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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 001-12749
HARTFORD LIFE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1470915
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 HOPMEADOW STREET, SIMSBURY, CONNECTICUT 06089
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
7.2% Trust Preferred Securities, Series A, issued by Hartford Life Capital I
7.625% Trust Preferred Securities, Series B, issued by Hartford Life Capital II
Securities registered pursuant to Section 12(g) of the Act:
6.90% Notes due June 15, 2004
7.10% Notes due June 15, 2007
7.65% Debentures due June 15, 2027
7.375% Senior Notes due March 1, 2031
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 Exchange Act Rule 12b-2). Yes [ ] No[X]
The aggregate market value of the shares of Common Stock held by non-affiliates
of the registrant as of June 30, 2003 was $0, because all of the outstanding
shares of Common Stock were owned by Hartford Holdings, Inc., a direct wholly
owned subsidiary of The Hartford Financial Services Group, Inc.
As of February 20, 2004, there were outstanding 1,000 shares of Common Stock,
$0.01 par value per share, of the registrant.
The registrant meets the conditions set forth in General Instruction (I) (1) (a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
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CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of Hartford Life* 3
2 Properties* 11
3 Legal Proceedings 12
4 **
PART II 5 Market for Hartford Life's Common Stock and Related Stockholder Matters 12
6 **
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations* 13
7A Quantitative and Qualitative Disclosures About Market Risk 49
8 Financial Statements and Supplementary Data 49
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 49
9A Controls and Procedures 49
PART III 10 **
11 **
12 **
13 **
14 Principal Accounting Fees and Services 50
PART IV 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 50
Signatures II-1
Exhibits Index II-2
* Item prepared in accordance with General Instruction I (2) of Form 10-K
** Item omitted in accordance with General Instruction I (2) of Form 10-K
2
PART I
ITEM 1. BUSINESS OF HARTFORD LIFE
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT FOR SHARE DATA, UNLESS OTHERWISE STATED)
GENERAL
Hartford Life, Inc. and its subsidiaries ("Hartford Life" or the "Company"), an
indirect subsidiary of The Hartford Financial Services Group, Inc. ("The
Hartford"), is headquartered in Simsbury, Connecticut and is a leading financial
services and insurance organization. Hartford Life provides (i) investment
products, including variable annuities, fixed market value adjusted ("MVA")
annuities, mutual funds and retirement plan services for the savings and
retirement needs of over 1.5 million customers, (ii) life insurance for wealth
protection, accumulation and transfer needs for approximately 735,000 customers,
(iii) group benefits products such as group life and group disability insurance
for the benefit of millions of individuals and (iv) corporate owned life
insurance, which includes life insurance policies purchased by a company on the
lives of its employees. The Company is one of the largest sellers of individual
variable annuities, variable universal life insurance and group disability
insurance in the United States. The Company's strong position in each of its
core businesses provides an opportunity to increase the sale of the Company's
products and services as individuals increasingly save and plan for retirement,
protect themselves and their families against the financial uncertainties
associated with disability or death and engage in estate planning. In an effort
to advance the Company's strategy of growing its businesses, The Hartford
acquired the group life and accident, and short-term and long-term disability
businesses of CNA Financial Corporation on December 31, 2003, and the individual
life insurance, annuity and mutual fund businesses of Fortis on April 2, 2001.
(For additional information, see the Capital Resources and Liquidity section of
the Management's Discussion and Analysis ("MD&A") section and Note 17 of Notes
to Consolidated Financial Statements). In addition, Hartford Life's Japanese
operation achieved $3.7 billion, $1.4 billion and $462 in variable annuity sales
for the years ended December 31, 2003, 2002 and 2001, respectively. The growth
in sales was the primary reason for the increased account values related to
Japan, which grew to more than $6.2 billion as of December 31, 2003 up from $1.7
billion at December 31, 2002.
Hartford Life is among the largest consolidated life insurance groups in the
United States based on statutory assets as of December 31, 2003. In the past
year, the Company's total assets under management, which include $22.5 billion
of third-party assets invested in the Company's mutual funds and 529 College
Savings Plans, increased 27% to $210.1 billion at December 31, 2003 from $165.1
billion at December 31, 2002. Hartford Life generated revenues of $8.1 billion,
$6.9 billion and $7.4 billion in 2003, 2002 and 2001, respectively.
Additionally, the Company generated net income of $769, $557 and $685 in 2003,
2002 and 2001, respectively.
CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE
The Company maintains advantageous economies of scale and operating efficiencies
due to its growth, attention to expense and claims management and commitment to
customer service and technology. These advantages allow the Company to
competitively price its products for its distribution network and policyholders.
In addition, the Company utilizes computer technology to enhance communications
within the Company and throughout its distribution network in order to improve
the Company's efficiency in marketing, selling and servicing its products and,
as a result, provides high-quality customer service. In recognition of
excellence in customer service for variable annuities, Hartford Life was awarded
the 2003 Annuity Service Award by DALBAR Inc., a recognized independent
financial services research organization, for the eighth consecutive year.
Hartford Life is the only company to receive this prestigious award in every
year of the award's existence. Also, in 2003 the Company earned its first DALBAR
Awards for Mutual Fund and Retirement Plan Service which recognize Hartford Life
as the No. 1 service provider of mutual funds and retirement plans in the
industry. Additionally, the Company's Individual Life segment won its third
consecutive DALBAR award for service of life insurance customers and its second
DALBAR Intermediary Service Award in 2003.
RISK MANAGEMENT
The Company's product designs, prudent underwriting standards and risk
management techniques are structured to protect it against disintermediation
risk, greater than expected mortality and morbidity experience and, for certain
product features, specifically the guaranteed minimum death benefit ("GMDB") and
guaranteed minimum withdrawal benefit ("GMWB") offered with variable annuity
products, equity market volatility. As of December 31, 2003, the Company had
limited exposure to disintermediation risk on approximately 96% of its domestic
life insurance and annuity liabilities through the use of non-guaranteed
separate accounts, MVA features, policy loans, surrender charges and
non-surrenderability provisions. The Company effectively utilizes prudent
underwriting to select and price insurance risks and regularly monitors
mortality and morbidity assumptions to determine if experience remains
consistent with these assumptions and to ensure that its product pricing remains
appropriate. The Company also enforces disciplined claims management to protect
itself against greater than expected morbidity experience. The Company uses
reinsurance structures and has modified benefit features to mitigate the
mortality exposure associated with guaranteed minimum death benefits. The
Company also uses reinsurance in combination with derivative instruments to
minimize the volatility associated with the GMWB liability.
3
REPORTING SEGMENTS
Hartford Life, headquartered in Simsbury, Connecticut, is organized into four
reportable operating segments: Investment Products, Individual Life, Group
Benefits and Corporate Owned Life Insurance ("COLI"). The Company includes in
"Other" corporate items not directly allocable to any of its reportable
operating segments, principally interest expense, as well as its international
operations, which are primarily located in Japan and Brazil, realized capital
gains and losses and intersegment eliminations. The following is a description
of each segment, including a discussion of principal products, methods of
distribution and competitive environments. Additional information on Hartford
Life's segments may be found in the MD&A and Note 16 of Notes to Consolidated
Financial Statements.
Investment Products
The Investment Products segment focuses, through the sale of individual variable
and fixed annuities, mutual funds, retirement plan services and other investment
products, on the savings and retirement needs of the growing number of
individuals who are preparing for retirement or who have already retired. This
segment's assets under management grew to $146.5 billion at December 31, 2003
from $110.2 billion at December 31, 2002. Investment Products generated revenues
of $3.8 billion, $3.1 billion and $3.3 billion in 2003, 2002 and 2001,
respectively, of which individual annuities accounted for $1.8 billion for 2003
and $1.5 billion for 2002 and 2001. Net income in the Investment Products
segment was $510, $432 and $463 in 2003, 2002 and 2001, respectively.
The Company sells both variable and fixed individual annuity products through a
wide distribution network of national and regional broker-dealer organizations,
banks and other financial institutions and independent financial advisors. The
Company is a market leader in the annuity industry with sales of $16.5 billion,
$11.6 billion and $10.0 billion in 2003, 2002 and 2001, respectively. The
Company was the largest seller of individual retail variable annuities in the
United States with sales of $15.7 billion, $10.3 billion and $9.0 billion in
2003, 2002 and 2001, respectively. In addition, the Company continues to be the
largest seller of individual retail variable annuities through banks in the
United States.
The Company's total account value related to individual annuity products was
$97.7 billion as of December 31, 2003. Of this total account value, $86.5
billion, or 89%, related to individual variable annuity products and $11.2
billion, or 11%, related primarily to fixed MVA annuity products. In 2002, the
Company's total account value related to individual annuity products was $74.9
billion. Of this total account value, $64.3 billion, or 86%, related to
individual variable annuity products and $10.6 billion, or 14%, related
primarily to fixed MVA annuity products.
In addition to its leading position in individual annuities, Hartford Life
continues to emerge as a significant participant in the mutual fund business. In
2003 The Hartford mutual funds reached $20 billion in assets faster than any
other retail-oriented mutual fund family in history, according to Strategic
Insight. As of December 31, 2003, retail mutual fund assets were $20.3 billion.
The Company is also among the top providers of retirement products and services,
including asset management and plan administration sold to small and medium size
corporations pursuant to Section 401(k) of the Internal Revenue Code of 1986, as
amended (referred to as "401(k)") and to municipalities pursuant to Section 457
and 403(b) of the Internal Revenue Code of 1986, as amended (referred to as
"Section 457" and "403(b)", respectively). The Company also provides structured
settlement contracts, terminal funding products and other investment products
such as guaranteed investment contracts ("GICs"). In 2002, the Company began
selling a 529 college savings product.
Principal Products
Individual Variable Annuities -- Hartford Life earns fees, based on
policyholders' account values, for managing variable annuity assets and
maintaining policyholder accounts. The Company uses specified portions of the
periodic deposits paid by a customer to purchase units in one or more mutual
funds as directed by the customer, who then assumes the investment performance
risks and rewards. As a result, variable annuities permit policyholders to
choose aggressive or conservative investment strategies, as they deem
appropriate, without affecting the composition and quality of assets in the
Company's general account. These products offer the policyholder a variety of
equity and fixed income options, as well as the ability to earn a guaranteed
rate of interest in the general account of the Company. The Company offers an
enhanced guaranteed rate of interest for a specified period of time (no longer
than twelve months) if the policyholder elects to dollar-cost average funds from
the Company's general account into one or more non-guaranteed separate accounts.
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.
Policyholders may make deposits of varying amounts at regular or irregular
intervals and the value of these assets fluctuates in accordance with the
investment performance of the funds selected by the policyholder. To encourage
persistency, many of the Company's individual variable annuities are subject to
withdrawal restrictions and surrender charges. Surrender charges range up to
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8% of the contract's deposits less withdrawals, and reduce to zero on a sliding
scale, usually within seven years from the deposit date. Individual variable
annuity account values of $86.5 billion as of December 31, 2003, have grown from
$64.3 billion as of December 31, 2002, due to strong net cash flow, resulting
from high levels of sales, low levels of surrenders and equity market
appreciation. Approximately 90% and 88% of the individual variable annuity
account values were held in non-guaranteed separate accounts as of December 31,
2003 and 2002, respectively.
In August 2002, the Company introduced Principal First, a new guaranteed
withdrawal benefit rider which is sold in conjunction with the Company's
variable annuity contracts. The Principal First rider 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 assets underlying the Company's variable annuities are managed both
internally and by independent money managers, while the Company provides all
policy administration services. The Company utilizes a select group of money
managers, such as Wellington Management Company, LLP ("Wellington"); Hartford
Investment Management Company ("Hartford Investment Management"), a wholly-owned
subsidiary of The Hartford; Putnam Financial Services, Inc. ("Putnam"); American
Funds; MFS Investment Management ("MFS"); Franklin Templeton Group; and AIM
Investments ("AIM"). All have an interest in the continued growth in sales of
the Company's products and enhance the marketability of the Company's annuities
and the strength of its product offerings. Hartford Leaders, which is a
multi-manager variable annuity that combines the product manufacturing,
wholesaling and service capabilities of the Company with the investment
management expertise of four of the nation's most successful investment
management organizations: American Funds, Franklin Templeton Group, AIM and MFS,
has emerged as the industry leader in terms of retail sales. In addition, the
Director variable annuity, which is managed in part by Wellington, ranks second
in the industry in terms of retail sales.
Fixed MVA Annuities -- Fixed MVA annuities are fixed rate annuity contracts
which guarantee a specific sum of money to be paid in the future, either as a
lump sum or as monthly income. In the event that a policyholder surrenders a
policy prior to the end of the guarantee period, the MVA feature increases or
decreases the cash surrender value of the annuity in respect of any interest
rate decreases or increases, respectively, thereby protecting the Company from
losses due to higher interest rates at the time of surrender. The amount of
payment will not fluctuate due to adverse changes in the Company's investment
return, mortality experience or expenses. The Company's primary fixed MVA
annuities have terms varying from one to ten years with an average term of
approximately four years. Account values of fixed MVA annuities were $11.2
billion and $10.6 billion as of December 31, 2003 and 2002, respectively.
Mutual Funds -- In September 1996, Hartford Life launched a family of retail
mutual funds for which the Company provides investment management and
administrative services. The fund family has grown significantly from 8 funds at
inception to the current offering of 34 funds, including the addition of the
Hartford Equity Income Fund introduced in 2003. The Company's funds are managed
by Wellington and Hartford Investment Management. The Company has entered into
agreements with over 960 financial services firms to distribute these mutual
funds.
The Company charges fees to the shareholders of the mutual funds, which are
recorded as revenue by the Company. Investors can purchase shares in the mutual
funds, all of which are registered with the Securities and Exchange Commission,
in accordance with the Investment Company Act of 1940. The mutual funds are
owned by the shareholders of those funds and not by the Company. As such, the
mutual fund assets and liabilities, as well as related investment returns, are
not reflected in the Company's consolidated financial statements. Total retail
mutual fund assets under management were $20.3 billion and $14.1 billion as of
December 31, 2003 and 2002, respectively.
Governmental -- The Company sells retirement plan products and services to
municipalities under Section 457 plans. The Company offers a number of different
investment products, including variable annuities and fixed products, to the
employees in Section 457 plans. Generally, with the variable products, the
Company manages the fixed income funds and certain other outside money managers
act as advisors to the equity funds offered in Section 457 plans administered by
the Company. As of December 31, 2003, the Company administered over 3,000 plans
under Section 457 and 403(b). Total governmental assets under management were
$9.7 billion and $7.9 billion as of December 31, 2003 and 2002, respectively.
Corporate -- The Company sells retirement plan products and services to
corporations under Section 401(k) plans targeting the small and medium case
markets. The Company believes these markets are under-penetrated in comparison
to the large case market. As of December 31, 2003, the Company administered over
4,100 Section 401(k) plans. Total corporate assets under management were $5.2
billion and $3.4 billion as of December 31, 2003 and 2002, respectively.
Institutional Investment Products -- The Company sells the following
institutional investment products; structured settlements, GICs and other short
term funding agreements, institutional mutual funds and other annuity contracts
for special purposes such as funding of
5
terminated defined benefit pension plans. Structured settlement contracts
provide for periodic payments to an injured person or survivor for a generally
determinable number of years, typically in settlement of a claim under a
liability policy in lieu of a lump sum settlement. The Company's structured
settlements are sold through The Hartford's Property & Casualty insurance
operations as well as specialty brokers. Total institutional investment products
assets under management were $13.1 billion and $9.9 billion as of December 31,
2003 and 2002, respectively. The increase in the institutional investment
products assets under management was the result of strong sales totaling $3.4
billion, $2.0 billion and $2.6 billion for the years ended December 31, 2003,
2002 and 2001, respectively.
Section 529 Plans - Hartford Life introduced a tax advantaged college savings
product ("529 plan") in March 2002 called SMART 529. SMART 529 is a
state-sponsored education savings program established by the State of West
Virginia which offers an easy way for both residents of West Virginia and
out-of-state participants to plan for a college education. In 1996, Congress
created a tax-advantaged college savings program as part of Section 529 of the
Internal Revenue Code (the "Code"). The 529 Plan is an investment plan operated
by a state, designed to help families save for future college costs. On January
1, 2002, 529 Plans became federal tax-exempt for qualified withdrawals. In July
2003, the Company began selling a multi-manager 529 product.
SMART 529 is designed to be flexible by allowing investors to choose from a wide
variety of investment portfolios to match their risk preference to help
investors accumulate savings for college. An individual can open a SMART 529
account for anyone, at any age. The SMART 529 product complements the Company's
existing offering of investment products (mutual funds, variable annuities,
401(k), 457 and 403(b) plans). It also leverages the Company's capabilities in
distribution, service and fund performance. Total 529 Plan assets under
management were $259 and $87 as of December 31, 2003 and 2002, respectively.
Marketing and Distribution
The Investment Products distribution network is based on management's strategy
of utilizing multiple and competing distribution channels to achieve the
broadest distribution to reach target customers. The success of the Company's
marketing and distribution system depends on its product offerings, fund
performance, successful utilization of wholesaling organizations, quality of
customer service, and relationships with national and regional broker-dealer
firms, banks and other financial institutions, and independent financial
advisors (through which the sale of the Company's retail investment products to
customers is consummated).
Hartford Life maintains a distribution network of approximately 1,500
broker-dealers and approximately 500 banks. As of December 31, 2003, the Company
was selling products through the 25 largest retail banks in the United States.
The Company periodically negotiates provisions and terms of its relationships
with unaffiliated parties, and there can be no assurance that such terms will
remain acceptable to the Company or such third parties. The Company's primary
wholesaler of its individual annuities and mutual funds is its wholly-owned
subsidiary, PLANCO Financial Services, Inc. and its affiliate, PLANCO,
Incorporated (collectively "PLANCO"). PLANCO is one of the nation's largest
wholesalers of individual annuities and has played a significant role in The
Hartford's growth over the past decade. As a wholesaler, PLANCO distributes the
Company's fixed and variable annuities, mutual funds, 401(k) plans and 529 Plans
by providing sales support to registered representatives, financial planners and
broker-dealers at brokerage firms and banks across the United States. Owning
PLANCO secures an important distribution channel for the Company and gives the
Company a wholesale distribution platform which it can expand in terms of both
the number of individuals wholesaling its products and the portfolio of products
which they wholesale. In addition, the Company uses internal personnel with
extensive experience in the Section 457 market, as well as access to the Section
401(k) market, to sell its products and services in the retirement plan and
institutional markets.
Competition
The Investment Products segment competes with numerous other insurance companies
as well as certain banks, securities brokerage firms, independent financial
advisors and other financial intermediaries marketing annuities, mutual funds
and other retirement-oriented products. Product sales are affected by
competitive factors such as investment performance ratings, product design,
visibility in the marketplace, financial strength ratings, distribution
capabilities, levels of charges and credited rates, reputation and customer
service.
6
Regulatory Developments
Recently, there has been a significant increase in federal and state regulatory
activity relating to financial services companies, particularly mutual funds
companies. These regulatory inquiries have focused on a number of mutual fund
issues. The Company, like many others in the financial services industry, has
received requests for information from the Securities and Exchange Commission
and a subpoena from the New York Attorney General's Office, in each case
requesting documentation and other information regarding various mutual fund
regulatory issues. The Company continues to cooperate fully with these
regulatory agencies in responding to these requests. In addition,
representatives from the SEC's Office of Compliance Inspections and
Examinations recently concluded an on-site compliance examination of the
Company's variable annuity and mutual fund operations.
The Company's mutual funds are available for purchase by the separate accounts
of different variable life insurance policies, variable annuity products, and
funding agreements, and they are offered directly to certain qualified
retirement plans. Although existing products contain transfer restrictions
between subaccounts, some products, particularly older variable annuity
products, do not contain restrictions on the frequency of transfers. In
addition, as a result of the settlement of litigation against the Company with
respect to certain owners of older variable annuity products, the Company's
ability to restrict transfers by these owners is limited.
A number of companies recently have announced settlements of enforcement
actions with various regulatory agencies, primarily the Securities and Exchange
Commission and the New York Attorney General's Office. No such action has been
initiated against the Company. It is possible that one or more regulatory
agencies may pursue action against the Company in the future.
INDIVIDUAL LIFE
The Individual Life segment provides life insurance solutions to a wide array of
partners to solve the wealth protection, accumulation and transfer needs of
their affluent, emerging affluent and business insurance clients. The individual
life business acquired from Fortis in 2001 added significant scale to the
Company's Individual Life segment, contributing to a significant increase in
life insurance in force in that year. As of December 31, 2003, life insurance in
force increased 3% to $130.8 billion, from $126.7 billion as of December 31,
2002. Account values increased 15% to $8.7 billion as of December 31, 2003 from
$7.6 billion as of December 31, 2002. Revenues were $982, $958 and $890 for the
years ended December 31, 2003, 2002 and 2001, respectively. Net income in the
Individual Life segment was $145, $133 and $121 for the years ended December 31,
2003, 2002 and 2001, respectively.
Principal Products
Hartford Life holds a significant market share in the variable universal life
product market and is the number one seller of variable life insurance,
according to the Tillinghast Value Survey. In 2003, the Company's sales of
individual life insurance were 54% variable universal life, 41% universal life
and other, and 5% term life insurance.
Variable Universal Life -- Variable universal life provides life insurance with
a return linked to an underlying investment portfolio and the Company allows
policyholders to determine their asset mix among a variety of underlying mutual
funds. As the return on the investment portfolio increases or decreases, the
surrender value of the variable universal life policy will increase or decrease,
and, under certain policyholder options or market conditions, the death benefit
may also increase or decrease. The Company's second-to-die products are
distinguished from other products in that two lives are insured rather than one,
and the policy proceeds are paid upon the death of both insureds. Second-to-die
policies are frequently used in estate planning for a married couple. Variable
universal life account values were $4.7 billion and $3.6 billion as of December
31, 2003 and 2002, respectively.
Universal Life and Interest Sensitive Whole Life -- Universal life and interest
sensitive whole life insurance coverages provide life insurance with adjustable
rates of return based on current interest rates. Universal life provides
policyholders with flexibility in the timing and amount of premium payments and
the amount of the death benefit, provided there are sufficient policy funds to
cover all policy charges for the coming period. The Company also sells
second-to-die universal life insurance policies similar to the variable
universal life insurance product offered. Universal life and interest sensitive
whole life account values were $3.3 and $3.1 billion as of December 31, 2003 and
2002, respectively.
Marketing and Distribution
Consistent with the Company's strategy to access multiple distribution outlets,
the Individual Life distribution organization has been developed to penetrate a
multitude of retail sales channels. These include independent life insurance
sales professionals; agents of other companies; national, regional and
independent broker-dealers; banks, financial planners, certified public
accountants and property and casualty insurance organizations. The primary
organization used to wholesale Hartford Life's products to these outlets is a
group of highly qualified life insurance professionals with specialized training
in sophisticated life insurance sales. These individuals
7
are generally employees of the Company who are managed through a regional sales
office system. Additional distribution is provided through Woodbury Financial
Services, a subsidiary retail broker dealer and other marketing relationships.
Competition
The Individual Life segment competes with approximately 1,200 life insurance
companies in the United States, as well as other financial intermediaries
marketing insurance products. Competitive factors related to this segment are
primarily the breadth and quality of life insurance products offered, pricing,
relationships with third-party distributors, effectiveness of wholesaling
support, pricing and availability of reinsurance, and the quality of
underwriting and customer service.
GROUP BENEFITS
The Group Benefits segment sells group life and group disability insurance, as
well as other products, including medical stop loss, accidental death and
dismemberment, travel accident and other special risk coverage to employers and
associations. The Company also offers disability underwriting, administration,
claims processing services and reinsurance to other insurers and self-funded
employer plans. Generally, policies sold in this segment are term insurance.
This allows the Company to adjust the rates or terms of its policies in order to
minimize the adverse effect of various market trends, including declining
interest rates and other factors. Typically policies are sold with one, two or
three year rate guarantees depending upon the product. In the disability market,
the Company focuses on strong risk and claims management to derive a competitive
advantage. The Group Benefits segment generated revenues of $2.6 billion for the
years ended December 31, 2003 and 2002, and $2.5 billion for the year ended
December 31, 2001, of which group disability insurance accounted for $1.1
billion in each of the three years and group life insurance accounted for $935,
$887 and $763, respectively. The Company held group disability reserves of $4.0
billion and $2.5 billion and group life reserves of $1.2 billion and $765, as of
December 31, 2003 and 2002, respectively. Net income in the Group Benefits
segment was $148, $128 and $106 for the years ended December 31, 2003, 2002 and
2001, respectively.
As previously mentioned, Hartford Life acquired the group life and accident, and
short-term and long-term disability businesses of CNA Financial Corporation on
December 31, 2003. This acquisition will increase the scale of the Company's
group life and disability operations, expand the Company's distribution and
enhance the Company's capability to deliver outstanding products and services.
Principal Products
Group Disability -- Hartford Life is one of the largest participants in the
"large case" market of the group disability insurance business. The large case
market, as defined by the Company, generally consists of group disability
policies covering over 500 employees in a particular company. The Company is
continuing its focus on the "small case" and "medium case" group markets,
emphasizing name recognition and reputation as well as the Company's managed
disability approach to claims and administration. The Company's efforts in the
group disability market focus on early intervention, return-to-work programs and
successful rehabilitation. Over the last several years, the focus of new
disability products introduced is to provide incentives for employees to return
to independence. The Company also works with disability claimants to improve the
receipt rate of Social Security offsets (i.e., reducing payment of benefits by
the amount of Social Security payments received).
The Company's short-term disability benefit plans provide a weekly benefit
amount (typically 60% to 70% of the employee's earned income up to a specified
maximum benefit) to insured employees when they are unable to work due to an
accident or illness. Long-term disability insurance provides a monthly benefit
for those extended periods of time not covered by a short-term disability
benefit plan when insured employees are unable to work due to disability.
Employees may receive total or partial disability benefits. Most of these
policies begin providing benefits following a 90 or 180 day waiting period and
generally continue providing benefits until the employee is no longer disabled
or until the employee reaches age 65. Long-term disability benefits are paid
monthly and are limited to a portion, generally 50-70%, of the employee's earned
income up to a specified maximum benefit.
Group Life -- Group term life insurance provides term coverage to employees and
their dependents for a specified period and has no accumulation of cash values.
The Company offers options for its basic group life insurance coverage,
including portability of coverage and a living benefit option, whereby
terminally ill policyholders can receive death benefits prior to their deaths.
In addition, the Company offers premium waiver and accidental death and
dismemberment coverages to employee groups.
Other -- Hartford Life provides excess of loss medical coverage (known as stop
loss insurance) to employers who self-fund their medical plans and pay claims
using the services of a third party administrator. The Company also provides
travel accident, hospital indemnity and other coverages (including group life
and disability) primarily to individual membership of various associations, as
well as employee groups. A significant Medicare supplement customer of the
company had been the members of the Retired Officers Association, an
organization consisting of retired military officers. Congress passed
legislation, effective in the fourth quarter of 2001, whereby retired military
officers age 65 and older will receive full medical insurance, eliminating the
need for Medicare supplement insurance. This legislation reduced the Company's
Military Medicare supplement premium revenue to zero after 2001.
Marketing and Distribution
8
The Company uses an experienced group of Company employees, managed through a
regional sales office system, to distribute its group insurance products and
services through a variety of distribution outlets, including brokers,
consultants, third-party administrators and trade associations. The Company
intends to continue to expand the system over the coming years in areas that
offer the highest growth potential.
Competition
The Group Benefits business remains highly competitive. Competitive factors
primarily affecting Group Benefits are the variety and quality of products and
services offered, the price quoted for coverage and services, the Company's
relationships with its third-party distributors, and the quality of customer
service. Group Benefits competes with numerous other insurance companies and
other financial intermediaries marketing insurance products. However, many of
these businesses have relatively high barriers to entry and there have been very
few new entrants over the past few years.
CORPORATE OWNED LIFE INSURANCE ("COLI")
Hartford Life is a leader in the COLI market, which includes life insurance
policies purchased by a company on the lives of its employees, with the company
or a trust sponsored by the company named as the beneficiary under the policy.
Until the passage of Health Insurance Portability and Accountability Act of 1996
("HIPAA"), the Company sold two principal types of COLI, leveraged and variable
products. Leveraged COLI is a fixed premium life insurance policy owned by a
company or a trust sponsored by a company. HIPAA phased out the deductibility of
interest on policy loans under leveraged COLI at the end of 1998, virtually
eliminating all future sales of leveraged COLI. Variable COLI continues to be a
product used by employers to fund non-qualified benefits or other
post-employment benefit liabilities.
Variable COLI account values were $21.0 billion and $19.7 billion as of December
31, 2003 and 2002, respectively. Leveraged COLI account values decreased to $2.5
billion as of December 31, 2003 from $3.3 billion as of December 31, 2002,
primarily due to surrender activity. COLI generated revenues of $483, $592 and
$719 for the years ended December 31, 2003, 2002 and 2001, respectively and net
(loss) income of $(1), $32 and $37 for the years ended December 31, 2003, 2002
and 2001, respectively.
RESERVES
In accordance with applicable insurance regulations under which the Company
operates, life insurance subsidiaries of Hartford Life establish and carry as
liabilities actuarially determined reserves which are calculated to meet the
Company's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States, which are modified to
reflect the Company's actual experience when appropriate. These reserves are
computed at amounts that, with additions from estimated premiums to be received
and with interest on such reserves compounded annually at certain assumed rates,
are expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's disability or death. Reserves also
include unearned premiums, premium deposits, claims incurred but not reported
and claims reported but not yet paid. Reserves for assumed reinsurance are
computed in a manner that is comparable to direct insurance reserves. Additional
information on Hartford Life reserves may be found in the Critical Accounting
Estimates section of the MD&A under "Reserves".
CEDED REINSURANCE
In accordance with normal industry practice, the Company is involved in both the
cession and assumption of insurance with other insurance and reinsurance
companies. As of December 31, 2003, the largest amount of life insurance
retained on any one life by any one of the life operations was approximately
$2.5. In addition, the Company has reinsured the majority of the minimum death
benefit guarantees and the guaranteed minimum withdrawal benefits offered in
connection with its variable annuity contracts. The majority of variable annuity
contracts issued since August 2002 include a guaranteed minimum withdrawal
benefit ("GMWB") rider. 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 were not covered by reinsurance as the Company had
exceeded the limit in the existing reinsurance agreement prior to that date. As
of December 31, 2003, approximately $11 billion or 64% of variable annuity
account value with GMWB was reinsured. Ceded reinsurance does not relieve the
Company of its primary liability and, as such, failure of reinsurers to honor
their obligations could result in losses to the Company. The Company also
assumes reinsurance from other insurers. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk. For the
years ended December 31, 2003, 2002 and 2001, the Company did not make any
significant changes in the terms under which reinsurance is ceded to other
insurers except for the Company's recapture of a block of business previously
reinsured with an unaffiliated reinsurer. For further discussion see Note 12 in
"Notes to Consolidated Financial Statements".
INVESTMENT OPERATIONS
9
An important element of the financial results of Hartford Life is return on
invested assets. The investment portfolios are managed based on the underlying
characteristics and nature of each operation's respective liabilities and within
established risk parameters.
The investment portfolios of the Company are managed by Hartford Investment
Management. Hartford Investment Management is responsible for monitoring and
managing the asset/liability profile, establishing investment objectives and
guidelines and determining, within specified risk tolerances and investment
guidelines, the appropriate asset allocation, duration, convexity and other
characteristics of the portfolios. Security selection and monitoring are
performed by asset class specialists working within dedicated portfolio
management teams.
The primary investment objective of the Company's general account and guaranteed
separate accounts is to maximize after-tax returns consistent with acceptable
risk parameters, including the management of the interest rate sensitivity of
invested assets and the generation of sufficient liquidity, relative to that of
policyholder and corporate obligations.
For a further discussion of Hartford Life's approach to managing risks,
including derivative utilization, see the Investments and Capital Markets Risk
Management sections, of the MD&A, as well as Note 2 of Notes to Consolidated
Financial Statements.
REGULATION AND PREMIUM RATES
Although there has been some deregulation with respect to large commercial
insurers in recent years, insurance companies, for the most part, are still
subject to comprehensive and detailed regulation and supervision throughout the
United States. The extent of such regulation varies, but generally has its
source in statutes which delegate regulatory, supervisory and administrative
powers to state insurance departments. Such powers relate to, among other
things, the standards of solvency that must be met and maintained; the licensing
of insurers and their agents; the nature of and limitations on investments;
establishing premium rates; claim handling and trade practices; restrictions on
the size of risks which may be insured under a single policy; deposits of
securities for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of companies; annual and other reports required to
be filed on the financial condition of companies or for other purposes; fixing
maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values; and the adequacy of reserves and other
necessary provisions for unearned premiums, unpaid claims and claim adjustment
expenses and other liabilities, both reported and unreported.
Most states have enacted legislation that regulates insurance holding company
systems such as The Company. This legislation provides that each insurance
company in the system is required to register with the insurance department of
its state of domicile and furnish information concerning the operations of
companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the system.
All transactions within a holding company system affecting insurers must be fair
and equitable. Notice to the insurance departments is required prior to the
consummation of transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any entity in its
holding company system. In addition, certain of such transactions cannot be
consummated without the applicable insurance department's prior approval.
The extent of insurance regulation on business outside the United States varies
significantly among the countries in which the Company operates. Some countries
have minimal regulatory requirements, while others regulate insurers
extensively. Foreign insurers in many countries are faced with greater
restrictions than domestic competitors domiciled in that particular
jurisdiction. The Company's international operations are comprised of insurers
licensed in their respective countries and, therefore, are subject to the
generally less restrictive domestic insurance regulations.
RATINGS
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Ratings".
RISK-BASED CAPITAL
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Risk-Based Capital".
LEGISLATIVE AND REGULATORY INITIATIVES
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Legislative and Regulatory Initiatives".
10
INSOLVENCY FUND
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Guaranty Fund".
NAIC PROPOSALS
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "NAIC Codification".
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Dependence on Certain Third Party Relationships".
EMPLOYEES
The Company had approximately 7,500 employees at December 31, 2003.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Simsbury, Connecticut.
The Company's home office complex consists of approximately 655 thousand square
feet, and is leased from a third party by Hartford Fire Insurance Company
(Hartford Fire), a direct subsidiary of The Hartford. This lease expires in the
year 2009. Expenses associated with these offices are allocated on a direct
basis to The Company by Hartford Fire. The Company believes its properties and
facilities are suitable and adequate for current operations.
11
ITEM 3. LEGAL PROCEEDINGS
The Company is or may become involved in various kinds of legal actions, some of
which assert claims for substantial amounts. These actions may include, among
others, putative state and federal class actions seeking certification of a
state or national class. The Company also is involved in individual actions in
which punitive damages are sought, such as claims alleging bad faith in the
handling of insurance claims. Management expects that the ultimate liability, if
any, with respect to such lawsuits, after consideration of provisions made for
potential losses and costs of defense, will not be material to the consolidated
financial condition of the Company. Nonetheless, given the large or
indeterminate amounts sought in certain of these actions, and the inherent
unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's consolidated results of operations or cash flows in particular
quarterly or annual periods.
Bancorp Services, LLC - 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, The 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. In November of 2003, the
Company paid the initial $70 of the settlement.
Reinsurance Arbitration - On March 16, 2003, a final decision and award was
issued in the previously disclosed reinsurance arbitration between subsidiaries
of The Hartford and one of their primary reinsurers relating to policies with
guaranteed death benefits written from 1994 to 1999. The arbitration involved
alleged breaches under the reinsurance treaties. Under the terms of the final
decision and award, the reinsurer's reinsurance obligations to The Hartford's
subsidiaries were unchanged and not limited or reduced in any manner. The award
was confirmed by the Connecticut Superior Court on May 5, 2003.
PART II
ITEM 5. MARKET FOR HARTFORD LIFE'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's outstanding shares are ultimately owned by The Hartford. As
of February 20, 2004, the Company had issued and outstanding 1,000 shares of
Common Stock at $0.01 par value per share. There is no established public
trading market for the Company's Common Stock.
For a discussion regarding the Company's payment of dividends, and the
restrictions related thereto, see the Capital Resources and Liquidity section of
the MD&A under "Dividends" and "Liquidity Requirements."
12
ITEM 7. 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 December 31, 2003,
compared with December 31, 2002, and its results of operations for the three
years ended December 31, 2003, 2002 and 2001. This discussion should be read in
conjunction with the Consolidated Financial Statements and related Notes
beginning on page F-1.
