Net income (loss) | $ | (84 | ) | $ | (227 | ) | $ | (163 | ) | $ | (246 | ) |
[1] Amounts represent the change in valuation of the derivative associated with this transaction.
The Company's Condensed Consolidated Balance Sheets include a modco reinsurance (payable)/recoverable and a deposit liability, as well as a net reinsurance recoverable that is comprised of an embedded derivative. The balance of the modco reinsurance (payable)/recoverable, deposit liability and net reinsurance payable were $249, $655, $148, respectively at September 30, 2013 and $1.3 billion, $527, $900, respectively at December 31, 2012.
Champlain Life Reinsurance Company
Effective November 1, 2007, HLAI entered into a modco and coinsurance with funds withheld agreement with Champlain Life Reinsurance Company ("Champlain Life"), an affiliate captive insurance company, to provide statutory surplus relief for certain life insurance policies. The agreement was accounted for as a financing transaction in accordance with U.S. GAAP. Simultaneous with the sale of the Individual Life business to Prudential, HLAI recaptured the business assumed by Champlain Life. As a result, on January 2, 2013, HLAI was relieved of its funds withheld obligation to Champlain Life of $691; HLAI paid a recapture fee of $347 to Champlain
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Life; and, HLAI recognized a pre-tax gain of $344 ($224 after-tax). HLAI simultaneously ceded the recaptured reserves to Prudential and recognized the gain on recapture as part of the reinsurance loss on disposition.
12. Restructuring and Other Costs
As a result of a strategic business realignment announced in 2012, The Hartford is currently focusing on its Property & Casualty, Group Benefits and Mutual Funds businesses. In addition, the Company implemented restructuring activities in 2011 across several areas aimed at reducing overall expense levels. The Company intends to substantially complete the related restructuring activities over the next 24 months. For further discussion of the Company's strategic business realignment and related business disposition transactions, see Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements.
Termination benefits related to workforce reductions and lease and other contract terminations have been accrued through September 30, 2013. Additional costs, mainly severance benefits and other related costs and professional fees, expected to be incurred subsequent to September 30, 2013, and asset impairment charges, if any, will be expensed as appropriate.
Restructuring and other costs are expected to approximate $150, pre-tax. Restructuring costs and other costs of approximately $137, pre-tax have been incurred by the Company to date in connection with these activities. As the Company executes on its operational and strategic initiatives, the Company's estimate of and actual costs incurred for restructuring activities may differ from these estimates.
Restructuring and other costs, pre-tax incurred by the Company in connection with these activities are as follows:
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2013 | 2012 | | 2013 | 2012 |
Severance benefits and related costs | $ | (4 | ) | $ | 30 |
| | $ | 2 |
| $ | 47 |
|
Professional fees | 2 |
| 6 |
| | 10 |
| 14 |
|
Asset impairment charges | — |
| 1 |
| | 5 |
| 4 |
|
Total restructuring and other costs | $ | (2 | ) | $ | 37 |
| | $ | 17 |
| $ | 65 |
|
Changes in the accrued restructuring liability balance included in other liabilities in the Company's Consolidated Balance Sheets
are as follows:
|
| | | | | | | | | | | | |
| Nine Months Ended September 30, 2013 |
| Severance Benefits and Related Costs | Professional Fees | Asset Impairment Charges | Total Restructuring and Other Costs |
Balance, beginning of period | $ | 31 |
| $ | — |
| $ | — |
| $ | 31 |
|
Accruals/provisions | 2 |
| 10 |
| 5 |
| 17 |
|
Payments/write-offs | (29 | ) | (10 | ) | — |
| (39 | ) |
Balance, end of period | $ | 4 |
| $ | — |
| $ | 5 |
| $ | 9 |
|
|
| | | | | | | | | | | | |
| Nine Months Ended September 30, 2012 |
| Severance Benefits and Related Costs | Professional Fees | Asset Impairment Charges | Total Restructuring and Other Costs |
Balance, beginning of period | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Accruals/provisions | 47 |
| 14 |
| 4 |
| 65 |
|
Payments/write-offs | (38 | ) | (7 | ) | (4 | ) | (49 | ) |
Balance, end of period | $ | 9 |
| $ | 7 |
| $ | — |
| $ | 16 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Discontinued Operations
The operations of the Company's U.K. variable annuity business meet the criteria for reporting as discontinued operations in accordance with the announced sale of HLIL.
The results of operations reflected as discontinued operations in the Condensed Consolidated Statements of Operations, consisting of amounts related to HLIL and the Company's Mutual Funds business, are as follows:
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2013 | 2012 | | 2013 | 2012 |
Revenues | | | | | |
Earned premiums | $ | — |
| $ | (2 | ) | | $ | (2 | ) | $ | (7 | ) |
Fee income | — |
| 139 |
| | $ | 8 |
| 420 |
|
Net investment income (loss) | | | | | |
Securities available-for-sale and other | (1 | ) | 2 |
| | (3 | ) | 8 |
|
Equity securities, trading | — |
| 75 |
| | 138 |
| 155 |
|
Total net investment income (loss) | (1 | ) | 77 |
| | 135 |
| 163 |
|
Net realized capital gains (losses) | (7 | ) | 24 |
| | (17 | ) | 72 |
|
Total revenues | (8 | ) | 238 |
| | 124 |
| 648 |
|
Benefits, losses and expenses | | | | | |
Benefits, losses and loss adjustment expenses | — |
| — |
| | 1 |
| 2 |
|
Benefits, losses and loss adjustment expenses - returns credited on international variable annuity | — |
| 75 |
| | 138 |
| 155 |
|
Amortization of DAC | — |
| 8 |
| | — |
| 26 |
|
Insurance operating costs and other expenses | (6 | ) | 116 |
| | (39 | ) | 327 |
|
Total benefits, losses and expenses | (6 | ) | 199 |
| | 100 |
| 510 |
|
Income before income taxes | (2 | ) | 39 |
| | 24 |
| 138 |
|
Income tax expense (benefit) | (1 | ) | 9 |
| | 1 |
| 28 |
|
Income (loss) from operations of discontinued operations, net of tax | (1 | ) | 30 |
| | 23 |
| 110 |
|
Net realized capital loss on disposal, net of tax | — |
| — |
| | (51 | ) | — |
|
Income (loss) from discontinued operations, net of tax | $ | (1 | ) | $ | 30 |
| | $ | (28 | ) | $ | 110 |
|
[1] Includes an income tax benefit of $298 on the sale of HLIL for nine months ended September 30, 2013.
