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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 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 2-89516
HARTFORD LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 06-0974148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 HOPMEADOW STREET, SIMSBURY, CONNECTICUT 06089
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No[X]
As of April 30, 2003 there were outstanding 1,000 shares of Common Stock, $5,690
par value per share, of the registrant.
The registrant meets the conditions set forth in General Instruction H (1) (a)
and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
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INDEX
PAGE
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Independent Accountants' Review Report 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income - Three Months
Ended March 31, 2003 and 2002 4
Condensed Consolidated Balance Sheets - March 31, 2003
and December 31, 2002 5
Condensed Consolidated Statements of Changes in
Stockholder's Equity - Three Months Ended March 31, 2003 and 2002 6
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2003 and 2002 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
ITEM 4. CONTROLS AND PROCEDURES 26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27
Signature 28
Certifications 29
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholder
Hartford Life Insurance Company
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of
Hartford Life Insurance Company and subsidiaries (the "Company") as of March 31,
2003, and the related condensed consolidated statements of income, changes in
stockholder's equity, and cash flows for the three-month periods ended March 31,
2003 and 2002. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2002, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the year then ended
(not presented herein); and in our report dated February 19, 2003, which
includes an explanatory paragraph relating to the Company's change in its method
of accounting for goodwill and indefinite-lived intangible assets in 2002, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2002 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
May 12, 2003
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS
ENDED
MARCH 31,
(In millions) (Unaudited) 2003 2002
- --------------------------------------------------------------------------------------------
REVENUES
Fee income $ 494 $ 531
Earned premiums and other 131 179
Net investment income 438 379
Net realized capital losses (45) (17)
- --------------------------------------------------------------------------------------------
TOTAL REVENUES 1,018 1,072
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BENEFITS, CLAIMS AND EXPENSES
Benefits and claims 586 581
Insurance expenses and other 149 177
Amortization of deferred policy acquisition costs and present
value of future profits 138 131
Dividends to policyholders 15 6
TOTAL BENEFITS, CLAIMS AND EXPENSES 888 895
-----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 130 177
Income tax expense 30 45
- --------------------------------------------------------------------------------------------
NET INCOME $ 100 $ 132
-----------------------------------------------------------------------------------------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(In millions, except for share data) 2003 2002
- ------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of
$25,664 and $23,675) $ 26,945 $ 24,786
Equity securities, available for sale, at fair value (cost of $84 and $137) 78 120
Policy loans, at outstanding balance 2,837 2,895
Other investments 882 918
- ----------------------------------------------------------------------------------------------------------------
Total investments 30,742 28,719
Cash 128 79
Premiums receivable and agents' balances 16 15
Reinsurance recoverables 1,553 1,477
Deferred policy acquisition costs and present value of future profits 5,590 5,479
Deferred income taxes (302) (243)
Goodwill 186 186
Other assets 924 1,073
Separate account assets 105,708 105,316
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 144,545 $ 142,101
=========================================================================================================
LIABILITIES
Reserve for future policy benefits $ 5,833 $ 6,658
Other policyholder funds 24,317 22,103
Other liabilities 2,687 2,207
Separate account liabilities 105,708 105,316
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 138,545 136,284
=========================================================================================================
STOCKHOLDER'S EQUITY
Common Stock - 1,000 shares authorized, issued and outstanding;
par value $5,690 6 6
Capital surplus 2,041 2,041
Accumulated other comprehensive income
Net unrealized capital gains on securities, net of tax 657 574
Foreign currency translation adjustments (1) (1)
Total accumulated other comprehensive income 656 573
Retained earnings 3,297 3,197
- ----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 6,000 5,817
=========================================================================================================
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 144,545 $ 142,101
=====================================================================================================
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
THREE MONTHS ENDED MARCH 31, 2003
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
-------------------------------------------
NET UNREALIZED NET GAIN ON
CAPITAL CASH FLOW FOREIGN
GAINS (LOSSES) HEDGING CURRENCY TOTAL
COMMON CAPITAL ON SECURITIES, INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS NET OF TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 6 $ 2,041 $ 463 $ 111 $ (1) $ 3,197 $ 5,817
Comprehensive income
Net income 100 100
---------
Other comprehensive income, net of
tax (1)
Unrealized gain on securities (2) 100 100
Net loss on cash flow hedging
Instruments (17) (17)
---------
Total other comprehensive income 83
---------
Total comprehensive income 183
===============================================================================================================================
BALANCE, MARCH 31, 2003 $ 6 $ 2,041 $ 563 $ 94 $ (1) $ 3,297 $ 6,000
===============================================================================================================================
THREE MONTHS ENDED MARCH 31, 2002
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
-------------------------------------------
NET UNREALIZED NET GAIN ON
CAPITAL CASH FLOW FOREIGN
GAINS (LOSSES) HEDGING CURRENCY TOTAL
COMMON CAPITAL ON SECURITIES, INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS NET OF TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 6 $ 1,806 $ 114 $ 63 $ (2) $ 2,771 $ 4,758
Comprehensive income
Net income 132 132
---------
Other comprehensive income, net of
tax (1)
Unrealized loss on securities (2) (140) (140)
Net loss on cash flow hedging
Instruments (15) (15)
Cumulative translation adjustments (1) (1)
---------
Total other comprehensive income (156)
---------
Total comprehensive income (24)
===============================================================================================================================
BALANCE, MARCH 31, 2002 $ 6 $ 1,806 $ (26) $ 48 $ (3) $ 2,903 $ 4,734
===============================================================================================================================
(1) Unrealized gain (loss) on securities is reflected net of tax provision
(benefit) of $54 and $(75) for the three months ended March 31, 2003 and
2002, respectively. Net loss on cash flow hedging instruments is net of tax
benefit of $(9) and $(8) for the three months ended March 31, 2003 and
2002. There is no tax effect on cumulative translation adjustments.
(2) There were reclassification adjustments for after-tax losses in the amount
of $27 and $11 realized in net income for the three months ended March 31,
2003 and 2002, respectively.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
-------------------
(In millions) (Unaudited) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
NET INCOME $ 100 $ 132
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net realized capital losses 45 17
Amortization of deferred policy acquisition costs and present value of
future profits 138 131
Additions to deferred policy acquisition costs and present value of future profits (282) (240)
Depreciation and amortization 17 -
Increase in premiums receivable and agents' balances (1) (3)
Decrease in other liabilities (37) (19)
Increase in receivables (34) (17)
Decrease in payables and accruals (9) (53)
Decrease in accrued tax (27) (31)
Increase in deferred income tax 25 81
Increase in future policy benefits 109 260
Increase in reinsurance recoverables (61) (103)
Other, net 81 (39)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 64 116
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investments (4,463) (2,316)
Sales of investments 2,373 1,466
Maturities and principal paydowns of fixed maturity investments 810 338
Capital expenditures and other - 2
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (1,280) (510)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net receipts from investment and universal life-type contracts 1,265 367
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,265 367
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 49 (27)
Impact of foreign exchange - (1)
- ---------------------------------------------------------------------------------------------------------------
Cash - beginning of period 79 87
- ---------------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 128 $ 59
===============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID (RECEIVED) DURING THE PERIOD FOR
Income Taxes $ (2) $ -
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
(Unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
These Condensed Consolidated Financial Statements include Hartford Life
Insurance Company and its wholly-owned subsidiaries ("Hartford Life Insurance
Company" or the "Company"), Hartford Life and Annuity Insurance Company
("HLAI"), Hartford International Life Reassurance Corporation ("HLRe") and
Servus Life Insurance Company, formerly Royal Life Insurance Company of America.
The Company is a wholly-owned subsidiary of Hartford Life and Accident Insurance
Company ("HLA"), a wholly-owned subsidiary of Hartford Life, Inc. ("Hartford
Life"). Hartford Life is a direct subsidiary of Hartford Holdings, Inc., a
direct subsidiary of The Hartford Financial Services Group, Inc. ("The
Hartford"), the Company's ultimate parent company. In November 1998, Hartford
Life Insurance Company transferred in the form of a dividend, Hartford Financial
Services, LLC and its subsidiaries to HLA.
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. During the third quarter
of 2002, Hartford Life became a direct subsidiary of Hartford Holdings, Inc., a
direct wholly owned subsidiary of The Hartford.