Certain of the statements contained herein are forward-looking statements. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and include estimates and
assumptions related to economic, competitive and legislative developments. These
forward-looking statements are subject to change and uncertainty which are, in
many instances, beyond the Company's control and have been made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon the Company. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on the Company will be those anticipated by
management. Actual results could differ materially from those expected by the
Company, depending on the outcome of various factors. These factors include: the
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 inability to effectively mitigate the impact of equity market volatility on
the Company's financial position and results of operations arising from
obligations under annuity product guarantees; the 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; 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 13
Consolidated Results of Operations: Operating Summary 18
Investment Products 20
Individual Life 22
Group Benefits 23
Corporate Owned Life Insurance (COLI) 24
Investments 25
Investment Credit Risk 29
Capital Markets Risk Management 36
Capital Resources and Liquidity 42
Effect of Inflation 47
Impact of New Accounting Standards 47
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability: deferred policy acquisition costs and present value of future
profits; valuation of investments; valuation of derivative instruments; reserves
and contingencies. In developing these estimates management makes subjective and
complex judgments that are inherently uncertain and subject to material change
as facts and circumstances develop. Although variability is inherent in these
estimates, management believes the amounts provided are appropriate based upon
the facts available upon compilation of the financial statements.
DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
Policy acquisition costs, which include commissions and certain other expenses
that vary with and are primarily associated with acquiring business, are
deferred and amortized over the estimated lives of the contracts, usually 20
years. These deferred costs, together with the present value of future profits
of acquired business, are recorded as an asset commonly referred to as deferred
policy
13
acquisition costs and present value of future profits ("DAC"). At December 31,
2003 and 2002, the carrying value of the Company's DAC was $6.6 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 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 to a lesser extent, variable
universal 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 universal
life business was 9% for the years ended December 31, 2003 and 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 both years ended
December 31, 2003 and 2002.
The Company has developed sophisticated modeling capabilities to evaluate its
DAC asset, which allowed it to run a large number of stochastically determined
scenarios of separate account fund performance. These scenarios were then
utilized to calculate a statistically significant range of reasonable estimates
of EGPs. This range was then compared to the present value of EGPs currently
utilized in the DAC amortization model. As of December 31, 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 December 31,
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 15% or
less for 2004, and if certain other assumptions that are implicit in the
computations of the EGPs are achieved.
Additionally, the Company continues to perform analyses with respect to the
potential impact of a revision to future EGPs. If such a revision to EGPs were
deemed necessary, the Company would adjust, as appropriate, all of its
assumptions for products accounted for in accordance with 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 December 31,
2003. If the Company assumed a 9% average long-term rate of growth from December
31, 2003 forward along with other appropriate assumption changes in determining
the revised EGPs, the Company estimates the cumulative increase to amortization
would be approximately $65-$75, 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 $80-$95, after-tax. Assuming that such an adjustment were
to have been required, the Company anticipates that there would have been
immaterial impacts on its DAC amortization for the 2004 and 2005 years exclusive
of the adjustment, and that there would have been positive earnings effects in
later years. Any such adjustment would not affect statutory income or surplus,
due to the prescribed accounting for such amounts that is discussed above.
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 1,112 on December 31, 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 December 31, 2003, the Company believed variable annuity
separate account assets could fall by at least 40% before portions of its DAC
asset would be unrecoverable.
14
VALUATION OF INVESTMENTS AND DERIVATIVE INSTRUMENTS
The Company's investments in both fixed maturities, which include bonds,
redeemable preferred stock and commercial paper; and equity securities, which
include common and non-redeemable preferred stocks, are classified as
"available-for-sale" as defined in Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Accordingly, these securities are carried at fair value with the
after-tax difference from amortized cost, as adjusted for the effect of
deducting the life and pension policyholders' share of the immediate
participation guaranteed contracts and certain life and annuity deferred policy
acquisition costs, reflected in stockholder's equity as a component of
accumulated other comprehensive income ("AOCI"). Policy loans are carried at
outstanding balance, which approximates fair value. Other investments primarily
consist of limited partnership interests, derivatives and mortgage loans. The
limited partnerships are accounted for under the equity method and accordingly
the partnership earnings are included in net investment income. Derivatives are
carried at fair value and mortgage loans on real estate are recorded at the
outstanding principal balance adjusted for amortization of premiums or discounts
and net of valuation allowances, if any.
Valuation of Fixed Maturities
The fair value for fixed maturity securities is largely determined by one of
three primary pricing methods: independent third party pricing services,
independent broker quotations or pricing matrices, which use data provided by
external sources. With the exception of short-term securities for which
amortized cost is predominantly used to approximate fair value, security pricing
is applied using a hierarchy or "waterfall" approach whereby prices are first
sought from independent pricing services with the remaining unpriced securities
submitted to brokers for prices or lastly priced via a pricing matrix.
Prices from independent pricing services are often unavailable for securities
that are rarely traded or are traded only in privately negotiated transactions.
As a result, a significant percentage of the Company's asset-backed and
commercial mortgage-backed securities are priced via broker quotations. A
pricing matrix is used to price securities for which the Company is unable to
obtain either a price from a third party service or an independent broker
quotation. The pricing matrix begins with current treasury rates and uses credit
spreads and issuer-specific yield adjustments received from an independent third
party source to determine the market price for the security. The credit spreads
incorporate the issuer's credit rating as assigned by a nationally recognized
rating agency and a risk premium, if warranted, due to the issuer's industry and
security's time to maturity. The issuer-specific yield adjustments, which can be
positive or negative, are updated twice annually, as of June 30 and December 31,
by an independent third-party source and are intended to adjust security prices
for issuer-specific factors. The matrix-priced securities at December 31, 2003
and 2002, primarily consisted of non-144A private placements and have an average
duration of 4.4 and 4.6, respectively.
The following table identifies the fair value of fixed maturity securities by
pricing source as of December 31, 2003 and 2002:
2003 2002
------------------------------------ ------------------------------------
General and Guaranteed Percentage General and Guaranteed Percentage
Separate Account Fixed of Total Separate Account Fixed of Total
Maturities at Fair Value Fair Value Maturities at Fair Value Fair Value
------------------------ ---------- ------------------------ ----------
Priced via independent market quotations $ 40,122 81.5% $ 31,422 77.7%
Priced via broker quotations 3,273 6.7% 4,949 12.2%
Priced via matrices 3,445 7.0% 2,898 7.2%
Priced via other methods 301 0.6% 171 0.4%
Short-term investments [1] 2,056 4.2% 1,022 2.5%
----------- ----- ------------ -----
TOTAL $ 49,197 100.0% $ 40,462 100.0%
=========== ===== ============ =====
Total general accounts $ 37,462 76.1% $ 29,377 72.6%
Total guaranteed separate accounts $ 11,735 23.9% $ 11,085 27.4%
=========== ===== ============ =====
[1] Short-term investments are valued at amortized cost, which approximates
fair value.
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. As such, the estimated fair value of a
financial instrument may differ significantly from the amount that could be
realized if the security were sold immediately.
Other-Than-Temporary Impairments
One of the significant estimations inherent in the valuation of investments is
the evaluation of other-than-temporary impairments. The evaluation of
impairments is a quantitative and qualitative process, which is subject to risks
and uncertainties and is intended to determine whether declines in the fair
value of investments should be recognized in current period earnings. 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. The Company's accounting policy requires that a decline in
the value of a security below its amortized cost basis be assessed to determine
if the decline is other-than-temporary. If so, the security is deemed to be
other-than-
15
temporarily impaired, and a charge is recorded in net realized
capital losses equal to the difference between the fair value and amortized cost
basis of the security. The fair value of the other-than-temporarily impaired
investment becomes its new cost basis. The Company has a security monitoring
process overseen by a committee of investment and accounting professionals that
identifies securities that, due to certain characteristics, as described below,
are subjected to an enhanced analysis on a quarterly basis.
Securities not subject to Emerging Issues Task Force ("EITF") Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets" ("non-EITF Issue No. 99-20
securities"), that are depressed by twenty percent or more for six months are
presumed to be other-than-temporarily impaired unless the depression is the
result of rising interest rates or significant objective verifiable evidence
supports that the security price is temporarily depressed and is expected to
recover within a reasonable period of time. Non-EITF Issue No. 99-20 securities
depressed less than twenty percent or depressed twenty percent or more but for
less than six months are also reviewed to determine if an other-than-temporary
impairment is present. The primary factors considered in evaluating whether a
decline in value for non-EITF Issue No. 99-20 securities is other-than-temporary
include: (a) the length of time and the extent to which the fair value has been
less than cost, (b) the financial condition, credit rating and near-term
prospects of the issuer, (c) whether the debtor is current on contractually
obligated interest and principal payments and (d) the intent and ability of the
Company to retain the investment for a period of time sufficient to allow for
recovery.
For certain securitized financial assets with contractual cash flows (including
asset-backed securities), EITF Issue No. 99-20 requires the Company to
periodically update its best estimate of cash flows over the life of the
security. If the fair value of a securitized financial asset is less than its
carrying amount and there has been a decrease in the present value of the
estimated cash flows since the last revised estimate, considering both timing
and amount, then an other-than-temporary impairment charge is recognized.
Projections of expected future cash flows may change based upon new information
regarding the performance of the underlying collateral.
For securities expected to be sold, an other-than-temporary impairment charge is
recognized if the Company does not expect the fair value of a security to
recover to amortized cost prior to the expected date of sale. Once an impairment
charge has been recorded, the Company continues to review the
other-than-temporarily impaired securities for additional other-than-temporary
impairments.
Valuation of Derivative Instruments
Derivative instruments are reported at fair value based upon either independent
market quotations for exchange traded derivative contracts, independent third
party pricing sources or pricing valuation models which utilize independent
third party data as inputs. Valuation of derivatives underlying the GMWB
investment product is discussed below.
Valuation of Guaranteed Minimum Withdrawal Benefit Embedded Derivatives
An embedded 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 guaranteed minimum withdrawal
benefit ("GMWB") embedded derivative 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 assumes expected returns
based on risk-free rates as represented by the current LIBOR forward curve
rates; market volatility assumptions for each underlying index is 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 is 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 is used to determine the present value of expected
future cash flows produced in the stochastic projection process.
RESERVES
The Company's insurance subsidiaries establish and carry as liabilities
actuarially determined reserves which are calculated to meet Hartford Life's
future obligations. Reserves for life insurance and disability contracts are
based on actuarially recognized methods using prescribed morbidity and mortality
tables in general use in the United States, which are modified to reflect The
Company's actual experience when appropriate. These reserves are computed at
amounts that, with additions from estimated premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's death. Changes in or deviations from
the assumptions used for mortality, morbidity, expected future premiums and
interest can significantly affect the Company's reserve levels and related
future operations. Reserves also include unearned premiums, premium deposits,
claims incurred but not reported ("IBNR") and claims reported but not yet paid.
Reserves for assumed reinsurance are computed in a manner that is comparable to
direct insurance reserves.
The liability for policy benefits for universal life-type contracts and
interest-sensitive whole life policies is equal to the balance that accrues to
the benefit of policyholders, including credited interest, amounts that have
been assessed to compensate the Company for
16
services to be performed over future periods, and any amounts previously
assessed against policyholders that are refundable on termination of the
contract.
For investment contracts, policyholder liabilities are equal to the accumulated
policy account values, which consist of an accumulation of deposit payments plus
credited interest, less withdrawals and amounts assessed through the end of the
period. Certain investment contracts include provisions whereby a guaranteed
minimum death benefit is provided in the event that the contractholder's account
value at death is below the guaranteed value. Although the Company reinsures the
majority of the death benefit guarantees associated with its in-force block of
business, declines in the equity market may increase the Company's net exposure
to death benefits under these contracts. In addition, these contracts contain
various provisions for determining the amount of the death benefit guaranteed
following the withdrawal of a portion of the account value by the policyholder.
Partial withdrawals under certain of these contracts may not result in a
reduction in the guaranteed minimum death benefit in proportion to the account
value surrendered. The Company records the death benefit costs, net of
reinsurance, as they are incurred. See Impact of New Accounting Standards
section for a discussion of the Company's adoption of Statement of Position
03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" (the "SOP") in
2004 and the recording of a liability for GMDB in accordance with the provisions
of the SOP.
For the Company's group disability policies, the level of reserves is based on a
variety of factors including particular diagnoses, termination rates and benefit
levels.
ACCOUNTING FOR CONTINGENCIES
Management follows the requirements of SFAS No. 5 "Accounting for
Contingencies". This statement requires management to evaluate each contingent
matter separately. The evaluation is a two-step process, including: determining
a likelihood of loss, and, if a loss is likely, developing a potential range of
loss. Management establishes reserves for these contingencies at its "best
estimate", or, if no one number within the range of possible losses is more
likely than any other, the Company records an estimated reserve at the low end
of the range of losses. The majority of contingencies currently being evaluated
by the Company relate to litigation and tax matters, which are inherently
difficult to evaluate and subject to significant changes.
CONSOLIDATED RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
The Company provides investment and retirement products such as variable and
fixed annuities, mutual funds and retirement plan services and other
institutional products; individual and corporate owned life insurance; and,
group benefit products, such as group life and group disability insurance.
The Company derives its revenues principally from: (a) fee income, including
asset management fees, on separate account and mutual fund assets and mortality
and expense fees, as well as cost of insurance charges; (b) fully insured
premiums; (c) certain other fees; and (d) net investment income on general
account assets. Asset management fees and mortality and expense fees are
primarily generated from separate account assets, which are deposited with the
Company through the sale of variable annuity and variable universal life
products and from mutual funds. Cost of insurance charges are assessed on the
net amount at risk for investment-oriented life insurance products. Premium
revenues are derived primarily from the sale of group life and group disability
insurance products.
The Company's expenses essentially consist of interest credited to policyholders
on general account liabilities, insurance benefits provided, dividends to
policyholders, costs of selling and servicing the various products offered by
the Company, and other general business expenses.
The Company's profitability in its variable annuity, mutual fund and to a lesser
extent, variable universal life businesses depends largely on the amount of its
assets under management on which it earns fees and the level of fees charged.
Changes in assets under management are comprised of two main factors: net flows,
which measure the success of the Company's asset gathering and retention efforts
(sales and other deposits less surrenders) and the market return of the funds,
which is heavily influenced by the return on the equity markets. The
profitability of the Company's fixed annuities depends largely on its ability to
earn target spreads between earned investment rates on its general account
assets and interest credited to policyholders. Profitability is also influenced
by operating expense management including the benefits of economies of scale in
its variable annuity businesses in particular. In addition, the size and
persistency of gross profits from these businesses is an important driver of
earnings as it affects the amortization of the deferred policy acquisition
costs.
The Company's profitability in its individual life insurance and group benefits
businesses depends largely on the size of its in force block, the adequacy of
product pricing and underwriting discipline, and the efficiency of its claims
and expense management.
17
OPERATING SUMMARY
2003 VS. 2002
2002 VS. 2001
---- --------
2003 2002 2001 CHANGE CHANGE
---- ---- ---- ------ ------
Fee income $ 2,760 $ 2,577 $ 2,633 7% (2%)
Earned premiums 3,086 2,697 2,975 14% (9%)
Net investment income 2,041 1,849 1,782 10% 4%
Other revenue 131 120 128 9% (6%)
Net realized capital gains (losses) 40 (308) (136) NM (126%)
--------- -------- -------- --- ----
TOTAL REVENUES 8,058 6,935 7,382 16% (6%)
--------- -------- -------- --- ----
Benefits, claims and claim adjustment expenses 4,616 4,158 4,444 11% (6%)
Insurance operating costs and expenses 1,535 1,438 1,390 7% 3%
Amortization of deferred policy acquisition costs
and present value of future profits 769 628 642 22% (2%)
Interest expense 117 112 104 4% 8%
Goodwill amortization -- -- 24 -- (100%)
Other expenses 72 32 13 125% 146%
--------- -------- -------- --- ----
TOTAL BENEFITS, CLAIMS AND EXPENSES 7,109 6,368 6,617 12% (4%)
--------- -------- -------- --- ----
INCOME BEFORE INCOME TAX EXPENSE AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGES 949 567 765 67% (26%)
Income tax expense 180 10 54 NM (81%)
--------- -------- -------- --- ----
Cumulative effect of accounting changes, net of
tax[1] -- -- (26) -- (100%)
--------- -------- -------- --- ----
NET INCOME $ 769 $ 557 $ 685 38% (19%)
========= ======== ======== === ====
[1] For the year ended December 31, 2001, represents the cumulative impact of
the Company's adoption of SFAS No. 133 of $(23) and EITF Issue 99-20 of
$(3).
The Company 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 allocable 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.
On December 31, 2003, the Company acquired CNA Financial Corporation's group
life and accident, and short-term and long-term disability businesses for $485
in cash. The purchase price paid on December 31, 2003, was based on a September
30, 2003 valuation of the business acquired. During the first quarter of 2004,
the purchase price will be adjusted to reflect a December 31, 2003 valuation of
the business acquired. The Company currently estimates that adjustment to the
purchase price to be an increase of $51 which primarily reflects the increase in
the surplus of the business acquired in the fourth quarter of 2003. As a result
of the acquisition being effective on December 31, 2003, there were no income
statement effects recorded for the year ended December 31, 2003. On April 2,
2001, the Company acquired the United States individual life insurance, annuity
and mutual fund businesses of Fortis. This transaction was accounted for as a
purchase and, as such, the revenues and expenses generated by this business from
April 2, 2001 forward are included in the Company's consolidated results of
operations. (For further discussion see Note 17 of Notes to Consolidated
Financial Statements).
18
2003 COMPARED TO 2002 -- Revenues increased as a result of realized gains in
2003 as compared to realized losses in 2002. (See the Investments section for
further discussion of investment results and related realized capital losses.)
Also contributing to the increased revenues were higher earned premiums and net
investment income in the Investment Products segment as compared to the prior
year. The increase in earned premiums in Investment Products is attributed to
higher sales in the institutional investment products business, specifically, in
the terminal funding and structured settlement businesses. 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
in 2003 compared to a year ago, as a result of higher average account values,
specifically in individual annuities and mutual fund businesses, due primarily
to stronger variable annuity sales. The Individual Life segment reported an
increase in revenues in 2003 compared to a year ago driven by increases in fees
and cost of insurance as life insurance inforce grew and aged, and variable
universal life account values increased 30% due primarily to the growth in the
equity markets. In addition, Group Benefits experienced an increase in revenues
driven by increases in net investment income and earned premiums in 2003 as
compared to a year ago. Partially offsetting these increases were lower fee
income and net investment income in the COLI segment. The decrease in COLI net
investment income for 2003 was primarily due to lower average leveraged COLI
account values as a result of surrender activity. In addition, COLI had lower
fee income due in part to lower sales in 2003, as compared to the prior year.
Benefits, claims and expenses increased primarily due to increases in the
Investment Products segment associated with the growth in the individual annuity
and institutional investments businesses discussed above. Partially offsetting
this increase was a decrease in interest credited expenses in COLI related to
the decline in leverage COLI account values. For the year ended December 31,
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 14 of Notes to
Consolidated Financial Statements.)
Net income increased for the year ended December 31, 2003 due primarily to the
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 claims experience as compared to the prior
year and continued expense management. Individual Life experienced earnings
growth in 2003 due to increases in fee income, favorable mortality and growth in
the in force business. Partially offsetting these increases was a decrease in
COLI net income of $(33) for the year ended December 31, 2003, as compared to
the prior year period. This decrease includes the effects of a year over year
increase of $29 in the charge for the Bancorp litigation. 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 effective tax rate increased in 2003 when compared with 2002 as a result of
higher earnings and lower dividends received deduction ("DRD") related tax
items. The tax provision recorded during 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. This compares
with a tax benefit of $76 recorded in 2002. (See Note 14 of Notes Consolidated
Financial Statements.) The total DRD benefit related to the 2003 tax year for
the year ended December 31, 2003 was $87 as compared to $63 for the year ended
December 31, 2002.
2002 COMPARED TO 2001 -- Revenues decreased, primarily driven by an increase in
realized capital losses in 2002 as compared to the prior year. (See the
Investments section for further discussion of investment results and related
realized capital losses.) Additionally, COLI experienced a decline in revenues,
as a result of the decrease in leveraged COLI account values as compared to a
year ago, which was partially offset by revenue growth across the other
operating segments. Revenues related to the Investment Products segment
decreased, as a result of lower earned premiums in the institutional investment
product business and a decline in revenues within the individual annuity
operation. Lower assets under management due to the decline in the equity
markets are the principal driver of declining revenues for the individual
annuity operation. The Group Benefits Division experienced an increase in
revenues, as a result of strong sales to new customers and solid persistency
within the in-force block of business. Additionally, Individual Life revenues
increased, as a result of increased life insurance inforce and the Fortis
acquisition.
Total benefits, claims and expenses decreased due primarily to the revenue
changes described above. Expenses decreased in the Investment Products segment,
principally due to a lower change in reserve as a result of the lower earned
premiums discussed above and a $31 increase in death benefits related to the
individual annuity operation, as a result of depressed contractholder account
values driven by the lower equity markets. In addition, 2002 expenses include
$11, after-tax, of accrued expenses recorded within the COLI segment related to
the Bancorp litigation. (For a discussion of the Bancorp litigation, see Note 14
of Notes to Consolidated Financial Statements.) Also included in 2002 expenses
was an after-tax benefit of $8, recorded within "Other", associated with
favorable development related to the estimated September 11 exposure.
Net income decreased, due primarily to lower income in Other as a result of
higher realized capital losses and lower income in the Investment Products
segment as a result of the lower equity markets. These declines were partially
offset by increases in Group Benefits Division as a result of business growth
and stable loss ratios and Individual Life primarily due to the Fortis
acquisition. In addition, the Company recorded, in 2002, an $11 after-tax
expense associated with the Bancorp Litigation and recognized an $8 after-
19
tax benefit due to favorable development related to September 11. In 2001, the
Company recorded a $20 after-tax loss related to September 11.
SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
2003 2002 2001
---- ---- ----
Investment Products $ 510 $ 432 $ 463
Individual Life 145 133 121
Group Benefits 148 128 106
Corporate Owned Life Insurance (1) 32 37
Other (33) (168) (42)
------- ------ ------
NET INCOME $ 769 $ 557 $ 685
------- ------ ------
A description of each segment as well as an analysis of the operating results
summarized above is included on the following pages.
INVESTMENT PRODUCTS
OPERATING SUMMARY
2003 VS. 2002 VS.
2002 2001
2003 2002 2001 CHANGE CHANGE
---- ---- ---- ------ ------
Fee income and other $ 1,744 $ 1,631 $ 1,724 7% (5%)
Earned premiums 764 397 729 92% (46%)
Net investment income 1,273 1,070 884 19% 21%
Net realized capital gains 27 9 2 NM NM
-------- -------- -------- -- ---
TOTAL REVENUES 3,808 3,107 3,339 23% (7%)
-------- -------- -------- -- ---
Benefits, claims and claim adjustment expenses 1,993 1,454 1,652 37% (12%)
Insurance operating costs and other expenses 652 648 608 1% 7%
Amortization of deferred policy acquisition costs and
present value of future profits 542 444 461 22% (4%)
-------- -------- -------- -- ---
TOTAL BENEFITS, CLAIMS AND EXPENSES 3,187 2,546 2,721 25% (6%)
-------- -------- -------- -- ---
INCOME BEFORE INCOME TAX EXPENSE 621 561 618 11% (9%)
Income tax expense 111 129 155 (14%) (17%)
-------- -------- -------- -- ---
NET INCOME $ 510 $ 432 $ 463 18% (7%)
======== ======== ======== == ===
Individual variable annuity account values $ 86,501 $ 64,343 $ 74,581 34% (15%)
Other individual annuity account values 11,215 10,565 9,572 6% 10%
Other investment products account values 26,279 19,921 19,322 32% 3%
-------- -------- -------- -- ---
TOTAL ACCOUNT VALUES 123,995 94,829 103,475 31% (8%)
Mutual fund assets under management 22,462 15,321 16,809 47% 9%
-------- -------- -------- -- ---
TOTAL ASSETS UNDER MANAGEMENT $146,457 $110,150 $120,284 33% (8%)
======== ======== ======== == ===
The Investment Products segment focuses on the savings and retirement needs of
the growing number of individuals who are preparing for retirement, or have
already retired, through the sale of individual variable and fixed annuities,
mutual funds, retirement plan services and other investment products. The
Company is both a leading writer of individual variable annuities and a top
seller of individual variable annuities through banks in the United States.
2003 COMPARED TO 2002 -- Revenues in the Investment Products segment increased
primarily driven by higher earned premiums and higher net investment income. The
increase in earned premiums is due to higher sales of terminal funding and
structured settlement products in the institutional investment products
business. Net investment income increased due to higher general account assets.
General account assets for the individual annuity business were $9.4 billion as
of December 31, 2003, an increase of approximately $800 or 9% from 2002, due
primarily to an increase in individual annuity sales, with the majority of those
new sales electing to use the dollar cost averaging ("DCA") feature. The DCA
feature allows policyholders to earn a credited interest rate in the general
account for a defined period of time as their invested assets are systematically
invested into the separate account funds. Additionally, net
20
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 general account assets under management
increased $2.4 billion, since December 31, 2002, to $10.4 billion as of December
31, 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 in 2003 compared to a year ago, 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.
Total benefits, claims and expenses increased primarily due to higher terminal
funding and structured settlement sales in the institutional investment business
causing an increase in reserve levels and increased interest credited in the
individual annuity operation as a result of higher general account asset levels.
Additionally, amortization of deferred policy acquisition costs related to the
individual annuity business increased due to higher gross profits.
Net income was higher driven by an increase in revenues in the individual
annuity and other investment product operations as a result of the strong net
flows and growth in the equity markets during 2003 and strong expense
management. In addition, net income increased in 2003 compared to 2002 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 year ended December 31, 2003 was $81 as compared to $59 for the
year ended December 31, 2002.
2002 COMPARED TO 2001 - Revenues in the Investment Products segment decreased,
primarily due to lower earned premiums in the institutional investment products
business and lower fee income related to the individual annuity operation as
average account values decreased from $85.7 billion to $79.5 billion compared to
prior year, primarily due to the lower equity markets. Partially offsetting
these declines was an increase in net investment income, primarily driven by
growth in the institutional investment product business, where related assets
under management increased $669, or 7%, to $9.7 billion as of December 31, 2002.
Total benefits, claims and expenses decreased, due primarily to a lower change
in reserve as a result of the lower earned premiums discussed above.
Additionally, there was a decrease in amortization of policy acquisition costs
related to the individual annuity business, which declined as a result of lower
gross profits, driven by the decrease in fee income and the increase in death
benefit costs. Partially offsetting these decreases were increases of $84, or
11%, in interest credited on general account assets, $61, or 6%, in commissions
and wholesaling expenses, and $31 in individual annuity death benefit costs due
to the lower equity markets. The increase in operating expenses was primarily
driven by the mutual fund business.
Net income decreased, driven by the lower equity markets resulting in the
decline in revenues in the individual annuity operation and increases in the
death benefit costs incurred by the individual annuity operation.
OUTLOOK
Management believes the market for retirement products continues to expand as
individuals increasingly save and plan for retirement. Demographic trends
suggest that as the "baby boom" generation matures, a significant portion of the
United States population will allocate a greater percentage of their disposable
incomes to saving for their retirement years due to uncertainty surrounding the
Social Security system and increases in average life expectancy. In addition,
the Company believes that it has developed and implemented strategies to
maintain and enhance its position as a market leader in the financial services
industry. This was demonstrated by record individual annuity sales in 2003 of
$16.5 billion (a 42% increase) compared to $11.6 billion and $10.0 billion in
2002 and 2001, respectively. Significantly contributing to the growth in sales
was the introduction of Principal First, a guaranteed minimum withdrawal benefit
rider, which was developed in response to our customers' needs. However, the
competition is increasing in this market and as a result, the Company may not be
able to sustain the level of sales attained in 2003. Based on VARDS, the Company
had 12.6% market share as of December 31, 2003 as compared to 9.4% at December
31, 2002. Additionally, in 2003 The Hartford mutual funds reached $20 billion in
assets faster than any other retail-oriented mutual fund family in history,
according to Strategic Insight.
The growth and profitability of the individual annuity and mutual fund
businesses is dependent to a large degree on the performance of the equity
markets. In periods of favorable equity market performance, the Company may
experience stronger sales and higher net cash flows, which will increase assets
under management and thus increase fee income earned on those assets. In
addition, higher equity market levels will generally reduce certain costs to the
Company of individual annuities, such as GMDB and GMWB benefits. Conversely
though, weak equity markets may dampen sales activity and increase surrender
activity causing declines in assets under management and lower fee income. Such
declines in the equity markets will also increase the cost to the Company of
GMDB and GMWB benefits associated with individual annuities. The Company
attempts to mitigate some of the volatility associated with the GMDB and GMWB
benefits using reinsurance or other risk management strategies, such as hedging.
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
21
income volatility associated with the GMDB and GMWB benefits of variable annuity
contracts. For spread based products sold in the Investment Products segment,
the future growth will depend on the ability to earn targeted returns on new
business, given competition and the future interest rate environment.
INDIVIDUAL LIFE
OPERATING SUMMARY
2003 VS. 2002 VS.
2002 2001
---- ----
2003 2002 2001 CHANGE CHANGE
---- ---- ---- ------ ------
Fee income and other $ 747 $ 705 $ 643 6% 10%
Earned premiums (20) (8) 4 (150%) NM
Net investment income 256 262 244 (2%) 8%
Net realized capital losses (1) (1) (1) - -
--------- --------- --------- ---- --
TOTAL REVENUES 982 958 890 3% 8%
--------- --------- --------- ---- --
Benefits, claims and claim adjustment expenses 436 443 385 (2%) 15%
Amortization of deferred policy acquisition costs 176 160 168 10% (5%)
Insurance operating costs and other expenses 161 159 159 1% -
--------- --------- --------- ---- --
TOTAL BENEFITS, CLAIMS AND EXPENSES 773 762 712 1% 7%
--------- --------- --------- ---- --
INCOME BEFORE INCOME TAX EXPENSE 209 196 178 7% 10%
Income tax expense 64 63 57 2% 10%
--------- --------- --------- ---- --
NET INCOME $ 145 $ 133 $ 121 9% 10%
========= ========= ========= ==== ==
Variable universal life account values $ 4,725 $ 3,648 $ 3,993 30% (9%)
--------- --------- --------- ---- --
TOTAL ACCOUNT VALUES $ 8,726 $ 7,557 $ 7,868 15% (4%)
--------- --------- --------- ---- --
Variable universal life insurance in force $ 67,031 $ 66,715 $ 61,617 - 8%
--------- --------- --------- ---- --
TOTAL LIFE INSURANCE IN FORCE $ 130,798 $ 126,680 $ 120,269 3% 5%
--------- --------- --------- ---- --
The Individual Life segment provides life insurance solutions to a wide array of
partners to solve the wealth protection, accumulation and transfer needs of
their affluent, emerging affluent and business insurance clients.
2003 COMPARED TO 2002 - Revenues in the Individual Life segment increased
primarily driven by increases in fees and cost of insurance charges as life
insurance in force grew and aged, and variable universal life account values
increased 30%, driven by the growth in the equity markets in 2003. These
increases were partially offset by lower earned premiums and net investment
income in 2003. The decrease in net investment income was due primarily to lower
investment yields. Earned premiums, which include premiums for ceded
reinsurance, decreased primarily due to increased use of reinsurance.
Total benefits, claims and expenses increased, principally driven by an increase
in amortization of deferred policy acquisition costs. These increases were
partially offset by a decrease in benefit costs in 2003 as compared to 2002 due
to favorable mortality rates compared to the prior year.
Net income increased due to increases in fee income and unusually favorable
mortality. Additionally, net income for the year ended December 31, 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 year ended
December 31, 2003 was $4 as compared to $3 for the year ended December 31, 2002.
2002 COMPARED TO 2001 - Revenues in the Individual Life segment increased,
primarily driven by business growth including the impact of the Fortis
transaction. Total benefits, claims, and expenses increased, driven by the
growth in the business including the impact of the Fortis acquisition. In
addition, mortality rates for 2002 increased as compared to the prior year, but
were in line with management's expectations. Individual Life's earnings
increased for the year ended December 31, 2002, principally due to the
contribution to earnings from the Fortis transaction. The increase in net income
was also impacted by an after-tax loss of $3 related to September 11 in the
third quarter of 2001.
OUTLOOK
The Individual Life segment benefited from unusually favorable mortality during
the fourth quarter. It is not anticipated that similar experience would be
likely to continue. Individual life sales grew to $196 in 2003 from $173 in 2002
with the successful introduction of new universal life and whole life products.
Improved equity markets should help increase variable universal life sales. The
Company also continues to introduce new and enhanced products, which are
expected to increase sales. However, the Company continues to face uncertainty
surrounding estate tax legislation and aggressive competition from life
insurance providers. The Company is actively
22
pursuing broader distribution opportunities to fuel growth, including our
Pinnacle Partners marketing initiative, and anticipates growth at Woodbury
Financial Services.
GROUP BENEFITS
OPERATING SUMMARY
2003 VS. 2002 VS.
2002 2001
---- ----
2003 2002 2001 CHANGE CHANGE
---- ---- ---- ------ ------
Earned premiums and other $ 2,362 $ 2,327 $ 2,259 2% 3%
Net investment income 264 258 255 2% 1%
Net realized capital losses (2) (3) (7) 33% 57%
------- ------- ------- -- ----
TOTAL REVENUES 2,624 2,582 2,507 2% 3%
------- ------- ------- -- ----
Benefits, claims and claim adjustment expenses 1,862 1,878 1,874 (1%) -
Insurance operating costs and other expenses 571 541 498 6% 9%
------- ------- ------- -- ----
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,433 2,419 2,372 1% 2%
------- ------- ------- -- ----
INCOME BEFORE INCOME TAX EXPENSE 191 163 135 17% 21%
Income tax expense 43 35 29 23% 21%
------- ------- ------- -- ----
NET INCOME $ 148 $ 128 $ 106 16% 21%
======= ======= ======= == ====
Fully insured - ongoing premiums $ 2,302 $ 2,295 $ 2,014 - 14%
Buyout premiums 40 13 97 NM (87%)
Military Medicare supplement - - 131 -- (100%)
Other 20 19 17 5% 12%
------- ------- ------- -- ----
Earned premiums $ 2,362 $ 2,327 $ 2,259 1% 3%
------- ------- ------- -- ----
Hartford Life is a leading provider of group benefits, and through this segment
sells group life and group disability insurance as well as other products,
including medical stop loss and supplementary medical coverages to employers and
employer sponsored plans, accidental death and dismemberment, travel accident
and other special risk coverages to employers and associations. The Company also
offers disability underwriting, administration, claims processing services and
reinsurance to other insurers and self-funded employer plans.
2003 COMPARED TO 2002 -- Revenues in the Group Benefits segment increased in
2003 as compared to 2002, driven by increases in earned premiums and other and
net investment income in 2003 as compared to a year ago. Premiums growth was not
as high as anticipated due to lower sales to new customers in 2003 and lower
persistency on renewals reflecting a competitive marketplace. However, the
segment reported an increase in total buyout premiums. Buyouts involve the
acquisition of claim liabilities from another carrier for a purchase price
calculated to cover the run off of those liabilities plus administration
expenses and profit. Due to the nature of the buyout marketplace, the
predictability of buyout premiums is uncertain.
Total benefits, claims and expenses increased for the year ended December 31,
2003, which is consistent with the increase in buyout premiums previously
described. Excluding buyouts, total benefits, claims and expenses decreased $43,
or 2%, over the same period. The segment's loss ratio (defined as benefits,
claims and claim adjustment expenses as a percentage of premiums and other
considerations excluding buyouts) was 79%, down from 81% in 2002. Insurance
operating costs and other expenses increased due to the premium growth
previously described and continued investments in technology, service and
distribution. The segment's ratio of insurance operating costs and other
expenses to premiums and other considerations was 24%, increasing slightly from
23% in 2002.
The increase in net income was due primarily to favorable claims experience.
2002 COMPARED TO 2001 -- Revenues in the Group Benefits segment increased,
driven primarily by growth in premiums, which increased in 2002 as compared to
2001. The growth in premiums was due to an increase in fully insured ongoing
premiums, as a result of steady persistency and pricing actions on the in-force
block of business and strong sales. Fully insured ongoing sales were $597, an
increase of $66, or 12%. Offsetting this increase was a decrease in military
Medicare supplement premiums resulting from federal legislation effective in the
fourth quarter of 2001. This legislation provides retired military officers age
65 and older with full medical insurance paid for by the government, eliminating
the need for Medicare supplement insurance. Additionally, premium revenues for
2002 were partially offset by a decrease in total buyout premiums.
