UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2009
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
Commission file number
001-32293
HARTFORD LIFE INSURANCE
COMPANY
(Exact name of registrant as
specified in its charter)
|
|
|
Connecticut
(State or other jurisdiction
of
incorporation or organization)
|
|
06-0974148
(I.R.S. Employer
Identification No.)
|
200 Hopmeadow Street, Simsbury, Connecticut 06089
(Address of principal executive
offices)
(860) 547-5000
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
3.75% Secured Medium-Term Notes due 2009 of Hartford Life
Global Funding
Trust 2004-001
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
Large
accelerated
filer o
|
Accelerated
filer o
|
Non-accelerated
filer þ
|
Smaller
reporting
company o
|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant as of June 30, 2009 was
$0, because all of the outstanding shares of Common Stock were
owned by Hartford Life and Accident Insurance Company, a direct
wholly owned subsidiary of Hartford Life, Inc.
As of February 15, 2010 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 (I) (1) (a) and (b) of
Form 10-K
and is therefore filing this Form with the reduced disclosure
format.
CONTENTS
|
|
|
* |
|
Item prepared in accordance with General Instruction I
(2) of
Form 10-K |
|
** |
|
Item omitted in accordance with General Instruction I
(2) of
Form 10-K |
2
Forward-Looking
Statements
Certain of the statements contained herein are forward-looking
statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by words such as
anticipates, intends, plans,
seeks, believes, estimates,
expects, and similar references to future periods.
Forward-looking statements are based on our current expectations
and assumptions regarding economic, competitive and legislative
developments. Because forward-looking statements relate to the
future, they are subject to inherent uncertainties, risks and
changes in circumstances that are difficult to predict. They
have been made based upon managements expectations and
beliefs concerning future developments and their potential
effect upon Hartford Life Insurance Company (the
Company). Future developments may not be in line with
managements expectations or have unanticipated effects.
Actual results could differ materially from expectations,
depending on the evolution of various factors, including those
set forth in Part I, Item 1A. These important risks
and uncertainties include:
|
|
|
significant risks and uncertainties related to the
Companys current operating environment, which reflects
continued volatility in financial markets, constrained capital
and credit markets and uncertainty about the timing and strength
of an economic recovery and the impact of governmental budgetary
and regulatory initiatives and whether managements
initiatives to address these risks will be effective;
|
|
|
risks associated with our continued execution of steps to
realign our business and reposition our investment portfolio,
including the potential need to adjust our plans to take other
restructuring actions, such as divestitures;
|
|
|
market risks associated with our business, including changes in
interest rates, credit spreads, equity prices, foreign exchange
rates, as well as challenging or deteriorating conditions in key
sectors such as the commercial real estate market, that have
pressured our results and are expected to continue to do so in
2010;
|
|
|
volatility in our earnings resulting from our recent adjustment
of our risk management program to emphasize protection of
statutory surplus;
|
|
|
the impact on our statutory capital of various factors,
including many that are outside the Companys control,
which can in turn affect our credit and financial strength
ratings, cost of capital, regulatory compliance and other
aspects of our business and results;
|
|
|
risks to our business, financial position, prospects and results
associated with downgrades in the Companys financial
strength and credit ratings or negative rating actions relating
to our investments;
|
|
|
the potential for differing interpretations of the
methodologies, estimations and assumptions that underlie the
valuation of the Companys financial instruments that could
result in changes to investment valuations;
|
|
|
the subjective determinations that underlie the Companys
evaluation of
other-than-temporary
impairments on
available-for-sale
securities;
|
|
|
losses due to nonperformance or defaults by others;
|
|
|
the potential for further acceleration of deferred policy
acquisition cost amortization;
|
|
|
the potential for further impairments of our goodwill or the
potential for establishing valuation allowances against deferred
tax assets;
|
|
|
the possible occurrence of terrorist attacks and the
Companys ability to contain its exposure, including the
effect of the absence or insufficiency of applicable terrorism
legislation on coverage;
|
|
|
the possibility of a pandemic or other man-made disaster that
may adversely affect the Companys businesses and cost and
availability of reinsurance;
|
|
|
weather and other natural physical events, including the
severity and frequency of storms, hail, snowfall and other
winter conditions, natural disasters such as hurricanes and
earthquakes, as well as climate change, including effects on
weather patterns, greenhouse gases, sea, land and air
temperatures, sea levels, rain and snow;
|
3
|
|
|
the response of reinsurance companies under reinsurance
contracts and the availability, pricing and adequacy of
reinsurance to protect the Company against losses;
|
|
|
the possibility of unfavorable loss development;
|
|
|
actions by our competitors, many of which are larger or have
greater financial resources than we do;
|
|
|
the costs, compliance and other consequences of The
Hartfords participation in the Capital Purchase Program
under the Emergency Economic Stabilization Act of 2008 and the
eventual repayment thereof;
|
|
|
unfavorable judicial or legislative developments;
|
|
|
the potential effect of domestic and foreign regulatory
developments, including those that could adversely impact the
demand for the Companys products, operating costs and
required capital levels, including changes to statutory reserves
and/or
risk-based capital requirements related to secondary guarantees
under universal life and variable annuity products;
|
|
|
the Companys ability to distribute its products through
distribution channels, both current and future;
|
|
|
the uncertain effects of emerging claim and coverage issues;
|
|
|
the ability of the Companys subsidiaries to pay dividends
to the Company;
|
|
|
the Companys ability to maintain the availability of its
systems and safeguard the security of its data in the event of a
disaster or other unanticipated events;
|
|
|
the potential for difficulties arising from outsourcing
relationships;
|
|
|
the impact of potential changes in federal or state tax laws,
including changes affecting the availability of the separate
account dividend received deduction;
|
|
|
the impact of potential changes in accounting principles and
related financial reporting requirements;
|
|
|
the Companys ability to protect its intellectual property
and defend against claims of infringement; and
|
|
|
other factors described in such forward-looking statements.
|
Any forward-looking statement made by us in this document speaks
only as of the date on which it is made. Factors or events that
could cause our actual results to differ may emerge from time to
time, and it is not possible for us to predict all of them. We
undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future
developments or otherwise, except as may be required by law.
4
PART I
(Dollar Amounts In Millions, Unless Otherwise
Stated)
General
Hartford Life Insurance Company (together with its subsidiaries,
HLIC, Company, we or
our), is an indirect wholly-owned subsidiary of The
Hartford Financial Services Group, Inc. (The
Hartford), an insurance and financial services company.
HLIC is among the largest providers of insurance and investment
products in the United States. The Company also assumes fixed
annuity products and living and death benefit riders on variable
annuities from The Hartfords Japan operations and also
cedes insurance risks to affiliates and third party reinsurance
companies. At December 31, 2009, total assets and total
stockholders equity were $221.3 billion and
$6.2 billion, respectively.
Reporting
Segments
The Company is organized into four reporting segments: Retail
Products Group (Retail), Individual Life
(Individual Life), Retirement Plans
(Retirement Plans), and Institutional Solutions
Group (Institutional). Lifes Other category
includes: its leveraged PPLI product line of business; corporate
items not directly allocated to any of its reportable operating
segments; intersegment eliminations; assumed and ceded
reinsurance of death and living benefits from The
Hartfords Japan operations; certain direct group life and
group disability insurance that is ceded to an affiliate; as
well as other International operations.
For disclosures on revenues, net income and assets for each
reporting segment, see Note 2 of Notes to Consolidated
Financial Statements. For disclosures of assets under
management, account values, life insurance in-force and net
investment spread, see Part 11, Item 7, MD&A,
Life Operations, Key Performance Measures and Ratios and the
respective segment discussions. Life provides investment
products for approximately 7 million customers and life
insurance products for approximately 730,000 customers.
Life
Principal Products
Retail provides fixed annuities and individual variable
annuities with living and death benefit guarantees, mutual funds
and 529 plans in the United States. In October 2009, the Company
launched a new variable annuity product designed to meet
customer needs for growth and income within the risk tolerances
of The Hartford which is replacing its guaranteed minimum
withdrawal benefit product.
Individual Life provides variable universal life, universal
life, interest sensitive whole life and term life insurance
products to affluent, emerging affluent and business life
insurance clients.
Retirement Plans provide retirement products and services,
including asset management and plan administration, to small and
medium-size corporations pursuant to Section 401(k) of the
Internal Revenue Code of 1986, as amended (401(k)).
Retirement also provides retirement products and services,
including asset management and plan administration, to
municipalities and
not-for-profit
organizations pursuant to Section 457 and 403(b) of the
Internal Revenue Code of 1986, as amended (457 and
403(b)). In 2008, Retirement completed three acquisitions.
These three acquisitions were not accretive to 2008 net
income. Furthermore, return on assets was lower for retirement
overall in 2009 reflecting, in part, a full year of the new
business mix represented by the acquisitions, which includes
larger, more institutionally priced plans, predominantly
executed on a mutual fund platform, and the cost of maintaining
multiple technology platforms during the integration period.
Institutional, prior to the fourth quarter of 2009, provided
variable private placement life insurance (PPLI),
structured settlements, institutional annuities, longevity
assurance, income annuities, institutional mutual funds and
stable value investment products. In the fourth quarter of 2009,
the Company has completed the strategic review of the
Institutional businesses and has decided to exit several
businesses that have been determined to be outside of the
Companys core business model. Several lines
institutional mutual funds, private placement life insurance,
5
income annuities and certain institutional annuities will
continue to be managed for growth. The private placement life
insurance industry (including the corporate-owned and bank-owned
life insurance markets) has experienced a slowdown in sales due
to, among other things, limited availability of stable value
wrap providers. We believe that the Companys current PPLI
assets will experience high persistency, but our ability to grow
this business in the future will be affected by near term market
and industry challenges. The remaining businesses, Structured
Settlements, Guaranteed Investment Products, and most
Institutional Annuities will be managed in conjunction with
other businesses that the Company has previously decided will
not be actively marketed. Certain guaranteed investment products
may be offered on a selective basis.
Life
Distribution
Retails distribution network includes national and
regional broker-dealer organizations, banks and other financial
institutions and independent financial advisors. Life
periodically negotiates provisions and terms of its
relationships with unaffiliated parties, and there can be no
assurance that such terms will remain acceptable to Life or such
third parties. Lifes primary wholesaler of its individual
annuities is Hartford Life Distributors, LLC, and its affiliate,
PLANCO, LLC (collectively HLD) which are indirect
wholly-owned subsidiaries of Hartford Life. HLD provides sales
support to registered representatives, financial planners and
broker-dealers at brokerage firms and banks across the United
States. As part of the Companys assessment of its
opportunities in the variable annuity marketplace it
significantly scaled back its HLD operations in 2009.
Individual Lifes distribution network includes national
and regional broker-dealer organizations, banks, independent
agents, independent life and property-casualty agents, and
Woodbury Financial Services, an indirect, wholly-owned
subsidiary retail broker-dealer. To wholesale Lifes
products, Life has a group of highly qualified life insurance
professionals with specialized training in sophisticated life
insurance sales.
Retirement Plans distribution network includes Company employees
with extensive experience selling its products and services
through national and regional broker-dealer firms, banks and
other financial institutions.
Institutionals PPLI distribution network includes:
specialized brokers, with expertise in the large case market;
financial advisors that work with individual investors;
investment banking and wealth management specialists; benefits
consulting firms; investment consulting firms employed by
retirement plan sponsors; and Hartford employees.
Life
Competition
Retail and Retirement compete with numerous other insurance
companies as well as certain banks, securities brokerage firms,
independent financial advisors and other financial
intermediaries marketing annuities, mutual funds and other
retirement-oriented products. Product sales are affected by
competitive factors such as investment performance ratings,
product design, visibility in the marketplace, financial
strength ratings, distribution capabilities, levels of charges
and credited rates, reputation and customer service.
Retails annuity deposits continue to decline resulting
from the recent equity market volatility. Many competitors have
responded to the recent equity market volatility by increasing
the price of their living benefit products and changing the
level of the guarantee offered. Management believes that the
most significant industry de-risking changes have occurred. In
the first six months of 2009, the Company increased fees on
in-force variable annuity guarantees in order to address the
risks and costs associated with variable annuity benefit
features. The Company continues to explore other risk limiting
techniques including product design, hedging and reinsurance. As
part of the Companys de-risking initiative, the Company is
transitioning to a new variable annuity product designed to meet
customers future income needs within the risk tolerances of the
Company.
Retails mutual funds compete with other mutual fund
companies and differentiate themselves through product
solutions, performance, expenses, wholesaling and service. In
this non-proprietary broker sold market, the Company and its
competitors compete aggressively for net sales. Success will be
driven by diversifying net sales across the mutual fund
platform, delivering superior investment performance and
creating new investment solutions for current and future mutual
fund shareholders.
6
For the 457 and 403(b) as well as the 401(k) markets, which
offer mutual funds wrapped in a variable annuity, variable
funding agreement, or mutual fund retirement program, the
variety of available funds and their performance is most
important to plan sponsors. The competitors tend to be the major
mutual fund companies. The past few years have seen
consolidation among industry providers seeking to increase
scale, improve cost efficiencies, and enter new market segments.
The consolidation of providers is expected to continue as
smaller providers exit the market.
Individual Life competes with approximately 1,000 life insurance
companies in the United States, as well as other financial
intermediaries marketing insurance products. Product sales are
affected primarily by the breadth and quality of life insurance
products, pricing, relationships with third-party distributors,
effectiveness of wholesaling support, pricing and availability
of reinsurance, and the quality of underwriting and customer
service. The individual life industry continues to see a
distribution shift away from the traditional life insurance
sales agents, to the consultative financial advisor as the place
people go to buy their life insurance. Individual Lifes
regional sales office system is a differentiator in the market
and allows it to compete effectively across multiple
distribution outlets.
Institutional competes with other life insurance companies and
asset managers who provide investment and risk management
solutions. Product sales are often affected by competitive
factors such as investment performance, company credit ratings,
perceived financial strength, product design, marketplace
visibility, distribution capabilities, fees, credited rates, and
customer service. In 2009, ratings agency downgrades, as well as
changes in the Companys strategic business model, limited
Institutional sales and resulted in the Company exiting certain
markets. For institutional mutual funds, the variety of
available funds, fee levels, and fund performance are most
important to plan sponsors and investment consultants.
Competitors tend to be the major mutual fund companies,
insurance companies, and asset managers.
Reserves
The Companys insurance subsidiaries establish and carry as
liabilities, predominantly, five types of reserves: (1) a
liability equal to the balance that accrues to the benefit of
the policyholder as of the financial statement date, otherwise
known as the account value, (2) a liability for unpaid
losses, including those that have been incurred but not yet
reported, (3) a liability for future policy benefits,
representing the present value of future benefits to be paid to
or on behalf of policyholders less the present value of future
net premiums, (4) fair value reserves for living benefits
embedded derivative guarantees; and (5) death and living
benefit reserves which are computed based on a percentage of
revenues less actual claim costs The liabilities for unpaid
losses and future policy benefits are calculated based on
actuarially recognized methods using morbidity and mortality
tables, which are modified to reflect Lifes actual
experience when appropriate. Liabilities for unpaid losses
include estimates of amounts to fully settle known reported
claims as well as claims related to insured events that the
Company estimates have been incurred but have not yet been
reported. Future policy benefit reserves are computed at amounts
that, with additions from estimated net premiums to be received
and with interest on such reserves compounded annually at
certain assumed rates, are expected to be sufficient to meet the
Companys policy obligations at their maturities or in the
event of an insureds disability or death. Other insurance
liabilities include those for unearned premiums and benefits in
excess of account value. Reserves for assumed reinsurance are
computed in a manner that is comparable to direct insurance
reserves.
Ceded
Reinsurance
The Company cedes insurance risk to reinsurance companies.
Reinsurance does not relieve the Company of its primary
liability and, as such, failure of reinsurers to honor their
obligations could result in losses to The Hartford. The Company
evaluates the risk transfer of its reinsurance contracts, the
financial condition of its reinsurers and monitors
concentrations of credit risk. The Companys monitoring
procedures include careful initial selection of its reinsurers,
structuring agreements to provide collateral funds where
possible, and regularly monitoring the financial condition and
ratings of its reinsurers. Reinsurance accounting is followed
for ceded transactions that provide indemnification against loss
or liability relating to insurance risk (i.e. risk transfer).
The Company cedes certain insurance risks to various affiliate
entities to enable the Company to manage capital and risk
exposure. For further
7
discussion of reinsurance, see Note 5 and Note 16 of
Notes to Consolidated Financial Statements. If the ceded
transactions do not provide risk transfer, the Company accounts
for these transactions as financing transactions.
Investment
Operations
The investment portfolios of the Company are managed by Hartford
Investment Management Company (HIMCO), a
wholly-owned subsidiary of The Hartford. HIMCO manages the
portfolios to maximize economic value, while attempting to
generate the income necessary to support the Companys
various product obligations, within internally established
objectives, guidelines and risk tolerances. The portfolio
objectives and guidelines are developed based upon the
asset/liability profile, including duration, convexity and other
characteristics within specified risk tolerances. The risk
tolerances considered include, for example, asset and credit
issuer allocation limits, maximum portfolio below investment
grade holdings and foreign currency exposure. The Company
attempts to minimize adverse impacts to the portfolio and the
Companys results of operations from changes in economic
conditions through asset allocation limits, asset/liability
duration matching and through the use of derivatives. For
further discussion of HIMCOs portfolio management
approach, see the Investment Credit Risk Section of the
MD&A.
Regulation
and Premium Rates
Insurance companies are subject to comprehensive and detailed
regulation and supervision throughout the United States. The
extent of such regulation varies, but generally has its source
in statutes which delegate regulatory, supervisory and
administrative powers to state insurance departments. Such
powers relate to, among other things, the standards of solvency
that must be met and maintained; the licensing of insurers and
their agents; the nature of and limitations on investments;
establishing premium rates; claim handling and trade practices;
restrictions on the size of risks which may be insured under a
single policy; deposits of securities for the benefit of
policyholders; approval of policy forms; periodic examinations
of the affairs of companies; annual and other reports required
to be filed on the financial condition of companies or for other
purposes; fixing maximum interest rates on life insurance policy
loans and minimum rates for accumulation of surrender values;
and the adequacy of reserves and other necessary provisions for
unearned premiums, unpaid losses and loss adjustment expenses
and other liabilities, both reported and unreported.
Most states have enacted legislation that regulates insurance
holding company systems such as Hartford Life. This legislation
provides that each insurance company in the system is required
to register with the insurance department of its state of
domicile and furnish information concerning the operations of
companies within the holding company system that may materially
affect the operations, management or financial condition of the
insurers within the system. All transactions within a holding
company system affecting insurers must be fair and equitable.
Notice to the insurance departments is required prior to the
consummation of transactions affecting the ownership or control
of an insurer and of certain material transactions between an
insurer and any entity in its holding company system. In
addition, certain of such transactions cannot be consummated
without the applicable insurance departments prior
approval. In the jurisdictions in which the Companys
insurance company subsidiaries are domiciled, the acquisition of
more than 10% of The Hartfords outstanding common stock
would require the acquiring party to make various regulatory
filings.
The extent of insurance regulation on business outside the
United States varies significantly among the countries in which
the Company operates. Some countries have minimal regulatory
requirements, while others regulate insurers extensively.
Foreign insurers in certain countries are faced with greater
restrictions than domestic competitors domiciled in that
particular jurisdiction. The Companys international
operations are comprised of insurers licensed in their
respective countries.
Intellectual
Property
We rely on a combination of contractual rights and copyright,
trademark, patent and trade secret laws to establish and protect
our intellectual property.
We have a worldwide trademark portfolio that we consider
important in the marketing of our products and services,
including, among others, the trademarks of The Hartford name,
the Stag Logo and the combination of these two
8
marks. The duration of trademark registrations varies from
country to country and may be renewed indefinitely subject to
country-specific use and registration requirements. We regard
our trademarks as extremely valuable assets in marketing our
products and services and vigorously seek to protect them
against infringement.
Investing in The Hartford involves risk. In deciding whether to
invest in the securities of the Company, you should carefully
consider the following risk factors, any of which could have a
significant or material adverse effect on the business,
financial condition, operating results or liquidity of the
Company. This information should be considered carefully
together with the other information contained in this report and
the other reports and materials filed by the Company with the
Securities and Exchange Commission (the SEC).
Our
operating environment remains challenging in light of
uncertainty about the timing and strength of an economic
recovery and the impact of governmental budgetary and regulatory
initiatives. The steps we have taken to realign our businesses
and strengthen our capital position may not be adequate to
mitigate the financial, competitive and other risks associated
with our operating environment, particularly if economic
conditions deteriorate from their current levels or regulatory
requirements change significantly, and we may be required to or
we may seek to raise additional capital or take other strategic
or financial actions that could adversely affect our business
and results or trading prices for The Hartfords common
stock.
Persistent volatility in financial markets and uncertainty about
the timing and strength of a recovery in the global economy
adversely affected our business and results in 2009, and we
believe that these conditions may continue to affect our
operating environment in 2010. High unemployment, lower family
income, lower business investment and lower consumer spending in
most geographic markets we serve have adversely affected the
demand for financial and insurance products, as well as their
profitability in some cases. Our results, financial condition
and statutory capital remain sensitive to equity and credit
market performance, and we expect that market volatility will
continue to pressure returns in our life and property and
casualty investment portfolios and that our hedging costs will
remain high. Until economic conditions become more stable and
improve, we also expect to experience realized and unrealized
investment losses, particularly in the commercial real estate
sector where significant market illiquidity and risk premiums
exist that reflect the current uncertainty in the real estate
market. Deterioration or negative rating agency actions with
respect to our investments, or our own credit and financial
strength ratings, could also indirectly adversely affect our
statutory capital and RBC ratios, which could in turn have other
negative consequences for our business and results.
The steps we have taken to realign our businesses and strengthen
our capital position may not be adequate if economic conditions
do not stabilize in line with our forecasts or if they
experience a significant deterioration. Many of these steps
involve ongoing initiatives, particularly those relating to
repositioning our investment portfolios, so we are also exposed
to significant execution risk. In addition, we have modified our
variable annuity product offerings and, in October 2009,
launched a new variable annuity product. However, the future
success of this new variable annuity product will be dependent
on market acceptance. The level of market acceptance of this new
product will directly affect the level of variable annuity sales
of the Company in the future. If our actions are not adequate,
our ability to support the scale of our business and to absorb
operating losses and liabilities under our customer contracts
could be impaired, which would in turn adversely affect our
overall competitiveness. We could be required to raise
additional capital or consider other actions to manage our
capital position and liquidity or further reduce our exposure to
market and financial risks. While the Hartford participated in
the Capital Purchase Program (the CPP) of the
U.S. Treasury Department (Treasury) as a means
to strengthen its capital position, it may seek to repay those
funds, which would also likely require them to raise capital.
Any capital that it raises may be on terms that are dilutive to
shareholders or otherwise unfavorable to it. We may also be
forced to sell assets on unfavorable terms that could cause us
to incur charges or lose the potential for market upside on
those assets in a market recovery. We could also face other
pressures, such as employee recruitment and retention issues and
potential loss of distributors for our products. Finally,
trading prices for The Hartfords common stock could
decline as a result or in anticipation of sales of The
Hartfords common stock or equity-linked instruments.
Even if the measures we have taken (or take in the future) are
effective to mitigate the risks associated with our current
operating environment, they may have unintended consequences.
For example, rebalancing our hedging
9
program may better protect our statutory surplus, but also
results in greater U.S. GAAP earnings volatility. Actions
we take may also entail impairment or other charges or adversely
affect our ability to compete successfully in an increasingly
difficult consumer market.
Regulatory developments relating to the recent financial crisis
may also significantly affect our operations and prospects in
ways that we cannot predict. U.S. and overseas governmental
or regulatory authorities, including the SEC, the Office of
Thrift Supervision (OTS), the New York Stock
Exchange or the Financial Industry Regulatory Authority
(FINRA), are considering enhanced or new regulatory
requirements intended to prevent future crises or otherwise
stabilize the institutions under their supervision. New
regulations will likely affect critical matters, including
capital requirements, and published proposals by insurance
regulatory authorities that could reduce the pressure on our
capital position may not be adopted or may be adopted in a form
that does not afford as much capital relief as anticipated. If
we fail to manage the impact of these developments effectively,
our prospects, results and financial condition could be
materially adversely affected.
We are
exposed to significant financial and capital markets risk,
including changes in interest rates, credit spreads, equity
prices, foreign exchange rates and global real estate market
deterioration which may have a material adverse effect on our
results of operations, financial condition and
liquidity.
We are exposed to significant financial and capital markets
risk, including changes in interest rates, credit spreads,
equity prices foreign currency exchange rates and global real
estate market deterioration.
One important exposure to equity risk relates to the potential
for lower earnings associated with certain of our Life
businesses, such as variable annuities, where fee income is
earned based upon the fair value of the assets under management.
The decline in equity markets over the last two years has
significantly reduced assets under management and related fee
income during that period. In addition, certain of our Life
products offer guaranteed benefits which increase our potential
obligation and statutory capital exposure should equity markets
decline. Due to declines in equity markets, our liability for
these guaranteed benefits has significantly increased and our
statutory capital position has decreased. Further sustained
declines in equity markets may result in the need to devote
significant additional capital to support these products. We are
also exposed to interest rate and equity risk based upon the
discount rate and expected long-term rate of return assumptions
associated with our pension and other post-retirement benefit
obligations. Sustained declines in long-term interest rates or
equity returns are likely to have a negative effect on the
funded status of these plans.
Our exposure to interest rate risk relates primarily to the
market price and cash flow variability associated with changes
in interest rates. A rise in interest rates, in the absence of
other countervailing changes, will increase the net unrealized
loss position of our investment portfolio and, if long-term
interest rates rise dramatically within a six to twelve month
time period, certain of our Life businesses may be exposed to
disintermediation risk. Disintermediation risk refers to the
risk that our policyholders may surrender their contracts in a
rising interest rate environment, requiring us to liquidate
assets in an unrealized loss position. Due to the long-term
nature of the liabilities associated with certain of our Life
businesses, such as structured settlements and guaranteed
benefits on variable annuities, sustained declines in long term
interest rates may subject us to reinvestment risks and
increased hedging costs. In other situations, declines in
interest rates or changes in credit spreads may result in
reducing the duration of certain Life liabilities, creating
asset liability duration mismatches and lower spread income.
Our exposure to credit spreads primarily relates to market price
and cash flow variability associated with changes in credit
spreads. If issuer credit spreads widen significantly or retain
historically wide levels over an extended period of time,
additional
other-than-temporary
impairments and increases in the net unrealized loss position of
our investment portfolio will likely result. In addition,
increased losses have also occurred due to the volatility in
credit spreads. When credit spreads widen, we incur losses
associated with the credit derivatives where the Company assumes
exposure. When credit spreads tighten, we incur losses
associated with derivatives where the Company has purchased
credit protection. If credit spreads tighten significantly, the
Companys net investment income associated with new
purchases of fixed maturities may be reduced. In addition, a
reduction in market liquidity has made it difficult to value
certain of our securities as trading has become less frequent.
As such, valuations may include assumptions or estimates that
may be more susceptible to significant
period-to-period
changes which could have a material adverse effect on our
consolidated results of operations or financial condition.
10
Our statutory surplus is also affected by widening credit
spreads as a result of the accounting for the assets and
liabilities on our fixed market value adjusted (MVA)
annuities. Statutory separate account assets supporting the
fixed MVA annuities are recorded at fair value. In determining
the statutory reserve for the fixed MVA annuities we are
required to use current crediting rates in the U.S. and Japanese
LIBOR in Japan. In many capital market scenarios, current
crediting rates in the U.S. are highly correlated with market
rates implicit in the fair value of statutory separate account
assets. As a result, the change in the statutory reserve from
period to period will likely substantially offset the change in
the fair value of the statutory separate account assets.
However, in periods of volatile credit markets, actual credit
spreads on investment assets may increase sharply for certain
sub-sectors
of the overall credit market, resulting in statutory separate
account asset market value losses. As actual credit spreads are
not fully reflected in current crediting rates in the U.S. or
Japanese LIBOR in Japan, the calculation of statutory reserves
will not substantially offset the change in fair value of the
statutory separate account assets resulting in reductions in
statutory surplus. This has resulted and may continue to result
in the need to devote significant additional capital to support
the product.
One important exposure to foreign currency exchange risks are
related to net income from reinsurance with affiliated foreign
operations,
non-U.S.
dollar denominated investments, investments in foreign
subsidiaries, our yen-denominated individual fixed annuity
product, and certain guaranteed benefits associated with the
Japan and U.K. variable annuities. One important exposure to
foreign currency exchange risks is related to net income from
foreign operations,
non-U.S.
dollar denominated investments, investments in foreign
subsidiaries, our yen-denominated individual fixed annuity
product, and certain guaranteed benefits associated with the
Japan and U.K. variable annuities. These risks relate to
potential decreases in value and income resulting from a
strengthening or weakening in foreign exchange rates versus the
U.S. dollar. In general, the weakening of foreign
currencies versus the U.S. dollar will unfavorably affect
net income from foreign operations, the value of
non-U.S.
dollar denominated investments, investments in foreign
subsidiaries and realized gains or losses on the yen denominated
individual fixed annuity product. In comparison, certain of our
Life products offer guaranteed benefits which could
substantially increase our potential obligation and statutory
capital exposure should the yen strengthen versus other
currencies. Correspondingly, a strengthening of the
U.S. dollar compared to other currencies will increase our
exposure to the U.S. variable annuity guarantee benefits where
policyholders have elected to invest in international funds.
