================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number 1-12749
HARTFORD LIFE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1470915
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 HOPMEADOW STREET, SIMSBURY, CONNECTICUT 06089
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
As of October 31, 2003 there were outstanding 1,000 shares of Common Stock,
$0.01 par value per share, of the registrant, all of which were directly owned
by Hartford Holdings, Inc., a direct wholly owned subsidiary of The Hartford
Financial Services Group, Inc.
The registrant meets the conditions set forth in General Instruction H (1) (a)
and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
================================================================================
INDEX
PAGE
----
Independent Accountants' Review Report 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income - Third Quarter and Nine Months
Ended September 30, 2003 and 2002 4
Condensed Consolidated Balance Sheets - September 30, 2003 and December 31, 2002 5
Condensed Consolidated Statements of Changes in Stockholder's Equity - Nine Months
Ended September 30, 2003 and 2002 6
Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30,
2003 and 2002 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 33
ITEM 4. CONTROLS AND PROCEDURES 33
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 34
Signature 35
Exhibits Index 36
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholder
Hartford Life, Inc.
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of
Hartford Life, Inc and subsidiaries (the "Company") as of September 30, 2003,
and the related condensed consolidated statements of income for the third
quarters and nine-month periods ended September 30, 2003 and 2002, and changes
in stockholder's equity, and cash flows for the nine-month period ended
September 30, 2003 and 2002. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2002, and the related consolidated statements of
income, changes in stockholder's equity, and cash flows for the year then ended
(not presented herein); and in our report dated February 19, 2003, which
includes an explanatory paragraph relating to the Company's change in its method
of accounting for goodwill and indefinite-lived intangible assets in 2002, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2002 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
November 3, 2003
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THIRD QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In millions) (Unaudited) 2003 2002 2003 2002
- ------------------------------------------------------------- ----------- ---------- --------- ----------
REVENUES
Fee income $ 716 $ 627 $ 1,989 $ 1,961
Earned premiums and other 1,016 694 2,469 2,131
Net investment income 518 462 1,538 1,360
Net realized capital losses (2) (118) - (253)
----------- ---------- --------- ----------
TOTAL REVENUES 2,248 1,665 5,996 5,199
----------- ---------- --------- ----------
BENEFITS, CLAIMS AND EXPENSES
Benefits and claims 1,375 1,050 3,544 3,135
Insurance expenses and other 429 333 1,142 1,050
Amortization of deferred policy acquisition costs and present
value of future profits 202 163 540 486
Dividends to policyholders 15 8 55 30
Interest expense 29 28 87 84
----------- ---------- --------- ----------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,050 1,582 5,368 4,785
----------- ---------- --------- ----------
INCOME BEFORE INCOME TAX EXPENSE 198 83 628 414
Income tax expense 37 (78) 98 (18)
----------- ---------- --------- ----------
NET INCOME $ 161 $ 161 $ 530 $ 432
----------- ---------- --------- ----------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(In millions, except for share data) 2003 2002
- ----------------------------------------------------------------------------- ------------- ------------
(Unaudited)
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of
$33,254 and $27,982) $ 35,237 $ 29,377
Equity securities, available for sale, at fair value (cost of $396 and $483) 424 458
Policy loans, at outstanding balance 2,533 2,934
Other investments 891 1,122
--------- -----------
Total investments 39,085 33,891
Cash 293 179
Premiums receivable and agents' balances 205 208
Reinsurance recoverables 686 796
Deferred policy acquisition costs and present value of future profits 6,265 5,758
Deferred income taxes (479) (274)
Goodwill 796 796
Other assets 1,177 1,362
Separate account assets 125,110 107,078
--------- -----------
TOTAL ASSETS $ 173,138 $ 149,794
========= ===========
LIABILITIES
Reserve for future policy benefits $ 9,362 $ 8,583
Other policyholder funds 26,241 23,957
Short-term debt 200 -
Long-term debt 1,155 1,125
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely parent junior subordinated debentures 450 450
Other liabilities 4,213 2,913
Separate account liabilities 125,110 107,078
--------- -----------
TOTAL LIABILITIES 166,731 144,106
========= ===========
STOCKHOLDER'S EQUITY
Common Stock - 1,000 shares authorized, issued and outstanding;
par value $0.01 - -
Capital surplus 1,970 1,970
Accumulated other comprehensive income
Net unrealized capital gains on securities, net of tax 991 747
Foreign currency translation adjustments (42) (39)
Total accumulated other comprehensive income 949 708
Retained earnings 3,488 3,010
--------- -----------
TOTAL STOCKHOLDER'S EQUITY 6,407 5,688
========= ===========
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 173,138 $ 149,794
========= ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003
ACCUMULATED OTHER
COMPREHENSIVE INCOME
-------------------------------------------
NET UNREALIZED NET GAINS ON
CAPITAL CASH FLOW FOREIGN
GAINS ON HEDGING CURRENCY TOTAL
COMMON CAPITAL SECURITIES, NET INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS OF TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- ------------------------------------ ------ ------- --------------- ------------ ----------- -------- -------------
Balance, December 31, 2002 $ - $ 1,970 $ 621 $ 126 $ (39) $ 3,010 $ 5,688
Comprehensive income
Net income 530 530
-----------
Other comprehensive income, net of
tax (1)
Unrealized gain on securities (2) 323 323
Net loss on cash flow hedging
Instruments (79) (79)
Cumulative translation adjustments (3) (3)
-----------
Total other comprehensive income 241
-----------
Total comprehensive income 771
-----------
Dividends declared (52) (52)
====== ======= ========== ========= ========== ======== ===========
BALANCE, SEPTEMBER 30, 2003 $ - $ 1,970 $ 944 $ 47 $ (42) $ 3,488 $ 6,407
====== ======= ========== ========= ========== ======== ===========
NINE MONTHS ENDED SEPTEMBER 30, 2002
ACCUMULATED OTHER
COMPREHENSIVE INCOME
-------------------------------------------
NET UNREALIZED NET GAINS ON
CAPITAL CASH FLOW FOREIGN
GAINS ON HEDGING CURRENCY TOTAL
COMMON CAPITAL SECURITIES, NET INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS OF TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- ------------------------------------ ------ ------- --------------- ------------ ----------- -------- -------------
Balance, December 31, 2001 $ - $ 1,895 $ 163 $ 62 $ (29) $ 2,519 $ 4,610
Comprehensive income
Net income 432 432
----------
Other comprehensive income, net of
tax (1)
Unrealized gain on securities (2) 570 570
Net gain on cash flow hedging
Instruments 80 80
Cumulative translation adjustments (5) (5)
----------
Total other comprehensive income 645
----------
Total comprehensive income 1,077
----------
Dividends declared (50) (50)
====== ======= ========== ========= ========== ======== ==========
BALANCE, SEPTEMBER 30, 2002 $ - $ 1,895 $ 733 $ 142 $ (34) $ 2,901 $ 5,637
====== ======= ========== ========= ========== ======== ==========
(1) Unrealized gain on securities is reflected net of tax provision of $174 and
$307 for the nine months ended September 30, 2003 and 2002, respectively.
Net (loss) gain on cash flow hedging instruments is net of tax (benefit)
provision of $(43) and $43 for the nine months ended September 30, 2003 and
2002. There is no tax effect on cumulative translation adjustments.
(2) There were reclassification adjustments for after-tax gains (losses) in the
amount of $8 and $(154) realized in net income for the nine months ended
September 30, 2003 and 2002, respectively.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
(In millions) (Unaudited) 2003 2002
- -------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 530 $ 432
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net realized capital losses - 253
Amortization of deferred policy acquisition costs and present value of
future profits 540 486
Additions to deferred policy acquisition costs and present value of future profits (1,169) (818)
Depreciation and amortization 112 33
Decrease in premiums receivable and agents' balances 3 31
Increase in receivables (56) (31)
Decrease in accrued liabilities and payables (24) (17)
Increase (decrease) in other liabilities 373 (131)
Increase in accrued tax 10 211
Increase (decrease) in deferred income tax 58 (16)
Increase in future policy benefits 779 472
Increase (decrease) in reinsurance recoverables (6) 6
Other, net (75) (61)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,075 850
- ------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investments (10,809) (10,963)
Sales of investments 4,559 5,592
Maturities and principal paydowns of fixed maturity investments 2,680 1,725
Capital expenditures and other 35 (48)
- ------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (3,535) (3,694)
- ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid (52) (50)
Proceeds from issuance of long-term debt 230 -
Net receipts from investment and universal life-type contracts 2,399 2,916
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,577 2,866
- ------------------------------------------------------------------------------------------------------------
Net increase in cash 117 22
Impact of foreign exchange (3) 5
- ------------------------------------------------------------------------------------------------------------
Cash - beginning of period 179 167
- ------------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 293 $ 194
============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID DURING THE PERIOD FOR
Income taxes $ 16 $ 22
Interest $ 80 $ 78
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
(unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Hartford Life, Inc. (a Delaware corporation), together with its consolidated
subsidiaries ("Hartford Life" or the "Company"), is a leading financial services
and insurance organization which provides, primarily in the United States,
investment, retirement, estate planning and group benefits products. Hartford
Life, Inc. was formed on December 13, 1996 and capitalized on December 16, 1996
with the contribution of all the outstanding common stock of Hartford Life and
Accident Insurance Company ("HLA"), a subsidiary of The Hartford Financial
Services Group, Inc. ("The Hartford"). Pursuant to an initial public offering
(the "IPO") on May 22, 1997, Hartford Life sold to the public 26 million shares
of Class A Common Stock at $28.25 per share and received proceeds, net of
offering expenses, of $687. The 26 million shares sold in the IPO represented
approximately 18.6% of the equity ownership in Hartford Life. On June 27, 2000,
The Hartford acquired all of the outstanding common shares of Hartford Life not
already owned by The Hartford ("The Hartford Acquisition"). As a result of The
Hartford Acquisition, Hartford Life became a direct subsidiary of Hartford Fire
Insurance Company ("Hartford Fire"), a direct wholly-owned subsidiary of The
Hartford. During the third quarter of 2002, Hartford Life became a direct
subsidiary of Hartford Holdings, Inc., a direct wholly owned subsidiary of The
Hartford. Hartford Life, Inc. is a holding company, and as such, has no material
business of its own.
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements have been prepared on the basis
of accounting principles generally accepted in the United States of America
("GAAP"), which differ materially from the accounting practices prescribed by
various insurance regulatory authorities. Less than majority-owned subsidiaries
in which the Company has at least a 20% interest are reported on the equity
basis. All intercompany transactions and balances between Hartford Life, its
subsidiaries and affiliates have been eliminated.
The accompanying condensed consolidated financial statements as of September 30,
2003, and for the third quarter and nine-month periods ended September 30, 2003
and 2002 are unaudited. These condensed consolidated financial statements
reflect all adjustments (consisting only of normal accruals) which are, in the
opinion of management, necessary for the fair presentation of the financial
position, results of operations, and cash flows for the interim periods. These
condensed consolidated financial statements and condensed notes should be read
in conjunction with the consolidated financial statements and notes thereto
included in Hartford Life's 2002 Form 10-K Annual Report. The results of
operations for the interim periods should not be considered indicative of
results to be expected for the full year.
(b) RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial information to
conform to the current period classifications.
(c) USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The most significant estimates include those used in determining reserves,
deferred policy acquisition costs, valuation of investments and derivative
instruments, income taxes and contingencies.
(d) SIGNIFICANT ACCOUNTING POLICIES
For a description of accounting policies, see Note 2 of Notes to Consolidated
Financial Statements included in Hartford Life's 2002 Form 10-K Annual Report.
(e) ADOPTION OF NEW ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity". SFAS No. 150 establishes standards for classifying and
measuring as liabilities certain financial instruments that embody obligations
of the issuer and have characteristics of both liabilities and equity.
Generally, SFAS No. 150 requires liability classification for two broad classes
of financial instruments: (a) instruments that represent, or are indexed to, an
obligation to buy back the issuer's shares regardless whether the instrument is
settled on a net-cash or gross physical basis and (b) obligations that (i) can
be settled in shares but derive their value predominately from another
underlying instrument or index (e.g., security prices, interest rates, and
currency rates), (ii) have a fixed value, or (iii) have a value inversely
related to the issuer's shares. Mandatorily redeemable equity and written
options requiring the issuer to buy back shares are examples of financial
instruments that should be reported as liabilities under this new guidance.
SFAS No. 150 specifies accounting only for certain freestanding financial
instruments and does not affect whether an embedded derivative must be
bifurcated and accounted for in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
SFAS No. 150 is effective for instruments entered into or modified after May 31,
2003 and for all other instruments beginning
with the first interim reporting period beginning after June 15, 2003. Adoption
of this statement did not have a material impact on the Company's consolidated
financial condition or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133.
SFAS No. 149 amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group (DIG) process that effectively required amendments to SFAS
No. 133, in connection with other FASB projects dealing with financial
instruments. SFAS No. 149 also clarifies under what circumstances a contract
with an initial net investment and purchases and sales of when-issued securities
that do not yet exist meet the characteristic of a derivative as discussed in
SFAS No. 133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after June
30, 2003. The provisions of this statement should be applied prospectively,
except as stated below.
The provisions of this statement that relate to SFAS No. 133 DIG issues that
have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, the guidance in SFAS No. 149 related to forward purchases or
sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact
on the Company's financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"), which
requires an enterprise to assess whether consolidation of an entity is
appropriate based upon its interests in a variable interest entity ("VIE"). A
VIE is an entity in which the equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. The initial determination of whether an entity is a
VIE shall be made on the date at which an enterprise becomes involved with the
entity. An enterprise shall consolidate a VIE if it has a variable interest that
will absorb a majority of the VIE's expected losses if they occur, receive a
majority of the entity's expected residual returns if they occur or both. FIN 46
was effective immediately for new VIEs established or purchased subsequent to
January 31, 2003. For VIEs established or purchased subsequent to January 31,
2003, the adoption of FIN 46 did not have a material impact on the Company's
consolidated financial condition or results of operations as there were no
material VIEs identified which required consolidation.