Total benefits, claims and expenses increased from 2001 to 2002. The increase in
expenses is consistent with the growth in revenues previously described.
Benefits and claims expenses, excluding buyouts, increased over the same period;
however, the segment's loss ratio was 81% down slightly from 82% in 2001.
Insurance operating costs and other expenses increased, due to the fully insured
23
ongoing premium growth previously described and continued investments in
technology and service. The segment's ratio of insurance operating costs and
other expenses to premiums and other considerations was 23%, consistent with
prior year.
The increase in net income was due to the increase in premium revenues and
favorable loss costs, which was partially offset by increased insurance
operating costs and other expenses as previously described. Group Benefits
incurred an after-tax loss of $2 related to September 11 in the third quarter of
2001.
OUTLOOK
Despite the current market conditions, including low interest rates, rising
medical costs, the changing regulatory environment and cost containment pressure
on employers, the Group Benefits segment continues to leverage off of its
strength in claim and risk management, service and distribution, enabling the
Company to capitalize on market opportunities. Additionally, employees continue
to look to the workplace for a broader and ever expanding array of insurance
products. As employers design benefit strategies to attract and retain
employees, while attempting to control their benefit costs, management believes
that the need for the Group Benefits segment's products will continue to expand.
This, combined with the significant number of employees who currently do not
have coverage or adequate levels of coverage, creates unique opportunities for
our products and services. Furthermore, on December 31, 2003, the Company
acquired the group life and accident, and short-term and long-term disability
businesses of CNA Financial Corporation. This acquisition will increase the
scale of the Company's group life and disability operations and expand the
Company's distribution of its products and services.
CORPORATE OWNED LIFE INSURANCE (COLI)
OPERATING SUMMARY
2003 VS. 2002 VS.
2002 2001
---- ----
2003 2002 2001 CHANGE CHANGE
---- ---- ---- ------ ------
Fee income and other $ 267 $ 316 $ 367 (16%) (14%)
Net investment income 216 275 352 (21%) (22%)
Net realized capital gains - 1 - (100%) 100%
-------- -------- -------- ---- ---
TOTAL REVENUES 483 592 719 (18%) (18%)
-------- -------- -------- ---- ---
Benefits, claims and claim adjustment expenses 324 401 514 (19%) (22%)
Insurance operating costs and expenses 103 82 84 26% (2%)
Dividends to policyholders 60 62 66 (3%) (6%)
-------- -------- -------- ---- ---
TOTAL BENEFITS, CLAIMS AND EXPENSES 487 545 664 (11%) (18%)
-------- -------- -------- ---- ---
(LOSS) INCOME BEFORE INCOME TAX (4) 47 55 NM (15%)
(BENEFIT) EXPENSE
Income tax (benefit) expense (3) 15 18 NM (17%)
-------- -------- -------- ---- ---
NET (LOSS) INCOME $ (1) $ 32 $ 37 NM (14%)
======== ======== ======== ==== ===
Variable COLI account values $ 20,993 $ 19,674 $ 18,019 7% 9%
Leveraged COLI account values 2,524 3,321 4,315 (24%) (23%)
-------- -------- -------- ---- ---
TOTAL ACCOUNT VALUES $ 23,517 $ 22,995 $ 22,334 2% 3%
-------- -------- -------- ---- ---
The Company is a leader in the COLI market, which includes life insurance
policies purchased by a company on the lives of its employees, with the company
or a trust sponsored by the company named as beneficiary under the policy. Until
the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), the
Company sold two principal types of COLI business: leveraged and variable
products. Leveraged COLI is a fixed premium life insurance policy owned by a
company or a trust sponsored by a company. HIPAA phased out the deductibility of
interest on policy loans under leveraged COLI through the end of 1998, virtually
eliminating all future sales of this product. Variable COLI continues to be a
product used by employers to fund non-qualified benefits or other
post-employment benefit liabilities.
2003 COMPARED TO 2002 -- COLI revenues decreased, primarily driven by lower net
investment and fee income. Net investment income and fee income decreased due to
the decline in leveraged COLI account values as a result of surrender activity.
Fee income also decreased as the result of lower sales volume in 2003 as
compared to prior year.
Total benefits, claims and expenses decreased in 2003, primarily as a result of
a decline in interest credited. This was due to the decline in general account
assets as compared to 2002. This is related to the surrender activity noted
above. These decreases were partially offset by an increase in insurance
operating costs and expenses due primarily to a $40 after-tax expense, related
to the Bancorp litigation expense recorded in 2003 compared with the $11
after-tax expense recorded in 2002. (For a discussion of the Bancorp litigation,
see Note 14 of Notes to Consolidated Financial Statements).
24
Net income decreased in 2003 compared to 2002 principally as a result of the
Bancorp litigation expense. Excluding the expenses associated with the Bancorp
litigation discussed above, net income decreased $4 or 9%, primarily due to the
decline in leveraged COLI account values discussed above.
2002 COMPARED TO 2001 -- COLI revenues decreased, primarily related to lower net
investment and fee income due to the declining block of leveraged COLI compared
to a year ago. Total benefits, claims and expenses decreased, which is
relatively consistent with the decrease in revenues described above. However,
the decrease was partially offset by an $11 after-tax expense related to the
Bancorp litigation. COLI's net income decreased principally due to the $11
after-tax expense accrued in connection with the Bancorp litigation. The
decrease in net income was also impacted by an after-tax loss of $2 related to
September 11 recorded in the third quarter of 2001.
OUTLOOK
The focus of this segment is variable COLI, which continues to be a product
generally used by employers to fund non-qualified benefits or other
post-employment benefit liabilities. The leveraged COLI product has been an
important contributor to The Hartford's profitability in recent years and will
continue to contribute to the profitability of the Company in the future,
although the level of profit has declined in 2003, compared to 2002. COLI
continues to be subject to a changing legislative and regulatory environment
that could have a material adverse effect on its business.
INVESTMENTS
GENERAL
The investment portfolios are managed based on the underlying characteristics
and nature of each operation's respective liabilities and within established
risk parameters. (For a further discussion of Hartford Life's approach to
managing risks, see the Investment Credit Risk and Capital Markets Risk
Management sections.)
The investment portfolios are managed by Hartford Investment Management Company
("Hartford Investment Management"), a wholly-owned subsidiary of The Hartford.
Hartford Investment Management is responsible for monitoring and managing the
asset/liability profile, establishing investment objectives and guidelines and
determining, within specified risk tolerances and investment guidelines, the
appropriate asset allocation, duration, convexity and other characteristics of
the portfolios. Security selection and monitoring are performed by asset class
specialists working within dedicated portfolio management teams.
The primary investment objective of Hartford Life's general account is to
maximize after-tax returns consistent with acceptable risk parameters, including
the management of the interest rate sensitivity of invested assets and the
generation of sufficient liquidity relative to that of policyholder and
corporate obligations, as discussed in the Capital Markets Risk Management
section under "Market Risk - Key Market Risk Exposures".
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. Net investment income and net realized capital gains
and losses accounted for approximately 26%, 22% and 22% of the Company's
consolidated revenues for the years ended December 31, 2003, 2002 and 2001,
respectively.
Fluctuations in interest rates affect the Company's return on, and the fair
value of, general account fixed maturity investments, which comprised
approximately 91% and 87% of the fair value of its invested assets as of
December 31, 2003 and 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.
The Company invests in private placement securities, mortgage loans and limited
partnership arrangements in order to further diversify its investment portfolio.
These investment types comprised approximately 19% and 18% of the fair value of
its invested assets as of December 31, 2003 and 2002, respectively. These
security types are typically less liquid than direct investments in publicly
traded fixed income or equity investments. However, generally these securities
have higher yields to compensate for the liquidity risk.
A decrease in the fair value of any investment that is deemed
other-than-temporary would result in the Company's recognition of a net realized
capital loss in its financial results prior to the actual sale of the
investment. (For a further discussion, see the Company's discussion of the
evaluation of other-than-temporary impairments in Critical Accounting Estimates
under "Investments".)
The following table identifies the invested assets by type held in the general
account as of December 31, 2003 and 2002.
COMPOSITION OF INVESTED ASSETS
25
2003 2002
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Fixed maturities, at fair value $ 37,462 91.0% $ 29,377 86.7%
Equity securities, at fair value 357 0.9% 458 1.3%
Policy loans, at outstanding balance 2,512 6.1% 2,934 8.7%
Mortgage loans, at cost 466 1.1% 334 1.0%
Limited partnerships, at fair value 177 0.4% 519 1.5%
Other investments 180 0.5% 269 0.8%
----------- ----- ----------- -----
TOTAL INVESTMENTS $ 41,154 100.0% $ 33,891 100.0%
=========== ===== =========== =====
During 2003, fixed maturity investments increased 28%, primarily the result of
investment and universal life contract sales, operating cash flows, redeployment
of invested assets from limited partnerships and the acquisition of CNA's group
life and accident, long-term and short-term disability and certain specialty
businesses. 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 totaled $397 during the year and as of
December 31, 2003 were liquidated.
INVESTMENT RESULTS
The following table summarizes the Company's investment results.
(before-tax) 2003 2002 2001
------------ ---- ---- ----
Net investment income - excluding policy loan income [1] $ 1,831 $ 1,595 $ 1,475
Policy loan income 210 254 307
------- ------- -------
Net investment income - total [1] $ 2,041 $ 1,849 $ 1,782
Yield on average invested assets [2] 6.0% 6.1% 7.0%
------- ------- -------
Gross gains on sale 267 175 106
Gross losses on sale (95) (112) (120)
Impairments (162) (380) (105)
Periodic net coupon settlements on non-qualifying derivatives [1] 26 9 (3)
GMWB derivatives, net [3] 6 -- --
Other, net [4] (2) -- (14)
------- ------- -------
Net realized capital gains (losses), before-tax [1] $ 40 $ (308) $ (136)
======= ======= =======
[1] Prior periods reflect the reclassification of periodic net coupon
settlements on non-qualifying derivatives from net investment income to net
realized capital gains (losses).
[2] Represents net investment income (excluding net realized capital gains
(losses)) divided by average invested assets at cost or amortized cost, as
applicable. Average invested assets are calculated by dividing the sum of
the beginning and ending period amounts by two, excluding the collateral
obtained from the securities lending program and the fixed maturities
associated with the acquisition of CNA's group life and accident, long-term
and short-term disability and certain specialty businesses.
[3] Net gains on GMWB derivatives were due principally to a $4 gain associated
with international funds for which hedge positions were initiated in the
first quarter of 2004 and $2 due to modeling refinements to improve
valuation estimates. Ineffectiveness on S&P 500 and NASDAQ economic hedge
positions for the year was not significant.
[4] Primarily consists of changes in fair value and hedge ineffectiveness on
derivative instruments as well as the amortization of deferred acquisition
costs.
2003 COMPARED TO 2002 -- Net investment income, excluding policy loan income,
increased $236, or 15%, compared to the prior year. The increase was primarily
due to income earned on a higher invested asset base partially offset by lower
investment yields. Policy loan income decreased primarily due to the decline in
leveraged COLI policies, as a result of surrender activity and lower sales.
Yield 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 2003 improved by $348 compared to the
prior year, primarily as a result of net gains on sales of fixed maturities and
a decrease in other-than-temporary impairments on fixed maturities. (For a
further discussion of other-than-temporary impairments, see the
Other-Than-Temporary Impairments commentary in this section of the MD&A.)
2002 COMPARED TO 2001 -- Net investment income, excluding policy loan income,
increased $120, or 8%. The increase was primarily due to income earned on a
higher invested asset base partially offset by $36 lower income on limited
partnerships and the impact of lower interest rates on new investment purchases.
Policy loan income decreased primarily due to the decline in leveraged COLI
policies, as a result of surrender activity and lower sales. Yield on average
invested assets decreased as a result of lower rates on new investment
purchases, decreased policy loan income and decreased income on limited
partnerships.
Net realized capital losses for 2002 increased $172, or 126%, compared to the
prior year as a result of higher other-than-temporary impairments. (For a
further discussion of other-than-temporary impairments, see the
Other-Than-Temporary Impairments commentary in this section of the MD&A.)
26
SEPARATE ACCOUNT PRODUCTS
Separate account products are those for which a separate investment and
liability account is maintained on behalf of the policyholder. The Company's
separate accounts reflect two categories of risk assumption: non-guaranteed
separate accounts totaling $124.5 billion and $95.3 billion as of December 31,
2003 and 2002, respectively, wherein the policyholder assumes substantially all
the risk and reward; and guaranteed separate accounts totaling $12.1 billion and
$11.8 billion as of December 31, 2003 and 2002, respectively, wherein the
Company contractually guarantees either a minimum return or the account value to
the policyholder. Guaranteed separate account products primarily consist of
modified guaranteed individual annuities and modified guaranteed life insurance
and generally include market value adjustment features and surrender charges to
mitigate the risk of disintermediation. The primary investment objective of
guaranteed separate accounts is to maximize after-tax returns consistent with
acceptable risk parameters, including the management of the interest rate
sensitivity of invested assets relative to that of policyholder obligations, as
discussed in the Capital Markets Risk Management section under "Market Risk -
Key Market Risk Exposures". Effective January 1, 2004, these investments will be
included with general account assets pursuant to Statement of Position ("SOP")
03-01, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts".
Investment objectives for non-guaranteed separate accounts, which consist of the
participants' account balances, vary by fund account type, as outlined in the
applicable fund prospectus or separate account plan of operations.
Non-guaranteed separate account products include variable annuities, variable
universal life insurance contracts and variable COLI. The separate accounts
associated with variable annuity products sold in Japan do not meet the criteria
to be recognized as a separate account because the assets are not legally
insulated from the Company. These assets will also be included with general
account assets effective January 1, 2004.
27
OTHER-THAN-TEMPORARY IMPAIRMENTS
The following table identifies the Company's other-than-temporary impairments by
type.
OTHER-THAN-TEMPORARY IMPAIRMENTS BY TYPE
(before-tax) 2003 2002 2001
------------ ---- ---- ----
Asset-backed securities ("ABS")
Aircraft lease receivables $ 29 $ 73 $ 2
Corporate debt obligations ("CDO") 21 35 14
Credit card receivables 12 9 --
Interest only securities 5 3 10
Manufacturing housing ("MH") receivables 9 14 --
Mutual fund fee receivables 3 16 --
Other ABS 3 13 5
---------- ---------- ---------
Total ABS 82 163 31
Commercial mortgage-backed securities ("CMBS") 5 4 --
Corporate
Basic industry 1 -- 9
Consumer non-cyclical 7 -- --
Financial services 4 6 --
Food and beverage 25 -- --
Technology and communications 3 142 17
Transportation 7 1 --
Utilities -- 23 37
Other Corporate -- 13 --
---------- ---------- ---------
Total Corporate 47 185 63
Equity 21 17 --
Foreign government -- 11 11
Mortgage-backed securities ("MBS") - interest only securities 7 -- --
---------- ---------- ---------
TOTAL OTHER-THAN-TEMPORARY IMPAIRMENTS $ 162 $ 380 $ 105
========== ========== =========
ABS -- During 2003, other-than-temporary impairments were recorded for various
ABS security types as a result of a continued deterioration of cash flows
derived from the underlying collateral. A significant number of these
impairments were recorded on the Company's investments in lower tranches of ABS
supported by aircraft lease and enhanced equipment trust certificates (together,
"aircraft lease receivables") due to continued lower aircraft lease rates and
the prolonged decline in airline travel. CDO impairments were primarily the
result of increasing default rates and lower recovery rates on the collateral.
Impairments on ABS backed by credit card receivables were a result of issuers
extending credit to sub-prime borrowers and the higher default rates on these
loans, while 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, 2002 and 2001 were due
to the flattening of the forward yield curve.
Impairments of ABS during 2002 and 2001 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.
CORPORATE -- The decline in corporate bankruptcies and improvement in general
economic conditions have contributed to lower corporate impairment levels in
2003 compared to 2002.
A significant portion of corporate impairments during 2003 resulted from issuers
who experienced fraud or accounting irregularities. The most significant of
these was the Italian dairy concern, Parmalat SpA, and one consumer non-cyclical
issuer in the healthcare industry, which resulted in a $25 and $6, before-tax
loss, respectively. A loss of $3 was recorded relating to one communications
sector issuer in the cable television industry due to deteriorating earnings
forecasts, debt restructuring issues and accounting irregularities. Additional
impairments were incurred as a result of the deterioration in the transportation
sector during the first half of the year, specifically issuers of airline debt,
as a result of a continued decline in airline travel.
During 2002, impairments of corporate securities were concentrated in the
technology and communications sector and included a $74, before-tax, loss
related to securities issued by WorldCom.
During 2001, impairments of corporate securities were concentrated in the
technology and communications and the utilities sectors, which included a $37,
before-tax, loss related to securities issued by Enron Corporation.
28
OTHER -- Other-than-temporary impairments were also recorded in 2003 on various
diversified mutual funds and preferred stock investments. In 2002 and 2001
other-than-temporary impairments were recognized on various common stock
investments, primarily in the technology and communications sector, which had
experienced declines in fair value for an extended period of time.
In addition to the impairments described above, fixed maturity and equity
securities were sold during 2003, 2002 and 2001 at total gross losses of $75,
$76 and $65, respectively. No single security was sold at a loss in excess of
$8, $13 and $8 during 2003, 2002 and 2001, respectively.
Based upon the general improvement in corporate credit quality, favorable
overall market conditions and the apparent stabilization in certain ABS types,
the Company expects other-than-temporary impairments to trend lower in 2004 from
the 2003 and 2002 amounts.
INVESTMENT CREDIT RISK
Hartford Life has established investment credit policies that focus on the
credit quality of obligors and counterparties, limit credit concentrations,
encourage diversification and require frequent creditworthiness reviews.
Investment activity, including setting of policy and defining acceptable risk
levels, is subject to regular review and approval by senior management and by
the Company's Finance Committee of the Board of Directors.
The Company invests primarily in securities which 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 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 stockholder's equity.
DERIVATIVE INSTRUMENTS
The Company's derivatives counterparty exposure policy establishes market-based
credit limits, favors long-term financial stability and creditworthiness and
typically requires credit enhancement/credit risk reducing agreements. Credit
risk is measured as the amount owed to the Company based on current market
conditions and potential payment obligations between the Company and its
counterparties. Credit exposures are generally quantified weekly and netted, and
collateral is pledged to and held by, or on behalf of, the Company to the extent
the current value of derivatives exceeds exposure policy thresholds. The Company
also minimizes the credit risk in derivative instruments by entering into
transactions with high quality counterparties which are reviewed periodically by
the Company's internal compliance unit, reviewed frequently by senior management
and reported to the Company's Finance Committee of the Board of Directors. The
Company also maintains a policy of requiring that all derivative contracts be
governed by an International Swaps and Derivatives Association Master Agreement
which is structured by legal entity and by counterparty and permits right of
offset.
The Company periodically enters into swap agreements in which the Company
assumes credit exposure from a single entity, referenced index or asset pool.
Total return swaps involve the periodic exchange of payments with other parties,
at specified intervals, calculated using the agreed upon index and notional
principal amounts. Generally, no cash or principal payments are exchanged at the
inception of the contract. Typically, at the time a swap is entered into, the
cash flow streams exchanged by the counterparties are equal in value.
Credit default swaps involve a transfer of credit risk from one party to another
in exchange for periodic payments. One party to the contract will make a payment
based on an agreed upon rate and a notional amount. The second party, who
assumes credit exposure will only make a payment when there is a credit event,
and such payment will be equal to the notional value of the swap contract, and
in return, the second party will receive the debt obligation of the first party.
A credit event is generally defined as default on contractually obligated
interest or principal, payments or bankruptcy.
As of December 31, 2003 and 2002, the notional value of total return and credit
default swaps totaled $534 and $497, respectively, and the swap fair value
totaled $(16) and $(41), respectively.
29
FIXED MATURITIES
The following table identifies fixed maturity securities by type, including
guaranteed separate accounts, as of December 31, 2003 and December 31, 2002.
FIXED MATURITIES BY TYPE
2003 2002
----------------------------------------------------- --------------------------------------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
AMORTIZED UNREALIZED UNREALIZED FAIR FAIR AMORTIZED UNREALIZED UNREALIZED FAIR FAIR
COST GAINS LOSSES VALUE VALUE COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- -------- -------- --------- ---------- ---------- -------- --------
ABS $ 5,397 $ 113 $ (101) $ 5,409 11.0% $ 5,403 $ 111 $ (154) $ 5,360 13.2%
CMBS 7,757 432 (21) 8,168 16.6% 5,529 467 (8) 5,988 14.8%
Collateralized mortgage
obligations ("CMO") 1,023 15 (3) 1,035 2.1% 866 39 (2) 903 2.2%
Corporate
Basic industry 2,985 223 (9) 3,199 6.5% 2,155 144 (9) 2,290 5.7%
Capital goods 1,422 104 (6) 1,520 3.1% 1,097 75 (7) 1,165 2.9%
Consumer cyclical 2,406 160 (7) 2,559 5.2% 1,477 92 (4) 1,565 3.9%
Consumer non-cyclical 2,779 199 (10) 2,968 6.0% 2,584 186 (18) 2,752 6.8%
Energy 1,499 119 (5) 1,613 3.3% 1,477 112 (8) 1,581 3.9%
Financial services 5,742 416 (28) 6,130 12.5% 5,210 333 (91) 5,452 13.5%
Technology and
communications 3,682 375 (10) 4,047 8.2% 3,083 263 (71) 3,275 8.1%
Transportation 632 43 (3) 672 1.4% 601 49 (12) 638 1.6%
Utilities 2,077 179 (11) 2,245 4.6% 1,833 118 (43) 1,908 4.7%
Other 575 26 (1) 600 1.2% 429 20 -- 449 1.1%
Government/Government
agencies
Foreign 866 87 (1) 952 1.9% 774 77 (5) 846 2.1%
United States 1,100 30 (4) 1,126 2.3% 645 48 -- 693 1.7%
MBS - agency 2,145 32 (2) 2,175 4.4% 2,233 63 -- 2,296 5.7%
Municipal
Taxable 401 14 (7) 408 0.8% 99 16 (1) 114 0.3%
Tax-exempt 1,850 168 (1) 2,017 4.1% 1,854 146 -- 2,000 4.9%
Redeemable preferred stock 32 1 -- 33 0.1% 31 3 -- 34 0.1%
Short-term 2,319 2 -- 2,321 4.7% 1,153 -- -- 1,153 2.8%
--------- --------- -------- -------- ----- --------- -------- -------- -------- -----
TOTAL FIXED MATURITIES $ 46,689 $ 2,738 $ (230) $ 49,197 100.0% $ 38,533 $ 2,362 $ (433) $ 40,462 100.0%
========= ========= ======== ======== ===== ========= ======== ======== ======== =====
Total general account
fixed maturities $ 35,569 $ 2,051 $ (158) $ 37,462 76.1% $ 27,982 $ 1,704 $ (309) $ 29,377 72.6%
Total guaranteed separate
account fixed maturities $ 11,120 $ 687 $ (72) $ 11,735 23.9% $ 10,551 $ 658 $ (124) $ 11,085 27.4%
========= ========= ======== ======== ===== ========= ======== ======== ======== =====
The Company's fixed maturity gross unrealized gains and losses have improved by
$376 and $203, respectively from December 31, 2002 to December 31, 2003,
primarily due to improved corporate credit quality and to a lesser extent
recognition of other-than-temporary impairments and 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 10 year Treasury rate increasing over
40 basis points since December 31, 2002 and more than 100 basis points from its
low in June 2003.
Investment allocations as a percentage of total fixed maturities have remained
materially consistent since December 31, 2002, except for ABS, CMBS and
short-term securities.
Although the fair value of the Company's ABS fixed maturities improved slightly
during 2003, portfolio allocations to ABS decreased in favor of other sectors
with higher relative yields. 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, securities received as part of the CNA
transaction and collateral obtained related to the Company's securities lending
program.
Effective December 31, 2003, the Company purchased CNA's group life and
accident, long-term and short-term disability and certain specialty business.
Associated with the purchase, CNA transferred to the Company $2.3 billion of
fixed maturities on December 31. The securities were recorded at fair value on
the date of acquisition resulting in no unrealized gain or loss as of December
31, 2003. The acquired fixed maturities were concentrated in corporate and
short-term securities but did not significantly alter the Company's
30
overall investment allocations as a percentage of total fixed maturities. The
corporate securities are distributed into several sectors, most notably the
financial services, technology and communications and consumer cyclical sectors.
As of December 31, 2003 and 2002, 20% and 19%, respectively, of the fixed
maturities were invested in private placement securities, including 13% and 11%
of Rule 144A offerings to qualified institutional buyers. Private placement
securities are generally less liquid than public securities. Most of the private
placement securities are rated by nationally recognized rating agencies.
(For a further discussion of risk factors associated with sectors with
significant unrealized loss positions, see the sector risk factor commentary
under the Total Securities with Unrealized Loss Greater than Six Months by Type
schedule in this section of the MD&A.)
The following table identifies fixed maturities by credit quality, including
guaranteed separate accounts, as of December 31, 2003 and 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
2003 2002
------------------------------------ ------------------------------------
PERCENT OF PERCENT OF
AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
---------- ----------- ---------- ---------- ---------- ----------
United States Government/Government agencies $ 4,291 $ 4,361 8.9% $ 3,596 $ 3,737 9.2%
AAA 8,285 8,681 17.7% 6,519 6,960 17.2%
AA 4,243 4,486 9.1% 4,161 4,396 10.9%
A 13,015 13,901 28.3% 11,745 12,467 30.8%
BBB 12,277 13,061 26.5% 9,211 9,665 23.9%
BB & below 2,259 2,386 4.8% 2,148 2,084 5.2%
Short-term 2,319 2,321 4.7% 1,153 1,153 2.8%
---------- ---------- ----- ---------- --------- -----
TOTAL FIXED MATURITIES $ 46,689 $ 49,197 100.0% $ 38,533 $ 40,462 100.0%
========== ========== ===== ========== ========= =====
Total general account fixed maturities $ 35,569 $ 37,462 76.1% $ 27,982 $ 29,377 72.6%
Total guaranteed separate account fixed maturities $ 11,120 $ 11,735 23.9% $ 10,551 $ 11,085 27.4%
========== ========== ===== ========== ========= =====
As of December 31, 2003 and 2002, over 95% and 94%, respectively, of the fixed
maturity portfolio was invested in short-term securities or securities rated
investment grade (BBB and above).
The following table presents the Below Investment Grade ("BIG") fixed maturities
by type, including guaranteed separate accounts, as of December 31, 2003 and
2002.
BIG FIXED MATURITIES BY TYPE
2003 2002
------------------------------------ ------------------------------------
PERCENT OF PERCENT OF
AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
---------- ----------- ---------- ---------- ----------- ----------
ABS $ 259 $ 234 9.9% $ 176 $ 151 7.2%
CMBS 117 120 5.0% 117 124 6.0%
Corporate
Basic industry 225 237 9.9% 226 227 10.9%
Capital goods 102 106 4.4% 137 138 6.6%
Consumer cyclical 264 285 11.9% 221 227 10.9%
Consumer non-cyclical 311 324 13.6% 198 189 9.1%
Energy 79 87 3.6% 82 83 4.0%
Financial services 12 12 0.5% 27 21 1.0%
Technology and communications 291 346 14.5% 445 411 19.7%
Transportation 38 40 1.7% 21 21 1.0%
Utilities 369 380 16.0% 305 277 13.3%
Foreign government 173 195 8.2% 172 193 9.3%
Other 19 20 0.8% 21 22 1.0%
---------- ---------- ----- ---------- ---------- -----
TOTAL FIXED MATURITIES $ 2,259 $ 2,386 100.0% $ 2,148 $ 2,084 100.0%
---------- ---------- ----- ---------- ---------- -----
Total general account fixed maturities $ 1,513 $ 1,604 67.2% $ 1,459 $ 1,400 67.2%
Total guaranteed separate account fixed maturities $ 746 $ 782 32.8% $ 689 $ 684 32.8%
========== ========== ===== ========== ========== =====
As of December 31, 2003 and 2002, the Company held no issuer of a BIG security
with a fair value in excess of 4% of the total fair value for BIG securities.
31
The following table presents the Company's unrealized loss aging for total fixed
maturity and equity securities, including guaranteed separate accounts, as of
December 31, 2003 and 2002, by length of time the security was in an unrealized
loss position.
UNREALIZED LOSS AGING OF TOTAL SECURITIES
2003 2002
------------------------------------ ------------------------------------
AMORTIZED UNREALIZED AMORTIZED UNREALIZED
COST FAIR VALUE LOSS COST FAIR VALUE LOSS
---------- ----------- ---------- ---------- ----------- ----------
Three months or less $ 2,903 $ 2,878 $ (25) $ 1,532 $ 1,459 $ (73)
Greater than three months to six months 1,943 1,882 (61) 1,294 1,239 (55)
Greater than six months to nine months 265 250 (15) 568 508 (60)
Greater than nine months to twelve months 138 130 (8) 1,334 1,264 (70)
Greater than twelve months 1,661 1,528 (133) 2,135 1,927 (208)
--------- --------- --------- --------- ---------- ---------
TOTAL $ 6,910 $ 6,668 $ (242) $ 6,863 $ 6,397 $ (466)
========= ========= ========= ========= ========== =========
Total general accounts $ 4,887 $ 4,717 $ (170) $ 4,744 $ 4,404 $ (340)
Total guaranteed separate accounts $ 2,023 $ 1,951 $ (72) $ 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 recognition of other-than-temporary impairments and asset sales,
partially offset by an increase in interest rates. (For a further discussion,
see the economic commentary under the Fixed Maturities by Type table in this
section of the MD&A.)
As of December 31, 2003, fixed maturities represented $230, or 95%, of the
Company's total unrealized loss. There were no fixed maturities as of December
31, 2003 with a fair value less than 80% of the security's amortized cost basis
for six continuous months other than certain asset-backed and commercial
mortgage-backed securities. Other-than-temporary impairments for certain
asset-backed and commercial mortgage-backed securities are recognized if the
fair value of the security, as determined by external pricing sources, is less
than its carrying amount and there has been a decrease in the present value of
the expected cash flows since the last reporting period. There were no
asset-backed or commercial mortgage-backed securities included in the table
above, as of December 31, 2003 and 2002, for which management's best estimate of
future cash flows adversely changed during the reporting period. As of December
31, 2003, no asset-backed or commercial mortgage backed securities had an
unrealized loss in excess of $15. (For a further discussion of the
other-than-temporary impairments criteria, see "Investments" included in the
Critical Accounting Estimates section of the MD&A and in Note 2 of Notes to
Consolidated Financial Statements.)
The Company held no securities of a single issuer that were at an unrealized
loss position in excess of 7% of the total unrealized loss amount as of December
31, 2003 and 2002, respectively.
The total securities in an unrealized loss position for longer than six months
by type as of December 31, 2003 and 2002 are presented in the following table.
32
TOTAL SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS BY TYPE
2003 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 $ 163 $ 108 $ (55) 35.3% $ 90 $ 77 $ (13) 3.8%
CDOs 140 120 (20) 12.8% 221 185 (36) 10.7%
Credit card receivables 123 111 (12) 7.7% 373 328 (45) 13.3%
Other ABS and CMBS 616 602 (14) 9.0% 741 726 (15) 4.4%
Corporate
Financial services 678 646 (32) 20.5% 768 698 (70) 20.7%
Technology and communications 39 37 (2) 1.3% 456 406 (50) 14.8%
Transportation 25 22 (3) 1.9% 60 50 (10) 3.0%
Utilities 85 79 (6) 3.8% 290 264 (26) 7.7%
Other 181 169 (12) 7.7% 624 600 (24) 7.1%
Diversified equity mutual funds 4 4 -- -- 96 77 (19) 5.6%
Other securities 10 10 -- -- 318 288 (30) 8.9%
---------- ------- ---------- ----- ---------- -------- -------- -----
TOTAL $ 2,064 $ 1,908 $ (156) 100.0% $ 4,037 $ 3,699 $ (338) 100.0%
---------- ------- ---------- ----- ---------- -------- -------- -----
Total general accounts $ 1,425 $ 1,315 $ (110) 70.5% $ 2,760 $ 2,524 $ (236) 69.8%
Total guaranteed separate accounts $ 639 $ 593 $ (46) 29.5% $ 1,277 $ 1,175 $ (102) 30.2%
========== ======= ========== ===== ========== ======== ======== =====
The ABS securities in an unrealized loss position for six months or more as of
December 31, 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 lease
receivables continued to decline in value during 2003 due to a reduction in
lease payments and aircraft values driven by a prolonged decline in airline
travel, which has resulted in the financial difficulties of many airline
carriers. As a result of the uncertainty surrounding the timing of any potential
recovery in this industry, significant risk premiums have been required by the
market for these securities, resulting in reduced liquidity and lower broker
quoted prices. Air travel began to improve in the second half of 2003, which
resulted in lease rates stabilizing on certain aircrafts. While the Company saw
some modest price increases and greater liquidity in this sector during the
fourth quarter of 2003, additional price recovery will depend on continued
improvement in economic fundamentals, political stability and airline operating
performance.
CDOS -- Adverse CDO experience can be attributed to higher than expected default
rates and downgrades of the collateral supporting these securities, particularly
in the technology and utilities sectors, causing a deterioration in the
subordinated tranches of these structures. As a result, significant risk
premiums have been required by the market for these securities, resulting in
reduced liquidity and lower broker quoted prices. Improved economic and
operating fundamentals of the underlying security issuers, along with better
market liquidity, 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 due to the better than expected performance of the
underlying collateral of credit card receivables, concerns remain regarding the
long-term viability of certain issuers within this sub-sector.
As of December 31, 2003, security types other than ABS and CMBS that were in a
significant unrealized loss position for greater than six months were corporate
fixed maturities primarily within the financial services sector.
FINANCIAL SERVICES -- As of December 31, 2003, the securities in the financial
services sector unrealized loss position for greater than six months were
comprised of approximately 50 different securities. The securities in this
category are primarily investment grade and substantially all of these
securities are priced at or greater than 90% of amortized cost as of December
31, 2003. These positions are primarily variable rate securities with extended
maturity dates, which have been adversely impacted by the reduction in forward
interest rates resulting in lower expected cash flows. Unrealized loss amounts
for these securities have 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.
As part of the Company's ongoing security monitoring process by a committee of
investment and accounting professionals, the Company has reviewed its investment
portfolio and concluded that there were no additional other-than-temporary
impairments as of
33
December 31, 2003 and 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, management's intent and ability to
hold these securities, as well as the evaluation of the fundamentals of the
issuers' financial condition and other objective evidence, the Company believes
that the prices of the securities in the sectors identified above were
temporarily depressed.
The evaluation for other-than-temporary impairments is a quantitative and
qualitative process, which is subject to risks and uncertainties in the
determination of whether declines in the fair value of investments are
other-than-temporary. The risks and uncertainties include changes in general
economic conditions, the issuer's financial condition or near term recovery
prospects and the effects of changes in interest rates. In addition, for
securitized financial assets with contractual cash flows (e.g. ABS and CMBS),
projections of expected future cash flows may change based upon new information
regarding the performance of the underlying collateral. As of December 31, 2003,
management's expectation of the discounted future cash flows on these securities
was in excess of the associated securities' amortized costs. (For a further
discussion, see "Investments" included in the Critical Accounting Estimates
section of MD&A and in Note 2 of Notes to Consolidated Financial Statements.)
The following table presents the Company's unrealized loss aging for BIG and
equity securities, including guaranteed separate accounts, as of December 31,
2003 and 2002.
UNREALIZED LOSS AGING OF BIG AND EQUITY SECURITIES
2003 2002
------------------------------------ ------------------------------------
AMORTIZED UNREALIZED AMORTIZED UNREALIZED
COST FAIR VALUE LOSS COST FAIR VALUE LOSS
---------- ---------- ---------- ---------- ---------- ----------
Three months or less $ 57 $ 55 $ (2) $ 162 $ 130 $ (32)
Greater than three months to six months 91 87 (4) 208 185 (23)
Greater than six months to nine months 60 54 (6) 175 145 (30)
Greater than nine months to twelve months 18 17 (1) 330 293 (37)
Greater than twelve months 361 302 (59) 501 431 (70)
--------- -------- --------- --------- --------- ---------
TOTAL $ 587 $ 515 $ (72) $ 1,376 $ 1,184 $ (192)
========= ======== ========= ========= ========= =========
Total general accounts $ 467 $ 411 $ (56) $ 1,044 $ 887 $ (157)
Total guaranteed separate accounts $ 120 $ 104 $ (16) $ 332 $ 297 $ (35)
========= ======== ========= ========= ========= =========
Similar to the decrease in the Unrealized Loss Aging of Total Securities table
from December 31, 2002 to December 31, 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 recognition of
other-than-temporary impairments and assets sales, partially offset by an
increase in interest rates. (For a further discussion, see the economic
commentary under the Fixed Maturities by Type table in this section of the
MD&A.)