Our real estate market exposure includes investments in
commercial mortgage-backed securities (CMBS),
residential mortgage-backed securities (RMBS),
commercial real estate (CRE), collateralized debt
obligations (CDOs), mortgage and real estate
partnerships, and mortgage loans. The recent deterioration in
the global real estate market, as evidenced by increases in
property vacancy rates, delinquencies and foreclosure, has
negatively impacted property values and sources of refinancing
resulting in market illiquidity and risk premiums that reflect
the current uncertainty in the real estate market. Should these
trends continue further reductions in net investment income
associated with real estate partnership, impairments of real
estate backed securities and increases in our valuation
allowance for mortgage loans.
If significant, further declines in equity prices, changes in
U.S. interest rates, changes in credit spreads, the
strengthening or weakening of foreign currencies against the
U.S. dollar, and global real estate market deterioration,
individually or in combination, could continue to have a
material adverse effect on our consolidated results of
operations, financial condition and liquidity both directly and
indirectly by creating competitive and other pressures,
including, but not limited to, employee retention issues and the
potential loss of distributors for our products.
In addition, in the conduct of our business, there could be
scenarios where in order to reduce risks, fulfill our
obligations or to raise incremental liquidity, we would sell
assets at a loss.
Declines in equity markets, changes in interest rates and credit
spreads and global real estate market deterioration can also
negatively impact the fair values of each of our segments. If a
significant decline in the fair value of a segment occurred and
this resulted in an excess of that segments book value
over fair value, the goodwill assigned to that segment might be
impaired and could cause the Company to record a charge to
impair a part or all of the related goodwill assets.
11
Our
adjustment of our risk management program relating to products
we offer with guaranteed benefits to emphasize protection of
statutory surplus will likely result in greater U.S. GAAP
volatility in our earnings and potentially material charges to
net income in periods of rising equity market pricing
levels.
Some of the products offered by our life businesses, especially
variable annuities, offer certain guaranteed benefits which, in
the event of a decline in equity markets, would not only result
in lower earnings, but will also increase our exposure to
liability for benefit claims. We are also subject to equity
market volatility related to these benefits, especially the
guaranteed minimum death benefit (GMDB), guaranteed
minimum withdrawal benefit (GMWB), guaranteed
minimum accumulation benefit (GMAB) and guaranteed
minimum income benefit (GMIB) offered with variable
annuity products. We use reinsurance structures and have
modified benefit features to mitigate the exposure associated
with GMDB. We also use reinsurance in combination with a
modification of benefit features and derivative instruments to
attempt to minimize the claim exposure and to reduce the
volatility of net income associated with the GMWB liability.
However, due to the severe economic conditions in the fourth
quarter of 2008, we adjusted our risk management program to
place greater relative emphasis on the protection of statutory
surplus. This shift in relative emphasis has resulted in greater
U.S. GAAP earnings volatility in 2009 and, based upon the
types of hedging instruments used, can result in potentially
material charges to net income in periods of rising equity
market pricing levels. While we believe that these actions have
improved the efficiency of our risk management related to these
benefits, we remain liable for the guaranteed benefits in the
event that reinsurers or derivative counterparties are unable or
unwilling to pay. We are also subject to the risk that other
management procedures prove ineffective or that unanticipated
policyholder behavior, combined with adverse market events,
produces economic losses beyond the scope of the risk management
techniques employed, which individually or collectively may have
a material adverse effect on our consolidated results of
operations, financial condition and cash flows.
The
amount of statutory capital that we have and the amount of
statutory capital that we must hold to maintain our financial
strength and credit ratings and meet other requirements can vary
significantly from time to time and is sensitive to a number of
factors outside of our control, including equity market, credit
market, interest rate and foreign currency conditions, changes
in policyholder behavior and changes in rating agency
models.
We conduct the vast majority of our business through licensed
insurance company subsidiaries. Accounting standards and
statutory capital and reserve requirements for these entities
are prescribed by the applicable insurance regulators and the
National Association of Insurance Commissioners
(NAIC). Insurance regulators have established
regulations that provide minimum capitalization requirements
based on risk-based capital (RBC) formulas for the
life companies. The RBC formula for life companies establishes
capital requirements relating to insurance, business, asset and
interest rate risks, including equity, interest rate and expense
recovery risks associated with variable annuities and group
annuities that contain death benefits or certain living benefits.
In any particular year, statutory surplus amounts and RBC ratios
may increase or decrease depending on a variety of
factors the amount of statutory income or losses
generated by Life (which itself is sensitive to equity market
and credit market conditions), the amount of additional capital
Life must hold to support business growth, changes in equity
market levels, the value of certain fixed-income and equity
securities in our investment portfolio, the value of certain
derivative instruments, changes in interest rates and foreign
currency exchange rates, as well as changes to the NAIC RBC
formulas. Most of these factors are outside of the
Companys control. The Companys financial strength
and credit ratings are significantly influenced by its statutory
surplus amounts and RBC ratios of Life. In addition, rating
agencies may implement changes to their internal models that
have the effect of increasing or decreasing the amount of
statutory capital we must hold in order to maintain our current
ratings. Also, in extreme scenarios of equity market declines,
the amount of additional statutory reserves that we are required
to hold for our variable annuity guarantees increases at a
greater than linear rate. This reduces the statutory surplus
used in calculating our RBC ratios. When equity markets
increase, surplus levels and RBC ratios will generally increase,
however, as a result of a number of factors and market
conditions, including the level of hedging costs and other risk
transfer activities, reserve requirements for death and living
benefit guarantees and RBC requirements could increase resulting
in lower RBC ratios. Due to all of these factors, projecting
statutory capital and the related RBC ratios is complex. In
2009, our financial strength and credit ratings were downgraded
by multiple rating agencies. If
12
our statutory capital resources are insufficient to maintain a
particular rating by one or more rating agencies, The Hartford
may seek to raise additional capital through public or private
equity or debt financing. If it is not to raise additional
capital, either at its discretion or because The Hartford was
unable to do so, our financial strength and credit ratings might
be further downgraded by one or more rating agencies.
We have
experienced and may experience additional future downgrades in
our financial strength or credit ratings, which may make our
products less attractive, increase our cost of capital and
inhibit our ability to refinance our debt, which would have a
material adverse effect on our business, results of operations,
financial condition and liquidity.
Financial strength and credit ratings, including commercial
paper ratings, are an important factor in establishing the
competitive position of insurance companies. In 2009, our
financial strength and credit ratings were downgraded by
multiple rating agencies. Rating agencies assign ratings based
upon several factors. While most of the factors relate to the
rated company, some of the factors relate to the views of the
rating agency, general economic conditions, and circumstances
outside the rated companys control. In addition, rating
agencies may employ different models and formulas to assess the
financial strength of a rated company, and from time to time
rating agencies have at their discretion, altered these models.
Changes to the models, general economic conditions, or
circumstances outside our control could impact a rating
agencys judgment of its rating and the rating it assigns
us. We cannot predict what actions rating agencies may take, or
what actions we may take in response to the actions of rating
agencies, which may adversely affect us.
Our financial strength ratings, which are intended to measure
our ability to meet policyholder obligations, are an important
factor affecting public confidence in most of our products and,
as a result, our competitiveness. A downgrade or an announced
potential further downgrade in the rating of our financial
strength or of one of our principal insurance subsidiaries could
affect our competitive position and reduce future sales of our
products.
Our credit ratings also affect our cost of capital. A downgrade
or an announced potential downgrade of our credit ratings could
make it more difficult or costly to refinance maturing debt
obligations, to support business growth at Life and to maintain
or improve the financial strength ratings of our principal
insurance subsidiaries. Downgrades could begin to trigger
potentially material collateral calls on certain of our
derivative instruments and counterparty rights to terminate
derivative relationships, both of which could limit our ability
to purchase additional derivative instruments. These events
could materially adversely affect our business, results of
operations, financial condition and liquidity.
Our
valuations of many of our financial instruments include
methodologies, estimations and assumptions that are subject to
differing interpretations and could result in changes to
investment valuations that may materially adversely affect our
results of operations and financial condition.
The following financial instruments are carried at fair value in
the Companys consolidated financial statements: fixed
maturities, equity securities, freestanding and embedded
derivatives, and separate account assets. The Company is
required to categorize these securities into a three-level
hierarchy, based on the priority of the inputs to the respective
valuation technique. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets
or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). In many situations, inputs
used to measure the fair value of an asset or liability position
may fall into different levels of the fair value hierarchy. In
these situations, the Company will determine the level in which
the fair value falls based upon the lowest level input that is
significant to the determination of the fair value.
The determination of fair values are made at a specific point in
time, based on available market information and judgments about
financial instruments, including estimates of the timing and
amounts of expected future cash flows and the credit standing of
the issuer or counterparty. The use of different methodologies
and assumptions may have a material effect on the estimated fair
value amounts.
During periods of market disruption, including periods of
rapidly widening credit spreads or illiquidity, it may be
difficult to value certain of our securities, if trading becomes
less frequent
and/or
market data becomes less observable. There may be certain asset
classes that were in active markets with significant observable
data that become illiquid due to the financial environment. In
such cases, more securities may fall to Level 3 and thus
require
13
more subjectivity and management judgment. As such, valuations
may include inputs and assumptions that are less observable or
require greater estimation thereby resulting in values that may
differ materially from the value at which the investments may be
ultimately sold. Further, rapidly changing and unprecedented
credit and equity market conditions could materially impact the
valuation of securities as reported within our consolidated
financial statements and the
period-to-period
changes in value could vary significantly. Decreases in value
could have a material adverse effect on our results of
operations and financial condition.
Evaluation
of
available-for-sale
securities for other than temporary impairment involves
subjective determinations and could materially impact our
results of operations.
The evaluation of impairments is a quantitative and qualitative
process, which is subject to risks and uncertainties and is
intended to determine whether a credit
and/or
non-credit impairment exists and whether an impairment should be
recognized in current period earnings or in other comprehensive
income. The risks and uncertainties include changes in general
economic conditions, the issuers financial condition or
future recovery prospects, the effects of changes in interest
rates or credit spreads and the expected recovery period. For
securitized financial assets with contractual cash flows, the
Company currently uses its best estimate of cash flows over the
life of the security. In addition, estimating future cash flows
involves incorporating information received from third party
sources and making internal assumptions and judgments regarding
the future performance of the underlying collateral and
assessing the probability that an adverse change in future cash
flows has occurred. The determination of the amount of other
than temporary impairments is based upon our quarterly
evaluation and assessment of known and inherent risks associated
with the respective asset class. Such evaluations and
assessments are revised as conditions change and new information
becomes available.
Additionally, our management considers a wide range of factors
about the security issuer and uses their best judgment in
evaluating the cause of the decline in the estimated fair value
of the security and in assessing the prospects for recovery.
Inherent in managements evaluation of the security are
assumptions and estimates about the operations of the issuer and
its future earnings potential. Considerations in the impairment
evaluation process include, but are not limited to:
|
|
|
the length of time and the extent to which the fair value has
been less than cost or amortized cost;
|
|
|
changes in the financial condition, credit rating and near-term
prospects of the issuer;
|
|
|
whether the issuer is current on contractually obligated
interest and principal payments;
|
|
|
changes in the financial condition of the securitys
underlying collateral;
|
|
|
the payment structure of the security;
|
|
|
the potential for impairments in an entire industry sector or
sub-sector;
|
|
|
the potential for impairments in certain economically depressed
geographic locations;
|
|
|
the potential for impairments of securities where the issuer,
series of issuers or industry has suffered a catastrophic type
of loss or has exhausted natural resources;
|
|
|
unfavorable changes in forecasted cash flows on mortgage-backed
and asset-backed securities;
|
|
|
for mortgage-backed and asset-backed securities, commercial and
residential property value declines that vary by property type
and location and average cumulative collateral loss rates that
vary by vintage year;
|
|
|
other subjective factors, including concentrations and
information obtained from regulators and rating agencies;
|
|
|
our intent to sell a debt or an equity security with debt-like
characteristics (collectively, debt security) or
whether it is more likely than not that the Company will be
required to sell the debt security before its anticipated
recovery; and
|
|
|
our intent and ability to retain an equity security without
debt-like characteristics for a period of time sufficient to
allow for the recovery of its value.
|
14
During 2009, the Company recognized impairment losses in
earnings. Additional impairments may be recorded in the future,
which could materially adversely affect our results and
financial condition.
Losses
due to nonperformance or defaults by others, including issuers
of investment securities (which include structured securities
such as commercial mortgage backed securities and residential
mortgage backed securities or other high yielding bonds),
mortgage loans, or reinsurance and derivative instrument
counterparties, could have a material adverse effect on the
value of our investments, results of operations, financial
condition and cash flows.
Issuers or borrowers whose securities or loans we hold,
customers, trading counterparties, counterparties under swaps
and other derivative contracts, reinsurers, clearing agents,
exchanges, clearing houses and other financial intermediaries
and guarantors may default on their obligations to us due to
bankruptcy, insolvency, lack of liquidity, adverse economic
conditions, operational failure, fraud, government intervention
or other reasons. Such defaults could have a material adverse
effect on our results of operations, financial condition and
cash flows. Additionally, the underlying assets supporting our
structured securities or loans may deteriorate causing these
securities or loans to incur losses.
Our investment portfolio includes securities backed by real
estate assets that have been adversely impacted due to the
recent recessionary period and the associated property value
declines, resulting in a reduction in expected future cash flow
for certain securities. Additional significant property value
declines and loss rates, which exceed our current estimates, as
outlined in Part II, Item 7, MD&A
Investment Credit Risk Other-Than-Temporary
Impairments could have a material adverse effect on our results
of operations, financial condition and cash flows.
The Company is not exposed to any credit concentration risk of a
single issuer greater than 10% of the Companys
stockholders equity other than U.S. government and
U.S. government agencies backed by the full faith and
credit of the U.S. government. However, if issuers of
securities or loans we hold are acquired, merge or otherwise
consolidate with other issuers of securities or loans held by
the Companys, the Companys credit concentration risk
could increase above the 10% threshold, for a period of time,
until the Company is able to sell securities to get back in
compliance with the established investment credit policies.
If
assumptions used in estimating future gross profits differ from
actual experience, we may be required to accelerate the
amortization of DAC and increase reserves for guaranteed minimum
death and income benefits, which could have a material adverse
effect on our results of operations and financial
condition.
The Company defers acquisition costs associated with the sales
of its universal and variable life and variable annuity
products. These costs are amortized over the expected life of
the contracts. The remaining deferred but not yet amortized cost
is referred to as the Deferred Acquisition Cost
(DAC) asset. We amortize these costs in proportion
to the present value of estimated gross profits
(EGPs). The Company also establishes reserves for
GMDB and GMIB using components of EGPs. The projection of
estimated gross profits requires the use of certain assumptions,
principally related to separate account fund returns in excess
of amounts credited to policyholders, surrender and lapse rates,
interest margin (including impairments), mortality, and hedging
costs. Of these factors, we anticipate that changes in
investment returns are most likely to impact the rate of
amortization of such costs. However, other factors such as those
the Company might employ to reduce risk, such as the cost of
hedging or other risk mitigating techniques could also
significantly reduce estimates of future gross profits.
Estimating future gross profits is a complex process requiring
considerable judgment and the forecasting of events well into
the future. If our assumptions regarding policyholder behavior,
hedging costs or costs to employ other risk mitigating
techniques prove to be inaccurate, if significant impairment
charges are anticipated or if significant or sustained equity
market declines persist, we could be required to accelerate the
amortization of DAC related to variable annuity and variable
universal life contracts, and increase reserves for GMDB and
GMIB which would result in a charge to net income. Such
adjustments could have a material adverse effect on our results
of operations and financial condition.
15
If our
businesses do not perform well, we may be required to recognize
an impairment of our goodwill or to establish a valuation
allowance against the deferred income tax asset, which could
have a material adverse effect on our results of operations and
financial condition.
Goodwill represents the excess of the amounts we paid to acquire
subsidiaries and other businesses over the fair value of their
net assets at the date of acquisition. We test goodwill at least
annually for impairment. Impairment testing is performed based
upon estimates of the fair value of the reporting
unit to which the goodwill relates. The reporting unit is
the operating segment or a business one level below that
operating segment if discrete financial information is prepared
and regularly reviewed by management at that level. The fair
value of the reporting unit is impacted by the performance of
the business and could be adversely impacted by any efforts made
by the Company to limit risk. If it is determined that the
goodwill has been impaired, the Company must write down the
goodwill by the amount of the impairment, with a corresponding
charge to net income. These write downs could have a material
adverse effect on our results of operations or financial
condition. Deferred income tax represents the tax effect of the
differences between the book and tax basis of assets and
liabilities. Deferred tax assets are assessed periodically by
management to determine if they are realizable. Factors in
managements determination include the performance of the
business including the ability to generate capital gains, to
offset previously recognized capital losses, from a variety of
sources and tax planning strategies. However, we anticipate
limited ability, going forward, to recognize a full tax benefit
certain on realized capital losses. Therefore, if based on
available information, it is more likely than not that the
deferred income tax asset will not be realized then a valuation
allowance must be established with a corresponding charge to net
income. Our valuation allowance of $80, as of
December 2009, based on future facts and circumstances may
not be sufficient. Charges to increase our valuation allowance
could have a material adverse effect on our results of
operations and financial condition.
The
occurrence of one or more terrorist attacks or the threat of
terrorism in general may have a material adverse effect on our
business, consolidated operating results, financial condition
and liquidity.
The occurrence of one or more terrorist attacks could result in
substantially higher claims under our insurance policies than we
have anticipated. Private sector catastrophe reinsurance is
extremely limited and generally unavailable for terrorism losses
caused by attacks with nuclear, biological, chemical or
radiological weapons. Reinsurance coverage from the federal
government under the Terrorism Risk Insurance Program
Reauthorization Act of 2007 is also limited. Accordingly, the
effects of a terrorist attack may result in claims and related
losses for which we do not have adequate reinsurance. This would
likely cause us to increase our reserves, adversely affect our
earnings during the period or periods affected and, if
significant enough, could adversely affect our liquidity and
financial condition. Further, the continued threat of terrorism
and the occurrence of terrorist attacks, as well as heightened
security measures and military action in response to these
threats and attacks, may cause significant volatility in global
financial markets, disruptions to commerce and reduced economic
activity. These consequences could have an adverse effect on the
value of the assets in our investment portfolio as well as those
in our separate accounts. The continued threat of terrorism also
could result in increased reinsurance prices and potentially
cause us to retain more risk than we otherwise would retain if
we were able to obtain reinsurance at lower prices. Terrorist
attacks also could disrupt our operations centers in the
U.S. or abroad. As a result, it is possible that any, or a
combination of all, of these factors may have a material adverse
effect on our business, consolidated operating results,
financial condition and liquidity.
We are
particularly vulnerable to losses from the incidence and
severity of catastrophes, both natural and
man-made,
the occurrence of which may have a material adverse effect on
our financial condition, consolidated results of operations and
liquidity.
Our life insurance operations are also exposed to risk of loss
from catastrophes. For example, natural or
man-made
disasters or a disease pandemic such as could arise from avian
flu, could significantly increase our mortality and morbidity
experience. Policyholders may be unable to meet their
obligations to pay premiums on our insurance policies or make
deposits on our investment products. Our liquidity could be
constrained by a catastrophe, or multiple catastrophes, which
could result in extraordinary losses or a further downgrade of
our debt or financial strength ratings. In addition, in part
because accounting rules do not permit insurers to reserve for
such catastrophic events until they occur, claims from
catastrophic events could have a material adverse effect on our
financial
16
condition, consolidated results of operations and cash flows. To
the extent that loss experience unfolds or models improve, we
will seek to reflect any increased risk in the design and
pricing of our products. However, the Company may be exposed to
regulatory or legislative actions that prevent a full accounting
of loss expectations in the design or price of our products or
result in additional risk-shifting to the insurance industry.
We may
incur losses due to our reinsurers unwillingness or
inability to meet their obligations under reinsurance contracts
and the availability, pricing and adequacy of reinsurance may
not be sufficient to protect us against losses.
As an insurer, we frequently seek to reduce the losses that may
arise from catastrophes or mortality, or other events that can
cause unfavorable results of operations, through reinsurance.
Under these reinsurance arrangements, other insurers assume a
portion of our losses and related expenses; however, we remain
liable as the direct insurer on all risks reinsured.
Consequently, ceded reinsurance arrangements do not eliminate
our obligation to pay claims, and we are subject to our
reinsurers credit risk with respect to our ability to
recover amounts due from them. Although we evaluate periodically
the financial condition of our reinsurers to minimize our
exposure to significant losses from reinsurer insolvencies, our
reinsurers may become financially unsound or choose to dispute
their contractual obligations by the time their financial
obligations become due. The inability or unwillingness of any
reinsurer to meet its financial obligations to us could have a
material adverse effect on our consolidated operating results.
In addition, market conditions beyond our control determine the
availability and cost of the reinsurance we are able to
purchase. Historically, reinsurance pricing has changed
significantly from time to time. No assurances can be made that
reinsurance will remain continuously available to us to the same
extent and on the same terms as are currently available. If we
were unable to maintain our current level of reinsurance or
purchase new reinsurance protection in amounts that we consider
sufficient and at prices that we consider acceptable, we would
have to either accept an increase in our net liability exposure,
reduce the amount of business we write, or develop other
alternatives to reinsurance.
Our
consolidated results of operations, financial condition and cash
flows may be materially adversely affected by unfavorable loss
development.
Our success, in part, depends upon our ability to accurately
assess the risks associated with the businesses that we insure.
We establish loss reserves to cover our estimated liability for
the payment of all unpaid losses and loss expenses incurred with
respect to premiums earned on the policies that we write. Loss
reserves do not represent an exact calculation of liability.
Rather, loss reserves are estimates of what we expect the
ultimate settlement and administration of claims will cost, less
what has been paid to date. These estimates are based upon
actuarial and statistical projections and on our assessment of
currently available data, as well as estimates of claims
severity and frequency, legal theories of liability and other
factors. Loss reserve estimates are refined periodically as
experience develops and claims are reported and settled.
Establishing an appropriate level of loss reserves is an
inherently uncertain process. Because of this uncertainty, it is
possible that our reserves at any given time will prove
inadequate. Furthermore, since estimates of aggregate loss costs
for prior accident years are used in pricing our insurance
products, we could later determine that our products were not
priced adequately to cover actual losses and related loss
expenses in order to generate a profit. To the extent we
determine that losses and related loss expenses are emerging
unfavorably to our initial expectations, we will be required to
increase reserves. Increases in reserves would be recognized as
an expense during the period or periods in which these
determinations are made, thereby adversely affecting our results
of operations for the related period or periods. Depending on
the severity and timing of any changes in these estimated
losses, such determinations could have a material adverse effect
on our consolidated results of operations, financial condition
and cash flows.
Competitive
activity may adversely affect our market share and financial
results, which could have a material adverse effect on our
business, results of operations and financial
condition.
The insurance industry is highly competitive. Our competitors
include other insurers and, because many of our products include
an investment component, securities firms, investment advisers,
mutual funds, banks and other financial institutions. In recent
years, there has been substantial consolidation and convergence
among companies in the insurance and financial services
industries resulting in increased competition from large,
well-capitalized
17
insurance and financial services firms that market products and
services similar to ours. The current economic environment has
only served to further increase competition. Many of these firms
also have been able to increase their distribution systems
through mergers or contractual arrangements. These competitors
compete with us for producers such as brokers and independent
agents and for our employees. Larger competitors may have lower
operating costs and an ability to absorb greater risk while
maintaining their financial strength ratings, thereby allowing
them to price their products more competitively. These highly
competitive pressures could result in increased pricing
pressures on a number of our products and services, particularly
as competitors seek to win market share, and may harm our
ability to maintain or increase our profitability. In addition,
as actual or potential future downgrades occur, and if our
competitors have not been similarly downgraded, sales of our
products could be significantly reduced. Because of the highly
competitive nature of the insurance industry, there can be no
assurance that we will continue to effectively compete with our
industry rivals, or that competitive pressure will not have a
material adverse effect on our business, results of operations
and financial condition.
The
Hartfords participation in the CPP subjects us to
additional restrictions, oversight and cost that could
materially affect our business, results and prospects.
Although participation in the CPP has been an important
component of the Hartfords strategy to enhance its capital
position and financial flexibility, The Hartfords
continued participation subjects us to additional restrictions,
oversight and costs, and have other potential consequences, that
could materially affect our business, results and prospects,
including the following:
|
|
|
The Hartfords continued participation in the CPP, even as
other financial institutions have repaid their government
assistance, may cause us to be perceived as having greater
capital needs and weaker overall financial prospects than those
of our competitors that have not participated in the CPP, which
could adversely affect our competitive position and results,
including new product sales and policy retention rates,
and affect trading prices for the Hartfords common
stock.
|
|
|
As a condition to The Hartfords participation in CPP, The
Hartford acquired Federal Trust Corporation, the parent company
of Federal Trust Bank (FTB), a federally
chartered, FDIC-insured thrift. As a member of a savings and
loan holding company, we are subject to regulation, supervision
and examination by the Office of Thrift Supervision
(OTS) and OTS reporting requirements. All of our
activities must be financially-related activities as defined by
federal law (which includes insurance activities), and OTS has
enforcement authority over us, including the right to pursue
administrative orders or penalties and the right to restrict or
prohibit activities determined by OTS to be a serious risk to
FTB. The Hartford must also be a source of strength to FTB,
which could require further capital contributions.
|
|
|
Receipt of CPP funds subjects us to restrictions, oversight and
costs that may have an adverse impact on our business results or
the trading prices for The Hartfords common stock. For
example, we are subject to significant limitations on the amount
and form of bonus, retention and other incentive compensation
that we may pay to executive officers and senior management.
These provisions may adversely affect our ability to attract and
retain executive officers and other key personnel. Other
regulatory initiatives applicable to participants in federal
funding programs may also be forthcoming. Compliance with such
current and potential regulation and scrutiny may significantly
increase our costs, impede the efficiency of our internal
business processes, require us to increase our regulatory
capital and limit our ability to pursue business opportunities
in an efficient manner.
|
|
|
Future federal statutes may adversely affect the terms of the
CPP that are applicable to us, and the Treasury may amend the
terms of our agreement unilaterally if required by future
statutes, including in a manner materially adverse to us.
|
|
|
While The Hartfords eventual objective is to repay the CPP
funds invested in us, its ability to do so is subject to federal
regulatory approvals that may impose significant conditions,
including a requirement that it raises additional capital, and
we cannot predict whether or when The Hartford may reach
agreement with the federal regulators with respect to the terms
of its repayment. The Hartfords ability to raise capital
as a condition to repayment will in turn depend on a variety of
considerations, including its capital resources and market
conditions at the time, as well as the terms on which it could
raise capital, including the potential dilutive impact on
shareholders.
|
18
We may
experience unfavorable judicial or legislative developments that
could have a material adverse effect on our results of
operations, financial condition and liquidity.
The Company is involved in claim litigation arising in the
ordinary course of business. The Company is also involved in
legal actions that do not arise in the ordinary course of
business, some of which assert claims for substantial amounts.
Pervasive or significant changes in the judicial environment
relating to matters such as trends in the size of jury awards,
developments in the law relating to the liability of insurers,
and rulings concerning the availability or amount of certain
types of damages could cause our ultimate liabilities to change
from our current expectations. Changes in federal or state
litigation laws or other applicable law could have a similar
effect. It is not possible to predict changes in the judicial
and legislative environment and their impact on the outcome of
litigation field against the Company. Our results, financial
condition and liquidity could also be adversely affected if
judicial or legislative developments cause our ultimate
liabilities to increase from current expectations.
Potential
changes in domestic and foreign regulation may increase our
business costs and required capital levels, which could have a
material adverse effect on our business, consolidated operating
results, financial condition and liquidity.
We are subject to extensive U.S. and
non-U.S. laws
and regulations that are complex, subject to change and often
conflicting in their approach or intended outcomes. Compliance
with these laws and regulations is costly and can affect our
strategy, as well as the demand for and profitability of the
products we offer. There is also a risk that any particular
regulators or enforcement authoritys interpretation
of a legal issue may change over time to our detriment, or
expose us to different or additional regulatory risks.