For VIEs entered into prior to February 1, 2003, FIN 46 was originally effective
for interim periods beginning after June 15, 2003. In October 2003, the FASB
deferred this effective date until interim or annual periods ending after
December 15, 2003. Early adoption is permitted. The Company has elected to defer
the adoption of FIN 46 for VIEs created before February 1, 2003 until the fourth
quarter of 2003. The adoption of FIN 46 for these VIEs is not expected to have a
material impact on the Company's financial condition or results of operations.
FIN 46 further requires the disclosure of certain information related to VIEs in
which the Company holds a significant variable interest. As of September 30,
2003, the Company did not own any such interests that required disclosure.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45" or "the Interpretation"). FIN 45 requires
certain guarantees to be recorded at fair value and also requires a guarantor to
make new disclosures, even when the likelihood of making payments under the
guarantee is remote. In general, the Interpretation applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying instrument or
indices (e.g., security prices, interest rates, or currency rates) that are
related to an asset, liability or an equity security of the guaranteed party.
The recognition provisions of FIN 45 are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim and annual
periods ending after December 15, 2002. For further discussion, see Note 2(h),
"Other Investment and Risk Management Activities-Specific Strategies", of Notes
to Consolidated Financial Statements included in Hartford Life's 2002 Form 10-K
Annual Report. Adoption of this statement did not have a material impact on the
Company's consolidated financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Action
(including Certain Costs Incurred in a Restructuring)" ("Issue 94-3"). The
principal difference between SFAS No. 146 and Issue 94-3 is that SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, rather than at the date
of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or
disposal activities after December 31, 2002. Adoption of SFAS No. 146 will
result in a change in the timing of when a liability is recognized if the
Company has restructuring activities after December 31, 2002. Adoption of this
statement did not have a material impact on the Company's consolidated financial
condition or results of operations.
(f) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In July 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued a final Statement of Position
03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" (the "SOP").
The SOP addresses a wide variety of topics, some of which may have a significant
impact on the Company. The major provisions of the SOP require:
- Recognizing expenses for a variety of contracts and
contract features, including guaranteed minimum death benefits ("GMDB")
and annuitization options, on an accrual basis versus the previous
method of recognition upon payment;
- Reporting and measuring assets and liabilities of certain separate
account products as general account assets and liabilities when
specified criteria are not met;
- Reporting and measuring seed money in separate accounts as general
account assets based on the insurer's proportionate beneficial interest
in the separate account's underlying assets; and
- Capitalizing sales inducements that meet specified criteria and
amortizing such amounts over the life of the contracts using the same
methodology as used for amortizing deferred acquisition costs ("DAC").
The SOP is effective for financial statements for fiscal years beginning after
December 15, 2003. At the date of initial application of this SOP, the Company
will have to make various determinations, such as qualification for separate
account treatment, classification of securities in separate account arrangements
not meeting the criteria of the SOP, significance of mortality and morbidity
risk, adjustments to contract holder liabilities, and adjustments to estimated
gross profits, all of which may have a significant effect on the Company's
financial condition and results of operations.
Based on management's preliminary review of the SOP and market conditions as of
September 30, 2003, the requirement for recording a liability for variable
annuity products with a guaranteed minimum death benefit feature will have an
impact on the Company's results of operations. The determination of this
liability is based on models that involve numerous estimates and subjective
judgments, including those regarding expected market rates of return and
volatility, contract surrender rates and mortality experience. The unrecorded
GMDB liabilities, net of anticipated reinsurance recoverables of approximately
$270, are estimated to be between $60 and $70 at September 30, 2003. Net of
estimated DAC and income tax effects, the cumulative effect of establishing the
required GMDB reserves as of September 30, 2003 would result in an estimated
reduction of net income of between $30 and $40. The ultimate actual impact on
the Company's financial statements will differ from management's current
estimates and will depend in part on market conditions and other factors at the
date of adoption.
Through September 30, 2003, the Company has not recorded a liability for the
risks associated with GMDB offered on the Company's variable annuity business,
but has consistently recorded the related expenses in the period the benefits
are paid to contractholders. Net of reinsurance, the Investment Products segment
paid $12 and $43 for the third quarter and nine months ended September 30, 2003,
respectively, and $17 and $33 for the third quarter and nine months ended
September 30, 2002, respectively, in GMDB benefits to contractholders. Downturns
in the equity markets could increase these payments. At September 30, 2003, the
Investment Products segment held $68.8 billion of variable annuities in its
separate accounts. The estimate of the net amount at risk relating to these
variable annuities (the amount by which current account values of its variable
annuity contracts are not sufficient to meet its GMDB commitments) was $16.2
billion. However, at September 30, 2003, approximately 77% of the net amount at
risk was covered by reinsurance, resulting in a retained net amount at risk of
$3.7 billion.
In addition to the foregoing impact of the SOP, liabilities for certain of the
Company's fixed annuity products (primarily the Company's compound rate contract
("CRC")), of approximately $11 billion, which are currently recorded at fair
value as guaranteed separate account liabilities will be revalued at current
account value in the general account. The related guaranteed separate account
assets supporting CRC will also be reclassified to the general account as
available for sale securities and will continue to be recorded at fair value
with subsequent changes in fair value, net of amortization of deferred
acquisition costs and income taxes, recorded in other comprehensive income. Upon
adoption of the SOP, the Company will record a cumulative effect adjustment to
earnings equal to the revaluation of the liabilities from fair value to account
value plus the adjustment to record unrealized gains (losses) on the invested
assets, previously recorded as a component of net income, as other comprehensive
income. The cumulative adjustment to earnings as well as the adjustment to other
comprehensive income will be recorded net of amortization of deferred
acquisition costs and income taxes. As of September 30, 2003, the Company is
still in the process of evaluating the impact of these changes on its
consolidated financial condition and results of operations. However, it is
expected that the impact to stockholder's equity (accumulated other
comprehensive income) will be positive and significant. Moreover, the interest
rate environment at the date of the adoption of the SOP will have a significant
impact on the cumulative effect change in earnings and other comprehensive
income.
The Company's liability for variable annuity products offered in Japan, recorded
at account value in the separate account, will also be reclassified to the
general account. The related separate account assets supporting the Japanese
variable annuity liabilities will be reclassified to the general account, as
well, and recorded in accordance with the Company's investment accounting
policies. As of September 30, 2003, the Company is still in the process of
evaluating the impact of revaluing these separate account assets and liabilities
upon their movement into the general account.
The Company does not expect the impact of adopting the remaining provisions of
the SOP to be significant.
In April 2003, the FASB issued guidance in Statement 133 Implementation Issue
No. B36, "Embedded Derivatives: Modified Coinsurance Arrangements and Debt
Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only
Partially Related to the Creditworthiness of the Obligor of Those Instruments",
("DIG B36") that addresses the instances in which bifurcation of an instrument
into a debt host contract and an embedded credit derivative is required. The
effective date of DIG B36 is October 1, 2003. DIG B36 indicates that bifurcation
is necessary in a modified coinsurance arrangement when the yield on the
receivable and payable is based on a specified proportion of the ceding
company's return on either its general account assets or a specified block of
those assets, rather than the overall creditworthiness of the ceding company.
The Company believes that the majority of its modified coinsurance and funds
withheld agreements are not impacted by DIG B36 as they were entered
into prior to the Company's "grandfather" date for embedded derivatives, without
substantive modifications, or the "modco" payable or receivable is recorded in
the separate account, and is already recorded at fair value with changes in fair
value recorded in net income. The Company has determined that one of its
modified coinsurance does contain an embedded derivative. The Company believes
the embedded derivative is akin to a total return swap and is in the process of
determining the fair value for the swap.
DIG B36 is also applicable to corporate issued debt securities that incorporate
credit risk exposures that are unrelated or only partially related to the
creditworthiness of the obligor. The Company is currently evaluating the impact
of DIG B36 on such corporate issued debt securities. The Company does not
believe the adoption of DIG B36 will have a material effect on the Company's
consolidated financial condition or results of operations.
(g) STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure an Amendment to FASB No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of SFAS No. 123. In January 2003, The Hartford adopted the fair
value recognition provisions of accounting for employee stock-based compensation
and used the prospective transition method. Under the prospective method,
stock-based compensation expense is recognized for awards granted or modified
after the beginning of the fiscal year in which the change is made. The Hartford
expenses all stock-based compensation awards granted after January 1, 2003. The
allocated expense to the Company from The Hartford associated with these awards
for the third quarter ending September 30, 2003, was immaterial.
All stock-based compensation awards granted or modified prior to January 1,
2003, will continue to be valued using the intrinsic value-based provisions set
forth in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock-Issued to Employees". Under the intrinsic value method, compensation
expense is determined on the measurement date, which is the first date on which
both the number of shares the employee is entitled to receive and the exercise
price are known. Compensation expense, if any, is measured based on the award's
intrinsic value, which is the excess of the market price of the stock over the
exercise price on the measurement date. The expense, including non-option plans,
related to stock-based employee compensation included in the determination of
net income for the third quarter and nine months ended September 30, 2003 is
less than that which would have been recognized if the fair value method had
been applied to all awards granted since the effective date of SFAS No. 123.
(For further discussion of the Company's stock-based compensation plans, see
Note 11 of Notes to Consolidated Financial Statements included in The Hartford's
2002 Form 10-K Annual Report.)
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", and accordingly ceased all amortization of goodwill. The
carrying amount of goodwill is $796 as of September 30, 2003 and December 31,
2002.
The following table shows the Company's acquired intangible assets that continue
to be subject to amortization and aggregate amortization expense. Except for
goodwill, the Company has no intangible assets with indefinite useful lives.
AS OF SEPTEMBER 30, 2003
------------------------
GROSS ACCUMULATED
CARRYING NET
AMOUNT AMORTIZATION
AMORTIZED INTANGIBLE ASSETS
- -------------------------------------------------------------------------------------
Present value of future profits $ 501 $ 104
- -------------------------------------------------------------------------------------
TOTAL $ 501 $ 104
=====================================================================================
Net amortization expense for the quarter and nine months ended September 30,
2003 was $10 and $27, respectively. Net amortization expense for the quarter and
nine months ended September 30, 2002 was $13 and $32, respectively.
Estimated future net amortization expense for the succeeding five years is as
follows:
FOR THE YEAR ENDING DECEMBER 31,
- --------------------------------
2003 $ 35
2004 $ 35
2005 $ 31
2006 $ 28
2007 $ 26
- --------------------------------
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS
(a) SECURITIES LENDING
The Company participates in a securities lending program, to generate additional
income, whereby certain domestic fixed income securities are loaned for a short
period of time from the Company's portfolio to qualifying third parties, via a
lending agent. Borrowers of these securities provide collateral of 102% of the
market value of the loaned securities. Acceptable collateral may be in the form
of cash or U.S. Government securities. The market value of the loaned securities
is monitored and additional
collateral is obtained if the market value of the collateral falls below 100% of
the market value of the loaned securities. Under the terms of the securities
lending program, the lending agent indemnifies the Company against borrower
defaults. As of September 30, 2003, the fair value of the loaned securities was
approximately $846 and was included in fixed maturities. The cash collateral
received as of September 30, 2003 of approximately $854 was invested in
short-term securities and was also included in fixed maturities, with a
corresponding liability for the obligation to return the collateral recorded in
other liabilities. The Company retains a portion of the income earned from the
cash collateral or receives a fee from the borrower. The Company recorded
before-tax income from securities lending transactions, net of lending fees,
that was immaterial for the third quarter and nine months ended September 30,
2003, which was included in net investment income.
(b) DERIVATIVE INSTRUMENTS
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards, futures and options, for one of four Company-approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; to control transaction costs; or to enter
into income enhancement and replication transactions.
All of the Company's derivative transactions are permitted uses of derivatives
under the derivatives use plan filed with and/or approved by, as applicable, by
the State of Connecticut and State of New York insurance departments. The
Company does not make a market or trade in these instruments for the express
purpose of earning short-term trading profits.
For a detailed discussion of the Company's use of derivative instruments, see
Note 2(h) of Notes to Consolidated Financial Statements included in Hartford
Life's 2002 Form 10-K Annual Report.
As of September 30, 2003 and December 31, 2002, the Company carried $256 and
$257, respectively, of derivative assets in other investments and $201 and $162,
respectively, of derivative liabilities in other liabilities. In addition, the
Company recognized embedded derivative (assets) liabilities related to
guaranteed minimum withdrawal benefits ("GMWB") on certain of its variable
annuity contracts of $(39) and $48 at September 30, 2003 and December 31, 2002,
respectively, in other policyholder funds. The Company has entered into an
offsetting reinsurance arrangement, recognized as a derivative. The fair value
of this derivative (liability) asset, at September 30, 2003 and December 31,
2002 was $(42) and $48, respectively, and was included in reinsurance
recoverables. See the "Product Derivatives and Risk Management" section below
for a discussion concerning the Company's risk management strategies for the
unreinsured GMWB business.
Cash-Flow Hedges
For the third quarter and nine months ended September 30, 2003 and 2002, the
Company's net gain or loss representing the total ineffectiveness of all
cash-flow hedges was immaterial.
Gains and losses on derivative contracts that are reclassified from accumulated
other comprehensive income ("AOCI") to current period earnings are included in
the line item in the statement of income in which the hedged item is recorded.
As of September 30, 2003 and 2002, the after-tax deferred net gains on
derivative instruments accumulated in AOCI that are expected to be reclassified
to earnings during the next twelve months were $8 and $5, respectively. This
expectation is based on the anticipated interest payments on hedged investments
in fixed maturity securities that will occur over the next twelve months, at
which time the Company will recognize the deferred net gains and losses as an
adjustment to interest income over the term of the investment cash flows. The
maximum term over which the Company is hedging its exposure to the variability
of future cash flows (for all forecasted transactions, excluding interest
payments on variable-rate debt) is twenty-four months. As of September 30, 2003
and December 31, 2002, the Company held derivative notional value related to
strategies categorized as cash-flow hedges of $3.1 billion. For the third
quarter and nine months ended September 30, 2003 and 2002, the net
reclassifications from AOCI to earnings resulting from the discontinuance of
cash-flow hedges were immaterial.
Fair-Value Hedges
For the third quarter and nine months ended September 30, 2003 and 2002, the
Company's gross gains and losses representing the total ineffectiveness of all
fair-value hedges were immaterial, with the net impact reported as net realized
capital gains and losses. All components of each derivative's gain or loss are
included in the assessment of hedge effectiveness. As of September 30, 2003 and
December 31, 2002, the Company held $259 and $300, respectively, in derivative
notional value related to strategies categorized as fair-value hedges.