The BIG and equity securities in an unrealized loss position for longer than six
months by type as of December 31, 2003 and 2002 are presented in the following
table.
34
BIG AND EQUITY SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS BY TYPE
2003 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 $ 52 $ 34 $ (18) 27.3% $ -- $ -- $ -- --
CDOs 42 32 (10) 15.1% 2 1 (1) 0.7%
Credit card receivables 45 34 (11) 16.7% 36 23 (13) 9.5%
Other ABS and CMBS 49 42 (7) 10.6% 42 36 (6) 4.4%
Corporate
Financial services 113 101 (12) 18.2% 88 83 (5) 3.6%
Technology and communications 5 5 -- -- 218 181 (37) 27.0%
Transportation 8 8 -- -- 13 10 (3) 2.2%
Utilities 71 65 (6) 9.1% 158 138 (20) 14.6%
Other 49 47 (2) 3.0% 247 229 (18) 13.1%
Diversified equity mutual funds 4 4 -- -- 96 77 (19) 13.9%
Other securities 1 1 -- -- 106 91 (15) 11.0%
---------- ------- ---------- ----- ---------- -------- -------- -----
TOTAL $ 439 $ 373 $ (66) 100.0% $ 1,006 $ 869 $ (137) 100.0%
---------- ------- ---------- ----- ---------- -------- -------- -----
Total general accounts $ 340 $ 289 $ (51) 77.3% $ 745 $ 636 $ (109) 79.6%
Total guaranteed separate accounts $ 99 $ 84 $ (15) 22.7% $ 261 $ 233 $ (28) 20.4%
========== ======= ========== ===== ========== ======== ======== =====
For a further discussion of the Company's current view of risk factors relative
to certain security types listed above, see the Total Securities with Unrealized
Loss Greater Than Six Months by Type table in this section of the MD&A.
35
CAPITAL MARKETS RISK MANAGEMENT
Hartford Life has a disciplined approach to managing risks associated with its
capital markets and asset/liability management activities. Investment portfolio
management is organized to focus investment management expertise on specific
classes of investments, while asset/liability management is the responsibility
of dedicated risk management units supporting the Company, including 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. Derivatives play an important role
in facilitating the management of interest rate risk, mitigating equity market
risk exposure associated with certain variable annuity products and changes in
currency exchange rates.
MARKET RISK
The Company is exposed to market risk, primarily relating to the market price
and/or cash flow variability associated with changes in interest rates, market
indices or foreign currency exchange rates.
Interest Rate Risk
The Company's exposure to interest rate risk relates to the market price and/or
cash flow variability associated with the changes in market interest rates. The
Company manages its exposure to interest rate risk through asset allocation
limits, asset/liability duration matching and through the use of derivatives.
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.
Measures the Company uses to quantify its exposure to interest rate risk
inherent in its invested assets and interest rate sensitive liabilities are
duration and key rate duration. Duration is the weighted average
term-to-maturity of a security's cash flows, and is used to approximate the
percentage change in the price of a security for a 100-basis-point change in
market interest rates. For example, a duration of 5 means the price of the
security will change by approximately 5% for a 1% change in interest rates. The
key rate duration analysis considers the expected future cash flows of assets
and liabilities assuming non-parallel interest rate movements.
To calculate duration, projections of asset and liability cash flows are
discounted to a present value using interest rate assumptions. These cash flows
are then revalued at alternative interest rate levels to determine the
percentage change in fair value due to an incremental change in rates. Cash
flows from corporate obligations are assumed to be consistent with the
contractual payment streams on a yield to worst basis. The primary assumptions
used in calculating cash flow projections include expected asset payment streams
taking into account prepayment speeds, issuer call options and contract holder
behavior. Asset-backed securities, collateralized mortgage obligations and
mortgage-backed securities are modeled based on estimates of the rate of future
prepayments of principal over the remaining life of the securities. These
estimates are developed using prepayment speeds provided in broker consensus
data. Such estimates are derived from prepayment speeds previously experienced
at the interest rate levels projected for the underlying collateral. Actual
prepayment experience may vary from these estimates.
Equity Risk
The Company's primary exposure to equity risk relates to the potential for lower
earnings associated with certain of the Company's businesses such as variable
annuities where fee income is earned based upon the fair value of the assets
under management. In addition, the Company offers certain guaranteed benefits,
primarily associated with variable annuity products, which increases the
Company's potential benefit exposure as the equity markets decline. (For a
further discussion, see the "Equity Risk" in the Key Market Risk Exposures
section.)
The Company does not have significant equity risk exposure from invested assets.
In March 2003, the Company decided to liquidate its hedge fund limited
partnership investments and certain equity securities and reinvest the proceeds
into fixed maturity investments, thereby reducing its exposure to equity price
risk. The Company has not materially changed other aspects of its overall asset
allocation position or market risk since December 31, 2002.
Foreign Currency Exchange Risk
The Company's currency exchange risk is related to non - US dollar denominated
investments, which primarily consist of fixed maturity investments and the
investment in the Japanese Life operation. A significant portion of the
Company's foreign currency exposure is mitigated through the use of derivatives.
Derivative Instruments
Hartford Life utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards, futures and options, in compliance with Company policy
and regulatory requirements to mitigate interest rate, equity market or currency
exchange rate risk or volatility.
36
Interest rate swaps involve the periodic exchange of payments with other
parties, at specified intervals, calculated using the agreed upon rates and
notional principal amounts. Generally, no cash or principal payments are
exchanged at the inception of the contract. Typically, at the time a swap is
entered into, the cash flow streams exchanged by the counterparties are equal in
value.
Interest rate cap and floor contracts entitle the purchaser to receive from the
issuer at specified dates, the amount, if any, by which a specified market rate
exceeds the cap strike rate or falls below the floor strike rate, applied to a
notional principal amount. A premium payment is made by the purchaser of the
contract at its inception, and no principal payments are exchanged.
Forward contracts are customized commitments to either purchase or sell
designated financial instruments, at a future date, for a specified price and
may be settled in cash or through delivery of the underlying instrument.
Financial futures are standardized commitments to either purchase or sell
designated financial instruments, at a future date, for a specified price and
may be settled in cash or through delivery of the underlying instrument. Futures
contracts trade on organized exchanges. Margin requirements for futures are met
by pledging securities, and changes in the futures' contract values are settled
daily in cash.
Option contracts grant the purchaser, for a premium payment, the right to either
purchase from or sell to the issuer a financial instrument at a specified price,
within a specified period or on a stated date.
Foreign currency swaps exchange an initial principal amount in two currencies,
agreeing to re-exchange the currencies at a future date, at an agreed upon
exchange rate. There is also periodic exchange of payments at specified
intervals calculated using the agreed upon rates and exchanged principal
amounts.
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to the Finance Committee of the
Board of Directors. The notional amounts of derivative contracts represent the
basis upon which pay or receive amounts are calculated and are not reflective of
credit risk. Notional amounts pertaining to derivative instruments used in the
management of market risk for both the general and guaranteed separate accounts
at December 31, 2003 and 2002 were $35.6 billion and $16.8 billion,
respectively. The increase in the derivative notional amount during 2003 was
primarily due to the embedded derivatives and reinsurance contracts associated
with the GMWB product feature.
KEY MARKET RISK EXPOSURES
The following discussions focus on the key market risk exposures within the
Company's portfolios.
The Company is responsible for maximizing after-tax returns within acceptable
risk parameters, including the management of the interest rate sensitivity of
invested assets and the generation of sufficient liquidity to support
policyholder and corporate obligations. The Company's fixed maturity portfolios
and certain investment contract and insurance product liabilities have material
market exposure to interest rate risk. In addition, 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. The
Company's foreign currency exposure is primarily related to non-US dollar
denominated fixed income securities and the investment in the Japanese Life
operation.
Interest Rate Risk
The Company's exposure to interest rate risk relates to the market price and/or
cash flow variability associated with changes in market interest rates. Changes
in interest rates can potentially impact the Company's profitability. In certain
scenarios where interest rates are volatile, the Company could be exposed to
disintermediation risk and a reduction in net interest rate spread or profit
margins. The investments and liabilities primarily associated with interest rate
risk are included in the following discussion. Certain product liabilities,
including those containing guaranteed minimum withdrawal or death benefits,
expose the Company to interest rate risk but also have significant equity risk.
These liabilities are discussed as part of the Equity Risk in the section below.
Fixed Maturity Investments
The Company's general account and guaranteed separate account investment
portfolios primarily consist of investment grade fixed maturity securities,
including corporate bonds, asset-backed securities, commercial mortgage-backed
securities, tax-exempt municipal securities and collateralized mortgage
obligations. The fair value of these investments was $49.2 billion and $40.5
billion at December 31, 2003 and 2002, respectively. The fair value of these and
other invested assets fluctuates depending on the interest rate environment and
other general economic conditions. During periods of declining interest rates,
paydowns on mortgage-backed securities and collateralized mortgage obligations
increase as the underlying mortgages are prepaid. During such periods, the
Company generally will not be able to reinvest the proceeds of any such
prepayments at comparable yields. Conversely, during periods of rising interest
rates, the rate of prepayments generally declines, exposing the Company to the
possibility of asset/liability
37
cash flow and yield mismatch. The weighted average duration of the fixed
maturity portfolio was approximately 4.8 and 4.5 as of December 31, 2003 and
2002, respectively.
Liabilities
The Company's investment contracts and certain insurance product liabilities,
other than non-guaranteed separate accounts, include asset accumulation vehicles
such as fixed, guaranteed investment contracts, other investment and universal
life-type contracts and other insurance products such as long-term disability.
Asset accumulation vehicles primarily require a fixed rate payment, often for a
specified period of time. Product examples include fixed rate annuities with a
market value adjustment feature and fixed rate guaranteed investment contracts.
The duration of these contracts generally range from less than one year to ten
years. In addition, certain products such as universal life contracts and the
general account portion of the Company's variable annuity products, credit
interest to policyholders subject to market conditions and minimum interest rate
guarantees. The duration of these products is short-to-intermediate term.
While interest rate risk associated with many of these products has been reduced
through the use of market value adjustment features and surrender charges, the
primary risk associated with these products is that the spread between
investment return and credited rate may not be sufficient to earn targeted
returns.
The Company also manages the risk of other insurance liabilities similarly to
investment type products due to the relative predictability of the aggregate
cash flow payment streams. Products in this category may contain significant
actuarial (including mortality and morbidity) pricing and cash flow risks.
Product examples include structured settlement contracts, on-benefit annuities
(i.e., the annuitant is currently receiving benefits thereon) and short and
long-term disability contracts. The cash out flows associated with these policy
liabilities are not interest rate sensitive but do vary based on the timing and
amount of benefit payments. The primary risks associated with these products are
that the benefits will exceed expected actuarial pricing and/or that the actual
timing of the cash flows differ from those anticipated, resulting in an
investment return lower than that assumed in pricing. Contract duration can
range from less than one year to typically up to ten years.
Product Liability Characteristics
Hartford Life's product liabilities, other than non-guaranteed separate
accounts, include accumulation vehicles such as fixed and variable annuities,
other investment and universal life-type contracts, and other insurance products
such as long-term disability and term life insurance. The table below shows
carrying values of insurance policy liabilities as of December 31, 2003 and
2002.
(Dollars in billions)
2003 2002
DESCRIPTION (1) TOTAL TOTAL
--------------- ----- -----
Fixed rate asset accumulation vehicles $ 14.6 $ 13.6
Weighted average credited rate 6.0% 5.8%
Indexed asset accumulation vehicles $ 1.6 $ 0.7
Weighted average credited rate 1.8% 3.0%
Interest credited asset accumulation vehicles $ 17.2 $ 16.0
Weighted average credited rate 3.8% 4.2%
Long-term pay out liabilities $ 11.8 $ 9.1
Short-term pay out liabilities $ 1.2 $ 1.0
The Company employs several risk management tools to quantify and manage risk
arising from investment contracts and other insurance liabilities, such as
duration and key rate duration and the use of derivative instruments. For
certain portfolios, management monitors the changes in present value between
assets and liabilities resulting from various interest rate scenarios using
integrated asset/liability measurement systems and a proprietary system that
simulates the impacts of parallel and non-parallel yield curve shifts. Based on
this current and prospective information, management implements risk reducing
techniques to improve the match between assets and liabilities, including the
use of derivative instruments. Derivatives used to mitigate interest rate risk
are discussed in more detail below.
Derivatives
The Company utilizes a variety of derivative instruments to mitigate interest
rate risk. Interest rate swaps are primarily used to convert interest receipts
to a fixed or variable rate. In addition, interest rate swaps are used to
convert the contract rate on certain liability products offered by the Company
into a rate that trades in a more liquid and efficient market. The use of such
swaps enables the Company to customize contract terms and conditions to customer
objectives and satisfies the operation's asset/liability duration
38
matching policy. Occasionally, swaps are also used to hedge the variability in
the cash flow of a forecasted purchase or sale due to changes in interest rates.
Interest rate caps and floors, swaptions and option contracts are primarily used
to hedge against the risk of liability contract holder disintermediation in a
rising interest rate environment, and to offset the changes in fair value of
corresponding derivatives embedded in certain of the Company's fixed maturity
investments.
At December 31, 2003 and 2002, notional amounts pertaining to derivatives
utilized to manage interest rate risk totaled $9.5 billion and $10.0 billion,
respectively ($7.8 billion and $8.3 billion, respectively related to insurance
investments and $1.7 billion and $1.7 billion, respectively related to life
insurance liabilities). The fair value of these derivatives as reflected on the
Consolidated Balance Sheet was $142 and $357 as of December 31, 2003 and 2002,
respectively.
Calculated Interest Rate Sensitivity
The after-tax change in the net economic value of investment contracts (e.g.
guaranteed investment contracts) and other insurance product liabilities (e.g.
short and long-term disability contracts), that are not substantially affected
by changes in interest rates ("fixed liabilities") and for which the investment
experience is substantially absorbed by the Company, are included in the
following table along with the corresponding general and guaranteed separate
account assets. Also included in this analysis are the interest rate sensitive
derivatives used by the Company to hedge its exposure to interest rate risk.
Certain financial instruments, such as limited partnerships, have been omitted
from the analysis because the investments are accounted for under the equity
method and lack sensitivity to interest rate changes. Interest rate sensitive
investment contracts and universal life-type contracts are excluded from the
hypothetical calculation below because the contracts generally allow the Company
significant flexibility to adjust credited rates to reflect actual investment
experience and thereby pass through a substantial portion of actual investment
experience to the policyholder. Non-guaranteed separate account assets and
liabilities are excluded from the hypothetical calculation below because gains
and losses in separate accounts generally accrue to policyholders. The estimated
change in net economic value assumes a 100 basis point upward and downward
parallel shift in the yield curve.
CHANGE IN NET ECONOMIC VALUE
AS OF DECEMBER 31,
------------------------------------------------------
2003 2002
------------------------- --------------------------
Basis point shift - 100 + 100 - 100 + 100
---------- ------------ ------------ -----------
Amount $ (27) $ (19) $ 17 $ (51)
========== ============ ============ ===========
These fixed liabilities included above represented approximately 60% of Life's
general and guaranteed separate account liabilities as of December 31, 2003 and
2002. The assets supporting the fixed liabilities are monitored and managed
within rigorous duration guidelines using scenario simulation techniques, and
are evaluated on an annual basis, in compliance with regulatory requirements.
The after-tax change in fair value of the general account invested asset
portfolios that support interest rate sensitive investment contracts and
universal life-type contracts and other insurance contracts that possess
significant mortality risk are shown in the following table. The cash flows
associated with these liabilities are less predictable than fixed liabilities.
The Company identifies the most appropriate investment strategy based upon the
expected policyholder behavior and liability crediting needs. The hypothetical
calculation of the estimated change in fair value below, assumes a 100 basis
point upward and downward parallel shift in the yield curve.
CHANGE IN FAIR VALUE
AS OF DECEMBER 31,
------------------------------------------------------
2003 2002
------------------------- --------------------------
Basis point shift - 100 + 100 - 100 + 100
---------- ------------ ------------ -----------
Amount $ 481 $ (473) $ 415 $ (401)
========== ============ ============ ===========
The above quantitative presentation was adopted in the current year and is in
lieu of the tabular presentation historically disclosed. The Company believes
the current presentation is preferable in understanding the Company's invested
asset interest rate risk exposure.
The selection of the 100 basis point parallel shift in the yield curve was made
only as a hypothetical illustration of the potential impact of such an event and
should not be construed as a prediction of future market events. Actual results
could differ materially from those illustrated above due to the nature of the
estimates and assumptions used in the above analysis. The Company's sensitivity
analysis calculation assumes that the composition of invested assets and
liabilities remain materially consistent throughout the year and that the
current relationship between short-term and long-term interest rates will remain
constant over time. As a result, these calculations may not fully capture the
impact of portfolio re-allocations, significant product sales or non-parallel
changes in interest rates.
In addition, the Company carries other obligations (non-insurance liabilities)
that have, to a lesser extent, exposure to interest rate risk. As of December
31, 2003 the carrying amount and fair value of these debt obligations, including
junior subordinated debentures, was
39
$1.8 billion and $2.0 billion, respectively, as compared to a carrying amount
and fair value of $1.6 billion and $1.7 billion, respectively, as of December
31, 2002.
Equity Risk
The Company's operations are significantly influenced by changes in the equity
markets. The Company's profitability depends largely on the amount of assets
under management, which is primarily driven by the level of sales, equity market
appreciation and depreciation and the persistency of the in-force block of
business. Prolonged and precipitous declines in the equity markets can have a
significant impact on the Company's operations, as sales of variable products
may decline and surrender activity may increase, as customer sentiment towards
the equity market turns negative. Lower assets under management will have a
negative impact on the Company's financial results, primarily due to lower fee
income related to the Investment Products and, to a lesser extent, Individual
Life segments, where a heavy concentration of equity linked products are
administered and sold. Furthermore, the Company may experience a reduction in
profit margins if a significant portion of the assets held in the variable
annuity separate accounts move to the general account and the Company is unable
to earn an acceptable investment spread, particularly in light of the low
interest rate environment and the presence of contractually guaranteed minimum
interest credited rates, which for the most part are at a 3% rate.
In addition, prolonged declines in the equity market may also decrease the
Company's expectations of future gross profits, which are utilized to determine
the amount of DAC to be amortized in 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 Company pays the greater of (1) the account value at death; (2)
the sum of all premium payments less prior withdrawals; or (3) the maximum
anniversary value of the contract, plus any premium payments since the contract
anniversary, minus any withdrawals following the contract anniversary. The
Company currently reinsures a significant portion of these 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 December 31, 2003 is $11.4 billion. Due
to the fact that 81% of this amount is reinsured, the net exposure is $2.2
billion. This amount is often referred to as the net amount at risk. However,
the Company will incur these guaranteed death benefit payments in the future
only if the policyholder has an in-the-money guaranteed death benefit at their
time of death. 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 $88 to $282 for these contracts. The median of the stochastically generated
investment performance scenarios was $132. In addition, the Company's gross and
net exposure to GMDB and other benefits in its Japanese operation was $0.1
billion at December 31, 2003.
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. 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 above.
On January 1, 2004, the Company adopted 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. As of January 1, 2004, the Company has recorded a liability for
GMDB's sold with variable annuity products of $199 and a related reinsurance
recoverable asset of $108. Net of estimated DAC and income tax effects, the
cumulative effect of establishing the required GMDB reserves resulted in a
reduction of net income of $54 during the first quarter of 2004.
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
40
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 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 the GMWB contracts. For all contracts in effect through July 6, 2003, the
Company entered into a reinsurance arrangement to offset its exposure to the
GMWB for the remaining lives of those contracts. As of July 6, 2003, the Company
exhausted all but a small portion of the reinsurance capacity for new business
under the current arrangement and will be ceding only a very small number of new
contracts subsequent to July 6, 2003. Substantially all new contracts with the
GMWB are not covered by reinsurance. These unreinsured contracts are expected to
generate volatility in net income as the underlying embedded derivative
liabilities are recorded at fair value each reporting period, resulting in the
recognition of net realized capital gains or losses in response to changes in
certain critical factors including capital market conditions and policyholder
behavior. In order to minimize the volatility associated with the unreinsured
GMWB liabilities, the Company established an alternative risk management
strategy. During the third quarter of 2003, the Company began hedging its
unreinsured GMWB exposure using interest rate futures, Standard and Poor's (S&P)
500 and NASDAQ index put options and futures contracts.
The net impact of the change in value of the embedded derivative, net of the
results of the hedging program, was a $6 pre-tax gain for the year ended
December 31, 2003. The net gain is due principally to an approximate $4 gain
associated with international funds for which hedge positions had not been
initiated prior to December 31, 2003, but were initiated in the first quarter of
2004 and $2 due to modeling refinements to improve valuation estimates.
Excluding these items our hedging strategy ineffectiveness on S&P 500 and NASDAQ
economic hedge positions was not significant.
Currency Exchange Risk
Currency exchange risk exists with respect to investments in non-US dollar
denominated fixed maturities, primarily denominated in Euro, Sterling, Yen and
Canadian dollars, as well as the Company's investment in foreign operations,
primarily Japan.
The functional currency of the Japanese operation is the Japanese yen.
Accordingly, the premiums, claims, commissions and investment income are paid or
received in yen. In addition, most of the Japanese operation's investments are
yen denominated.
The risk associated with these investments relates to potential decreases in
value and income resulting from unfavorable changes in foreign exchange rates.
At December 31, 2003 and 2002, the Company had approximately $2.0 billion and
$1.2 billion of non-US dollar denominated fixed maturities, respectively. The
net investment in the Japanese operation was approximately $250 and $113, as of
December 31, 2003 and 2002, respectively.
In order to manage its currency exposures, the Company enters into foreign
currency swaps to hedge the variability in cash flow associated with certain
foreign denominated fixed maturities. These foreign currency swap agreements are
structured to match the foreign currency cash flows of the hedged foreign
denominated securities. As of December 31, 2002, substantially all the fixed
maturity investments were hedged into US dollars mitigating the foreign currency
exchange risk. In addition during 2003, the Company entered into yen denominated
forwards to hedge a substantial portion of the net investment in the Japanese
operation. At December 31, 2003 and 2002, the derivatives used to hedge currency
exchange risk had a total notional value of $1.6 billion and $1.3 billion,
respectively, and total fair value of $(303) and $(70), respectively.
Based on the fair values of the Company's non-US dollar denominated investments
and derivative instruments (including its Japanese operation) as of December 31,
2003 and 2002, management estimates that a 10% unfavorable change in exchange
rates would decrease the fair values by a total of $36 and $13, respectively.
The estimated impact was based upon a 10% change in December 31 spot rates. The
selection of the 10% unfavorable change was made only for hypothetical
illustration of the potential impact of such an event and should not be
construed as a prediction of future market events. Actual results could differ
materially from those illustrated above due to the nature of the estimates and
assumptions used in the above analysis.
41
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 $2.2
billion and $1.3 billion as of December 31, 2003 and 2002, respectively.
The capital structure of Hartford Life as of December 31, 2003 and 2002
consisted of debt and equity, summarized as follows:
2003 2002
--------- --------
Short-term debt (includes current maturities of long-term debt) 505 $ -
Long-term debt (1) 1,300 1,575
--------- --------
TOTAL DEBT $ 1,805 $ 1,575
--------- --------
Equity excluding net unrealized capital gains on securities, net of tax $ 6,156 $ 4,941
Net unrealized capital gains on securities, net of tax 903 747
--------- --------
TOTAL STOCKHOLDER'S EQUITY $ 7,059 $ 5,688
--------- --------
TOTAL CAPITALIZATION $ 7,961 $ 6,516
--------- --------
Debt to equity 29% 32%
Debt to capitalization 23% 24%
--------- --------
(1) Includes junior subordinated debentures.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table identifies the Company's contractual obligations by payment
due period.
PAYMENTS
DUE BY
PERIOD
------------------------------------------------------------
LESS THAN 1 MORE THAN 5
TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
-------- ----------- ---------- --------- -----------
Short-term debt $ 771 $ 771 $ -- $ -- $ --
Long-term debt 3,067 78 156 335 2,498
-------- -------- ------- -------- --------
Total debt [1] [2] $ 3,838 $ 849 $ 156 $ 335 2,498
-------- -------- ------- -------- --------
Operating leases 297 55 105 73 64
Purchase obligations [3] 492 452 30 10 --
Other long-term liabilities [4] 91 91 -- -- --
======== ======== ======= ======== ========
Total $ 4,718 $ 1,447 $ 291 $ 418 $ 2,562
======== ======== ======= ======== ========
(1) Includes contractual interest and principal payments. Payments exclude
amounts associated with fair-value hedges of certain of the Company's
long-term debt. All long-term debt obligations have fixed rates of
interest.
(2) On February, 13, 2004, the Company provided notice that all outstanding 7.2%
junior subordinated debentures underlying trust preferred securities issued
by Hartford Life Capital I have been called for redemption on March 15,
2004. The principal and interest payable on redemption of $253 has been
reflected in payments due in less than one year. Long-term debt obligations
also includes principal and interest payments of $200 and $691,
respectively, related to junior subordinated debentures which are callable
beginning in 2006.
(3) Includes $277 in commitments to purchase investments, including $161 of
limited partnerships and $116 of mortgage loans in less than one year, since
the timing of funding the limited partnership commitments cannot be
estimated. Payables for securities purchased of $169, which are reflected on
the consolidated balance sheet, are also included.
(4) As of December 31, 2003, the Company has accepted cash collateral of $91
million in connection with the Company's derivative instruments. Since the
timing of the return of the collateral is uncertain, the return of the
collateral has been included in the payments due in less than one year.
The Company's unfunded commitments at December 31, 2003 to fund limited
partnership investments totaled $277. These capital commitments can be called by
the partnerships during the commitment period (on average, 3-6 years) to fund
working capital needs or the purchase of new investments. If the commitment
period expires and the commitment has not been fully funded, The Hartford is not
required to fund the remaining unfunded commitment but may elect to do so.
42
SUBSEQUENT EVENTS
On January 30, 2004, the Company received a capital contribution in the form of
cash of $305 from The Hartford which was then used by the Company to fund the
payment and settlement of the intercompany note agreements totaling $305 with
The Hartford. Accordingly the debt has been classified as short-term debt in the
consolidated financial statements.
On February 13, 2004, the Company announced that notice has been given that all
outstanding 7.20% Trust Preferred Securities, Series A of Hartford Life Capital
I, have been called for redemption on March 15, 2004. The redemption price will
be $25 per share, plus accumulated and unpaid distributions thereon to March 15,
2004, in the amount of $0.30 per share. The redemption price will be payable on
March 15, 2004, in the manner provided in the Amended and Restated Declaration
of Trust for preferred securities. The Company will record a $7, before-tax,
expense for the unamortized costs associated with these preferred securities in
the first quarter of 2004.
ACQUISITIONS
On December 31, 2003, the Company acquired CNA Financial Corporation's group
life and accident, and short-term and long-term disability businesses for $485
in cash. Purchase consideration for this transaction was obtained from a capital
contribution by The Hartford to the Company. The purchase price paid on December
31, 2003, was based on a September 30, 2003 valuation of the business acquired.
During the first quarter of 2004, the purchase price will be adjusted to reflect
a December 31, 2003 valuation of the business acquired. The Company currently
estimates that adjustment to the purchase price to be an increase of $51 which
primarily reflects the increase in the surplus of the business acquired in the
fourth quarter of 2003.
On April 2, 2001, The Hartford acquired Fortis Financial Group for $1.12 billion
in cash. The Company effected the acquisition through several reinsurance
agreements with subsidiaries of Fortis, Inc. and the purchase of 100% of the
stock of Fortis Advisers, Inc. and Fortis Investors, Inc., wholly-owned
subsidiaries of Fortis, Inc. The acquisition was recorded as a purchase
transaction.
For a further discussion of these acquisitions, see Note 17 of Notes to
Consolidated Financial Statements.
CAPITALIZATION
The Company's total capitalization, excluding unrealized gains (losses) on
securities and other, net of tax, increased $1.4 billion, or 22%, from December
31, 2002 to December 31, 2003. The increase was primarily the result of net
income of $769, a capital contribution from The Hartford in the amount of $519
to finance the acquisition of the group life and accident, and short term and
long term disability business of CNA Financial Corporation, additional debt of
$230, partially offset by dividends declared of $69. The debt to equity and debt
to capitalization ratios (both exclude net unrealized capital gains on
securities, net of tax) decreased to 29% and 23% from December 31, 2002 to
December 31, 2003, respectively, from 32% and 24% as of December 31, 2002,
respectively. Net unrealized capital gains (losses) on securities, net of tax,
increased $156, or 21%, as December 31, 2003, as compared to December 31, 2002,
primarily due to the declining interest rate environment.
SHELF REGISTRATION
On May 15, 2001, the Company filed with the SEC a shelf registration statement
for the potential offering and sale of up to $1.0 billion in debt and preferred
securities. The registration statement was declared effective on May 29, 2001.
As of December 31, 2003, the Company had $1.0 billion remaining on its shelf.
For a further discussion of the shelf registration statements, see Note 8 of
Notes to Consolidated Financial Statements.
DEBT
For a discussion of Debt, see Note 8 of Notes to Consolidated Financial
Statements.
DIVIDENDS
The Company declared $69 in dividends to Hartford Holdings, Inc. for 2003.
Future dividend decisions will be based on, and affected by, a number of
factors, including the operating results and financial requirements of the
Company on a stand-alone basis and the impact of regulatory restrictions
discussed in Liquidity Requirements below.
LIQUIDITY REQUIREMENTS
The liquidity requirements of Hartford Life have been and will continue to be
met by funds from operations as well as the issuance of commercial paper, debt
securities and borrowings from its credit facilities. The principal sources of
operating funds for its insurance entities are premiums and investment income as
well as maturities and sales of invested assets. Hartford Life is a holding
company which relies upon operating cash flow in the form of dividends from its
subsidiaries, which enables it to service its debt, pay dividends
43
to its parent, and pay certain business expenses. As a holding company, Hartford
Life, Inc. has no significant business operations of its own and, therefore,
relies mainly on the dividends from its insurance company subsidiaries, which
are primarily domiciled in Connecticut, as the principal source of cash to meet
its obligations (predominantly debt obligations) and pay stockholder dividends.
Dividends to Hartford Life, Inc. from its direct subsidiary, Hartford Life and
Accident Insurance Company ("HLA"), are restricted. The payment of dividends by
Connecticut-domiciled insurers is limited under the insurance holding company
laws of Connecticut. Under these laws, the insurance subsidiaries may only make
their dividend payments out of unassigned surplus. These laws require notice to
and approval by the state insurance commissioner for the declaration or payment
of any dividend, which, together with other dividends or distributions made
within the preceding twelve months, exceeds the greater of (i) 10% of the
insurer's policyholder surplus as of December 31 of the preceding year or (ii)
net income (or net gain from operations, if such company is a life insurance
company) for the twelve-month period ending on the thirty-first day of December
last preceding, in each case determined under statutory insurance accounting
policies. In addition, if any dividend of a Connecticut-domiciled insurer
exceeds the insurer's earned surplus, it requires the prior approval of the
Connecticut Insurance Commissioner. HLA declared to the Company dividends of
$139 in 2003 and accrued dividends of $17 as of December 31, 2003. The statutory
net gain in 2003 was $1.0 billion as compared to a net loss of $137 in 2002. The
gain in the current year was primarily the result of improvements in the equity
market performance in 2003. Statutory capital and surplus as of December 31,
2003 was $4.5 billion, a 48% increase over December 31, 2002.
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.
The primary uses of funds are to pay claims, policy benefits, operating expenses
and commissions, and to purchase new investments. In addition, Hartford Life has
a policy of carrying a significant short-term investment positions and
accordingly does not anticipate selling intermediate and long-term fixed
maturity investments to meet any liquidity needs. (For a discussion of the
Company's investment objectives and strategies, see the Investments and Capital
Markets Risk Management sections.)
CASH FLOW
2003 2002 2001
------------ ------------- --------------
Cash provided by operating activities $ 1,425 $ 1,058 $ 1,642
Cash used for investing activities (4,424) (4,673) (4,627)
Cash provided by financing activities 3,089 3,623 3,052
Cash - end of year 265 179 167
2003 COMPARED TO 2002 -- The increase in cash provided by operating activities
was primarily the result of the timing of the settlement of receivables,
payables and other related liabilities. The decrease in cash provided by
financing activities primarily relates to the decrease in net general account
receipts from investment and universal life-type contracts charged against
policyholder accounts. Operating cash flows in the periods presented have been
more than adequate to meet liquidity requirements.
2002 COMPARED TO 2001 -- The decrease in cash provided by operating activities
was primarily the result of the timing of the settlement of receivables,
payables and other related liabilities. The increase in cash provided by
financing activities primarily relates to the increase in net general account
receipts from investment and universal life-type contracts charged against
policyholder accounts. Operating cash flows in the periods presented have been
more than adequate to meet liquidity requirements
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.
Upon completion of the Hartford's asbestos reserve study and the Hartford's
capital-raising activities, certain of the major independent ratings
organizations revised The Hartford'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 capital-raising
activities. The outlook is stable.
44
On May 14, 2003, Moody's downgraded the debt ratings of both The Hartford
Financial Services Group, Inc. and Hartford Life, Inc. 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 and P-1 short term rating
is negative.
On May 13, 2003, A.M. Best affirmed the financial strength ratings of A+ of The
Hartford Fire Intercompany Pool and the main operating life insurance
subsidiaries of Hartford Life, Inc. Concurrently, A.M. Best downgraded to "a-"
from "a+" the senior debt ratings of The Hartford Financial Services Group, Inc.
and Hartford Life Inc. 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 February 20, 2004:
STANDARD &
A.M. BEST FITCH POOR'S S MOODY'S
--------- ----- ---------- -------
INSURANCE RATINGS
Hartford Life Insurance Company A+ AA AA- Aa3
Hartford Life and Accident A+ AA AA- Aa3
Hartford Life Group Insurance Company A+ AA AA- --
Hartford Life and Annuity A+ AA AA- Aa3
OTHER RATINGS
Hartford Life, Inc.
Senior debt a- A A- A3
Commercial paper
-- F1 A-2 P-2
Hartford Life Capital I and II bbb A- BBB Baa1
Trust preferred securities
Hartford Life Insurance Company:
Short Term Rating -- -- A-1+ P-1
The agencies consider many factors in determining the final rating of an
insurance company. One consideration is the relative level of statutory surplus
necessary to support the business written. Statutory surplus represents the
capital of the insurance company reported in accordance with accounting
practices prescribed by the applicable state insurance department.
EQUITY MARKETS
For a discussion of equity markets impact to capital and liquidity, see the
Capital Markets Risk Management section under "Market Risk".
RISK-BASED CAPITAL
The National Association of Insurance Commissioners ("NAIC") has regulations
establishing minimum capitalization requirements based on risk-based capital
("RBC") formulas for both life and property and casualty companies. The
requirements consist of formulas, which identify companies that are
undercapitalized and require specific regulatory actions. The RBC formula for
life companies establishes capital requirements relating to insurance, business,
asset and interest rate risks. As of December 31, 2003, Hartford Life had more
than sufficient capital to meet the NAIC's minimum RBC requirements.
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.
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
Hartford Life distributes its annuity and life insurance products through a
variety of distribution channels, including broker-dealers, banks, wholesalers,
its own internal sales force and other third party organizations. The Company
periodically negotiates provisions and renewals of these relationships and there
can be no assurance that such terms will remain acceptable to the Company or
such third
45
parties. An interruption in the Company's continuing relationship with certain
of these third parties could materially affect the Company's ability to market
its products.
TERRORISM RISK INSURANCE ACT OF 2002
The Terrorism Risk Insurance Act of 2002 ("the Act") created a program under
which the federal government will pay 90% of covered losses after an insurer's
losses exceed a deductible determined by a statutorily prescribed formula, up
to a combined annual aggregate limit for the federal government and all
insurers of $100 billion. If an act of terrorism or acts of terrorism result in
covered losses exceeding the $100 billion annual limit, insurers with losses
exceeding their deductibles will not be responsible for additional losses.
The statutory formula for determining a company's deductible for each year is
based on the company's direct commercial earned premium for the prior calendar
year multiplied by a specified percentage. The specified percentages are 10% for
2004 and 15% for 2005.
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.
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. While sales of these products
do not appear to have been reduced to date, the long-term effect of the Jobs and
Growth Act of 2003 on the Company's financial condition or results of operations
cannot be reasonably estimated at this time.