Along with its parent, HLA, the Company is a leading financial services and
insurance group which provides (a) investment products, such as individual
variable annuities and fixed market value adjusted annuities and retirement plan
services for savings and retirement needs; (b) individual life insurance for
income protection and estate planning; (c) group benefits products such as group
life and group disability insurance that is directly written by the Company and
is substantially ceded to its parent, HLA, and (d) corporate owned life
insurance.
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements have been prepared on the basis
of accounting principles generally accepted in the United States, which differ
materially from the accounting prescribed by various insurance regulatory
authorities. Less than majority-owned subsidiaries in which the Company has at
least a 20% interest are reported on the equity basis. All intercompany
transactions and balances between Hartford Life Insurance Company, its
subsidiaries and affiliates have been eliminated.
The accompanying consolidated financial statements and the condensed notes as of
March 31, 2003, and for the first quarters ended March 31, 2003 and 2002 are
unaudited. These financial statements reflect all adjustments (consisting only
of normal accruals) which are, in the opinion of management, necessary for the
fair presentation of the financial position, results of operations, and cash
flows for the interim periods. These financial statements and condensed notes
should be read in conjunction with the consolidated financial statements and
notes thereto included in Hartford Life Insurance Company's 2002 Form 10-K
Annual Report. The results of operations for the interim periods should not be
considered indicative of results to be expected for the full year.
(b) RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial information to
conform to the current year classifications.
(c) USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining reserves,
deferred policy acquisition costs, valuation of investments and derivative
instruments and contingencies.
(d) SIGNIFICANT ACCOUNTING POLICIES
For a description of accounting policies, see Note 2 of Notes to Consolidated
Financial Statements included in Hartford Life Insurance Company's 2002 Form
10-K Annual Report.
(e) ADOPTION OF NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46")
which requires an enterprise to assess if consolidation of an entity is
appropriate based upon its variable economic interests in a variable interest
entity ("VIE"). 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. 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. 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 is effective for new VIEs established or
purchased subsequent to January 31, 2003. For VIEs entered into prior to
February 1, 2003, FIN 46 is effective for interim periods beginning after June
15, 2003. During the three months ended March 31, 2003, the Company has not
entered into our established any VIEs that would require consolidation under FIN
46.
The Company invests in a variety of investment structures that require analysis
under FIN 46, including asset-backed securities, partnerships and certain trust
securities and is currently assessing the impact of adopting FIN 46. Based upon
a preliminary review, the adoption of FIN 46 is not expected to have a material
impact on the Company's financial condition or results of operations as there
were no material VIEs identified which would require consolidation. FIN 46
further requires the disclosure of certain information related to VIEs in which
the Company holds a significant variable interest. The Company does not believe
that it owns any such interests that require disclosure at this time.
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 that is
related to an asset, liability or an equity security of the guaranteed party.
The recognition provisions of FIN 45 are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim and annual
periods ending after December 15, 2002. (For further discussion, see Note 2(e)
of Notes to Consolidated Financial Statements included in Hartford Life
Insurance Company's 2002 Form 10-K Annual Report.) Adoption of this statement
did not have a material impact on the Company's consolidated financial condition
or results of operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards
("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.
(f) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In April 2003, the FASB issued guidance in FASB Statement No. 133 Implementation
Issue No. B36, "Embedded Derivatives: Bifurcation of a Debt Instrument That
Incorporates Both Interest Rate Risk and Credit Risk Exposures That Are
Unrelated or Only Partially Related to the Creditworthiness of the Issuer of
That Instrument", ("DIG B36") that addresses in what instances bifurcation of an
instrument into a debt host contract and an embedded credit derivative is
required. Specifically, one of the examples is related to the bifurcation of an
embedded derivative within a reinsurer's receivable and ceding company's payable
which arises from a modified coinsurance arrangement. DIG B36 indicates that
bifurcation is necessary in a modified coinsurance arrangement because the yield
on the receivable and payable is based on a specified proportion of the ceding
company's return on either its general account assets or a specified block of
those assets, rather than the overall creditworthiness of the ceding company.
The Company believes that the majority of its modified coinsurance and funds
withheld agreements are out of the scope of DIG B36. While the Company believes
there will be no material effect on its results of operations or financial
condition due to the implementation of this guidance, it is currently evaluating
those potential impacts. The guidance is effective for periods beginning after
September 15, 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 Company is currently evaluating the impact
of DIG B36 on such corporate issued debt securities. The Company does not
believe the adoption of DIG B36 will have a material effect on the Company's
consolidated financial condition or results of operations.
(g) EXPENSING STOCK OPTIONS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure and 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. Under the prospective method, stock-based
compensation expense is recognized for awards granted after the beginning of the
fiscal year in which the change is made. In January 2003, The Hartford adopted
the fair value recognition provisions of accounting for employee stock
compensation and will use the prospective method to calculate stock-based
compensation expense. Under the prospective method The Hartford will expense all
stock-based compensation awards granted after January 1, 2003. The allocated
expense to the Company from Hartford Life associated with these awards for the
first quarter ending March 31, 2003, was immaterial.
All stock-based compensation awards granted prior to January 1, 2003, will
continue to be valued using the intrinsic value-based provisions set forth in
APB Opinion No. 25. 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. For the quarters ended March 31, 2003 and 2002,
the Hartford's after-tax compensation expense related to its stock-based
compensation plans, including the expense associated with the transition to SFAS
No. 123 and non-option plans, was $1. The expense, including non-option plans,
related to stock-based employee compensation included in the determination of
net income for the first quarter ended March 31, 2003 is less than that which
would have been recognized if the fair value method had been applied to all
awards since the effective date of SFAS No. 123. (For further discussion of the
Company's stock compensation plans, see Note 11 of Notes to Consolidated
Financial Statements included in The Hartford's 2002 Form 10-K Annual Report.)
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", and accordingly ceased all amortization of goodwill. The
carrying amount of goodwill is $186 as of March 31, 2003 and December 31, 2002.
The following table shows the Company's acquired intangible assets that continue
to be subject to amortization and aggregate amortization expense. Except for
goodwill, the Company has no intangible assets with indefinite useful lives.
AS OF MARCH 31, 2003
-------------------------
GROSS ACCUMULATED
CARRYING NET
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION
- -----------------------------------------------------------------------------------
Present value of future profits $ 520 $ 85
- ---------------------------------------------------------------------------------
TOTAL $ 520 $ 85
=================================================================================
Net amortization expense for the three months ended March 31, 2003 and 2002 was
$5 and $8, respectively.
Estimated future net amortization expense for the succeeding five years is as
follows:
FOR THE YEAR ENDING DECEMBER 31,
- --------------------------------------------
2003 $ 42
2004 $ 39
2005 $ 36
2006 $ 34
2007 $ 31
- --------------------------------------------
4. DERIVATIVES AND HEDGING ACTIVITIES
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded 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.
All of 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 State of New York insurance departments. The Company
does not make a market or trade in these instruments for the express purpose of
earning short-term trading profits.
For a detailed discussion of the Company's use of derivative instruments, see
Note 2(h) of Notes to Consolidated Financial Statements included in Hartford
Life Insurance Company's December 31, 2002 Form 10-K Annual Report.
As of March 31, 2003 and December 31, 2002, the Company carried $185 and $179,
respectively, of derivative assets in other investments and $87 and $78,
respectively, of derivative liabilities in other liabilities. In addition, the
Company recognized embedded derivative liabilities related to guaranteed minimum
withdrawal benefits (GMWB) on certain of its variable annuity contracts of $95
and $48 at March 31, 2003 and December 31, 2002, respectively, in other
policyholder funds. Offsetting reinsurance arrangements recognized as derivative
assets at March 31, 2003 and December 31, 2002 were $95 and $48, respectively,
and were included in reinsurance recoverables.
Cash-Flow Hedges
For the quarters ended March 31, 2003 and March 31, 2002, the Company's gross
gains and losses representing the total ineffectiveness of all cash-flow hedges
were immaterial, with the net impact reported as net realized capital gains or
losses.
Gains and losses on derivative contracts that are reclassified from accumulated
other comprehensive income ("AOCI") to current period earnings are included in
the line item in the statement of income in which the hedged item is recorded.
As of March 31, 2003 and March 31, 2002, the after-tax deferred net gains on
derivative instruments accumulated in AOCI that are expected to be reclassified
to earnings during the next twelve months are $12 and $3, respectively. This
expectation is based on the anticipated interest payments on hedged investments
in fixed maturity
securities that will occur over the next twelve months, at which time the
Company will recognize the deferred net gains/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 twelve months. As of March 31, 2003 and December 31,
2002, the Company held derivative notional value related to strategies
categorized as cash-flow hedges of $2.9 billion. For the quarters ended March
31, 2003 and March 31, 2002, the net reclassifications from AOCI to earnings
resulting from the discontinuance of cash-flow hedges were immaterial.