State insurance laws regulate most aspects of our
U.S. insurance businesses, and our insurance subsidiaries
are regulated by the insurance departments of the states in
which they are domiciled, licensed or authorized to conduct
business. U.S. state laws grant insurance regulatory
authorities broad administrative powers with respect to, among
other things:
|
|
|
licensing companies and agents to transact business;
|
|
|
calculating the value of assets to determine compliance with
statutory requirements;
|
|
|
mandating certain insurance benefits;
|
|
|
regulating certain premium rates;
|
|
|
reviewing and approving policy forms;
|
|
|
regulating unfair trade and claims practices, including through
the imposition of restrictions on marketing and sales practices,
distribution arrangements and payment of inducements;
|
|
|
establishing statutory capital and reserve requirements and
solvency standards;
|
|
|
fixing maximum interest rates on insurance policy loans and
minimum rates for guaranteed crediting rates on life insurance
policies and annuity contracts;
|
|
|
approving changes in control of insurance companies;
|
|
|
restricting the payment of dividends and other transactions
between affiliates;
|
|
|
establishing assessments and surcharges for guaranty funds,
second-injury funds and other mandatory pooling arrangements;
|
|
|
requiring insurers to dividend to policy holders any excess
profits; and
|
|
|
regulating the types, amounts and valuation of investments.
|
State insurance regulators and the NAIC, regularly re-examine
existing laws and regulations applicable to insurance companies
and their products. Our international operations are subject to
regulation in the relevant jurisdictions in which they operate,
which in many ways is similar to the state regulation outlined
above, with similar related restrictions. Our asset management
businesses are also subject to extensive regulation in the
various jurisdictions
19
where they operate. These laws and regulations are primarily
intended to protect investors in the securities markets or
investment advisory clients and generally grant supervisory
authorities broad administrative powers. Changes in these laws
and regulations, or in the interpretations thereof, are often
made for the benefit of the consumer at the expense of the
insurer and thus could have a material adverse effect on our
business, consolidated operating results, financial condition
and liquidity. Compliance with these laws and regulations is
also time consuming and personnel-intensive, and changes in
these laws and regulations may increase materially our direct
and indirect compliance costs and other expenses of doing
business, thus having an adverse effect on our business,
consolidated operating results, financial condition and
liquidity.
We may
experience difficulty in marketing and distributing products
through our current and future distribution channels.
We distribute our annuity and life insurance products through a
variety of distribution channels, including brokers,
broker-dealers, banks, wholesalers, our own internal sales force
and other third-party organizations. We periodically negotiate
provisions and renewals of these relationships, and there can be
no assurance that such terms will remain acceptable to us or
such third parties. An interruption in our continuing
relationship with certain of these third parties could
materially affect our ability to market our products and could
have a material adverse effect on our business, operating
results and financial condition.
Our
business, results of operations, financial condition and
liquidity may be adversely affected by the emergence of
unexpected and unintended claim and coverage issues.
As industry practices and legal, judicial, social and other
environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues
may either extend coverage beyond our underwriting intent or
increase the frequency or severity of claims. In some instances,
these changes may not become apparent until some time after we
have issued insurance contracts that are affected by the
changes. As a result, the full extent of liability under our
insurance contracts may not be known for many years after a
contract is issued, and this liability may have a material
adverse effect on our business, results of operations, financial
condition and liquidity at the time it becomes known.
Limits on
the ability of our insurance subsidiaries to pay dividends to us
could have a material adverse effect on our liquidity.
State insurance regulatory authorities limit the payment of
dividends by insurance subsidiaries. These restrictions and
other regulatory requirements affect the ability of our
insurance subsidiaries to make dividend payments. Limits on the
ability of the insurance subsidiaries to pay dividends could
have a material adverse effect on our liquidity, including our
ability to pay dividends to our parent.
If we are
unable to maintain the availability of our systems and safeguard
the security of our data due to the occurrence of disasters or
other unanticipated events, our ability to conduct business may
be compromised, which may have a material adverse effect on our
business, consolidated results of operations, financial
condition or cash flows.
We use computer systems to store, retrieve, evaluate and utilize
customer and company data and information. Our computer,
information technology and telecommunications systems, in turn,
interface with and rely upon third-party systems. Our business
is highly dependent on our ability, and the ability of certain
affiliated third parties, to access these systems to perform
necessary business functions, including, without limitation,
providing insurance quotes, processing premium payments, making
changes to existing policies filing and paying claims,
administering variable annuity products and mutual funds,
providing customer support and managing our investment
portfolios. Systems failures or outages could compromise our
ability to perform these functions in a timely manner, which
could harm our ability to conduct business and hurt our
relationships with our business partners and customers. In the
event of a disaster such as a natural catastrophe, an industrial
accident, a blackout, a computer virus, a terrorist attack or
war, our systems may be inaccessible to our employees, customers
or business partners for an extended period of time. Even if our
employees are able to report to work, they may be unable to
perform their duties for an extended period of time if our data
or systems are disabled or destroyed. Our systems could also be
subject to
20
physical and electronic break-ins, and subject to similar
disruptions from unauthorized tampering with our systems. This
may impede or interrupt our business operations and may have a
material adverse effect on our business, consolidated operating
results, financial condition or liquidity.
If we
experience difficulties arising from outsourcing relationships,
our ability to conduct business may be compromised.
We outsource certain technology and business functions to third
parties and expect to do so selectively in the future. If we do
not effectively develop and implement our outsourcing strategy,
third-party providers do not perform as anticipated, or we
experience problems with a transition, we may experience
operational difficulties, increased costs and a loss of business
that may have a material adverse effect on our consolidated
results of operations.
Potential
changes in federal or state tax laws, including changes
impacting the availability of the separate account dividend
received deduction, could adversely affect our business,
consolidated operating results or financial condition or
liquidity.
Many of the products that the Company sells benefit from one or
more forms of tax-favored status under current federal and state
income tax regimes. For example, the Company sells life
insurance policies that benefit from the deferral or elimination
of taxation on earnings accrued under the policy, as well as
permanent exclusion of certain death benefits that may be paid
to policyholders beneficiaries. We also sell annuity
contracts that allow the policyholders to defer the recognition
of taxable income earned within the contract. Other products
that the Company sells also enjoy similar, as well as other,
types of tax advantages. The Company also benefits from certain
tax benefits, including but not limited to, tax-exempt bond
interest, dividends-received deductions, tax credits (such as
foreign tax credits), and insurance reserve deductions.
Due in large part to the recent financial crisis that has
affected many governments, there is an increasing risk that
federal
and/or state
tax legislation could be enacted that would result in higher
taxes on insurance companies
and/or their
policyholders. Although the specific form of any such potential
legislation is uncertain, it could include lessening or
eliminating some or all of the tax advantages currently
benefiting the Company or its policyholders including, but not
limited to, those mentioned above. This could occur in the
context of deficit reduction or other tax reforms. The effects
of any such changes could result in materially lower product
sales, lapses of policies currently held,
and/or our
incurrence of materially higher corporate taxes.
Changes
in accounting principles and financial reporting requirements
could result in material changes to our reported results and
financial condition.
U.S. GAAP and related financial reporting requirements are
complex, continually evolving and may be subject to varied
interpretation by the relevant authoritative bodies. Such varied
interpretations could result from differing views related to
specific facts and circumstances. Changes in U.S. GAAP and
financial reporting requirements, or in the interpretation of
U.S. GAAP or those requirements, could result in material
changes to our reported results and financial condition.
We may
not be able to protect our intellectual property and may be
subject to infringement claims.
We rely on a combination of contractual rights and copyright,
trademark, patent and trade secret laws to establish and protect
our intellectual property. Although we use a broad range of
measures to protect our intellectual property rights, third
parties may infringe or misappropriate our intellectual
property. We may have to litigate to enforce and protect our
copyrights, trademarks, patents, trade secrets and know-how or
to determine their scope, validity or enforceability, which
represents a diversion of resources that may be significant in
amount and may not prove successful. The loss of intellectual
property protection or the inability to secure or enforce the
protection of our intellectual property assets could have a
material adverse effect on our business and our ability to
compete.
We also may be subject to costly litigation in the event that
another party alleges our operations or activities infringe upon
another partys intellectual property rights. Third parties
may have, or may eventually be issued, patents that could be
infringed by our products, methods, processes or services. Any
party that holds such a patent could make a claim of
infringement against us. We may also be subject to claims by
third parties for breach of copyright,
21
trademark, trade secret or license usage rights. Any such claims
and any resulting litigation could result in significant
liability for damages. If we were found to have infringed a
third-party patent or other intellectual property rights, we
could incur substantial liability, and in some circumstances
could be enjoined from providing certain products or services to
our customers or utilizing and benefiting from certain methods,
processes, copyrights, trademarks, trade secrets or licenses, or
alternatively could be required to enter into costly licensing
arrangements with third parties, all of which could have a
material adverse effect on our business, results of operations
and financial condition.
|
|
Item 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
The Companys principal executive offices are located in
Simsbury, Connecticut. The Companys home office complex
consists of approximately 655 thousand square feet, and is
leased from a third party by Hartford Fire Insurance Company
(Hartford Fire), a direct subsidiary of The
Hartford. This is an operating lease which expired on
December 31, 2009 and was replaced by a capital lease
between HLA and Hartford Fire. Expenses currently associated
with these offices are allocated on a direct basis to the
Company by Hartford Fire. The Company believes its properties
and facilities are suitable and adequate for current operations.
|
|
Item 3.
|
LEGAL
PROCEEDINGS
|
For a discussion of legal proceedings, see Note 10 of the
Notes to Consolidated Financial Statements, which is
incorporated herein by reference.
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
(Dollar amounts in millions, unless otherwise stated)
Managements 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,
Life or the Company) as of
December 31, 2009, compared with December 31, 2008,
and its results of operations for each of the three years in the
period ended December 31, 2009. This discussion should be
read in conjunction with the Consolidated Financial Statements
and related Notes beginning on
page F-1.
Certain reclassifications have been made to prior year financial
information to conform to the current year presentation.
INDEX
|
|
|
|
|
|
|
Consolidated Results of Operations
|
|
23
|
|
Institutional
|
|
50
|
Outlook
|
|
25
|
|
Other
|
|
53
|
Critical Accounting Estimates
|
|
28
|
|
Investment Results
|
|
54
|
Overview
|
|
37
|
|
Investment Credit Risk
|
|
57
|
Key Performance Measures and Ratios
|
|
38
|
|
Capital Markets Risk Management
|
|
69
|
Retail
|
|
41
|
|
Capital Resources and Liquidity
|
|
78
|
Individual Life
|
|
45
|
|
Impact of New Accounting Standards
|
|
84
|
Retirement Plans
|
|
48
|
|
|
|
|
22
CONSOLIDATED
RESULTS OF OPERATIONS
Operating
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Fee income and other
|
|
$
|
3,752
|
|
|
$
|
4,155
|
|
|
$
|
4,470
|
|
Earned premiums
|
|
|
377
|
|
|
|
984
|
|
|
|
983
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
and other
|
|
|
2,505
|
|
|
|
2,588
|
|
|
|
3,056
|
|
Equity securities, trading(3)
|
|
|
343
|
|
|
|
(246
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income
|
|
|
2,848
|
|
|
|
2,342
|
|
|
|
3,057
|
|
Net realized capital gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-impairment
(OTTI) losses
|
|
|
(1,722
|
)
|
|
|
(1,888
|
)
|
|
|
(339
|
)
|
OTTI losses recognized to other comprehensive income
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OTTI losses recognized in earnings
|
|
|
(1,192
|
)
|
|
|
(1,888
|
)
|
|
|
(339
|
)
|
Net realized capital gains (losses), excluding net OTTI losses
recognized in earnings
|
|
|
315
|
|
|
|
(3,875
|
)
|
|
|
(595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized capital losses
|
|
|
(877
|
)
|
|
|
(5,763
|
)
|
|
|
(934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues(1)
|
|
|
6,100
|
|
|
|
1,718
|
|
|
|
7,576
|
|
Benefits, losses and loss adjustment expenses
|
|
|
3,716
|
|
|
|
4,047
|
|
|
|
3,982
|
|
Benefits, losses and loss adjustment expenses
returns credited on International unit linked bonds
and pension products(3)
|
|
|
343
|
|
|
|
(246
|
)
|
|
|
1
|
|
Insurance operating costs and other expenses
|
|
|
1,850
|
|
|
|
1,940
|
|
|
|
1,832
|
|
Amortization of deferred policy acquisition costs and present
value of future profits
|
|
|
3,727
|
|
|
|
1,620
|
|
|
|
605
|
|
Goodwill impairment
|
|
|
|
|
|
|
184
|
|
|
|
|
|
Dividends to policyholders
|
|
|
12
|
|
|
|
13
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, claims and expenses
|
|
|
9,648
|
|
|
|
7,558
|
|
|
|
6,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(3,548
|
)
|
|
|
(5,840
|
)
|
|
|
1,145
|
|
Income tax expense (benefit)
|
|
|
(1,401
|
)
|
|
|
(2,181
|
)
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(2)
|
|
$
|
(2,147
|
)
|
|
$
|
(3,659
|
)
|
|
$
|
893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) loss attributable to the noncontrolling
interest
|
|
|
(10
|
)
|
|
|
105
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Hartford Life Insurance
Company
|
|
$
|
(2,157
|
)
|
|
$
|
(3,554
|
)
|
|
$
|
886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The transition impact related to the adoption of fair value
accounting guidance was a reduction in revenues of $788, for
year ended December 31, 2008. |
|
(2) |
|
The transition impact related to the adoption of fair value
accounting guidance was a reduction in net income of $311 for
the year ended December 31, 2008. |
|
(3) |
|
Net investment income includes investment income and
mark-to-market
effects of equity securities, trading, supporting the
international variable annuity business, which are classified in
net investment income with corresponding amounts credited to
policy holders. |
Year
ended December 31, 2009 compared to the year ended
December 31, 2008
Net loss improved as a result of lower net realized losses. The
following factors detail changes in operating results between
these two periods:
|
|
|
Lower realized losses were primarily due to lower net losses
from impairments on investment securities, as well as decreased
credit related losses and gains on GMWB/GMIB/GMAB reinsurance
compared to 2008 and the impact of the adoption of fair value
accounting guidance in 2008. For further discussion on refer to
Note 16 Transactions with Affiliates.
|
23
|
|
|
In the fourth quarter of 2009, Retail recorded a DAC Unlock of
$1.9 billion, pre-tax at the inception of a reinsurance
transaction with an affiliated captive reinsurer. For further
discussions refer to Note 16.
|
|
|
Earned premiums declined in Other as a result of ceded premiums
upon inception of an October 1st reinsurance
transaction with an affiliated captive reinsurer. For further
discussions on transaction with affiliates, refer to
Note 16. Additionally, declines resulted from ratings
downgrades in the later half of 2008 restricting sales of payout
annuities within Institutional and a corresponding decrease in
losses and loss adjustment expenses.
|
|
|
Fee income and other decreased as a result of the decline in
average account values of the variable annuity and mutual fund
assets in Retail.
|
|
|
In the fourth quarter of 2009, the Company recorded an increase
in benefits, losses and loss adjustments expense as a result of
a reinsurance transaction with an affiliated captive reinsurer.
For further discussions on transaction with affiliates, refer to
Note 16. Interest credited recorded in Retail decreased by
$152.
|
Year
ended December 31, 2008 compared to the year ended
December 31, 2007
The decrease in Lifes net income was due to the following:
|
|
|
Realized losses increased as compared to the comparable prior
year period primarily due to net losses from impairments on
investment securities as well as increased credit related losses
and increased losses on GMWB/GMIB/GMAB reinsurance and the
adoption of fair value guidance.
|
|
|
Life recorded a DAC Unlock charge of $825, after-tax, during the
third quarter of 2008 as compared to a DAC Unlock benefit of
$188, after tax, during the third quarter of 2007. See Critical
Accounting Estimates with Managements Discussion and Analysis
for a further discussion on the DAC Unlock.
|
|
|
Declines in assets under management in Retail, primarily driven
by market depreciation of $37.8 billion for Individual
Annuity and $20.2 billion for retail mutual funds during
2008, drove declines in fee income compared to 2007.
|
|
|
Net investment income on securities,
available-for-sale,
and other declined primarily due to declines in limited
partnership and other alternative investment income and a
decrease in investment yield for fixed maturities.
|
Net
Realized Capital Gains and Losses
For further discussion of net realized capital gains and losses,
see Investment Results within the Investments
section as well as each segments operating summary
discussion.
Income
Taxes
The effective tax rate for 2009, 2008 and 2007 was 39%, 38%, and
22%, respectively. The principal cause of the difference between
the effective rate and the U.S. statutory rate of 35% for
2009, 2008 and 2007 was the separate account dividends received
deduction (DRD). This caused an increase in the tax
benefit on the 2009 and 2008 pretax losses and a decrease in the
tax expense on the 2007 pretax income. Income taxes refunded in
2009 and 2008 were $(282) and $(183), respectively, in 2007
income taxes paid were $329.
The separate account DRD is estimated for the current year using
information from the prior year-end, adjusted for current year
equity market performance and other appropriate factors,
including estimated levels of corporate dividend payments. The
actual current year DRD can vary from estimates based on, but
not limited to, changes in eligible dividends received by the
mutual funds, amounts of distributions from these mutual funds,
amounts of short-term capital gains at the mutual fund level and
the Companys taxable income before the DRD. The Company
recorded benefits of $181, $176 and $155 related to the separate
account DRD in the years ended December 31, 2009, 2008 and
2007, respectively, which included a benefit (charge) in 2009 of
$29 related to prior year tax returns, in 2008 of $9 related to
a true-up of
the prior year tax return, and in 2007 of $(1) related to a
true-up of
the prior year tax return.
In Revenue Ruling
2007-61,
issued on September 25, 2007, the IRS announced its
intention to issue regulations with respect to certain
computational aspects of the DRD on separate account assets held
in connection with
24
variable annuity contracts. Revenue Ruling
2007-61
suspended Revenue Ruling
2007-54,
issued in August 2007 that purported to change accepted industry
and IRS interpretations of the statutes governing these
computational questions. Any regulations that the IRS may
ultimately propose for issuance in this area will be subject to
public notice and comment, at which time insurance companies and
other members of the public will have the opportunity to raise
legal and practical questions about the content, scope and
application of such regulations. As a result, the ultimate
timing and substance of any such regulations are unknown, but
they could result in the elimination of some or all of the
separate account DRD tax benefit that the Company receives.
Management believes that it is highly likely that any such
regulations would apply prospectively only.
The Company receives a foreign tax credit against its
U.S. tax liability for foreign taxes paid by the Company
including payments from its separate account assets. The
separate account foreign tax credit is estimated for the current
year using information from the most recent filed return,
adjusted for the change in the allocation of separate account
investments to the international equity markets during the
current year. The actual current year foreign tax credit can
vary from the estimates due to actual foreign tax credits passed
through by the mutual funds. The Company recorded benefits of
$16, $16 and $11 related to separate account foreign tax credit
in the years ended December 31, 2009, 2008 and, 2007
respectively. These amounts included benefits related to
true-ups of
prior years tax returns of $3, $4 and $0 in 2009, 2008 and
2007, respectively.
OUTLOOK
Retail
In the long-term, management continues to believe the market for
retirement products will expand as individuals increasingly save
and plan for retirement. Demographic trends suggest that as the
baby boom generation matures, a significant portion
of the United States population will allocate a greater
percentage of their disposable incomes to saving for their
retirement years due to uncertainty surrounding the Social
Security system and increases in average life expectancy.
Near-term, the Company is continuing to experience lower
variable annuity sales as a result of market disruption, and the
competitiveness of the Companys current product offerings.
The Company expects these lower sales levels to continue into
2010. Despite the partial equity market recovery over the past
nine months, the current market level and market volatility have
resulted in higher claim costs, and have increased the cost and
volatility of hedging programs, and the level of capital needed
to support living benefit guarantees. Many competitors have
responded to recent market turbulence by increasing the price of
their guaranteed living benefits and changing the amount of the
guarantee offered. Management believes that the most significant
industry de-risking changes have occurred. In the first six
months of 2009, the Company adjusted pricing levels and took
other actions to de-risk its variable annuity product features
in order to address the risks and costs associated with variable
annuity benefit features in the current economic environment and
continues to explore other risk limiting techniques such as
changes to hedging or other reinsurance structures. The Company
will continue to evaluate the benefits offered within its
variable annuities and launched a new variable annuity product
in October 2009 that responds to customer needs for growth and
income within the risk tolerances of The Hartford.
The Companys fixed annuity sales have declined throughout
2009 as a result of lower interest rates and the transition to a
new product. Management expects fixed annuity sales to continue
to be challenged until interest rates increase.
For the retail mutual fund business, net sales can vary
significantly depending on market conditions, as was experienced
throughout 2009. The continued declines in equity markets in the
first quarter of 2009 helped drive declines in the
Companys mutual fund deposits and assets under management.
During the last nine months of 2009, the equity markets improved
from the first quarter and as a result the Companys mutual
fund assets under management and deposits have increased
correspondingly. As this business continues to evolve, success
will be driven by diversifying net sales across the mutual fund
platform, delivering superior investment performance and
creating new investment solutions for current and future mutual
fund shareholders.
The decline in assets under management as compared to 2008 is
the result of continued depressed values of the equity markets
in 2009 as compared to 2008, which has decreased the extent of
the scale efficiencies that Retail has
25
benefited from in recent years. The significant reduction in
assets under management has resulted in revenues declining
faster than expenses causing lower earnings during 2009. The
equity markets have partially recovered during the last nine
months of 2009, which has helped improve profitability in recent
quarters. Retails profitability in 2010 as compared to
historical levels will be affected by an affiliated reinsurance
transaction entered into in the fourth quarter of 2009. This
reinsurance transaction cedes the economic risks and rewards on
a large portion of Retails in-force variable annuity block
and future variable annuity business to an affiliated captive
reinsurer. Retails net income will be reduced as a result
of the affiliated reinsurance transaction. Individual Annuity
net investment spread has been impacted by losses on limited
partnership and other alternative investments, lower yields on
fixed maturities and an increase in crediting rates on renewals
for MVA annuities. Management expects these conditions to
persist in 2010. Management has evaluated, and will continue to
actively evaluate, its expense structure to ensure the business
is controlling costs while maintaining an appropriate level of
service to our customers.
Individual
Life
Future sales for all products will be influenced by active
management of current distribution relationships, responding to
the negative impact of recent merger and consolidation activity
on existing distribution relationships and the development of
new sources of distribution, and the Companys ratings as
published by the various ratings agencies, while offering
competitive and innovative products and product features. The
current economic environment poses challenges for future sales;
while life insurance products respond well to consumer demand
for financial security and wealth accumulation solutions,
individuals may be reluctant to transfer funds when market
volatility has recently resulted in significant declines in
investment values. In addition, the availability and terms of
capital solutions in the marketplace, as discussed below, to
support universal life products with secondary guarantees, may
reduce future growth in these products.
Effective November 1, 2007, Individual Life reinsured the
policy liability related to statutory reserves in universal life
with secondary guarantees to a captive reinsurance affiliate. An
unaffiliated standby third party letter of credit supports a
portion of the statutory reserves that have been ceded to this
subsidiary. The use of the letter of credit enhanced statutory
capital but resulted in a decline in net investment income and
increased expenses in future periods for Individual Life. As of
December 31, 2009, the transaction provided approximately
$585 of statutory capital relief associated with the
Companys universal life products with secondary
guarantees. The Company has received notice from the issuer of
the letter of credit that they will be terminating the letter of
credit as it applies to the new business written after
January 31, 2010. In addition, the issuer has notified the
Company that it will not extend the letter of credit covering
the inforce beyond its current expiration date of
December 31, 2028. The letter of credit is expected to
provide sufficient coverage for the reinsured business through
2028. Management is reviewing product design alternatives with
the objective of developing a competitively priced product that
meets the Companys capital efficiency objectives.
For risk management purposes, Individual Life accepts and
retains up to $10 in risk on any one life. Individual Life uses
reinsurance where appropriate to protect against the severity of
losses on individual claims; however, death claim experience may
continue to lead to periodic short-term earnings volatility. In
the fourth quarter of 2008, Individual Life began ceding
insurance under a new reinsurance structure for all new business
excluding term life insurance. The new reinsurance structure
allows Individual Life greater flexibility in writing larger
policies, while retaining less of the overall risk associated
with individual insured lives. This new reinsurance structure
will help balance the overall profitability of Individual
Lifes business. The financial results of this change in
the reinsurance structure will be recognized over time as the
percentage of new business subject to the structure grows. This
will result in Individual Life recognizing increasing
reinsurance premiums while reducing earnings volatility
associated with mortality experience over time.
Individual Life continues to face uncertainty surrounding estate
tax legislation, aggressive competition from other life
insurance providers, reduced availability and higher price of
reinsurance, and the current regulatory environment related to
reserving for term life insurance and universal life products
with no-lapse guarantees. Additionally, volatility in the equity
markets may reduce the attractiveness of variable universal life
products. These risks may have a negative impact on Individual
Lifes future sales and earnings. Despite these risks,
management believes there are opportunities to increase future
sales by implementing strategies to expand distribution
capabilities,
26
including utilizing independent agents and continuing to build
on the strong relationships within the financial institution
marketplace.
Retirement
Plans
The future financial results of the Retirement Plans segment
will depend on Lifes ability to increase assets under
management across all businesses, achieve scale in areas with a
high degree of fixed costs and maintain its investment spread
earnings on the general account products sold largely in the
403(b)/457 business.
During 2008, the Company completed three Retirement Plans
acquisitions. These acquisitions gave Retirement Plans a
foothold in the business of providing recordkeeping services to
large financial firms which offer defined contribution plans to
their clients, added substantial assets under management which
helped provide a level of scale, and the ability to provide
web-based technology to address data management, administration
and benefit calculations. Disciplined expense management will
continue to be a focus of the Retirement Plans segment as
necessary investments in service and technology are made to
effect the integration of the 2008 acquisitions.
Retirement Plans deposits have been negatively impacted by
market volatility and by the market decline in 2008 and the
first quarter of 2009 as businesses reduce their workforces and
offer more modest salary increases and as workers potentially
allocate less to retirement accounts in the near term. The
impact of the partial equity markets recovery over the last nine
months has been offset by a few large case surrenders, resulting
in an overall decline in average assets under management
compared to 2008. The reduction in average assets under
management has strained net income in 2009, and this earnings
strain is expected to continue until average account value
exceeds the level seen in the first half of 2008.
Institutional
The Company has completed the strategic review of the
Institutional businesses and has decided to exit several
businesses that have been determined to be outside of the
Companys core business model. Several lines
institutional mutual funds, private placement life insurance,
income annuities and certain institutional annuities will
continue to be managed for growth. The private placement life
insurance industry (including the corporate-owned and bank-owned
life insurance markets) has experienced a slowdown in sales due
to, among other things, limited availability of stable value
wrap providers. We believe that the Companys current PPLI
assets will experience high persistency, but our ability to grow
this business in the future will be affected by near term market
and industry challenges. The remaining businesses, Structured
Settlements, Guaranteed Investment Products, and most
Institutional Annuities will be managed in conjunction with
other businesses that the Company has previously decided will
not be actively marketed. Certain guaranteed investment products
may be offered on a selective basis.
The net income of this segment depends on Institutionals
ability to retain assets under management, the relative mix of
business, and net investment spread. Net investment spread, as
discussed in Institutionals Operating section of this
MD&A, has declined year over year and management expects
net investment spread will remain pressured in the intermediate
future due to the low level of short-term interest rates,
increased allocation to lower yielding U.S. Treasuries and
short-term investments, and anticipated performance of limited
partnerships and other alternative investments.
Stable value products experienced net outflows in 2009 as a
result of contractual maturities and the payments associated
with certain contracts which allow an investor to accelerate
principal repayments (after a defined notice period of typically
thirteen months) as well as the Company opting to accelerate the
repayment of principal for certain stable value products. $3.9B
of account value was paid out on stable value contracts during
2009. The Company has the option to accelerate the repayment of
principal for certain other stable value products and will
continue to evaluate calling these contracts on a contract by
contract basis based upon the financial impact to the Company.
In addition, the Company may seek to retire or repurchase
certain stable value products in open market transactions. Such
repurchases, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual
restrictions, and other factors. Institutional will fund these
obligations from cash and short-term investments presently held
in its investment portfolios along with projected receipts of
earned interest and principal maturities from long-term invested
assets.
27
CRITICAL
ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States of
America (U.S. GAAP), requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ, and in the past has
differed, 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: estimated gross profits
used in the valuation and amortization of assets and liabilities
associated with variable annuity and other universal life-type
contracts; living benefits required to be fair valued; valuation
of investments and derivative instruments; evaluation of
other-than-temporary
impairments on
available-for-sale
securities and contingencies relating to corporate litigation
and regulatory matters; DTA and goodwill impairment. 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.
Estimated
Gross Profits Used in the Valuation and Amortization of Assets
and Liabilities Associated with Variable Annuity and Other
Universal Life-Type Contracts
Estimated gross profits (EGPs) are used in the
amortization of: the Companys deferred policy acquisition
cost (DAC) asset, which includes the present value
of future profits; sales inducement assets (SIA);
and unearned revenue reserves (URR). See Note 6
of the Notes to Consolidated Financial Statements for additional
information on DAC. See Note 9 of the Notes to Consolidated
Financial Statements for additional information on SIA. EGPs are
also used in the valuation of reserves for death and other
insurance benefit features on variable annuity and universal
life-type contracts. See Note 8 of the Notes to
Consolidated Financial Statements for additional information on
death and other insurance benefit feature reserves.
For most contracts, the Company estimates gross profits over
20 years as EGPs emerging subsequent to that timeframe are
immaterial. Products sold in a particular year are aggregated
into cohorts. Future gross profits for each cohort are projected
over the estimated lives of the underlying contracts, based on
future account value projections for variable annuity and
variable universal life products. The projection of future
account values requires the use of certain assumptions
including: separate account returns; separate account fund mix;
fees assessed against the contract holders account
balance; surrender and lapse rates; interest margin; mortality;
and hedging costs. Changes in these assumptions and, in
addition, changes to other policyholder behavior assumptions
such as resets, partial surrenders, reaction to price increases,
and asset allocations causes EGPs to fluctuate which impacts
earnings.