There are proposals in the federal 2005 budget submitted by President Bush which
would create new investment vehicles with larger annual contribution limits for
individuals. Some of these proposed vehicles would have significant tax
advantages, and could have a material effect on sales of the Company's life
insurance and investment products. There also have been proposals regarding the
estate tax and deferred compensation arrangements that could have negative
effects on the Company's product sales. Prospects for enactment of this
legislation in 2004 are uncertain. Therefore, any potential effect on the
Company's financial condition or results of operations cannot be reasonably
estimated at this time.
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, and
reductions in benefits currently received by the Company stemming from the
dividends received deduction. Legislation to restructure the Social Security
system and expand private pension plans incentives also may be considered.
Prospects for enactment and the ultimate effect of these proposals are
uncertain.
Congress is likely to consider a number of legal reform proposals this year.
Among them is legislation that would reduce the number and type of national
class actions certified by state judges by updating the federal rules on
diversity jurisdiction. Prospects for enactment of these proposals in 2004 are
uncertain.
GUARANTY FUND
Under insurance guaranty fund laws in each state, the District of Columbia and
Puerto Rico, insurers licensed to do business can be assessed by state insurance
guaranty associations for certain obligations of insolvent insurance companies
to policyholders and claimants. Part of the assessments paid by the Company's
insurance subsidiaries pursuant to these laws may be used as credits for a
46
portion of the Company's insurance subsidiaries' premium taxes. There were no
guaranty fund assessment payments or refunds in 2003. There were guaranty fund
assessment refunds of $2 in 2002 and no guaranty fund payments or refunds in
2001.
NAIC CODIFICATION
The NAIC adopted the Codification of Statutory Accounting Principles
("Codification") in March 1998. The effective date for the statutory accounting
guidance was January 1, 2001. Each of Hartford Life's domiciliary states has
adopted Codification, and the Company has made the necessary changes in its
statutory accounting and reporting required for implementation. The overall
impact of applying the new guidance resulted in a benefit of $74 in statutory
surplus.
EFFECT OF INFLATION
The rate of inflation as measured by the change in the average consumer price
index has not had a material effect on the revenues or operating results of
Hartford Life during the three most recent fiscal years.
IMPACT OF NEW ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 2 of Notes to Consolidated
Financial Statements.
In July 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 03-1,
"Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts" (the "SOP"). The SOP
addresses a wide variety of topics, some of which have a significant impact on
the Company. The major provisions of the SOP require:
- - Recognizing expenses for a variety of contracts and contract features,
including guaranteed minimum death benefits ("GMDB"), certain death benefits
on universal-life type contracts and annuitization options, on an accrual
basis versus the previous method of recognition upon payment;
- - Reporting and measuring assets and liabilities of certain separate account
products as general account assets and liabilities when specified criteria
are not met;
- - Reporting and measuring the Company's interest in its separate accounts as
general account assets based on the insurer's proportionate beneficial
interest in the separate account's underlying assets; and
- - Capitalizing sales inducements that meet specified criteria and amortizing
such amounts over the life of the contracts using the same methodology as
used for amortizing deferred acquisition costs ("DAC").
47
The SOP is effective for financial statements for fiscal years beginning after
December 15, 2003. At the date of initial application, January 1, 2004, the
estimated cumulative effect of the adoption of the SOP on net income and other
comprehensive income was comprised of the following individual impacts:
Other
Comprehensive
Cumulative Effect of Adoption Net Income Income
- ----------------------------- ---------- -------------
Establishing GMDB and other
benefit reserves for annuity
contracts $ (54) $ --
Reclassifying certain separate
accounts to general accounts
30 294
Other
(1) (2)
---------- -------------
Total cumulative effect of adoption $ (25) $ 292
========== =============
Exclusive of the cumulative effect, overall application of the SOP is expected
to have a small positive impact to earnings over the next few years, with
individual impacts described below.
Death Benefits and Other Insurance Benefit Features
The Company sells variable annuity contracts that offer various guaranteed death
benefits. For certain guaranteed death benefits, Hartford Life 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 these death benefit guarantees associated with its
in-force block of business. As of January 1, 2004, the Company has recorded a
liability for GMDB and other benefits sold with variable annuity products of
$199 and a related reinsurance recoverable asset of $108. The determination of
the GMDB liability and related reinsurance recoverable is based on models that
involve a range of scenarios and assumptions, including those regarding expected
market rates of return and volatility, contract surrender rates and mortality
experience. The assumptions used are consistent with those used in determining
estimated gross profits for purposes of amortizing deferred acquisition costs.
Exclusive of the cumulative effect adjustment, the establishment of the required
liability at January 1, 2004 is expected to result in slightly higher earnings
in future years as well as a more stable pattern of death benefit expense.
The Company sells universal life-type contracts with certain secondary
guarantees, such as a guarantee that the policy will not lapse, even if the
account value is reduced to zero, as long as the policyholder makes scheduled
premium payments. The assumptions used in the determination of the secondary
guarantee liability are consistent with those used in determining estimated
gross profits for purposes of amortizing deferred policy acquisition costs.
Based on current estimates, the Company expects the cumulative effect on net
income upon recording this liability to be not material. The establishment of
the required liability will change the earnings pattern of these products,
lowering earnings in the early years of the contract and increasing earnings in
the later years. Based on the current in-force of these products, the impact is
not expected to be material in the near term. Currently there is diversity in
industry practice and inconsistent guidance surrounding the application of the
SOP to universal life-type contracts. The Company believes consensus or further
guidance surrounding the methodology for determining reserves for secondary
guarantees will develop in the future. This may result in an adjustment to the
cumulative effect of adopting the SOP and could impact future earnings.
Separate Account Presentation
The Company has recorded certain MVA fixed annuity and modified guarantee life
insurance products (primarily the Company's Compound Rate Contract ("CRC") and
associated assets) as separate account assets and liabilities through December
31, 2003. Notwithstanding the market value adjustment feature in this product,
all of the investment performance of the separate account assets is not being
passed to the contractholder, and it therefore, does not meet the conditions for
separate account reporting under the SOP. On January 1, 2004, the cumulative
adjustments to earnings and other comprehensive income as a result of recording
the separate account assets and liabilities in the general account were recorded
net of amortization of deferred acquisition costs and income taxes. Through
December 31, 2003, the Company had recorded CRC assets and liabilities on a
market value basis with all changes in value (market value spread) included in
current earnings as a component of other revenues. Upon adoption of the SOP, the
component of CRC spread on a book value basis will be recorded in net investment
income and interest credited. Realized gains and losses on investments
48
and market value adjustments on contract surrenders will be recognized as
incurred. On balance, exclusive of the cumulative effect gain recognized, these
changes will result in smaller future earnings from the in-force block of CRC
contracts.
The Company has also recorded its variable annuity products offered in Japan in
separate account assets and liabilities through December 31, 2003. As the
separate account arrangement in Japan is not legally insulated from the general
account liabilities of the Company, it does not meet the conditions for separate
account reporting under the SOP. The adoption of the SOP will not change the
pattern of earnings in the future.
Certain other products offered by the Company recorded in separate account
assets and liabilities through December 31, 2003, were reclassified to the
general account upon adoption of the SOP.
Interests in Separate Accounts
As of December 31, 2003, the Company had $24 representing unconsolidated
interests in its own separate accounts. On January 1, 2004, the Company
reclassified $11 to investment in trading securities, where the Company's
proportionate beneficial interest in the separate account was less than 20%. In
instances where the Company's proportionate beneficial interest was between
20-50%, the Company reclassified $13 of its investment to reflect the Company's
proportionate interest in each of the underlying assets of the separate account.
Future impacts to net income as a result of adopting these provisions of the SOP
are expected to be insignificant.
Sales Inducements
The Company currently offers enhanced or bonus crediting rates to
contractholders on certain of its individual and group annuity products.
Effective January 1, 2004, upon adopting the SOP, the future expense associated
with offering a bonus will be deferred and amortized over the life of the
related contract in a pattern consistent with the amortization of deferred
acquisition costs. Effective January 1, 2004, amortization expense associated
with expenses previously deferred will be recorded over the remaining life of
the contract rather than over the contingent deferred sales charge period. Due
to the longer deferral periods, this provision is expected to have a small
positive impact to earnings in future periods.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by Item 7A is set forth in the Capital Markets Risk
Management section of the Management's Discussion and Analysis of Financial
Condition and Results of Operations and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 December 31, 2003.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING.
There was no change in the Company's internal control over financial
reporting that occurred during the Company's fourth quarter of 2003
that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
49
PART III
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 9(e) of Schedule 14A with regard to the
Company's ultimate parent entity, The Hartford, is set forth in Item 14 of The
Hartford's Form 10-K for the fiscal year ended December 31, 2003, and is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. CONSOLIDATED FINANCIAL STATEMENTS. See Index to Consolidated Financial
Statements and Schedules elsewhere herein.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES. See Index to Consolidated
Financial Statement Schedules elsewhere herein.
3. EXHIBITS. See Exhibit Index elsewhere herein.
(b) Reports on Form 8-K - During the fourth quarter of 2003, the Company filed
the following Current Report on Form 8-K:
Filed December 2, 3003, Item 5, Other Events, to report the agreement of one of
the Company's subsidiaries to acquire certain group benefits businesses from CNA
Financial Corporation.
(c) Exhibits - See Item 15(a)(3).
(d) Schedules - See Item 15(a)(2).
50
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page(s)
Report of Management F-1
Independent Auditors' Report F-2
Consolidated Statements of Income for the three years ended December 31, 2003 F-3
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-4
Consolidated Statements of Changes in Stockholder's Equity for the three
years ended December 31, 2003 F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 2003 F-6
Notes to Consolidated Financial Statements F-7-42
Schedule I -- Summary of Investments - Other Than Investments in Affiliates S-1
Schedule II -- Condensed Financial Information of Hartford Life, Inc. S-2-3
Schedule III -- Supplementary Insurance Information S-4
Schedule IV -- Reinsurance S-5
Schedule V -- Valuation and Qualifying Accounts S-6
REPORT OF MANAGEMENT
The management of Hartford Life, Inc. (Hartford Life) is responsible for the
preparation and integrity of information contained in the accompanying
consolidated financial statements. The consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the
United States and, where necessary, include amounts that are based on
management's informed judgments and estimates. Management believes these
consolidated statements present fairly, Hartford Life's financial position and
results of operations.
Management has made available Hartford Life's financial records and related data
to Deloitte & Touche LLP, independent auditors, in order for them to perform
their audits of Hartford Life's consolidated financial statements. Their report
appears on page F-2.
An essential element in meeting management's financial responsibilities is
Hartford Life's system of internal controls. These controls, which include
accounting controls and Hartford Life's internal auditing program, are designed
to provide reasonable assurance that assets are safeguarded, and transactions
are properly authorized, executed and recorded. The controls, which are
documented and communicated to employees in the form of written codes of conduct
and policies and procedures, provide for careful selection of personnel and for
appropriate division of responsibility. Management continually monitors for
compliance, while Hartford Life's internal auditors independently assess the
effectiveness of the controls and make recommendations for improvement.
Another important element is management's recognition and acknowledgement within
the organization of its responsibility for fostering a strong, ethical climate,
thereby firmly establishing an expectation that Hartford Life's affairs be
transacted according to the highest standards of personal and professional
conduct. Hartford Life has a long-standing reputation of integrity in business
conduct and utilizes communication and education to create and fortify a strong
compliance culture.
The Audit Committee of the Board of Directors of The Hartford Financial Services
Group, Inc. (the "Committee"), the Company's ultimate parent, composed of
independent directors, meets periodically with the external and internal
auditors to evaluate the effectiveness of work performed by them in discharging
their respective responsibilities and to ensure their independence and free
access to the Committee.
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Hartford Life, Inc.
Hartford, Connecticut
We have audited the accompanying consolidated balance sheets of Hartford Life,
Inc. and its subsidiaries (collectively, "the Company") as of December 31, 2003
and 2002, and the related consolidated statements of income, changes in
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 2003. Our audits also included the financial statement
schedules listed in the Index to Consolidated Financial Statements and
Schedules. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hartford Life, Inc. and its
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 2 of the consolidated financial statements, the Company
changed its method of accounting for goodwill and indefinite-lived intangible
assets in 2002. In addition, the Company changed its method of accounting for
derivative instruments and hedging activities and its method of accounting for
the recognition of interest income and impairment on purchased and retained
beneficial interests in securitized financial assets in 2001.
Deloitte & Touche LLP
Hartford, Connecticut
February 25, 2004
F-2
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
---------------------------------
(In millions) 2003 2002 2001
------------ -------- --------- --------
REVENUES
Fee income $ 2,760 $ 2,577 $ 2,633
Earned premiums and other 3,217 2,817 3,103
Net investment income 2,041 1,849 1,782
Net realized capital gains (losses) 40 (308) (136)
-------- --------- --------
TOTAL REVENUES 8,058 6,935 7,382
-------- --------- --------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 4,616 4,158 4,444
Insurance expenses and other 1,544 1,405 1,359
Amortization of deferred policy acquisition costs and present value
of future profits 769 628 642
Dividends to policyholders 63 65 68
Interest expense 117 112 104
-------- --------- --------
TOTAL BENEFITS, CLAIMS AND EXPENSES 7,109 6,368 6,617
-------- --------- --------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 949 567 765
Income tax expense 180 10 54
-------- --------- --------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 769 557 711
======== ========= ========
Cumulative effect of accounting changes, net of tax - - (26)
======== ========= ========
NET INCOME $ 769 $ 557 $ 685
======== ========= ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
-------------------------------
(In millions, except for share data) 2003 2002
------------------------------------ ------------- --------------
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of $35,569
and $27,982) $ 37,462 $ 29,377
Equity securities, available for sale, at fair value (cost of $335 and $483) 357 458
Policy loans, at outstanding balance 2,512 2,934
Other investments 823 1,122
------------- --------------
Total investments 41,154 33,891
Cash 265 179
Premiums receivable and agents' balances 335 208
Reinsurance recoverables 604 796
Deferred policy acquisition costs and present value of future profits 6,623 5,758
Deferred income taxes (486) (274)
Goodwill 796 796
Other assets 1,668 1,362
Separate account assets 136,633 107,078
------------- --------------
TOTAL ASSETS $ 187,592 $ 149,794
============= ==============
LIABILITIES
Reserve for future policy benefits $ 11,411 $ 8,583
Other policyholder funds 26,186 23,957
Short-term debt 505 -
Long-term debt 1,300 1,575
Other liabilities 4,498 2,913
Separate account liabilities 136,633 107,078
------------- --------------
TOTAL LIABILITIES 180,533 144,106
============= ==============
COMMITMENTS AND CONTINGENT LIABILITIES, NOTE 17
STOCKHOLDER'S EQUITY
Common Stock - 1,000 shares authorized, issued and outstanding
Par value $0.01 - -
Capital surplus 2,489 1,970
Accumulated other comprehensive income
Net unrealized capital gains on securities, net of tax 903 747
Foreign currency translation adjustments (43) (39)
Total accumulated other comprehensive income 860 708
Retained earnings 3,710 3,010
------------- --------------
TOTAL STOCKHOLDER'S EQUITY 7,059 5,688
============= ==============
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 187,592 $ 149,794
============= ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
ACCUMULATED OTHER COMPREHENSIVE INCOME
--------------------------------------
NET NET GAIN
UNREALIZED (LOSS) ON
CAPITAL CASH FLOW FOREIGN
GAINS ON HEDGING CURRENCY TOTAL
COMMON CAPITAL SECURITIES, INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) STOCK SURPLUS NET OF TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
------------- ------ ------- ----------- ----------- ----------- -------- -------------
2003
Balance, December 31, 2002 $ - $ 1,970 $ 621 $ 126 $ (39) $ 3,010 $ 5,688
Comprehensive income
Net income 769 769
------------
Other comprehensive income, net of
tax (1)
Net change in unrealized capital
gains on securities (3) 307 307
Net loss on cash flow hedging
instruments (151) (151)
------------
Cumulative translation
adjustments (4) (4)
------------
Total other comprehensive income 152
------------
Total comprehensive income 921
------------
Dividends declared (69) (69)
Capital contribution from parent 519 519
----- ------- ----------- ----------- ----------- -------- ------------
BALANCE, DECEMBER 31, 2003 $ - $ 2,489 $ 928 $ (25) $ (43) $ 3,710 $ 7,059
===== ======= =========== =========== =========== ======== ============
2002
Balance, December 31, 2001 $ - $ 1,895 $ 163 $ 62 $ (29) $ 2,519 $ 4,610
Comprehensive income
Net income 557 557
------------
Other comprehensive income, net of
tax (1)
Net change in unrealized capital
gains on securities (3) 458 458
Net gain on cash flow hedging
instruments 64 64
------------
Cumulative translation
adjustments (10) (10)
------------
Total other comprehensive income 512
------------
Total comprehensive income 1,069
------------
Dividends declared (66) (66)
Capital contribution from parent 75 75
----- ------- ----------- ----------- ----------- -------- ------------
BALANCE, DECEMBER 31, 2002 $ - $ 1,970 $ 621 $ 126 $ (39) $ 3,010 $ 5,688
===== ======= =========== =========== =========== ======== ============
2001
Balance, December 31, 2000 $ - $ 1,280 $ 40 $ - $ (13) $ 1,900 $ 3,207
Comprehensive income
Net income 685 685
------------
Other comprehensive income, net of
tax (1)
Cumulative effect of accounting
change(2) 3 20 23
Net change in unrealized capital
gains on securities (3) 120 120
Net gain on cash flow hedging
instruments 42 42
------------
Cumulative translation
adjustments (16) (16)
------------
Total other comprehensive income 169
------------
Total comprehensive income 854
------------
Dividends declared (66) (66)
Capital contribution from parent 615 615
----- ------- ----------- ----------- ----------- -------- ------------
BALANCE, DECEMBER 31, 2001 $ - $ 1,895 $ 163 $ 62 $ (29) $ 2,519 $ 4,610
===== ======= =========== =========== =========== ======== ============
(1) Net change in unrealized capital gain on securities is reflected net of tax
provision of $165, $247 and $65 for the years ended December 31, 2003, 2002
and 2001, respectively. Cumulative effect of accounting change is net of
tax benefit of $12 for the year ended December 31, 2001. Net (loss) gain on
cash flow hedging instruments is net of tax (benefit) provision of $(81)
and $34 for the years ended December 31, 2003 and 2002, respectively. There
is no tax effect on cumulative translation adjustments.
(2) Net change in unrealized capital gain on securities, net of tax, includes
cumulative effect of accounting change of $(23) to net income and $20 to
net gain on cash flow hedging instruments.
(3) There were reclassification adjustments for after-tax gains (losses)
realized in net income of $24, $(187) and $(77) for the years ended
December 31, 2003, 2002 and 2001, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
----------------------------------
(In millions) 2003 2002 2001
------------ --------- --------- ----------
OPERATING ACTIVITIES
Net income $ 769 $ 557 $ 685
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Net realized capital (gains) losses (40) 308 136
Cumulative effect of accounting changes, net of tax - - 26
Amortization of deferred policy acquisition costs and present value of future
profits 769 628 642
Additions to deferred policy acquisition costs and present value of future
profits (1,626) (1,163) (1,083)
Depreciation and amortization 137 63 27
Decrease (increase) in premiums receivable and agents' balances 1 21 (14)
Increase (decrease) in other liabilities 467 (177) 17
Increase in receivables (65) (44) (23)
Increase in accrued liabilities and payables 298 75 (24)
(Decrease) increase in accrued tax (36) 192 103
Decrease (increase) in deferred income tax 153 (26) (2)
Increase in future policy benefits 928 631 1,383
Decrease increase in reinsurance recoverables 35 (12) (127)
(Increase) decrease in other assets (365) 5 (104)
--------- --------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,425 1,058 1,642
========= ========= ==========
INVESTING ACTIVITIES
Purchases of investments (15,286) (14,727) (12,023)
Sales of investments 7,787 7,510 6,113
Maturity and principal paydowns of fixed maturity investments 3,540 2,601 2,470
Purchase of business/affiliate, net of cash acquired (464) - (1,078)
Other (1) (57) (109)
--------- --------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (4,424) (4,673) (4,627)
========= ========= ==========
FINANCING ACTIVITIES
Capital contribution from parent 519 75 615
Proceeds from issuance of long-term debt 230 75 400
Proceeds from issuance of company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely parent junior subordinated
debentures - - 200
Dividends paid (69) (66) (64)
Net receipts from investment and universal life-type contracts charged
against policyholder accounts 2,409 3,539 1,901
--------- --------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,089 3,623 3,052
========= ========= ==========
Net increase in cash 90 8 67
Impact of foreign exchange (4) 4 (6)
Cash - beginning of year 179 167 106
--------- --------- ----------
CASH - END OF YEAR $ 265 $ 179 $ 167
========= ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID (RECEIVED) DURING THE YEAR FOR
Income taxes $ 50 $ 48 $ (40)
Interest $ 115 $ 110 $ 89
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
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
BASIS OF PRESENTATION
The 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. The financial statements include the
accounts of Hartford Life and its wholly-owned as well as controlled majority
owned subsidiaries. Investments in companies in which the Company exercises
significant influence over operating and financial policies are accounted for
using the equity method. All material intercompany transactions and balances
between Hartford Life, its subsidiaries and affiliates have been eliminated.
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 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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial information to
conform to the current period classifications.
ADOPTION OF NEW ACCOUNTING STANDARDS
Effective December 31, 2003, the Company adopted the disclosure requirements of
Emerging Issues Task Force ("EITF") Issue No. 03-01, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments".
Under the consensus, disclosures are required for unrealized losses on fixed
maturity and equity securities accounted for under SFAS No. 115, "Accounting for
Certain Investment in Debt and Equity Securities", and SFAS No. 124, "Accounting
for Certain Investments Held by Not-for-Profit Organizations", that are
classified as either available-for-sale or held-to-maturity. The disclosure
requirements include quantitative information regarding the aggregate amount of
unrealized losses and the associated fair value of the investments in an
unrealized loss position, segregated into time periods for which the investments
have been in an unrealized loss position. The consensus also requires certain
qualitative disclosures about the unrealized holdings in order to provide
additional information that the Company considered in concluding that the
unrealized losses were not other-than-temporary. See disclosures in Note 3.
F-7
In May 2003, the 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 of 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 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 derivative is required. The effective
date of DIG B36 was 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 has
evaluated its modified coinsurance and funds withheld agreements and believes
all but one are not impacted by the provisions of DIG B36. The one modified
coinsurance agreement that requires the separate recording of an embedded
derivative contains two total return swap embedded derivatives that virtually
offset each other. Due to the offsetting nature of these total return swaps, the
net value of the embedded derivatives in the modified coinsurance agreement had
no material effect on the consolidated financial statements upon adoption of DIG
B36 on October 1, 2003 and at December 31, 2003.
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 adoption of DIG B36, as it relates to
corporate issued debt securities, did not have a material effect 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 SFAS No. 149 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 VIEs 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.
F-8
In December 2003, the FASB issued a revised version of FIN 46 ("FIN 46R"), which
incorporates a number of modifications and changes made to the original version.
FIN 46R replaces the previously issued FIN 46 and, subject to certain special
provisions, is effective no later than the end of the first reporting period
that ends after December 15, 2003 for entities considered to be special-purpose
entities and no later than the end of the first reporting period that ends after
March 15, 2004 for all other VIEs. Early adoption is permitted. The Company
adopted FIN 46R in the fourth quarter of 2003. The adoption of FIN 46R did not
result in the consolidation of any material VIEs but resulted in the
deconsolidation of VIEs that issued Mandatorily Redeemable Preferred Securities
of Subsidiary Trust ("trust preferred securities"). The Company is not the
primary beneficiary of the VIEs, which issued the trust preferred securities.
The Company does not own any of the trust preferred securities which were issued
to unrelated third parties. These trust preferred securities are considered the
principal variable interests issued by the VIEs. As a result, the VIEs, which
the Company previously consolidated, are no longer consolidated. The sole assets
of the VIEs are junior subordinated debentures issued by the Company with
repayment terms identical to the trust preferred securities. Previously, the
trust preferred securities were reported as a separate liability on the
Company's Consolidated Balance Sheets as "company obligated mandatorily
redeemable preferred securities of subsidiary trusts holding solely junior
subordinated debentures". The dividends on the trust preferred securities were
reported as interest expense. At December 31, 2003 and 2002, the impact of
deconsolidation was to increase long-term debt and decrease the trust preferred
securities by $450 and $450, respectively. See Note 8, "Debt", for disclosure of
information related to these VIEs as required under FIN 46R.
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. 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
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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Under historical guidance, all gains and losses resulting from the
extinguishment of debt were required to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. SFAS No.
145 rescinds that guidance and requires that gains and losses from
extinguishments of debt be classified as extraordinary items only if they are
both unusual and infrequent in occurrence. SFAS No. 145 also amends SFAS No. 13,
"Accounting for Leases" for the required accounting treatment of certain lease
modifications that have economic effects similar to sale-leaseback transactions.
SFAS No. 145 requires that those lease modifications be accounted for in the
same manner as sale-leaseback transactions. The provisions of SFAS No. 145
related to SFAS No. 13 are effective for transactions occurring after May 15,
2002. Adoption of the provisions of SFAS No. 145 related to SFAS No. 13 did not
have a material impact on the Company's consolidated financial condition or
results of operations.
Effective September 2001, the Company adopted EITF Issue No. 01-10, "Accounting
for the Impact of the Terrorist Attacks of September 11, 2001". Under the
consensus, costs related to the terrorist act should be reported as part of
income from continuing operations and not as an extraordinary item. The Company
has recognized and classified all direct and indirect costs associated with the
attack of September 11 in accordance with the consensus. (For discussion of the
impact of the September 11 terrorist attack ("September 11"), see Note 19.)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 establishes an accounting model for
long-lived assets to be disposed of by sale that applies to all long-lived
assets, including discontinued operations. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. Adoption
of SFAS No. 144 did not have a material impact on the Company's consolidated
financial condition or results of operations.
F-9
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No.
141 eliminates the pooling-of-interests method of accounting for business
combinations, requiring all business combinations to be accounted for under the
purchase method. Accordingly, net assets acquired are recorded at fair value
with any excess of cost over net assets assigned to goodwill. SFAS No. 141 also
requires that certain intangible assets acquired in a business combination be
recognized apart from goodwill. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001. Adoption of SFAS No. 141
did not have a material impact on the Company's consolidated financial condition
or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". Under SFAS No. 142, amortization of goodwill is precluded, however, its
recoverability must be periodically (at least annually) reviewed and tested for
impairment. Goodwill must be tested at the reporting unit level for impairment
in the year of adoption, including an initial test performed within six months
of adoption. If the initial test indicates a potential impairment, then a more
detailed analysis to determine the extent of impairment must be completed within
twelve months of adoption.
During the second quarter of 2002, the Company completed the review and analysis
of its goodwill asset in accordance with the provisions of SFAS No. 142. The
result of the analysis indicated that each reporting unit's fair value exceeded
its carrying amount, including goodwill. As a result, goodwill for each
reporting unit was not considered impaired. SFAS No. 142 also requires that
useful lives for intangibles other than goodwill be reassessed and remaining
amortization periods be adjusted accordingly. (For further discussion of the
impact of SFAS No. 142, see Note 6.)
Effective April 1, 2001, the Company adopted EITF Issue No. 99-20, "Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets". Under the consensus, investors in certain
securities with contractual cash flows, primarily asset-backed securities, are
required to periodically update their best estimate of cash flows over the life
of the security. If the fair value of the securitized financial asset is less
than its carrying amount and there has been a decrease in the present value of
the estimated cash flows since the last revised estimate, considering both
timing and amount, an other than temporary impairment charge is recognized. The
estimated cash flows are also used to evaluate whether there have been any
changes in the securitized asset's estimated yield. All yield adjustments are
accounted for on a prospective basis. Upon adoption of EITF Issue No. 99-20, the
Company recorded a $3 charge as the net of tax cumulative effect of the
accounting change.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and
138. The standard requires, among other things, that all derivatives be carried
on the balance sheet at fair value. The standard also specifies accounting
criteria under which a derivative can qualify for hedge accounting. In order to
receive hedge accounting, the derivative instrument must qualify as a hedge of
either the fair value or the variability of the cash flow of a qualified asset
or liability, or forecasted transaction. Hedge accounting for qualifying hedges
provides for matching the timing of gain or loss recognition on the hedging
instrument with the recognition of the corresponding changes in value of the
hedged item. The Company's policy prior to adopting SFAS No. 133 was to carry
its derivative instruments on the balance sheet in a manner similar to the
hedged item(s).
Upon adoption of SFAS No. 133, the Company recorded a $23 charge as the net of
tax cumulative effect of the accounting change. This transition adjustment was
primarily comprised of gains and losses on derivatives that had been previously
deferred and not adjusted to the carrying amount of the hedged item. Also
included in the transition adjustment were gains and losses related to
recognizing at fair value all derivatives that are designated as fair-value
hedging instruments offset by the difference between the book values and fair
values of related hedged items attributable to the hedged risks. The entire
transition amount was previously recorded in Accumulated Other Comprehensive
Income ("AOCI") - Unrealized Gain/Loss on Securities in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities". Gains
and losses on derivatives that were previously deferred as adjustments to the
carrying amount of hedged items were not affected by the implementation of SFAS
No. 133. Upon adoption, the Company also reclassified $20, net of tax, to AOCI -
Gain on Cash-Flow Hedging Instruments from AOCI - Unrealized Gain/Loss on
Securities. This reclassification reflects the January 1, 2001 net unrealized
gain for all derivatives that were designated as cash-flow hedging instruments.
(For further discussion of the Company's derivative-related accounting policies,
see Note 2.)
FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In December 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC") issued Statement of Position
03-3, "Accounting for Certain Loans or Debt Securities", (SOP 03-3). SOP 03-3
addresses the accounting for differences between contractual and expected cash
flows to be collected from an investment in loans or fixed maturity securities
(collectively hereafter referred to as "loan(s)") acquired in a transfer if
those differences are attributable, at least in part, to credit quality. SOP
03-3 limits the yield that may be accreted to the excess of the estimated
undiscounted expected principal, interest and other cash flows over the initial
investment in the loan. SOP 03-3 also requires that the excess of contractual
cash flows over cash flows expected to be collected not be recognized as an
adjustment of yield, loss accrual or valuation allowance. SOP 03-3 is effective
for loans acquired in fiscal years beginning after December 15, 2004. For loans
acquired in fiscal years beginning on or
F-10
before December 15, 2004 and within the scope of Practice Bulletin 6
"Amortization of Discount on Certain Acquired Loans", SOP 03-3, as it pertains
to decreases in cash flows expected to be collected, should be applied
prospectively for fiscal years beginning after December 15, 2004. Adoption of
this statement is not expected to have a material impact on the Company's
consolidated financial condition or results of operations.
In July 2003, AcSEC 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 have a significant impact on the Company. The
major provisions of the SOP require:
- - Recognizing expenses for a variety of contracts and contract features,
including guaranteed minimum death benefits ("GMDB"), certain death
benefits on universal-life type contracts and annuitization options, on an
accrual basis versus the previous method of recognition upon payment;
- - Reporting and measuring assets and liabilities of certain separate account
products as general account assets and liabilities when specified criteria
are not met;
- - Reporting and measuring the Company's interest in its separate accounts as
general account assets based on the insurer's proportionate beneficial
interest in the separate account's underlying assets; and
- - Capitalizing sales inducements that meet specified criteria and amortizing
such amounts over the life of the contracts using the same methodology as
used for amortizing deferred acquisition costs ("DAC").
The SOP is effective for financial statements for fiscal years beginning after
December 15, 2003. At the date of initial application, January 1, 2004, the
estimated cumulative effect of the adoption of the SOP on net income and other
comprehensive income was comprised of the following individual impacts:
Other
Comprehensive
Cumulative Effect of Adoption Net Income Income
----------------------------- ---------- ------
Establishing GMDB and other benefit
reserves for annuity contracts $ (54)* $ --
Reclassifying certain separate
accounts to general accounts 30 294
Other
(1) (2)
---------- -------------
Total cumulative effect of adoption $ (25) $ 292
========== =============
* As of September 30, 2003, the Company estimated the cumulative effect of
adopting this provision of the SOP to be between $30 and $40, net of
amortization of DAC and taxes. During the fourth quarter, industry and the
largest public accounting firms reached general consensus on how to record the
reinsurance recovery asset related to GMDB's. This refinement resulted in the
increase to the cumulative effect adjustment as of January 1, 2004.
Death Benefits and Other Insurance Benefit Features
The Company sells variable annuity contracts that offer various guaranteed death
benefits. For certain guaranteed death benefits, the Company pays the greater of
(1) the account value at death; (2) the sum of all premium payments less prior
withdrawals; or (3) the maximum anniversary value of the contract, plus any
premium payments since the contract anniversary, minus any withdrawals following
the contract anniversary. The Company currently reinsures a significant portion
of these death benefit guarantees associated with its in-force block of
business. As of January 1, 2004, the Company has recorded a liability for GMDB
and other benefits sold with variable annuity products of $199 and a related
reinsurance recoverable asset of $108. The determination of the GMDB liability
and related reinsurance recoverable is based on models that involve a range of
scenarios and assumptions, including those regarding expected market rates of
return and volatility, contract surrender rates and mortality experience. The
assumptions used are consistent with those used in determining estimated gross
profits for purposes of amortizing deferred acquisition costs.
Through December 31, 2003, the Company had not recorded a liability for the
risks associated with GMDB offered on the Company's variable annuity business,
but had consistently recorded the related expenses in the period the benefits
were paid to contractholders.
F-11
Net of reinsurance, the Company paid $54 and $49 for the years ended December
31, 2003 and 2002, respectively, in GMDB benefits to contractholders.
At December 31, 2003, the Company held $92.4 billion of variable annuities that
contained guaranteed minimum death and other benefits. The Company's total gross
exposure (i.e. before reinsurance), or net amount at risk (the amount by which
current account values in the variable annuity contracts are not sufficient to
meet its GMDB commitments), related to these guaranteed death benefits as of
December 31, 2003 was $11.5 billion. Due to the fact that 80% of this amount was
reinsured, the Company's net exposure was $2.3 billion. However, the Company
will only incur these guaranteed death benefit payments in the future if the
policyholder has an in-the-money guaranteed death benefit at their time of
death.
The Individual Life segment sells universal life-type contracts with certain
secondary guarantees, such as a guarantee that the policy will not lapse, even
if the account value is reduced to zero, as long as the policyholder makes
scheduled premium payments. The assumptions used in the determination of the
secondary guarantee liability are consistent with those used in determining
estimated gross profits for purposes of amortizing deferred policy acquisition
costs. Based on current estimates, the Company expects the cumulative effect on
net income upon recording this liability to be not material. The establishment
of the required liability will change the earnings pattern of these products,
lowering earnings in the early years of the contract and increasing earnings in
the later years. Currently there is diversity in industry practice and
inconsistent guidance surrounding the application of the SOP to universal
life-type contracts. The Company believes consensus or further guidance
surrounding the methodology for determining reserves for secondary guarantees
will develop in the future. This may result in an adjustment to the cumulative
effect of adopting the SOP and could impact future earnings.
Separate Account Presentation
The Company has recorded certain MVA fixed annuity products and modified
guarantee life insurance (primarily the Company's Compound Rate Contract ("CRC")
and associated assets) as separate account assets and liabilities through
December 31, 2003. Notwithstanding the market value adjustment feature in this
product, all of the investment performance of the separate account assets is not
being passed to the contractholder, and it therefore, does not meet the
conditions for separate account reporting under the SOP. On January 1, 2004,
market value reserves included in separate account liabilities for CRC, of $10.8
billion, were revalued at current account value in the general account to $10.1
billion. The related separate account assets of $11.0 billion were also
reclassified to the general account. Fixed maturities and equity securities were
reclassified to the general account, as available for sale securities, and will
continue to be recorded at fair value, however, subsequent changes in fair
value, net of amortization of deferred acquisition costs and income taxes, will
be recorded in other comprehensive income rather than net income. On January 1,
2004, the Company recorded a cumulative effect adjustment to earnings equal to
the revaluation of the liabilities from fair value to account value plus the
adjustment to record unrealized gains (losses) on available for sale invested
assets, previously recorded as a component of net income, as other comprehensive
income. The cumulative adjustments to earnings and other comprehensive income
were recorded net of amortization of deferred acquisition costs and income
taxes. Through December 31, 2003, the Company had recorded CRC assets and
liabilities on a market value basis with all changes in value (market value
spread) included in current earnings as a component of other revenues. Upon
adoption of the SOP, the components of CRC spread on a book value basis will be
recorded in interest income and interest credited. Realized gains and losses on
investments and market value adjustments on contract surrenders will be
recognized as incurred.