Other Investment and Risk Management Activities
General
The Company's other investment and risk management activities primarily relate
to strategies used to reduce economic risk or enhance income, and do not receive
hedge accounting treatment. Swap agreements, interest rate cap and floor
agreements and option contracts are used to reduce economic risk. Income
enhancement and replication transactions include the use of written covered call
options, which offset embedded equity call options, total return swaps and
synthetic replication of cash market instruments. The change in the value of all
derivatives held for other investment and risk management purposes is reported
in current period earnings as net realized capital gains and losses. As of
September 30, 2003 and December 31, 2002, the Company held $6.3 billion and $4.8
billion, respectively, in derivative notional value related to strategies
categorized as Other Investment and Risk Management Activities, excluding
Product Derivatives and Risk Management Activities.
Product Derivatives and Risk Management
The Company offers certain variable annuity products with a GMWB rider. The GMWB
provides the policyholder with a guaranteed remaining balance ("GRB") if the
account value is reduced to zero through a combination of market declines and
withdrawals. The GRB is generally equal to premiums less withdrawals. However,
annual withdrawals that exceed 7% of the premiums paid may reduce the GRB by an
amount greater than the withdrawals and may also impact the guaranteed annual
withdrawal amount that subsequently applies after the excess annual withdrawals
occur. The policyholder also has the option, after a specified time period, to
reset the GRB to the then-current account value, if greater. The GMWB represents
an embedded derivative in the variable annuity contract that is required to be
reported separately from the host variable annuity contract. It is carried at
fair value and reported in other policyholder funds. The fair value of the GMWB
obligations is calculated based on actuarial assumptions related to the
projected cash flows, including benefits and related contract charges, over the
lives of the contracts, incorporating expectations concerning policyholder
behavior. Because of the dynamic and complex nature of these cash flows,
stochastic techniques under a variety of market return scenarios and other best
estimate assumptions are used. Estimating these cash flows involves numerous
estimates and subjective judgments including those regarding expected market
rates of return, market volatility, correlations of market returns and discount
rates. In valuing the embedded derivative, the Company attributes a portion of
the fees collected from the policyholder equal to the present value of future
GMWB claims (the "Attributed Fees"). All changes in the fair value of the
embedded derivative are recorded in net realized capital gains and losses. The
excess of fees collected from the policyholder for the GMWB over the Attributed
Fees are recorded in fee income.
For all contracts in effect through July 6, 2003, the Company entered into a
reinsurance arrangement to offset its exposure to the GMWB for the lives of
those contracts. This arrangement is recognized as a derivative and carried at
fair value in reinsurance recoverables. Changes in the fair value of both the
derivative assets and liabilities related to the reinsured GMWB are recorded in
net realized capital gains and losses. As of July 6, 2003, the Company exhausted
all but a small portion of the reinsurance capacity under the current
arrangement, as it relates to new business, and will be ceding only a very small
number of new contracts subsequent to July 6, 2003. Substantially all new
contracts with the GMWB are not covered by reinsurance. As of September 30,
2003, $9.8 billion out of $12.6 billion of account value with the GMWB feature
was reinsured. In order to minimize the volatility associated with the
unreinsured GMWB liabilities, the Company has established an alternative risk
management strategy. During the third quarter of 2003, the Company began hedging
its unreinsured GMWB exposure using interest rate futures, Standard and Poor's
("S&P") 500 and NASDAQ index put options and futures contracts. At September 30,
2003, the notional value of the options and futures contracts purchased was
$475. During the third quarter of 2003, net realized capital gains and losses
included the change in market value of both the value of the embedded derivative
related to the GMWB liability and the related derivative contracts that were
purchased as economic hedges, the net effect of which was a loss of less than $1
before deferred policy acquisition costs and tax effects for the quarter ended
September 30, 2003.
For further discussion of the Company's other investment and risk management
activities, see "Other Investments and Risk Management Activities" in Note 2(h)
of Notes of Consolidated Financial Statements included in Hartford Life's 2002
Form 10-K Annual Report.
5. COMMITMENTS AND CONTINGENCIES
(a) LITIGATION
Hartford Life is or may become involved in various legal actions, in the normal
course of its business, in which claims for alleged economic and punitive
damages have been or may be asserted, some for substantial amounts. Some of the
pending litigation has been filed as purported class actions and some actions
have been filed in certain jurisdictions that permit punitive damage awards that
are disproportionate to the actual damages incurred. Although there can be no
assurances, at the present time, the Company does not anticipate that the
ultimate liability arising from potential, pending or threatened legal actions,
after consideration of provisions made for estimated losses and costs of
defense, will have a material adverse effect on the financial condition or
operating results of the Company.
In the third quarter of 2003, Hartford Life Insurance Company ("HLIC") and its
affiliate International Corporate Marketing Group, LLC ("ICMG") settled their
intellectual property dispute with Bancorp Services, LLC ("Bancorp"). The
dispute concerned, among other things, Bancorp's claims for alleged patent
infringement, breach of a confidentiality agreement, and misappropriation of
trade secrets related to certain stable value corporate-owned life insurance
("COLI") products. The dispute was the subject of litigation in the United
States District Court for the Eastern District of Missouri, in which Bancorp
obtained in 2002 a judgment exceeding $134 against HLIC and ICMG after a jury
trial on the trade secret and breach of contract claims, and HLIC and ICMG
obtained summary judgment on the patent infringement claim. Based on the advice
of legal counsel following entry of the judgment, the Company recorded an $11
after-tax charge in the first quarter of 2002 to increase litigation reserves.
Both components of the judgment were appealed.
Under the terms of the settlement, Hartford will pay a minimum of $70 and a
maximum of $80, depending on the outcome of the patent appeal, to resolve all
disputes between the parties. The appeal from the trade secret and breach of
contract judgment will be dismissed. The settlement resulted in the recording of
an additional charge of $40 after-tax in the third quarter of 2003, reflecting
the maximum amount payable under the settlement.
(b) TAX MATTERS
The Company's Federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). The Company is currently under audit for the 1998-2001
tax years. Management believes that adequate provision has been made in the
financial statements for any potential assessments that may result from tax
examinations and other tax-related matters for all open tax years.
The tax provision recorded during the nine months ended September 30, 2003,
reflects a benefit of $30, consisting primarily of a change in estimate of the
dividends-received deduction ("DRD") tax benefit reported during 2002. The
change in estimate was the result of actual 2002 investment performance on the
related separate accounts being unexpectedly out of pattern with past
performance, which had been the basis for the estimate. The total DRD benefit
relating to the 2003 tax year recorded during the nine months ended September
30, 2003 was $65.
6. DEBT
Effective May 29, 2003, Hartford Life signed a promissory note for $150 with its
ultimate parent The Hartford. The note matures on May 26, 2006. Interest on the
note is payable semi-annually on June 1 and December 1 commencing on December 1,
2003. If not earlier declared due and payable by the lender, the entire
principal balance of the note together with all accrued and unpaid interest
thereon shall be due and payable in full in one, lump sum, balloon payment on
May 26, 2006.
Effective September 30, 2003, Hartford Life signed a promissory note for $80
with its ultimate parent The Hartford. The note matures on May 26, 2006.
Interest on the note is payable semi-annually on June 1 and December 1
commencing on December 1, 2003. If not earlier declared due and payable by the
lender, the entire principal balance of the note together with all accrued and
unpaid interest thereon shall be due and payable in full in one, lump sum,
balloon payment on May 26, 2006.
During the second quarter of 2003, $200 of long-term debt was reclassified to
short-term debt as it matures in June of 2004.
7. OTHER RELATED PARTY TRANSACTIONS
In connection with a comprehensive evaluation of various capital maintenance and
allocation strategies by The Hartford, an intercompany asset sale transaction
was completed in April 2003. The transaction resulted in certain of The
Hartford's Property & Casualty subsidiaries selling ownership interests in
certain high quality fixed maturity securities to Hartford Life for cash equal
to the fair value of the securities as of the effective date of the sale. For
the Property and Casualty subsidiaries, the transaction monetized the embedded
gain in certain securities on a tax deferred basis to The Hartford because no
capital gains tax will be paid until the securities are sold to unaffiliated
third parties. The transfer re-deployed to Hartford Life desirable investments
without incurring substantial transaction costs that would have been payable in
a comparable open market transaction. The fair value of securities transferred
was $1.8 billion.
During the second quarter of 2003, the Company sold certain of its furniture and
equipment with an estimated book value of $8 to Hartford Fire Insurance Company.
The furniture and equipment was sold at fair value and resulted in a gain of $4
before tax, which was recorded in other revenue.
8. SEPTEMBER 11 TERRORIST ATTACK
As a result of the September 11 terrorist attack, the Company recorded an
estimated loss amounting to $20, net of taxes and reinsurance, in the third
quarter of 2001. The Company based the loss estimate upon a review of insured
exposures using a variety of assumptions and actuarial techniques, including
estimated amounts for unknown and unreported policyholder losses. Also included
was an estimate of amounts recoverable under the Company's ceded reinsurance
programs, including the cost of additional reinsurance premiums. In the first
quarter of 2002, the Company recognized an $8 after-tax benefit related to
favorable development of reserves related to the September 11 terrorist attack.
9. REINSURANCE RECAPTURE
On June 30, 2003, the Company recaptured a block of business previously
reinsured with an unaffiliated reinsurer. Under this treaty, Hartford Life
reinsured a portion of the guaranteed minimum death benefit (GMDB) feature
associated with certain of its annuity contracts. As consideration for
recapturing the business and final settlement under the treaty, the Company has
received assets valued at approximately $32 and one million warrants exercisable
for the unaffiliated company's stock. This amount represents to the Company an
advance collection of its future recoveries under the reinsurance agreement and
will be recognized as future losses are incurred. Prospectively, as a result of
the recapture, Hartford Life will be responsible for all of the remaining and
ongoing risks associated with the GMDB's related to this block of business. The
recapture increased the net amount at risk retained by the Company, which is
included in the net amount at risk discussed in Note 2 (f).
10. SEGMENT INFORMATION
Hartford Life is organized into four reportable operating segments: Investment
Products, Individual Life, Group Benefits and Corporate Owned Life Insurance
(COLI). Investment Products offers individual variable and fixed annuities,
mutual funds, retirement plan services and other investment products. Individual
Life sells a variety of life insurance products, including variable life,
universal life, interest sensitive whole life and term life insurance. Group
Benefits sells group insurance products, including group life and group
disability insurance as well as other products, including stop loss and
supplementary medical coverage to employers and employer sponsored plans,
accidental death and dismemberment, travel accident and other special risk
coverages to employers and associations. COLI primarily offers variable products
used by employers to fund non-qualified benefits or other postemployment benefit
obligations as well as leveraged COLI. The Company includes in an Other
category, its international operations, which are primarily located in Japan and
Brazil; realized capital gains and losses; as well as corporate items not
directly allocable to any of its reportable operating segments, principally
interest expense; and intersegment eliminations.
The accounting policies of the reportable operating segments are the same as
those described in "Basis of Presentation and Accounting Policies" in Note 2 in
the Company's 2002 Form 10-K Annual Report. Hartford Life evaluates performance
of its segments based on revenues, net income and the segment's return on
allocated capital. The Company charges direct operating expenses to the
appropriate segment and allocates the majority of indirect expenses to the
segments based on an intercompany expense arrangement. Intersegment revenues are
not significant and primarily occur between corporate and the operating
segments. These amounts include interest income on allocated surplus and the
allocation of net realized capital gains and losses through net investment
income utilizing the duration of the segment's investment portfolios. The
Company's revenues are primarily derived from customers within the United
States. The Company's long-lived assets primarily consist of deferred policy
acquisition costs and deferred tax assets from within the United States. The
following tables present summarized financial information concerning the
Company's segments.
Investment Individual Group
SEPTEMBER 30, 2003 Products Life Benefits COLI Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER ENDED
Total revenues $ 1,182 $ 249 $ 663 $ 117 $ 37 $ 2,248
Net income (loss) 129 36 38 (30) (12) 161
NINE MONTHS ENDED
Total revenues $ 2,832 $ 733 $ 1,968 $ 370 $ 93 $ 5,996
Net income (loss) 368 104 107 (11) (38) 530
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Individual Group
SEPTEMBER 30, 2002 Products Life Benefits COLI Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER ENDED
Total revenues $ 761 $ 239 $ 645 $ 145 $ (125) $ 1,665
Net income (loss) 100 33 34 10 (16) 161
NINE MONTHS ENDED
Total revenues $ 2,337 $ 720 $ 1,943 $ 451 $ (252) $ 5,199
Net income (loss) 335 99 92 20 (114) 432
- ----------------------------------------------------------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in millions, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of Hartford Life, Inc. and
its subsidiaries ("Hartford Life" or the "Company") as of September 30, 2003,
compared with December 31, 2002, and its results of operations for the third
quarter and nine months ended September 30, 2003 compared with the equivalent
periods in 2002. This discussion should be read in conjunction with the MD&A
included in the Company's 2002 Form 10-K Annual Report.
Certain of the statements contained herein are forward-looking statements. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and include estimates and
assumptions related to economic, competitive and legislative developments. These
forward-looking statements are subject to change and uncertainty which are, in
many instances, beyond the Company's control and have been made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon the Company. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on Hartford Life will be those anticipated by
management. Actual results could differ materially from those expected by the
Company, depending on the outcome of various factors. These factors include: the
uncertain nature of damage theories and loss amounts and the development of
additional facts related to the September 11 terrorist attack ("September 11");
the uncertain effect on the Company of the Jobs and Growth Tax Relief
Reconciliation Act of 2003, in particular the reduction in tax rates on
long-term capital gains and most dividend distributions; the response of
reinsurance companies under reinsurance contracts, the impact of increasing
reinsurance rates, and the availability and adequacy of reinsurance to protect
the Company against losses; the ability to effectively mitigate the impact of
equity market volatility on the Company's financial position and results of
operations arising from obligations under annuity product guarantees; the
possibility of more unfavorable loss experience than anticipated; the
possibility of general economic and business conditions that are less favorable
than anticipated; the effect of changes in interest rates, the stock markets or
other financial markets; stronger than anticipated competitive activity;
unfavorable legislative, regulatory or judicial developments; the Company's
ability to distribute its products through distribution channels, both current
and future; the uncertain effects of emerging claim and coverage issues; the
effect of assessments and other surcharges for guaranty funds and second-injury
funds and other mandatory pooling arrangements; a downgrade in the Company's
claims-paying, financial strength or credit ratings; the ability of the
Company's subsidiaries to pay dividends to the Company; and other factors
described in such forward-looking statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
Critical Accounting Estimates 16
Consolidated Results of Operations - Operating Summary 18
Investment Products 19
Individual Life 20
Group Benefits 21
Corporate Owned Life Insurance (COLI) 21
Investments 22
Capital Markets Risk Management 24
Capital Resources and Liquidity 31
Accounting Standards 33
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability: reserves; valuation of investments and derivative instruments;
deferred policy acquisition costs; and contingencies. In developing these
estimates management makes subjective and complex judgments that are inherently
uncertain and subject to material change as facts and circumstances develop.