Fair-Value Hedges
For the quarters ended March 31, 2003 and March 31, 2002, the Company's gross
gains and losses representing the total ineffectiveness of all fair-value hedges
were immaterial, with the net impact reported as net realized capital gains or
losses. All components of each derivative's gain or loss are included in the
assessment of hedge effectiveness. As of March 31, 2003 and December 31, 2002,
the Company held $159 and $159, respectively, in derivative notional value
related to strategies categorized as fair-value hedges.
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. Swap agreements, interest rate cap and floor
agreements and option contracts are used to reduce economic risk. Income
enhancement and replication transactions include the use of written covered call
options which offset embedded equity call options, total return swaps and
synthetic replication of cash market instruments. The change in the value of all
derivatives held for other investment and risk management purposes is reported
in current period earnings as realized capital gains or losses. As of March 31,
2003 and December 31, 2002, the Company held $4.5 billion and $3.4 billion,
respectively, in derivative notional value related to the above described
strategies.
In addition, Hartford Life issues certain variable annuity products that contain
a GMWB. The GMWB gives the policyholder the right to make periodic surrenders
that total an amount equal to the policyholders' premium payments. This
guarantee will remain in effect if periodic surrenders do not exceed an amount
equal to 7% of premium payments each contract year. If the policyholder chooses
to surrender an amount equal to more than 7% in a contract year, then the
guarantee may be reduced to an amount less than premium payments. The GMWB
represents an embedded derivative liability in the 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 benefits and related contract charges over the lives of
the contracts. Because of the dynamic and complex nature of these cash flows,
stochastic techniques under a variety of market return scenarios and other best
estimate actuarial assumptions are used. This model involves numerous estimates
and subjective judgements including those regarding expected market rates of
return and volatility.
The Company has entered into a reinsurance arrangement to offset its exposure to
the GMWB. This arrangement is recognized as a derivative asset and carried at
fair value in reinsurance recoverables. Changes in the fair value of both the
derivative assets and liabilities related to the GMWB are recorded in net
realized capital gains and losses.
5. COMMITMENTS AND CONTINGENCIES
(A) LITIGATION
Hartford Life Insurance Company is or may become involved in various legal
actions, in the normal course of its business, in which claims for alleged
economic and punitive damages have been or may be asserted, some for substantial
amounts. Some of the pending litigation has been filed as purported class
actions and some actions have been filed in certain jurisdictions that permit
punitive damage awards that are disproportionate to the actual damages incurred.
Although there can be no assurances, at the present time, the Company does not
anticipate that the ultimate liability arising from potential, pending or
threatened legal actions, after consideration of provisions made for estimated
losses and costs of defense, will have a material adverse effect on the
financial condition or operating results of the Company.
On March 15, 2002, a jury in the U.S. District Court for the Eastern District of
Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life
Insurance Company, et al. in favor of Bancorp in the amount of $118. The case
involved claims of patent infringement, misappropriation of trade secrets, and
breach of contract against the Company and its affiliate International Corporate
Marketing Group, Inc. ("ICMG"). The judge dismissed the patent infringement
claim on summary judgment. The jury's award was based on the last two claims. On
August 28, 2002, the Court entered an order awarding Bancorp prejudgment
interest on the breach of contract claim in the amount of $16.
The Company and ICMG have appealed the judgment on the trade secret and breach
of contract claims. Bancorp has cross-appealed the pretrial dismissal of its
patent infringement claim. The Company's management, based on the advice of its
legal counsel, believes that there is a substantial likelihood that the judgment
will not survive at its current amount. Based on the advice of legal counsel
regarding the potential outcomes of this litigation, the Company recorded an $11
after-tax charge in the first quarter of 2002 to increase litigation reserves.
Should the Company and ICMG not succeed in eliminating or reducing the judgment,
a significant additional expense would be recorded in the future.
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. 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.
(b) TAX MATTERS
The Company's Federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). The Company is currently under audit for the 1998-2001
tax years. No significant issues have been raised to date. 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.
6. RELATED PARTY TRANSACTIONS
In connection with a comprehensive evaluation of various capital maintenance and
allocation strategies by The Hartford, an intercompany asset sale transaction
was partially executed on March 21, 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
on March 21, 2003 was $693.
The remaining portion of the asset sale transaction discussed above was
completed in April 2003. The fair value of securities transferred in April 2003
was $1.0 billion.
7. SEPTEMBER 11 TERRORIST ATTACK
As a result of the September 11 terrorist attack, the Company recorded an
estimated loss amounting to $9, net of taxes and reinsurance, in the third
quarter of 2001. The Company based the loss estimate upon a review of insured
exposures using a variety of assumptions and actuarial techniques, including
estimated amounts for unknown and unreported policyholder losses. Also included
was an estimate of amounts recoverable under the Company's ceded reinsurance
programs, including the cost of additional reinsurance premiums. In the first
quarter of 2002, the Company recognized an $3 after-tax benefit related to
favorable development of reserves related to the September 11 terrorist attack.
8. SEGMENT INFORMATION
Hartford Life Insurance Company is organized into three reportable operating
segments: Investment Products, Individual Life and Corporate Owned Life
Insurance (COLI). Investment Products offers individual variable and fixed
annuities, mutual funds, retirement plan services and other investment products.
Individual Life sells a variety of life insurance products, including variable
life, universal life, interest sensitive whole life and term life insurance.
COLI primarily offers variable products used by employers to fund non-qualified
benefits or other postemployment benefit obligations as well as leveraged COLI.
The Company includes in "Other" realized capital gains and losses, corporate
items not directly allocable to any of its reportable operating segments, as
well as certain group benefit products including group life and group disability
insurance that is directly written by the Company and is substantially ceded to
its parent, HLA.
The accounting policies of the reportable operating segments are the same as
those described in "Basis of Presentation and Accounting Policies" in Note 2 in
the Company's 2002 Form 10-K Annual Report. Hartford Life Insurance Company
evaluates performance of its segments based on revenues, net income and the
segment's return on allocated capital. The Company charges direct operating
expenses to the appropriate segment and allocates the majority of indirect
expenses to the segments based on an intercompany expense arrangement.
Intersegment revenues are not significant and primarily occur between corporate
and the operating segments. These amounts include interest income on allocated
surplus and the allocation of net realized capital gains and losses through net
investment income utilizing the duration of the segment's investment portfolios.
The Company's revenues are primarily derived from customers within the United
States. The Company's long-lived assets primarily consist of deferred policy
acquisition costs and deferred tax assets from within the United States. The
following tables present summarized financial information concerning the
Company's segments.
Investment Individual
MARCH 31, 2003 Products Life COLI Other Total
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
Total revenues $ 682 $ 220 $ 126 $ (10) $ 1,018
Net income (loss) 80 29 9 (18) 100
- --------------------------------------------------------------------------------
Investment Individual
MARCH 31, 2002 Products Life COLI Other Total
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
Total revenues $ 696 $ 207 $ 159 $ 10 $ 1,072
Net income (loss) 93 30 - 9 132
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollar amounts in millions, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of Hartford Life Insurance
Company and its subsidiaries ("Hartford Life Insurance Company" or the
"Company") as of March 31, 2003, compared with December 31, 2002, and its
results of operations for the three months ended March 31, 2003 compared with
the equivalent period in 2002. This discussion should be read in conjunction
with the MD&A included in the Company's 2002 Form 10-K Annual Report.