The carrying values of the assets and liabilities of HLIL classified as held for sale in the Condensed Consolidated Balance Sheets are as follows:
|
| | | |
| As of September 30, 2013 |
Assets | |
Fixed maturities | $ | 469 |
|
Equity securities, trading | 1,732 |
|
Short-term investments | 2 |
|
Cash | 115 |
|
Other assets
| (316 | ) |
Total assets held for sale | $ | 2,002 |
|
Liabilities | |
Other policyholder funds and benefits payable – international variable annuities
| 1,732 |
|
Other liabilities
| (9 | ) |
Total liabilities held for sale | $ | 1,723 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Changes In and Reclassifications From Accumulated Other Comprehensive Income
Changes in AOCI by component consist of the following:
Three months ended September 30, 2013 |
| | | | | | | | | | | | |
| Net Unrealized Gain on Securities [1] | Net Gain (Loss) on Cash-Flow Hedging Instruments [1] | Foreign Currency Translation Adjustments [1] | Total AOCI [1] |
Beginning balance | $ | 463 |
| $ | 121 |
| $ | (64 | ) | $ | 520 |
|
OCI before reclassifications | (92 | ) | 1 |
| 62 |
| (29 | ) |
Amounts reclassified from AOCI | 8 |
| (12 | ) | — |
| (4 | ) |
Net OCI | (84 | ) | (11 | ) | 62 |
| (33 | ) |
Ending balance | $ | 379 |
| $ | 110 |
| $ | (2 | ) | $ | 487 |
|
[1] All amounts are net of tax and DAC.
Nine months ended September 30, 2013
|
| | | | | | | | | | | | |
| Net Unrealized Gain on Securities [1] | Net Gain (Loss) on Cash-Flow Hedging Instruments [1] | Foreign Currency Translation Adjustments [1] | Total AOCI [1] |
Beginning balance | $ | 1,752 |
| $ | 258 |
| $ | (23 | ) | 1,987 |
|
OCI before reclassifications | (368 | ) | (76 | ) | 21 |
| (423 | ) |
Amounts reclassified from AOCI | (1,005 | ) | (72 | ) | — |
| (1,077 | ) |
Net OCI | (1,373 | ) | (148 | ) | 21 |
| (1,500 | ) |
Ending balance | $ | 379 |
| $ | 110 |
| $ | (2 | ) | $ | 487 |
|
[1] All amounts are net of tax and DAC.
Reclassifications from AOCI consist of the following:
|
| | | | | | | |
| Amount Reclassified from AOCI | |
AOCI | Three months ended September 30, 2013 | Nine months ended September 30, 2013 | Affected Line Item in the Condensed Consolidated Statement of Operations |
Net Unrealized Gain on Securities | | | |
Available-for-sale securities [1] | $ | (13 | ) | $ | 1,546 |
| Net realized capital gains (losses) |
| (13 | ) | 1,546 |
| Total before tax |
| (5 | ) | 541 |
| Income tax expense |
| $ | (8 | ) | $ | 1,005 |
| Net income |
Net Gains on Cash-Flow Hedging Instruments | | | |
Interest rate swaps [2] | $ | — |
| $ | 66 |
| Net realized capital gains (losses) |
Interest rate swaps | 14 |
| 43 |
| Net investment income |
Foreign currency swaps | 4 |
| 2 |
| Net realized capital gains (losses) |
| 18 |
| 111 |
| Total before tax |
| 6 |
| 39 |
| Income tax expense |
| $ | 12 |
| $ | 72 |
| Net income |
Total amounts reclassified from AOCI | $ | 4 |
| $ | 1,077 |
| Net income |
[1] Includes $1.5 billion of net unrealized gains on securities relating to the sales of the Retirement Plans and Individual Life businesses.
[2] Includes $71 of net gains on cash flow hedging instruments relating to the sales of the Retirement Plans and Individual Life businesses.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in millions, unless otherwise stated)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Hartford Life Insurance Company and its subsidiaries (“Hartford Life Insurance Company” or the “Company”) as of September 30, 2013, and its results of operations for the three months ended September 30, 2013 compared to the equivalent 2012 period. This discussion should be read in conjunction with MD&A in Hartford Life Insurance Company’s 2012 Form 10-K Annual Report. Certain reclassifications have been made to prior period financial information to conform to the current period classifications.
The Company meets the conditions specified in General Instruction H(1) of Form 10-Q and is filing this Form with the reduced disclosure format permitted for wholly-owned subsidiaries of reporting entities. The Company has omitted, from this Form 10-Q, certain information in Part I Item 2 Management Discussion and Analysis of Financial Condition and Results of Operations. The Company has included, under Item 2, Consolidated Results of Operations to explain any material changes in revenue and expense items for the periods presented.