Although variability is inherent in these estimates, management believes the
amounts provided are appropriate based upon the facts available upon compilation
of the financial statements. There have been no significant changes to the
Company's critical accounting estimates since December 31, 2002 other than
deferred policy acquisition costs and valuation of derivatives as discussed
below.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, which include commissions and certain other expenses
that vary with and are primarily associated with acquiring business, are
deferred and amortized over the estimated lives of the contracts, usually 20
years. These deferred costs, together with the present value of future profits
of acquired business, are recorded as an asset commonly referred to as
deferred policy acquisition costs and present value of future profits ("DAC").
At September 30, 2003 and December 31, 2002, the carrying value of the Company's
Life operations' DAC was $6.3 billion and $5.8 billion, respectively. For
statutory accounting purposes, such costs are expensed as incurred.
DAC related to traditional policies are amortized over the premium-paying period
in proportion to the present value of annual expected premium income. DAC
related to investment contracts and universal life-type contracts are deferred
and amortized using the retrospective deposit method. Under the retrospective
deposit method, acquisition costs are amortized in proportion to the present
value of the estimated gross profits ("EGPs") arising principally from projected
investment, mortality and expense margins and surrender charges. The
attributable portion of the DAC amortization is allocated to realized gains and
losses on investments. The DAC balance is also adjusted through other
comprehensive income by an amount that represents the amortization of deferred
policy acquisition costs that would have been required as a charge or credit to
operations had unrealized gains and losses on investments been realized. Actual
gross profits can vary from management's estimates, resulting in increases or
decreases in the rate of amortization.
The Company regularly evaluates its EGPs to determine if actual experience or
other evidence suggests that earlier estimates should be revised. In the event
that the Company were to revise its EGPs, the cumulative DAC amortization would
be adjusted to reflect such revised EGPs in the period the revision was
determined to be necessary. Several assumptions considered to be significant in
the development of EGPs include separate account fund performance, surrender and
lapse rates, estimated interest spread and estimated mortality. The separate
account fund performance assumption is critical to the development of the EGPs
related to the Company's variable annuity and variable life insurance
businesses. The average annual long-term rate of assumed separate account fund
performance (before mortality and expense charges) used in estimating gross
profits for the variable annuity and variable life business was 9% for the nine
months ended September 30, 2003 and September 30, 2002. For other products,
including fixed annuities and other universal life-type contracts, the average
assumed investment yield ranged from 5% to 8.5% for the periods ended September
30, 2003 and 2002.
Due to increased volatility and the decline experienced by the U.S. equity
markets in recent periods, the Company continues to enhance its DAC evaluation
process. The Company has developed sophisticated modeling capabilities, which
allowed it to run a large number of stochastically determined scenarios of
separate account fund performance. These scenarios were then utilized to
calculate a statistically significant range of reasonable estimates of EGPs.
This range was then compared to the present value of EGPs currently utilized in
the DAC amortization model. As of September 30, 2003, the present value of the
EGPs utilized in the DAC amortization model fall within a reasonable range of
statistically calculated present value of EGPs. As a result, the Company does
not believe there is sufficient evidence to suggest that a revision to the EGPs
(and therefore, a revision to the DAC) as of September 30, 2003 is necessary;
however, if in the future the EGPs utilized in the DAC amortization model were
to exceed the margin of the reasonable range of statistically calculated EGPs, a
revision could be necessary. Furthermore, the Company has estimated that the
present value of the EGPs is likely to remain within a reasonable range if
overall separate account returns decline by 10% or less for the remainder of
2003, and if overall separate account returns decline by 5% or less for the next
twelve months, and if certain other assumptions that are implicit in the
computations of the EGPs are achieved.
Additionally, the Company continues to perform analyses with respect to the
potential impact of a revision to future EGPs. If such a revision to EGPs were
deemed necessary, the Company would adjust, as appropriate, all of its
assumptions for products accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments", and reproject its future EGPs based on
current account values at the end of the quarter in which a revision is deemed
to be necessary. To illustrate the effects of this process, assume the Company
had concluded that a revision of the Company's EGPs was required at September
30, 2003. If the Company assumed a 9% average long-term rate of growth from
September 30, 2003 forward along with other appropriate assumption changes in
determining the revised EGPs, the Company estimates the cumulative increase to
amortization would be approximately $100-$110, after-tax. If instead the Company
were to assume a long-term growth rate of 8% in determining the revised EGPs,
the adjustment would be approximately $120-$140, after-tax. Assuming that such
an adjustment were to have been required, the Company anticipates that there
would have been immaterial impacts on its DAC amortization for the 2003 and 2004
years exclusive of the adjustment, and that there would have been positive
earnings effects in later years. Any such adjustment would not affect statutory
income or surplus, due to the prescribed accounting for such amounts that is
discussed above.
Aside from absolute levels and timing of market performance assumptions,
additional factors that will influence this determination include the degree of
volatility in separate account fund performance and shifts in asset allocation
within the separate account made by policyholders. The overall return generated
by the separate account is dependent on several factors, including the relative
mix of the underlying sub-accounts among bond funds and equity funds as well as
equity sector weightings. The Company's overall separate account fund
performance has been reasonably correlated to the overall performance of the S&P
500 Index (which closed at 996 on September 30, 2003), although no assurance can
be provided that this correlation will continue in the future.
The overall recoverability of the DAC asset is dependent on the future
profitability of the business. The Company tests the aggregate recoverability of
the DAC asset by comparing the amounts deferred to the present value of total
EGPs. In addition, the Company routinely stress tests its DAC asset for
recoverability against severe declines in its separate account assets, which
could occur if the equity markets experienced another significant sell-off, as
the majority of policyholders' funds in the separate accounts is invested in the
equity market. As of September 30, 2003, the Company believed variable annuity
separate account assets could fall by at least 30% before portions of its DAC
asset would be unrecoverable.
VALUATION OF DERIVATIVES
A derivative instrument is reported at fair value based upon internally
established valuations that are consistent with external valuation models,
quotations furnished by dealers in such instrument or market quotations. The
Company has calculated the fair value of the GMWB liability based on actuarial
assumptions related to the projected cash flows, including benefits and related
contract charges, over the lives of the contracts, incorporating expectations
concerning policyholder behavior. Because of the dynamic and complex nature of
these cash flows, stochastic techniques under a variety of market return
scenarios and other best estimate assumptions are used. Estimating these cash
flows involves numerous estimates and subjective judgments including those
regarding expected market rates of return, market volatility, correlations of
market returns and discount rates. At each valuation date, the Company has
assumed expected returns based on risk-free rates as represented by the current
LIBOR forward curve rates; market volatility assumptions for each underlying
index will be based on a blend of observed market "implied volatility" data and
annualized standard deviations of monthly returns using the most recent 20 years
of observed market performance; correlations of market returns across underlying
indices shall be based on actual observed market returns and relationships over
the ten years preceding the valuation date; and current risk-free spot rates as
represented by the current LIBOR spot curve shall be used to determine the
present value of expected future cash flows produced in the stochastic
projection process.
CONSOLIDATED RESULTS OF OPERATIONS - OPERATING SUMMARY
OPERATING SUMMARY
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 981 $ 667 47% $ 2,370 $ 2,040 16%
Fee income 716 627 14% 1,989 1,961 1%
Net investment income 518 462 12% 1,538 1,360 13%
Other revenues 35 27 30% 99 91 9%
Net realized capital gains (losses) (2) (118) 98% - (253) 100%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,248 1,665 35% 5,996 5,199 15%
Benefits, claims and claim adjustment expenses 1,375 1,050 31% 3,544 3,135 13%
Amortization of deferred policy acquisition costs
and present value of future profits 202 163 24% 540 486 11%
Insurance operating costs and expenses 379 335 13% 1,125 1,050 7%
Other expenses 94 34 176% 159 114 39%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,050 1,582 30% 5,368 4,785 12%
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 198 83 139% 628 414 52%
Income tax expense (benefit) 37 (78) NM 98 (18) NM
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 161 $ 161 - $ 530 $ 432 23%
====================================================================================================================================
Hartford Life is organized into four reportable operating segments: Investment
Products, Individual Life, Group Benefits and Corporate Owned Life Insurance
("COLI"). The Company also includes in an Other category its international
operations, which are primarily located in Japan and Brazil; realized capital
gains and losses; as well as corporate items not directly allocated to any of
its reportable operating segments, principally interest expense; and
intersegment eliminations. The Company defines the following as "NM" or not
meaningful: increases or decreases greater than 200%, or changes from a net gain
to a net loss position, or vice versa.
Revenues increased for the third quarter and nine months ended September 30,
2003 as a result of higher revenues in the Investment Products segment and a
decrease in realized capital losses reported in the Other category compared to
the prior year comparable periods. Earned premiums in Investment Products
increased due to higher sales in the institutional investment products business.
Additionally, net investment income increased due to higher general account
assets in the individual annuity business and growth in assets in the
institutional investments business. Fee income in the Investment Products
segment was higher for the third quarter ended September 30, 2003 as a result of
higher average account values, specifically in individual annuities and mutual
fund businesses, due primarily to stronger variable annuity sales and the higher
equity market values compared to the prior year period. Partially offsetting
these increases were lower fee income and net investment income in the COLI
segment. The decrease in COLI net investment income for the third quarter and
nine months ended September 30, 2003 was primarily due to lower average
leveraged COLI account values as compared to a year ago. In addition, COLI had
lower fee income due in part to lower sales in the third quarter of 2003 and for
the nine months ended September 30, 2003, as compared to the prior year
comparable periods.
Benefits, claims and expenses increased for the third quarter and nine months
ended September 30, 2003 primarily due to increases in the Investment Products
segment associated with the growth in the institutional investment business,
partially offset by lower benefit costs in COLI related to the decline in the
account values of the leveraged COLI business. For the third quarter ended
September 30, 2003, COLI other expenses increased due to a $40 after-tax charge,
associated with the settlement for the Bancorp Services, LLC ("Bancorp")
litigation. (For further discussion of the Bancorp litigation, see Note 5(a) of
Notes to Condensed Consolidated Financial Statements.)
Net income remained the same for the third quarter and increased for the nine
months ended September 30, 2003 as compared to the
prior year comparable periods. Net income has been favorably impacted by growth
in the Investment Products segment and a decrease in net realized capital losses
compared to a year ago. Additionally, Group Benefits net income increased due
principally to more favorable loss ratios as compared to the prior year.
Partially offsetting these increases was a decrease in COLI net income of $31
for the nine months ended September 30, 2003, as compared to the prior year
period. This decrease included the effects of a year over year increase in the
charge for the Bancorp litigation, aggregating $29. In addition, there was an $8
after-tax impact recorded in the first quarter of 2002 related to favorable
development on the Company's estimated September 11 exposure.
The tax provision recorded during the nine months ended September 30, 2003,
reflects a benefit of $30, consisting primarily of a change in estimate of the
DRD tax benefit reported during 2002. The change in estimate was the result of
actual 2002 investment performance on the related separate accounts being
unexpectedly out of pattern with past performance, which had been the basis for
the estimate. The total DRD benefit related to the 2003 tax year for the nine
months ended September 30, 2003 was $65.
Future net income for the Company will be affected by the effectiveness of the
risk management strategies the Company has implemented to mitigate the net
income volatility associated with the unreinsured guaranteed minimum withdrawal
benefit ("GMWB") rider currently being sold with the majority of new variable
annuity contracts. The GMWB represents an embedded derivative in the variable
annuity contract that is required to be reported separately from the host
variable annuity contract. Beginning July 7, 2003, substantially all new
contracts with the GMWB have not been covered by reinsurance. These unreinsured
contracts are expected to generate volatility in net income as the underlying
embedded derivative liabilities are recorded at fair value each reporting
period, resulting in the recognition of net realized capital gains or losses in
response to changes in certain critical factors including capital market
conditions and policyholder behavior. In order to minimize the volatility
associated with the unreinsured GMWB liabilities, the Company established an
alternative risk management strategy. During the third quarter of 2003, the
Company began hedging its unreinsured GMWB exposure using interest rate futures,
Standard and Poor's (S&P) 500 and NASDAQ index put options and futures
contracts. The net impact to the Company's net income for the third quarter of
the change in value of the embedded derivative net of the results of the hedging
program was immaterial.
INVESTMENT PRODUCTS
OPERATING SUMMARY
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 459 $ 385 19% $ 1,243 $ 1,253 (1%)
Earned premiums 393 96 NM 627 306 105%
Net investment income 330 280 18% 962 778 24%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,182 761 55% 2,832 2,337 21%
Benefits, claims and claim adjustment expenses 707 368 92% 1,552 1,068 45%
Insurance operating costs and other expenses 165 157 5% 470 489 (4%)
Amortization of deferred policy acquisition costs 145 108 34% 375 342 10%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,017 633 61% 2,397 1,899 26%
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 165 128 29% 435 438 (1%)
Income tax expense 36 28 29% 67 103 (35%)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 129 $ 100 29% $ 368 $ 335 10%
==================================================================================================================================
Individual variable annuity account values $ 77,572 $ 59,618 30%
Other individual annuity account values 10,939 10,513 4%
Other investment products account values 24,295 19,368 25%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES [1] 112,806 89,499 26%
Mutual fund assets under management 18,900 14,092 34%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 131,706 $ 103,591 27%
==================================================================================================================================
[1] Includes policyholder balances for investment contracts and reserves for
future policy benefits for insurance contracts.