Prior to the second quarter of 2009, the Company determined EGPs
using the mean derived from stochastic scenarios that had been
calibrated to the estimated separate account return. The Company
also completed a comprehensive assumption study, in the third
quarter of each year and revised best estimate assumptions used
to estimate future gross profits when the EGPs in the
Companys models fell outside of an independently
determined reasonable range of EGPs. The Company also
considered, on a quarterly basis, other qualitative factors such
as product, regulatory and policyholder behavior trends and
would revise EGPs if those trends were expected to be
significant.
Beginning with the second quarter of 2009, the Company now
determines EGPs from a single deterministic reversion to mean
(RTM) separate account return projection which is an
estimation technique commonly used by insurance entities to
project future separate account returns. Through this estimation
technique, the Companys DAC model is adjusted to reflect
actual account values at the end of each quarter. Through a
consideration of recent market returns, the Company will unlock,
or adjust, projected returns over a future period so that the
account value returns to the long-term expected rate of return,
providing that those projected returns do not exceed certain
caps or floors. This DAC Unlock, for future separate account
returns, is determined each quarter. Under RTM, the expected
long term rate of return is 7.1%, on a weighted average basis,
including 9.5% for equities and 6.0% for fixed income.
28
In the third quarter of each year, the Company completes a
comprehensive non-market related policyholder behavior
assumption study and incorporates the results of those studies
into its projection of future gross profits. Additionally,
throughout the year, the Company evaluates various aspects of
policyholder behavior and periodically revises its policyholder
assumptions as credible emerging data indicates that changes are
warranted. In the fourth quarter of 2009, recent market
volatility provided the Company additional credible information
regarding policyholder behavior, related to living benefit
lapses, withdrawal rates and GMDB lapses. This information was
incorporated into the Companys assumptions used in
determining estimated gross profits. Upon completion of an
assumption study or evaluation of credible new information, the
Company will revise its assumptions to reflect its current best
estimate. These assumption revisions will change the projected
account values and the related EGPs in the DAC, SIA and URR
amortization models, as well as the death and other insurance
benefit reserving model.
All assumption changes that affect the estimate of future EGPs
including: the update of current account values; the use of the
RTM estimation technique; and policyholder behavior assumptions,
are considered an Unlock in the period of revision. An Unlock
adjusts DAC, SIA, URR and death and other insurance benefit
reserve balances in the Consolidated Balance Sheets with an
offsetting benefit or charge in the Consolidated Statements of
Operations in the period of the revision. An Unlock that results
in an after-tax benefit generally occurs as a result of actual
experience or future expectations of product profitability being
favorable compared to previous estimates. An Unlock that results
in an after-tax charge generally occurs as a result of actual
experience or future expectations of product profitability being
unfavorable compared to previous estimates.
An Unlock revises EGPs, on a quarterly basis, to reflect the
Companys current best estimate assumptions. After each
quarterly Unlock, the Company also tests the aggregate
recoverability of DAC by comparing the DAC balance to the
present value of future EGPs. As of December 31, 2009, the
margin between the DAC balance and to the present value of
future EGPs was 1% for U.S. individual variable annuities,
reflective of the reinsurance of a block of individual variable
annuities with an affiliated captive reinsurer. If the margin
between the DAC asset and the present value of future EGPs is
exhausted, further reductions in EGPs would cause portions of
DAC to be unrecoverable.
Estimated gross profits are also used to determine the expected
excess benefits and assessments included in the measurement of
death and other insurance benefit reserves. These excess
benefits and assessments are derived from a range of stochastic
scenarios that have been calibrated to the Companys RTM
separate account returns. The determination of death and other
insurance benefit reserves is also impacted by discount rates,
lapses, volatilities and mortality assumptions.
Effective October 1, 2009, a subsidiary of HLIC, Hartford
Life and Annuity Insurance Company (HLAI) entered
into a reinsurance agreement with an affiliated captive
reinsurer, White River Life Reinsurance Company (the
affiliated captive reinsurer or WRR). This
agreement provides that HLAI will cede, and WRR will reinsure
100% of the in-force and prospective U.S. variable
annuities and the associated GMDB and GMWB riders. This
transaction resulted in a DAC Unlock of $2.0 billion,
pre-tax and $1.3 billion, after-tax as the related
EGPs were ceded to the affiliate. See Note 16
Transactions with Affiliates for further information on the
transaction.
29
Unlocks
The after-tax impact on the Companys assets and
liabilities as a result of the Unlocks for the years ended 2009,
2008 and 2007 were:
For
the year ended 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
|
Benefit
|
|
|
|
|
|
|
|
After-tax (Charge) Benefit
|
|
DAC
|
|
|
URR
|
|
|
Reserves(1)
|
|
|
SIA
|
|
|
Total(2)
|
|
|
Retail(4)
|
|
$
|
(1,682
|
)
|
|
$
|
78
|
|
|
$
|
(158
|
)
|
|
$
|
(180
|
)
|
|
$
|
(1,942
|
)
|
Retirement Plans
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(56
|
)
|
Individual Life
|
|
|
(100
|
)
|
|
|
54
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(50
|
)
|
Institutional
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Other(3)
|
|
|
(77
|
)
|
|
|
6
|
|
|
|
(17
|
)
|
|
|
(8
|
)
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,915
|
)
|
|
$
|
138
|
|
|
$
|
(179
|
)
|
|
$
|
(189
|
)
|
|
$
|
(2,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a result of the Unlock, Retail reserves increased $522,
pre-tax, offset by an increase in reinsurance recoverables of
$279, pre-tax. |
|
(2) |
|
The most significant contributor to the Unlock was a result of
actual separate account returns being significantly below our
aggregated estimated return. |
|
(3) |
|
Includes $(49) related to DAC recoverability impairment
associated with the decision to suspend sales in the U.K.
variable annuity business. |
|
(4) |
|
Includes $(1.3) billion related to reinsurance of a block
of in-force and prospective U.S. variable annuities and the
associated GMDB and GMWB riders with an affiliated captive
reinsurer. |
For
the year ended 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
|
Benefit
|
|
|
|
|
|
|
|
After-tax (Charge) Benefit
|
|
DAC
|
|
|
URR
|
|
|
Reserves(1)
|
|
|
SIA
|
|
|
Total(2)
|
|
|
Retail
|
|
$
|
(648
|
)
|
|
$
|
18
|
|
|
$
|
(75
|
)
|
|
$
|
(27
|
)
|
|
$
|
(732
|
)
|
Retirement Plans
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
Individual Life
|
|
|
(29
|
)
|
|
|
(12
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(726
|
)
|
|
$
|
6
|
|
|
$
|
(78
|
)
|
|
$
|
(27
|
)
|
|
$
|
(825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a result of the Unlock, Retail reserves increased $389,
pre-tax, offset by an increase in reinsurance recoverables of
$273, pre-tax. |
|
(2) |
|
The most significant contributors to the Unlock were: |
|
|
|
Actual separate account returns were significantly below our
aggregated estimated return.
|
|
|
The Company reduced its 20 year projected separate
account return assumption from 7.8% to 7.2% in the U.S.
|
|
|
Retirement Plans reduced its estimate of future fees as plans
met contractual size limits (breakpoints), causing a
lower fee schedule to apply, and the Company increased its
assumption for future deposits by existing plan participants.
|
30
For
the year ended 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
|
Benefit
|
|
|
|
|
|
|
|
After-tax (Charge) Benefit
|
|
DAC
|
|
|
URR
|
|
|
Reserves(1)
|
|
|
SIA
|
|
|
Total(2)
|
|
|
Retail
|
|
$
|
180
|
|
|
$
|
(5
|
)
|
|
$
|
(4
|
)
|
|
$
|
9
|
|
|
$
|
180
|
|
Retirement Plans
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
Individual Life
|
|
|
24
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Institutional
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
196
|
|
|
$
|
(13
|
)
|
|
$
|
(4
|
)
|
|
$
|
9
|
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a result of the Unlock, Retail reserves decreased $4,
pre-tax, offset by a decrease, in reinsurance recoverables of
$10, pre-tax. |
|
(2) |
|
The most significant contributors to the Unlock were: |
|
|
|
Actual separate account returns were above our aggregated
estimated return.
|
|
|
During the third quarter of 2007, the Company estimated gross
profits using the mean of EGPs derived from a set of stochastic
scenarios that have been calibrated to our estimated separate
account return as compared to prior year where we used a single
deterministic estimation. The impact of this change in
estimation was a benefit of $20, after-tax, for
U.S. variable annuities.
|
|
|
Dynamic lapse behavior assumptions, reflecting that lapse
behavior will be different depending upon market movements,
along with other base lapse rate assumption changes resulted in
an approximate benefit of $40, after-tax, for U.S. variable
annuities.
|
Living
Benefits Required to be Fair Valued (in Other Policyholder Funds
and Benefits Payable)
The Company offers certain variable annuity products with a GMWB
rider in the U.S. and formerly in the U.K. The Company has
also assumed, through reinsurance, from HLIKK, GMWB, GMIB, and
GMAB. The fair value of the GMWB, GMIB and GMAB is a liability
of approximately $2.0 billion, $1.4 billion and
$1 million as of December 31, 2009, respectively.
Effective October 1, 2009, the Company ceded U.S. and
International variable annuity contracts to an affiliated
captive reinsurer including assumed GMWB, GMIB and GMAB. The
initial fair value of the derivative associated with the
business was approximately $1.3 billion.
Fair values for direct, assumed and ceded GMWB, GMIB and GMAB
contracts are calculated based upon internally developed models
because active, observable markets do not exist for those items.
The fair value of the Companys guaranteed benefit
liabilities, classified as embedded derivatives, and the related
reinsurance and customized freestanding derivatives is
calculated as an aggregation of the following components: Best
Estimate Claims Costs; Credit Standing Adjustment; and Margins.
The resulting aggregation is reconciled or calibrated, if
necessary, to market information that is, or may be, available
to the Company, but may not be observable by other market
participants, including reinsurance discussions and
transactions. The Company believes the aggregation of each of
these components, as necessary and as reconciled or calibrated
to the market information available to the Company, results in
an amount that the Company would be required to transfer, or
receive, to or from market participants in an active liquid
market, if one existed, for those market participants to assume
the risks associated with the guaranteed minimum benefits and
the related reinsurance and customized derivatives. The fair
value is likely to materially diverge from the ultimate
settlement of the liability as the Company believes settlement
will be based on our best estimate assumptions rather than those
best estimate assumptions plus risk margins. In the absence of
any transfer of the guaranteed benefit liability to a third
party, the release of risk margins is likely to be reflected as
realized gains in future periods net income. Each of the
components described below are unobservable in the marketplace
and require subjectivity by the Company in determining their
value.
Best
Estimate Claims Costs
The Best Estimate Claims Costs is calculated based on actuarial
and capital market assumptions related to projected cash flows,
including benefits and related contract charges, over the lives
of the contracts, incorporating
31
expectations concerning policyholder behavior such as lapses,
fund selection, resets and withdrawal utilization (for the
customized derivatives, policyholder behavior is prescribed in
the derivative contract). Because of the dynamic and complex
nature of these cash flows, best estimate assumptions and a
Monte Carlo stochastic process involving the generation of
thousands of scenarios that assume risk neutral returns
consistent with swap rates and a blend of observable implied
index volatility levels were used. Estimating these cash flows
involves numerous estimates and subjective judgments including
those regarding expected markets rates of return, market
volatility, correlations of market index returns to funds, fund
performance, discount rates and policyholder behavior. At each
valuation date, the Company assumes expected returns based on:
|
|
|
risk-free rates as represented by the current LIBOR forward
curve rates;
|
|
|
forward market volatility assumptions for each underlying index
based primarily on a blend of observed market implied
volatility data;
|
|
|
correlations of market returns across underlying indices based
on actual observed market returns and relationships over the ten
years preceding the valuation date;
|
|
|
three years of history for fund regression; and
|
|
|
current risk-free spot rates as represented by the current LIBOR
spot curve to determine the present value of expected future
cash flows produced in the stochastic projection process.
|
As many guaranteed benefit obligations are relatively new in the
marketplace, actual policyholder behavior experience is limited.
As a result, estimates of future policyholder behavior are
subjective and based on analogous internal and external data. As
markets change, mature and evolve and actual policyholder
behavior emerges, management continually evaluates the
appropriateness of its assumptions for this component of the
fair value model.
On a daily basis, the Company updates capital market assumptions
used in the GMWB liability model such as interest rates and
equity indices. On a weekly basis, the blend of implied equity
index volatilities is updated. The Company continually monitors
various aspects of policyholder behavior and may modify certain
of its assumptions, including living benefit lapses and
withdrawal rates, if credible emerging data indicates that
changes are warranted. At a minimum, all policyholder behavior
assumptions are reviewed and updated, as appropriate, in
conjunction with the completion of the Companys
comprehensive study to refine its estimate of future gross
profits during the third quarter of each year.
Credit
Standing Adjustment
This assumption makes an adjustment that market participants
would make to reflect the risk that guaranteed benefit
obligations or the GMWB reinsurance recoverables will not be
fulfilled (nonperformance risk). As a result of
sustained volatility in the Companys credit default
spreads, during 2009 the Company changed its estimate of the
Credit Standing Adjustment to incorporate observable Company and
reinsurer credit default spreads from capital markets, adjusted
for market recoverability. Prior to the first quarter of 2009,
the Company calculated the Credit Standing Adjustment by using
default rates published by rating agencies, adjusted for market
recoverability. For the twelve months ended December 31,
2009 and 2008, the credit standing adjustment resulted in a
pre-tax gain of $135 and $6 for U.S. GMWB liabilities net
of reinsurance.
Margins
The behavior risk margin adds a margin that market participants
would require for the risk that the Companys assumptions
about policyholder behavior could differ from actual experience.
The behavior risk margin is calculated by taking the difference
between adverse policyholder behavior assumptions and best
estimate assumptions. The Company revised certain adverse
assumptions in the behavior risk margin for withdrawals, lapses
and annuitization behavior as emerging policyholder behavior
experience suggested the prior adverse policyholder behavior
assumptions were no longer representative of an appropriate
margin for risk.
Assumption updates, including policyholder behavior assumptions,
affected best estimates and margins for a total realized gain
before-tax of $495 and $470 for the years ended
December 31, 2009 and 2008 for U.S. GMWB
32
liabilities net of third party reinsurance. For the year ended
December 31, 2007, these updates affected best estimates
resulting in a pre-tax loss of $(158).
In addition to the non-market-based updates described above, for
the twelve months ended December 31, 2009, 2008, and 2007,
the Company recognized non-market-based updates to the
U.S. GMWB fair value driven by:
|
|
|
The relative outperformance (underperformance) of the underlying
actively managed funds as compared to their respective indices
resulting in a pre-tax gain/(loss) of approximately $481, $
(355), and $(2), respectively.
|
In addition to the non-market based updates described above, the
Company recognized non-market based updates to the reinsured
Japan GMWB, GMIB, and GMAB fair values primarily driven by:
|
|
|
Updates to assumptions, including policyholder behavior
resulting in a pre-tax loss of approximately $ (264) for
the year ended December 31, 2009; and
|
|
|
The credit standing adjustment (described above), resulting in a
pre-tax gain (loss) of approximately $155 and $(115) for the
years ended December 31, 2009 and 2008.
|
Valuation
of Investments and Derivative Instruments
The Companys investments in fixed maturities include
bonds, redeemable preferred stock and commercial paper. These
investments, along with certain equity securities, which include
common and non-redeemable preferred stocks, are classified as
available-for-sale
(AFS) and are carried at fair value. The after-tax
difference from cost or amortized cost is reflected in
stockholders equity as a component of Other Comprehensive
Income (Loss), after adjustments for the effect of deducting the
life and pension policyholders share of the immediate
participation guaranteed contracts and certain life and annuity
deferred policy acquisition costs and reserve adjustments. The
equity investments associated with the variable annuity products
offered in the U.K. are recorded at fair value and are
classified as trading with changes in fair value
recorded in net investment income. Policy loans are carried at
outstanding balance. Mortgage loans are recorded at the
outstanding principal balance adjusted for amortization of
premiums or discounts and net of valuation allowances.
Short-term investments are carried at amortized cost, which
approximates fair value. Limited partnerships and other
alternative investments are reported at their carrying value
with the change in carrying value accounted for under the equity
method and accordingly the Companys share of earnings are
included in net investment income. Recognition of limited
partnerships and other alternative investment income is delayed
due to the availability of the related financial information, as
private equity and other funds are generally on a three-month
delay and hedge funds are on a one-month delay. Accordingly,
income for the years ended December 31, 2009, 2008 and
2007 may not include the full impact of current year
changes in valuation of the underlying assets and liabilities,
which are generally obtained from the limited partnerships and
other alternative investments general partners. Other
investments primarily consist of derivatives instruments which
are carried at fair value.
Available-for-Sale
Securities and Short-Term Investments
The fair value of AFS securities and short-term investments in
an active and orderly market (i.e. not distressed or forced
liquidation) is determined by management after considering one
of three primary sources of information: third-party pricing
services, independent broker quotations or pricing matrices.
Security pricing is applied using a waterfall
approach whereby prices are first sought from third party
pricing services, the remaining unpriced securities are
submitted to independent brokers for prices, or lastly,
securities are priced using a pricing matrix. Typical inputs
used by these pricing methods include, but are not limited to,
reported trades, benchmark yields, issuer spreads, bids, offers,
and/or
estimated cash flows and prepayments speeds. Based on the
typical trading volumes and the lack of quoted market prices for
fixed maturities, third-party pricing services will normally
derive the security prices through recent reported trades for
identical or similar securities making adjustments through the
reporting date based upon available market observable
information as outlined above. If there are no recent reported
trades, the third party pricing services and brokers may use
matrix or model processes to develop a security price where
future cash flow expectations are developed based upon
collateral performance and discounted at an estimated market
rate. For further discussion, see the
Available-for-Sale
and Short-term Investments Section in Note 3 of the Notes
to the Consolidated Financial Statements.
33
The Company has analyzed the third-party pricing services
valuation methodologies and related inputs, and has also
evaluated the various types of securities in its investment
portfolio to determine an appropriate fair value hierarchy level
based upon trading activity and the observability of market
inputs. For further discussion of fair value measurement, see
Note 3 of the Notes to the Consolidated Financial
Statements.
The following table presents the fair value of AFS securities
and short-term investments by pricing source and hierarchy level
as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Priced via third party pricing services
|
|
$
|
438
|
|
|
$
|
30,945
|
|
|
$
|
1,448
|
|
|
$
|
32,831
|
|
Priced via independent broker quotations
|
|
|
|
|
|
|
|
|
|
|
3,101
|
|
|
|
3,101
|
|
Priced via matrices
|
|
|
|
|
|
|
|
|
|
|
4,542
|
|
|
|
4,542
|
|
Priced via other methods(1)
|
|
|
|
|
|
|
|
|
|
|
348
|
|
|
|
348
|
|
Short-term investments
|
|
|
3,785
|
|
|
|
1,343
|
|
|
|
|
|
|
|
5,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,223
|
|
|
$
|
32,288
|
|
|
$
|
9,439
|
|
|
$
|
45,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
9.2
|
%
|
|
|
70.3
|
%
|
|
|
20.5
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents securities for which adjustments were made to reduce
prices received from third parties and certain private equity
investments that are carried at the Companys determination
of fair value from inception. |
The fair value is the amount at which the security could be
exchanged in a current transaction between knowledgeable,
unrelated willing parties using inputs, including assumptions
and estimates, a market participant would utilize. As the
estimated fair value of a security utilizes assumptions and
estimates, the amount that may be realized may differ
significantly.
Valuation
of Derivative Instruments, excluding embedded derivatives within
liability contracts and reinsurance related
derivatives
Derivative instruments are reported on the Consolidated Balance
Sheets at fair value and are reported in Other Investments and
Other Liabilities. Derivative instruments are fair valued using
pricing valuation models, which utilize market data inputs or
independent broker quotations. Excluding embedded and
reinsurance related derivatives, as December 31, 2009 and
2008, 96% and 95% of derivatives, respectively, based upon
notional values, were priced by valuation models, which utilize
independent market data. The remaining derivatives were priced
by broker quotations. The derivatives are valued using
mid-market level inputs that are predominantly observable in the
market, with the exception of the customized swap contracts that
hedge guaranteed minimum withdrawal benefits (GMWB)
liabilities. Inputs used to value derivatives include, but are
not limited to, swap interest rates, foreign currency forward
and spot rates, credit spreads and correlations, interest and
equity volatility and equity index levels. The Company performs
a monthly analysis on derivative valuations which includes both
quantitative and qualitative analysis. Examples of procedures
performed include, but are not limited to, review of pricing
statistics and trends, back testing recent trades, analyzing the
impacts of changes in the market environment, and review of
changes in market value for each derivative including those
derivatives priced by brokers.
The following table presents the notional value and net fair
value of derivative instruments by hierarchy level as of
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
Notional Value
|
|
|
Fair Value
|
|
|
Quoted prices in active markets for identical assets
(Level 1)
|
|
$
|
2,276
|
|
|
$
|
6
|
|
Significant observable inputs (Level 2)
|
|
|
29,764
|
|
|
|
(41
|
)
|
Significant unobservable inputs (Level 3)
|
|
|
42,533
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74,573
|
|
|
$
|
333
|
|
|
|
|
|
|
|
|
|
|
34
The following table presents the notional value and net fair
value of the derivative instruments within the Level 3
securities classification as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
Notional Value
|
|
|
Fair Value
|
|
|
Credit derivatives
|
|
$
|
2,782
|
|
|
$
|
(162
|
)
|
Interest derivatives
|
|
|
2,591
|
|
|
|
(2
|
)
|
Equity derivatives
|
|
|
37,136
|
|
|
|
532
|
|
Other
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3
|
|
$
|
42,533
|
|
|
$
|
368
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments classified as Level 3 include
complex derivatives, primarily consisting of equity options and
swaps, interest rate derivatives which have interest rate
optionality, certain credit default swaps, and long-dated
interest rate swaps. These derivative instruments are valued
using pricing models which utilize both observable and
unobservable inputs and, to a lesser extent, broker quotations.
A derivative instrument that is priced using both observable and
unobservable inputs will be classified as a Level 3
financial instrument in its entirety if the unobservable input
is significant in developing the price. The Company utilizes
derivative instruments to manage the risk associated with
certain assets and liabilities. However, the derivative
instrument may not be classified with the same fair value
hierarchy level as the associated assets and liabilities.
Other-Than-Temporary
Impairments and Valuation Allowances on
Investments
The Company has a monitoring process overseen by a committee of
investment and accounting professionals that identifies
investments that are subject to an enhanced evaluation on a
quarterly basis to determine if an
other-than-temporary
impairment (impairment) is present for AFS
securities or a valuation allowance is required for mortgage
loans. This evaluation is a quantitative and qualitative
process, which is subject to risks and uncertainties. For
further discussion of the accounting policies, see the
Significant Investment Accounting Policies Section in
Note 4 of the Notes to the Consolidated Financial
Statements. For a discussion of results, see the
Other-Than-Temporary
Impairments Section within the Investment Credit Risk section of
the MD&A.
Goodwill
Impairment
Goodwill balances are reviewed for impairment at least annually
or more frequently if events occur or circumstances change that
would indicate that a triggering event has occurred. A reporting
unit is defined as an operating segment or one level below an
operating segment. The Companys reporting units, for which
goodwill has been allocated, is equivalent to the Companys
operating segments as there is no discrete financial information
available for the separate components of the segment or all of
the components of the segment have similar economic
characteristics. The 401(k), 457 and 403(b) components of
Retirement have been aggregated into one reporting unit; the
variable life, universal life and term life components of
Individual Life have been aggregated into one reporting unit. In
circumstances where the components of an operating segment
constitute a business for which discrete financial information
is available and segment management regularly reviews the
operating results of that component such as with Other Retail,
the Company has classified those components as reporting units.
As of December 31, 2009 and 2008, the Company had goodwill
allocated to the following reporting units:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Retail Other
|
|
|
159
|
|
|
|
159
|
|
Retirement(1)
|
|
|
87
|
|
|
|
79
|
|
Individual Life
|
|
|
224
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
470
|
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2009, the Company added $8 of goodwill related to a
contingent earnout provisions. |
35
The goodwill impairment test follows a two step process. In the
first step, the fair value of a reporting unit is compared to
its carrying value. If the carrying value of a reporting unit
exceeds its fair value, the second step of the impairment test
is performed for purposes of measuring the impairment. In the
second step, the fair value of the reporting unit is allocated
to all of the assets and liabilities of the reporting unit to
determine an implied goodwill value. This allocation is similar
to a purchase price allocation performed in purchase accounting.
If the carrying amount of the reporting unit goodwill exceeds
the implied goodwill value, an impairment loss shall be
recognized in an amount equal to that excess.
Managements determination of the fair value of each
reporting unit incorporates multiple inputs including cash flow
calculations, price to earnings multiples, the level of The
Hartfords share price and assumptions that market
participants would make in valuing the reporting unit. Other
assumptions include levels of economic capital, future business
growth, earnings projections, assets under management and the
weighted average cost of capital used for purposes of
discounting. Decreases in the amount of economic capital
allocated to a reporting unit, decreases in business growth,
decreases in earnings projections and increases in the weighted
average cost of capital will all cause the reporting units
fair value to decrease.
The Company completed its annual goodwill assessment for the
individual reporting units of the Company as of January 1,
2009. The conclusion reached as a result of the annual goodwill
impairment testing was that the fair value of each reporting
unit, for which goodwill had been allocated, was in excess of
the respective reporting units carrying value (the first
step of the goodwill impairment test).
However, as noted above, goodwill is reassessed at an interim
date if certain circumstances occur which would cause the entity
to conclude that it was more likely than not that the carrying
value of one or more of its reporting units would be in excess
of the respective reporting units fair value. As a result
of the continued decline in the equity markets from
January 1, 2009, rating agency downgrades, and a decline in
The Hartfords share price, the Company concluded, during
the first quarter of 2009, that the conditions had been met to
warrant an interim goodwill impairment test.
As a result of the first quarter 2009 interim goodwill
impairment test which included the effects of decreasing sales
outlooks and declining equity markets on future earnings, the
fair value in step two of the goodwill impairment analysis for
the Individual Life reporting unit continued to be in excess of
its carrying value.
Valuation
Allowance on Deferred Tax Assets
Deferred tax assets represent the tax benefit of future
deductible temporary differences and operating loss and tax
credit carryforwards. Deferred tax assets are measured using the
enacted tax rates expected to be in effect when such benefits
are realized if there is no change in tax law. Under
U.S. GAAP, we test the value of deferred tax assets for
impairment on a quarterly basis at the entity level within each
tax jurisdiction, consistent with our filed tax returns.
Deferred tax assets are reduced by a valuation allowance if,
based on the weight of available evidence, it is more likely
than not that some portion, or all, of the deferred tax assets
will not be realized. The determination of the valuation
allowance for our deferred tax assets requires management to
make certain judgments and assumptions. In evaluating the
ability to recover deferred tax assets, we have considered all
available evidence including past operating results, the
existence of cumulative losses in the most recent years,
forecasted earnings, future taxable income, and prudent and
feasible tax planning strategies. In the event we determine that
we most likely would not be able to realize all or part of our
deferred tax assets in the future, an increase to the valuation
allowance would be charged to earnings in the period such
determination is made. Likewise, if it is later determined that
it is more likely than not that those deferred tax assets would
be realized, the previously provided valuation allowance would
be reversed. Our judgments and assumptions are subject to change
given the inherent uncertainty in predicting future performance,
which is impacted by such things as policyholder behavior,
competitor pricing, new product introductions, and specific
industry and investment market conditions.
In managements judgment, the net deferred tax asset will
more likely than not be realized. Included in the deferred tax
asset is the expected tax benefit attributable to net operating
losses of $290, which have no expiration. A valuation allowance
of $80 has been recorded which relates to foreign operations. No
valuation allowance has been recorded for realized or unrealized
losses. In assessing the need for a valuation allowance,
management considered taxable income in prior carryback years,
future taxable income and tax planning strategies that include
holding debt
36
securities with market value losses until recovery, selling
appreciated securities to offset capital losses, and sales of
certain corporate assets. Such tax planning strategies are
viewed by management as prudent and feasible and will be
implemented if necessary to realize the deferred tax asset.
However, we anticipate limited ability, going forward, to
recognize a full tax benefit on realized losses, which will
result in additional valuation allowances and, if interest rates
rise, an increased likelihood of recording a valuation allowance
on previously recognized realized capital losses.
If the Company were to follow a separate entity
approach, it would have to record a valuation allowance of
$387 related to realized capital losses. In addition, the
current tax benefit related to any of the Companys tax
attributes realized by virtue of its inclusion in The
Hartfords consolidated tax return would have been recorded
directly to surplus rather than income. These benefits were $65,
$500 and $0 for 2009, 2008 and 2007 respectively.
OVERVIEW
The Company is organized into four reporting segments: Retail
Products Group (Retail), Individual Life
(Individual Life), Retirement Plans
(Retirement Plans), and Institutional Solutions
Group (Institutional). The Company provides retail
and institutional investment products such as variable and fixed
annuities, mutual funds, private placement life insurance
(PPLI) and retirement plan services, individual life
insurance products including variable universal life, universal
life, interest sensitive whole life and term life.