INDEX
CONSOLIDATED RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | | | | |
Operating Summary | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2013 | 2012 | Change | | 2013 | 2012 | Change |
Fee income and other | $ | 375 |
| $ | 739 |
| (49 | %) | | $ | 1,085 |
| $ | 2,260 |
| (52 | %) |
Earned premiums | 55 |
| 3 |
| NM |
| | 135 |
| 76 |
| 78 | % |
Net investment income: | | |
|
| | | |
|
|
Securities available-for-sale and other | 415 |
| 620 |
| (33 | %) | | 1,282 |
| 1,919 |
| (33 | %) |
Equity securities, trading | — |
| — |
| — | % | | 1 |
| 1 |
| — | % |
Total net investment income | 415 |
| 620 |
| (33 | %) | | 1,283 |
| 1,920 |
| (33 | %) |
Net realized capital gains (losses) [1] | (41 | ) | (192 | ) | (79 | %) | | 797 |
| (778 | ) | NM |
|
Total revenues | 804 |
| 1,170 |
| (31 | %) | | 3,300 |
| 3,478 |
| (5 | %) |
Benefits, losses and loss adjustment expenses | 435 |
| 762 |
| (43 | %) | | 1,304 |
| 2,196 |
| (41 | %) |
Amortization of deferred policy acquisition costs and present value of future profits | 147 |
| 83 |
| 77 | % | | 218 |
| 236 |
| (8 | %) |
Insurance operating costs and other expenses | (36 | ) | 99 |
| NM |
| | (450 | ) | 455 |
| NM |
|
Reinsurance loss on dispositions | — |
| — |
| — | % | | 1,491 |
| — |
| NM |
|
Dividends to policyholders | 4 |
| 4 |
| — | % | | 12 |
| 15 |
| (20 | %) |
Total benefits, losses and expenses | 550 |
| 948 |
| (42 | %) | | 2,575 |
| 2,902 |
| (11 | %) |
Income from continuing operations before income taxes | 254 |
| 222 |
| 14 | % | | 725 |
| 576 |
| 26 | % |
Income tax expense | 52 |
| 49 |
| 6 | % | | 145 |
| 108 |
| 34 | % |
Income from continuing operations, net of tax | 202 |
| 173 |
| 17 | % | | 580 |
| 468 |
| 24 | % |
Income from discontinued operations, net of tax | (1 | ) | 30 |
| NM |
| | (28 | ) | 110 |
| NM |
|
Net income | 201 |
| 203 |
| (1 | %) | | 552 |
| 578 |
| (4 | %) |
Net income (loss) attributable to noncontrolling interest | — |
| — |
| — | % | | 6 |
| (1 | ) | NM |
|
Net income attributable to Hartford Life Insurance Company | $ | 201 |
| $ | 203 |
| (1 | %) | | $ | 546 |
| $ | 579 |
| (6 | %) |
| |
[1] | Includes net realized capital gains (losses) on business dispositions of $1,561 for the nine months ended September 30, 2013. |
Three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012
Net income decreased for the three and nine months ended September 30, 2013 as compared to the prior year periods. The decrease in net income for the three and nine months ended September 30, 2013 was primarily driven by a decline in net investment income as a result of the sale of the Retirement Plans and Individual Life businesses in January 2013 and a slight decline in yield offset by the change in the modco reinsurance agreement. For further discussion of net investment income, see MD&A - Net Investment Income (Loss)
A reduction in the loss on the affiliate modco reinsurance agreement increased earnings by $143 and $83 for the three and nine months ended September 30, 2013, respectively, as compared to 2012. The most significant fluctuations of the modco agreement were within net realized capital gains (losses) and insurance operating costs and other expenses, which are primarily due to changes in reserves and hedging costs associated with the reinsured block of business. For further discussion on the affiliate modco reinsurance agreement see Note 11 - Transactions with Affiliates of Notes to Condensed Consolidated Financial Statements.
Net realized capital gains (losses), excluding the impacts of the affiliate modco reinsurance agreement and the net realized gains on business disposition, decreased by $192 and increased by $66 for the three and nine months ended September 30, 2013, respectively, as compared to the prior year periods, resulting in net realized capital losses of $282 and net realized capital gains of $486 for the three and nine months ended September 30, 2013. For further discussion of net realized capital gains (losses), see MD&A - Net Realized Capital Gains (Losses).
The effective tax rates in 2013 and 2012 differ from the U.S. Federal statutory rate of 35% primarily due to permanent differences related to the separate account dividends received deduction (“DRD”). For further discussion of income taxes, see the Income Taxes section within Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.
Investment Results
Net Investment Income (Loss)
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2013 | 2012 | | 2013 | 2012 |
(Before-tax) | Amount | Yield [1] | Amount | Yield [1] | | Amount | Yield [1] | Amount | Yield [1] |
Fixed maturities [2] | $ | 318 |
| 4.4 | % | $ | 484 |
| 4.5 | % | | $ | 957 |
| 4.3 | % | $ | 1,472 |
| 4.4 | % |
Equity securities, AFS | 2 |
| 2.1 | % | 2 |
| 2.1 | % | | 6 |
| 2.5 | % | 7 |
| 2.2 | % |
Mortgage loans | 43 |
| 4.8 | % | 65 |
| 5.1 | % | | 130 |
| 4.8 | % | 186 |
| 5.2 | % |
Policy loans | 20 |
| 5.7 | % | 29 |
| 6.0 | % | | 61 |
| 5.6 | % | 88 |
| 6.1 | % |
Limited partnerships and other alternative investments | 21 |
| 6.7 | % | 10 |
| 3.0 | % | | 88 |
| 9.0 | % | 67 |
| 6.6 | % |
Other [3] | 28 |
| | 49 |
| | | 92 |
| | 154 |
| |
Investment expense | (17 | ) | | (19 | ) | | | (52 | ) | | (55 | ) | |
Total securities AFS and other | 415 |
| 4.3 | % | 620 |
| 4.4 | % | | 1,282 |
| 4.4 | % | 1,919 |
| 4.5 | % |
Equity securities, trading | — |
| | — |
| | | 1 |
| | 1 |
| |
Total net investment income (loss) | $ | 415 |
| | $ | 620 |
| | | 1,283 |
| | 1,920 |
| |
Total securities, AFS and other excluding limited partnerships and other alternative investments | $ | 394 |
| 4.3 | % | $ | 610 |
| 4.5 | % | | $ | 1,194 |
| 4.3 | % | $ | 1,852 |
| 4.4 | % |
| |
[1] | Yields calculated using annualized net investment income (excluding income related to equity securities, trading) before investment expenses divided by the monthly average invested assets at cost, or adjusted carrying value, as applicable, excluding equity securities, trading, repurchase agreement and dollar roll collateral, and consolidated variable interest entity non-controlling interests. Yield calculations for the nine months ended September 30, 2013 exclude assets transfered due to the sale of the Retirement Plans and Individual Life businesses. Yield calculations for all periods exclude income and assets associated with the disposal of the HLIL business. |
| |
[2] | Includes net investment income on short-term investments. |
| |
[3] | Primarily includes income from derivatives that qualify for hedge accounting and hedge fixed maturities. |
Three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012
Total net investment income declined primarily due to a decrease in asset levels as a result of the sale of the Retirement Plans and Individual Life businesses in January 2013, but also reflects a slight decline in yield. Refer to Note 2 - Business Dispositions of the Notes to Condensed Consolidated Financial Statements for further discussion of this transaction. This decline was partially offset by higher income from limited partnerships, due to underlying real estate and private equity funds selling underlying investments.