Revenues in the Investment Products segment increased for the third quarter and
nine months ended September 30, 2003. The increase in earned premiums is due to
higher sales of terminal funding products in the institutional investment
products business. Net investment income increased primarily due to higher
general account assets in the individual annuity business. General account
individual annuity assets were $9.8 billion as of September 30, 2003, an
increase of $2.2 billion, or 29%, from September 30, 2002, due to policyholders
transfer activity and increased sales of individual annuities. Additionally, net
investment income related to other investment products increased as a result of
the growth in average assets over the last twelve months in the institutional
investment business, where related assets under management increased $2.2
billion, or 22%, since September 30, 2002, to $11.9 billion as of September 30,
2003. Assets under management is an internal performance measure used by the
Company since a significant portion of the Company's revenue is based upon asset
values. These revenues increase or decrease with a rise or fall, respectively,
in the level of average assets under management. Fee income in the Investment
Products segment was higher for the third quarter ended September 30, 2003 as a
result of higher average account values, specifically in individual annuities
and mutual fund businesses, due primarily to stronger variable annuity sales and
the higher equity market values compared
to the prior year period. However, fee income was slightly lower for the nine
months ended September 30, 2003 as average account values were lower when
compared to the prior year period.
Total benefits, claims and expenses increased for the third quarter and nine
months ended September 30, 2003, primarily driven by growth in the institutional
investment business. Additionally, amortization of deferred policy acquisition
costs increased for the third quarter and nine months ended September 30, 2003
due to higher gross profits.
Net income increased for the third quarter and nine months ended September 30,
2003. Net income was higher for the nine months ended September 30, 2003 due to
the favorable impact of $21, resulting from the Company's previously discussed
change in estimate of the DRD tax benefit reported during 2002. The change in
estimate was the result of 2002 actual investment performance on the related
separate accounts being unexpectedly out of pattern with past performance, which
had been the basis for the estimate. The total DRD benefit related to the 2003
tax year for the nine months ended September 30, 2003 was $60.
INDIVIDUAL LIFE
OPERATING SUMMARY
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 190 $ 178 7% $ 556 $ 528 5%
Earned premiums (4) (3) (33%) (14) (5) (180%)
Net investment income 63 64 (2%) 191 197 (3%)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 249 239 4% 733 720 2%
Benefits, claims and claim adjustment expenses 117 104 13% 337 330 2%
Insurance operating costs and other expenses 38 37 3% 116 116 -
Amortization of deferred policy acquisition costs 42 49 (14%) 131 128 2%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 197 190 4% 584 574 2%
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 52 49 6% 149 146 2%
Income tax expense 16 16 - 45 47 (4%)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 36 $ 33 9% $ 104 $ 99 5%
====================================================================================================================================
Variable life account values $ 4,284 $ 3,458 24%
Total account values $ 8,247 $ 7,360 12%
- ------------------------------------------------------------------------------------------------------------------------------------
Variable life insurance in force $ 66,561 $ 65,797 1%
Total life insurance in force $ 128,462 $ 125,138 3%
====================================================================================================================================
Revenues in the Individual Life segment increased for the third quarter and nine
months ended September 30, 2003 primarily driven by increases in fees and cost
of insurance charges as life insurance in force values grew, and variable life
account values increased 24% from the prior year. These increases were partially
offset by decreases in net investment income and lower earned premiums. The
decrease in investment income was due primarily to lower investment yields. The
lower earned premiums were driven by higher ceded premiums and declining assumed
premiums on the Fortis block of business.
Total benefits, claims and expenses increased for the third quarter ended
September 30, 2003 principally due to higher benefit costs when compared to the
prior year favorable results. Year-to-date mortality was higher in 2003 largely
due to the increased size and age of the inforce business.
Net income increased for the third quarter and nine months ended September 30,
2003 due to increases in fee income and growth in the in force business. These
increases were partially offset by mortality experience and lower net investment
income for the third quarter and nine months ended September 30, 2003 compared
to the equivalent prior year periods. Additionally, net income for the nine
months ended September 30, 2003 includes the favorable impact of $2 DRD benefit
resulting from the Company's previously discussed change in estimate of the DRD
tax benefit reported during 2002. The total DRD benefit related to the 2003 tax
year for the nine months ended September 30, 2003 was $3.
GROUP BENEFITS
OPERATING SUMMARY
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums and other $ 597 $ 582 3% $ 1,772 $ 1,754 1%
Net investment income 66 63 5% 196 189 4%
- ------------------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 472 471 - 1,412 1,431 (1%)
Insurance operating costs and other expenses 137 127 8% 406 385 5%
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization of deferred policy acquisition costs 4 4 - 13 11 18%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 613 602 2% 1,831 1,827 -
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 50 43 16% 137 116 18%
Income tax expense 12 9 33% 30 24 25%
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 38 $ 34 12% $ 107 $ 92 16%
====================================================================================================================================
Revenues increased for the third quarter and nine months ended September 30,
2003 primarily due to an increase in earned premiums. The Group Benefits segment
had premium buyouts of $11 and $40 for the third quarter and nine months ended
September 30, 2003 compared with $6 for both the third quarter and nine months
ended September 30, 2002. Premiums, excluding buyouts, for the third quarter
ended September 30, 2003 were higher primarily due to sales growth and improved
persistency. Premiums, excluding buyouts, for the nine months ended September
30, 2003 were lower as a result of the Group Benefits division's continued
pricing and risk management discipline in light of a challenging competitive and
economic environment.
Total benefits, claims and expenses increased 2% for the third quarter and
remained essentially flat for the nine months ended September 30, 2003 due to an
increase in commission expenses and operating expenses, partially offset by
lower loss costs for the nine months ended September 30, 2003 as compared to the
equivalent prior year period. The segment's loss ratio (defined as benefits and
claims as a percentage of premiums and other considerations, excluding buyouts)
was 79% for both the third quarter and nine months ended September 30, 2003,
respectively as compared to 81% and 82% for the comparable prior year periods.
Net income increased for the third quarter and nine months ended September 30,
2003 principally due to favorable loss ratios discussed above. However, future
net income growth will be dependent upon the Group Benefits segment's ability to
increase earned premiums and continue to control benefit costs within pricing
assumptions.
CORPORATE OWNED LIFE INSURANCE ("COLI")
OPERATING SUMMARY
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
2003 2002 CHANGE 2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 64 $ 79 (19%) $ 201 $ 238 (16%)
Net investment income 53 66 (20%) 169 213 (21%)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 117 145 (19%) 370 451 (18%)
Benefits, claims and claim adjustment expenses 78 108 (28%) 242 325 (26%)
Insurance operating costs and other expenses 72 15 NM 93 70 33%
Dividends to policyholders 14 7 100% 53 27 96%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 164 130 26% 388 422 (8%)
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (47) 15 NM (18) 29 NM
Income tax expense (benefit) (17) 5 NM (7) 9 NM
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (30) $ 10 NM $ (11) $ 20 NM
====================================================================================================================================
Variable COLI account values $ 20,557 $ 19,298 7%
Leveraged COLI account values 2,602 3,601 (28%)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $ 23,159 $ 22,899 1%
====================================================================================================================================
COLI revenues decreased for the third quarter and nine months ended September
30, 2003 due to lower net investment and fee income. Net investment income
decreased, primarily due to the decline in leveraged COLI account values as a
result of surrender activity. Fee income was reduced as the result of lower
sales for the third quarter and nine months ended September 30, 2003 as compared
to the equivalent prior year periods.
Total benefits, claims and expenses increased for the third quarter ended
September 30, 2003 due primarily to a $40 after-tax expense related to the
Bancorp litigation. (For further discussion of the Bancorp litigation, see Note
5(a) of Notes to Condensed Consolidated Financial Statements.) Total benefits,
claims and expenses decreased for the nine months ended September 30, 2003
primarily as a result of a decline in interest credited due to lower general
account assets and policy loans compared to prior year due to the decline in the
leveraged COLI account values noted above. These decreases for the nine months
ended September 30, 2003 were partially offset by an increase in insurance
operating costs and other expenses due primarily to the $40 after-tax expense
related to the Bancorp litigation expense recorded in 2003, compared with the
$11 after-tax expense recorded in 2002. In addition, dividends to policyholders
increased for the third quarter and nine months ended September 30, 2003 due to
an increase in mortality dividends on the leveraged COLI product related
primarily to surrender activity.
Net income decreased for the third quarter and nine months ended
September 30, 2003 as compared to the prior periods principally as a result of
the Bancorp litigation expense. Excluding the expenses associated with the
Bancorp litigation discussed above, net income was $10 for the third quarter
ended September 30, 2003 and 2002, and was $29 and $31 for the nine months ended
September 30, 2003 and 2002. This decline in net income for the nine months
ended September 30, 2003 was principally related to the decline in the leveraged
COLI business discussed above.
INVESTMENTS
Hartford Life's general account and guaranteed separate account investment
portfolios are managed based on the underlying characteristics and nature of
each operation's respective liabilities and within established risk parameters.
(For a further discussion on Hartford Life's approach to managing risks, see the
Capital Markets Risk Management section.)
Please refer to the Investments section of the MD&A in Hartford Life's 2002 Form
10-K Annual Report for a description of the Company's investment objectives and
policies.
Return on general account invested assets is an important element of Hartford
Life's financial results. Significant fluctuations in the fixed income or equity
markets could weaken the Company's financial condition or its results of
operations. Additionally, changes in market interest rates may impact the period
of time over which certain investments, such as mortgage-backed securities, are
repaid and whether certain investments are called by the issuers. Such changes
may, in turn, impact the yield on these investments and also may result in
reinvestment of funds received from calls and prepayments at rates below the
average portfolio yield.
Fluctuations in interest rates affect the Company's return on, and the fair
value of, fixed maturity investments, which comprised approximately 90% and 87%
of the fair value of its general account invested assets as of September 30,
2003 and December 31, 2002, respectively. Other events beyond the Company's
control could also adversely impact the fair value of these investments.
Specifically, a downgrade of an issuer's credit rating or default of payment by
an issuer could reduce the Company's investment return.
A decrease in the fair value of any investment that is deemed other than
temporary would result in the Company's recognition of a realized loss in its
financial results prior to the actual sale of the investment.
The following table identifies invested assets by type held in the Company's
general account as of September 30, 2003 and December 31, 2002.
COMPOSITION OF INVESTED ASSETS
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed maturities, at fair value $ 35,237 90.2% $ 29,377 86.7%
Equity securities, at fair value 424 1.1% 458 1.3%
Policy loans, at outstanding balance 2,533 6.5% 2,934 8.7%
Limited partnerships, at fair value 236 0.6% 519 1.5%
Other investments 655 1.6% 603 1.8%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 39,085 100.0% $ 33,891 100.0%
=================================================================================================================================
Fixed maturity investments increased 20% since December 31, 2002, primarily the
result of investment and universal life contract sales and operating cash flows.
In March 2003, the Company decided to liquidate its hedge fund limited
partnership investments and reinvest the proceeds in fixed maturity investments.
Hedge fund liquidations have totaled approximately $323 since December 31, 2002.
As of September 30, 2003, Hartford Life owned approximately $71 of hedge fund
investments, all of which are expected to be liquidated by March 31, 2004.
INVESTMENT RESULTS
The table below summarizes the Company's investment results.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
(Before-tax) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 467 $ 401 $ 1,375 $ 1,164
Policy loan income 51 61 163 196
-------------------------------------------------------------
Net investment income - total $ 518 $ 462 $ 1,538 $ 1,360
Yield on average invested assets [1] 5.7% 6.0% 5.9% 6.1%
- -----------------------------------------------------------------------------------------------------------------------------------
Gross gains on sale $ 61 $ 44 $ 209 $ 118
Gross losses on sale (31) (28) (95) (75)
Impairments (27) (132) (111) (291)
Other, net [2] [3] (5) (2) (3) (5)
-------------------------------------------------------------
Net realized capital gains (losses) $ (2) $ (118) $ -- $ (253)
===================================================================================================================================
[1] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost or amortized
cost, as applicable, for the third quarter and nine months ended September
30, 2003 and 2002. Average invested assets are calculated by dividing the
sum of the beginning and ending period amounts by two.
[2] Primarily consists of changes in fair value and hedge ineffectiveness on
derivative instruments.
[3] Includes the net GMWB derivative activity, which was a loss of less than $1
for the third quarter and nine months ended September 30, 2003.
For the third quarter and nine months ended September 30, 2003, net investment
income, excluding policy loan income, increased $66, or 16%, and $211, or 18%,
compared to the respective prior year periods. The increases in net investment
income were primarily due to income earned on a higher invested asset base
partially offset by lower investment yields. Yields on average invested assets
decreased as a result of lower rates on new investment purchases and decreased
policy loan income.
Net realized capital gains (losses) for the third quarter and nine months ended
September 30, 2003 improved by $116 and $253, respectively, compared to the
prior year periods, primarily as a result of a decrease in other than temporary
impairments on fixed maturities.
The table below and following discussion identify the Company's other than
temporary impairments by type.
OTHER THAN TEMPORARY IMPAIRMENTS BY TYPE
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Asset-backed securities ("ABS")
Aircraft lease receivables $ 15 $ 53 $ 15 $ 72
Corporate debt obligations ("CDO") -- 13 10 22
Credit card receivables -- -- 12 --
Interest only securities -- 3 5 3
Manufacturing housing ("MH") receivables 9 12 9 12
Mutual fund fee receivables -- 7 3 14
Other ABS 2 3 3 5
Commercial mortgage-backed securities ("CMBS") -- -- 4 --
Corporate
Basic industry 1 -- 1 --
Consumer non-cyclical -- -- 7 --
Financial services -- 1 4 1
Technology and communications -- 10 3 125
Transportation -- -- 7 1
Utilities -- 6 -- 12
Equity -- 14 21 14
Foreign government -- 10 -- 10
Mortgage-backed securities ("MBS") - interest only securities -- -- 7 --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL IMPAIRMENTS $ 27 $ 132 $ 111 $ 291
===================================================================================================================================
ABS
During 2003, impairments were recorded for various ABS security types as a
result of a continued deterioration of cash flows derived from the underlying
collateral. The ABS securities supported by aircraft lease and enhanced
equipment trust certificates (together, "aircraft lease receivables") have
continued to decline primarily due to a reduction in lease payments and aircraft
values driven by a decline in airline travel. CDO impairments were primarily the
result of increasing default rates and lower recovery rates on the collateral.