Certain of the statements contained herein are forward-looking statements. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and include estimates and
assumptions related to economic, competitive and legislative developments. These
forward-looking statements are subject to change and uncertainty which are, in
many instances, beyond the Company's control and have been made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon the Company. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on Hartford Life Insurance 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 nature of damage theories and loss amounts and
the development of additional facts related to the September 11 terrorist attack
("September 11"); the uncertain impact on the Company of various tax reduction
proposals being considered by Congress that relate to the lowering of the
capital gains rate and the application of that rate to 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 possibility of more unfavorable loss
experience than anticipated; the possibility of general economic and business
conditions that are less favorable than anticipated; the effect of changes in
interest rates, the stock markets or other financial markets; stronger than
anticipated competitive activity; unfavorable legislative, regulatory or
judicial developments; the Company's ability to distribute its products through
distribution channels, both current and future; the uncertain effects of
emerging claim and coverage issues; the effect of assessments and other
surcharges for guaranty funds and second-injury funds and other mandatory
pooling arrangements; a downgrade in the Company's claims-paying, financial
strength or credit ratings; the ability of the Company's subsidiaries to pay
dividends to the Company; and other factors described in such forward-looking
statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
Critical Accounting Estimates 14
Consolidated Results of Operations - Operating Summary 16
Investment Products 17
Individual Life 18
Corporate Owned Life Insurance (COLI) 18
Investments 19
Capital Markets Risk Management 20
Accounting Standards 26
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: valuation of investments and derivative instruments; deferred
policy acquisition costs; reserves and accounting for contingencies. In
developing these estimates management makes subjective and complex judgments
that are inherently uncertain and subject to material change as facts and
circumstances develop. Although variability is inherent in these estimates,
management believes the amounts provided are appropriate based upon the facts
available upon compilation of the financial statements. There have been no
significant changes to the Company's critical accounting estimates since
December 31, 2002 other than deferred policy acquisition costs as discussed
below.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, which include commissions and certain other expenses
that vary with and are primarily associated with acquiring business, are
deferred and amortized over the estimated lives of the contracts, usually 20
years. These deferred costs, together with the present value of future profits
of acquired business, are recorded as an asset commonly referred to as deferred
policy acquisition costs and present value of future profits ("DAC"). At March
31, 2003 and December 31, 2002, the carrying value of the Company's DAC was $5.6
billion and $5.5
billion, respectively. For statutory accounting purposes, such costs are
expensed as incurred.
DAC related to traditional policies are amortized over the premium-paying period
in proportion to the present value of annual expected premium income. DAC
related to investment contracts and universal life-type contracts are deferred
and amortized using the retrospective deposit method. Under the retrospective
deposit method, acquisition costs are amortized in proportion to the present
value of the estimated gross profits ("EGPs") arising principally from projected
investment, mortality and expense margins and surrender charges. The
attributable portion of the DAC amortization is allocated to realized gains and
losses on investments. The DAC balance is also adjusted through other
comprehensive income by an amount that represents the amortization of deferred
policy acquisition costs that would have been required as a charge or credit to
operations had unrealized gains and losses on investments been realized. Actual
gross profits can vary from management's estimates, resulting in increases or
decreases in the rate of amortization.
The Company regularly evaluates its EGPs to determine if actual experience or
other evidence suggests that earlier estimates should be revised. In the event
that the Company were to revise its EGPs, the cumulative DAC amortization would
be adjusted to reflect such revised EGPs in the period the revision was
determined to be necessary. Several assumptions considered to be significant in
the development of EGPs include separate account fund performance, surrender and
lapse rates, estimated interest spread and estimated mortality. The separate
account fund performance assumption is critical to the development of the EGPs
related to the Company's variable annuity and variable life insurance
businesses. The average long-term rate of assumed separate account fund
performance (before mortality and expense charges) used in estimating gross
profits for the variable annuity and variable life business was 9% for the
periods ended March 31, 2003 and March 31, 2002. For other products, including
fixed annuities and other universal life-type contracts, the average assumed
investment yield ranged from 5% to 8.5% for the periods ended March 31, 2003 and
March 31, 2002.
Due to increased volatility and the decline experienced by the U.S. equity
markets in recent periods, the Company continues to enhance its DAC evaluation
process. The Company has developed sophisticated modeling capabilities which
allowed it to run a large number of stochastically determined scenarios of
separate account fund performance. These scenarios were then utilized to
calculate a statistically significant range of reasonable estimates of EGPs.
This range was then compared to the present value of EGPs currently utilized in
the DAC amortization model. As of March 31, 2003, the present value of the EGPs
utilized in the DAC amortization model fall at the margin of a reasonable range
of statistically calculated present value of EGPs. As a result, the Company does
not believe there is sufficient evidence to suggest that a revision to the EGPs
(and therefore, a revision to the DAC) as of March 31, 2003 is necessary;
however, if the EGPs utilized in the DAC amortization model remain at or above
the margin of the reasonable range of statistically calculated EGPs, a revision
would be necessary within the next two quarters. Furthermore, the Company has
estimated that such a revision to the future EGPs may occur if the overall
separate account fund performance does not meet the 9% return assumption
discussed above, or if certain other assumptions that are implicit in the
computations of the EGP's are not achieved.
Additionally, the Company has performed an analysis 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 March 31,
2003. If the Company assumed a 9% average long-term rate of growth from that
date forward along with other appropriate assumption changes in determining the
revised EGPs, the Company estimates the cumulative positive adjustment to
amortization would have been approximately $340-$375, after tax. If instead, the
Company was to assume a long-term growth rate of 8% in determining the revised
EGPs, the adjustment would have been approximately $390-$440, after tax.
Assuming that such an adjustment were to have been required, the Company
anticipates that there would have been immaterial impacts on its DAC
amortization for the 2003 and 2004 years exclusive of the adjustment, and that
there would have been positive earnings effects in later years. Any such
adjustment would not affect statutory income or surplus, due to the prescribed
accounting for such amounts that is discussed above.
Aside from absolute levels and timing of market performance assumptions,
additional factors that will influence this determination include the degree of
volatility in separate account fund performance and shifts in asset allocation
within the separate account made by policyholders. The overall return generated
by the separate account is dependent on several factors, including the relative
mix of the underlying sub-accounts among bond funds and equity funds as well as
equity sector weightings. The Company's overall separate account fund
performance has been reasonably correlated to the overall performance of the S&P
500 Index (which closed at 848 on March 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 March 31, 2003, the Company believes variable annuity
separate account assets could fall by as much as 19% before portions of its DAC
asset would not be recoverable.
CONSOLIDATED RESULTS OF OPERATIONS - OPERATING SUMMARY
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
----------------------------
2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------
Earned premiums $ 103 $ 147 (30%)
Fee income 494 531 (7%)
Net investment income 438 379 16%
Other revenue 28 32 (13%)
Net realized capital losses (45) (17) NM
- ------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,018 1,072 (5%)
Benefits and claims 586 581 1%
Insurance operating costs and expenses 162 165 (2%)
Amortization of deferred policy acquisition costs and present value
of future profits 138 131 5%
Other expenses 2 18 (89%)
- ------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 888 895 (1%)
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 130 177 (27%)
Income tax expense 30 45 (33%)
- ------------------------------------------------------------------------------------------------------------
NET INCOME 100 132 (24%)
- ------------------------------------------------------------------------------------------------------------
Hartford Life Insurance Company is organized into the following reportable
operating segments: Investment Products, Individual Life and Corporate Owned
Life Insurance ("COLI"). The Company also includes in "Other" realized capital
gains and losses, corporate items not directly allocated to any of its
reportable operating segments, as well as certain group benefits operations,
including group life and group disability insurance that is directly written by
the Company and is substantially ceded to its parent, Hartford Life and Accident
Insurance Company ("HLA").
Revenues decreased primarily as a result of revenue decreases in its Investment
Products and COLI segments. Investment Products revenues decreased as average
individual annuity account values declined compared to prior year and earned
premiums declined on lower sales of certain other investment products. The
decline in account values was due primarily to weakness in the equity markets.
Additionally, COLI revenues decreased primarily as a result of lower net
investment income, as average leveraged COLI account values declined as compared
to a year ago and lower fee income resulting from lower sales in the first
quarter of 2003 as compared to the prior year. Partially offsetting these
decreases was an increase in revenues in Individual Life. Individual Life
revenues increased as a result of an increase in fee revenues as life insurance
in force was higher than the prior year.
Total benefits, claims and expenses decreased slightly primarily due to a
decrease in COLI expenses consistent with lower COLI revenues, partially offset
by higher benefit and claim costs in Investment Products. Additionally, in the
first quarter of 2002, the Company incurred a charge associated with the Bancorp
litigation. (For further discussion of the Bancorp litigation, see Note 5 of
Notes to Condensed Consolidated Financial Statements.) Partially offsetting this
decrease was an increase in Investment Products benefits and claim costs
associated with higher interest credited due to growth in the business as well
as higher death benefit costs in the individual annuity operation.