The annualized net investment income yield, excluding limited partnerships and other alternative investments, has declined to 4.3% or approximately 20 basis points in the third quarter of 2013 versus the third quarter of 2012, based upon the impacts of the divested Individual Life and Retirement Plans businesses. The invested assets transferred associated with the divested Individual Life and Retirement Plans businesses had a carrying value of $16.9 billion and an average book yield, including the impact of associated derivatives, of approximately 5.0% and represent the vast majority of the estimated change in the net investment income yield. The average reinvestment rate for the nine months ended September 30, 2013 was approximately 3.6%, excluding treasury securities and mortgage backed securities related to dollar roll transactions (for further discussion on dollar roll transactions see Note 4 - Investments and Derivative Investments of Notes to Condensed Consolidated Financial Statements), which approximates the average yield of sales and maturities for the same period. Based upon current reinvestment rates, we currently expect the portfolio yield, excluding limited partnerships and other alternative investments, for the full year 2013, to remain relatively consistent with the third quarter annualized net investment income yield. The estimated impact on net investment income is subject to change as the composition of the portfolio changes through normal portfolio management and trading activities and changes in market conditions.
Net Realized Capital Gains (Losses) |
| | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Before-tax) | 2013 | 2012 | | 2013 | 2012 |
Gross gains on sales | $ | 50 |
| $ | 120 |
| | $ | 1,723 |
| $ | 402 |
|
Gross losses on sales | (47 | ) | (83 | ) | | (145 | ) | (244 | ) |
Net OTTI losses recognized in earnings | (16 | ) | (13 | ) | | (32 | ) | (77 | ) |
Valuation allowances on mortgage loans | — |
| — |
| | — |
| — |
|
Japanese fixed annuity contract hedges, net [1] | (8 | ) | (24 | ) | | (4 | ) | (42 | ) |
Periodic net coupon settlements on credit derivatives/Japan | 3 |
| 4 |
| | (2 | ) | 4 |
|
Results of variable annuity hedge program |
|
|
|
| |
|
|
|
|
U.S. GMWB derivatives, net | 203 |
| 381 |
| | 219 |
| 451 |
|
U.S. macro hedge program | (50 | ) | (109 | ) | | (182 | ) | (292 | ) |
Total U.S. program | 153 |
| 272 |
| | 37 |
| 159 |
|
International Program | (72 | ) | (122 | ) | | (671 | ) | (484 | ) |
Total results of variable annuity hedge program | 81 |
| 150 |
| | (634 | ) | (325 | ) |
GMIB/GMAB/GMWB reinsurance | 226 |
| 348 |
| | 837 |
| 599 |
|
Coinsurance and modified coinsurance reinsurance contracts | (322 | ) | (734 | ) | | (1,023 | ) | (1,176 | ) |
Other, net [2] | (8 | ) | 40 |
| | 77 |
| 81 |
|
Net realized capital gains (losses) | $ | (41 | ) | $ | (192 | ) | | $ | 797 |
| $ | (778 | ) |
| |
[1] | Relates to the Japanese fixed annuity product (adjustment of product liability for changes in spot currency exchange rates, related derivative hedging instruments, excluding net periodic coupon settlements, and Japan FVO securities). |
| |
[2] | Primarily consists of transactional foreign currency re-valuation associated with the internal reinsurance of the Japan variable annuity business, which is offset in AOCI and changes in value of non-qualifying derivatives. |
Details on the Company's net realized capital gains and losses are as follows:
Gross gains and losses on sales
| |
• | Gross gains on sales for the three months ended September 30, 2013 were primarily due to gains on the sale of industrial corporate, RMBS, and financial service securities. Gross losses on the sales three months ended September 30, 2013 were the result of losses on sales of U.S. treasury securities due to rising interest rates. The sales were primarily as a result of management of duration and liquidity, as well as, progress towards sector allocation objectives. Gross gains and losses on sales for the nine months ended September 30, 2013 were primarily due to the sale of the Retirement Plans and Individual Life businesses resulting in a gain of $1.5 billion. |
| |
• | Gross gains and losses on sales for the three and nine months ended September 30, 2012 were predominately from sales of investment grade corporate securities and U.S. treasuries due to tactical repositioning of the portfolio. |
Variable annuity hedge program
• For the three and nine months ended September 30, 2013 the net gain related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily driven by gains of $83 and $186, respectively, due to favorable policyholder behavior largely related to increased surrenders, and gains of $27 and $63, respectively, due to the passage of time. Additional gains of $75 for the three months ended September 30, 2013 were primarily due to liability assumption updates for lapses and withdrawal rates.