The Company includes in an Other category its leveraged PPLI
product line of business; corporate items not directly allocated
to any of its reporting segments; intersegment eliminations,
guaranteed minimum income benefit (GMIB), guaranteed
minimum death benefit (GMDB), guaranteed minimum
accumulation benefit (GMAB) and guaranteed minimum
withdrawal benefit (GMWB) and reinsurance assumed
from and subsequently ceded to another related party and certain
group benefit products, including group life and group
disability insurance that is directly written by the Company and
for which nearly half is ceded to its parent, HLA, as well as
other International operations.
The Company derives its revenues principally from: (a) fee
income, including asset management fees, on separate account
assets and mortality and expense fees, as well as cost of
insurance charges; (b) net investment income on general
account assets; (c) fully insured premiums; and
(d) certain other fees. Asset management fees and mortality
and expense fees are primarily generated from separate account
assets, which are deposited with the Company through the sale of
variable annuity and variable universal life products. Cost of
insurance charges are assessed on the net amount at risk for
investment-oriented life insurance products.
The Companys expenses essentially consist of interest
credited to policyholders on general account liabilities,
insurance benefits provided, amortization of deferred policy
acquisition costs, expenses related to selling and servicing the
various products offered by the Company, dividends to
policyholders, and other general business expenses.
The Companys profitability in its variable annuity and to
a lesser extent, variable universal life businesses depends
largely on the amount of the contract holder account value or
assets under management on which it earns fees and the level of
fees charged. Changes in account value or assets under
management are driven by two main factors: net flows, which
measure the success of the Companys asset gathering and
retention efforts, and the market return of the funds, which is
heavily influenced by the return realized in the equity markets.
Net flows are comprised of new sales and other deposits less
surrenders, death benefits, policy charges and annuitizations of
investment type contracts, such as variable annuity contracts.
The Company uses the average daily value of the S&P 500
Index as an indicator for evaluating market returns of the
underlying account portfolios in the United States. Relative
profitability of variable products is highly correlated to the
growth in account values or assets under management since these
products generally earn fee income on a daily basis. An
immediate significant downturn in the financial markets could
result in a charge against deferred acquisition costs. See the
Critical Accounting Estimates section of the MD&A for
further information on DAC unlocks.
The profitability of the Companys fixed annuities and
other spread-based products depends largely on its
ability to earn target spreads between earned investment rates
on its general account assets and interest credited to
37
policyholders. In addition, the size and persistency of gross
profits from these businesses is an important driver of earnings
as it affects the rate of amortization of deferred policy
acquisition costs.
The Companys profitability in its individual life
insurance business depends largely on the size of its in-force
block, the adequacy of product pricing and underwriting
discipline, actual mortality experience, and the efficiency of
its claims and expense management.
KEY
PERFORMANCE MEASURES AND RATIOS
DAC
amortization ratio
DAC amortization ratio, return on assets (ROA)
or after-tax margin, excluding realized gains (losses) or DAC
Unlock are non-GAAP financial measures that the Company uses to
evaluate, and believes are important measures of, segment
operating performance. DAC amortization ratio, ROA or after-tax
margin is the most directly comparable GAAP measure. The
Hartford believes that the measures of DAC amortization ratio,
ROA or after-tax margin, excluding realized gains (losses) and
DAC Unlock provide investors with a valuable measure of the
performance of the Companys on-going businesses because it
reveals trends in our businesses that may be obscured by the
effect of realized gains (losses) or periodic DAC Unlocks. Some
realized capital gains and losses are primarily driven by
investment decisions and external economic developments, the
nature and timing of which are unrelated to insurance aspects of
our businesses. Accordingly, these non-GAAP measures exclude the
effect of all realized gains and losses that tend to be highly
variable from period to period based on capital market
conditions. The Company believes, however, that some realized
capital gains and losses are integrally related to our insurance
operations, so DAC amortization ratio, ROA and after-tax margin,
excluding the realized gains (losses) and DAC Unlock should
include net realized gains and losses on net periodic
settlements on the Japan fixed annuity cross-currency swap.
These net realized gains and losses are directly related to an
offsetting item included in the statement of operations such as
net investment income. DAC Unlocks occur when the Company
determines based on actual experience or other evidence, that
estimates of future gross profits should be revised. As the DAC
Unlock is a reflection of the Companys new best estimates
of future gross profits, the result and its impact on DAC
amortization ratio, ROA and after-tax margin is meaningful;
however, it does distort the trend of DAC amortization ratio,
ROA and after-tax margin. DAC amortization ratio, ROA or
after-tax margin, excluding realized gains (losses) and DAC
Unlock should not be considered as a substitute for DAC
amortization ratio, ROA or after-tax margin and does not reflect
the overall profitability of our businesses. Therefore, the
Company believes it is important for investors to evaluate both
DAC amortization ratio, ROA and after-tax margin, excluding
realized gains (losses) and DAC Unlock and DAC amortization
ratio, ROA and after-tax margin when reviewing the
Companys performance.
Fee
Income
Fee income is largely driven from amounts collected as a result
of contractually defined percentages of assets under management.
These fees are generally collected on a daily basis. For
individual life insurance products, fees are contractually
defined as percentages based on levels of insurance, age,
premiums and deposits collected and contract holder value. Life
insurance fees are generally collected on a monthly basis.
Therefore, the growth in assets under management either through
positive net flows or net sales, or favorable equity market
performance will have a favorable impact on fee income.
Conversely, either negative net flows of net sales, or
unfavorable equity market performance will reduce fee income.
For a detailed discussion of account value activity, refer the
individual segments analysis of operating results.
Net
Investment Spread
Management evaluates performance of certain products based on
net investment spread. These products include those that have
insignificant mortality risk, such as fixed annuities, certain
general account universal life contracts and certain
institutional contracts. Net investment spread is determined by
taking the difference between the earned rate, (excluding the
effects of capital gains and losses, including those related to
the Companys GMWB product and related reinsurance and
hedging programs), and the related crediting rates on average
general account assets under management. The net investment
spreads are for the total portfolio of relevant contracts in
each segment and reflect business written at different times.
When pricing products, the Company considers current investment
yields
38
and not the portfolio average. The determination of credited
rates is based upon consideration of current market rates for
similar products, portfolio yields and contractually guaranteed
minimum credited rates. Net investment spread can be volatile
period over period, which can have a significant positive or
negative effect on the operating results of each segment.
Investment earnings can also be influenced by factors such as
the actions of the Federal Reserve and a decision to hold higher
levels of short-term investments. The volatile nature of net
investment spread is driven primarily by prepayment premiums on
securities and earnings on limited partnership and other
alternative investments.
Expenses
There are three major categories for expenses. The first major
category of expenses is benefits and losses. These include the
costs of mortality in the individual life business, as well as
other contractholder benefits to policyholders. The second major
category is insurance operating costs and expenses, which is
commonly expressed in a ratio of a revenue measure depending on
the type of business. The third major category is the
amortization of deferred policy acquisition costs and the
present value of future profits (DAC amortization
ratio), which is typically expressed as a percentage of
pre-tax income before the cost of this amortization (an
approximation of actual gross profits) and excludes the effects
of unrealized gains (losses).
Profitability
Management evaluates the rates of return various businesses can
provide as an input in determining where additional capital
should be invested to increase net income and shareholder
returns. The Company uses the return on assets for the
Individual Annuity, Retirement Plans and Institutional
businesses for evaluating profitability. In Individual Life,
after-tax margin is a key indicator of overall profitability.
39
|
|
|
|
|
|
|
Ratios
|
|
2009
|
|
2008
|
|
2007
|
|
Retail
|
|
|
|
|
|
|
Individual annuity return on assets (ROA)
|
|
(214.8) bps
|
|
(119.3) bps
|
|
58.8 bps
|
Effect of net realized gains (losses), net of tax and DAC on ROA
|
|
(42.1) bps
|
|
(96.6) bps
|
|
(14.7) bps
|
Effect of DAC Unlock on ROA(1)
|
|
(213.1) bps
|
|
(67.9) bps
|
|
15.7 bps
|
|
|
|
|
|
|
|
ROA excluding realized gains (losses) and DAC Unlock(2)
|
|
40.4 bps
|
|
45.2 bps
|
|
56.5 bps
|
|
|
|
|
|
|
|
Retirement Plans
|
|
|
|
|
|
|
Retirement Plans (ROA)
|
|
(54.8) bps
|
|
(47.9) bps
|
|
22.9 bps
|
Effect of net realized gains (losses), net of tax and DAC on ROA
|
|
(44.8) bps
|
|
(51.5) bps
|
|
(10.5) bps
|
Effect of DAC Unlock on ROA(1)
|
|
(13.8) bps
|
|
(15.0) bps
|
|
(3.4) bps
|
|
|
|
|
|
|
|
ROA excluding realized gains (losses) and DAC Unlock
|
|
3.8 bps
|
|
18.6 bps
|
|
36.8 bps
|
|
|
|
|
|
|
|
Institutional
|
|
|
|
|
|
|
Institutional (ROA)
|
|
(93.9) bps
|
|
(84.0) bps
|
|
2.2 bps
|
Effect of net realized gains (losses), net of tax and DAC on ROA
|
|
(85.2) bps
|
|
(84.8) bps
|
|
(23.4) bps
|
Effect of DAC Unlock on ROA(1)
|
|
(0.2) bps
|
|
bps
|
|
0.3 bps
|
|
|
|
|
|
|
|
ROA excluding realized gains (losses) and DAC Unlock
|
|
(8.5) bps
|
|
0.8 bps
|
|
25.1 bps
|
|
|
|
|
|
|
|
Individual Life
|
|
|
|
|
|
|
After-tax margin
|
|
0.8%
|
|
(5.5)%
|
|
16.3%
|
Effect of net realized gains (losses), net of tax and DAC on
after-tax margin
|
|
(6.6)%
|
|
(13.7)%
|
|
(0.7)%
|
Effect of DAC Unlock on after-tax margin(1)
|
|
(5.2)%
|
|
(5.0)%
|
|
1.5%
|
|
|
|
|
|
|
|
After-tax margin excluding realized gains (losses) and
|
|
|
|
|
|
|
DAC Unlock
|
|
12.6%
|
|
13.2%
|
|
15.5%
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Unlocks within the Critical Accounting Estimates section of
the MD&A |
|
(2) |
|
Excludes the effect of the October
1st
reinsurance transaction with an affiliated captive reinsurer.
Refer to Note 16 Transactions with Affiliates. |
Year
ended December 31, 2009 compared to year ended
December 31, 2008
|
|
|
The decrease in Individual Annuitys ROA, excluding
realized gains (losses) and the effect of the DAC Unlock,
reflects significant losses on limited partnership and other
alternative investments, a higher DAC amortization rate and
lower investment spread in 2009. Return on assets in Retail is
expected to be lower in the future due to cession of a large
block of variable annuity contracts to an affiliate in the
fourth quarter of 2009.
|
|
|
The decrease in Retirement Plans ROA, excluding realized losses
and DAC Unlock was primarily driven by lower returns on fixed
maturities and a full year of activity from the business
acquired in 2008, which produce a lower ROA as they are
primarily mutual fund businesses.
|
|
|
The decrease in Institutionals ROA, excluding realized
gains (losses), is primarily due to lower yields on investments.
|
40
|
|
|
The decrease in Individual Lifes after-tax margin,
excluding realized gains (losses) and the effect of the DAC
Unlock, was primarily due to higher DAC amortization rate,
partially offset by lower effective tax rate and lower operating
expenses.
|
Year
ended December 31, 2008 compared to year ended
December 31, 2007
|
|
|
The decrease in Retail Individual annuity ROA,
excluding realized gains (losses) and the effect of the DAC
Unlock, reflects the write-off of goodwill, lower limited
partnership and other alternative investment income, and the net
effect of lower fees.
|
|
|
The decrease in Retirement Plans ROA, excluding realized gains
(losses) and the effect of the DAC Unlock, was primarily driven
by an increase in assets under management due to the acquired
rights to service $18.7 billion in mutual funds, comprised
of $15.8 billion in mutual funds from Sun Life Retirement
Services, Inc., and $2.9 billion in mutual funds from
Princeton Retirement Group, both of which closed in the first
quarter of 2008. The acquired blocks of assets produce a lower
ROA as they are comprised of mutual fund assets and assets under
administration as opposed to traditional annuity contracts. Also
contributing to the decrease was lower yields on fixed maturity
investments and a decline in limited partnership and other
alternative investments income, as well as higher service and
technology costs. Partially offsetting these decreases were tax
benefits primarily associated with DRD.
|
|
|
The decrease in Institutionals ROA, excluding realized
gains (losses), is primarily due to a decline in limited
partnership and other alternative investment income. The
decrease is also due to unfavorable mortality and lower yields
on fixed maturity investments.
|
|
|
The decrease in Individual Lifes after-tax margin,
excluding realized gains (losses) and the effect of the DAC
Unlock, was primarily due to unfavorable mortality expense,
partially offset by lower DAC amortization rate.
|
RETAIL
Operating
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Fee income and other
|
|
$
|
2,117
|
|
|
$
|
2,681
|
|
|
$
|
3,039
|
|
|
|
|
|
Earned premiums
|
|
|
(7
|
)
|
|
|
(4
|
)
|
|
|
(62
|
)
|
|
|
|
|
Net investment income
|
|
|
756
|
|
|
|
755
|
|
|
|
810
|
|
|
|
|
|
Net realized capital losses
|
|
|
(491
|
)
|
|
|
(1,911
|
)
|
|
|
(381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues(1)
|
|
|
2,375
|
|
|
|
1,521
|
|
|
|
3,406
|
|
|
|
|
|
Benefits, losses, and loss adjustment expenses
|
|
|
1,374
|
|
|
|
1,008
|
|
|
|
820
|
|
|
|
|
|
Insurance operating costs and other expenses
|
|
|
972
|
|
|
|
1,124
|
|
|
|
1,160
|
|
|
|
|
|
Amortization of deferred policy acquisition costs and present
value of future profits
|
|
|
3,239
|
|
|
|
1,347
|
|
|
|
404
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
5,585
|
|
|
|
3,663
|
|
|
|
2,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(3,210
|
)
|
|
|
(2,142
|
)
|
|
|
1,022
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(1,281
|
)
|
|
|
(894
|
)
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(2)
|
|
$
|
(1,929
|
)
|
|
$
|
(1,248
|
)
|
|
$
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Individual variable annuity account values
|
|
$
|
84,679
|
|
|
$
|
74,578
|
|
|
$
|
119,071
|
|
|
|
|
|
Individual fixed annuity and other account values(3)
|
|
|
12,110
|
|
|
|
11,278
|
|
|
|
10,243
|
|
|
|
|
|
Other retail products account values
|
|
|
|
|
|
|
398
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Account Values
|
|
$
|
96,789
|
|
|
$
|
86,254
|
|
|
$
|
129,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail mutual fund assets under management
|
|
|
42,829
|
|
|
|
31,032
|
|
|
|
48,383
|
|
|
|
|
|
Other mutual fund assets under management
|
|
|
1,202
|
|
|
|
1,678
|
|
|
|
2,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mutual fund assets under management
|
|
|
44,031
|
|
|
|
32,710
|
|
|
|
50,496
|
|
|
|
|
|
Total assets under management
|
|
$
|
140,820
|
|
|
$
|
118,964
|
|
|
$
|
180,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account Value and Assets Under Management Roll-Forward
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Retail Individual Variable Annuities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, beginning of period
|
|
$
|
74,578
|
|
|
$
|
119,071
|
|
|
$
|
114,365
|
|
|
|
|
|
Net flows
|
|
|
(7,122
|
)
|
|
|
(6,235
|
)
|
|
|
(2,733
|
)
|
|
|
|
|
Change in market value and other
|
|
|
17,223
|
|
|
|
(38,258
|
)
|
|
|
7,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, end of period
|
|
$
|
84,679
|
|
|
$
|
74,578
|
|
|
$
|
119,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Mutual Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management, beginning of period
|
|
$
|
31,032
|
|
|
$
|
48,383
|
|
|
$
|
38,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
2,004
|
|
|
|
2,840
|
|
|
|
5,545
|
|
|
|
|
|
Change in market value and other
|
|
|
9,793
|
|
|
|
(20,191
|
)
|
|
|
4,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management, end of period
|
|
$
|
42,829
|
|
|
$
|
31,032
|
|
|
$
|
48,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Spread
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Individual Annuity
|
|
|
20 bps
|
|
|
|
72 bps
|
|
|
|
173 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense Ratios
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Individual Variable Annuities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General insurance expense ratio (individual annuity)
|
|
|
21.0 bps
|
|
|
|
21.0 bps
|
|
|
|
17.9 bps
|
|
|
|
|
|
DAC amortization ratio (individual annuity)(4)
|
|
|
692.2
|
%
|
|
|
164.0
|
%
|
|
|
25.4
|
%
|
|
|
|
|
DAC amortization ratio (individual annuity) excluding DAC
unlock(4),(5)
|
|
|
62.4
|
%
|
|
|
50.9
|
%
|
|
|
49.4
|
%
|
|
|
|
|
|
|
|
(1) |
|
For the year ended December 31, 2008, the transition impact
related to the adoption of fair value guidance was a reduction
in revenues of $616. For further discussion of the fair value
guidance transition impact, refer to Note 3 in the Notes to
the Consolidated Financial Statements. |
|
(2) |
|
For the year ended December 31, 2008, the transition impact
related to the fair value guidance was a reduction in net income
of $209. For further discussion of the fair value guidance
transition impact, refer to Note 3 in the Notes to the
Consolidated Financial Statements. |
|
(3) |
|
Includes policyholders balances for investment contracts
and reserves for future policy benefits for insurance contracts |
|
(4) |
|
Excludes the effects of realized gains and losses. |
|
(5) |
|
See Unlock in the Critical Accounting Estimates section of the
MD&A. |
Retail focuses on the savings and retirement needs of the
growing number of individuals who are preparing for retirement,
or have already retired, through the sale of individual variable
and fixed annuities, mutual funds and other investment products.
42
Year
ended December 31, 2009 compared to the year ended
December 31, 2008
Net loss increased primarily as a result of the write-off of DAC
related to the variable annuity business reinsured to an
affiliated captive reinsurer; as well as lower fee income driven
by a decrease in average account values.
For further discussion of the fair value guidance transition
impact, see Note 3 in the Notes to the Consolidated
Financial Statements. For further discussion of the 2009 and
2008 DAC Unlocks, see the Critical Accounting Estimates section
of the MD&A. The following other factors contributed to the
changes in net loss:
|
|
|
|
|
Fee income and other
|
|
|
|
Fee income and other decreased $564 primarily as a result of
lower variable annuity and mutual fund fee income due to a
decline in average account values. Average variable annuity
account values declined from $99.8 billion in 2008 to $77
billion in 2009 driven by net outflows of $7.1 billion during
2009 as well as the effect of the equity market declines. Net
outflows were driven by surrender activity resulting from the
aging of the variable annuity in-force block of business; lower
deposits driven by increased competition, particularly
competition related to guaranteed living benefits, and
volatility in the equity markets. Average retail mutual fund
assets under management declined from $42.4 billion to
$35.5 billion driven primarily by the effect of the equity
market declines, partially offset by net flows of $2.0 billion
during 2009.
|
Net investment income
|
|
|
|
Net investment income in 2009 was relatively consistent with
2008 as increased derivative income and an increase in general
account assets was largely offset by a greater percentage of
assets in short-term investments, lower yields on fixed
maturities and greater losses on limited partnerships and other
alternative investments..
|
Net investment spread
|
|
|
|
The drop in net investment spread is primarily related to lower
earnings on fixed maturities and lower partnership returns,
|
Realized capital losses
|
|
|
|
Net realized capital losses decreased as a result of the
recognition of $1.5 billion of gains on GMWB derivatives in 2009
compared with losses of $631 in 2008; the transition impact
related to the adoption of fair value accounting guidance, which
resulted in losses of $616 in 2008; and impairment losses of
$263 in 2009 compared with $474 in 2008. Partially offsetting
these items were losses of $733 in 2009 related to the
Companys macro hedge program compared with gains of $40 in
2008; losses of $183 related to the affiliated captive
reinsurance transaction and net losses on sales of $329 in 2009
compared with net losses of $31 in 2008.
|
Benefits, losses and loss adjustment expenses
|
|
|
|
Benefits, losses and loss adjustment expenses increased
primarily as a result of the net impact of the Unlocks over the
last twelve months, which increased the benefit ratio used in
the calculation of GMDB reserves.
|
Insurance operating costs and other expenses
|
|
|
|
Insurance operating costs and other expenses decreased primarily
as a result of lower asset based trail commissions due to equity
market declines as well as ongoing efforts to actively reduce
operating expenses.
|
General insurance expense ratio
|
|
|
|
The general insurance expense ratio has remained flat as a
result of managements efforts to reduce expenses, offset
by a decline in the average asset base.
|
Amortization of DAC
|
|
|
|
Amortization of DAC increased primarily due to the write-off of
DAC related to the variable annuity business reinsured to an
affiliated captive reinsurer as well as a higher individual
annuity DAC amortization rate in 2009 as compared to 2008 due
primarily to Unlock assumption changes made in 2008 and 2009 and
lower gross profits in 2009. Additionally, the adoption of fair
value
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
accounting guidance at the beginning of the first quarter of
2008 resulted in a DAC benefit.
|
DAC amortization ratio, excluding DAC Unlocks
|
|
|
|
The Retail DAC amortization ratio (Individual Annuity) excluding
realized losses, DAC Unlocks including the Unlock of DAC related
to the variable annuity business reinsured to an affiliated
captive reinsurer increased due to the lower fee income due to
declines in average account value and lower net investment
income due to a greater percentage of fixed maturities being
held in short-term investments and lower returns on limited
partnerships and other alternative investments.
|
Income tax expense (benefit)
|
|
|
|
The income tax benefit is primarily due to the pre-tax losses
driven by the factors discussed previously. 2009 included a
higher DRD benefit than 2008. The difference from a 35% tax rate
is primarily due to the recognition of tax benefits associated
with the DRD and foreign tax credits.
|
Year
ended December 31, 2008 compared to the year ended
December 31, 2007
Net income decreased primarily as a result of increased realized
capital losses, the impact of the 2008 Unlock charge, the
impairment of goodwill attributed to the individual annuity line
of business and the effect of equity market declines on variable
annuity and mutual fund fee income. The following other factors
also contributed to the changes in net income:
|
|
|
|
|
Fee income and other
|
|
|
|
Fee income and other decreased primarily as a result of lower
variable annuity fee income of $342 due to a decline in average
account values. The decrease in average variable annuity account
values can be attributed to market depreciation of $38.3 billion
and net outflows of $6.2 billion during the year. Net outflows
were driven by surrender activity due to the aging of the
variable annuity in-force block of business, volatility in the
equity markets and increased sales competition, particularly
competition related to guaranteed living benefits. Also
contributing to the decrease in fee income was lower mutual fund
fees due to declining assets under management primarily driven
by market depreciation of $20.1 billion, partially offset by
$2.8 billion of net flows.
|
Earned Premiums
|
|
|
|
Earned Premiums increased primarily due to an increase in life
contingent premiums combined with a decrease in reinsurance
premiums as a result of the lapsing of business covered by
reinsurance and the significant decline in the equity markets.
|
Net investment income
|
|
|
|
Net investment income was lower primarily due to a $77 decline
in income from limited partnerships and other alternative
investments, combined with lower yields on fixed maturity
investments due to interest rate declines, partially offset by
an increase in general account assets from increased fixed
account sales.
|
Net investment spread
|
|
|
|
Net investment spread decreased primarily due to negative
earnings on limited partnership and other alternative investment
income in 2008 compared to strong earnings in these classes in
2007 and lower yields on fixed maturities, partially offset by
reduced average credited rates.
|
Realized capital losses
|
|
|
|
Net realized capital losses increased primarily as a result of
losses on GMWB derivatives of $631 in 2008 compared with losses
of $286 million in 2007; the transition impact related to
the adoption of fair value accounting guidance, which resulted
in losses of $616 in 2008; and impairments of $474 in 2008
compared with $87 in 2007.
|
44
|
|
|
|
|
Benefits, losses and loss adjustment expenses
|
|
|
|
Benefits, losses and loss adjustment expenses increased
primarily as a result of the impact of the 2008 Unlock which
increased the benefit ratio used in the calculation of GMDB
reserves.
|
Insurance operating costs and other expenses
|
|
|
|
Insurance operating costs and other expenses decreased primarily
as a result of lower non deferrable asset based trail
commissions due to equity market declines.
|
General insurance expense ratio
|
|
|
|
General insurance expense ratio increased from 2007 to 2008 due
to the impact of a declining asset base on relatively consistent
expenses
|
Amortization of DAC
|
|
|
|
Amortization of DAC increased, primarily due to the impact of
the 2008 Unlock charge as compared to the 2007 Unlock benefit,
offset by DAC amortization benefits associated with increased
realized capital losses. This was partially offset by a DAC
benefit associated with the adoption of fair value accounting
guidance at the beginning of the first quarter of 2008.
|
DAC amortization ratio, excluding DAC Unlocks
|
|
|
|
DAC amortization ratio (individual annuity), excluding the
effects of the DAC Unlock and realized losses, increased in 2008
as compared to 2007 due to the write-off of goodwill and changes
in assumptions made as part of the 2007 Unlock.
|
Goodwill impairment
|
|
|
|
As a result of testing performed during the fourth quarter of
2008, all goodwill attributed to the individual annuity business
in Retail was deemed to be impaired and was written off. For
further discussion of this impairment, see the Critical
Accounting Estimates section of the MD&A.
|
Income tax expense (benefit)
|
|
|
|
The effective tax rate increased from 21% in 2007 to 42% in 2008
primarily due to losses before income taxes in 2008 compared to
pre-tax earnings in 2007. The impact of DRD and other permanent
differences caused an increase in the tax benefit to above 35%
on the 2008 pre-tax loss and a decrease in the tax expense on
the 2007 pre-tax income.
|
INDIVIDUAL
LIFE
Operating
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Fee income and other
|
|
$
|
989
|
|
|
$
|
857
|
|
|
$
|
827
|
|
Earned premiums
|
|
|
(87
|
)
|
|
|
(65
|
)
|
|
|
(56
|
)
|
Net investment income
|
|
|
304
|
|
|
|
308
|
|
|
|
331
|
|
Net realized capital losses
|
|
|
(144
|
)
|
|
|
(247
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,062
|
|
|
|
853
|
|
|
|
1,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and loss adjustment expenses
|
|
|
584
|
|
|
|
569
|
|
|
|
510
|
|
Insurance operating costs and other expenses
|
|
|
185
|
|
|
|
201
|
|
|
|
188
|
|
Amortization of deferred policy acquisition costs and present
value of future profits
|
|
|
312
|
|
|
|
166
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
1,081
|
|
|
|
936
|
|
|
|
815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(19
|
)
|
|
|
(83
|
)
|
|
|
260
|
|
Income tax expense (benefit)
|
|
|
(27
|
)
|
|
|
(36
|
)
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8
|
|
|
$
|
(47
|
)
|
|
$
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Account Values
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable universal life insurance
|
|
$
|
5,766
|
|
|
$
|
4,802
|
|
|
$
|
7,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total account values
|
|
$
|
11,034
|
|
|
$
|
9,733
|
|
|
$
|
11,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance In-force
|
|
|
|
|
|
|
|
|
|
|
|
|
Total life insurance in-force
|
|
$
|
201,366
|
|
|
$
|
191,861
|
|
|
$
|
175,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Spread
|
|
|
82 bps
|
|
|
|
87 bps
|
|
|
|
131 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death Benefits
|
|
$
|
308
|
|
|
$
|
320
|
|
|
$
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Life provides life insurance solutions to a wide
array of business intermediaries to solve the wealth protection,
accumulation and transfer needs of their affluent, emerging
affluent and small business insurance clients.
Year
ended December 31, 2009 compared to the year ended
December 31, 2008
Net income improvements are primarily attributed to lower net
realized capital losses. The following other factors contributed
to the changes in net income:
|
|
|
|
|
Fee income and other
|
|
|
|
Fee income and other increased primarily due to the impact of
the 2009 Unlock amortization of unearned revenue reserves of $83
and increased cost of insurance charges of $40 as a result of
growth in guaranteed universal life insurance in-force,
partially offset by lower variable life fees as a result of
equity market declines. For further discussion on the Unlock,
see Unlock in the Critical Accounting Estimates section of the
MD&A.
|
Earned premiums
|
|
|
|
Earned premiums, which include premiums for ceded reinsurance,
decreased primarily due to increased ceded reinsurance premiums
due to aging and growth in life insurance in-force.
|
Net investment spread
|
|
|
|
Net investment spread was lower due to a $4 decline in
investment income and a $3 increase in interest credited.