Net income decreased as a result of the decline in revenues described above and
higher net realized capital losses compared to a year ago. Additionally, net
income for the first quarter 2002 was positively impacted by a $3 after-tax
benefit related to favorable development on the Company's estimated September 11
exposure. Earnings for the Investment Products segment decreased from the prior
year as a result of the impact of the lower equity markets on the individual
annuity business. Partially offsetting the decrease in individual annuity
earnings was an increase in other investment products due to growth in the
institutional investment business. Earnings related to the Other category
decreased $27, primarily related to increased realized capital losses noted
above. Partially offsetting these decreases was an increase in earnings related
to the COLI segment. COLI earnings increased $9 as compared to prior year,
primarily due to the $11 after-tax expense related to the Bancorp litigation
accrued in the first quarter of 2002.
INVESTMENT PRODUCTS
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
----------------------------
2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------
Fee income and other $ 287 $ 326 (12%)
Earned premiums 91 131 (31%)
Net investment income 304 239 27%
- ------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 682 696 (2%)
Benefits and claims 389 365 7%
Insurance operating costs and other expenses 97 110 (11%)
Amortization of deferred policy acquisition costs 96 102 (6%)
- ------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 582 577 1%
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 100 119 (16%)
INCOME TAX EXPENSE 20 26 (23%)
- ------------------------------------------------------------------------------------------------------------
Net income $ 80 $ 93 (14%)
- ------------------------------------------------------------------------------------------------------------
Revenues in the Investment Products segment decreased due to lower fee income
and earned premiums, which was partially offset by higher net investment income.
Fee income generated by the individual annuity operation decreased, as average
account values decreased from prior year levels, principally due to the lower
equity markets. The decrease in earned premiums are due to lower sales of
certain products in the institutional investment products business. Net
investment income increased due to higher general account assets in the
individual annuity business, which increased 74% to $9.5 billion. Additionally,
net investment income related to other investment products increased as a result
of the growth over the last twelve months in the institutional investment
business, where related assets under management increased compared to prior year
levels.
Total benefits, claims and expenses increased, primarily driven by an increase
in death benefit costs and an increase in interest credited resulting from
growth in the segment's general account assets. Partially offsetting these
increases were lower commissions and wholesaling expenses related to lower sales
in the other investment products business for the first quarter ended March 31,
2003 as well as disciplined operating expense management. Additionally, there
was a decrease in amortization of deferred policy acquisition costs in the
individual annuity operation which declined as a result of lower gross profits
in the first quarter of 2003.
Net income related to the individual annuity operation decreased, primarily as a
result of the lower equity markets. Net income for other investment products
increased due to growth in the institutional investment business.
INDIVIDUAL LIFE
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
----------------------------
2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------
Fee income and other $ 163 $ 152 7%
Net investment income 57 55 4%
- ------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 220 207 6%
Benefits and claims 98 98 --
Amortization of deferred policy acquisition costs 42 29 45%
Insurance operating costs and other expenses 36 35 3%
- ------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 176 162 9%
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 44 45 (2%)
Income tax expense 15 15 --
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 29 $ 30 (3%)
- ------------------------------------------------------------------------------------------------------------
Revenues in the Individual Life segment increased compared to prior year as cost
of insurance charges were higher as the result of higher total life insurance in
force. Amortization of unearned revenue also increased due to favorable
mortality results compared to prior year, which drove higher gross profits.
Additionally, net investment income was higher due primarily to higher average
general account assets and higher prepayment income on certain assets as
compared to the prior year.
Total benefits, claims and expenses increased principally due to the increase in
amortization of deferred policy acquisition costs resulting from higher gross
profits driven by more favorable mortality results.
Net income decreased slightly as operating expenses offset the in-force growth
and higher net investment income.
CORPORATE OWNED LIFE INSURANCE (COLI)
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
----------------------------
2003 2002 CHANGE
- ------------------------------------------------------------------------------------------------------------
Fee income and other $ 67 $ 84 (20%)
Net investment income 59 75 (21%)
- ------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 126 159 (21%)
Benefits and claims 87 115 (24%)
Insurance operating costs and other expenses 11 40 (73%)
Dividends to policyholders 14 5 180%
- ------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 112 160 (30%)
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 14 (1) NM
Income tax expense 5 (1) NM
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 9 $ -- NM
- ------------------------------------------------------------------------------------------------------------
COLI revenues decreased due to lower net investment and fee income. Net
investment income decreased primarily related to the decline in leveraged COLI
account values resulting from surrender activity. Fee income was reduced as the
result of lower sales in the first quarter of 2003 as compared to the first
quarter of 2002, and a $1.1 billion or 26% decline in leveraged COLI account
values.
Total benefits, claims and expenses decreased as a result of the decline in the
leveraged COLI block noted above and a decline in insurance operating costs and
expenses related to the $11 after-tax expense related to the Bancorp litigation
accrued in the first quarter 2002. Dividends to policyholders increased due to
an increase in mortality dividends on the leveraged COLI block.
Net income increased compared to the prior year principally as a result of the
Bancorp litigation expense recorded in the first quarter 2002.
INVESTMENTS
Hartford Life Insurance Company's general account and guaranteed separate
account investment portfolios are managed based on the underlying
characteristics and nature of each operation's liabilities and within
established risk parameters. (For a further discussion on The Hartford's
approach to managing risks, see the Capital Markets Risk Management section.)
Please refer to the Investments section of the MD&A in Hartford Life Insurance
Company's 2002 Form 10-K Annual Report for a description of the Company's
investment objectives and policies.
Return on general account invested assets is an important element of the
Company's 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 theses investments an
also may result in reinvestment of funds received from calls and prepayments at
rates below the average portfolio yield.
Fluctuations in interest rates affect the Company's return on, and the fair
value of, fixed maturity investments, which comprised approximately 88% and 86%
of the fair value of its invested assets as of March 31, 2003 and December 31,
2002, respectively. Other events beyond the Company's control could also
adversely impact the fair value of these investments. Specifically, a downgrade
of an issuer's credit rating or default of payment by an issuer could reduce the
Company's investment return.
The following table identifies invested assets by type held in the Company's
general account as of March 31, 2003 and December 31, 2002.
COMPOSITION OF INVESTED ASSETS
MARCH 31, 2003 DECEMBER 31, 2002
---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------------------------------------------------------------
Fixed maturities, at fair value $ 26,945 87.6% $ 24,786 86.3%
Equity securities, at fair value 78 0.4% 120 0.4%
Policy loans, at outstanding balance 2,837 9.2% 2,895 10.1%
Limited partnerships, at fair value 422 1.4% 486 1.7%
Other investments 460 1.4% 432 1.5%
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 30,742 100.0% $ 28,719 100.0%
================================================================================================
Fixed maturity investments increased 9% since December 31, 2002, primarily the
result of operating cash flows. In March 2003, the Company decided to liquidate
its hedge fund limited partnership investments and reinvest the proceeds into
fixed maturity investments. A total of $73 of hedge fund investments were sold
during the quarter. The limited partnership agreements allow for the withdrawal
proceeds to be paid over a period of time. A majority of the limited partnership
proceeds are expected to be received by June 30, 2003 with the remainder no
later than March 31, 2004.
Investment Results
The table below summarizes Company's investments results.
FIRST QUARTER ENDED
MARCH 31,
--------------------
(Before-tax) 2003 2002
- -----------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 381 $ 312
Policy loan income 57 67
--------------------
Net investment income - total $ 438 $ 379
Yield on average invested assets [1] 6.2% 6.4%
- -----------------------------------------------------------------------------------
Gross gains on sale $ 48 $ 29
Gross losses on sale (41) (29)
Impairments (51) (15)
Other, net [2] (1) (2)
--------------------
Net realized capital losses $ (45) $ (17)
===================================================================================
[1] Represents annualized net investment income (excluding net realized capital
losses) divided by average invested assets at cost (fixed maturities at
amortized cost).
[2] Primarily consists of changes in fair value and hedge ineffectiveness on
derivative instruments.
For the first quarter ended March 31, 2003, net investment income, excluding
policy loans, increased $69, or 22%, compared to the same period in 2002. The
increase was primarily due to income earned on a higher invested asset base, the
result of increased cash flow, partially offset by lower investment yields.
Yields on average invested assets decreased as a result of lower rates on new
investment purchases and decreased policy loan income.
Net realized capital losses for the first quarter ended March 31, 2003 increased
by $28 compared to the same period in 2002, primarily the result of higher
write-downs for other than temporary impairments on fixed maturities.