| |
• | For the nine months ended September 30, 2013 the loss on the U.S. macro hedge program was primarily due to losses of $98 related to an improvement in domestic equity markets, losses of $44 due to passage of time, and losses of $44 driven by an increase in long term interest rates. |
| |
• | For the three and nine months ended September 30, 2013 the losses associated with the international program were primarily driven by losses due to an improvement in global equity markets, and losses due to a depreciation of the Japanese yen in relation to the euro. |
• For the three and nine months ended September 30, 2012 the gain on U.S. GMWB related derivatives, net, was primarily due to liability model assumption updates of $301 related to increased expenses and lower benefit utilization by policyholders offset by lower lapse rates, decreased domestic equity volatility gains of $42 and $73, respectively, and outperformance of the underlying actively managed funds as compared to their respective indices of $25 and $34, respectively.
• For the three and nine months ended September 30, 2012 the loss on the U.S. macro hedge program was primarily due to losses of $47 and $124, respectively, related to an increase in domestic equity markets, losses of $49 and $121, respectively, related to the passage of time, and losses of $16 and $56, respectively, related to a decrease in equity volatility.
• For the three months ended September 30, 2012 the loss associated with the international program was primarily driven by an improvement in global and domestic equity markets, partially offset by gains due to an appreciation of the Japanese yen in relation to the euro and the U.S. dollar. For the nine months ended September 30, 2012 the loss associated with the international program was primarily driven by an improvement in global and domestic equity markets, and depreciation of the Japanese yen in relation to the euro and the U.S. dollar, partially offset by a decline in interest rates.
Other, net
| |
• | Other, net gain for the nine months ended September 30, 2013 was primarily due to gains of $71 on interest derivatives largely associated with fixed rate bonds sold as part of the Individual Life and Retirement Plans business dispositions. For further information on the business dispositions, see Note 2. Additional gains of $32 for the nine months ended September 30, 2013 were related to transactional foreign currency re-valuation associated with the internal reinsurance of the Japan variable annuity business, which is offset in AOCI, due to depreciation of the Japanese yen versus the U.S. dollar. |
| |
• | Other, net gain for the three and nine months ended September 30, 2012 was primarily due to gains of $76 and $187, respectively, on credit derivatives driven by credit spread tightening, partially offset by losses of $31 and $87, respectively, related to Japan 3Win foreign currency swaps primarily driven by the strengthening of the currency basis swap spread between U.S. dollar and Japanese yen and the decline in U.S. interest rates. |
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), 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, and in the past have differed, from those estimates. The Company’s critical accounting estimates are discussed in Part II, Item 7 MD&A in the Company’s 2012 Form 10-K Annual Report. The following discussion updates certain of the Company’s critical accounting estimates for September 30, 2013 results.
Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and Other Universal Life-Type Contracts
Estimated gross profits (“EGPs”) are used in the amortization of the DAC asset, which includes the present value of future profits; sales inducement assets (“SIA”); and unearned revenue reserves (“URR”). For additional information on DAC, see Note 2 and Note 6 of Notes to Condensed Consolidated Financial Statements . For additional information on SIA, see Note 8 of Notes to Condensed Consolidated Financial Statements. Unearned revenue reserves associated with the Retirement Plans and Individual Life businesses are no longer included in EGP based balances due to the sales of these business in January 2013. Portions of EGPs are also used in the valuation of reserves for death and other insurance benefit features on variable annuity and universal life-type contracts. Universal life ("UL") secondary guarantee benefits associated with the Retirement Plans and Individual Life businesses are no longer considered EGP based balances as the sales of these businesses were structured as reinsurance transactions. For additional information on death and other insurance benefit feature reserves, see Note 7 of Notes to Condensed Consolidated Financial Statements
Unlocks
The benefit (charge) to net income (loss) by asset and liability as a result of the Unlock is as follows:
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2013 | 2012 | 2013 | 2012 |
DAC | $ | (106 | ) | $ | (9 | ) | $ | (109 | ) | $ | (2 | ) |
SIA | (2 | ) | (56 | ) | (3 | ) | (57 | ) |
URR | 8 |
| (3 | ) | 8 |
| 2 |
|
Death and Other Insurance Benefit Reserves | 9 |
| 10 |
| 32 |
| 55 |
|
Total (pre-tax) | (91 | ) | (58 | ) | (72 | ) | (2 | ) |
Income tax effect | (32 | ) | (20 | ) | (25 | ) | (1 | ) |
Total (after-tax) | $ | (59 | ) | $ | (38 | ) | $ | (47 | ) | $ | (1 | ) |
The Unlock charge for the three months and nine months ended September 30, 2013 and 2012 was primarily due to assumption changes in connection with the annual policyholder behavior assumption study, partially offset by actual separate account returns above our aggregated estimated returns during these periods. The Unlock charge for the three months ended September 30, 2013 was driven by an increase in lapses and partial withdrawals and a reduction in the spread between assumed investment income and contract crediting rates. The Unlock charge for the three months ended September 30, 2012 was driven by lower estimated gross profits due to increased unit costs and changes to benefit utilization assumptions.
An Unlock revises EGPs, on a quarterly basis, to reflect the Company's current best estimate assumptions and market updates of policyholder account value. Modifications to the Company’s hedging programs may impact EGPs, and correspondingly impact DAC recoverability. After each quarterly Unlock, the Company also tests the aggregate recoverability of DAC by comparing the DAC balance to the present value of future EGPs. As of September 30, 2013, the margin between the DAC balance and the present value of future EGPs for U.S. individual variable annuities was 24%, reflective of the reinsurance of a block of individual variable annuities with an affiliated captive reinsurer. If the margin between the DAC asset and the present value of future EGPs is exhausted, then further reductions in EGPs would cause portions of DAC to be unrecoverable and the DAC asset would be written down to equal future EGPs.