Interest credited increased due primarily to increased average
account values, partially offset by a reduction in the average
credited rate of 19 bps.
|
Net realized capital losses
|
|
|
|
Net realized capital losses improved primarily related to lower
losses from impairments. For further discussion on impairments,
see Other-Than-Temporary Impairments within the Investment
Credit Risk Section of the MD&A.
|
Benefits, losses and loss adjustment expenses
|
|
|
|
Benefits, losses and loss adjusted expenses increased primarily
related to reserve increases on secondary guaranteed universal
life products due to aging and growth in life insurance
in-force, partially offset by favorable mortality experience
|
Death benefits
|
|
|
|
Death benefits decreased due to favorable mortality volatility
partially offset by an increase in net amount at risk for
variable universal life policies caused by equity market
declines.
|
Insurance operating costs and other expenses
|
|
|
|
Insurance operating costs and other expenses decreased primarily
as a result of continued active expense management efforts.
|
Amortization of DAC
|
|
|
|
Amortization of DAC increased primarily as a result of the
additional Unlock charges in 2009 compared to 2008. DAC
amortization had a partial offset in amortization of unearned
revenue reserve, which drove the increase in fee income noted
above.
|
Income tax expense (benefit)
|
|
|
|
Income tax expense (benefit) decreased as a result of improved
earnings before income taxes primarily due to lower net realized
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
capital losses and the effects of the 2009 Unlocks. The
effective tax rate for 2009 differs from the statutory rate of
35% primarily due to the recognition of the DRD.
|
Year
ended December 31, 2008 compared to the year ended
December 31, 2007
Net income decreased for the year ended December 31, 2008,
driven primarily by significantly higher net realized capital
losses and the impacts of the Unlock in the third quarter of
2008 as compared to the third quarter of 2007. For further
discussion on the Unlock, see Unlock in the Critical Accounting
Estimates section of the MD&A. The following other factors
contributed to the changes in net income:
|
|
|
|
|
Fee income and other
|
|
|
|
Fee income and other increased primarily due to an increase in
cost of insurance charges of $47 as a result of growth in
guaranteed universal life insurance in-force and fees on higher
surrenders of $12 due to internal exchanges from non-guaranteed
universal life insurance to variable universal life insurance.
Partially offsetting these increases are the impacts of the 2008
and 2007 Unlocks as well as lower variable life fees as a result
of equity market declines.
|
Earned premiums
|
|
|
|
Earned premiums, which include premiums for ceded reinsurance,
decreased primarily due to increased ceded reinsurance premiums
due to life insurance in-force growth.
|
Net investment income
|
|
|
|
Net investment income decreased primarily due to lower
investment income from limited partnership and other alternative
investments, lower yields on fixed maturity investments and
reduced net investment income associated with a more efficient
capital approach for our secondary guarantee universal life
business, which released assets supporting capital and the
related net investment income earned on those assets, (described
further in the Outlook section), partially offset by
growth in general account values.
|
Net investment spread
|
|
|
|
Net investment spread decreased attributable to lower
partnership returns of 57 bps and lower maturity income
returns, partially offset by a reduction in the credited rate of
24 bps.
|
Net realized capital losses
|
|
|
|
Net realized capital losses increased primarily related to
losses from impairments. For further discussion on impairments,
see Other-Than-Temporary Impairments within the Investment
Credit Risk Section of the MD&A.
|
Benefits, losses and loss adjustment expenses
|
|
|
|
Benefits, losses and loss adjustment expenses increased as a
result of higher death benefits consistent with a larger life
insurance in-force and unfavorable mortality, as well as the
impact of the 2008 Unlock.
|
Death benefits
|
|
|
|
Death benefits increased, primarily due to growth of life
insurance in-force and unfavorable mortality.
|
Insurance operating costs and other expenses
|
|
|
|
Insurance operating costs and other increased less than the
growth of in- force business as a result of active expense
management efforts.
|
Amortization of DAC
|
|
|
|
Amortization of DAC increased primarily as a result of the
unlock expense in 2008 as compared to the unlock benefit in
2007, partially offset by reduced DAC amortization primarily
attributed to net realized capital losses. This increase had a
partial offset in amortization of unearned revenue reserve
included in fee income.
|
Income tax expense (benefit)
|
|
|
|
Income tax benefits were a result of lower income before income
taxes primarily due to an increase in realized capital losses
and DAC amortization.
|
47
RETIREMENT
PLANS
Operating
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Fee income and other
|
|
$
|
321
|
|
|
$
|
334
|
|
|
$
|
238
|
|
Earned premiums
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
Net investment income
|
|
|
315
|
|
|
|
342
|
|
|
|
355
|
|
Net realized capital losses
|
|
|
(333
|
)
|
|
|
(272
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
306
|
|
|
|
408
|
|
|
|
556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and loss adjustment expenses
|
|
|
269
|
|
|
|
271
|
|
|
|
249
|
|
Insurance operating costs and other expenses
|
|
|
346
|
|
|
|
335
|
|
|
|
170
|
|
Amortization of deferred policy acquisition costs and present
value of future profits
|
|
|
56
|
|
|
|
91
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
671
|
|
|
|
697
|
|
|
|
477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(365
|
)
|
|
|
(289
|
)
|
|
|
79
|
|
Income tax expense (benefit)
|
|
|
(143
|
)
|
|
|
(132
|
)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(222
|
)
|
|
$
|
(157
|
)
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management
|
|
|
|
|
|
|
|
|
|
|
|
|
403(b)/457 account values
|
|
|
11,116
|
|
|
|
10,242
|
|
|
|
12,363
|
|
401(k) account values
|
|
|
16,142
|
|
|
|
11,956
|
|
|
|
14,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total account values(1)
|
|
|
27,258
|
|
|
|
22,198
|
|
|
$
|
27,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403(b)/457 mutual fund assets under management
|
|
|
245
|
|
|
|
99
|
|
|
|
26
|
|
401(k) mutual fund assets under management(2)
|
|
|
16,459
|
|
|
|
14,739
|
|
|
|
1,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mutual fund assets under management
|
|
$
|
16,704
|
|
|
$
|
14,838
|
|
|
$
|
1,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets under management
|
|
$
|
43,962
|
|
|
$
|
37,036
|
|
|
$
|
28,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets under administration 401(k)(3)
|
|
$
|
5,588
|
|
|
$
|
5,122
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account Value and Assets Under Management Rollforward
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plans Group Annuities
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, beginning of period
|
|
$
|
22,198
|
|
|
$
|
27,094
|
|
|
$
|
23,575
|
|
Net flows
|
|
|
563
|
|
|
|
2,418
|
|
|
|
1,669
|
|
Change in market value and other
|
|
|
4,497
|
|
|
|
(7,314
|
)
|
|
|
1,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account value, end of period
|
|
$
|
27,258
|
|
|
$
|
22,198
|
|
|
$
|
27,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Plans Mutual Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management, beginning of period
|
|
|
14,838
|
|
|
|
1,454
|
|
|
|
1,140
|
|
Net sales/(redemptions)
|
|
|
(1,705
|
)
|
|
|
(446
|
)
|
|
|
103
|
|
Acquisitions
|
|
|
|
|
|
|
18,725
|
|
|
|
|
|
Change in market value and other
|
|
|
3,571
|
|
|
|
(4,895
|
)
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management, end of period
|
|
$
|
16,704
|
|
|
$
|
14,838
|
|
|
$
|
1,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Spread
|
|
|
66 bps
|
|
|
|
92 bps
|
|
|
|
162 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes policyholder balances for investment contracts and
reserves for future policy benefits for insurance contracts. |
|
(2) |
|
During the year ended December 31, 2008, Life acquired the
rights to service mutual fund assets from Sun Life Retirement
Services, Inc., and Princeton Retirement Group. |
48
|
|
|
(3) |
|
During the year ended December 31, 2008, Life acquired the
rights to service assets under administration (AUA)
from Princeton Retirement Group. Servicing revenues from AUA are
based on the number of plan participants and do not vary
directly with asset levels. As such, they are not included in
AUM upon which asset based returns are calculated. |
The Retirement Plans segment primarily offers customized wealth
creation and financial protection for corporate, government and
tax-exempt employers through its two business units, 403(b)/457
and 401(k).
Year
ended December 31, 2009 compared to the year ended
December 31, 2008
Net loss in Retirement Plans increased due to an increase in net
realized capital losses, lower net investment income and lower
fee income. For further discussion of the DAC Unlock, see
Unlocks within the Critical Accounting Estimates section of the
MD&A. The following other factors contributed to the
changes in net loss:
|
|
|
|
|
Fee income and other
|
|
|
|
Fee income and other decreased primarily due to lower average
account values. Despite equity market improvements during the
last nine months of 2009, account values have not returned to
early 2008 levels. Net flows in group annuities and net sales in
mutual funds have declined due primarily to a few large case
surrenders.
|
Net investment income
|
|
|
|
Net investment income decreased primarily as a result of lower
yields on fixed maturity investments partially offset by an
increase in derivative income.
|
Net investment spread
|
|
|
|
The decline in net investment spread is attributable to lower
fixed income returns of 34 bps and lower partnership
returns of 3 bps, partially offset by a reduction in
credited rates of 10 bps.
|
Realized capital gains and losses
|
|
|
|
Net realized capital losses increased primarily as a result of
realized losses of $56 on non-qualifying derivatives in 2009
compared with $14 of gains in 2008 and mortgage valuation
allowances of $38 in 2009, partially offset by impairment losses
of $178 in 2009 compared with $243 in 2008.
|
Insurance operating costs and other expenses
|
|
|
|
Insurance operating costs and other expenses increased primarily
due to a full year of operating expenses associated with the
businesses acquired in the latter part of the first quarter of
2008 and lower deferrable acquisition expenses unable to be
deferred due to low sales levels, partially offset by expense
management initiatives.
|
Amortization of DAC
|
|
|
|
Amortization of deferred policy acquisition costs decreased as a
result of lower gross profits in 2009 than 2008.
|
Income tax expense (benefit)
|
|
|
|
The income tax benefit is greater than the prior year income tax
benefit due to a higher loss before income taxes primarily due
to the income items discussed above. The effective tax rate
differs from the statutory rate of 35% primarily due to the
recognition of the DRD.
|
Year
ended December 31, 2008 compared to the year ended
December 31, 2007
Net income in Retirement Plans decreased due to higher net
realized capital losses, the higher DAC Unlock expense in 2008
as compared to 2007 and increased operating expenses partially
offset by growth in fee income. For further discussion of the
DAC Unlocks, see Unlock within the Critical Accounting Estimates
section of the MD&A. The following other factors
contributed to the changes in net income:
|
|
|
|
|
Fee income and other
|
|
|
|
Fee income and other increased primarily due to $109 of fees
earned on assets relating to the acquisitions in the first
quarter of 2008. Offsetting this increase was lower annuity fees
driven by lower average account values as a result of market
depreciation of $7.3 billion, partially offset by positive net
flows of $2.4 billion over the past four quarters. Group
annuities had positive net flows
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
driven by higher deposits as a result of the expanded sales
force obtained through the 2008 acquisitions.
|
Net investment income
|
|
|
|
Net investment income declined due to a decrease in the returns
from limited partnership and other alternative investment income
of $33, partially offset by growth in general account assets.
|
Net investment spread
|
|
|
|
The decline in net investment spread is attributable to lower
limited partnership returns of 50 bps and lower fixed
income returns of 25 bps, partially offset by a reduction
in credited rates of 6 bps.
|
Realized capital gains and losses
|
|
|
|
Net realized capital losses increased primarily due to
impairment losses of $243 in 2008 compared with losses of $22 in
2007.
|
Insurance operating costs and other expenses
|
|
|
|
Insurance operating costs and other expenses increased primarily
attributable to operating expenses associated with the acquired
businesses. Also contributing to higher insurance operating
costs were higher trail commissions resulting from an aging
portfolio and higher service and technology costs.
|
Amortization of DAC
|
|
|
|
Amortization of deferred policy acquisition costs increased
primarily as a result of the higher Unlock charge in the third
quarter of 2008 of $76 as compared to the Unlock charge in the
third quarter of 2007 of $14, partially offset by DAC
amortization benefits associated with lower gross profits. For
further discussion, see Unlocks within in the Critical
Accounting Estimates section of the MD&A.
|
Income tax expense (benefit)
|
|
|
|
The income tax benefit for 2008 as compared to the prior year
periods income tax expense was due to lower income before income
taxes primarily due to increased realized capital losses and
increased tax benefits associated with the DRD.
|
INSTITUTIONAL
Operating
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Fee income and other
|
|
$
|
145
|
|
|
$
|
153
|
|
|
$
|
252
|
|
Earned premiums
|
|
|
356
|
|
|
|
894
|
|
|
|
990
|
|
Net investment income
|
|
|
817
|
|
|
|
988
|
|
|
|
1,227
|
|
Net realized capital losses
|
|
|
(738
|
)
|
|
|
(784
|
)
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
580
|
|
|
$
|
1,251
|
|
|
$
|
2,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and loss adjustment expenses
|
|
|
1,296
|
|
|
|
1,899
|
|
|
|
2,066
|
|
Insurance operating costs and other expenses
|
|
|
89
|
|
|
|
120
|
|
|
|
183
|
|
Amortization of deferred policy acquisition costs and present
value of future profits
|
|
|
17
|
|
|
|
19
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
1,402
|
|
|
|
2,038
|
|
|
|
2,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(822
|
)
|
|
|
(787
|
)
|
|
|
10
|
|
Income tax expense (benefit)
|
|
|
(295
|
)
|
|
|
(283
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(527
|
)
|
|
$
|
(504
|
)
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Account Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional account values(1)
|
|
$
|
22,110
|
|
|
$
|
23,810
|
|
|
$
|
24,828
|
|
Private Placement Life Insurance account values(2)
|
|
|
33,356
|
|
|
|
32,459
|
|
|
|
32,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund assets under management
|
|
|
4,262
|
|
|
|
2,578
|
|
|
|
3,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total account values
|
|
$
|
59,728
|
|
|
$
|
58,847
|
|
|
$
|
61,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Spread
|
|
|
|
|
|
|
|
|
|
|
|
|
Stable Value (GICs, Funding Agreements, Funding Agreement Backed
Notes and Consumer Notes)
|
|
|
(48) bps
|
|
|
|
21 bps
|
|
|
|
101 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
General insurance expense ratio
|
|
|
11.4 bps
|
|
|
|
14.2 bps
|
|
|
|
13.8 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Institutional investment product account values include
transfers from Retirement Plans of $413 and $350 from the Retail
segment during 2007. |
|
(2) |
|
Includes policyholder balances for investment contracts and
reserves for future policy benefits for insurance contracts. |
During 2009, the Company decided to not actively market or sell
certain products. As a part of that strategic initiative the
Company will no longer actively market structured settlements,
guaranteed investment products or most institutional annuities.
Prior to this change in strategy, Institutional provided
customized investment, insurance, and income solutions to select
markets. Products included PPLI owned by corporations and high
net worth individuals, institutional annuities, mutual funds
owned by institutional investors, structured settlements, stable
value contracts and individual products including income
annuities and longevity assurance.
Year
ended December 31, 2009 compared to the year ended
December 31, 2008
Net income in Institutional increased primarily due to decreased
revenue and lower net investment income, partially offset by a
decrease in net realized capital losses. The following other
factors contributed to changes in net income:
|
|
|
|
|
Earned premiums
|
|
|
|
Earned premiums decreased as ratings downgrades reduced payout
annuity sales. The decrease in earned premiums was offset by a
corresponding decrease in benefits, losses, and loss adjustment
expenses.
|
Net investment income
|
|
|
|
Net investment income declined due to lower income on fixed
maturities resulting from a decline in average rates and fixed
maturity investments, as well as an increased average asset base
of securities with greater market liquidity. This lower yield on
income was partially offset by a corresponding decrease in
interest credited on liabilities reported in benefits, losses,
and loss adjustment expenses.
|
Net investment spread
|
|
|
|
Stable Value, net investment spreads were negatively impacted by
166 bps due to lower yields on variable rate securities and
maintaining additional liquidity in the Institutional portfolios
in the form of short term and Treasury securities. In both
periods, the drop in variable rate yields was partially offset
by lower credited rates on floating rate liabilities.
|
Realized capital gains and losses
|
|
|
|
Net realized capital losses were slightly lower due to smaller
impairments
|
Benefits, losses and loss adjustment expenses
|
|
|
|
Benefits, losses and loss adjustment expenses decreased
primarily due to lower interest credited due to lower rates on
floating rate guaranteed investment products as well as an
overall lower block of business.
|
51
|
|
|
|
|
Insurance operating costs and other expenses
|
|
|
|
Insurance operating costs and other expenses decreased due to
active expense management efforts and reduced information
technology expenses.
|
General insurance expense ratio
|
|
|
|
Institutional general expense ratio decreased from 2009 as
compared to 2008 due to active expense management efforts and
reduced information technology expenses.
|
Year
ended December 31, 2008 compared to the year ended
December 31, 2007
Net income in Institutional decreased primarily due to increased
net realized capital losses and lower net investment income.
Further discussion of income is presented below:
|
|
|
|
|
Fee income and other
|
|
|
|
Fee income and other decreased primarily due to lower front-end
loads on PPLI cases during 2008. PPLI collects front-end loads
recorded in fee income, offset by corresponding premium taxes
reported in insurance operating costs and other expenses. For
2008 and 2007, PPLI deposits of $247 and $5.2 billion,
respectively, resulted in fee income due to front-end loads of
$2 and $107, respectively.
|
Earned premiums
|
|
|
|
Earned premiums decreased as compared to the prior year due to
greater amounts of life contingent business sold in 2007. The
decrease in earned premiums was offset by a corresponding
decrease in benefits, losses, and loss adjustment expenses.
|
Net investment income
|
|
|
|
Net investment income declined due to negative yields on limited
partnership and other alternative investments, lower yields on
fixed maturity investments indexed to LIBOR, and lower assets
under management. The decline in yield on fixed maturities was
largely offset by a corresponding decrease in interest credited
on liabilities reported in benefits, losses, and loss adjustment
expenses.
|
Net investment spread
|
|
|
|
Net investment spread decreased primarily due to negative
earnings on limited partnership and other alternative investment
income in 2008 compared to strong earnings in these classes in
2007 and lower yields on fixed maturities, partially offset by
reduced credited rates.
|
Realized capital gains and losses
|
|
|
|
Net realized capital losses were higher due to large impairments
|
Benefits, losses and loss adjustment expenses
|
|
|
|
Benefits, losses and loss adjustment expenses decreased
primarily due to lower changes in reserve as the result of lower
sales in life contingent business, as well as lower interest
credited on liabilities indexed to LIBOR. The decrease was
partially offset by $8 greater mortality loss.
|
Insurance operating costs and other expenses and general
insurance expense ratio
|
|
|
|
Insurance operating costs and other expenses decreased due to a
decline in premium tax, driven by reduced PPLI deposits,
partially offset by discontinued administrative system projects
and product development expenses.
|
General insurance expense ratio
|
|
|
|
Institutional general insurance expense ratio increased from
2008 as compared to 2007 due to additional product development
expenses.
|
Income tax expense (benefit)
|
|
|
|
The income tax benefit increased compared to the prior year
primarily due to a decline in income before taxes primarily due
to increased realized capital losses.
|
52
OTHER
Operating
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Fee income and other
|
|
$
|
180
|
|
|
$
|
130
|
|
|
$
|
114
|
|
Earned premiums
|
|
|
112
|
|
|
|
155
|
|
|
|
107
|
|
Net investment income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
and other
|
|
|
313
|
|
|
|
195
|
|
|
|
333
|
|
Equity securities held for trading(3)
|
|
|
343
|
|
|
|
(246
|
)
|
|
|
1
|
|
Total net investment income (loss)
|
|
|
656
|
|
|
|
(51
|
)
|
|
|
334
|
|
Net realized capital gains (losses)
|
|
|
829
|
|
|
|
(2,549
|
)
|
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues(1)
|
|
$
|
1,777
|
|
|
$
|
(2,315
|
)
|
|
$
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and loss adjustment expenses
|
|
|
193
|
|
|
|
301
|
|
|
|
337
|
|
Benefits, losses and loss adjustment expenses
returns credited on International unit-linked bonds and pension
products(3)
|
|
|
343
|
|
|
|
(246
|
)
|
|
|
1
|
|
Insurance operating costs and other expenses
|
|
|
270
|
|
|
|
172
|
|
|
|
139
|
|
Amortization of deferred policy acquisition costs and present
value of future profits
|
|
|
103
|
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
909
|
|
|
|
224
|
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
868
|
|
|
|
(2,539
|
)
|
|
|
(223
|
)
|
Income tax expense (benefit)
|
|
|
345
|
|
|
|
(836
|
)
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(2)
|
|
$
|
523
|
|
|
$
|
(1,703
|
)
|
|
$
|
(164
|
)
|
Less: Net (income) loss attributable to the noncontrolling
interest
|
|
|
(10
|
)
|
|
|
105
|
|
|
|
(7
|
)
|
Net income (loss) attributable to Hartford Life Insurance
Company
|
|
|
513
|
|
|
$
|
(1,598
|
)
|
|
$
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The transition impact related to the fair value adoption was a
reduction in revenues of $172 for Other for the year ended
December 31, 2008. For further discussion of the fair value
transition impact, refer to Note 3 in the Notes to the
Consolidated Financial Statements. |
|
(2) |
|
The transition impact related to the fair value adoption was a
reduction in net income of $102 for Other for the year ended
December 31, 2008. For further discussion of the fair value
transition impact, refer to Note 3 in the Notes to the
Consolidated Financial Statements. |
|
(3) |
|
Net investment income includes investment income and
mark-to-market
effects of equity securities, held for trading, supporting the
international variable annuity business, which are classified in
net investment income with corresponding amounts credited to
policyholders. |
The Company includes in an Other category its leveraged PPLI
product line of business; corporate items not directly allocated
to any of its reporting segments; intersegment eliminations,
guaranteed minimum income benefit (GMIB), guaranteed
minimum death benefit. (GMDB), guaranteed minimum
accumulation benefit (GMAB) and guaranteed minimum
withdrawal benefit (GMWB) and reinsurance assumed
from an affiliate and subsequently ceded to another related
party, certain group benefit products, including group life and
group disability insurance that is directly written by the
Company and for which nearly half is ceded to its parent, HLA,
as well as other International operations.
Year
ended December 31, 2009 compared to the year ended
December 31, 2008
|
|
|
|
|
Earned Premiums
|
|
|
|
Earned premiums decreased as compared to the prior year as a
result of ceded premiums at inception of October 1st reinsurance
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
transaction with an affiliated captive reinsurer. Refer to
Note 16 Transaction with Affiliates.
|
Net investment income
securities available for sale and other
|
|
|
|
Net investment income on securities available-for-sale and other
increased as compared to the prior year period due to lower
losses on limited partnerships and other alternative
investments.
|
Net realized capital gains
|
|
|
|
Net realized capital gains increased due to gains on the
derivates resulting from assumed GMIB/AB/WB reinsurance through
the first nine months of 2009. Partially offsetting these gains
was a loss of $51 attributed to the sale of a joint venture
recorded in fourth quarter. Refer to Note 18 Sale of Joint
Venture Interest in ICATU Hartford Seguros, S.A.
|
Insurance operating costs and other expenses
|
|
|
|
Insurance operating costs and other expenses increased due to
restructuring costs that are severance benefits and other costs
associated with the suspension of sales in the Companys
European operations and severance and other benefits associated
with the restructuring of the Companys domestic insurance
operations as well as interest expense for the structured
financing transaction with HLIKK that was initiated in the
fourth quarter of 2008. See Note 17 for further details on the
Companys restructuring, severance and other costs and
restructurings within other Life segments and Note 16 for
further details on the structured financing transaction with
HLIKK.
|
Benefits, losses and loss adjustment expenses
|
|
|
|
The decrease in benefits, losses and loss adjustment expenses
relates to reinsurance transaction with an affiliated captive
reinsurer. Refer to Note 16 Transaction with Affiliate for
further discussion.
|
Year
ended December 31, 2008 compared to the year ended
December 31, 2007
|
|
|
|
|
Net investment income
securities
available-for-sale
and other
|
|
|
|
Net investment income declined due to a decrease in investment
yields on fixed maturities and declines in limited partnership
and other alternative investment income.
|
Net realized capital gains (losses)
|
|
|
|
Net realized capital losses increased due to decreased
valuations on the embedded derivates resulting from GMIB/AB/WB
reinsurance.
|
Benefits, losses and loss adjustment expenses
|
|
|
|
The decrease in benefits, losses and loss adjustment expenses
for the year ended December 31, 2008 was primarily due to a
charge recorded in 2007 of $55, after-tax, for regulatory
matters.
|
Insurance operating costs and other expenses
|
|
|
|
Insurance operating costs and other expenses decreased,
primarily due to a charge of $21 for regulatory matters in the
second quarter of 2007, a decline in 2008 expenses now allocated
to other segments partially offset by increased tax expenses due
to a state tax credit that was recorded in the third quarter of
2007.
|
INVESTMENT
RESULTS
Composition
of Invested Assets
The primary investment objective of the Company is to maximize
economic value, consistent with acceptable risk parameters,
including the management of credit risk and interest rate
sensitivity of invested assets, while generating sufficient
after-tax income to support policyholder and corporate
obligations. Investment strategies are developed based on a
variety of factors including business needs, regulatory
requirements and tax considerations.
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Fixed maturities, AFS, at fair value
|
|
$
|
40,403
|
|
|
|
75.6
|
%
|
|
$
|
39,560
|
|
|
|
71.9
|
%
|
Equity securities, AFS, at fair value
|
|
|
419
|
|
|
|
0.8
|
%
|
|
|
434
|
|
|
|
0.8
|
%
|
Mortgage loans
|
|
|
4,304
|
|
|
|
8.0
|
%
|
|
|
4,896
|
|
|
|
8.9
|
%
|
Policy loans, at outstanding balance
|
|
|
2,120
|
|
|
|
4.0
|
%
|
|
|
2,154
|
|
|
|
3.9
|
%
|
Limited partnerships and other alternative investments
|
|
|
759
|
|
|
|
1.4
|
%
|
|
|
1,033
|
|
|
|
1.9
|
%
|
Other investments(1)
|
|
|
338
|
|
|
|
0.6
|
%
|
|
|
1,237
|
|
|
|
2.2
|
%
|
Short-term investments
|
|
|
5,128
|
|
|
|
9.6
|
%
|
|
|
5,742
|
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments excluding equity securities, trading
|
|
$
|
53,471
|
|
|
|
100.0
|
%
|
|
$
|
55,056
|
|
|
|
100.0
|
%
|
Equity securities, trading, at fair value(2)
|
|
|
2,443
|
|
|
|
|
|
|
|
1,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
55,914
|
|
|
|
|
|
|
$
|
56,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily relates to derivative instruments. |
|
(2) |
|
These assets primarily support the European variable annuity
business. Changes in these balances are also reflected in the
respective liabilities. |
Total investments decreased primarily due to declines in
short-term investments largely due to funding liability
outflows, mortgage loans resulting from valuation allowances and
maturities, and limited partnerships and other alternative
investments attributable to hedge fund redemptions and negative
re-valuations of the underlying investments. These declines were
offset by an increase in equity securities, trading, primarily
due to positive cash flows generated from sales and deposits of
the U.K. unit-linked and pension product foreign currency gains
attributable to the appreciation of the British pound as
compared to the U.S. dollar and positive market performance
of the underlying investment funds.
Net
Investment Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Before-tax)
|
|
Amount
|
|
|
Yield(1)
|
|
|
Amount
|
|
|
Yield(1)
|
|
|
Amount
|
|
|
Yield(1)
|
|
|
Fixed maturities(2)
|
|
$
|
2,094
|
|
|
|
4.5
|
%
|
|
$
|
2,458
|
|
|
|
5.0
|
%
|
|
$
|
2,714
|
|
|
|
5.9
|
%
|
Equity securities, AFS
|
|
|
43
|
|
|
|
8.3
|
%
|
|
|
65
|
|
|
|
9.3
|
%
|
|
|
54
|
|
|
|
9.9
|
%
|
Mortgage loans
|
|
|
232
|
|
|
|
4.9
|
%
|
|
|
251
|
|
|
|
5.6
|
%
|
|
|
227
|
|
|
|
6.4
|
%
|
Policy loans
|
|
|
136
|
|
|
|
6.3
|
%
|
|
|
136
|
|
|
|
6.5
|
%
|
|
|
132
|
|
|
|
6.5
|
%
|
Limited partnerships and other alternative investments
|
|
|
(171
|
)
|
|
|
(18.1
|
)%
|
|
|
(224
|
)
|
|
|
(16.3
|
)%
|
|
|
112
|
|
|
|
13.0
|
%
|
Other(3)
|
|
|
242
|
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
(120
|
)
|
|
|
|
|
Investment expense
|
|
|
(71
|
)
|
|
|
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income excluding equity securities,
trading
|
|
$
|
2,505
|
|
|
|
4.2
|
%
|
|
$
|
2,588
|
|
|
|
4.6
|
%
|
|
$
|
3,056
|
|
|
|
6.0
|
%
|
Equity securities, trading
|
|
|
343
|
|
|
|
|
|
|
|
(246
|
)
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income
|
|
$
|
2,848
|
|
|
|
|
|
|
$
|
2,342
|
|
|
|
|
|
|
$
|
3,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Yields calculated using annualized net investment income before
investment expenses divided by the monthly average invested
assets at cost, amortized cost, or adjusted carrying value, as
applicable, excluding collateral received associated with the
securities lending program and consolidated variable interest
entity noncontrolling |
55
|
|
|
|
|
interests. Included in the fixed maturity yield is other, which
primarily relates to fixed maturities (see footnote (3)
below). Included in the total net investment income yield is
investment expense. |
|
(2) |
|
Includes net investment income on short-term investments. |
|
(3) |
|
Includes income from derivatives that qualify for hedge
accounting and hedge fixed maturities. Also, includes fees
associated with securities lending activities of $4, $60 and
$84, respectively, for the years ended December 31, 2009,
2008 and 2007. The income from securities lending activities is
included within fixed maturities. |
Year
ended December 31, 2009 compared to the year ended
December 31, 2008
Total net investment income increased primarily due to equity
securities, trading resulting from improved market performance
of the underlying investment funds supporting the U.K.
unit-linked and pension product.