Impairments on securities supported by MH receivables were primarily the result
of repossessed units liquidated at depressed levels. Interest only security
impairments recorded during 2003 and 2002 were due to the flattening of the
forward yield curve.
Impairments of ABS during the nine months ended September 30, 2002 were driven
by deterioration of collateral cash flows. Numerous bankruptcies, collateral
defaults, weak economic conditions and reduced airline travel were all factors
contributing to lower collateral cash flows and broker quoted market prices of
ABS in 2002.
Corporate
The decline in corporate bankruptcies and improvement in general economic
conditions have contributed to much lower corporate impairment levels in 2003
compared to 2002.
Corporate impairments recorded during the third quarter of 2003 were
concentrated in the United States steel industry and resulted from a decision to
dispose of securities, which were in an unrealized loss position. A significant
portion of corporate impairments during the nine months ended September 30, 2003
were driven by a deterioration in the transportation sector, specifically
issuers of airline debt as the result of a decline in airline travel.
Impairments during the nine months ended September 30, 2003 were also the result
of one consumer noncyclical issuer in the healthcare industry stemming from its
decline in value due to accounting fraud, and one communications sector issuer
in the cable television industry due to deteriorating earnings forecasts, debt
restructuring issues and accounting irregularities.
For the third quarter and nine months ended September 30, 2002, impairments of
corporate securities were concentrated in the technology and communications
sector and for the nine months ended September 30, 2002 included a $74
before-tax loss related to securities issued by WorldCom.
Other
Other than temporary impairments were also recorded in 2003 and 2002, on various
diversified seeded equity and mutual fund investments that had experienced
declines in fair value for an extended period of time.
CAPITAL MARKETS RISK MANAGEMENT
Hartford Life has a disciplined approach to managing risks associated with its
capital markets and asset/liability management activities. Investment portfolio
management is organized to focus investment management expertise on specific
classes of investments, while asset/liability management is the responsibility
of dedicated risk management units supporting Hartford Life, including the
Company's guaranteed separate accounts. Derivative instruments are utilized in
compliance with established Company policy and regulatory requirements and are
monitored internally and reviewed by senior management.
The Company is exposed to two primary sources of investment and asset/liability
management risk: credit risk, relating to the uncertainty associated with the
ability of an obligor or counterparty to make timely payments of principal
and/or interest, and market risk, relating to the market price and/or cash flow
variability associated with changes in interest rates, securities prices, market
indices, yield curves or currency exchange rates. The Company does not hold any
financial instruments purchased for trading purposes.
Please refer to the Capital Markets Risk Management section of the MD&A in
Hartford Life's 2002 Form 10-K Annual Report for a description of the Company's
objectives, policies and strategies.
CREDIT RISK
The Company invests primarily in securities that are rated investment grade, and
has established exposure limits, diversification standards and review procedures
for all credit risks including borrower, issuer and counterparty.
Creditworthiness of specific obligors is determined by an internal credit
evaluation supplemented by consideration of external determinants of
creditworthiness, typically ratings assigned by nationally recognized ratings
agencies. Obligor, asset sector and industry concentrations are subject to
established limits and are monitored on a regular basis. Hartford Life is not
exposed to any credit concentration risk of a single issuer greater than 10% of
the Company's stockholders' equity.
The following table identifies fixed maturity securities by type, including
guaranteed separate accounts, as of September 30, 2003 and December 31, 2002.
FIXED MATURITIES BY TYPE
SEPTEMBER 30, 2003
----------------------------------------------------
PERCENT
OF TOTAL
AMORTIZED UNREALIZED UNREALIZED FAIR FAIR
COST GAINS LOSSES VALUE VALUE
- ----------------------------------------------------------------------------------------
ABS $ 5,431 $ 112 $ (132) $ 5,411 11.5%
CMBS 7,214 507 (17) 7,704 16.4%
Collateralized mortgage obligation
("CMO") 976 24 (2) 998 2.1%
Corporate
Basic industry 2,701 194 (9) 2,886 6.1%
Capital goods 1,307 108 (5) 1,410 3.0%
Consumer cyclical 2,087 150 (8) 2,229 4.8%
Consumer non-cyclical 2,812 220 (7) 3,025 6.5%
Energy 1,451 135 (5) 1,581 3.4%
Financial services 5,180 450 (41) 5,589 11.9%
Technology and communications 3,413 398 (9) 3,802 8.1%
Transportation 609 50 (6) 653 1.4%
Utilities 1,910 173 (19) 2,064 4.4%
Other 520 32 (1) 551 1.2%
Government/Government agencies
Foreign 584 74 (1) 657 1.4%
United States 896 48 (1) 943 2.0%
MBS - agency 2,042 39 (1) 2,080 4.4%
Municipal
Tax-exempt 1,864 164 (1) 2,027 4.3%
Taxable 261 14 (5) 270 0.6%
Redeemable preferred stock 32 1 -- 33 0.1%
Short-term 3,002 1 (1) 3,002 6.4%
- ----------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $44,292 $2,894 $ (271) $46,915 100.0%
========================================================================================
Total general account fixed
maturities $33,254 $2,173 $ (190) $35,237 75.1%
Total guaranteed separate account
fixed maturities $11,038 $ 721 $ (81) $11,678 24.9%
========================================================================================
DECEMBER 31, 2002
----------------------------------------------------
PERCENT
OF TOTAL
AMORTIZED UNREALIZED UNREALIZED FAIR FAIR
COST GAINS LOSSES VALUE VALUE
- ----------------------------------------------------------------------------------------
ABS $ 5,403 $ 111 $ (154) $ 5,360 13.2%
CMBS 5,529 467 (8) 5,988 14.8%
Collateralized mortgage obligation
("CMO") 866 39 (2) 903 2.2%
Corporate
Basic industry 2,155 144 (9) 2,290 5.7%
Capital goods 1,097 75 (7) 1,165 2.9%
Consumer cyclical 1,477 92 (4) 1,565 3.9%
Consumer non-cyclical 2,584 186 (18) 2,752 6.8%
Energy 1,477 112 (8) 1,581 3.9%
Financial services 5,210 333 (91) 5,452 13.5%
Technology and communications 3,083 263 (71) 3,275 8.1%
Transportation 601 49 (12) 638 1.6%
Utilities 1,833 118 (43) 1,908 4.7%
Other 429 20 -- 449 1.1%
Government/Government agencies
Foreign 774 77 (5) 846 2.1%
United States 645 48 -- 693 1.7%
MBS - agency 2,233 63 -- 2,296 5.7%
Municipal
Tax-exempt 1,854 146 -- 2,000 4.9%
Taxable 99 16 (1) 114 0.3%
Redeemable preferred stock 31 3 -- 34 0.1%
Short-term 1,153 -- -- 1,153 2.8%
- ----------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $38,533 $ 2,362 $ (433) $40,462 100.0%
========================================================================================
Total general account fixed
maturities $27,982 $ 1,704 $ (309) $29,377 72.6%
Total guaranteed separate account
fixed maturities $10,551 $ 658 $ (124) $11,085 27.4%
========================================================================================
The Company's fixed maturity gross unrealized gains and losses have improved by
$532 and $162, respectively from December 31, 2002 to September 30, 2003,
primarily the result of improved corporate credit quality and to a lesser extent
asset sales partially offset by an increase in interest rates. The improvement
in corporate credit quality was largely due to the security issuers' renewed
emphasis on improving liquidity, reducing leverage and various cost cutting
measures. Throughout 2003, the general economic outlook has continued to
rebound, the result of improved profitability supported by improved
manufacturing demand, a continued strong housing market and robust consumer and
government spending. The apparent economic acceleration has resulted in the
increase of the 10-year Treasury rate since December 2002, including an 80 basis
point increase from its low in June 2003 of 3.1%. In recent months, there has
been a considerable amount of volatility in the Treasury market. Speculation
over the possibility of the Federal Reserve purchasing Treasuries combined with
talk of deflation on the part of the Federal Reserve pushed the yield on 10-year
Treasuries down to its June low. However, signs of a rebound in the economy and
the Federal Reserve's comments downplaying the prospects for both deflation and
market intervention have caused the price of 10-year Treasuries to fall by
almost 9% between mid-June and the end of July, as the yield rose to nearly
4.5%. As of September 30, 2003, the 10-year Treasury yield dipped down to 3.94%.
Except for CMBS and short-term securities, the investment allocations as a
percentage of total fixed maturities have remained materially consistent since
December 31, 2002.
Portfolio allocations to CMBS increased due to the asset class's stable spreads
and high quality. CMBS securities have lower prepayment risk than MBS due to
contractual penalties. Short-term securities have increased primarily due to the
receipt of operating cash flows awaiting investment in longer term securities
and from the collateral obtained related to the Company's securities lending
program.
For a discussion of risk factors associated with sectors with significant
unrealized loss positions, please see the sector risk factor commentary under
the Total Securities with Unrealized Loss Greater than Six Months by type
schedule in this section of the MD&A.
The following table identifies fixed maturities by credit quality, including
guaranteed separate accounts, as of September 30, 2003 and December 31, 2002.
The ratings referenced below are based on the ratings of a nationally recognized
rating organization or, if not rated, assigned based on the Company's internal
analysis of such securities.
FIXED MATURITIES BY CREDIT QUALITY
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------- -------------------------------------
PERCENT OF PERCENT OF
AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
United States Government/Government agencies $ 3,869 $ 3,975 8.5% $ 3,596 $ 3,737 9.2%
AAA 7,346 7,783 16.6% 6,519 6,960 17.2%
AA 4,070 4,323 9.1% 4,161 4,396 10.9%
A 12,664 13,630 29.1% 11,745 12,467 30.8%
BBB 11,110 11,889 25.4% 9,211 9,665 23.9%
BB & below 2,231 2,313 4.9% 2,148 2,084 5.2%
Short-term 3,002 3,002 6.4% 1,153 1,153 2.8%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 44,292 $ 46,915 100.0% $ 38,533 $ 40,462 100.0%
=================================================================================================================================
Total general account fixed maturities $ 33,254 $ 35,237 75.1% $ 27,982 $ 29,377 72.6%
Total guaranteed separate account fixed maturities $ 11,038 $ 11,678 24.9% $ 10,551 $ 11,085 27.4%
=================================================================================================================================
As of September 30, 2003 and December 31, 2002, over 95% and 94%, respectively,
of the fixed maturity portfolio was invested in securities rated investment
grade (BBB and above).
The following table presents the Below Investment Grade ("BIG") fixed maturities
by type including guaranteed separate accounts, as of September 30, 2003 and
December 31, 2002.
BIG FIXED MATURITIES BY TYPE
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------- -------------------------------------
PERCENT OF PERCENT OF
AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
ABS $ 270 $ 224 9.7% $ 176 $ 151 7.2%
CMBS 127 130 5.6% 117 124 6.0%
Corporate
Basic industry 216 221 9.6% 226 227 10.9%
Capital goods 112 114 4.9% 137 138 6.6%
Consumer cyclical 249 265 11.5% 221 227 10.9%
Consumer non-cyclical 287 295 12.8% 198 189 9.1%
Energy 78 84 3.6% 82 83 4.0%
Financial services 11 12 0.5% 27 21 1.0%
Technology and communications 314 364 15.7% 445 411 19.7%
Transportation 23 24 1.0% 21 21 1.0%
Utilities 339 342 14.8% 305 277 13.3%
Foreign government 187 220 9.5% 172 193 9.3%
Other [1] 18 18 0.8% 21 22 1.0%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 2,231 $ 2,313 100.0% $ 2,148 $ 2,084 100.0%
=================================================================================================================================
Total general account fixed maturities $ 1,444 $ 1,493 64.5% $ 1,459 $ 1,400 67.2%
Total guaranteed separate account fixed maturities $ 787 $ 820 35.5% $ 689 $ 684 32.8%
=================================================================================================================================
[1] Other represents tax-exempt municipal bonds, redeemable preferred stocks and
real estate investment trusts.
As of September 30, 2003 and December 31, 2002 the Company held no issuer of a
BIG security with a fair value in excess of 4% of the total period ended fair
value for BIG securities.
The following table presents the Company's unrealized loss aging for total fixed
maturity and equity securities, including guaranteed separate accounts, as of
September 30, 2003 and December 31, 2002, by length of time the security was in
an unrealized loss position.
UNREALIZED LOSS AGING OF TOTAL SECURITIES
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------ ------------------------------------
AMORTIZED FAIR UNREALIZED AMORTIZED FAIR UNREALIZED
COST VALUE LOSS COST VALUE LOSS
- ----------------------------------------------------------------------------------------------------------------------
Three months or less $ 2,956 $ 2,890 $ (66) $ 1,532 $ 1,459 $ (73)
Greater than three months to six months 398 381 (17) 1,294 1,239 (55)
Greater than six months to nine months 263 253 (10) 568 508 (60)
Greater than nine months to twelve months 335 309 (26) 1,334 1,264 (70)
Greater than twelve months 1,816 1,655 (161) 2,135 1,927 (208)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $ 5,768 $ 5,488 $ (280) $ 6,863 $ 6,397 $ (466)
======================================================================================================================
Total general account $ 3,984 $ 3,785 $ (199) $ 4,744 $ 4,404 $ (340)
Total guaranteed separate account $ 1,784 $ 1,703 $ (81) $ 2,119 $ 1,993 $ (126)
======================================================================================================================
The decrease in the unrealized loss amount since December 31, 2002 is primarily
the result of improved corporate fixed maturity credit quality and to a lesser
extent asset sales, partially offset by an increase in interest rates. For
further discussion, please see the economic commentary under the Fixed
Maturities by Type table in this section of the MD&A.