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 over the next twelve months.
Liquidity Requirements and Sources of Capital
The Hartford has an intercompany liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates of up to $2.0 billion for liquidity and other general corporate purposes. The Connecticut Insurance Department granted approval for certain affiliated insurance companies that are parties to the agreement to treat receivables from a parent, including the HFSG Holding Company, as admitted assets for statutory accounting purposes. On April 29, 2013 HLIC issued a Revolving Note (the "Note") in the principal amount of $100 to Hartford Life and Accident Insurance Company, the Company's parent, under the intercompany liquidity agreement. The Note bears interest at 0.92% and matures on April 29, 2014. On May 29, 2013 Hartford Life and Annuity Insurance Company, a subsidiary of the Company, issued a Note in the principal amount of $225 to Hartford Life and Accident Insurance Company, the Company's parent, under the intercompany liquidity agreement. The Note bears interest at 1.00% and matures on May 29, 2014.
Hartford Life and Annuity Insurance Company ("HLAI"), a wholly-owned subsidiary of the Company, cedes certain variable annuity contracts and their associated riders as well as certain payout annuities issued by HLAI or assumed by it to White River Life Reinsurance Company ("WRR"), an affiliate captive reinsurer. The economic purpose of the WRR arrangement is to provide the Company and its subsidiaries with a more efficient vehicle to manage risks in connection with these products. The reinsurance transaction between HLAI and WRR is mainly structured as modified coinsurance ("modco"). Accordingly, the assets and reinsured reserves remain on the books of HLAI and all insurance and investment experience is passed to WRR through modco adjustments. The reinsurance arrangement between HLAI and WRR does not impact the Company's reserving methodology or the amount of required regulatory capital associated with the reinsured business.
Pursuant to an intercompany note agreement between WRR and the Company's ultimate parent, The Hartford Financial Services Group, Inc. ("HFSG"), WRR may borrow up to $1 billion from HFSG in order to maintain certain statutory capital levels required by its plan of operations and which can be used by WRR to settle outstanding payables with HLAI. As of December 31, 2012, WRR has borrowed $655 under the intercompany note agreement.
Derivative Commitments
Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings of the individual legal entity that entered into the derivative agreement as set by nationally recognized statistical rating agencies. If the legal entity’s financial strength were to fall below certain ratings, the counterparties to the derivative agreements could demand immediate and ongoing full collateralization and in certain instances demand immediate settlement of all outstanding derivative positions traded under each impacted bilateral agreement. The settlement amount is determined by netting the derivative positions transacted under each agreement. If the termination rights were to be exercised by the counterparties, it could impact the legal entity’s ability to conduct hedging activities by increasing the associated costs and decreasing the willingness of counterparties to transact with the legal entity. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position as of September 30, 2013, is $740. Of this $740 the legal entities have posted collateral of $889 in the normal course of business. In addition, the Company has posted collateral of $44 associated with a customized GMWB derivative. Based on derivative market values as of September 30, 2013, a downgrade of one or two levels below the current financial strength ratings by either Moody’s or S&P would not require additional assets to be posted as collateral. These collateral amounts could change as derivative market values change, as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the collateral that we would post, if required, would be primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agencies.
As September 30, 2013, there were no derivative relationships that could be subject to immediate termination in the event of rating agency downgrades to either BBB+ or Baa1, or both BBB+ and Baa1. In addition, the Company holds notional and fair value amounts of $3.8 billion and $69, respectively, of a customized GMWB derivative which contains an early termination trigger.
On June 17, 2013, S&P lowered its counterparty credit and insurer financial strength ratings on Hartford Life Insurance Company to BBB+. Given this downgrade action, termination rating triggers of one derivative counterparty relationship was impacted. This counterparty has the right to terminate this relationship and would have to settle the outstanding derivatives prior to exercising its termination right. The Company is in the process of re-negotiating the rating trigger which it expects to successfully complete.
Accordingly, the Company's hedging programs have not been adversely impacted by the announcement of the downgrade of Hartford Life Insurance Company. As of September 30, 2013, the notional amount and fair value related to this counterparty is $1.3 billion and $(6), respectively.
Insurance Operations
In the event customers elect to surrender separate account assets, international statutory separate accounts or retail mutual funds, the Company will use the proceeds from the sale of the assets to fund the surrender and the Company’s liquidity position will not be impacted. In many instances the Company will receive a percentage of the surrender amount as compensation for early surrender (surrender charge), increasing the Company’s liquidity position. In addition, a surrender of variable annuity separate account or general account assets will decrease the Company’s obligation for payments on guaranteed living and death benefits.
The Company may from time to time retire or repurchase its funding agreement backed notes through cash repurchases, in the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. In the third quarter of 2013, the Company did not repurchase any funding agreements. The amounts of any future repurchases may be material.
As of September 30, 2013, the Company’s cash and short-term investments of $2.7 billion, included $97 million of collateral received from, and held on behalf of, derivative counterparties and $105 million of collateral pledged to derivative counterparties. The Company also held $2.3 billion of treasury securities, of which $614 million had been pledged to derivative counterparties and $2.1 billion of government agency securities of which $229 million had been pledged to derivative counterparties.
Total general account contractholder obligations are supported by $41 billion of cash and total general account invested assets, excluding equity securities, trading, which includes a significant short-term investment position, as depicted below, to meet liquidity needs.
The following table summarizes the Company’s fixed maturities, short-term investments, and cash, as of September 30, 2013:
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Fixed maturities | $ | 30,690 |
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Short-term investments | 2,262 |
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Cash | 470 |
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Less: Derivative collateral | 1,045 |
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Total | $ | 32,377 |
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Capital resources available to fund liquidity, upon contract holder surrender, are a function of the legal entity in which the liquidity requirement resides. Obligations of Individual Annuity, Individual Life and private placement life insurance products will be generally funded by both Hartford Life Insurance Company and Hartford Life and Annuity Insurance Company; obligations of Retirement Plans and institutional investment products will be generally funded by Hartford Life Insurance Company; and obligations of the Company’s international annuity subsidiary and affiliate will be generally funded by the legal entity in the country in which the obligation was generated.