For the quarter ended March 31, 2003, fixed maturity impairment losses of $43
consisted of asset-backed securities of $25 and corporate securities of $18. The
asset-backed securities primarily consisted of $12 backed by credit card
receivables and $10 of corporate debt. These amounts included one asset-backed
security supported by sub-prime credit card receivables that the Company no
longer had the intent to hold even though the Company's best estimate of future
cash flows indicated a full recovery of interest and principal amounts. In
addition to the impairment, the Company also recognized an $8 loss on the sale
of a portion of this security. The corporate securities impaired were
concentrated in the following sectors: $7 in transportation, $7 in consumer
non-cyclical, $3 in technology and communications and $2 in financial services.
Also included in net realized capital losses for the quarter ended March 31,
2003 were write-downs for other than temporary impairments on seeded equity and
mutual fund investments of $8.
For the quarter ended March 31, 2002, the fixed maturity impairment losses of
$14 consisted of corporate securities of $12 and asset-backed securities of $2.
The corporate securities impaired were $9 in the technology and communications
and $3 in the energy sectors. The asset-backed securities impaired were backed
by corporate debt.
CAPITAL MARKETS RISK MANAGEMENT
Hartford Life Insurance Company has a disciplined approach to managing risks
associated with its capital markets and asset/liability management activities.
Investment portfolio management is organized to focus investment management
expertise on specific classes of investments, while asset/liability management
is the responsibility of a dedicated risk management unit 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.
The Company is exposed to two primary sources of investment and asset/liability
management risk: credit risk, relating to the uncertainty associated with the
ability of an obligor or counterparty to make timely payments of principal
and/or interest, and market risk, relating to the market price and/or cash flow
variability associated with changes in interest rates, securities prices, market
indices, yield curves or currency exchange rates. The Company does not hold any
financial instruments purchased for trading purposes.
Please refer to the Capital Markets Risk Management section of the MD&A in
Hartford Life Insurance Company's 2002 Form 10-K Annual Report for further
discussion, including a description of the Company's objectives, policies and
strategies.
CREDIT RISK
Hartford Life Insurance Company has established investment credit policies that
focus on the credit quality of obligors and counterparties, limit credit
concentrations, encourage diversification and require frequent creditworthiness
reviews. Investment activity, including setting of policy and defining
acceptable risk levels, is subject to regular review and approval by senior
management and reported to The Finance Committee of the Board of Directors of
The Hartford.
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 Insurance
Company is not exposed to any credit concentration risk of a single issuer
greater than 10% of the Company's stockholder's equity.
The following tables identify fixed maturity securities for Hartford Life
Insurance Company, including guaranteed separate accounts, by type and credit
quality. The ratings referenced in the credit quality tables 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. In
addition, an aging of the gross unrealized loss position is presented for fixed
maturity and equity securities.
FIXED MATURITIES BY TYPE
MARCH 31, 2003
--------------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
- ------------------------------------------------------------------------------------------------------------
Asset-backed securities ("ABS") $ 5,093 $ 103 $ (167) $ 5,029
Commercial mortgage-backed securities ("CMBS") 5,873 434 (9) 6,298
Collateralized mortgage obligation ("CMO") 855 29 (4) 880
Corporate
Basic industry 2,287 142 (7) 2,422
Capital goods 988 73 (7) 1,054
Consumer cyclical 1,575 90 (7) 1,658
Consumer non cyclical 2,587 185 (15) 2,757
Energy 1,436 121 (5) 1,552
Financial services 5,257 339 (87) 5,509
Technology and communications 3,066 309 (13) 3,362
Transportation 614 44 (9) 649
Utilities 1,748 152 (21) 1,879
Other 446 23 - 469
Government/Government agencies - Foreign 746 77 (7) 816
Government/Government agencies - United States 608 43 - 651
Mortgage-backed securities ("MBS") - agency 1,779 44 (1) 1,822
Municipal - tax-exempt - - - -
Municipal - taxable 95 15 (1) 109
Redeemable preferred stock 1 - - 1
Short-term 1,263 2 - 1,265
- ------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 36,317 $ 2,225 $ (360) $ 38,182
============================================================================================================
Total general account fixed maturities $ 25,664 $ 1,534 $ (253) $ 26,945
Total guaranteed separate account fixed maturities $ 10,653 $ 691 $ (107) $ 11,237
============================================================================================================
At March 31, 2003 the Company fixed maturity portfolio had gross unrealized
losses of $360, of which 76% were concentrated in the financial services and
utilities sectors and asset-backed securities. The Company's current view of
risk factors relative to these fixed maturity types are as follows:
Financial Services - This sector has been adversely impacted by security
write-offs especially in the energy, utilities and communications industries,
along with reserve increases by property and casualty insurers the result of
poor underwriting and asbestos related exposures. In general, industry balance
sheets are strong and security credit quality is improving.
Utilities - The utilities sector remains adversely impacted by several events
that primarily occurred in 2001 including the bankruptcy of Enron Corporation,
the decline in the energy trading industry and the regulatory, political and
legal effect of the California Utility Crisis. In the short-term, restructuring
and possible bankruptcies may continue as companies seek liquidity sources.
Asset sales of non-core operations are expected to continue to be a significant
source of liquidity. The short-term events are expected to reduce the number of
power suppliers, which, in the longer term, the Company believes will lead to a
gradual rise in power prices and allow this sector to recover.
ABS- As of March 31, 2003, asset-backed securities supported by corporate debt
("CDO"), aircraft lease and credit card receivables were in a gross unrealized
loss position of $31, $57 and $52, respectively.
Adverse CDO experience can be attributable to higher than expected default rates
especially in the technology and utilities sectors and lower than expected
recovery rates. Approximately 86% of the CDOs at March 31, 2003 were investment
grade.
The securities supported by aircraft and aircraft lease payments have declined
in value due to a reduction in lease payments and aircraft values driven by
bankruptcies and other financial difficulties of airline carriers. These
securities may continue to be stressed due to a continued decline in air
passenger traffic. Approximately 85% of the Company's investment in securities
supported by aircraft and aircraft lease payments at March 31, 2003 were
investment grade.
The unrealized loss position in credit card securities has primarily been caused
by exposure to companies originating loans to sub-prime borrowers. The Company
expects this sub-sector will continue to be under stress and holdings to be very
sensitive to changes in collateral performance. Approximately 99% of the
Company's investment in securities supported by credit card receivables, at
March 31, 2003 were investment grade.
FIXED MATURITIES BY TYPE
DECEMBER 31, 2002
--------------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
- ------------------------------------------------------------------------------------------------------------
Asset-backed securities ("ABS") $ 5,115 $ 109 $ (143) $ 5,081
Commercial mortgage-backed securities ("CMBS") 4,979 416 (9) 5,386
Collateralized mortgage obligation ("CMO") 752 33 (2) 783
Corporate
Basic industry 2,000 129 (7) 2,122
Capital goods 1,048 68 (7) 1,109
Consumer cyclical 1,425 88 (3) 1,510
Consumer non cyclical 2,462 176 (16) 2,622
Energy 1,446 110 (8) 1,548
Financial services 4,956 307 (81) 5,182
Technology and communications 2,911 247 (68) 3,090
Transportation 571 45 (11) 605
Utilities 1,757 114 (41) 1,830
Other 404 18 - 422
Government/Government agencies - Foreign 720 68 (5) 783
Government/Government agencies - United States 553 44 - 597
Mortgage-backed securities ("MBS") - agency 2,035 58 - 2,093
Municipal - tax-exempt - - - -
Municipal - taxable 99 16 (1) 114
Redeemable preferred stock 1 - - 1
Short-term 992 1 - 993
- ------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 34,226 $ 2,047 $ (402) $ 35,871
============================================================================================================
Total general account fixed maturities $ 23,675 $ 1,389 $ (278) $ 24,786
Total guaranteed separate account fixed maturities $ 10,551 $ 658 $ (124) $ 11,085
============================================================================================================
FIXED MATURITIES BY CREDIT QUALITY
MARCH 31, 2003 DECEMBER 31, 2002
------------------------------------ -----------------------------------
PERCENT OF PERCENT OF
AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
United States Government/Government agencies $ 3,134 $ 3,241 8.5% $ 3,213 $ 3,341 9.3%
AAA 5,572 5,897 15.4% 5,077 5,399 15.1%
AA 3,411 3,589 9.4% 3,334 3,507 9.8%
A 11,552 12,270 32.2% 11,019 11,687 32.5%
BBB 9,425 9,958 26.1% 8,662 9,081 25.3%
BB & below 1,960 1,962 5.1% 1,928 1,862 5.2%
Short-term 1,263 1,265 3.3% 993 994 2.8%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 36,317 $ 38,182 100.0% $ 34,226 $ 35,871 100.0%
==================================================================================================================================
Total general account fixed maturities $ 25,664 $ 26,945 70.6% $ 23,675 $ 24,786 69.1%
Total guaranteed separate account fixed maturities $ 10,653 $ 11,237 29.4% $ 10,551 $ 11,085 30.9%
==================================================================================================================================
As of March 31, 2003 and December 31, 2002, over 94% of the fixed maturity
portfolio was invested in securities rated investment grade (BBB and above). As
of March 31, 2003, below investment grade ("BIG") holdings were diversified by
sector and issuer with the greatest concentration of securities, based upon fair
value, in the in the following sectors: 21% in technology and communications,
14% in utilities, 10% in consumer cyclical, 10% in basic industry, 10% in
consumer non-cyclical and 8% in foreign government. At March 31, 2003, the
Company held no issuer of a BIG security with a fair value in excess of 2% of
the total fair value for BIG securities. As of December 31, 2002, BIG holdings
were concentrated, based upon fair value, in the following sectors: 20% in
technology and communications, 17% in utilities, 11% in consumer cyclical, 11%
in basic industry and 9% in foreign government. At December 31, 2002, the
Company held no issuer of a BIG security with a fair value in excess of 2% of
the total fair value for BIG securities.