The Company has also recorded its variable annuity products offered in Japan in
separate account assets and liabilities through December 31, 2003. As the
separate account arrangement in Japan is not legally insulated from the general
account liabilities of the Company, it does not meet the conditions for separate
account reporting under the SOP. On January 1, 2004, separate account
liabilities in Japan of $6.2 billion recorded at account value in the separate
account, were reclassified to the general account with no change in value. The
related separate account assets of $6.2 billion were also reclassified to the
general account with no change in value. The separate account assets are
primarily comprised of equity securities. These assets were recorded at fair
value in a trading securities portfolio with the subsequent changes in fair
value reflected in net investment income.
Certain other products offered by the Company recorded in separate account
assets and liabilities through December 31, 2003, were reclassified to the
general account upon adoption of the SOP.
F-12
Interests in Separate Accounts
As of December 31, 2003, the Company had $24 representing unconsolidated
interests in its own separate accounts. These interests were recorded as
available for sale equity securities, with changes in fair value recorded
through other comprehensive income. On January 1, 2004, the Company reclassified
$11 to investment in trading securities, where the Company's proportionate
beneficial interest in the separate account was less than 20%. Trading
securities are recorded at fair value with changes in fair value recorded to net
investment income. In instances where the Company's proportionate beneficial
interest was between 20-50%, the Company reclassified $13 of its investment to
reflect the Company's proportionate interest in each of the underlying assets of
the separate account. The Company has designated its proportionate interest in
these equity securities and fixed maturities as available for sale.
Sales Inducements
The Company currently offers enhanced or bonus crediting rates to
contractholders on certain of its individual and group annuity products. Through
December 31, 2003, the expense associated with offering certain of these bonuses
was deferred and amortized over the contingent deferred sales charge period.
Others were expensed as incurred. Effective January 1, 2004, upon adopting the
SOP, the future expense associated with offering a bonus will be deferred and
amortized over the life of the related contract in a pattern consistent with the
amortization of deferred acquisition costs. Effective January 1, 2004,
amortization expense associated with expenses previously deferred will be
recorded over the remaining life of the contract rather than over the contingent
deferred sales charge period.
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 year ended December 31, 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 years ended December 31, 2003, 2002 and 2001 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 Hartford's stock-based compensation plans, see Note 10 of
Notes to Consolidated Financial Statements
INVESTMENTS
Hartford Life's investments in both fixed maturities, which include bonds,
redeemable preferred stock and commercial paper and equity securities, which
include common and non-redeemable preferred stocks, are classified as
"available-for-sale" in accordance with SFAS No. 115. Accordingly, these
securities are carried at fair value with the after-tax difference from
amortized cost, as adjusted for the effect of deducting the life and pension
policyholders' share related to the Company's immediate participation guarantee
contracts and certain life and annuity deferred policy acquisition costs,
reflected in stockholder's equity as a component of accumulated other
comprehensive income. Upon adoption of SOP 03-1 on January 1, 2004, certain
investments associated with the variable annuity products offered in Japan and
investments in interests in separate accounts will be recorded in a trading
securities portfolio. These assets will be recorded at fair value with the
changes in fair value reflected in net investment income. See footnote 2 for
further details. Policy loans are carried at outstanding balance which
approximates fair value. Other investments consist primarily of limited
partnership investments which are accounted for by the equity method. The
Company's net income from partnerships is included in net investment income.
Other investments also include mortgage loans carried at amortized cost and
derivatives at fair value.
Valuation of Fixed Maturities
The fair value for fixed maturity securities is largely determined by one of
three primary pricing methods: independent third party pricing services,
independent broker quotations or pricing matrices, which use data provided by
external sources. With the exception of short-term securities for which
amortized cost is predominantly used to approximate fair value, security pricing
is applied using a hierarchy or "waterfall" approach whereby prices are first
sought from independent pricing services with the remaining unpriced securities
submitted to brokers for prices or lastly priced via a pricing matrix.
F-13
Prices from independent pricing services are often unavailable for securities
that are rarely traded or are traded only in privately negotiated transactions.
As a result, a significant percentage of the Company's asset-backed and
commercial mortgage-backed securities are priced via broker quotations. A
pricing matrix is used to price securities for which the Company is unable to
obtain either a price from a third party service or an independent broker
quotation. The pricing matrix begins with current treasury rates and uses credit
spreads and issuer-specific yield adjustments received from an independent third
party source to determine the market price for the security. The credit spreads
incorporate the issuer's credit rating as assigned by a nationally recognized
rating agency and a risk premium, if warranted, due to the issuer's industry and
security's time to maturity. The issuer-specific yield adjustments, which can be
positive or negative, are updated twice annually, as of June 30 and December 31,
by an independent third-party source and are intended to adjust security prices
for issuer-specific factors. The matrix-priced securities at December 31, 2003
and 2002, primarily consisted of non-144A private placements and have an average
duration of 4.5 and 4.7, respectively.
The following table identifies the fair value of fixed maturity securities by
pricing source as of December 31, 2003 and 2002:
2003 2002
------------------------------------ ------------------------------------
General Account Fixed Percentage of General Account Fixed Percentage of
Maturities at Fair Total Fair Maturities at Fair Total Fair
Value Value Value Value
--------------------- ------------- --------------------- -------------
Priced via independent market quotations $ 30,806 82.2% $ 23,134 78.8%
Priced via broker quotations 2,250 6.0% 3,127 10.6%
Priced via matrices 2,488 6.6% 2,039 6.9%
Priced via other methods 172 0.5% 87 0.3%
Short-term investments [1] 1,746 4.7% 990 3.4%
------------ ----- ----------- -----
TOTAL $ 37,462 100.0% $ 29,377 100.0%
============ ===== =========== =====
[1] Short-term investments are valued at amortized cost, which approximates
fair value.
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. As such, the estimated fair value of a
financial instrument may differ significantly from the amount that could be
realized if the security was sold immediately.
Other-Than-Temporary Impairments
One of the significant estimations inherent in the valuation of investments is
the evaluation of other-than-temporary impairments. The evaluation of
impairments is a quantitative and qualitative process, which is subject to risks
and uncertainties and is intended to determine whether declines in the fair
value of investments should be recognized in current period earnings. 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. The Company's accounting policy requires that a decline in
the value of a security below its amortized cost basis be assessed to determine
if the decline is other-than-temporary. If so, the security is deemed to be
other-than-temporarily impaired, and a charge is recorded in net realized
capital losses equal to the difference between the fair value and amortized cost
basis of the security. The fair value of the other-than-temporarily impaired
investment becomes its new cost basis. The Company has a security monitoring
process overseen by a committee of investment and accounting professionals that
identifies securities that, due to certain characteristics, as described below,
are subjected to an enhanced analysis on a quarterly basis.
Securities not subject to EITF Issue No. 99-20, ("non-EITF Issue No. 99-20
securities"), that are depressed by twenty percent or more for six months are
presumed to be other-than-temporarily impaired unless the depression is the
result of rising interest rates or significant objective verifiable evidence
supports that the security price is temporarily depressed and is expected to
recover within a reasonable period of time. Non-EITF Issue No. 99-20 securities
depressed less than twenty percent or depressed twenty percent or more but for
less than six months are also reviewed to determine if an other-than-temporary
impairment is present. The primary factors considered in evaluating whether a
decline in value for non-EITF Issue No. 99-20 securities is other-than-temporary
include: (a) the length of time and the extent to which the fair value has been
less than cost, (b) the financial condition, credit rating and near-term
prospects of the issuer, (c) whether the debtor is current on contractually
obligated interest and principal payments and (d) the intent and ability of the
Company to retain the investment for a period of time sufficient to allow for
recovery.
For certain securitized financial assets with contractual cash flows (including
asset-backed securities), EITF Issue No. 99-20 requires the Company to
periodically update its best estimate of cash flows over the life of the
security. If the fair value of a securitized financial asset is less than its
carrying amount and there has been a decrease in the present value of the
estimated cash flows since the last revised estimate, considering both timing
and amount, then an other-than-temporary impairment charge is recognized.
Projections of expected future cash flows may change based upon new information
regarding the performance of the underlying collateral.
F-14
For securities expected to be sold, an other-than-temporary impairment charge is
recognized if the Company does not expect the fair value of a security to
recover to amortized cost prior to the expected date of sale. Once an impairment
charge has been recorded, the Company continues to review the
other-than-temporarily impaired securities for additional other-than-temporary
impairments.
Net Realized Capital Gains and Losses
Net realized capital gains and losses on security transactions associated with
the Company's immediate participation guaranteed contracts are recorded and
offset by amounts owed to policyholders and were $1 for the years ended December
31, 2003, 2002 and 2001. Under the terms of the contracts, the net realized
capital gains and losses will be credited to policyholders in future years as
they are entitled to receive them. Net realized capital gains and losses, after
deducting the life and pension policyholders' share and related amortization of
deferred policy acquisition costs for certain products, are reported as a
component of revenues and are determined on a specific identification basis.
Net Investment Income
Interest income from fixed maturities is recognized when earned on a constant
effective yield basis. The Company stops recognizing interest income when it
does not expect to receive amounts in accordance with the contractual terms of
the security. Net investment income on these investments is recognized only when
interest payments are received.
DERIVATIVE INSTRUMENTS
Overview
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards, futures and options through 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. (For a further discussion,
see Note 3.)
The Company's derivative transactions are permitted uses of derivatives under
the derivatives use plan filed and/or approved, as applicable, by the State of
Connecticut and the State of New York insurance departments. The Company does
not make a market or trade in these instruments for the express purpose of
earning short-term trading profits.
Accounting and Financial Statement Presentation of Derivative Instruments and
Hedging Activities
Effective January 1, 2001, and in accordance with SFAS No. 133, all derivatives
are recognized on the balance sheet at their fair value. Fair value is based
upon either independent market quotations for exchange traded derivative
contracts, independent third party pricing sources or pricing valuation models
which utilize independent third party data as inputs. The derivative contracts
are reported as assets or liabilities in other investments and other
liabilities, respectively, in the Consolidated Balance Sheets, excluding
embedded derivatives and GMWB reinsurance contracts. Embedded derivatives are
recorded in the consolidated balance sheets with the associated host instrument.
GMWB reinsurance contract amounts are recorded in reinsurance recoverables in
the Consolidated Balance Sheets. (For further discussion of GMWB, see "Product
Derivatives and Risk Management".)
On the date the derivative contract is entered into, the Company designates the
derivative as (1) a hedge of the fair value of a recognized asset or liability
("fair value" hedge), (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized asset
or liability ("cash-flow" hedge), (3) a foreign-currency, fair value or
cash-flow hedge ("foreign-currency" hedge), (4) a hedge of a net investment in a
foreign operation or (5) held for other investment and risk management
activities, which primarily involve managing asset or liability related risks
which do not qualify for hedge accounting under SFAS No. 133.
Fair-Value Hedges
Changes in the fair value of a derivative that is designated and qualifies as a
fair-value hedge, along with the changes in the fair value of the hedged asset
or liability that is attributable to the hedged risk, are recorded in current
period earnings with any differences between the net change in fair value of
derivative and the hedged item representing the hedge ineffectiveness. Periodic
derivative net coupon settlements are recorded in net investment income.
F-15
Cash-Flow Hedges
Changes in the fair value of a derivative that is designated and qualifies as a
cash-flow hedge are recorded in AOCI and are reclassified into earnings when the
variability of the cash flow of the hedged item impacts earnings. Gains and
losses on derivative contracts that are reclassified from AOCI to current period
earnings are included in the line item in the Consolidated Statements of
Operations in which the hedged item is recorded. Any hedge ineffectiveness is
recorded immediately in current period earnings. Periodic derivative net coupon
settlements are recorded in net investment income.
Foreign-Currency Hedges
Changes in the fair value of derivatives that are designated and qualify as
foreign-currency hedges are recorded in either current period earnings or AOCI,
depending on whether the hedged transaction is a fair-value hedge or a cash-flow
hedge, respectively. Any hedge ineffectiveness is recorded immediately in
current period earnings. Periodic derivative net coupon settlements are recorded
in net investment income.
Net Investment in a Foreign Operation Hedges
Changes in fair value of a derivative used as a hedge of a net investment in a
foreign operation, to the extent effective as a hedge, are recorded in the
foreign currency translation adjustments account within AOCI. Cumulative changes
in fair value recorded in AOCI are reclassified into earnings upon the sale or
complete or substantially complete liquidation of the foreign entity. Any hedge
ineffectiveness is recorded immediately in current period earnings. Periodic
derivative net coupon settlements are recorded in net investment income.
Other Investment and Risk Management Activities
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 under SFAS No. 133. Changes in the fair value,
including periodic net coupon settlements, of derivative instruments held for
other investment and risk management purposes are reported in current period
earnings as net realized capital gains and losses. During 2003, the Company
began recording periodic net coupon settlement in net realized capital gains and
losses and reclassified prior period amounts to conform to the current year
presentation
Hedge Documentation and Effectiveness Testing
At hedge inception, the Company formally documents all relationships between
hedging instruments and hedged items, as well as its risk-management objective
and strategy for undertaking each hedge transaction. In connection with the
implementation of SFAS No. 133, the Company designated anew all existing hedge
relationships. The documentation process includes linking all derivatives that
are designated as fair-value, cash-flow, foreign-currency or net-investment
hedges to specific assets and liabilities on the balance sheet or to specific
forecasted transactions. The Company also formally assesses, both at the hedge's
inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values
or cash flows of hedged items. At inception, and on a quarterly basis, the
change in value of the hedging instrument and the change in value of the hedged
item are measured to assess the validity of maintaining special hedge
accounting. Hedging relationships are considered highly effective if the changes
in the fair value or discounted cash flows of the hedging instrument are within
a ratio of 80-125% of the inverse changes in the fair value or discounted cash
flows of the hedged item. Hedge effectiveness is assessed using the quantitative
methods prescribed by SFAS No. 133, as amended, including the "Change in
Variable Cash Flows Method," the "Change in Fair Value Method" and the
"Hypothetical Derivative Method" depending on the hedge strategy. If it is
determined that a derivative is no longer highly effective as a hedge, the
Company discontinues hedge accounting in the period in which the derivative
became ineffective and prospectively, as discussed below under discontinuance of
hedge accounting.
Discontinuance of Hedge Accounting
The Company discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item; (2) the derivative is
dedesignated as a hedge instrument, because it is unlikely that a forecasted
transaction will occur; or (3) the derivative expires or is sold, terminated, or
exercised. When hedge accounting is discontinued because it is determined that
the derivative no longer qualifies as an effective fair-value hedge, the
derivative continues to be carried at fair value on the balance sheet with
changes in its fair value recognized in current period earnings. The changes in
the fair value of the hedged asset or liability are no longer recorded in
earnings. When hedge accounting is discontinued because the Company becomes
aware that it is not probable that the forecasted transaction will occur, the
derivative continues to be carried on the balance sheet at its fair value, and
gains and losses that were accumulated in AOCI are recognized immediately in
earnings. In all other situations in which hedge accounting is discontinued on a
cash-flow hedge, including those where the derivative is sold, terminated or
exercised, amounts previously deferred in AOCI are amortized into earnings when
earnings are impacted by the variability of the cash flow of the hedged item.
F-16
Embedded Derivatives
The Company occasionally purchases or issues financial instruments or products
that contain a derivative instrument that is embedded in the financial
instruments or products. When it is determined that (1) the embedded derivative
possesses economic characteristics that are not clearly and closely related to
the economic characteristics of the host contract, and (2) a separate instrument
with the same terms would qualify as a derivative instrument, the embedded
derivative is bifurcated from the host for measurement purposes. The embedded
derivative, which is reported with the host instrument in the Consolidated
Balance Sheets, is carried at fair value with changes in fair value reported in
net realized capital gains and losses.
Credit Risk
The Company's derivatives counterparty exposure policy establishes market-based
credit limits, favors long-term financial stability and creditworthiness, and
typically requires credit enhancement/credit risk reducing agreements. By using
derivative instruments, the Company is exposed to credit risk, which is measured
as the amount owed to the Company based on current market conditions and
potential payment obligations between the Company and its counterparties. When
the fair value of a derivative contract is positive, this indicates that the
counterparty owes the Company, and, therefore, exposes the Company to credit
risk. Credit exposures are generally quantified weekly and netted, and
collateral is pledged to and held by, or on behalf of, the Company to the extent
the current value of derivatives exceeds exposure policy thresholds. The Company
also minimizes the credit risk in derivative instruments by entering into
transactions with high quality counterparties that are reviewed periodically by
the Company's internal compliance unit, reviewed frequently by senior management
and reported to the Company's Finance Committee of the Board of Directors. The
Company also maintains a policy of requiring that all derivative contracts be
governed by an International Swaps and Derivatives Association Master Agreement
which is structured by legal entity and by counterparty and permits the right of
offset. In addition, the Company periodically enters into swap agreements in
which the Company assumes credit exposure from a single entity, referenced index
or asset pool.
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 December 31, 2003,
$6.2 billion or 36% of account value with the GMWB feature was unreinsured. In
order to minimize the volatility associated with the unreinsured GMWB
liabilities, the Company has established an alternative risk management
strategy. During the third quarter of 2003, the Company began hedging its
unreinsured GMWB exposure using interest rate futures, Standard and Poor's
("S&P") 500 and NASDAQ index put options and futures contracts. For the year
ended December 31, 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 $6 gain before deferred policy
acquisition costs and tax effects. The net gain is due principally to an
approximate $4 gain associated with international funds for which hedge
positions had not been initiated prior to December 31, 2003, but were initiated
in the first quarter of 2004 and $2 due to modeling refinements to improve
valuation estimates. Excluding these items our hedging strategy ineffectiveness
on S&P 500 and NASDAQ economic hedge positions was not significant.
F-17
SEPARATE ACCOUNTS
Hartford Life maintains separate account assets and liabilities, which are
reported at fair value. Separate account assets are segregated from other
investments and investment income and gains and losses accrue directly to the
policyholder. Separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts, wherein the policyholder assumes the
investment risk, and guaranteed separate accounts, wherein Hartford Life
contractually guarantees either a minimum return or account value to the
policyholder. The fees earned for administrative and contractholder maintenance
services performed for these separate accounts are included in fee income.
Beginning January 1, 2004, products previously recorded in guaranteed separate
accounts through December 31, 2003, will be recorded in the general account in
accordance with the Company's adoption of the SOP. See Note 2 of Notes to
Consolidated Financial Statements for a more complete discussion of the
Company's adoption of the SOP.
DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
Policy acquisition costs, which include commissions and certain other expenses
that vary with and are primarily associated with acquiring business, are
deferred and amortized over the estimated lives of the contracts, usually 20
years. These deferred costs, together with the present value of future profits
of acquired business, are recorded as an asset commonly referred to as deferred
policy acquisition costs and present value of future profits ("DAC"). At
December 31, 2003 and 2002, the carrying value of the Company's DAC was $6.6
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 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 to a lesser extent, variable
universal 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 universal
life business was 9% for the years ended December 31, 2003 and 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 both years ended
December 31, 2003 and 2002.
The Company has developed sophisticated modeling capabilities to evaluate its
DAC asset, which allowed it to run a large number of stochastically determined
scenarios of separate account fund performance. These scenarios were then
utilized to calculate a statistically significant range of reasonable estimates
of EGPs. This range was then compared to the present value of EGPs currently
utilized in the DAC amortization model. As of December 31, 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 December 31,
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 15% or
less for 2004, and if certain other assumptions that are implicit in the
computations of the EGPs are achieved.
Additionally, the Company continues to perform analyses with respect to the
potential impact of a revision to future EGPs. If such a revision to EGPs were
deemed necessary, the Company would adjust, as appropriate, all of its
assumptions for products accounted for in accordance with 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 December 31,
2003. If the Company assumed a 9% average long-term rate of growth from December
31, 2003 forward along with other appropriate assumption changes in determining
the revised EGPs, the Company estimates the cumulative increase to amortization
would be approximately $65-$75, 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 $80-$95, after-tax. Assuming that such an adjustment were
to have been required, the Company anticipates that there would have been
immaterial impacts on its DAC amortization for the 2004 and 2005 years exclusive
of
F-18
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 1,112 on December 31, 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 December 31, 2003, the Company believed variable annuity
separate account assets could fall by at least 40% before portions of its DAC
asset would be unrecoverable.
RESERVE FOR FUTURE POLICY BENEFITS
Hartford Life establishes and carries as liabilities actuarially determined
reserves which are calculated to meet the Company's future obligations. Reserves
for life insurance and disability contracts are based on actuarially recognized
methods using prescribed morbidity and mortality tables in general use in the
United States, which are modified to reflect the Company's actual experience
when appropriate. These reserves are computed at amounts that, with additions
from estimated premiums to be received and with interest on such reserves
compounded annually at certain assumed rates, are expected to be sufficient to
meet the Company's policy obligations at their maturities or in the event of an
insured's disability or death. Reserves also include unearned premiums, premium
deposits, claims incurred but not reported and claims reported but not yet paid.
Reserves for assumed reinsurance are computed in a manner that is comparable to
direct insurance reserves.
Liabilities for future policy benefits are computed by the net level premium
method using interest assumptions ranging from 3% to 11% and withdrawal and
mortality assumptions appropriate at the time the policies were issued. Claim
reserves, which are the result of sales of group long-term and short-term
disability, stop loss, and Medicare supplement, are stated at amounts determined
by estimates on individual cases and estimates of unreported claims based on
past experience.
F-19
The following table displays the development of the claim reserves (included in
reserve for future policy benefits in the Consolidated Balance Sheets) resulting
primarily from group disability products.
For the years ended
December 31,
2003 2002 2001
------- -------------------- ---------
BEGINNING CLAIM RESERVES - GROSS $ 2,914 $ 2,764 $ 2,384
Less: Reinsurance recoverables 275 264 177
------- ----------- ---------
BEGINNING CLAIM RESERVES - NET 2,639 2,500 2,207
------- ----------- ---------
INCURRED EXPENSES RELATED TO:
Current year 1,140 1,154 1,272
Prior years (41) 4 (15)
------- ----------- ---------
TOTAL INCURRED 1,099 1,158 1,257
------- ----------- ---------
PAID EXPENSES RELATED TO:
Current year 367 387 439
Prior years 638 632 525
------- ----------- ---------
TOTAL PAID 1,005 1,019 964
------- ----------- ---------
ENDING CLAIM RESERVES - NET 2,733 2,639 2,500
Add: Acquisition of claim reserves 1,497 - -
Add: Reinsurance recoverables 250 275 264
------- ----------- ---------
ENDING CLAIM RESERVES - GROSS $ 4,480 $ 2,914 $ 2,764
======= =========== =========
OTHER POLICYHOLDER FUNDS
Other policyholder funds and benefits payable include reserves for investment
contracts without life contingencies, corporate owned life insurance and
universal life insurance contracts. Of the amounts included in this item, $25.6
billion and $22.3 billion, as of December 31, 2003 and 2002, respectively,
represent net policyholder obligations. The liability for policy benefits for
universal life-type contracts is equal to the balance that accrues to the
benefit of policyholders, including credited interest, amounts that have been
assessed to compensate the Company for services to be performed over future
periods, and any amounts previously assessed against policyholders that are
refundable on termination of the contract.
For investment contracts, policyholder liabilities are equal to the accumulated
policy account values, which consist of an accumulation of deposit payments plus
credited interest, less withdrawals and amounts assessed through the end of the
period.
REVENUE RECOGNITION
For investment and universal life-type contracts, the amounts collected from
policyholders are considered deposits and are not included in revenue. Fee
income for investment and universal life-type contracts consists of policy
charges for policy administration, cost of insurance charges and surrender
charges assessed against policyholders' account balances and are recognized in
the period in which services are provided. Traditional life and the majority of
the Company's accident and health products are long duration contracts, and
premiums are recognized as revenue when due from policyholders. Retrospective
and contingent commissions and other related expenses are incurred and recorded
in the same period that the retrospective premiums are recorded or other
contract provisions are met.
FOREIGN CURRENCY TRANSLATION
Foreign currency translation gains and losses are reflected in stockholder's
equity as a component of accumulated other comprehensive income. The Company's
foreign subsidiaries' balance sheet accounts are translated at the exchange
rates in effect at each year end and income statement accounts are translated at
the average rates of exchange prevailing during the year. Gains and losses on
foreign currency transactions are reflected in earnings. The national currencies
of the international operations are their functional currencies.
DIVIDENDS TO POLICYHOLDERS
Policyholder dividends are accrued using an estimate of the amount to be paid
based on underlying contractual obligations under policies and applicable state
laws.
Participating life insurance in force accounted for 6%, 6% and 8% as of December
31, 2003, 2002 and 2001, respectively, of total life insurance in force.
Dividends to policyholders were $63, $65 and $68 for the years ended December
31, 2003, 2002 and 2001, respectively. There were no additional amounts of
income allocated to participating policyholders. If limitations exist on the
amount
F-20
of net income from participating life insurance contracts that may be
distributed to stockholders, the policyholder's share of net income on those
contracts that cannot be distributed is excluded from stockholders' equity by a
charge to operations and a credit to a liability.
MUTUAL FUNDS
The Company maintains a retail mutual fund operation, whereby the Company,
through wholly-owned subsidiaries, provides investment management and
administrative services to The Hartford mutual funds, a family of 34 mutual
funds. The Company charges fees to the shareholders of the mutual funds, which
are recorded as revenue by the Company. Investors can purchase "shares" in the
mutual funds, all of which are registered with the Securities and Exchange
Commission, in accordance with the Investment Company Act of 1940. The mutual
funds are owned by the shareholders of those funds and not by the Company. As
such, the mutual fund assets and liabilities and related investment returns are
not reflected in the Company's consolidated financial statements since they are
not assets, liabilities and operations of the Company.
REINSURANCE
Written premiums, earned premiums and incurred insurance losses and loss
adjustment expense all reflect the net effects of assumed and ceded reinsurance
transactions. Assumed reinsurance refers to our acceptance of certain insurance
risks that other insurance companies have underwritten. Ceded reinsurance means
other insurance companies have agreed to share certain risks the Company has
underwritten. Reinsurance accounting is followed for assumed and ceded
transactions when the risk transfer provisions of SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," have
been met.
INCOME TAXES
The Company recognizes taxes payable or refundable for the current year and
deferred taxes for the future tax consequences of differences between the
financial reporting and tax basis of assets and liabilities. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years the temporary differences are expected to reverse.
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS
For the years ended December 31,
-------------------------------------------------
2003 2002 2001
----------- ---------- ----------
COMPONENTS OF NET INVESTMENT INCOME
Fixed maturities income $ 1,673 $ 1,485 $ 1,364
Policy loans income 210 254 307
Other investment income 181 131 127
----------- ---------- ----------
Gross investment income 2,064 1,870 1,798
Less: Investment expenses 23 21 16
----------- ---------- ----------
NET INVESTMENT INCOME $ 2,041 $ 1,849 $ 1,782
=========== ========== ==========
COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
Fixed maturities $ 19 $ (296) $ (49)
Equity securities (7) (22) (11)
Periodic net coupon settlements on non-qualifying derivatives 26 9 (3)
Sale of affiliates (1) (4) (39)
Other [1] 2 4 (35)
Change in liability to policyholders for net realized capital gains 1 1 1
----------- ---------- ----------
NET REALIZED CAPITAL GAINS (LOSSES) $ 40 $ (308) $ (136)
=========== ========== ==========
[1] 2003 Includes $6 of net gains associated with the GMWB hedging program.
F-21
COMPONENTS OF UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES
Gross unrealized gains $ 34 $ 10 $ 9
Gross unrealized losses (12) (35) (29)
----------- ---------- ----------
Net unrealized gains (losses) 22 (25) (20)
Deferred income taxes and other items 8 (9) (7)
----------- ---------- ----------
Net unrealized gains (losses), net of tax 14 (16) (13)
Balance - beginning of year (16) (13) (6)
----------- ---------- ----------
CHANGE IN UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES $ 30 $ (3) $ (7)
=========== ========== ==========
COMPONENTS OF UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES
Gross unrealized gains $ 2,051 $ 1,704 $ 632
Gross unrealized losses (158) (309) (341)
Net unrealized losses credited to policyholders (63) (58) (21)
----------- ---------- ----------
Net unrealized gains 1,830 1,337 270
Deferred income taxes and other items 916 700 94
----------- ---------- ----------
Net unrealized gains, net of tax 914 637 176
Balance - beginning of year 637 176 46
----------- ---------- ----------
CHANGE IN UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES $ 277 $ 461 $ 130
=========== ========== ==========
As of December 31, 2003
--------------------------------------------------------------------
Amortized Gross Gross
COMPONENTS OF FIXED MATURITY INVESTMENTS Cost Unrealized Gains Unrealized Losses Fair Value
- ---------------------------------------- ------------ ---------------- ------------------ ------------
Bonds and Notes
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) $ 759 $ 9 $ (2) $ 766
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 2,634 38 (4) 2,668
States, municipalities and political subdivisions 2,184 174 (8) 2,350
International governments 697 65 (1) 761
Public utilities 1,452 109 (6) 1,555
All other corporate including international 16,166 1,263 (50) 17,379
All other corporate - asset-backed 9,672 389 (87) 9,974
Short-term investments 1,974 2 -- 1,976
Redeemable preferred stock 31 2 -- 33
------------ ------------ ------------ ------------
TOTAL FIXED MATURITIES $ 35,569 $ 2,051 $ (158) $ 37,462
============ ============ ============ ============
As of December 31, 2002
--------------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Gains Unrealized Losses Fair Value
------------ ---------------- ------------------ ------------
Bonds and Notes
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) $ 346 $ 12 $ -- $ 358
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 2,354 76 (3) 2,427
States, municipalities and political subdivisions 1,881 150 (1) 2,030
International governments 476 52 (2) 526
Public utilities 1,236 74 (31) 1,279
All other corporate including international 11,917 901 (134) 12,684
All other corporate - asset-backed 8,013 407 (115) 8,305
Short-term investments 1,099 1 -- 1,100
Certificates of deposit 629 28 (23) 634
Redeemable preferred stock 31 3 -- 34
------------ ------------ ------------ ------------
TOTAL FIXED MATURITIES $ 27,982 $ 1,704 $ (309) $ 29,377
============ ============ ============ ============
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 2003 by contractual maturity year are shown below. Estimated
maturities may differ from contractual maturities due to call or prepayment
provisions. Asset-backed
F-22
securities, including mortgage-backed securities and collateralized mortgage
obligations, are distributed to maturity year based on the Company's estimates
of the rate of future prepayments of principal over the remaining lives of the
securities. These estimates are developed using prepayment speeds provided in
broker consensus data. Such estimates are derived from prepayment speeds
experienced at the interest rate levels projected for the applicable underlying
collateral. Actual prepayment experience may vary from these estimates.
MATURITY Amortized Cost Fair Value
-------- -------------- ----------
One year or less $ 4,097 $ 4,114
Over one year through five years 11,800 12,303
Over five years through ten years 9,008 9,540
Over ten years 10,664 11,505
------------ ------------
TOTAL $ 35,569 $ 37,462
============ ============
NON-INCOME PRODUCING INVESTMENTS
Investments that were non-income producing as of December 31, are as follows:
2003 2002
------------------------ ------------------------
Amortized Amortized
Security Type Cost Fair Value Cost Fair Value
------------- ---------- ---------- ---------- ----------
All other corporate - asset-backed $ 2 $ 4 $ -- $ --
All other corporate including international 11 30 26 39
International governments 1 1 -- --
---------- ---------- --------- ---------
TOTAL $ 14 $ 35 $ 26 $ 39
========== ========== ========= =========
For 2003, 2002 and 2001, net investment income was $18, $14 and $2,
respectively, lower than it would have been if interest on non-accrual
securities had been recognized in accordance with the original terms of these
investments.
SALES OF FIXED MATURITY AND EQUITY SECURITY INVESTMENTS
For the years ended December 31,
-------------------------------------------------
2003 2002 2001
----------- ----------- -----------
SALE OF FIXED MATURITIES
Sale proceeds $ 7,036 $ 6,910 $ 6,033
Gross gains 236 143 104
Gross losses (75) (71) (52)
SALE OF EQUITY SECURITIES
Sale proceeds $ 169 $ 11 $ 46
Gross gains 14 1 2
Gross losses -- (5) (13)
----------- ----------- -----------
CONCENTRATION OF CREDIT RISK
The Company is not exposed to any credit concentration risk of a single issuer
greater than 10% of the Company's stockholder's equity.
SECURITY UNREALIZED LOSS AGING
The following table presents the Company's unrealized loss, fair value and
amortized cost for fixed maturity and equity securities, excluding securities
subject to EITF Issue No. 99-20, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2003.
F-23
Less Than 12 Months 12 Months or More Total
----------------------------- ------------------------------- -----------------------------
Amortized Fair Unrealized Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Losses Cost Value Losses Cost Value Losses
--------- ------ ---------- --------- ------ ---------- --------- ------- ----------
U.S. Gov't and Gov't agencies and
authorities (guaranteed and
sponsored) $ 262 $ 260 $ (2) $ -- $ -- $ -- $ 262 $ 260 $ (2)
U.S. Gov't and Gov't agencies and
authorities (guaranteed and
sponsored) - asset-backed 425 421 (4) 1 1 -- 426 422 (4)
States, municipalities and political
subdivisions 217 209 (8) -- -- -- 217 209 (8)
International governments 31 30 (1) -- -- -- 31 30 (1)
Public utilities 142 140 (2) 61 57 (4) 203 197 (6)
All other corporate including
international 1,356 1,323 (33) 377 361 (16) 1,733 1,684 (49)
All other corporate - asset-backed 845 835 (10) 142 141 (1) 987 976 (11)
------ ------ ------ --------- ------ -------- --------- ------ ------
Total fixed maturities 3,278 3,218 (60) 581 560 (21) 3,859 3,778 (81)
Common stock 2 2 -- 4 4 -- 6 6 --
Nonredeemable preferred stock 55 50 (5) 65 59 (6) 120 109 (11)
------ ------ ------ --------- ------ -------- --------- ------ ------
Total equity 57 52 (5) 69 63 (6) 126 115 (11)
------ ------ ------ --------- ------ -------- --------- ------ ------
TOTAL TEMPORARILY IMPAIRED SECURITIES $3,335 $3,270 $ (65) $ 650 623 $ (27) $ 3,985 $3,893 $ (92)
====== ====== ====== ========= ====== ======== ========= ====== ======
The following discussion refers to the data presented in the table above.
There were no fixed maturities or equity securities as of December 31, 2003,
with a fair value less than 80% of the security's amortized cost. As of December
31, 2003, fixed maturities represented approximately 88% of the Company's
unrealized loss amount, which was comprised of approximately 475 different
securities. As of December 31, 2003, the Company held no securities presented in
the table above that were at an unrealized loss position in excess of $4.2.
The majority of the securities in an unrealized loss position for less than
twelve months are depressed due to the rise in long-term interest rates. This
group of securities was comprised of over 400 securities. Of the less than
twelve months total unrealized loss amount $56, or 86%, was comprised of
securities with fair value to amortized cost ratios as of December 31, 2003 at
or greater than 90%. As of December 31, 2003, $55 of the less than twelve months
total unrealized loss amount was comprised of securities in an unrealized loss
position for less than six continuous months.
The securities depressed for twelve months or more were comprised of less than
100 securities. Of the twelve months or more unrealized loss amount $22, or 82%,
was comprised of securities with fair value to amortized cost ratios as of
December 31, 2003 at or greater than 90%.
As of December 31, 2003, the securities in an unrealized loss position for
twelve months or more were primarily interest rate related. The sector in the
greatest gross unrealized loss position in the schedule above was financial
services, which is included within the all other corporate including
international and non-redeemable preferred stock categories above. A description
of the events contributing to the security type's unrealized loss position and
the factors considered in determining that recording an other-than-temporary
impairment was not warranted are outlined below.
Financial services represents approximately $19 of the securities in an
unrealized loss position for twelve months or more. All of these positions
continue to be priced at or greater than 80% of amortized cost. The financial
services securities in an unrealized loss position are primarily investment
grade variable rate securities with extended maturity dates, which have been
adversely impacted by the reduction in forward interest rates after the purchase
date, 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 generally
receive cash flow hedge accounting treatment and are currently in an unrealized
gain position.
The remaining balance of $8 in the twelve months or more unrealized loss
category is comprised of approximately 50 securities with fair value to
amortized cost ratios greater than 80%.