As of September 30, 2003, fixed maturities represented $271, or 97%, of the
Company's total unrealized loss. There were no fixed maturities as of September
30, 2003 with a fair value less than 80% of the security's amortized cost basis
for six continuous months other than certain asset-backed and commercial
mortgage-backed securities. Other than temporary impairments for certain
asset-backed and commercial mortgage-backed securities are recognized if the
fair value of the security, as determined by external pricing sources, is less
than its carrying amount and there has been a decrease in the present value of
the expected cash flows since the last reporting period. There were no
asset-backed or commercial mortgage-backed securities included in the table
above, as of September 30, 2003 and December 31, 2002, for which management's
best estimate of future cash flows adversely changed during the reporting
period. As of September 30, 2003, no asset-backed securities had an unrealized
loss in excess of $20. For a detailed discussion of the other than temporary
impairment criteria, see "Valuation of Investments and Derivative Instruments"
included in the Critical Accounting Estimates section of the MD&A and in Note
1(g) of Notes to Consolidated Financial Statements, both of which are included
in Hartford Life's 2002 Form 10-K Annual Report.
As of September 30, 2003 and December 31, 2002, the Company held no securities
of a single issuer that were at an unrealized loss position in excess of 7% and
6%, respectively, of the total period ended unrealized loss amount.
The total securities in an unrealized loss position for longer than six months
by type as of September 30, 2003 and December 31, 2002 are presented in the
following table.
TOTAL SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS BY TYPE
SEPTEMBER 30, 2003 DECEMBER 31, 2002
-------------------------------------------- --------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMORTIZED FAIR UNREALIZED UNREALIZED AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE LOSS LOSS COST VALUE LOSS LOSS
- -----------------------------------------------------------------------------------------------------------------------------
ABS and CMBS
Aircraft lease receivables $ 170 $ 109 $ (61) 31.0% $ 90 $ 77 $ (13) 3.8%
CDOs 174 146 (28) 14.2% 221 185 (36) 10.7%
Credit card receivables 248 228 (20) 10.2% 373 328 (45) 13.3%
MH receivables 30 28 (2) 1.0% 21 20 (1) 0.3%
Other ABS and CMBS 756 744 (12) 6.1% 720 706 (14) 4.1%
Corporate
Financial services 687 647 (40) 20.3% 768 698 (70) 20.7%
Technology and communications 20 18 (2) 1.0% 456 406 (50) 14.8%
Transportation 26 21 (5) 2.5% 60 50 (10) 3.0%
Utilities 137 123 (14) 7.1% 290 264 (26) 7.7%
Other 149 140 (9) 4.6% 624 600 (24) 7.1%
Diversified equity mutual funds 5 4 (1) 0.5% 96 77 (19) 5.6%
Other securities 12 9 (3) 1.5% 318 288 (30) 8.9%
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,414 $ 2,217 $ (197) 100.0% $ 4,037 $ 3,699 $ (338) 100.0%
=============================================================================================================================
Total general account $ 1,629 $ 1,492 $ (137) 69.5% $ 2,760 $ 2,524 $ (236) 69.8%
Total guaranteed separate account $ 785 $ 725 $ (60) 30.5% $ 1,277 $ 1,175 $ (102) 30.2%
=============================================================================================================================
The ABS in an unrealized loss position for six months or more as of September
30, 2003, were primarily supported by aircraft lease receivables, CDOs and
credit card receivables. The Company's current view of risk factors relative to
these fixed maturity types is as follows:
Aircraft lease receivables - The securities supported by aircraft, aircraft
lease payments and enhanced equipment trust certificates (together, "aircraft
lease receivables") have continued to decline in value due to a reduction in
lease payments and aircraft values driven by a decline in airline travel, which
resulted in bankruptcies and other financial difficulties of airline carriers.
As a result of these factors, significant risk premiums have been required by
the market for securities in this sector, resulting in reduced liquidity and
lower broker quoted prices. The level of recovery will depend on economic
fundamentals and airline operating performance. Aircraft lease receivables will
be further stressed if passenger air traffic declines or airlines liquidate
rather than emerge from bankruptcy protection.
CDOs - Adverse CDO experience can be attributed to higher than expected default
rates on the collateral, particularly in the technology and utilities sectors,
and lower than expected recovery rates. Improved economic and operating
fundamentals of the underlying security issuers should lead to improved pricing
levels.
Credit card receivables - The unrealized loss position in credit card securities
has primarily been caused by exposure to companies originating loans to
sub-prime borrowers. While the unrealized loss position improved for these
holdings during the year, the Company believes that this sub-sector will
continue to be under stress and expects holdings to be very sensitive to changes
in collateral performance.
As of September 30, 2003, security types other than ABS and CMBS that were in a
significant unrealized loss position were corporate fixed maturities primarily
within the financial services and utilities sectors.
Financial Services - The financial services securities in an unrealized loss
position are primarily variable rate securities with extended maturity dates,
which have been adversely impacted by the reduction in forward interest rates
resulting in lower expected cash flows. Unrealized loss amounts for these
securities have declined during the year as interest rates have risen.
Additional changes in fair value of these securities are primarily dependent on
future changes in forward interest rates. A substantial percentage of these
securities are currently hedged with interest rate swaps, which convert the
variable rate earned on the securities to a fixed amount. The swaps receive cash
flow hedge accounting treatment and are currently in an unrealized gain
position.
Utilities - The utilities sector remains adversely impacted by several events
that primarily occurred in 2001 including the bankruptcy of Enron Corp., the
decline in the energy trading industry and the regulatory, political and legal
affect of the California Utility Crisis. These events led to credit downgrades,
which continue to negatively impact security price levels. Companies have begun
to reduce leverage, selling various non-core businesses and have secured
liquidity sources either through capital market issuances or bank lines to
support cash flow needs. Improved credit fundamentals coupled with increased
energy prices and demand should allow the price of these companies' securities
to improve.
As part of the Company's security ongoing monitoring process by a committee of
investment and accounting professionals, the Company has reviewed its investment
portfolio and concluded that there were no additional other than temporary
impairments as of September 30, 2003 and December 31, 2002. Due to the issuers'
continued satisfaction of the securities' obligations in accordance with their
contractual terms and the expectation that they will continue to do so, as well
as the evaluation of the fundamentals of the issuers' financial condition, the
Company believes that the prices of the securities in the sectors identified
above were temporarily depressed primarily as a result of a market dislocation
and generally poor cyclical economic conditions and sentiment. See "Valuation of
Investments and Derivative Instruments" included in the Critical Accounting
Estimates section of MD&A and in Note 1(g) of Notes to Consolidated Financial
Statements both included in Hartford Life's 2002 Form 10-K Annual Report.
The evaluation for other than temporary impairments is a quantitative and
qualitative process, which is subject to risks and uncertainties in the
determination of whether declines in the fair value of investments are other
than temporary. The risks and uncertainties include changes in general economic
conditions, the issuer's financial condition or near term recovery prospects and
the effects of changes in interest rates. In addition, for securitized financial
assets with contractual cash flows (e.g. ABS and CMBS), projections of expected
future cash flows may change based upon new information regarding the
performance of the underlying collateral.
The following table presents the Company's unrealized loss aging for BIG and
equity securities, including guaranteed separate accounts, as of September 30,
2003 and December 31, 2002.
UNREALIZED LOSS AGING OF BIG AND EQUITY SECURITIES
SEPTEMBER 30, 2003 DECEMBER 31, 2002
-------------------------------- ---------------------------------
AMORTIZED FAIR UNREALIZED AMORTIZED FAIR UNREALIZED
COST VALUE LOSS COST VALUE LOSS
- ---------------------------------------------------------------------------------------------------------------
Three months or less $ 245 $ 234 $ (11) $ 162 $ 130 $ (32)
Greater than three months to six months 82 75 (7) 208 185 (23)
Greater than six months to nine months 58 56 (2) 175 145 (30)
Greater than nine months to twelve months 65 56 (9) 330 293 (37)
Greater than twelve months 391 324 (67) 501 431 (70)
- ---------------------------------------------------------------------------------------------------------------
TOTAL $ 841 $ 745 $ (96) $ 1,376 $ 1,184 $ (192)
===============================================================================================================
Total general account $ 660 $ 581 $ (79) $ 1,044 $ 887 $ (157)
Total guaranteed separate account $ 181 $ 164 $ (17) $ 332 $ 297 $ (35)
===============================================================================================================
Similar to the decrease in the Unrealized Loss Aging of Total Securities table
from December 31, 2002 to September 30, 2003, the decrease in the BIG and equity
security unrealized loss amount was primarily the result of improved corporate
fixed maturity credit quality and to a lesser extent assets sales, partially
offset by an increase in interest rates. For further discussion, please see the
economic commentary under the Fixed Maturities by Type table in this section of
the MD&A.
The BIG and equity securities in an unrealized loss position for longer than six
months by type as of September 30, 2003 and December 31, 2002 are presented in
the following table.
BIG AND EQUITY SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS BY TYPE
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------------- -------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMORTIZED FAIR UNREALIZED UNREALIZED AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE LOSS LOSS COST VALUE LOSS LOSS
- -----------------------------------------------------------------------------------------------------------------------------
ABS and CMBS
Aircraft lease receivables $ 58 $ 36 $ (22) 28.2% $ -- $ -- $ -- --
CDOs 47 38 (9) 11.5% 2 1 (1) 0.7%
Credit card receivables 53 36 (17) 21.8% 36 23 (13) 9.5%
Other ABS and CMBS 45 40 (5) 6.4% 42 36 (6) 4.4%
Corporate
Financial Services 65 61 (4) 5.1% 88 83 (5) 3.6%
Technology and communications 15 14 (1) 1.3% 218 181 (37) 27.0%
Transportation 9 7 (2) 2.6% 13 10 (3) 2.2%
Utilities 122 110 (12) 15.4% 158 138 (20) 14.6%
Other 92 88 (4) 5.1% 247 229 (18) 13.1%
Diversified equity mutual funds 5 4 (1) 1.3% 96 77 (19) 13.9%
Other securities 3 2 (1) 1.3% 106 91 (15) 11.0%
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL $ 514 $ 436 $ (78) 100.0% $ 1,006 $ 869 $ (137) 100.0%
=============================================================================================================================
Total general account $ 393 $ 332 $ (61) 78.2% $ 745 $ 636 $ (109) 79.6%
Total guaranteed separate account $ 121 $ 104 $ (17) 21.8% $ 261 $ 233 $ (28) 20.4%
=============================================================================================================================
For a discussion of the Company's current view of risk factors relative to
certain security types listed above, please refer to the Total Securities with
Unrealized Loss Greater Than Six Months by Type table in this section of the
MD&A.
EQUITY RISK
The Company's operations are significantly influenced by changes in the equity
markets. The Company's profitability depends largely on the amount of assets
under management, which is primarily driven by the level of sales, equity market
appreciation and depreciation and the persistency of the in-force block of
business. Prolonged and precipitous declines in the equity markets can have a
significant impact on the Company's operations, as sales of variable products
may decline and surrender activity may increase, if customer sentiment towards
the equity market turns negative. Lower assets under management will have a
negative impact on the Company's financial results, primarily due to lower fee
income related to the Investment Products and Individual Life segments, where a
heavy concentration of equity-linked products are administered and sold.
Furthermore, the Company may experience a reduction in profit margins if a
significant portion of the assets held in the variable annuity separate accounts
move to the general account and the Company is unable to earn an acceptable
investment spread, particularly in light of the low interest rate environment
and the presence of contractually guaranteed minimum interest credited rates,
which for the most part are at a 3% rate.
In addition, prolonged declines in the equity market may also decrease the
Company's expectations of future gross profits, which are utilized to determine
the amount of DAC to be amortized in a given financial statement period. A
significant decrease in the Company's estimated gross profits would require the
Company to accelerate the amount of DAC amortization in a given period,
potentially causing a material adverse deviation in that period's net income.
Although an acceleration of DAC amortization would have a negative impact on the
Company's earnings, it would not affect the Company's cash flow or liquidity
position.
Additionally, the Investment Products segment sells variable annuity contracts
that offer various guaranteed death benefits. For certain guaranteed death
benefits, The Hartford pays the greater of (1) the account value at death; (2)
the sum of all premium payments less prior withdrawals; or (3) the maximum
anniversary value of the contract, plus any premium payments since the contract
anniversary, minus any withdrawals following the contract anniversary. The
Company currently reinsures a significant portion of the death benefit
guarantees associated with its in-force block of business. The Company currently
records the death benefit costs, net of reinsurance, as they are incurred.
Declines in the equity market may increase the Company's net exposure to death
benefits under these contracts.
The Investment Products segment's total gross exposure (i.e. before reinsurance)
to these guaranteed death benefits as of September 30, 2003 was $16.2 billion.
Due to the fact that 77% of this amount is reinsured, the net exposure is $3.7
billion. This amount is often referred to as the retained net amount at risk.
However, the Company will incur these guaranteed death benefit payments in the
future only if the policyholder has an in-the-money guaranteed death benefit at
their time of death. In order to analyze the total costs that the Company may
incur in the future related to these guaranteed death benefits, the Company
performed an actuarial present value analysis. This analysis included developing
a model utilizing stochastically generated scenarios and best estimate
assumptions related to mortality and lapse rates. A range of projected costs was
developed and discounted back to the financial statement date utilizing the
Company's cost of capital, which for this purpose was assumed to be 9.25%. Based
on this analysis, the Company estimated a 95% confidence interval of the present
value of the retained death benefit costs to be incurred in the future to be a
range of $110 to $368 for these contracts. The median of the stochastically
generated investment performance scenarios was $176.
On June 30, 2003, the Company recaptured a block of business previously
reinsured with an unaffiliated reinsurer. Under this treaty, Hartford Life
reinsured a portion of the guaranteed minimum death benefit (GMDB) feature
associated with certain of its annuity contracts. As consideration for
recapturing the business and final settlement under the treaty, the Company has
received assets valued at approximately $32 and one million warrants exercisable
for the unaffiliated company's stock. This amount represents to the Company an
advance collection of its future recoveries under the reinsurance agreement and
will be recognized as future losses are incurred. Prospectively, as a result of
the recapture, Hartford Life will be responsible for all of the remaining and
ongoing risks associated with the GMDB's related to this block of business. The
recapture increased the net amount at risk retained by the Company, which is
included in the net amount at risk discussed in Note 2 (f).
In the first quarter of 2004, the Company will adopt the provisions of Statement
of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts", (the "SOP").