The Company's total and BIG fixed maturity and equity securities held as of
March 31, 2003 and December 31, 2002 that were in an unrealized loss position
are presented in the tables below by length of time the security was in an
unrealized loss position.
UNREALIZED LOSS AGING AT MARCH 31, 2003
TOTAL SECURITIES BIG AND EQUITY SECURITIES
------------------------------------ -------------------------------------
AMORTIZED UNREALIZED AMORTIZED UNREALIZED
COST FAIR VALUE LOSS COST FAIR VALUE LOSS
- -----------------------------------------------------------------------------------------------------------------------------
Three months or less $ 1,987 $ 1,936 $ (51) $ 132 $ 117 $ (15)
Greater than three months to six months 688 645 (43) 35 26 (9)
Greater than six months to nine months 696 655 (41) 102 88 (14)
Greater than nine months to twelve months 215 198 (17) 77 65 (12)
Greater than twelve months 2,443 2,227 (216) 466 398 (68)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL $ 6,029 $ 5,661 $ (368) $ 812 $ 694 (118)
============================================================================================================================
The total securities that were in an unrealized loss position for longer than
six months as of March 31, 2003 primarily consisted of asset-backed and
corporate debt. Asset-backed securities backed by credit card receivables,
aircraft lease receivables and corporate debt comprised 18%, 14%, 10%,
respectively, of the greater than six months unrealized loss amount. The
significant corporate security industry sectors of financial services and
utilities comprised 24%, and 6%, respectively, of the greater than six months
unrealized loss amount. At March 31, 2003, the Company held no securities of a
single issuer that were at an unrealized loss in excess of 6% of total
unrealized losses. The total unrealized loss position of $(368) consisted of
$(261) in general account losses and $(107) in guaranteed separate account
losses.
As of March 31, 2003, fixed maturities represented $360, or 98%, of total Life
unrealized losses. Approximately 98% of the fixed maturities in an unrealized
loss position for longer than six months represented asset-backed and commercial
mortgage-backed securities and fixed maturities with a fair value greater than
80% of cost. As of March 31, 2003 the Company held four corporate debt
securities from two issuers with a market value that was less than 80% of the
security's amortized cost basis for six continuous months. The securities had an
aggregate market value of $15 and were in an unrealized loss position of $6. The
issuers have made all contractually obligated principal and interest payments
and their operating fundamentals continue to improve. As a result, the Company
concluded the security price depression was temporary.
Other than temporary impairments for certain asset-backed securities and
commercial mortgage-backed securities are recognized if the fair value of the
security is less than its carrying amount and there has been a decrease in the
present value of the expected cash flows since the last revised estimate. There
were no asset-backed securities included in the tables above for which
management's best estimate of future cash flows adversely changed during the
quarter ended March 31, 2003. For a detailed discussion of the other than
temporary impairment criteria for asset backed securities, see "Valuation of
Investments and Derivative Instruments" included in the Critical Accounting
Estimates section of MD&A and in Note 2(g) of Notes to Consolidated Financial
Statements both included in the Company's 2002 Form 10-K Annual Report.
As of March 31, 2003, one asset-backed security had an unrealized loss of $20.
The security is backed by sub-prime credit card receivables. See the overview of
the sub-prime credit card receivable market under the Fixed Maturities by Type
table in this section of the MD&A. The security issuer has had poor underwriting
and servicing results, which has contributed to a higher collateral loss rate
than expected. Management's best estimate of future cash flows based upon
historical payment and default rates and future interest rate assumptions
indicate that the Company will receive all interest and principal amounts.
The BIG and equity securities that were in an unrealized loss position for
longer than six months as of March 31, 2003 primarily consisted of asset-backed
securities backed by credit card receivables and corporate securities in the
utilities, technology and communications, and financial services sectors. The
asset-backed securities along with corporate securities in the utilities,
technology and communications, and financial services sectors, and diversified
equity securities including mutual funds comprised 42%, 15%, 8%, 8% and 9%,
respectively, of the BIG and equity securities that were in an unrealized loss
position for greater than six months at March 31, 2003. The total unrealized
loss position of BIG and equity securities of $(118) consisted of $(98) in
general account losses and $(20) in guaranteed separate account losses.
UNREALIZED LOSS AGING AT DECEMBER 31, 2002
TOTAL SECURITIES BIG AND EQUITY SECURITIES
------------------------------------ -------------------------------------
AMORTIZED UNREALIZED AMORTIZED UNREALIZED
COST FAIR VALUE LOSS COST FAIR VALUE LOSS
- -----------------------------------------------------------------------------------------------------------------------------
Three months or less $ 1,382 $ 1,316 $ (66) $ 131 $ 104 $ (27)
Greater than three months to six months 1,211 1,158 (53) 188 165 (23)
Greater than six months to nine months 519 465 (54) 160 134 (26)
Greater than nine months to twelve months 1,247 1,181 (66) 299 264 (35)
Greater than twelve months 1,873 1,693 (180) 354 299 (55)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL $ 6,232 $ 5,813 $ (419) $ 1,132 $ 966 (166)
============================================================================================================================
The total securities that were in an unrealized loss position for longer than
six months as of December 31, 2002 primarily consisted of corporate and
asset-backed securities. The significant corporate security industry sectors of
financial services, utilities, technology and communications and transportation
comprised of 20%, 13%, 14% and 3%, respectively, of the greater than six months
unrealized loss amount. Asset-backed securities comprised 34% of the greater
than six month unrealized loss amount and included securities backed by
corporate debt, aircraft lease receivables and credit card receivables. At
December 31, 2002, the Company held no securities of a single issuer that were
at an unrealized loss in excess of 4% of total unrealized losses. The total
unrealized loss position of $(419) consisted of $(297) in general account losses
and $(122) in guaranteed separate account losses.
The BIG and equity securities that were in an unrealized loss position for
longer than six months as of December 31, 2002 primarily consisted of corporate
securities in the technology and communications and utilities sectors as well as
asset-backed securities backed by corporate debt, equipment loans and credit
card receivables. The technology and communications and utilities sectors along
with diversified equity mutual funds and asset-backed securities comprised 29%,
23%, 18% and 14%, respectively, of the BIG and equity securities that were in an
unrealized loss position for greater than six months at December 31, 2002. The
total unrealized loss position of BIG and equity securities of $(166) consisted
of $(131) in general account losses and $(35) in guaranteed separate account
losses.
As part of the Company's ongoing monitoring process by a committee of investment
and accounting professionals, the Company has reviewed these securities and
concluded that there were no additional other than temporary impairments as of
March 31, 2003 and December 31, 2002. Due to the issuers' continued satisfaction
of the securities' obligations in accordance with their contractual terms and
their continued expectation to do so, as well as the evaluation of the
fundamentals of the issuers' financial condition, the Company believes that the
prices of the securities in the sectors identified above, were temporarily
depressed primarily as a result of a market dislocation and generally poor
cyclical economic conditions and sentiment. See "Valuation of Investments and
Derivative Instruments" included in the Critical Accounting Estimates section of
MD&A and in Note 2(g) of Notes to Consolidated Financial Statements both
included in the Company's 2002 Form 10-K Annual Report.