As part of the Company's ongoing security monitoring process by a committee of
investment and accounting professionals, the Company has reviewed its investment
portfolio and concluded that there were no additional other-than-temporary
impairments as of December 31, 2003 and 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, management's intent
and ability to hold these securities, as well as the evaluation of the
fundamentals of the issuers' financial condition and other objective evidence,
the Company believes that the prices of the securities in the sectors identified
above were temporarily depressed.
F-24
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.
DERIVATIVE INSTRUMENTS
Derivative instruments are recorded at fair value and presented in the
Consolidated Balance Sheets as of December 31, as follows:
Asset Values Liability Values
---------------------- ---------------------
2003 2002 2003 2002
-------- -------- ------- --------
Other investments $ 178 $ 257 $ -- --
Reinsurance recoverables -- 48 89 $ --
Other policyholder funds and benefits payable 115 -- -- 48
Fixed maturities 7 14 -- --
Other liabilities -- -- 257 161
-------- -------- ------- --------
TOTAL $ 300 $ 319 $ 346 $ 209
======== ======== ======= ========
The following table summarizes the primary derivative instruments used by the
Company and the hedging strategies to which they relate. Derivatives in the
Company's separate accounts are not included because associated gains and losses
generally accrue directly to policyholders. The notional value of derivative
contracts represent the basis upon which pay or receive amounts are calculated
and are not reflective of credit risk. The fair value amounts of derivative
assets and liabilities are presented on a net basis as of December 31 in the
following table.
F-25
Notional Amount Fair Value
----------------------- -----------------------
Hedging Strategy 2003 2002 2003 2002
---------------- ---------- ---------- ----------- ---------
CASH-FLOW HEDGES
Interest rate swaps
Interest rate swaps are primarily used to convert interest receipts on
floating-rate fixed maturity investments to fixed rates. These derivatives
are predominantly used to better match cash receipts from
assets with cash disbursements required to fund liabilities. $ 2,549 $ 2,734 $ 91 $ 204
Foreign currency swaps
Foreign currency swaps are used to convert foreign denominated cash flows
associated with certain foreign denominated fixed maturity investments to
U.S. dollars. The foreign fixed maturities are primarily denominated in
Euros and are swapped to minimize cash flow
fluctuations due to changes in currency rates. 736 389 (149) (29)
FAIR-VALUE HEDGES
Interest rate swaps
A portion of the Company's fixed debt is hedged against increases in LIBOR
(the benchmark interest rate). In addition, interest rate swaps are used to
hedge the changes in fair value of certain fixed rate liabilities due to
changes in LIBOR.
112 30 (5) --
Interest rate caps and floors
Interest rate caps and floors are used to offset the changes in fair value
related to corresponding interest rate caps and floors that exist
in certain of the Company's variable-rate fixed maturity investments. 80 180 (1) (4)
Swaptions
Swaption arrangements are utilized to offset the change in the fair value of
call options embedded in certain municipal fixed maturity securities. The
swaptions give the Company the option to enter into a "received fixed" swap.
The purpose of the swaptions is to mitigate reinvestment risk arising from
the call option embedded in the municipal security, providing for a fixed
return over the original term
to maturity. 14 90 1 4
NET INVESTMENT HEDGES
Forwards
Yen denominated forwards are used to hedge the net investment in the
Japanese Life operation from potential volatility in the yen to U.S.
dollar exchange rate. 200 -- (4) --
OTHER INVESTMENT AND RISK MANAGEMENT ACTIVITIES
Interest rate caps and swaption contracts
The Company is exposed to policyholder surrenders during a rising interest
rate environment. Interest rate cap and swaption contracts are used to
mitigate the Company's loss in a rising interest rate environment. The
increase in yield from the cap and swaption contract in a rising interest
rate environment may be used to raise credited rates, thereby increasing the
Company's competitiveness and reducing the policyholder's incentive to
surrender.
The Company also uses an interest rate cap as an economic hedge of the
interest rate risk related to fixed rate debt. In a rising interest rate
environment, the cap will limit the net interest expense on the
hedged fixed rate debt. 1,466 516 11 --
F-26
DERIVATIVE INSTRUMENTS (CONTINUED)
Notional Amount Fair Value
----------------------- -----------------------
Hedging Strategy 2003 2002 2003 2002
---------------- ---------- ---------- ----------- ---------
Credit default and total return swaps
The Company enters into swap agreements in which the Company assumes credit
exposure from an individual entity, referenced index or asset pool. The
Company assumes credit exposure to individual entities through credit
default swaps. These contracts entitle the company to receive a periodic
fee in exchange for an obligation to compensate the derivative counterparty
should a credit event occur on the part of the issuer. Credit events
typically include failure on the part of the issuer to make a fixed dollar
amount of contractual interest or principal, payments or bankruptcy. The
maximum potential future exposure to the Company is the notional value of
the swap contracts, $62, after-tax, as of December 31, 2003 and 2002.
The Company also assumes exposure to the change in value of indices or asset
pools through total return swaps. As of December 31, 2003 and 2002, the
maximum potential future exposure to the Company from such contracts is $172
and $93, after-tax, respectively. 360 367 (18) (42)
Options
The Company writes option contracts for a premium to monetize the option
embedded in certain of its fixed maturity investments. The written option
grants the holder the ability to call the bond at a predetermined strike
value. The maximum potential future economic exposure is represented by the
then fair value of the bond in excess of the strike value, which is expected
to be entirely offset by the appreciation in the value of the embedded
long option. 276 871 1 (1)
Interest rate swaps
The Company enters into interest rates swaps to terminate existing swaps in
hedging relationships, and thereby offsetting the changes in value in the
original swap. In addition, the Company uses interest rate swaps to convert
interest receipts on floating-rate fixed maturity investments to fixed rate. 3,077 2,706 11 (14)
Foreign currency swaps and put and call options
The Company enters into foreign currency swaps, purchases foreign put
options and writes foreign call options to hedge the foreign currency
exposures in certain of its foreign fixed maturity investments. Currency
options were closed in January 2003 for a loss of $1, after-tax. 104 353 (31) (8)
Product derivatives
The Company offers certain variable annuity products with a GMWB rider. The
GMWB is an embedded derivative that 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. The policyholder also has the
option, after a specified time period, to reset the GRB to the then-current
account value, if greater (For a further discussion, see Note 2). The
notional value of the embedded derivative is the GRB balance. 14,961 2,760 115 (48)
F-27
Notional Amount Fair Value
---------------------- -----------------------
Hedging Strategy 2003 2002 2003 2002
---------------- ---------- --------- ----------- ---------
Reinsurance contracts
Reinsurance arrangements are used to offset the Company's exposure to the
GMWB embedded derivative for the lives of the host variable annuity
contracts. The notional amount of the reinsurance contracts is the GRB
amount. 9,139 2,760 (89) 48
Futures contracts, equity index options and interest rate swap contracts
The Company enters into interest rate futures, Standard and Poor's ("S&P")
500 and NASDAQ index futures contracts and put and call options, as well as
interest rate swap contracts to hedge exposure to the volatility associated
with the portion of the GMWB liabilities which are not reinsured. 544 -- 21 --
--------- ---------- ---------- --------
TOTAL $ 33,618 $ 13,756 $ (46) $ 110
========= ========== ========== ========
For the years ended December 31, 2003, 2002 and 2001, the Company's gross gains
and losses representing the total ineffectiveness of all cash-flow, fair-value
and net investment hedges were immaterial. For the years ended December 31,
2003, 2002 and 2001, the Company recognized an after-tax net gain (loss) of
$(2), $2 and ($13), respectively, (reported as net realized capital gains and
losses in the Consolidated Statements of Operations), which represented the
total change in value for other derivative-based strategies which do not qualify
for hedge accounting treatment including the periodic net coupon settlements.
The net, after-tax, GMWB activity (including the embedded derivative liability,
reinsurance contracts and futures, swaps and option contracts) is included in
this amount and totaled $4, $0 and $0 for the years ended December 31, 2003,
2002 and 2001, respectively.
As of December 31, 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 twenty-four months are $7. This expectation is based on the
anticipated interest payments on hedged investments in fixed maturity securities
that will occur over the next twenty-four months, at which time the Company will
recognize the deferred net gains (losses) as an adjustment to interest income
over the term of the investment cash flows. The maximum term over which the
Company is hedging its exposure to the variability of future cash flows (for all
forecasted transactions, excluding interest payments on variable-rate debt) is
twenty-four months. For the years ended December 31, 2003, 2002 and 2001, the
net reclassifications from AOCI to earnings resulting from the discontinuance of
cash-flow hedges were immaterial.
The net investment hedge of the Japanese Life operation was established in the
fourth quarter of 2003. The after-tax amount of gain (loss) included in the
foreign currency translation adjustment associated with the net investment hedge
was $(3) as of December 31, 2003. The net amount of gains (losses) recorded in
the foreign currency translation adjustments account pertaining to the net
investment hedge for the year ended December 31, 2003 was $(3).
SECURITIES LENDING AND COLLATERAL ARRANGEMENTS
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 December 31, 2003, the fair value of
the loaned securities was approximately $0.8 billion and was included in fixed
maturities in the Consolidated Balance Sheets. 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, of $0.6 for the year ended December 31, 2003, which was
included in net investment income.
The Company enters into various collateral arrangements, which require both the
pledging and accepting of collateral in connection with its derivative
instruments. As of December 31, 2003 and 2002, collateral pledged of $275 and
$96, respectively, was included in fixed maturities in the Consolidated Balance
Sheets.
F-28
The classification and carrying amount of the loaned securities associated with
the lending program and the collateral pledged at December 31, 2003 and 2002
were as follows:
LOANED SECURITIES AND COLLATERAL PLEDGED 2003 2002
---------------------------------------- ---- ----
U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) $ 454 $ 20
U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored - asset-backed) 33 76
International governments 11 --
Public utilities 15 --
All other corporate including international 398 --
All other corporate - asset-backed 196 --
---------- ----------
TOTAL $ 1,107 $ 96
========== ==========
As of December 31, 2003 and 2002, the Company had accepted collateral relating
to the securities lending program and collateral arrangements consisting of
cash, U.S. Government, and U.S. Government agency securities with a fair value
of $1.1 billion and $454, respectively. At December 31, 2003 and 2002, only
cash collateral of $0.9 billion and $176, respectively, was invested and
recorded in the Consolidated Balance Sheets in fixed maturities and with a
corresponding amount recorded in other liabilities. The Company is only
permitted by contract to sell or repledge the noncash collateral in the event
of a default by the counterparty and none of the collateral has been sold or
repledged at December 31, 2003 and 2002. As of December 31, 2003 and 2002, all
collateral accepted was held in separate custodial accounts.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", requires
disclosure of fair value information of financial instruments. For certain
financial instruments where quoted market prices are not available, other
independent valuation techniques and assumptions are used. Because considerable
judgment is used, these estimates are not necessarily indicative of amounts that
could be realized in a current market exchange. SFAS No. 107 excludes certain
financial instruments from disclosure, including insurance contracts, other than
financial guarantees and investment contracts. Hartford Life uses the following
methods and assumptions in estimating the fair value of each class of financial
instrument.
Fair value for fixed maturities and marketable equity securities approximates
those quotations published by applicable stock exchanges or received from other
reliable sources.
For policy loans, carrying amounts approximate fair value.
Fair value of limited partnerships and trusts is based on external market
valuations from partnership and trust management.
Derivative instruments are 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. Other
policyholder funds and benefits payable fair value information is determined by
estimating future cash flows, discounted at the current market rate.
For short-term debt, carrying amounts approximate fair value.
Fair value for long-term debt is based on market quotations from independent
third party pricing services.
The carrying amounts and fair values of Hartford Life's financial instruments at
December 31, 2003 and 2002 were as follows:
2003 2002
--------------------------- ------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
ASSETS
Fixed maturities $ 37,462 37,462 $ 29,377 $ 29,377
Equity securities 357 357 458 458
Policy loans 2,512 2,512 2,934 2,934
Limited partnerships [1] 177 177 519 519
Other investments [2] 646 646 603 603
--------- -------- -------- ---------
LIABILITIES
Other policyholder funds [3] $ 24,284 $ 24,677 $ 20,744 $ 20,951
Short-term debt 200 205 - -
Long-term debt 1,300 1,461 1,500 1,608
Related Party Debt 305 305 75 75
Derivative related liabilities [4] 257 257 161 161
========= ======== ======== =========
[1] Included in other investments on the balance sheet.
[2] 2003 and 2002 include $178 and $257 of derivative related assets,
respectively.
[3] Excludes group accident and health and universal life contracts, including
corporate owned life insurance.
[4] Included in other liabilities on the balance sheet.
F-29
5. SALE OF SUDAMERICANA HOLDING S.A.
On September 7, 2001, Hartford Life completed the sale of its ownership interest
in an Argentine subsidiary, Sudamericana Holding S.A. The Company recognized an
after-tax net realized capital loss of $21 related to the sale.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142 and accordingly
ceased all amortization of goodwill. The carrying amount of goodwill is $796 as
of December 31, 2003 and 2002, respectively.
The following tables show net income for the years ended December 31, 2003, 2002
and 2001, with the 2001 period adjusted for goodwill amortization recorded.
NET INCOME 2003 2002 2001
---------- --------- ---------- ----------
Income before cumulative effect of accounting changes $ 769 $ 557 $ 711
Goodwill amortization, net of tax 16
--------- ---------- ----------
Adjusted income before cumulative effect of accounting changes 769 557 727
Cumulative effect of accounting changes, net of tax -- -- 26
--------- ---------- ----------
Adjusted net income $ 769 $ 557 $ 701
The following table shows the Company's acquired intangible assets that continue
to be subject to amortization and aggregate amortization expense. Except for
goodwill, the Company has no material intangible assets with indefinite useful
lives.
2003 2002
--------------------------- --------------------------
Carrying Accumulated Net Carrying Accumulated Net
AMORTIZED INTANGIBLE ASSETS Amount Amortization Amount Amortization
- --------------------------- --------- --------------- -------- ---------------
Present value of future profits $ 543 $ 115 $ 529 $ 76
-------- ------ ------- -----
Total $ 543 $ 115 $ 529 $ 76
======== ====== ======= =====
The following is detail of the PVP activity as of December 31, 2003 and 2002:
2003 2002
-------- ------
BEGINNING PVP BALANCE $ 529 $ 568
Acquisition of CNA Business 53 --
Amortization, net of the accretion of interest (39) (39)
-------- ------
ENDING PVP BALANCE $ 543 $ 529
======== ======
Net amortization expense for the years ended December 31, 2003, 2002 and 2001
was $39, $39 and $37, respectively.
Assuming no future acquisitions, dispositions or impairments of intangible
assets, estimated future net amortization expense for the succeeding five years
is as follows.
For the year ended December 31,
- --------------------------------
2004 $ 39
2005 $ 34
2006 $ 34
2007 $ 30
2008 $ 29
The Company's tests of its goodwill for other-than-temporary impairment in
accordance with SFAS No. 142 resulted in no write-downs for the years ended
December 31, 2003 and 2002. For further discussions of the adoption of SFAS No.
142, see Note 2.
7. SEPARATE ACCOUNTS
F-30
Hartford Life maintained separate account assets and liabilities totaling $136.6
billion and $107.1 billion at December 31, 2003 and 2002, respectively, which
are reported at fair value. Separate account assets, which are segregated from
other investments, reflect two categories of risk assumption: non-guaranteed
separate accounts totaling $124.5 billion and $95.3 billion at December 31, 2003
and 2002, respectively, wherein the policyholder assumes the investment risk,
and guaranteed separate accounts totaling $12.1 billion and $11.8 billion at
December 31, 2003 and 2002, respectively, wherein Hartford Life contractually
guarantees either a minimum return or the account value to the policyholder.
Included in the non-guaranteed category were policy loans totaling $139 and $384
at December 31, 2003 and 2002, respectively. Net investment income (including
net realized capital gains and losses) and interest credited to policyholders on
separate account assets are not reflected in the Consolidated Statements of
Income. Beginning January 1, 2004, products previously recorded in guaranteed
separate accounts through December 31, 2003, will be recorded in the general
account in accordance with the Company's adoption of the SOP. See Note 2 for a
more complete discussion of the Company's adoption of the SOP.
Separate account management fees and other revenues included in fee income were
$1.3 billion, $1.2 billion and $1.3 billion in 2003, 2002 and 2001,
respectively. The guaranteed separate accounts include fixed market value
adjusted ("MVA") individual annuities and modified guaranteed life insurance.
The average credited interest rate on these contracts was 6.0% and 6.3% at
December 31, 2003 and 2002, respectively. The assets that support these
liabilities were comprised of $11.7 billion and $11.1 billion in fixed
maturities as of December 31, 2003 and 2002, respectively, and $106 and $385 of
other investments as of December 31, 2003 and 2002, respectively. The portfolios
are segregated from other investments and are managed to minimize liquidity and
interest rate risk. In order to minimize the risk of disintermediation
associated with early withdrawals, fixed MVA annuity and modified guaranteed
life insurance contracts carry a graded surrender charge as well as a market
value adjustment. Additional investment risk is hedged using a variety of
derivatives which totaled $(81) and $135 in net carrying value and $2.6 billion
and $3.6 billion in notional amounts as of December 31, 2003 and 2002,
respectively.
8. DEBT
2003 2002
------------ ------------
Amount Amount
------------ ------------
SHORT-TERM DEBT
6.90% notes, due June 2004 $ 200 $ --
Related Party Debt
4.10% note, due November 2006 $ 75 --
2.57% note, due May 2006 150 --
2.57% note, due May 2006 80 --
Total related party debt $ 305 $ --
------------ ------------
TOTAL SHORT-TERM DEBT 505 --
============ ============
LONG-TERM DEBT
6.90% notes, due June 2004 $ -- $ 200
7.10% notes, due June 2007 200 200
7.65% debentures, due June 2027 250 250
7.375% notes, due March 2031 400 400
Related Party Debt
4.10% note, due November 2006 -- 75
Junior Subordinated Debentures 450 450
------------ ------------
TOTAL LONG-TERM DEBT $ 1,300 $ 1,575
SHELF REGISTRATIONS
On May 15, 2001, Hartford Life filed with the Securities and Exchange Commission
("SEC") a shelf registration statement for the potential offering and sale of up
to $1.0 billion in debt and preferred securities. The registration statement was
declared effective on May 29, 2001. As of December 31, 2003, the Company had
$1.0 billion remaining on its shelf.
F-31
SHORT-TERM DEBT
Effective December 31, 2002, Hartford Life terminated its existing $250 five
year revolving credit facility which was scheduled to expire in 2003. Also
effective December 31, 2002, Hartford Life, in conjunction with its parent The
Hartford, signed a new $490 three year revolving credit facility with a group of
participating banks. Hartford Life has access to up to $250 of this credit
facility. This facility, which expires in 2005, is available for general
corporate purposes and to provide additional support for the Company's
commercial paper program. In addition, the Company's Japanese operation has a
$30 line of credit with a Japanese bank.
Hartford Life has a commercial paper program, which allows it to borrow up to a
maximum amount of $250 in short-term commercial paper notes. As of December 31,
2003, the Company had no outstanding borrowings under the program.
LONG-TERM DEBT
Hartford Life's long-term debt securities are unsecured obligations of Hartford
Life and rank on a parity with all other unsecured and unsubordinated
indebtedness. In February 1997, the Company filed a shelf registration statement
for the issuance and sale of up to $1.0 billion in the aggregate of senior debt
securities, subordinated debt securities and preferred stock. In June 1997, the
Company issued an aggregate principal amount of $650 of unsecured redeemable
long-term debt in the form of notes and debentures, maturing between 2004 and
2027. Interest on each of the notes and debentures is payable semi-annually on
June 15 and December 15 of each year, which commenced December 15, 1997.
In June 1998, Hartford Life filed a shelf registration statement with the
Securities and Exchange Commission for the issuance of up to $1.0 billion of
debt and equity securities, including up to $350 of previously registered but
unsold securities, described above. The Company issued $250 of Company Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely
Parent Junior Subordinated Debentures on June 29, 1998, discussed below.
On March 1, 2001, the Company issued $400 of senior debt securities maturing in
2031 from its existing shelf registration in order to partially finance the
Fortis acquisition. Interest on the debt securities is payable semi-annually on
March 1 and September 1 of each year, which commenced September 1, 2001.
On March 6, 2001, the Company issued $200 of Company Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust Holding Solely Parent Junior
Subordinated Debentures, discussed below.
In May 2001, Hartford Life filed a shelf registration statement with the
Securities and Exchange Commission in May 2001 for the issuance of up to $1.0
billion of debt and equity securities, including up to $150 of previously
registered but unsold securities, described above. As of December 31, 2003,
Hartford Life had $1 billion remaining on this shelf registration.
Interest expense incurred related to short and long-term debt totaled $78, $78
and $73 for the years ended December 31, 2003, 2002 and 2001, respectively.
RELATED PARTY DEBT
Effective September 30, 2003, Hartford Life signed a promissory note for $80
with its 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 one, lump sum, balloon payment on May 26,
2006. For a discussion of the settlement of this note see Note 20 "Subsequent
Events".
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. For a discussion of the settlement of this note see Note 20
"Subsequent Events".
Effective December 27, 2002, Hartford Life signed a promissory note for $75 with
its parent The Hartford. The note matures on November 16, 2006. Interest on the
note is payable quarterly on February 16, May 16, August 16 and November 16,
commencing on February 16, 2003. If not earlier declared due and payable by the
lender the entire principal balance of the note will convert in full into fully
paid and non-assessable shares of Hartford Life common stock of then equivalent
value. For a discussion of the settlement of this note see Note 20 "Subsequent
Events".
F-32
Interest expense incurred for related-party debt totaled $6 for the year ended
December 31, 2003 and $0 for the years ended December 31, 2002 and 2001.
JUNIOR SUBORDINATED DEBENTURES
The Company has formed statutory business trusts, which exist for the exclusive
purposes of (i) issuing Trust Securities representing undivided beneficial
interests in the assets of the Trust; (ii) investing the gross proceeds of the
Trust Securities in Junior Subordinated Deferrable Interest Debentures (`Junior
Subordinated Debentures') of the Company; and (iii) engaging in only those
activities necessary or incidental thereto. In accordance with the adoption of
FIN 46R, the Company has deconsolidated the trust preferred securities. For
further discussion of the adoption of FIN 46R, see Note 2.
On June 29, 1998, Hartford Life Capital I, a special purpose Delaware trust
formed by Hartford Life, issued 10,000,000, 7.2% Trust Preferred Securities,
Series A (Series A Preferred Securities). The proceeds from the sale of the
Series A Preferred Securities were used to acquire $250 of 7.2% Series A Junior
Subordinated Deferrable Interest Debentures (Junior Subordinated Debentures)
issued by Hartford Life. Hartford Life used the proceeds from the offering for
the retirement of its outstanding commercial paper, strategic acquisitions and
other general corporate purposes. For a discussion of the settlement of this
note see Note 20 "Subsequent Events".
The Series A Preferred Securities represent undivided beneficial interests in
Hartford Life Capital I's assets, which consist solely of the Junior
Subordinated Debentures. Hartford Life owns all the beneficial interests
represented by Series A Common Securities of Hartford Life Capital I. Holders of
Series A Preferred Securities are entitled to receive cumulative cash
distributions accruing from June 29, 1998, the date of issuance, and payable
quarterly in arrears commencing July 15, 1998 at the annual rate of 7.2% of the
stated liquidation amount of $25.00 per Series A Preferred Security. The Series
A Preferred Securities are subject to mandatory redemption upon repayment of the
Junior Subordinate Debentures at maturity or upon earlier redemption. Hartford
Life has the right to redeem the Junior Subordinated Debentures on or after June
30, 2003 or earlier upon the occurrence of certain events. Holders of Series A
Preferred Securities generally have no voting rights.
Hartford Life has the right to redeem the Junior Subordinated Debentures (i) in
whole or in part on or after June 30, 2003 or (ii) at any time, in whole but not
in part, in certain circumstances upon the occurrence of certain specified
events, in either case at a redemption price equal to accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed for
redemption plus the principal amount thereof. In addition, prior to June 30,
2003, Hartford Life shall have the right to redeem the Junior Subordinated
Debentures at any time, in whole or in part, at a redemption price equal to the
accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to
the date fixed for redemption, plus the greater of (a) the principal amount
thereof or (b) an amount equal to the present value on the redemption date of
the interest payments that would have been paid through June 30, 2003, after
discounting that amount on a quarterly basis from the originally scheduled date
for payment, and the present value on the redemption date of principal, after
discounting that amount on a quarterly basis from June 30, 2003, at a discount
rate tied to the interest rate on Treasury securities maturing on June 30, 2003.
The Junior Subordinated Debentures bear interest at the annual rate of 7.2% of
the principal amount, payable quarterly in arrears, which commenced June 29,
1998, and mature on June 30, 2038. The Junior Subordinated Debentures are
unsecured and rank junior and subordinate in right of payment to all present and
future senior debt of Hartford Life and are effectively subordinated to all
existing and future liabilities of its subsidiaries.
Hartford Life has the right at any time, and from time to time, to defer
payments of interest on the Junior Subordinated Debentures for a period not
exceeding 20 consecutive quarters up to the debentures' maturity date. During
any such period, interest will continue to accrue and Hartford Life may not
declare or pay any cash dividends or distributions on, or purchase, Hartford
Life's capital stock, nor make any principal, interest or premium payments on or
repurchase any debt securities that rank pari passu with or junior to the Junior
Subordinated Debentures. The Company will have the right at any time to dissolve
the Trust and cause the Junior Subordinated Debentures to be distributed to the
holders of the Series A Preferred Securities and the Series A Common Stock.
Hartford Life has guaranteed, on a subordinated basis, all the Hartford Life
Capital I obligations under the Series A Preferred Securities, including payment
of the redemption price and any accumulated and unpaid distributions upon
dissolution, winding up or liquidation to the extent funds are available.
On March 6, 2001, Hartford Life Capital II, a special purpose Delaware trust
formed by Hartford Life, issued 8,000,000, 7.625% Trust Preferred Securities,
Series B (Series B Preferred Securities). The material terms of the Series B
Preferred Securities are substantially the same as the Hartford Series A
Preferred Securities described above, except for the rate and the maturity date.
The proceeds from the sale of the Series B Preferred Securities were used to
acquire $200 of 7.625% Series B Junior Subordinated Deferrable Interest
Debentures (Junior Subordinated Debentures) issued by Hartford Life. Hartford
Life used the proceeds from the offering to partially finance the Fortis
acquisition.
F-33
Interest expense incurred with respect to the Series A Preferred Securities and
Series B Preferred Securities totaled approximately $34, $34 and $31 for the
years ended December 31, 2003, 2002 and 2001, respectively.
9. STOCKHOLDER'S EQUITY
STATUTORY RESULTS
For the years ended December 31,
------------------------------------------------------------------
2003 2002 2001
------ ------ ------
Statutory net income (loss) $1,026 $ (137) $ (364)
------ ------ ------
Statutory surplus $4,470 $3,019 $2,991
------ ------ ------
A significant percentage of the consolidated statutory surplus is permanently
reinvested or is subject to various state regulatory restrictions which limit
the payment of dividends without prior approval. The payment of dividends by
Connecticut-domiciled insurers is limited under the insurance holding company
laws of Connecticut. Under these laws, the insurance subsidiaries may only make
their dividend payments out of unassigned surplus. These laws require notice to
and approval by the state insurance commissioner for the declaration or payment
of any dividend, which, together with other dividends or distributions made
within the preceding twelve months, exceeds the greater of (i) 10% of the
insurer's policyholder surplus as of December 31 of the preceding year or (ii)
net income (or net gain from operations, if such company is a life insurance
company) for the twelve-month period ending on the thirty-first day of December
last preceding, in each case determined under statutory insurance accounting
policies. In addition, if any dividend of a Connecticut-domiciled insurer
exceeds the insurer's earned surplus, it requires the prior approval of the
Connecticut Insurance Commissioner. The insurance holding company laws of the
other jurisdictions in which The Hartford's insurance subsidiaries are
incorporated (or deemed commercially domiciled) generally contain similar
(although in certain instances somewhat more restrictive) limitations on the
payment of dividends. As of December 31, 2003, the maximum amount of statutory
dividends which may be paid to Hartford Life from its insurance subsidiaries in
2004, without prior approval, is $447.
The domestic insurance subsidiaries of Hartford Life prepare their statutory
financial statements in accordance with accounting practices prescribed by the
applicable insurance department. Prescribed statutory accounting practices
include publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations and general administrative rules.
The NAIC adopted the Codification of Statutory Accounting Principles
("Codification") in March 1998. The effective date for the statutory accounting
guidance was January 1, 2001. Each of Hartford Life's domiciliary states has
adopted Codification and the Company has made the necessary changes in its
statutory reporting required for implementation. The impact of applying the new
guidance resulted in a benefit of approximately $74 in statutory surplus.
10. STOCK COMPENSATION PLANS
Hartford Life's employees are included in The Hartford 2000 Incentive Stock Plan
(the "2000 Plan") and The Hartford Employee Stock Purchase Plan.
Under the 2000 Plan, awards may be granted in the form of non-qualified or
incentive stock options qualifying under Section 422A of the Internal Revenue
Code, performance shares or restricted stock, or any combination of the
foregoing. In addition, stock appreciation rights may be granted in connection
with all or part of any stock options granted under the 2000 Plan. The aggregate
number of shares of stock which may be awarded is subject to a maximum limit of
17,211,837 shares applicable to all awards for the ten-year duration of the 2000
Plan.
All options granted have an exercise price equal to the market price of The
Hartford's common stock on the date of grant, and an option's maximum term is
ten years. Certain options become exercisable over a three year period
commencing one year from the date of grant, while certain other options become
exercisable upon the attainment of specified market price appreciation of the
Company's common shares or at seven years after the date of grant. For any year,
no individual employee may receive an award of options for more than 1,000,000
shares. As of December 31, 2003, The Hartford had not issued any incentive stock
options under the 2000 Plan.
Performance awards of common stock granted under the 2000 Plan become payable
upon the attainment of specific performance goals achieved over a period of not
less than two nor more than five years, and the restricted stock granted is
subject to a restriction period. On a cumulative basis, no more than 20% of the
aggregate number of shares which may be awarded under the 2000 Plan are
available for performance shares and restricted stock awards. Also, the maximum
award of performance shares for any individual employee in any year is 200,000
shares.
F-34
In 1997, the Hartford awarded special performance-based options and restricted
stock to certain key executives under the 1995 Plan. The awards vested only if
the Hartford's stock traded at certain predetermined levels for ten consecutive
days by March 1, 2001. Vested options could not be exercised nor restricted
shares disposed of until March 1, 2001. As a result of the Hartford's stock
trading at predetermined levels for ten consecutive days, in May 1999 and also
in September 2000, the special performance-based options and restricted stock
vested. As a result, the Hartford began recognizing compensation expense in May
1999 and continued to recognize expense through March 1, 2001.
In 1996, The Hartford established The Hartford Employee Stock Purchase Plan
("ESPP"). Under this plan, eligible employees of The Hartford may purchase
common stock of The Hartford at a 15% discount from the lower of the market
price at the beginning or end of the quarterly offering period. The Hartford may
sell up to 5,400,000 shares of stock to eligible employees under the ESPP,
443,467 and 408,304, and 315,101 shares were sold in 2003, 2002 and 2001,
respectively. The per share weighted average fair value of the discount under
the ESPP was $11.96, $11.70, and $14.31 in 2003, 2002 and 2001, respectively.
Additionally, during 1997, The Hartford established employee stock purchase
plans for certain employees of the Hartford's international subsidiaries. Under
these plans, participants may purchase common stock of The Hartford at a fixed
price at the end of a three-year period.
Effective January 1, 2003, The Hartford adopted the fair value recognition
provisions of accounting for stock-based compensation awards granted or modified
after January 1, 2003. All stock-based awards granted or modified prior to
January 1, 2003, continue to be valued using the intrinsic value-based
provisions set forth in APB Opinion No. 25 and related interpretations. (See
Note 2 for discussion of accounting for stock compensation plans.)
11. PENSION PLANS, POSTRETIREMENT, HEALTH CARE AND LIFE INSURANCE BENEFIT AND
SAVINGS PLANS
PENSION PLANS
Hartford Life's employees are included in The Hartford's non-contributory
defined benefit pension and postretirement health care and life insurance
benefit plans. Defined benefit pension expense, allocated by The Hartford, was
$34, $18 and $16 for the years ended December 31, 2003, 2002 and 2001,
respectively. Postretirement health care and life insurance benefits expense,
allocated by The Hartford, was not material to the results of operations for
2003, 2002 and 2001.
INVESTMENT AND SAVINGS PLAN
Substantially all U.S. employees are eligible to participate in The Hartford's
Investment and Savings Plan under which designated contributions may be invested
in common stock of The Hartford or certain other investments. These
contributions are matched, up to 3% of compensation, by the Company. In
addition, the Company allocates 0.5% of base salary to the plan for each
eligible employee. In 2004, the Company allocates 1.5% of base salary to plan
for eligible employees who have salaries of less than $90,000 per year. The cost
to Hartford Life for this plan was approximately $10, $9 and $8 for the years
ended December 31, 2003, 2002 and 2001, respectively.
12. REINSURANCE
Hartford Life cedes insurance to other insurers in order to limit its maximum
losses and to diversify its exposures. Such transfer does not relieve Hartford
Life of its primary liability and, as such, failure of reinsurers to honor their
obligations could result in losses to Hartford Life. The Company also assumes
reinsurance from other insurers and is a member of and participates in several
reinsurance pools and associations. Hartford Life evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk. As of
December 31, 2003, Hartford Life had no reinsurance recoverables and related
concentrations of credit risk greater than 10% of the Company's stockholders'
equity.
In accordance with normal industry practice, Hartford Life is involved in both
the cession and assumption of insurance with other insurance and reinsurance
companies. As of December 31, 2003, the largest amount of life insurance
retained on any one life by any one of the life operations was approximately
$2.5. In addition, the Company reinsures the majority of the minimum death
benefit guarantees and the guaranteed withdrawal benefits offered in connection
with its variable annuity contracts.
F-35
Insurance net retained premiums were comprised of the following:
For the years ended December 31,
---------------------------------------------------------------------
2003 2002 2001
------- ---------- ---------
Gross premiums $ 6,247 $ 5,634 $ 5,950
Reinsurance assumed 195 180 232
Reinsurance ceded (465) (420) (446)
-------- ---------- ---------
NET RETAINED PREMIUMS $ 5,977 $ 5,394 $ 5,736
======== ========== =========
Hartford Life reinsures certain of its risks to other reinsurers under yearly
renewable term, coinsurance, and modified coinsurance arrangements. Yearly
renewable term and coinsurance arrangements result in passing a portion of the
risk to the reinsurer. Generally, the reinsurer receives a proportionate amount
of the premiums less an allowance for commissions and expenses and is liable for
a corresponding proportionate amount of all benefit payments. Modified
coinsurance is similar to coinsurance except that the cash and investments that
support the liabilities for contract benefits are not transferred to the
assuming company, and settlements are made on a net basis between the companies.
Hartford Life also purchases reinsurance covering the death benefit guarantees
on a portion of its variable annuity business. On March 16, 2003, a final
decision and award was issued in the previously disclosed arbitration between
subsidiaries of the Company and one of their primary reinsurers relating to
policies with death benefits written from 1994 to 1999 (see further discussion
in Note 14)
The cost of reinsurance related to long-duration contracts is accounted for over
the life of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies. Insurance recoveries on ceded
reinsurance contracts, which reduce death and other benefits were $541, $484 and
$392 for the years ended December 31, 2003, 2002 and 2001, respectively.
Hartford Life also assumes reinsurance from other insurers.
Hartford Life records a receivable for reinsured benefits paid and the portion
of insurance liabilities that are reinsured, net of a valuation allowance, if
necessary. The amounts recoverable from reinsurers are estimated based on
assumptions that are consistent with those used in establishing the reserves
related to the underlying reinsured contracts. Management believes the
recoverables are appropriately established; however, in the event that future
circumstances and information require Hartford Life to change its estimates of
needed loss reserves, the amount of reinsurance recoverables may also require
adjustments.
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. On January 1, 2004, upon
adoption of the SOP, the $32 was included in the Company's GMDB reserve
calculation as part of the net reserve benefit ratio and as a claim recovery to
date.
13. INCOME TAX
Hartford Life and The Hartford have entered into a tax sharing agreement under
which each member in the consolidated U.S. Federal income tax return will make
payments between them such that, with respect to any period, the amount of taxes
to be paid by the Company, subject to certain tax adjustments, generally will be
determined as though the Company were filing a separate Federal income tax
return with current credit for net losses to the extent the losses provide a
benefit in the consolidated return.