The Company became a member of the Federal Home Loan Bank of Boston (“FHLBB”) in May 2011. Membership allows the Company access to collateralized advances, which may be used to support various spread-based business and enhance liquidity management. The Connecticut Department of Insurance (“CTDOI”) will permit the Company to pledge up to $1.25 billion in qualifying assets to secure FHLBB advances for 2013. The amount of advances that can be taken are dependent on the asset types pledged to secure the advances. The pledge limit is recalculated annually based on statutory admitted assets and capital and surplus. The Company would need to seek the prior approval of the CTDOI if there were a desire to exceed these limits. As of September 30, 2013, the Company had no advances outstanding under the FHLBB facility.
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Contractholder Obligations | As of September 30, 2013 |
Total Contractholder obligations | $ | 190,777 |
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Less: Separate account assets [1] | 139,864 |
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General account contractholder obligations | $ | 50,913 |
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Composition of General Account Contractholder Obligations | |
Contracts without a surrender provision and/or fixed payout dates [2] | $ | 17,252 |
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Fixed MVA annuities [3] | 8,369 |
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International fixed MVA annuities | 1,654 |
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Guaranteed investment contracts (“GIC”) [4] | 76 |
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Other [5] | 23,562 |
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General account contractholder obligations | $ | 50,913 |
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[1] | In the event customers elect to surrender separate account assets or international statutory separate accounts, the Company will use the proceeds from the sale of the assets to fund the surrender, and the Company’s liquidity position will not be impacted. In many instances the Company will receive a percentage of the surrender charge, increasing the Company’s liquidity position. In addition, a surrender of variable annuity separate account or general account assets will decrease the Company’s obligation for payments on guaranteed living and death benefits. |
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[2] | Relates to contracts such as payout annuities or institutional notes, other than guaranteed investment products with an MVA feature (discussed below) or surrenders of term life, group benefit contracts or death and living benefit reserves for which surrenders will have no current effect on the Company’s liquidity requirements. |
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[3] | Relates to annuities that are recorded in the general account (under U.S. GAAP), although these annuities are held in a statutory separate account, as the contractholders are subject to the Company's credit risk. In the statutory separate account, the Company is required to maintain invested assets with a fair value equal to the MVA surrender value of the Fixed MVA contract. In the event assets decline in value at a greater rate than the MVA surrender value of the Fixed MVA contract, the Company is required to contribute additional capital to the statutory separate account. The Company will fund these required contributions with operating cash flows or short-term investments. In the event that operating cash flows or short-term investments are not sufficient to fund required contributions, the Company may have to sell other invested assets at a loss, potentially resulting in a decrease in statutory surplus. As the fair value of invested assets in the statutory separate account are generally equal to the MVA surrender value of the Fixed MVA contract, surrender of Fixed MVA annuities will have an insignificant impact on the liquidity requirements of the Company. |
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[4] | GICs are subject to discontinuance provisions which allow the policyholders to terminate their contracts prior to scheduled maturity at the lesser of the book value or market value. Generally, the market value adjustment reflects changes in interest rates and credit spreads. As a result, the market value adjustment feature in the GIC serves to protect the Company from interest rate risks and limit the Company’s liquidity requirements in the event of a surrender. |
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[5] | Surrenders of, or policy loans taken from, as applicable, these general account liabilities, which include the general account option for Individual Annuity individual variable annuities and the variable life contracts of the former Individual Life business, the general account option for annuities of the former Retirement Plans business and universal life contracts sold by the former Individual Life business may be funded through operating cash flows of the Company, available short-term investments, or the Company may be required to sell fixed maturity investments to fund the surrender payment. Sales of fixed maturity investments could result in the recognition of significant realized losses and insufficient proceeds to fully fund the surrender amount. In this circumstance, the Company may need to take other actions, including enforcing certain contract provisions which could restrict surrenders and/or slow or defer payouts. See Note 2 - Business Dispositions of Notes to the Condensed Consolidated Financial Statements as to the sale of the Retirement Plans and Individual Life businesses and related transfer of invested assets in January 2013. |
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
There have been no material changes to the Company’s off-balance sheet arrangements and aggregate contractual obligations since the filing of the Company’s 2012 Form 10-K Annual Report.
Dividends
Dividends to the Company from its insurance subsidiaries are limited by state regulation, as is the ability of the Company to pay dividends to its parent company. 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.
The payment of dividends by Connecticut-domiciled insurers is limited under the insurance holding company laws of Connecticut. These laws require notice to and approval by the state insurance commissioner for the declaration or payment of any dividend, which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer’s policyholder surplus as of December 31 of the preceding year or (ii) net income (or net gain from operations, if such company is a life insurance company) for the twelve-month period ending on the thirty-first day of December last preceding, in each case determined under statutory insurance accounting principles. In addition, if any dividend of a Connecticut-domiciled insurer exceeds the insurer’s earned surplus, it requires the prior approval of the Connecticut Insurance Commissioner. The insurance holding company laws of the other jurisdictions in which the Company’s insurance subsidiaries are incorporated (or deemed commercially domiciled) generally contain similar (although in certain instances somewhat more restrictive) limitations on the payment of dividends.