The provisions of the SOP include a requirement for recording a liability for
variable annuity products with a guaranteed minimum death benefit feature. The
determination of this liability is also based on models that involve numerous
estimates and subjective judgments, including those regarding expected market
rates of return and volatility, contract surrender rates and mortality
experience. Based on management's preliminary review of the SOP and current
market conditions, the unrecorded GMDB liabilities, net of reinsurance, are
estimated to be between $60 and $70 at September 30, 2003. Net of estimated DAC
and income tax effects, the cumulative effect of establishing the required GMDB
reserves is expected to result in a reduction of net income of between $30 and
$40. The ultimate actual impact on the Company's financial statements will
differ from management's current estimates and will depend in part on market
conditions and other factors at the date of adoption.
In addition, the Company offers certain variable annuity products with a GMWB
rider. The GMWB provides the policyholder with a guaranteed remaining balance
("GRB") if the account value is reduced to zero through a combination of market
declines and withdrawals. The GRB is generally equal to premiums less
withdrawals. However, annual withdrawals that exceed 7% of the premiums paid may
reduce the GRB by an amount greater than the withdrawals and may also impact
that guaranteed annual withdrawal amount that subsequently applies after the
excess annual withdrawals occur. The policyholder also has the option, after a
specified time period, to reset the GRB to the then-current account value, if
greater. The GMWB represents an embedded derivative liability in the variable
annuity contract that is required to be reported separately from the host
variable annuity contract. It is carried at fair value and reported in other
policyholder funds. The fair value of the GMWB obligations are calculated based
on actuarial assumptions related to the projected cash flows, including benefits
and related contract charges, over the lives of the contracts, incorporating
expectations concerning policyholder behavior. Because of the dynamic and
complex nature of these cash flows, stochastic techniques under a variety of
market return scenarios and other best estimate assumptions are used. Estimating
cash flows involves numerous estimates and subjective judgments including those
regarding expected market rates of return, market volatility, correlations of
market returns and discount rates.
Declines in the equity market may increase the Company's exposure to benefits
under these contracts. For all contracts in effect through July 6, 2003, the
Company entered into a reinsurance arrangement to offset its exposure to the
GMWB for the remaining lives of those contracts. As of July 6, 2003, the Company
exhausted all but a small portion of the reinsurance capacity for new business
under the current arrangement and will be ceding only a very small number of new
contracts subsequent to July 6, 2003. Substantially all new contracts with the
GMWB are not covered by reinsurance. In order to minimize the volatility
associated with the unreinsured GMWB liabilities, the Company established an
alternative risk management strategy. During the third quarter of 2003, the
Company began hedging its unreinsured GMWB exposure using capital market
instruments.
MARKET RISK
Hartford Life has material exposure to both interest rate and equity market
risk. The Company analyzes interest rate risk using various models including
multi-scenario cash flow projection models that forecast cash flows of the
liabilities and their supporting investments, including derivative instruments.
There have been no material changes in market risk exposures from December 31,
2002.
DERIVATIVE INSTRUMENTS
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded futures and options, in compliance with
Company policy and regulatory requirements in order to achieve one of four
Company approved objectives: to hedge risk arising from interest rate, price or
currency exchange rate volatility; to manage liquidity; to control transaction
costs; or to enter into income enhancement and replication transactions. The
Company does not make a market or trade derivatives for the express purpose of
earning short term trading profits. (For further discussion on The Company's use
of derivative instruments, refer to Note 4 of Notes to Condensed Consolidated
Financial Statements.)
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of
Hartford Life and its ability to generate cash flows from each of the business
segments and borrow funds at competitive rates to meet operating and growth
needs. The Company maintained cash and short-term investments totaling $2.8
billion and $1.3 billion as of September 30, 2003 and December 31, 2002,
respectively.
The capital structure of Hartford Life as of September 30, 2003 and December 31,
2002 consisted of debt and equity, summarized as follows:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
- -------------------------------------------------------------------------------------------------------------------------
Short-term debt $ 200 $ -
Long-term debt 1,155 1,125
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely parent junior subordinated debentures (TruPS) 450 450
- -------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 1,805 $ 1,575
- -------------------------------------------------------------------------------------------------------------------------
Equity excluding net unrealized gains (losses) on securities, net of tax $ 5,416 $ 4,941
Net unrealized capital gains (losses) on securities, net of tax 991 747
- -------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $ 6,407 $ 5,688
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION (1) $ 7,221 $ 6,516
- -------------------------------------------------------------------------------------------------------------------------
Debt to equity (1) (2) 33% 32%
Debt to capitalization (1) (2) 25% 24%
- -------------------------------------------------------------------------------------------------------------------------
(1) Excludes unrealized gain on securities and other, net of tax.
(2) Excluding TruPS, the debt to equity ratios were 25% and 23% as of September
30, 2003 and December 31, 2002, respectively, and the debt to
capitalization ratio was 19% and 17% as of September 30, 2003 and December
31, 2002, respectively.
CAPITALIZATION
The Company's total capitalization, excluding unrealized gain on securities and
other, net of tax, increased $705, or 11%, as of September 30, 2003, as compared
to December 31, 2002. This increase was primarily the result of earnings and
additional related party debt borrowings, partially offset by dividends
declared.
DIVIDENDS
The Company declared $52 in dividends for the nine months ended September 30,
2003 to Hartford Holdings, Inc. 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.
RATINGS
Ratings are an important factor in establishing the competitive position in the
insurance and financial services marketplace. There can be no assurance that the
Company's ratings will continue for any given period of time or that they will
not be changed. In the event the Company's ratings are downgraded, the level of
revenues or the persistency of the Company's business may be adversely impacted.
On August 28, 2003, following the August 19, 2003 filing of The Hartford's $3
billion shelf registration statement A.M. Best Co. assigned indicative ratings
of "a-" for senior unsecured debt, "bbb+" for subordinated debt, and "bbb" for
trust preferred securities of The Hartford Trust associated with the shelf
registration statement.
Upon completion of the Hartford's asbestos reserve study and capital-raising
activities, certain of the major independent ratings organizations revised The
Hartford's and the Company's financial ratings as follows:
On May 23, 2003, Fitch affirmed all ratings on The Hartford Financial Services
Group, Inc. including the fixed income ratings and the insurer financial
strength rating of the Hartford Fire Intercompany Pool. Further, these ratings
have been removed from Rating Watch Negative and now have a Stable Rating
Outlook.
On May 20, 2003, Standard & Poor's removed from CreditWatch and affirmed the
long-term counterparty credit and senior debt rating of The Hartford Financial
Services Group, Inc. and the counterparty credit and financial strength ratings
on the operating companies following the Company's completion of the
capital-raising activities. The outlook is stable.
On May 14, 2003, Moody's downgraded the debt ratings of both The Hartford
Financial Services Group, Inc. and the Company to A3 from A2 and their
short-term commercial paper ratings to P-2 from P-1. The outlook on all of the
ratings except for the P-2 rating on commercial paper is negative.
On May 13, 2003, A.M. Best affirmed the financial strength ratings of A+
(Superior) of The Hartford Fire Intercompany Pool and the main operating life
insurance subsidiaries of the Company. Concurrently, A.M. Best downgraded to
"a-" from "a+" the senior debt ratings of The Hartford Financial Services Group,
Inc. and the Company and removed the ratings from under review.
The following table summarizes Hartford Life's significant United States member
companies' financial ratings from the major independent rating organizations as
of November 5, 2003:
STANDARD &
A.M. BEST FITCH MOODY'S POOR'S
- --------------------------------------------------------------------------------------------------------
INSURANCE RATINGS
Hartford Life Insurance Company A+ AA Aa3 AA-
Hartford Life and Accident A+ AA Aa3 AA-
Hartford Life and Annuity A+ AA Aa3 AA-
- --------------------------------------------------------------------------------------------------------
OTHER RATINGS
Hartford Life, Inc.
Senior debt a- A A3 A-
Commercial paper -- F1 P-2 A-2
Hartford Life Capital I and II
trust preferred securities bbb A- Baa1 BBB
Hartford Life Insurance Company:
Short Term Rating -- -- P-2 A-1+
The agencies consider many factors in determining the final rating of an
insurance company. One consideration is the relative level of statutory surplus
necessary to support the business written. Statutory surplus represents the
capital of the insurance company reported in accordance with accounting
practices prescribed by the applicable state insurance department. The statutory
surplus for the Company was approximately $3.6 billion as of September 30, 2003
and $3.0 billion as of December 31, 2002.
CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2003 2002
- -------------------------------------------------------------
Cash provided by operating activities $ 1,075 $ 850
Cash used for investing activities (3,535) (3,694)
Cash provided by financing activities 2,577 2,866
Cash - end of period 293 194
The increase in cash provided by operating activities was primarily the result
of the timing of the settlement of receivables and payables in the first nine
months of 2003. The decrease in cash provided by financing activities primarily
relates to less general account activity during the first nine months of 2003
compared to the prior year period. The decrease in cash used for investing
activities was primarily due to fewer purchases of investments compared to the
prior year period. Operating cash flows in both periods have been more than
adequate to meet liquidity requirements.
EQUITY MARKETS
For a discussion of the equity markets impact to capital and liquidity, see the
Capital Markets Risk Management under "Market Risk".
LIQUIDITY REQUIREMENTS
Hartford Life, Inc. is a holding company which relies upon operating cash flow
in the form of dividends from its subsidiaries, which enables it to service
debt, pay dividends to its parent, and pay certain business expenses. The
insurance holding company laws of the jurisdictions in which Hartford Life's
insurance subsidiaries are incorporated (or deemed commercially domiciled)
limit the payment of dividends. As of October 31, 2003, our insurance
subsidiaries have paid $139 and are permitted to pay up to a maximum of
approximately $163 in additional dividends for the remainder of 2003 without
prior approval from the applicable insurance commissioner.
REGULATORY INITIATIVES AND CONTINGENCIES
LEGAL PROCEEDINGS
Hartford Life is or may become involved in various legal actions, in the normal
course of its business, in which claims for alleged economic and punitive
damages have been or may be asserted, some for substantial amounts. Some of the
pending litigation has been filed as purported class actions and some actions
have been filed in certain jurisdictions that permit punitive damage awards that
are disproportionate to the actual damages incurred. Although there can be no
assurances, at the present time, the Company does not anticipate that the
ultimate liability arising from potential, pending or threatened legal actions,
after consideration of provisions made for estimated losses and costs of
defense, will have a material adverse effect on the financial condition or
operating results of the Company.
LEGISLATIVE INITIATIVES
Certain elements of the Jobs and Growth Tax Relief Reconciliation Act of 2003,
in particular the reduction in tax rates on long-term capital gains and most
dividend distributions, could have a material effect on the Company's sales of
variable annuities and other investment products. In addition, other tax
proposals and regulatory initiatives which have been or are being considered by
Congress could have a material effect on the insurance business. These proposals
and initiatives include changes pertaining to the tax treatment of insurance
companies and life insurance products and annuities, reductions in certain
individual tax rates and the estate tax, reductions in benefits currently
received by the Company stemming from the dividends received deduction, changes
to the tax treatment of deferred compensation arrangements, and changes to
investment vehicles and retirement savings plans and incentives. Prospects for
enactment and the ultimate market effect of these proposals are uncertain. Any
potential effect to the Company's financial condition or results of operations
from the Jobs and Growth Act of 2003 or future tax proposals cannot be
reasonably estimated at this time.
On August 15, 2003, the Treasury Department announced that it would not use its
legislatively-granted authority to include group life insurance under the
Federal backstop for terrorism losses in the Terrorism Risk Insurance Act of
2002. In announcing this decision, the Treasury stated that they would continue
to monitor the group life situation.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 2 of Notes to Condensed
Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Capital Markets Risk Management section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
The Company's principal executive officer and its principal financial officer,
based on their evaluation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-15(e)), have concluded that the Company's
disclosure controls and procedures are adequate and effective for the purposes
set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of
September 30, 2003.
Change in internal controls over financial reporting.
There was no change in the Company's internal control over financial reporting
that occurred during the third quarter of 2003 that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Hartford Life is or may become involved in various legal actions, in the normal
course of its business, in which claims for alleged economic and punitive
damages have been or may be asserted, some for substantial amounts. Some of the
pending litigation has been filed as purported class actions and some actions
have been filed in certain jurisdictions that permit punitive damage awards that
are disproportionate to the actual damages incurred. Although there can be no
assurances, at the present time, the Company does not anticipate that the
ultimate liability arising from potential, pending or threatened legal actions,
after consideration of provisions made for estimated losses and costs of
defense, will have a material adverse effect on the financial condition or
operating results of the Company.
In the third quarter of 2003, Hartford Life Insurance Company ("HLIC") and its
affiliate International Corporate Marketing Group, LLC ("ICMG") settled their
intellectual property dispute with Bancorp Services, LLC ("Bancorp"). The
dispute concerned, among other things, Bancorp's claims for alleged patent
infringement, breach of a confidentiality agreement, and misappropriation of
trade secrets related to certain stable value corporate-owned life insurance
products. The dispute was the subject of litigation in the United States
District Court for the Eastern District of Missouri, in which Bancorp obtained
in 2002 a judgment exceeding $134 against HLIC and ICMG after a jury trial on
the trade secret and breach of contract claims, and HLIC and ICMG obtained
summary judgment on the patent infringement claim. Based on the advice of legal
counsel following entry of the judgment, the Company recorded an $11 after-tax
charge in the first quarter of 2002 to increase litigation reserves. Both
components of the judgment were appealed.
Under the terms of the settlement, Hartford will pay a minimum of $70 and a
maximum of $80, depending on the outcome of the patent appeal, to resolve all
disputes between the parties. The appeal from the trade secret and breach of
contract judgment will be dismissed. The settlement resulted in the recording of
an additional charge of $40 after-tax in the third quarter of 2003, reflecting
the maximum amount payable under the settlement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K: None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTFORD LIFE, INC.
/s/ Ernest M. McNeill Jr.
--------------------------------------------
Ernest M. McNeill Jr.
Vice President and Chief Accounting Officer
November 5, 2003
HARTFORD LIFE, INC. AND SUBSIDIARIES
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
FORM 10-Q
EXHIBITS INDEX
EXHIBIT #
- ---------
15.01 Deloitte & Touche LLP Letter of Awareness
31.1 Certificate of Thomas M. Marra pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Lizabeth H. Zlatkus pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of Thomas M. Marra pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of Lizabeth H. Zlatkus pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.