Year
ended December 31, 2008 compared to the year ended
December 31, 2007
Total net investment income decreased primarily due to a
negative yield on limited partnerships and other alternative
investments and a lower yield on variable rate securities due to
declines in short-term interest rates, increased allocation to
lower yielding U.S. Treasuries and short-term investments.
The decline in limited partnerships and other alternative
investments yield was largely due to negative returns on hedge
funds and real estate partnerships as a result of the lack of
liquidity in the financial markets and a wider credit spread
environment. Also contributing to the decline in net investment
income was lower income on equity securities, trading due to a
decline in the value of the underlying investment funds
supporting the U.K. unit-linked and pension product as a result
of negative market performance year over year.
Net
Realized Capital Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(Before-tax)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Gross gains on sales
|
|
$
|
364
|
|
|
$
|
383
|
|
|
$
|
187
|
|
Gross losses on sales
|
|
|
(828
|
)
|
|
|
(398
|
)
|
|
|
(142
|
)
|
Net OTTI losses recognized in earnings
|
|
|
(1,192
|
)
|
|
|
(1,888
|
)
|
|
|
(339
|
)
|
Japanese fixed annuity contract hedges, net(1)
|
|
|
47
|
|
|
|
64
|
|
|
|
18
|
|
Periodic net coupon settlements on credit derivatives/Japan
|
|
|
(33
|
)
|
|
|
(34
|
)
|
|
|
(40
|
)
|
Fair value measurement transition impact
|
|
|
|
|
|
|
(798
|
)
|
|
|
|
|
Results of variable annuity hedge program
|
|
|
|
|
|
|
|
|
|
|
|
|
GMWB derivatives, net
|
|
|
1,505
|
|
|
|
(687
|
)
|
|
|
(286
|
)
|
Macro hedge program
|
|
|
(895
|
)
|
|
|
74
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total results of variable annuity hedge program
|
|
|
610
|
|
|
|
(613
|
)
|
|
|
(298
|
)
|
GMAB/GMWB/GMIB reinsurance
|
|
|
1,106
|
|
|
|
(1,986
|
)
|
|
|
(155
|
)
|
Coinsurance and modified coinsurance reinsurance contracts
|
|
|
(577
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(374
|
)
|
|
|
(493
|
)
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital losses
|
|
$
|
(877
|
)
|
|
$
|
(5,763
|
)
|
|
$
|
(934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Relates to derivative hedging instruments, excluding periodic
net coupon settlements, and is net of the Japanese fixed annuity
product liability adjustment for changes in the dollar/yen
exchange spot rate. |
The circumstances giving rise to the changes in these components
are as follows:
|
|
|
|
|
Gross gains and losses on sales
|
|
|
|
Gross gains and losses on sales for the year ended December 31,
2009 were predominantly within structured, government and
corporate securities resulting primarily from efforts to reduce
portfolio risk through sales of subordinated financials and real
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
estate related securities and from sales of U.S. Treasuries to
manage liquidity.
|
|
|
|
|
Gross gains and losses on sales for the year ended December 31,
2008 primarily resulted from the decision to reallocate the
portfolio to securities with more favorable risk/return
profiles. Also included was a gain of $141 from the sale of a
synthetic CDO.
|
Net OTTI losses
|
|
|
|
For further information, see Other- Than-Temporary Impairments
within the Investment Credit Risk section of the MD&A.
|
Variable annuity hedge program
|
|
|
|
See Note 4 of the Notes to the Consolidated Financial
Statements for a discussion of the gains related to the variable
annuity hedge program.
|
GMAB/GMWB/GMIB reinsurance
|
|
|
|
The net gain on these reinsurance contracts was primarily due to
an increase in interest rates, an increase in the Japan equity
markets, a decline in Japan equity market volatility, and
liability model assumption updates for credit standing.
|
Coinsurance and modified coinsurance reinsurance contracts
|
|
|
|
Under the reinsurance agreement with an affiliate, the gains
experienced from the GMAB, GMWB, and GMIB reinsurance along with
the net gains from liability model assumption updates, lower
volatility, increases in long-term interest rates, and rising
equity markets on the US GMWB are ceded to the affiliated
reinsurer and result in a realized loss.
|
Other, net
|
|
|
|
Other, net losses for the year ended December 31, 2009 primarily
resulted from net losses of $329 on credit derivatives where the
company purchased credit protection due to credit spread
tightening and $289 related to net additions to valuation
allowances on impaired mortgage loans. These losses were
partially offset by gains of $128 on credit derivatives that
assume credit risk due to credit spread tightening, as well as
$191 from a change in spot rates related to transactional
foreign currency predominately on the internal reinsurance of
the Japan variable annuity business, which is offset in
accumulated other comprehensive income (AOCI).
|
|
|
|
|
Other, net losses for the year ended December 31, 2008 were
primarily related to net losses of $295 related to transactional
foreign currency predominately on the internal reinsurance of
the Japan variable annuity business, which is offset in AOCI,
resulting from appreciation of the yen, as well as credit
derivatives losses of $191 due to significant credit spread
widening. Also included were derivative related losses of $39
due to counterparty default related to the bankruptcy of Lehman
Brothers Holdings Inc.
|
|
|
|
|
Other, net losses for the year ended December 31, 2007 were
primarily driven by the change in value of non-qualifying
derivatives due to credit spread widening, as well as
fluctuations in interest rates and foreign currency exchange
rates.
|
INVESTMENT
CREDIT RISK
The 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.
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
consideration of external determinants of creditworthiness,
57
typically ratings assigned by nationally recognized ratings
agencies and is supplemented by an internal credit evaluation.
Obligor, asset sector and industry concentrations are subject to
established Company limits and are monitored on a regular basis.
The Company is not exposed to any credit concentration risk of a
single issuer greater than 10% of the Companys
stockholders equity other than U.S. government and
government agencies backed by the full faith and credit of the
U.S. government. For further discussion of concentration of
credit risk, see the Concentration of Credit Risk section in
Note 4 of Notes to the Consolidated Financial Statements.
Derivative
Instruments
In the normal course of business, the Company uses various
derivative counterparties in executing its derivative
transactions. The use of counterparties creates credit risk that
the counterparty may not perform in accordance with the terms of
the derivative transaction. The Company has developed a
derivative counterparty exposure policy which limits the
Companys exposure to credit risk.
The derivative counterparty exposure policy establishes
market-based credit limits, favors long-term financial stability
and creditworthiness of the counterparty and typically requires
credit enhancement/credit risk reducing agreements.
The Company minimizes the credit risk of derivative instruments
by entering into transactions with high quality counterparties
rated A2/A or better, which are monitored by the Companys
internal compliance unit and reviewed frequently by senior
management. In addition, the Company monitors counterparty
credit exposure on a monthly basis to ensure compliance with
Company policies and statutory limitations. The Company also
maintains a policy of requiring that derivative contracts, other
than exchange traded contracts, certain currency forward
contracts, and certain embedded and reinsurance derivatives, be
governed by an International Swaps and Derivatives Association
Master Agreement, which is structured by legal entity and by
counterparty and permits right of offset.
The Company has developed credit exposure thresholds which are
based upon counterparty ratings. Credit exposures are measured
using the market value of the derivatives, resulting in amounts
owed to the Company by its counterparties or potential payment
obligations from the Company to its counterparties. Credit
exposures are generally quantified daily based on the prior
business days market value and collateral is pledged to
and held by, or on behalf of, the Company to the extent the
current value of derivatives exceeds the contractual thresholds.
In accordance with industry standards and the contractual
agreements, collateral is typically settled on the next business
day. The Company has exposure to credit risk for amounts below
the exposure thresholds which are uncollateralized as well as
for market fluctuations that may occur between contractual
settlement periods of collateral movements.
The maximum uncollateralized threshold for a derivative
counterparty for a single legal entity is $10. The Company
currently transacts
over-the-counter
derivatives in two legal entities and therefore the maximum
combined threshold for a single counterparty over all legal
entities that use derivatives is $20. In addition, the Company
may have exposure to multiple counterparties in a single
corporate family due to a common credit support provider. As of
December 31, 2009, the maximum combined threshold for all
counterparties under a single credit support provider over all
legal entities that use derivatives is $40. Based on the
contractual terms of the collateral agreements, these thresholds
may be immediately reduced due to a downgrade in a
counterpartys credit rating. For further discussion, see
the Derivative Commitments Section of Note 9 of the
Consolidated Financial Statements.
For the year ended December 31, 2009, the Company has
incurred no losses on derivative instruments due to counterparty
default.
In addition to counterparty credit risk, the Company enters into
credit default swaps to manage credit exposure. Credit default
swaps involve a transfer of credit risk of one or many
referenced entities from one party to another in exchange for
periodic payments. The party that purchases credit protection
will make periodic payments based on an agreed upon rate and
notional amount, and for certain transactions there will also be
an upfront premium payment. The second party, who sells credit
protection, will typically only make a payment if there is a
credit event and such payment will be equal to the notional
value of the swap contract less the value of the referenced
security
58
issuers debt obligation. A credit event is generally
defined as default on contractually obligated interest or
principal payments or bankruptcy of the referenced entity.
59
The Company uses credit derivatives to purchase credit
protection and, to a lesser extent, assume credit risk with
respect to a single entity, referenced index, or asset pool. The
Company purchases credit protection through credit default swaps
to economically hedge and manage credit risk of certain fixed
maturity investments across multiple sectors of the investment
portfolio. The Company has also entered into credit default
swaps that assume credit risk as part of replication
transactions. Replication transactions are used as an economical
means to synthetically replicate the characteristics and
performance of assets that would otherwise be permissible
investments under the Companys investment policies. These
swaps reference investment grade single corporate issuers and
baskets, which include trades ranging from baskets of up to five
corporate issuers to standard and customized diversified
portfolios of corporate issuers. The baskets of diversified
portfolios are established within sector concentration limits
and are typically divided into tranches which possess different
credit ratings ranging from AAA through the CCC rated first loss
position.
Investments
The following table presents the Companys fixed maturities
by credit quality. The ratings referenced below are based on the
ratings of a nationally recognized rating organization or, if
not rated, assigned based on the Companys internal
analysis of such securities.
Fixed
Maturities by Credit Quality
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
|
|
|
of Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Value
|
|
|
U.S. government/government agencies
|
|
$
|
4,707
|
|
|
$
|
4,552
|
|
|
|
11.3
|
%
|
|
$
|
7,200
|
|
|
$
|
7,289
|
|
|
|
18.4
|
%
|
AAA
|
|
|
6,564
|
|
|
|
5,966
|
|
|
|
14.8
|
%
|
|
|
10,316
|
|
|
|
7,368
|
|
|
|
18.6
|
%
|
AA
|
|
|
6,701
|
|
|
|
5,867
|
|
|
|
14.5
|
%
|
|
|
7,304
|
|
|
|
5,704
|
|
|
|
14.4
|
%
|
A
|
|
|
11,957
|
|
|
|
11,093
|
|
|
|
27.4
|
%
|
|
|
11,590
|
|
|
|
9,626
|
|
|
|
24.4
|
%
|
BBB
|
|
|
11,269
|
|
|
|
10,704
|
|
|
|
26.5
|
%
|
|
|
10,292
|
|
|
|
8,288
|
|
|
|
21.0
|
%
|
BB & below
|
|
|
3,086
|
|
|
|
2,221
|
|
|
|
5.5
|
%
|
|
|
1,742
|
|
|
|
1,285
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
44,284
|
|
|
$
|
40,403
|
|
|
|
100.0
|
%
|
|
$
|
48,444
|
|
|
$
|
39,560
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The movement within the Companys investment ratings was
primarily attributable to rating agency downgrades across
multiple sectors and sales of U.S. Treasuries that were
re-deployed to securities with more favorable risk profiles, in
particular investment grade corporate securities. The ratings
associated with the Companys commercial mortgage
backed-securities (CMBS), commercial real estate
(CRE) collateralized debt obligations
(CDOs) and residential mortgage-backed securities
(RMBS) may be negatively impacted as rating agencies
continue to make changes to their methodologies and monitor
security performance.
59
The following table presents the Companys AFS securities
by type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities by Type
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
Percent of
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
Percent of
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Total Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Total Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Value
|
|
|
Asset-backed securities (ABS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
$
|
1,596
|
|
|
$
|
13
|
|
|
$
|
(248
|
)
|
|
$
|
1,361
|
|
|
|
3.4
|
%
|
|
$
|
1,880
|
|
|
$
|
|
|
|
$
|
(512
|
)
|
|
$
|
1,368
|
|
|
|
3.4
|
%
|
Small business
|
|
|
418
|
|
|
|
|
|
|
|
(185
|
)
|
|
|
233
|
|
|
|
0.6
|
%
|
|
|
428
|
|
|
|
|
|
|
|
(197
|
)
|
|
|
231
|
|
|
|
0.6
|
%
|
Other
|
|
|
330
|
|
|
|
18
|
|
|
|
(39
|
)
|
|
|
309
|
|
|
|
0.8
|
%
|
|
|
482
|
|
|
|
5
|
|
|
|
(110
|
)
|
|
|
377
|
|
|
|
1.0
|
%
|
CDOs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLOs(1)
|
|
|
1,997
|
|
|
|
|
|
|
|
(208
|
)
|
|
|
1,789
|
|
|
|
4.4
|
%
|
|
|
2,107
|
|
|
|
|
|
|
|
(537
|
)
|
|
|
1,570
|
|
|
|
4.0
|
%
|
CRE
|
|
|
1,157
|
|
|
|
14
|
|
|
|
(804
|
)
|
|
|
367
|
|
|
|
0.9
|
%
|
|
|
1,566
|
|
|
|
2
|
|
|
|
(1,170
|
)
|
|
|
398
|
|
|
|
1.0
|
%
|
Other
|
|
|
4
|
|
|
|
5
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
13
|
|
|
|
|
|
CMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed(2)
|
|
|
62
|
|
|
|
3
|
|
|
|
|
|
|
|
65
|
|
|
|
0.2
|
%
|
|
|
243
|
|
|
|
8
|
|
|
|
|
|
|
|
251
|
|
|
|
0.6
|
%
|
Bonds
|
|
|
6,138
|
|
|
|
33
|
|
|
|
(1,519
|
)
|
|
|
4,652
|
|
|
|
11.5
|
%
|
|
|
7,160
|
|
|
|
1
|
|
|
|
(2,719
|
)
|
|
|
4,442
|
|
|
|
11.2
|
%
|
Interest only (IOs)
|
|
|
644
|
|
|
|
40
|
|
|
|
(36
|
)
|
|
|
648
|
|
|
|
1.6
|
%
|
|
|
840
|
|
|
|
12
|
|
|
|
(196
|
)
|
|
|
656
|
|
|
|
1.7
|
%
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic industry
|
|
|
1,794
|
|
|
|
78
|
|
|
|
(45
|
)
|
|
|
1,827
|
|
|
|
4.5
|
%
|
|
|
1,459
|
|
|
|
5
|
|
|
|
(233
|
)
|
|
|
1,231
|
|
|
|
3.1
|
%
|
Capital goods
|
|
|
2,078
|
|
|
|
100
|
|
|
|
(33
|
)
|
|
|
2,145
|
|
|
|
5.3
|
%
|
|
|
1,656
|
|
|
|
26
|
|
|
|
(201
|
)
|
|
|
1,481
|
|
|
|
3.7
|
%
|
Consumer cyclical
|
|
|
1,324
|
|
|
|
53
|
|
|
|
(33
|
)
|
|
|
1,344
|
|
|
|
3.3
|
%
|
|
|
1,588
|
|
|
|
29
|
|
|
|
(244
|
)
|
|
|
1,373
|
|
|
|
3.5
|
%
|
Consumer non-cyclical
|
|
|
3,260
|
|
|
|
205
|
|
|
|
(15
|
)
|
|
|
3,450
|
|
|
|
8.6
|
%
|
|
|
2,455
|
|
|
|
46
|
|
|
|
(172
|
)
|
|
|
2,329
|
|
|
|
5.9
|
%
|
Energy
|
|
|
2,239
|
|
|
|
130
|
|
|
|
(13
|
)
|
|
|
2,356
|
|
|
|
5.8
|
%
|
|
|
1,320
|
|
|
|
19
|
|
|
|
(118
|
)
|
|
|
1,221
|
|
|
|
3.1
|
%
|
Financial services
|
|
|
5,054
|
|
|
|
84
|
|
|
|
(590
|
)
|
|
|
4,548
|
|
|
|
11.3
|
%
|
|
|
5,563
|
|
|
|
163
|
|
|
|
(994
|
)
|
|
|
4,732
|
|
|
|
12.0
|
%
|
Tech./comm
|
|
|
2,671
|
|
|
|
145
|
|
|
|
(40
|
)
|
|
|
2,776
|
|
|
|
6.9
|
%
|
|
|
2,597
|
|
|
|
69
|
|
|
|
(248
|
)
|
|
|
2,418
|
|
|
|
6.1
|
%
|
Transportation
|
|
|
544
|
|
|
|
16
|
|
|
|
(19
|
)
|
|
|
541
|
|
|
|
1.3
|
%
|
|
|
410
|
|
|
|
8
|
|
|
|
(67
|
)
|
|
|
351
|
|
|
|
0.9
|
%
|
Utilities
|
|
|
3,790
|
|
|
|
161
|
|
|
|
(52
|
)
|
|
|
3,899
|
|
|
|
9.7
|
%
|
|
|
3,189
|
|
|
|
76
|
|
|
|
(376
|
)
|
|
|
2,889
|
|
|
|
7.3
|
%
|
Other(3)
|
|
|
867
|
|
|
|
13
|
|
|
|
(99
|
)
|
|
|
781
|
|
|
|
1.9
|
%
|
|
|
1,015
|
|
|
|
|
|
|
|
(305
|
)
|
|
|
710
|
|
|
|
1.8
|
%
|
Foreign govt./govt. agencies
|
|
|
824
|
|
|
|
35
|
|
|
|
(13
|
)
|
|
|
846
|
|
|
|
2.1
|
%
|
|
|
2,094
|
|
|
|
86
|
|
|
|
(33
|
)
|
|
|
2,147
|
|
|
|
5.4
|
%
|
Municipal
|
|
|
971
|
|
|
|
3
|
|
|
|
(194
|
)
|
|
|
780
|
|
|
|
1.9
|
%
|
|
|
917
|
|
|
|
8
|
|
|
|
(220
|
)
|
|
|
705
|
|
|
|
1.8
|
%
|
RMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
2,088
|
|
|
|
63
|
|
|
|
(5
|
)
|
|
|
2,146
|
|
|
|
5.3
|
%
|
|
|
1,924
|
|
|
|
53
|
|
|
|
(8
|
)
|
|
|
1,969
|
|
|
|
5.0
|
%
|
Non-agency
|
|
|
125
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
111
|
|
|
|
0.3
|
%
|
|
|
159
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
116
|
|
|
|
0.3
|
%
|
Alt-A
|
|
|
187
|
|
|
|
|
|
|
|
(52
|
)
|
|
|
135
|
|
|
|
0.3
|
%
|
|
|
256
|
|
|
|
|
|
|
|
(90
|
)
|
|
|
166
|
|
|
|
0.4
|
%
|
Sub-prime
|
|
|
1,565
|
|
|
|
5
|
|
|
|
(626
|
)
|
|
|
944
|
|
|
|
2.3
|
%
|
|
|
2,084
|
|
|
|
4
|
|
|
|
(741
|
)
|
|
|
1,347
|
|
|
|
3.4
|
%
|
U.S. Treasuries
|
|
|
2,557
|
|
|
|
5
|
|
|
|
(221
|
)
|
|
|
2,341
|
|
|
|
5.8
|
%
|
|
|
5,033
|
|
|
|
75
|
|
|
|
(39
|
)
|
|
|
5,069
|
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
44,284
|
|
|
|
1,222
|
|
|
|
(5,103
|
)
|
|
|
40,403
|
|
|
|
100.0
|
%
|
|
|
48,444
|
|
|
|
695
|
|
|
|
(9,579
|
)
|
|
|
39,560
|
|
|
|
100.0
|
%
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services
|
|
|
273
|
|
|
|
4
|
|
|
|
(51
|
)
|
|
|
226
|
|
|
|
|
|
|
|
334
|
|
|
|
|
|
|
|
(107
|
)
|
|
|
227
|
|
|
|
|
|
Other
|
|
|
174
|
|
|
|
34
|
|
|
|
(15
|
)
|
|
|
193
|
|
|
|
|
|
|
|
280
|
|
|
|
4
|
|
|
|
(77
|
)
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
447
|
|
|
|
38
|
|
|
|
(66
|
)
|
|
|
419
|
|
|
|
|
|
|
|
614
|
|
|
|
4
|
|
|
|
(184
|
)
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS securities
|
|
$
|
44,731
|
|
|
$
|
1,260
|
|
|
$
|
(5,169
|
)
|
|
$
|
40,822
|
|
|
|
|
|
|
$
|
49,058
|
|
|
$
|
699
|
|
|
$
|
(9,763
|
)
|
|
$
|
39,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2009, 80% of these senior secured bank
loan collateralized loan obligations (CLOs) were
rated AA and above with an average subordination of 29%. |
|
(2) |
|
Represents securities with pools of loans by the Small Business
Administration whose issued loans are backed by the full faith
and credit of the U.S. government. |
|
(3) |
|
Includes structured investments with an amortized cost and fair
value of $332 and $268, respectively, as of December 31,
2009 and $326 and $222, respectively, as of December 31,
2008. The underlying securities supporting these investments are
primarily diversified pools of investment grade corporate
issuers which can withstand a 15% cumulative default rate,
assuming a 35% recovery. |
The Company reallocated its AFS investment portfolio to
securities with more favorable risk profiles, in particular
investment grade corporate securities, while reducing its
exposure to real estate related securities. Additionally, the
Company reduced its allocation to U.S. Treasuries in order
to manage liquidity. The Companys AFS net unrealized loss
position decreased as a result of improved security valuations
due to credit spread tightening, partially offset by rising
interest rates and a $738 before-tax cumulative effect of
accounting change related to impairments. For further discussion
on the accounting change, see Note 1 of the Notes to the
Consolidated Financial Statements. The following sections
highlight the Companys significant investment sectors.
60
Financial
Services
Several positive developments occurred in the financial services
sectors during the second half of 2009. Earnings for large
domestic banks surpassed expectations and losses for banks that
underwent the Supervisory Capital Assessment Program
(SCAP), or stress test, were less than the Federal
Reserves projections. Unrealized losses on banks
investment portfolios decreased as credit spreads tightened and
the pace of deterioration of the credit quality of certain
assets slowed. Banks and insurance firms were also able to
access re-opened debt capital markets, reducing their dependence
on government guarantee programs and enhancing their liquidity
positions. In addition, certain financial institutions were able
to improve their junior capital ratios through common equity
capital raises, exchanges and tenders. Despite these positive
developments, financial services companies continue to face a
difficult macroeconomic environment and regulatory uncertainty
which could affect future earnings.
The Company has exposure to the financial services sector
predominantly through banking and insurance firms. The following
table presents the Companys exposure to the financial
services sector included in the AFS Securities by Type table
above. A comparison of fair value to amortized cost is not
indicative of the pricing of individual securities as
impairments have occurred.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
Amortized
|
|
|
|
|
|
Total Fair
|
|
|
Amortized
|
|
|
|
|
|
Total Fair
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Value
|
|
|
AAA
|
|
$
|
151
|
|
|
$
|
152
|
|
|
|
3.2
|
%
|
|
$
|
463
|
|
|
$
|
394
|
|
|
|
8.0
|
%
|
AA
|
|
|
1,311
|
|
|
|
1,273
|
|
|
|
26.7
|
%
|
|
|
1,422
|
|
|
|
1,240
|
|
|
|
25.0
|
%
|
A
|
|
|
2,702
|
|
|
|
2,373
|
|
|
|
49.7
|
%
|
|
|
3,386
|
|
|
|
2,834
|
|
|
|
57.1
|
%
|
BBB
|
|
|
805
|
|
|
|
681
|
|
|
|
14.2
|
%
|
|
|
537
|
|
|
|
411
|
|
|
|
8.3
|
%
|
BB & below
|
|
|
358
|
|
|
|
295
|
|
|
|
6.2
|
%
|
|
|
89
|
|
|
|
80
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
$
|
5,327
|
|
|
$
|
4,774
|
|
|
|
100.0
|
%
|
|
$
|
5,897
|
|
|
$
|
4,959
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The credit qualities above include downgrades that have shifted
the portfolio from higher rated assets to lower rated assets
since December 31, 2008. |
Sub-Prime
Residential Mortgage Loans
The following table presents the Companys exposure to RMBS
supported by
sub-prime
mortgage loans by current credit quality and vintage year
included in the AFS Securities by Type table above. These
securities have been affected by deterioration in collateral
performance caused by declining home prices and continued
macroeconomic pressures including higher unemployment levels. A
comparison of fair value to amortized cost is not indicative of
the pricing of individual securities as impairments have
occurred. Credit protection represents the current weighted
average percentage, excluding wrapped securities, of the
outstanding capital structure subordinated to the Companys
investment holding that is available to absorb losses before the
security incurs the first dollar loss
61
of principal. The ratings associated with the Companys
RMBS may be negatively impacted as rating agencies make changes
to their methodologies and continue to monitor security
performance.
Sub-Prime
Residential Mortgage Loans(1)(2)(3)(4)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
BB and Below
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
2003 & Prior
|
|
$
|
20
|
|
|
$
|
15
|
|
|
$
|
54
|
|
|
$
|
43
|
|
|
$
|
63
|
|
|
$
|
43
|
|
|
$
|
14
|
|
|
$
|
9
|
|
|
$
|
55
|
|
|
$
|
33
|
|
|
$
|
206
|
|
|
$
|
143
|
|
2004
|
|
|
79
|
|
|
|
66
|
|
|
|
243
|
|
|
|
178
|
|
|
|
60
|
|
|
|
37
|
|
|
|
6
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
388
|
|
|
|
285
|
|
2005
|
|
|
56
|
|
|
|
31
|
|
|
|
263
|
|
|
|
190
|
|
|
|
134
|
|
|
|
83
|
|
|
|
84
|
|
|
|
25
|
|
|
|
142
|
|
|
|
37
|
|
|
|
679
|
|
|
|
366
|
|
2006
|
|
|
4
|
|
|
|
3
|
|
|
|
11
|
|
|
|
8
|
|
|
|
11
|
|
|
|
8
|
|
|
|
27
|
|
|
|
10
|
|
|
|
133
|
|
|
|
65
|
|
|
|
186
|
|
|
|
94
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
|
|
56
|
|
|
|
106
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
159
|
|
|
$
|
115
|
|
|
$
|
571
|
|
|
$
|
419
|
|
|
$
|
268
|
|
|
$
|
171
|
|
|
$
|
131
|
|
|
$
|
48
|
|
|
$
|
436
|
|
|
$
|
191
|
|
|
$
|
1,565
|
|
|
$
|
944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection
|
|
46.1%
|
|
54.4%
|
|
41.1%
|
|
36.5%
|
|
25.8%
|
|
41.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
BB and Below
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
2003 & Prior
|
|
$
|
26
|
|
|
$
|
22
|
|
|
$
|
129
|
|
|
$
|
109
|
|
|
$
|
48
|
|
|
$
|
35
|
|
|
$
|
17
|
|
|
$
|
13
|
|
|
$
|
34
|
|
|
$
|
19
|
|
|
$
|
254
|
|
|
$
|
198
|
|
2004
|
|
|
108
|
|
|
|
79
|
|
|
|
303
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
419
|
|
|
|
326
|
|
2005
|
|
|
73
|
|
|
|
56
|
|
|
|
525
|
|
|
|
353
|
|
|
|
138
|
|
|
|
70
|
|
|
|
24
|
|
|
|
16
|
|
|
|
22
|
|
|
|
18
|
|
|
|
782
|
|
|
|
513
|
|
2006
|
|
|
45
|
|
|
|
41
|
|
|
|
109
|
|
|
|
50
|
|
|
|
10
|
|
|
|
5
|
|
|
|
87
|
|
|
|
35
|
|
|
|
96
|
|
|
|
36
|
|
|
|
347
|
|
|
|
167
|
|
2007
|
|
|
42
|
|
|
|
27
|
|
|
|
40
|
|
|
|
9
|
|
|
|
33
|
|
|
|
15
|
|
|
|
35
|
|
|
|
19
|
|
|
|
132
|
|
|
|
73
|
|
|
|
282
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
294
|
|
|
$
|
225
|
|
|
$
|
1,106
|
|
|
$
|
761
|
|
|
$
|
229
|
|
|
$
|
125
|
|
|
$
|
171
|
|
|
$
|
90
|
|
|
$
|
284
|
|
|
$
|
146
|
|
|
$
|
2,084
|
|
|
$
|
1,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection
|
|
39.3%
|
|
48.3%
|
|
32.1%
|
|
23.5%
|
|
20.1%
|
|
41.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The vintage year represents the year the underlying loans in the
pool were originated. |
|
(2) |
|
Includes second lien residential mortgages with an amortized
cost and fair value of $33 and $28, respectively, as of
December 31, 2009 and $120 and $60, respectively, as of
December 31, 2008, which are composed primarily of loans to
prime and Alt-A borrowers. |
|
(3) |
|
As of December 31, 2009, the weighted average life of the
sub-prime
residential mortgage portfolio was 4.5 years. |
|
(4) |
|
Approximately 94% of the portfolio is backed by adjustable rate
mortgages. |
|
(5) |
|
The credit qualities above include downgrades that have shifted
the portfolio from higher rated assets to lower rated assets
since December 31, 2008. |
Commercial
Mortgage Loans
The Company observed significant pressure on commercial real
estate market fundamentals throughout 2009 including increased
vacancies, rising delinquencies and declining property values
and expects continued pressure in the upcoming year. The
following tables present the Companys exposure to CMBS
bonds, CRE CDOs and CMBS IOs by current credit quality and
vintage year, included in the AFS Securities by Type table
above. A comparison of fair value to amortized cost is not
indicative of the pricing of individual securities as
impairments have occurred. Credit protection represents the
current weighted average percentage of the outstanding capital
structure subordinated to the Companys investment holding
that is available to absorb losses before the security incurs
the first dollar loss of principal. This credit protection does
not include any equity interest or property value in excess of
62
outstanding debt. The ratings associated with the Companys
CMBS and CRE CDOs may be negatively impacted as rating agencies
continue to make changes to their methodologies and monitor
security performance.