The Company is included in The Hartford's consolidated Federal income tax
return. The Company's effective tax rate was 19%, 2% and 7% for the year ended
December 31, 2003, 2002 and 2001, respectively.
F-36
Income tax expense (benefit) is as follows:
For the years ended December 31,
-------------------------------------
2003 2002 2001
-------- -------- --------
Current $ (2) $ 29 $ (230)
Deferred 182 (19) 284
------- ------- -------
INCOME TAX EXPENSE $ 180 $ 10 $ 54
======= ======= =======
A reconciliation of the tax provision at the U.S. Federal statutory rate to the
provision (benefit) for income taxes is as follows:
For the years ended December 31,
-------------------------------------
2003 2002 2001
-------- -------- --------
Tax provision at the U.S. federal statutory rate $ 332 $ 198 $ 268
Tax preferred investments (119) (93) (88)
IRS audit settlement (see Note 14) 0 (76) -
Tax adjustment (see Note 14) (30) - (130)
Foreign related investments (5) (14) -
Other 2 (5) 4
------- ------ -------
PROVISION FOR INCOME TAX $ 180 $ 10 $ 54
======= ====== =======
Deferred tax assets (liabilities) include the following as of December 31:
2003 2002
-------- -------
Tax basis deferred policy acquisition costs $ 678 $ 739
Financial statement deferred policy acquisition costs and reserves (645) (763)
Employee benefits 27 27
Net unrealized capital (gains) losses on securities (692) (528)
Net operating loss carryforward/Minimum tax credits 216 285
Investments and other (70) (34)
------- ------
TOTAL DEFERRED TAX ASSET (LIABILITY) $ (486) $ (274)
======= ======
Hartford Life had current federal income tax receivable of $3 and a current tax
payable of $6 as of December 31, 2003 and 2002, respectively.
In management's judgment, the gross deferred tax asset will more likely than not
be realized as reductions of future taxable income. Accordingly, no valuation
has been recorded. Included in the total net deferred tax liability is a
deferred tax asset for net operating losses of $273, which expire in 2017-2023.
Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax Act
of 1959 permitted the deferral from taxation of a portion of statutory income
under certain circumstances. In these situations, the deferred income was
accumulated in a "Policyholders' Surplus Account" and, based on current tax law,
will be taxable in the future only under conditions which management considers
to be remote; therefore, no federal income taxes have been provided on the
balance in this account, which for tax return purposes was $104 as of December
31, 2003. Included in the total net deferred tax liability is a deferred tax
asset for net operating losses of $273, which expire in 2017 - 2023.
14. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is or may become involved in various kinds of legal actions, some of
which assert claims for substantial amounts. These actions may include, among
others, putative state and federal class actions seeking certification of a
state or national class. The Company also is involved in individual actions in
which punitive damages are sought, such as claims alleging bad faith in the
handling of insurance claims. Management expects that the ultimate liability, if
any, with respect to such lawsuits, after consideration of provisions made for
potential losses and costs of defense, will not be material to the consolidated
financial condition of the Company.
F-37
Nonetheless, given the large or indeterminate amounts sought in certain of these
actions, and the inherent unpredictability of litigation, it is possible that an
adverse outcome in certain matters could, from time to time, have a material
adverse effect on the Company's consolidated results of operations or cash flows
in particular quarterly or annual periods.
In the third quarter of 2003, Hartford Life Insurance Company ("HLIC") 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, the Company 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. In November of 2003, the
Company paid the initial $70 of the settlement.
On March 16, 2003, a final decision and award was issued in the previously
disclosed reinsurance arbitration between subsidiaries of the Company and one of
their primary reinsurers relating to policies with guaranteed death benefits
written from 1994 to 1999. The arbitration involved alleged breaches under the
reinsurance treaties. Under the terms of the final decision and award, the
reinsurer's reinsurance obligations to the Company's subsidiaries were unchanged
and not limited or reduced in any manner. The award was confirmed by the
Connecticut Superior Court on May 5, 2003.
LEASES
The rent paid to Hartford Fire for operating leases entered into by the Company
was $51, $52, and $36 for the years ended December 31, 2003, 2002 and 2001,
respectively. Future minimum rental commitments are as follows:
2004 $ 53
2005 44
2006 40
2007 37
2008 35
Thereafter 63
----
TOTAL $272
====
Hartford Life's principal executive offices are located in Simsbury,
Connecticut. Rental expense is recognized on a level basis for the facility
located in Simsbury, Connecticut, which expires on December 31, 2009, and
amounted to approximately $20, $17 and $18 for the years ended December 31,
2003, 2002 and 2001, respectively.
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
Throughout the IRS audit of the 1996-1997 years, the Company and the IRS engaged
in a dispute regarding what portion of the separate account dividends-received
deduction ("DRD") is deductible by the Company. During 2001 the Company
continued its discussions with the IRS. As part of the Company's due diligence
with respect to this issue, the Company closely monitored the activities of the
IRS with respect to other taxpayers on this issue and consulted with outside tax
counsel and advisors on the merits of the Company's separate account DRD. The
due diligence was completed during the third quarter of 2001 and the Company
concluded that it was probable that a greater portion of the separate account
DRD claimed on its filed returns would be realized. Based on the Company's
assessment of the probable outcome, the Company concluded an additional $130 tax
benefit was appropriate to record in the third quarter of 2001, relating to the
tax years 1996-2000. Additionally, the Company increased its estimate of the
separate account DRD recognized with respect to tax year 2001 from $44 to $60.
Early in 2002, the Company and its IRS agent requested advice from the National
Office of the IRS with respect to certain aspects of the computation of the
separate account DRD that had been claimed by the Company for the 1996-1997
audit period. During
F-38
September 2002 the IRS National Office issued a ruling that confirmed that the
Company had properly computed the items in question in the separate account DRD
claimed on its 1996-1997 tax returns. Additionally, during the third quarter,
the Company reached agreement with the IRS on all other issues with respect to
the 1996-1997 tax years. The Company recorded a benefit of $76 during the third
quarter of 2002, primarily relating to the tax treatment of such issues for the
1996-1997 tax years, as well as appropriate carryover adjustments to the
1998-2002 years. The total DRD benefit related to the 2002 tax year was $63.
During the second quarter of 2003 the Company recorded 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 relating to the 2003 tax year recorded during the twelve months ended
December 31, 2003 was $87.
The Company will continue to monitor further developments surrounding the
computation of the separate account DRD, as well as other tax-related items, and
will adjust its estimate of the probable outcome of these issues as developments
warrant.
UNFUNDED COMMITMENTS
At December 31, 2003, Hartford Life has outstanding commitments totaling $277,
of which $161 is committed to fund limited partnership investments. These
capital commitments can be called by the partnership during the commitment
period (on average 2 to 5 years) to fund working capital needs or purchase new
investments. Once the commitment period expires, the Company is under no
obligation to fund the remaining unfunded commitment but may elect to do so. The
remaining $116 of outstanding commitments are primarily related to various
funding obligations associated with investments in mortgage loans. These have a
commitment period that expires in less than one year.
15. TRANSACTIONS WITH AFFILIATES
Transactions of the Company with Hartford Fire, Hartford Holdings and its
affiliates relate principally to tax settlements, reinsurance, insurance
coverage, rental and service fees, payment of dividends and capital
contributions. In addition, certain affiliated insurance companies purchased
group annuity contracts from the Company to fund pension costs and claim
annuities to settle casualty claims. Substantially all general insurance
expenses related to the Company, including rent and employee benefit plan
expenses, are initially paid by The Hartford. Direct expenses are allocated to
the Company using specific identification, and indirect expenses are allocated
using other applicable methods. Indirect expenses include those for corporate
areas which, depending on type, are allocated based on either a percentage of
direct expenses or on utilization. Indirect expenses allocated to the Company by
The Hartford were $109 for the year ended December 31, 2003, and $80 for the
years ended December 31, 2002 and 2001. Included in other liabilities are $24
and $45 due to The Hartford as of December 31, 2003 and 2002, respectively.
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.
HLIC has issued a guarantee to retirees and vested terminated employees
(Retirees) of The Hartford Retirement Plan for U.S. Employees (the Plan) who
retired or terminated prior to January 1, 2004. The Plan is sponsored by The
Hartford. The guarantee is an irrevocable commitment to pay all accrued benefits
which the Retiree or the Retiree's designated beneficiary is entitled to receive
under the Plan in the event the Plan assets are insufficient to fund those
benefits and The Hartford is unable to provide sufficient assets to fund those
benefits. The Company believes that the likelihood that payments will be
required under this guarantee is remote.
F-39
16. SEGMENT INFORMATION
Hartford Life is organized into four reportable operating segments: Investment
Products, Individual Life, Group Benefits (formerly Employee 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 universal life, universal life, interest sensitive whole life
and term life insurance. Group Benefits sells group insurance products,
including group life and group disability insurance as well as other products,
including 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
post-employment 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, as well as a Corporate category which includes
interest expense and certain other intersegment transactions which are outside
of the control of operating segment management.
The accounting policies of the reportable operating segments are the same as
those described in the summary of significant accounting policies in Note 2.
Hartford Life evaluates performance of its segments based on revenues, net
income and the segment's return on allocated capital. The Company charges direct
operating expenses to the appropriate segment and allocates the majority of
indirect expenses to the segments based on an intercompany expense arrangement.
Intersegment revenues primarily occur between Corporate and the operating
segments. These amounts primarily include interest income on allocated surplus,
interest charges on excess separate account surplus, the allocation of net
realized capital gains and losses and the allocation of credit risk charges.
Each operating segment is allocated corporate surplus as needed to support its
business. Portfolio management is a corporate function and net realized capital
gains and losses on invested assets are recognized in Corporate. Those net
realized capital gains and losses that are interest rate related are
subsequently allocated back to the operating segments in future periods, with
interest, over the average estimated duration of the operating segment's
investment portfolios, through an adjustment to each respective operating
segment's net investment income, with an offsetting adjustment in Corporate.
Credit related net capital losses are retained by Corporate. However, in
exchange for retaining credit related losses, Corporate charges each operating
segment a "credit-risk" fee through net investment income. The "credit-risk" fee
covers fixed income assets included in each operating segment's general account
and guaranteed separate accounts. The "credit-risk" fee is based upon historical
default rates in the corporate bond market, the Company's actual default
experience and estimates of future losses. 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.
For the years ended December 31,
---------------------------------------------
2003 2002 2001
------- ------ -------
REVENUES
Investment Products $ 3,808 $3,107 $3,339
Individual Life 982 958 890
Group Benefits 2,624 2,582 2,507
COLI 483 592 719
Other 161 (304) (73)
------- ------ ------
TOTAL REVENUES $ 8,058 $6,935 $7,382
======= ====== ======
NET INVESTMENT INCOME
Investment Products $ 1,273 $1,070 $ 884
Individual Life 256 262 244
Group Benefits 264 258 255
COLI 216 275 352
Other 32 (16) 47
------- ------ ------
TOTAL NET INVESTMENT INCOME $ 2,041 $1,849 $1,782
======= ====== ======
F-40
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF
FUTURE PROFITS
Investment Products $ 542 $ 444 $ 461
Individual Life 176 160 168
Group Benefits 18 17 11
COLI 1 - -
Other 32 7 2
-------- -------- --------
TOTAL AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS AND PRESENT
VALUE OF FUTURE PROFITS $ 769 $ 628 $ 642
======== ======== ========
INCOME TAX EXPENSE (BENEFIT)
Investment Products $ 111 $ 129 $ 155
Individual Life 64 63 57
Group Benefits 43 35 29
COLI (3) 15 18
Other (35) (232) (205)
-------- -------- --------
TOTAL INCOME TAX EXPENSE $ 180 $ 10 $ 54
======== ======== ========
NET INCOME (LOSS)
Investment Products $ 510 $ 432 $ 463
Individual Life 145 133 121
Group Benefits 148 128 106
COLI (1) 32 37
Other (33) (168) (42)
-------- -------- --------
TOTAL NET INCOME $ 769 $ 557 $ 685
======== ======== ========
ASSETS
Investment Products $127,191 $ 97,591 $103,906
Individual Life 9,702 8,888 9,157
Group Benefits 5,321 5,242 4,686
COLI 28,087 30,333 26,840
Other 17,291 7,740 7,020
-------- -------- --------
TOTAL ASSETS $187,592 $149,794 $151,609
======== ======== ========
For the years ended December 31,
----------------------------------
REVENUES BY PRODUCT 2003 2002 2001
--------- --------- ---------
Investment Products
Individual Annuities $ 1,750 $ 1,539 $ 1,532
Other 2,058 1,568 1,807
--------- --------- ---------
Total Investment Products 3,808 3,107 3,339
Individual Life 982 958 890
Group Benefits 2,624 2,582 2,507
COLI 483 592 719
--------- --------- ---------
TOTAL 7,897 7,239 7,455
========= ========= =========
17. ACQUISITIONS
On December 31, 2003, Hartford Life acquired CNA Financial Corporation's group
life and accident, and short-term and long-term disability businesses, through a
stock purchase, for $485 in cash. This acquisition will increase the scale of
the Company's group life and disability operations, expand the Company's
distribution and enhance the Company's capability to deliver outstanding
products and services. Purchase consideration for this transaction was obtained
from a capital contribution by The Hartford to the Company. The purchase price
paid on December 31, 2003, was based on a September 30, 2003 valuation of the
business acquired. During the
F-41
first quarter of 2004, the purchase price will be adjusted to reflect a December
31, 2003 valuation of the business acquired. The Company currently estimates
that adjustment to the purchase price to be an increase of $51 which primarily
reflects the increase of the surplus of the business acquired in the fourth
quarter of 2003. Through this acquisition assets increased $2.6 billion,
primarily comprised of fixed maturities and short-term investments, and
liabilities increased $2.1 billion, primarily comprised of reserve for future
policy benefits.
The assets and liabilities acquired in this transaction were recorded at fair
value. An intangible asset representing the present value of future profits
("PVP") of the acquired business was established in the amount of $53. The PVP
is amortized to expense in relation to the estimated gross profits of the
underlying insurance contracts, and interest is accreted on the unamortized
balance.
On April 2, 2001, Hartford Life acquired the individual life insurance, annuity
and mutual fund businesses of Fortis, Inc. ("Fortis Financial Group" or
"Fortis") for $1.12 billion in cash. The Company effected the acquisition
through several reinsurance agreements with subsidiaries of Fortis and the
purchase of 100% of the stock of Fortis Advisers, Inc. and Fortis Investors,
Inc., wholly-owned subsidiaries of Fortis, Inc. The acquisition was accounted
for as a purchase transaction and, as such, the revenues and expenses generated
by this business from April 2, 2001 forward are included in the Company's
Consolidated Statements of Income.
The assets and liabilities acquired in this transaction were recorded at values
prescribed by applicable purchase accounting rules, which generally estimated
fair value. In addition, an intangible asset representing the PVP of the
acquired business was established in the amount of $605. The PVP is amortized to
expense in relation to the estimated gross profits of the underlying insurance
contracts, and interest is accreted on the unamortized balance. Goodwill of
$553, representing the excess of the purchase price over the amount of net
assets (including PVP) acquired, has also been recorded and was amortized on a
straight-line basis until January 1, 2002, when amortization ceased under the
provisions of SFAS No. 142.
18. QUARTERLY RESULTS FOR 2003 AND 2002 (UNAUDITED)
Three Months Ended
--------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------------- ----------------- ----------------- ---------------
2003 2002 2003 2002 2003 2002 2003 2002
------ ------ ------ ------- ------ ------ ------ ------
Revenues $1,786 $1,836 $1,962 $ 1,698 $2,248 $1,665 $2,062 $1,736
Benefits, claims and expenses 1,630 1,614 1,688 1,589 2,050 1,582 1,741 1,583
Net income 126 170 243 101 161 161 239 125
[1] Included in the quarter ended September 30, 2003 is an after-tax expense of
$40 related to the Bancorp litigation dispute.
[2] Included in the quarter ended June 30, 2003 is a $30 tax benefit primarily
related to the favorable treatment of certain tax items arising during the
1996-2000 tax years.
19. SEPTEMBER 11 TERRORIST ATTACK
As a result of September 11, 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 and costs incurred in settling claims. 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 September 11.
20. SUBSEQUENT EVENTS
On January 30, 2004, the Company received a capital contribution in the form of
cash of $305 from The Hartford which was then used by the Company to fund the
payment and settlement of the related party note agreements totaling $305 with
The Hartford. For further discussion of the intercompany note see Note 8 "Debt".
On February 13, 2004, the Company announced that notice has been given that all
outstanding 7.20% Trust Preferred Securities, Series A of Hartford Life Capital
I, have been called for redemption on March 15, 2004. The redemption price will
be $25 per share, plus accumulated and unpaid distributions thereon to March 15,
2004, in the amount of $0.30 per share. The redemption price will be payable on
March 15, 2004, in the manner provided in the Amended and Restated Declaration
of Trust for preferred securities. The Company will record a $7, before-tax,
expense for the unamortized costs associated with these preferred securities in
the first quarter of 2004.
F-42
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
(In millions) As of December 31, 2003
-------------------------------------------
Amount at which
shown on Balance
Type of Investment Cost Fair Value Sheet
------------------ ------- ---------- ----------------
FIXED MATURITIES
Bonds and Notes
U.S. Government and Government agencies and authorities (guaranteed and
sponsored) $ 759 $ 766 $ 766
U.S. Government and Government agencies and authorities (guaranteed and
sponsored) - asset-backed 2,634 2,668 2,668
States, municipalities and political subdivisions 2,184 2,350 2,350
International governments 697 761 761
Public utilities 1,452 1,555 1,555
All other corporate including international 16,166 17,379 17,379
All other corporate - asset-backed 9,672 9,974 9,974
Short-term investments 1,974 1,976 1,976
Redeemable preferred stock 31 33 33
------- ------- -------
TOTAL FIXED MATURITIES 35,569 37,462 37,462
------ ------ ------
EQUITY SECURITIES
Common stocks
Industrial and miscellaneous 66 86 86
Nonredeemable preferred stocks 269 271 271
------- ------- -------
TOTAL EQUITY SECURITIES 335 357 357
------- ------- -------
TOTAL FIXED MATURITIES AND EQUITY SECURITIES 35,904 37,819 37,819
------- ------- -------
OTHER INVESTMENTS
Mortgage loans on real estate 466 466 466
Policy loans 2,512 2,512 2,512
Investments in partnerships and trusts 223 177 177
Other invested assets 55 180 180
------- ------- -------
TOTAL OTHER INVESTMENTS 3,256 3,335 3,335
------- ------- -------
TOTAL INVESTMENTS $39,160 $41,154 $41,154
======= ======= =======
S-1
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF HARTFORD LIFE, INC.
(REGISTRANT)
(In millions) As of December 31,
-------------------
CONDENSED BALANCE SHEETS 2003 2002
------- ------
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost of $1 and $1) $ 1 $ 1
Investment in subsidiaries 8,897 7,297
Other assets 124 72
------ ------
TOTAL ASSETS 9,022 7,370
------ ------
LIABILITIES AND STOCKHOLDER'S EQUITY
Short-term debt 505 -
Long-term debt 1,300 1,575
Other liabilities 158 107
------ ------
TOTAL LIABILITIES 1,963 1,682
TOTAL STOCKHOLDER'S EQUITY 7,059 5,688
------ ------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $9,022 $7,370
====== ======
(In millions) For the years ended December 31,
--------------------------------
CONDENSED STATEMENTS OF INCOME 2003 2002 2001
------- ----- ----
Earnings of subsidiaries $ 1,066 $ 679 $869
Interest expense 117 112 104
------- ----- ----
INCOME BEFORE INCOME TAX EXPENSE 949 567 765
Income tax expense 180 10 54
------- ----- ----
Cumulative effect of accounting change - - (26)
------- ----- ----
NET INCOME $ 769 $ 557 $685
======= ===== ====
The financial information of Hartford Life, Inc. (parent company of Hartford
Life) should be read in conjunction with the Consolidated Financial Statements
and Notes to Consolidated Financial Statements.
S-2
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF HARTFORD LIFE, INC. (CONTINUED)
(REGISTRANT)
(In millions)
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31,
-------------------------------------
2003 2002 2001
------- -------- --------
OPERATING ACTIVITIES
Net income $ 769 $ 557 $ 685
Undistributed earnings of subsidiaries (699) (483) (624)
Change in other assets and liabilities (1) 52 (20)
------ ------- -------
CASH PROVIDED BY OPERATING ACTIVITIES 69 126 41
------ ------- -------
INVESTING ACTIVITIES
Sales (purchases) of investments - 15 (15)
Capital contribution to subsidiary (749) (225) (1,177)
------ ------- -------
CASH USED FOR INVESTING ACTIVITIES (749) (210) (1,192)
------ ------- -------
FINANCING ACTIVITIES
Proceeds from long-term debt 230 75 400
Proceeds from issuance of company obligated mandatorily
Redeemable preferred securities of subsidiary trust holding
solely parent junior subordinated debentures - - 200
Capital contribution from parent 519 75 615
Dividends paid (69) (66) (64)
Proceeds from parent to retire common stock - - -
Payments to retire common stock - - -
Net issuance (purchase) of common stock - - -
------ ------- -------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES 680 84 1,151
------ ------- -------
Net change in cash - - -
Cash - beginning of year - - -
------ ------- -------
CASH - END OF YEAR $ - $ - $ -
------ ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH ACTIVITY DURING THE YEAR FOR:
Interest expense paid $ 115 $ 110 $ 89
Income taxes paid (received) $ 50 $ 48 $ (40)
S-3
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In millions)
Deferred Other Earned
Policy Future Policy- Premiums Net
Acquisition Policy holder Policy and Investment
Segment Costs Benefits Funds Fees Other Income
- ------------------------------ ----------- --------- ------- ------- -------- ----------
2003
Investment Products $ 4,375 $ 4,853 $19,059 $ 1,643 $ 865 $ 1,273
Individual Life 1,292 573 3,762 739 (12) 256
Group Benefits 48 5,616 391 20 2,342 264
Corporate Owned Life Insurance 13 291 2,760 258 9 216
Other 352 78 214 100 13 32
---------- --------- ------- ------- ------ -------
CONSOLIDATED $ 6,080 $ 11,411 $26,186 $ 2,760 $3,217 $ 2,041
========== ========= ======= ======= ====== =======
2002
Investment Products $ 3,818 $ 4,023 $16,444 $ 1,537 $ 491 $ 1,070
Individual Life 1,229 586 3,583 695 2 262
Group Benefits 44 3,571 362 19 2,308 258
Corporate Owned Life Insurance 12 316 3,334 305 11 275
Other 130 87 234 21 5 (16)
---------- --------- ------- ------- ------ -------
CONSOLIDATED $ 5,233 $ 8,583 $23,957 $ 2,577 $2,817 $ 1,849
========== ========= ======= ======= ====== =======
2001
Investment Products $ 3,683 $ 3,623 $12,101 $ 1,622 $ 831 $ 884
Individual Life 1,249 558 3,496 634 13 244
Group Benefits 36 3,352 289 17 2,242 255
Corporate Owned Life Insurance 8 321 4,120 355 12 352
Other 28 98 241 5 5 47
---------- --------- ------- ------- ------ -------
CONSOLIDATED $ 5,004 $ 7,952 $20,247 $ 2,633 $3,103 $ 1,782
========== ========= ======= ======= ====== =======
(In millions)
Net Benefits, Amortization
Realized Claims and of Deferred
Capital Claim Insurance Policy Dividends
Gains/ Adjustment Expenses Acquisition to Policy- Interest
Segment (Losses) Expenses and other Costs holders Expense
- ------------------------------ -------- ---------- --------- ------------ --------- --------
2003
Investment Products $ 27 $ 1,993 $ 652 $ 542 $ - $ -
Individual Life (1) 436 158 176 3 -
Group Benefits (2) 1,862 553 18 - -
Corporate Owned Life Insurance - 324 102 1 60 -
Other 16 1 79 32 - 117
------- --------- -------- ----------- --------- --------
CONSOLIDATED $ 40 $ 4,616 $ 1,544 $ 769 $ 63 $ 117
======= ========= ======== =========== ========= ========
2002
Investment Products $ 9 $ 1,454 $ 648 $ 444 $ - $ -
Individual Life (1) 443 156 160 3 -
Group Benefits (3) 1,878 524 17 - -
Corporate Owned Life Insurance 1 401 82 - 62 -
Other (314) (18) (5) 7 - 112
------- --------- -------- ----------- --------- --------
CONSOLIDATED $ (308) $ 4,158 $ 1,405 $ 628 $ 65 $ 112
======= ========= ======== =========== ========= ========
2001
Investment Products $ 2 $ 1,652 $ 608 $ 461 $ - $ -
Individual Life (1) 385 157 168 2 -
Group Benefits (7) 1,874 487 11 - -
Corporate Owned Life Insurance - 514 84 - 66 -
Other (130) 19 23 2 - 104
------- --------- -------- ----------- --------- --------
CONSOLIDATED $ (136) $ 4,444 $ 1,359 $ 642 $ 68 $ 104
======= ========= ======== =========== ========= ========
S-4
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
Assumed
Ceded to From Percentage of
Gross Other Other Net Amount Assumed
(In millions) Amount Companies Companies Amount to Net
-------- --------- --------- -------- --------------
FOR THE YEAR ENDED DECEMBER 31, 2003
Life insurance in force $704,369 $288,758 $59,969 $475,580 12.6%
-------- -------- ------- -------- ----
FEE INCOME, EARNED PREMIUMS AND OTHER
Life insurance and annuities $ 4,703 $ 361 $ 122 $ 4,464 2.7%
Accident and health insurance 1,544 104 73 1,513 4.8%
-------- -------- ------- -------- ----
TOTAL FEE INCOME, EARNED PREMIUMS AND OTHER 6,247 465 195 5,977 3.3%
======== ======== ======= ======== ====
FOR THE YEAR ENDED DECEMBER 31, 2002
Life insurance in force $629,028 $209,608 $65,590 $485,010 13.5%
-------- -------- ------- -------- ----
FEE INCOME, EARNED PREMIUMS AND OTHER
Life insurance and annuities $ 4,067 $ 279 $ 84 $ 3,872 2.2%
Accident and health insurance 1,567 141 96 1,522 6.3%
-------- -------- ------- -------- ----
TOTAL FEE INCOME, EARNED PREMIUMS AND OTHER $ 5,634 $ 420 $ 180 $ 5,394 3.3%
======== ======== ======= ======== ====
FOR THE YEAR ENDED DECEMBER 31, 2001
Life insurance in force $534,489 $142,352 $50,828 $442,965 11.5%
-------- -------- ------- -------- ----
FEE INCOME, EARNED PREMIUMS AND OTHER
Life insurance and annuities $ 4,542 $ 323 $ 68 $ 4,287 1.6%
Accident and health insurance 1,408 123 164 1,449 11.3%
-------- -------- ------- -------- ----
TOTAL FEE INCOME, EARNED PREMIUMS AND OTHER $ 5,950 $ 446 $ 232 $ 5,736 4.1%
======== ======== ======= ======== ====
S-5
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
Additions Deductions
------------------------- --------------
Charged to
Balance Costs and Translation Write-offs/ Balance
(In millions) January 1, Expenses Adjustment Payments/Other December 31,
- ---------------------------------- ---------- ---------- ----------- -------------- ------------
2003
Accumulated depreciation of plant,
property and equipment $ 249 $ 52 $ - $ (45) $ 256
2002
Accumulated depreciation of plant,
property and equipment $ 203 $ 49 $ - $ (3) $ 249
2001
Accumulated depreciation of plant,
property and equipment $ 173 $ 36 $ - $ (6) $ 203
S-6
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Ernest M. McNeill Jr.
-------------------------
Ernest M. McNeill Jr.
Vice President and Chief Accounting Officer
Date: March 1, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Ramani Ayer Chairman and Director March 1, 2004
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Ramani Ayer
/s/ Thomas M. Marra President, Chief Operating Officer March 1, 2004
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Thomas M. Marra and Director
/s/ Lizabeth H. Zlatkus Executive Vice President March 1, 2004
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Lizabeth H. Zlatkus and Chief Financial Officer
/s/ Ernest M. McNeill Jr. Vice President March 1, 2004
- -------------------------
Ernest M. McNeill Jr. and Chief Accounting Officer
/s/ David K. Zwiener Director March 1, 2004
- -------------------------
David K. Zwiener
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HARTFORD LIFE, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
EXHIBITS INDEX
EXHIBIT #
3.01 Restated Certificate of Incorporation of Hartford Life, Inc. ("Hartford
Life" or the "Company"), was filed as Exhibit 3.01 to the Company's
Form 10-Q filed for the second quarter ended June 30, 2000 and is
incorporated herein by reference.
3.02 Amended and Restated By-Laws of the Company, effective June 27, 2000
were filed as Exhibit 3.02 to the Company's Form 10-Q filed for the
second quarter ended June 30, 2000 and is incorporated herein by
reference.
4.01 Amended and Restated Certificate of Incorporation and By-Laws of the
Company (included as Exhibits 3.01 and 3.02, respectively).
4.02 Indenture, dated as of May 19, 1997, between the Company and Citibank,
N.A., as Trustee, with respect to the Company's 6.90% Notes due June
15, 2004, 7.10% Notes due June 15, 2007, and 7.65% Debentures due June
15, 2027, was filed as Exhibit 4.3 to the Company's Registration
Statement on Form S-3 (Amendment No. 2) dated May 23, 1997, and is
incorporated herein by reference.
4.03 Subordinated Indenture between Hartford Life and Wilmington Trust
Company, as Trustee, dated as of June 1, 1998, was filed as Exhibit
4.03 to the Company's Form 10-K for the fiscal year ended December 31,
1998 and is incorporated herein by reference.
4.04 First Supplemental Indenture, dated as of June 29, 1998 between
Hartford Life, as Issuer, and Wilmington Trust Company, as Trustee,
with respect to 7.2% Junior Subordinated Deferrable Interest
Debentures, due June 30, 2038, was filed as Exhibit 4.04 to the
Company's Form 10-K for the fiscal year ended December 31, 1998 and is
incorporated herein by reference.
4.05 Form of Junior Subordinated Deferrable Interest Debenture, Series A,
due June 30, 2038, included as Exhibit A to Exhibit 4.04 to the
Company's Form 10-K for the fiscal year ended December 31, 1998 and is
incorporated herein by reference.
4.06 Declaration of Trust of Hartford Life Capital I, dated as of June 3,
1998 between the Company, as Sponsor, and Wilmington Trust Company, as
Trustee, was filed as Exhibit 4.06 to the Company's Form 10-K for the
fiscal year ended December 31, 1998 and is incorporated herein by
reference.
4.07 Amended and Restated Declaration of Trust of Hartford Life Capital I,
dated as of June 29, 1998 between the Trustee and the Sponsor, relating
to the 7.2% Junior Subordinated Deferrable Interest Debentures, Series
A, due 2038, was filed as Exhibit 4.07 to the Company's Form 10-K for
the fiscal year ended December 31, 1998 and is incorporated herein by
reference.
4.08 Form of Preferred Security Certificate for Hartford Capital I, included
as Exhibit A-1 to Exhibit 4.07 filed herein by reference.
4.09 Preferred Securities Guarantee Agreement, dated as of June 29, 1998
between Hartford Life, as Guarantor, and Wilmington Trust Company, as
Preferred Guarantee Trustee, relating to Hartford Life Capital I, was
filed as Exhibit 4.09 to the Company's Form 10-K for the fiscal year
ended December 31, 1998 and is incorporated herein by reference.
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4.10 Second Supplemental Indenture between Hartford Life and Wilmington
Trust Company, as Trustee, dated as of March 6, 2001, with respect to
7.625% Junior Subordinated Deferred Interest Debentures, due February
15, 2050, was filed as Exhibit 4.02 to the Company's Form 8-A dated
March 13, 2001, and is incorporated herein by reference.
4.11 Form of 7.625% Junior Subordinated Deferrable Interest Debenture,
Series A, due February 15, 2050, was filed as Exhibit A to Exhibit 4.02
of the Company's Form 8-A dated March 13, 2001, and is incorporated
herein by reference.
4.12 Declaration of Trust of Hartford Life Capital II, dated as of June 3,
1998, between Hartford Life, as Sponsor, and Wilmington Trust Company,
as Trustee, was filed as Exhibit 4.13 to the Company's Registration
Statement on Form S-3 (Registration No. 333-56283) filed with the
Securities and Exchange Commission on June 18, 1998 by Hartford Life,
Inc., Hartford Life Capital I, Hartford Life Capital II and Hartford
Life Capital III, as amended, and is incorporated herein by reference.
4.13 Form of Amended and Restated Declaration of Trust of Hartford Life
Capital II between Hartford Life, as Sponsor, and Wilmington Trust
Company, as Indenture Trustee and Delaware Trustee, was filed as
Exhibit 4.19 to the Company's Registration Statement on Form S-3
(Registration No. 333-56283) filed with the Securities and Exchange
Commission on June 18, 1998 by Hartford Life, Hartford Life Capital I,
Hartford Life Capital II and Hartford Life Capital III, as amended, and
is incorporated herein by reference.
4.14 Form of Guarantee Agreement between Hartford Life, as Guarantor, and
Wilmington Trust Company, as Guarantee Trustee, was filed as Exhibit
4.21 to the Company's Registration Statement on Form S-3 (Registration
No. 333-56283) filed with the Securities and Exchange Commission on
June 18, 1998 by Hartford Life, Hartford Capital I, Hartford Capital II
and Hartford Capital III, as amended, and is incorporated herein by
reference.
4.15 Form of Preferred Security Certificate for Hartford Life Capital II was
filed as Exhibit 4.20 to the Company's Registration Statement on Form
S-3 (Registration No. 333-56283) filed with the Securities and Exchange
Commission on June 18, 1998 by Hartford Life, Hartford Life Capital I,
Hartford Life Capital II and Hartford Life Capital III, as amended, and
is incorporated herein by reference.
4.16 Form of 7.375% Senior Notes due March 1, 2031 was filed as Exhibit 3 to
the Company's Form 8-A dated February 28, 2001, and is incorporated
herein by reference.
10.01 Master Intercompany Agreement, dated May 19, 1997, among the Company,
The Hartford Financial Services Group, Inc. (formerly known as ITT
Hartford Group, Inc.) ("The Hartford") and with respect to Articles VI
and XII, Hartford Fire Insurance Company, was filed as Exhibit 10.1 to
the Company's Form 10-Q filed for the quarterly period ended June 30,
1997 and is incorporated herein by reference.
10.02 Tax Sharing Agreement, dated May 19, 1997, among The Hartford and its
subsidiaries, including the Company, was filed as Exhibit 10.2 to the
Company's Form 10-Q filed for the quarterly period ended June 30, 1997
and is incorporated herein by reference.
10.03 Management Agreement, dated March 31, 1997, among Hartford Life
Insurance Company and Hartford Investment Management Company, was filed
as Exhibit 10.3 to the Company's Form 10-Q filed for the quarterly
period ended June 30, 1997 and is incorporated herein by reference.
10.04 Management Agreement, dated March 31, 1997, among certain subsidiaries
of the Company and Hartford Investment Services, Inc., was filed as
Exhibit 10.4 to the Company's Form 10-Q filed for the quarterly period
ended June 30, 1997 and is incorporated herein by reference.
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10.05 Sublease Agreement, dated May 19, 1997, between Hartford Fire
Insurance Company and the Company, was filed as Exhibit 10.5 to the
Company's Form 10-Q filed for the quarterly period ended June 30, 1997
and is incorporated herein by reference.
10.06 Three Year Competitive Advance and Revolving Credit Facility Agreement
(the "Three Year Credit Facility") dated as of December 31, 2002 among
The Hartford, Hartford Life, and the Lenders named therein and JPMorgan
Chase Bank and Citibank, N.A. as Co-Administrative Agents, was filed as
Exhibit 10.28 to The Hartford Form 10-K for the fiscal year ended
December 31, 2002 and is incorporated herein by reference.
10.07 First Amendment, dated as of June 30, 2003, to the Three Year Credit
Facility among The Hartford, Hartford Life, the Lenders party thereto
and JPMorgan Chase Bank and Citibank, N.A., as Co-Administrative
Agents.
12.01 Computation of Ratio of Earnings to Fixed Charges is filed herewith.
23.01 Consent of Deloitte & Touche LLP to the incorporation by reference into
the Company's Registration Statements on Form S-8 and Form S-3 of the
Report of Deloitte & Touche LLP contained in this Form 10-K regarding
the audited financial statements is filed herewith.
31.01 Section 302 Certification of Thomas M. Marra
31.02 Section 302 Certification of Lizabeth H. Zlatkus
32.01 Section 906 Certification of Thomas M. Marra
32.02 Section 906 Certification of Lizabeth H. Zlatkus
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