The evaluation for other than temporary impairments is a quantitative and
qualitative process, which is subject to risks and uncertainties in the
determination of whether declines in the fair value of investments are other
than temporary. The risks and uncertainties include changes in general economic
conditions, the issuer's financial condition or near term recovery prospects and
the effects of changes in interest rates. In addition, for securitized financial
assets with contractual cash flows (e.g. asset-backed securities), projections
of expected future cash flows may change based upon new information regarding
the performance of the underlying collateral.
EQUITY RISK
Hartford Life Insurance 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. A prolonged and precipitous decline in the equity
markets, as has been experienced of late, 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. The lower assets under management will have a negative impact on the
Company's financial results, primarily due to lower fee income related to the
Investment Products and Individual Life segments, where a heavy concentration of
equity linked products are administered and sold. Furthermore, the Company may
experience a reduction in profit margins if a significant portion of the assets
held in the variable annuity separate accounts move to the general account and
the Company is unable to earn an acceptable investment spread, particularly in
light of the low interest rate environment and the presence of contractually
guaranteed minimum interest credited rates, which for the most part are at a 3%
rate.
In addition, prolonged declines in the equity market may also decrease the
Company's expectations of future gross profits, which are utilized to determine
the amount of DAC to be amortized in a given financial statement period. A
significant decrease in the Company's estimated gross profits would require the
Company to accelerate the amount of DAC amortization in a given period,
potentially causing a material adverse deviation in that period's net income.
Although an acceleration of DAC amortization would have a negative impact on the
Company's earnings, it would not affect the Company's cash flow or liquidity
position.
Additionally, the Investment Products segment sells variable annuity contracts
that offer various guaranteed death benefits. For certain guaranteed death
benefits, 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. 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 Company's total gross exposure (i.e. before reinsurance) to these guaranteed
death benefits as of March 31, 2003 is $23.6 billion. Due to the fact that 81%
of this amount is reinsured, the Company's net exposure is $4.4 billion. This
amount is often referred to as the net amount at risk. 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. 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 250 stochastically generated investment performance scenarios and best
estimate assumptions related to mortality and lapse rates. A range of projected
costs was developed and discounted back to the 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 that the present value of the retained
death benefit costs to be incurred in the future fell within a range of $108 to
$396. This range was calculated utilizing a 95% confidence interval. The median
of the 250 stochastically generated scenarios was $191.
In addition, Hartford Life Insurance Company issues certain variable annuity
products that contain a guaranteed minimum withdrawal benefit ("GMWB"). The GMWB
gives the policyholder the right to make periodic surrenders that total an
amount equal to the policyholders' premium payments. This guarantee will remain
in effect if periodic surrenders do not exceed an amount equal to 7% of premium
payments each contract year. If the policyholder chooses to surrender an amount
equal to more than 7% in a contract year, then the guarantee may be reduced to
an amount less than premium payments. The value of the GMWB obligations are
calculated based on actuarial assumptions related to the projected benefits and
related contract charges over the lives of the contracts. Because of the dynamic
and complex nature of these cash flows, stochastic techniques under a variety of
market return scenarios and other best estimate actuarial assumptions are used.
This model involves numerous estimates and subjective judgements including those
regarding expected market rates of return and volatility. Declines in the equity
market may increase the Company's exposure (prior to reinsurance) to benefits
under these contracts. The Company has entered into a reinsurance arrangement to
offset its exposure to the GMWB and currently reinsures 100% of these benefits.
MARKET RISK
Hartford Life Insurance Company has material exposure to both interest rate and
equity market risk. The Company analyzes interest rate risk using various models
including multi-scenario cash flow projection models that forecast cash flows of
the liabilities and their supporting investments, including derivative
instruments. There have been no material changes in market risk exposures from
December 31, 2002.
DERIVATIVE INSTRUMENTS
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded futures and options, in compliance with
Company policy and regulatory requirements in order to achieve one of four
Company approved objectives: to hedge risk arising from interest rate, price or
currency exchange rate volatility; to manage liquidity; to control transaction
costs; or to enter into income enhancement and replication transactions. The
Company does not make a market or trade derivatives for the express purpose of
earning short term trading profits. (For further discussion on The Company's use
of derivative instruments, refer to Note 4 of Notes to Condensed Consolidated
Financial Statements.)
REGULATORY INITIATIVES AND CONTINGENCIES
LEGAL PROCEEDINGS
Hartford Life Insurance Company is or may become involved in various legal
actions, in the normal course of its business, in which claims for alleged
economic and punitive damages have been or may be asserted, some for substantial
amounts. Some of the pending litigation has been filed as purported class
actions and some actions have been filed in certain jurisdictions that permit
punitive damage awards that are disproportionate to the actual damages incurred.
Although there can be no assurances, at the present time, the Company does not
anticipate that the ultimate liability arising from potential, pending or
threatened legal actions, after consideration of provisions made for estimated
losses and costs of defense, will have a material adverse effect on the
financial condition or operating results of the Company.
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
Hartford Life Insurance Company 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 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.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 2 of Notes to Condensed
Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Capital Markets Risk Management section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
The Company's principal executive officer and its principal financial officer,
based on their evaluation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-14(c)) as of a date within 90 days prior to
the filing of this Quarterly Report on Form 10-Q, 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-14(c).
Changes in internal controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's internal controls
subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Hartford Life Insurance Company is or may become involved in various legal
actions, in the normal course of its business, in which claims for alleged
economic and punitive damages have been or may be asserted, some for substantial
amounts. Some of the pending litigation has been filed as purported class
actions and some actions have been filed in certain jurisdictions that permit
punitive damage awards that are disproportionate to the actual damages incurred.
Although there can be no assurances, at the present time, the Company does not
anticipate that the ultimate liability arising from potential, pending or
threatened legal actions, after consideration of provisions made for estimated
losses and costs of defense, will have a material adverse effect on the
financial condition or operating results of the Company.
On March 15, 2002, a jury in the U.S. District Court for the Eastern District of
Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life
Insurance Company, et al. in favor of Bancorp in the amount of $118. The case
involved claims of patent infringement, misappropriation of trade secrets, and
breach of contract against the Company and its affiliate International Corporate
Marketing Group, Inc. ("ICMG"). The judge dismissed the patent infringement
claim on summary judgment. The jury's award was based on the last two claims. On
August 28, 2002, the Court entered an order awarding Bancorp prejudgment
interest on the breach of contract claim in the amount of $16.
Hartford Life Insurance Company and ICMG have appealed the judgment on the trade
secret and breach of contract claims. Bancorp has cross-appealed the pretrial
dismissal of its patent infringement claim. The Company's management, based on
the advice of its legal counsel, believes that there is a substantial likelihood
that the judgment will not survive at its current amount. Based on the advice of
legal counsel regarding the potential outcomes of this litigation, the Company
recorded an $11 after-tax charge in the first quarter of 2002 to increase
litigation reserves. Should Hartford Life Insurance Company and ICMG not succeed
in eliminating or reducing the judgment, a significant additional expense would
be recorded in the future.
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. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K:
During the quarterly period ended March 31, 2003, the Company filed the
following Current Reports on Form 8-K:
Dated March 17, 2003, Other Events, to report a final decision and award in
the previously disclosed arbitration between subsidiaries of the Company and
one of their primary reinsurers relating to policies with death benefit
guarantees written from 1994 to 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTFORD LIFE INSURANCE COMPANY
/s/ Ernest M. McNeill Jr.
--------------------------------------------
Ernest M. McNeill Jr.
Vice President and Chief Accounting Officer
May 13, 2003
CERTIFICATIONS
I, Thomas M. Marra, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hartford
Life Insurance Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
By : /s/ Thomas M. Marra
------------------------------------------
Thomas M. Marra
President, Chief Executive Officer and Chairman
I, David A. Carlson, certify that:
1. I have reviewed this quarterly report on Form 10-K of Hartford
Life Insurance Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
By : /s/ David A. Carlson
-------------------------------------------------
David A. Carlson
Senior Vice President and Chief Financial Officer
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
FORM 10-Q
EXHIBITS INDEX
EXHIBIT #
99.01 Certificate of Thomas M. Marra pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.02 Certificate of David A. Carlson pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.