The Company’s subsidiaries are permitted to pay up to a maximum of approximately $82 in dividends in 2013 without prior approval from the applicable insurance commissioner. With respect to dividends to its parent, the Company’s dividend limitation under the holding company laws of Connecticut is $515 in 2013. However, because the Company’s earned statutory surplus was negative as of December 31, 2012, the Company is not permitted to pay any dividends to its parent in 2013 without prior approval from the Connecticut Insurance Commissioner until such time as earned surplus becomes positive. On February 5, 2013 the Company received approval from the State of Connecticut Insurance Department to receive a $1.1 billion extraordinary dividend from its Connecticut domiciled life insurance subsidiaries, and to pay a $1.2 billion extraordinary dividend to its parent company. These dividends were received and paid on February 22, 2013.
Cash Flows
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| Nine Months Ended September 30, |
| 2013 | 2012 |
Net cash provided by operating activities | $ | 639 |
| $ | 1,510 |
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Net cash provided by (used for) investing activities | $ | 2,042 |
| $ | (1,468 | ) |
Net cash used for financing activities | $ | (3,436 | ) | $ | 327 |
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Cash – end of period | $ | 470 |
| $ | 1,552 |
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Net cash provided by operating activities decreased mainly due to realized capital losses of $797 in 2013 and a decrease in change in payables and accruals of $967 partially offset by reinsurance loss on disposal of $1.5 billion. Net cash provided in 2012 decreased due to settlements of a modified coinsurance agreement, partially offset by an increase in income taxes received of $275.
Net cash provided by investing activities in 2013 primarily relates to net proceeds of available-for-sale securities of $2.9 billion and net proceeds from businesses sold of $460, partially offset by net payments on derivatives of $1.3 billion. Net cash used for investing activities in 2012 primarily relates to net payments on derivatives of $1.2 billion, net purchases of mortgage loans of $871, and net purchases of partnerships of $312, partially offset by net proceeds of available-for-sale securities of $991.
Net cash used for financing activities in 2013 relates to a return of capital of $1.2 billion, fee repayment to recapture affiliate reinsurance of $347, decrease in securities loaned or sold of $719, and net outflows on investment and universal life-type contracts of $1.1 billion. Net cash used for financing activities in 2012 relates to a net increase in securities loaned or sold of $1.6 billion, partially offset by net outflows on investment and universal life-contracts of $1.1 billion and repayments of consumer notes of $124.
Operating cash flows in both periods have been adequate to meet liquidity requirements.
Ratings
Ratings impact the Company’s cost of borrowing and its ability to access financing and 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 Company’s cost of borrowing and the ability to access financing as well as its level of revenues, or the persistency of its business may be adversely impacted.
On June 17, 2013, Standard & Poor's ("S&P") affirmed the financial strength ratings of BBB+ for Hartford Life and Annuity Insurance Company. S&P downgraded the financial strength rating for Hartford Life Insurance Company to BBB+ from A-. The outlook is stable for Hartford Life Insurance Company and Hartford Life and Annuity.
The following table summarizes Hartford Life Insurance Company’s significant member companies’ financial ratings from the major independent rating organizations as of October 23, 2013:
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Insurance Financial Strength Ratings: | A.M. Best | Fitch | Standard & Poor’s | Moody’s |
Hartford Life Insurance Company | A- | A- | BBB+ | A3 |
Hartford Life and Annuity Insurance Company | A- | A- | BBB+ | Baa2 |
These ratings are not a recommendation to buy or hold any of the Company’s securities and they may be revised or revoked at any time at the sole discretion of the rating organization.
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.
Statutory Surplus
The Company’s aggregate statutory capital and surplus, as prepared in accordance with the National Association of Insurance Commissioners’ Accounting Practices and Procedures Manual (“US STAT”), was $5.4 billion as of September 30, 2013 and $5.0 billion as of December 31, 2012, respectively. The statutory surplus amount as of December 31, 2012 is based on actual statutory filings with the applicable regulatory authorities. The statutory surplus amount as of September 30, 2013, is an estimate, as the third quarter 2013 statutory filings have not yet been made.
IMPACT OF NEW ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements included in the Company’s 2012 Form 10-K Annual Report and Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Financial Risk Management section of Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company's of the Company’s 2012 Form 10-K Annual Report 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 effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of September 30, 2013.
Changes in internal control over financial reporting
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s current fiscal quarter 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
The Company is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending or providing indemnity for third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The Company accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. Management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition, results of operations or cash flows of the Company.
The Company is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. These actions include, among others, individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims or other allegedly unfair or improper business practices. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to the consolidated financial condition of the Company. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, the outcome in certain matters could, from time to time, have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows in particular quarterly or annual periods.
Item 1A. RISK FACTORS
Investing in the Company involves risk. In deciding whether to invest in the securities of the Company, you should carefully consider the risk factors disclosed in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 and in Item 1A of Part II of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, any of which could have a significant or material adverse effect on the business, financial condition, operating results or liquidity of the Company. This information should be considered carefully together with the other information contained in this report and the other reports and materials filed by the Company with the SEC.
Item 6. EXHIBITS
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See Exhibits Index on page | |
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 hereunto duly authorized.
HARTFORD LIFE INSURANCE COMPANY
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/s/ Peter F. Sannizzaro |
Peter F. Sannizzaro Senior Vice President and Principal Accounting Officer (Principal Financial Officer and duly authorized signatory) |
October 28, 2013 |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2013
EXHIBITS INDEX
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Exhibit No. | | |
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12.01 | | Computation of Ratio of Earnings to Fixed Charges ** |
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15.01 | | Deloitte & Touche LLP Letter of Awareness ** |
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31.01 | | Certification of Beth A. Bombara pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ** |
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31.02 | | Certification of Peter F. Sannizzaro pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ** |
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32.01 | | Certification of Beth A. Bombara pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ** |
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32.02 | | Certification of Peter F. Sannizzaro pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ** |
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101.INS | | XBRL Instance Document ** |
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101.SCH | | XBRL Taxonomy Extension Schema ** |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase ** |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase ** |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase ** |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase ** |
**Filed with the Securities and Exchange Commission as an Exhibit to this report.