CMBS
Bonds(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
BB and Below
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
2003 & Prior
|
|
$
|
1,198
|
|
|
$
|
1,192
|
|
|
$
|
159
|
|
|
$
|
120
|
|
|
$
|
50
|
|
|
$
|
34
|
|
|
$
|
14
|
|
|
$
|
13
|
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
1,427
|
|
|
$
|
1,363
|
|
2004
|
|
|
342
|
|
|
|
338
|
|
|
|
61
|
|
|
|
39
|
|
|
|
27
|
|
|
|
17
|
|
|
|
15
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
445
|
|
|
|
401
|
|
2005
|
|
|
490
|
|
|
|
449
|
|
|
|
199
|
|
|
|
133
|
|
|
|
126
|
|
|
|
72
|
|
|
|
87
|
|
|
|
54
|
|
|
|
61
|
|
|
|
45
|
|
|
|
963
|
|
|
|
753
|
|
2006
|
|
|
1,293
|
|
|
|
1,091
|
|
|
|
374
|
|
|
|
238
|
|
|
|
377
|
|
|
|
167
|
|
|
|
244
|
|
|
|
95
|
|
|
|
199
|
|
|
|
71
|
|
|
|
2,487
|
|
|
|
1,662
|
|
2007
|
|
|
283
|
|
|
|
223
|
|
|
|
36
|
|
|
|
24
|
|
|
|
116
|
|
|
|
42
|
|
|
|
180
|
|
|
|
88
|
|
|
|
201
|
|
|
|
96
|
|
|
|
816
|
|
|
|
473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,606
|
|
|
$
|
3,293
|
|
|
$
|
829
|
|
|
$
|
554
|
|
|
$
|
696
|
|
|
$
|
332
|
|
|
$
|
540
|
|
|
$
|
257
|
|
|
$
|
467
|
|
|
$
|
216
|
|
|
$
|
6,138
|
|
|
$
|
4,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection
|
|
27.4%
|
|
21.5%
|
|
13.3%
|
|
11.7%
|
|
9.1%
|
|
22.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
BB and Below
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
2003 & Prior
|
|
$
|
1,492
|
|
|
$
|
1,365
|
|
|
$
|
259
|
|
|
$
|
179
|
|
|
$
|
71
|
|
|
$
|
40
|
|
|
$
|
11
|
|
|
$
|
8
|
|
|
$
|
23
|
|
|
$
|
16
|
|
|
$
|
1,856
|
|
|
$
|
1,608
|
|
2004
|
|
|
365
|
|
|
|
317
|
|
|
|
53
|
|
|
|
22
|
|
|
|
41
|
|
|
|
15
|
|
|
|
20
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
479
|
|
|
|
362
|
|
2005
|
|
|
561
|
|
|
|
428
|
|
|
|
243
|
|
|
|
93
|
|
|
|
235
|
|
|
|
109
|
|
|
|
48
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
1,087
|
|
|
|
653
|
|
2006
|
|
|
1,732
|
|
|
|
1,025
|
|
|
|
228
|
|
|
|
76
|
|
|
|
353
|
|
|
|
140
|
|
|
|
354
|
|
|
|
129
|
|
|
|
39
|
|
|
|
12
|
|
|
|
2,706
|
|
|
|
1,382
|
|
2007
|
|
|
528
|
|
|
|
256
|
|
|
|
263
|
|
|
|
90
|
|
|
|
102
|
|
|
|
31
|
|
|
|
134
|
|
|
|
59
|
|
|
|
5
|
|
|
|
1
|
|
|
|
1,032
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,678
|
|
|
$
|
3,391
|
|
|
$
|
1,046
|
|
|
$
|
460
|
|
|
$
|
802
|
|
|
$
|
335
|
|
|
$
|
567
|
|
|
$
|
227
|
|
|
$
|
67
|
|
|
$
|
29
|
|
|
$
|
7,160
|
|
|
$
|
4,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection
|
|
24.7%
|
|
18.6%
|
|
12.6%
|
|
4.9%
|
|
4.3%
|
|
20.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The vintage year represents the year the pool of loans was
originated. |
|
(2) |
|
The credit qualities above include downgrades that have shifted
the portfolio from higher rated assets to lower rated assets
since December 31, 2008. |
CRE
CDOs(1)(2)(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
BB and Below
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
2003 & Prior
|
|
$
|
37
|
|
|
$
|
24
|
|
|
$
|
30
|
|
|
$
|
15
|
|
|
$
|
65
|
|
|
$
|
24
|
|
|
$
|
143
|
|
|
$
|
38
|
|
|
$
|
53
|
|
|
$
|
7
|
|
|
$
|
328
|
|
|
$
|
108
|
|
2004
|
|
|
18
|
|
|
|
11
|
|
|
|
70
|
|
|
|
22
|
|
|
|
33
|
|
|
|
8
|
|
|
|
24
|
|
|
|
3
|
|
|
|
20
|
|
|
|
3
|
|
|
|
165
|
|
|
|
47
|
|
2005
|
|
|
16
|
|
|
|
8
|
|
|
|
73
|
|
|
|
12
|
|
|
|
23
|
|
|
|
6
|
|
|
|
39
|
|
|
|
5
|
|
|
|
22
|
|
|
|
5
|
|
|
|
173
|
|
|
|
36
|
|
2006
|
|
|
23
|
|
|
|
12
|
|
|
|
108
|
|
|
|
33
|
|
|
|
76
|
|
|
|
23
|
|
|
|
62
|
|
|
|
20
|
|
|
|
21
|
|
|
|
10
|
|
|
|
290
|
|
|
|
98
|
|
2007
|
|
|
51
|
|
|
|
26
|
|
|
|
12
|
|
|
|
3
|
|
|
|
20
|
|
|
|
5
|
|
|
|
26
|
|
|
|
8
|
|
|
|
15
|
|
|
|
10
|
|
|
|
124
|
|
|
|
52
|
|
2008
|
|
|
17
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
1
|
|
|
|
15
|
|
|
|
4
|
|
|
|
13
|
|
|
|
3
|
|
|
|
50
|
|
|
|
17
|
|
2009
|
|
|
12
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
4
|
|
|
|
1
|
|
|
|
9
|
|
|
|
2
|
|
|
|
27
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
174
|
|
|
$
|
96
|
|
|
$
|
293
|
|
|
$
|
85
|
|
|
$
|
224
|
|
|
$
|
67
|
|
|
$
|
313
|
|
|
$
|
79
|
|
|
$
|
153
|
|
|
$
|
40
|
|
|
$
|
1,157
|
|
|
$
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection
|
|
39.9%
|
|
10.9%
|
|
22.4%
|
|
35.0%
|
|
31.3%
|
|
26.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
BB and Below
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
2003 & Prior
|
|
$
|
127
|
|
|
$
|
43
|
|
|
$
|
90
|
|
|
$
|
28
|
|
|
$
|
59
|
|
|
$
|
14
|
|
|
$
|
48
|
|
|
$
|
6
|
|
|
$
|
30
|
|
|
$
|
5
|
|
|
$
|
354
|
|
|
$
|
96
|
|
2004
|
|
|
118
|
|
|
|
35
|
|
|
|
16
|
|
|
|
5
|
|
|
|
31
|
|
|
|
9
|
|
|
|
12
|
|
|
|
2
|
|
|
|
13
|
|
|
|
2
|
|
|
|
190
|
|
|
|
53
|
|
2005
|
|
|
71
|
|
|
|
29
|
|
|
|
58
|
|
|
|
12
|
|
|
|
56
|
|
|
|
10
|
|
|
|
10
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
196
|
|
|
|
53
|
|
2006
|
|
|
222
|
|
|
|
68
|
|
|
|
83
|
|
|
|
18
|
|
|
|
74
|
|
|
|
19
|
|
|
|
15
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
394
|
|
|
|
107
|
|
2007
|
|
|
126
|
|
|
|
40
|
|
|
|
106
|
|
|
|
19
|
|
|
|
101
|
|
|
|
10
|
|
|
|
11
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
344
|
|
|
|
70
|
|
2008
|
|
|
39
|
|
|
|
11
|
|
|
|
22
|
|
|
|
5
|
|
|
|
24
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
703
|
|
|
$
|
226
|
|
|
$
|
375
|
|
|
$
|
87
|
|
|
$
|
345
|
|
|
$
|
65
|
|
|
$
|
99
|
|
|
$
|
13
|
|
|
$
|
44
|
|
|
$
|
7
|
|
|
$
|
1,566
|
|
|
$
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit protection
|
|
27.1%
|
|
21.3%
|
|
17.9%
|
|
17.0%
|
|
57.5%
|
|
23.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The vintage year represents the year that the underlying
collateral in the pool was originated. Individual CDO fair value
is allocated by the proportion of collateral within each vintage
year. |
|
(2) |
|
As of December 31, 2009, approximately 37% of the
underlying CRE CDOs collateral are seasoned, below investment
grade securities. |
|
(3) |
|
For certain CRE CDOs, the collateral manager has the ability to
reinvest proceeds that become available, primarily from
collateral maturities. The increase in the 2008 and 2009 vintage
years represents reinvestment under these CRE CDOs. |
|
(4) |
|
The credit qualities above include downgrades that have shifted
the portfolio from higher rated assets to lower rated assets
since December 31, 2008. |
CMBS
IOs(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
AAA
|
|
|
A
|
|
|
BBB
|
|
|
BB and Below
|
|
|
Total
|
|
|
AAA
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
2003 & Prior
|
|
$
|
224
|
|
|
$
|
241
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
224
|
|
|
$
|
241
|
|
|
$
|
295
|
|
|
$
|
287
|
|
2004
|
|
|
123
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123
|
|
|
|
130
|
|
|
|
158
|
|
|
|
119
|
|
2005
|
|
|
160
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
161
|
|
|
|
157
|
|
|
|
200
|
|
|
|
136
|
|
2006
|
|
|
79
|
|
|
|
68
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
82
|
|
|
|
70
|
|
|
|
93
|
|
|
|
54
|
|
2007
|
|
|
54
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
50
|
|
|
|
94
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
640
|
|
|
$
|
645
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
644
|
|
|
$
|
648
|
|
|
$
|
840
|
|
|
$
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The vintage year represents the year the pool of loans was
originated. |
|
(2) |
|
The credit qualities above include downgrades that have shifted
the portfolio from higher rated assets to lower rated assets
since December 31, 2008. |
In addition to CMBS, the Company has exposure to commercial
mortgage loans as presented in the following table. These loans
are collateralized by a variety of commercial properties and are
diversified both geographically throughout the United States and
by property type. These loans may be either in the form of a
whole loan, where the Company is the sole lender, or a loan
participation. Loan participations are loans where the Company
has purchased or retained a portion of an outstanding loan or
package of loans and participates on a pro-rata basis in
collecting interest and principal pursuant to the terms of the
participation agreement. In general, A-Note participations have
senior payment priority, followed by B-Note participations and
then mezzanine loan participations. As of December 31,
2009, loans within the Companys mortgage loan portfolio
have had minimal extensions or restructurings. The recent
deterioration in the global real estate market, as evidenced by
increases in property vacancy rates, delinquencies and
foreclosures, has negatively impacted property values and
sources of refinancing
64
and should these trends continue, additional increases in the
Companys valuation allowance for mortgage loans may result.
Commercial
Mortgage Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Amortized
|
|
|
Valuation
|
|
|
Carrying
|
|
|
Amortized
|
|
|
Valuation
|
|
|
Carrying
|
|
|
|
Cost(1)
|
|
|
Allowance
|
|
|
Value
|
|
|
Cost(1)
|
|
|
Allowance
|
|
|
Value
|
|
|
Whole loans
|
|
$
|
2,505
|
|
|
$
|
(26
|
)
|
|
$
|
2,479
|
|
|
$
|
2,707
|
|
|
$
|
(2
|
)
|
|
$
|
2,705
|
|
A-Note participations
|
|
|
326
|
|
|
|
|
|
|
|
326
|
|
|
|
335
|
|
|
|
|
|
|
|
335
|
|
B-Note participations
|
|
|
508
|
|
|
|
(131
|
)
|
|
|
377
|
|
|
|
562
|
|
|
|
|
|
|
|
562
|
|
Mezzanine loans
|
|
|
856
|
|
|
|
(100
|
)
|
|
|
756
|
|
|
|
859
|
|
|
|
|
|
|
|
859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(2)
|
|
$
|
4,195
|
|
|
$
|
(257
|
)
|
|
$
|
3,938
|
|
|
$
|
4,463
|
|
|
$
|
(2
|
)
|
|
$
|
4,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amortized cost represents carrying value prior to valuation
allowances, if any. |
|
(2) |
|
Excludes agricultural mortgage loans. For further information on
the total mortgage loan portfolio, see Note 4 of the Notes
to Consolidated Financial Statements. |
Included in the table above are valuation allowances on mortgage
loans held for sale associated with B-note participations and
mezzanine loans of $36 and $40, respectively, which had a
carrying value of $38 and $85, respectively, as of
December 31, 2009.
At origination, the weighted average
loan-to-value
(LTV) rate of the Companys commercial mortgage
loan portfolio was approximately 63%. As of December 31,
2009, the current weighted average LTV was approximately 81%.
LTV rates compare the loan amount to the value of the underlying
property collateralizing the loan. The loan values are updated
periodically through property level reviews of the portfolio.
Factors considered in the property valuation include, but are
not limited to, actual and expected property cash flows,
geographic market data and capitalization rates.
ABS
Consumer Loans
The following table presents the Companys exposure to ABS
consumer loans by credit quality, included in the AFS Securities
by Type table above. Currently, the Company expects its ABS
consumer loan holdings will continue to pay contractual
principal and interest payments due to the ultimate expected
borrower repayment performance and structural credit
enhancements, which remain sufficient to absorb a significantly
higher level of defaults than are currently anticipated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
BB and Below
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Auto(1)
|
|
$
|
69
|
|
|
$
|
71
|
|
|
$
|
47
|
|
|
$
|
46
|
|
|
$
|
96
|
|
|
$
|
96
|
|
|
$
|
83
|
|
|
$
|
83
|
|
|
$
|
11
|
|
|
$
|
8
|
|
|
$
|
306
|
|
|
$
|
304
|
|
Credit card
|
|
|
422
|
|
|
|
431
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
25
|
|
|
|
153
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
601
|
|
|
|
599
|
|
Student loan(2)
|
|
|
271
|
|
|
|
168
|
|
|
|
300
|
|
|
|
229
|
|
|
|
118
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
689
|
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
$
|
762
|
|
|
$
|
670
|
|
|
$
|
347
|
|
|
$
|
275
|
|
|
$
|
240
|
|
|
$
|
182
|
|
|
$
|
236
|
|
|
$
|
226
|
|
|
$
|
11
|
|
|
$
|
8
|
|
|
$
|
1,596
|
|
|
$
|
1,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
BB and Below
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Auto
|
|
$
|
108
|
|
|
$
|
84
|
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
142
|
|
|
$
|
103
|
|
|
$
|
160
|
|
|
$
|
123
|
|
|
$
|
15
|
|
|
$
|
10
|
|
|
$
|
432
|
|
|
$
|
326
|
|
Credit card
|
|
|
313
|
|
|
|
273
|
|
|
|
6
|
|
|
|
4
|
|
|
|
97
|
|
|
|
86
|
|
|
|
278
|
|
|
|
197
|
|
|
|
57
|
|
|
|
39
|
|
|
|
751
|
|
|
|
599
|
|
Student loan
|
|
|
272
|
|
|
|
143
|
|
|
|
306
|
|
|
|
229
|
|
|
|
119
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
697
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
693
|
|
|
$
|
500
|
|
|
$
|
319
|
|
|
$
|
239
|
|
|
$
|
358
|
|
|
$
|
260
|
|
|
$
|
438
|
|
|
$
|
320
|
|
|
$
|
72
|
|
|
$
|
49
|
|
|
$
|
1,880
|
|
|
$
|
1,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
(1) |
|
As of December 31, 2009, approximately 9% of the auto
consumer loan-backed securities were issued by lenders whose
primary business is to
sub-prime
borrowers. |
|
(2) |
|
As of December 31, 2009, approximately half of the student
loan-backed exposure is guaranteed by the Federal Family
Education Loan Program, with the remainder comprised of loans to
prime borrowers. |
|
(3) |
|
The credit qualities above include downgrades that have shifted
the portfolio from higher rated assets to lower rated assets
since December 31, 2008. |
Limited
Partnerships and Other Alternative Investments
The following table presents the Companys investments in
limited partnerships and other alternative investments which
include hedge funds, mortgage and real estate funds, mezzanine
debt funds, and private equity and other funds. Hedge funds
include investments in funds of funds and direct funds. Mortgage
and real estate funds consist of investments in funds whose
assets consist of mortgage loans, mortgage loan participations,
mezzanine loans or other notes which may be below investment
grade quality, as well as equity real estate and real estate
joint ventures. Mezzanine debt funds include investments in
funds whose assets consist of subordinated debt that often
incorporates equity-based options such as warrants and a limited
amount of direct equity investments. Private equity and other
funds primarily consist of investments in funds whose assets
typically consist of a diversified pool of investments in small
non-public businesses with high growth potential.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Hedge funds
|
|
$
|
105
|
|
|
|
13.8
|
%
|
|
$
|
263
|
|
|
|
25.5
|
%
|
Mortgage and real estate funds
|
|
|
124
|
|
|
|
16.4
|
%
|
|
|
228
|
|
|
|
22.1
|
%
|
Mezzanine debt funds
|
|
|
66
|
|
|
|
8.7
|
%
|
|
|
78
|
|
|
|
7.5
|
%
|
Private equity and other funds
|
|
|
464
|
|
|
|
61.1
|
%
|
|
|
464
|
|
|
|
44.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
759
|
|
|
|
100.0
|
%
|
|
$
|
1,033
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnerships and other alternative investments decreased
primarily due to hedge fund redemptions and negative
re-valuations of the underlying investments associated primarily
with the real estate markets.
Security
Unrealized Loss Aging
As part of the Companys ongoing security monitoring
process, the Company has reviewed its AFS securities in an
unrealized loss position and concluded that there were no
additional impairments as of December 31, 2009 and 2008 and
that these securities have sufficient expected future cash flows
to recover the entire amortized cost basis, are temporarily
depressed and are expected to recover in value as the securities
approach maturity or as CMBS and
sub-prime
RMBS market spreads return to more normalized levels.
Most of the securities depressed over 20% for nine months or
more are supported by real estate related assets, specifically
investment grade CMBS bonds,
sub-prime
RMBS and CRE CDOs, and have a weighted average current rating of
A. Current market spreads continue to be significantly wider for
securities supported by real estate related assets, as compared
to spreads at the securitys respective purchase date,
largely due to the continued effects of the recession and the
economic and market uncertainties regarding future performance
of commercial and residential real estate. The Company reviewed
these securities as part of its impairment evaluation process.
The Companys best estimate of future cash flows utilized
in its impairment process involves both macroeconomic and
security specific assumptions that may differ based on asset
class, vintage year and property location including, but not
limited to, historical and projected default and recovery rates,
current and expected future delinquency rates, property value
declines and the impact of obligor re-financing. For these
securities in an unrealized loss position where a credit
impairment has not been recorded, the Companys best
estimate of expected future cash flows are sufficient to recover
the amortized cost basis of the security.
66
For further discussion on the Companys ongoing impairment
evaluation process and the factors considered in determining
whether a credit impairment exists, see the Recognition and
Presentation of
Other-Than-Temporary
Impairments Section in Note 4 of the Notes to the
Consolidated Financial Statements.
The following table presents the Companys unrealized loss
aging for AFS securities by length of time the security was in a
continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Items
|
|
|
Cost
|
|
|
Value
|
|
|
Loss
|
|
|
Items
|
|
|
Cost
|
|
|
Value
|
|
|
Loss
|
|
|
Three months or less
|
|
|
766
|
|
|
$
|
5,878
|
|
|
$
|
5,622
|
|
|
$
|
(256
|
)
|
|
|
1,039
|
|
|
$
|
11,458
|
|
|
$
|
10,538
|
|
|
$
|
(920
|
)
|
Greater than three to six months
|
|
|
39
|
|
|
|
161
|
|
|
|
143
|
|
|
|
(18
|
)
|
|
|
596
|
|
|
|
3,599
|
|
|
|
2,817
|
|
|
|
(782
|
)
|
Greater than six to nine months
|
|
|
172
|
|
|
|
1,106
|
|
|
|
931
|
|
|
|
(175
|
)
|
|
|
535
|
|
|
|
4,554
|
|
|
|
3,735
|
|
|
|
(819
|
)
|
Greater than nine to twelve months
|
|
|
62
|
|
|
|
1,501
|
|
|
|
1,205
|
|
|
|
(296
|
)
|
|
|
360
|
|
|
|
3,107
|
|
|
|
2,183
|
|
|
|
(924
|
)
|
Greater than twelve months
|
|
|
1,434
|
|
|
|
15,309
|
|
|
|
10,885
|
|
|
|
(4,424
|
)
|
|
|
1,626
|
|
|
|
16,303
|
|
|
|
9,985
|
|
|
|
(6,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,473
|
|
|
$
|
23,955
|
|
|
$
|
18,786
|
|
|
$
|
(5,169
|
)
|
|
|
4,156
|
|
|
$
|
39,021
|
|
|
$
|
29,258
|
|
|
$
|
(9,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the Companys unrealized loss
aging for AFS securities continuously depressed over 20% by
length of time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
Consecutive Months
|
|
Items
|
|
|
Cost
|
|
|
Value
|
|
|
Loss
|
|
|
Items
|
|
|
Cost
|
|
|
Value
|
|
|
Loss
|
|
|
Three months or less
|
|
|
79
|
|
|
$
|
591
|
|
|
$
|
395
|
|
|
$
|
(196
|
)
|
|
|
1,216
|
|
|
$
|
14,145
|
|
|
$
|
8,749
|
|
|
$
|
(5,396
|
)
|
Greater than three to six months
|
|
|
16
|
|
|
|
52
|
|
|
|
36
|
|
|
|
(16
|
)
|
|
|
147
|
|
|
|
1,360
|
|
|
|
568
|
|
|
|
(792
|
)
|
Greater than six to nine months
|
|
|
99
|
|
|
|
1,237
|
|
|
|
844
|
|
|
|
(393
|
)
|
|
|
103
|
|
|
|
1,318
|
|
|
|
560
|
|
|
|
(758
|
)
|
Greater than nine to twelve months
|
|
|
67
|
|
|
|
1,201
|
|
|
|
801
|
|
|
|
(400
|
)
|
|
|
154
|
|
|
|
1,562
|
|
|
|
503
|
|
|
|
(1,059
|
)
|
Greater than twelve months
|
|
|
585
|
|
|
|
6,235
|
|
|
|
3,115
|
|
|
|
(3,120
|
)
|
|
|
31
|
|
|
|
311
|
|
|
|
57
|
|
|
|
(254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
846
|
|
|
$
|
9,316
|
|
|
$
|
5,191
|
|
|
$
|
(4,125
|
)
|
|
|
1,651
|
|
|
$
|
18,696
|
|
|
$
|
10,437
|
|
|
$
|
(8,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the Companys unrealized loss
aging for AFS securities (included in the tables above)
continuously depressed over 50% by length of time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
Consecutive Months
|
|
Items
|
|
|
Cost
|
|
|
Value
|
|
|
Loss
|
|
|
Items
|
|
|
Cost
|
|
|
Value
|
|
|
Loss
|
|
|
Three months or less
|
|
|
42
|
|
|
$
|
132
|
|
|
$
|
46
|
|
|
$
|
(86
|
)
|
|
|
504
|
|
|
$
|
5,904
|
|
|
$
|
2,068
|
|
|
$
|
(3,836
|
)
|
Greater than three to six months
|
|
|
11
|
|
|
|
5
|
|
|
|
2
|
|
|
|
(3
|
)
|
|
|
37
|
|
|
|
299
|
|
|
|
50
|
|
|
|
(249
|
)
|
Greater than six to nine months
|
|
|
51
|
|
|
|
175
|
|
|
|
69
|
|
|
|
(106
|
)
|
|
|
24
|
|
|
|
194
|
|
|
|
32
|
|
|
|
(162
|
)
|
Greater than nine to twelve months
|
|
|
52
|
|
|
|
499
|
|
|
|
173
|
|
|
|
(326
|
)
|
|
|
2
|
|
|
|
7
|
|
|
|
1
|
|
|
|
(6
|
)
|
Greater than twelve months
|
|
|
205
|
|
|
|
2,105
|
|
|
|
601
|
|
|
|
(1,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
361
|
|
|
$
|
2,916
|
|
|
$
|
891
|
|
|
$
|
(2,025
|
)
|
|
|
567
|
|
|
$
|
6,404
|
|
|
$
|
2,151
|
|
|
$
|
(4,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Other-Than-Temporary
Impairments
The following table presents the Companys impairments
recognized in earnings by type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
ABS
|
|
$
|
50
|
|
|
$
|
11
|
|
|
$
|
18
|
|
CDOs
|
|
|
|
|
|
|
|
|
|
|
|
|
CREs
|
|
|
421
|
|
|
|
212
|
|
|
|
|
|
Other
|
|
|
23
|
|
|
|
|
|
|
|
|
|
CMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
140
|
|
|
|
55
|
|
|
|
6
|
|
IOs
|
|
|
17
|
|
|
|
68
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
126
|
|
|
|
803
|
|
|
|
40
|
|
Other
|
|
|
50
|
|
|
|
325
|
|
|
|
64
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
|
62
|
|
|
|
128
|
|
|
|
|
|
Other
|
|
|
47
|
|
|
|
28
|
|
|
|
18
|
|
Foreign govt./govt. agencies
|
|
|
|
|
|
|
14
|
|
|
|
5
|
|
Municipal
|
|
|
|
|
|
|
1
|
|
|
|
|
|
RMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency
|
|
|
4
|
|
|
|
13
|
|
|
|
|
|
Alt-A
|
|
|
46
|
|
|
|
16
|
|
|
|
|
|
Sub-prime
|
|
|
204
|
|
|
|
214
|
|
|
|
188
|
|
U.S. Treasuries
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,192
|
|
|
$
|
1,888
|
|
|
$
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2009
Impairments recognized in earnings were comprised of credit
impairments of $965, impairments on debt securities for which
the Company intended to sell of $127 and impairments on equity
securities of $100.
Credit impairments were primarily concentrated on structured
securities, mainly CRE CDOs, below-prime RMBS and CMBS bonds.
These securities were impaired primarily due to increased
severity in macroeconomic assumptions and continued
deterioration of the underlying collateral. The Company
determined these impairments utilizing both a top down modeling
approach and, for certain real estate-backed securities, a loan
by loan collateral review. The top down modeling approach used
discounted cash flow models that considered losses under current
and expected future economic conditions. Assumptions used over
the current recessionary period included macroeconomic factors,
such as a high unemployment rate, as well as sector specific
factors including, but not limited to:
|
|
|
Commercial property value declines that averaged 40% to 45% from
the valuation peak but differed by property type and location.
|
|
|
Average cumulative CMBS collateral loss rates that varied by
vintage year but reached approximately 12% for the 2007 vintage
year.
|
|
|
Residential property value declines that averaged 40% to 45%
from the valuation peak but differed by location.
|
|
|
Average cumulative RMBS collateral loss rates that varied by
vintage year but reached approximately 50% for the 2007 vintage
year.
|
68
In addition to the top down modeling approach, the Company
reviewed the underlying collateral of certain of its real
estate-backed securities to estimate potential future losses.
This review included loan by loan underwriting utilizing
assumptions about expected future collateral cash flows
discounted at the securitys book yield prior to
impairment. The expected future cash flows included projected
rental rates and occupancy levels that varied based on property
type and
sub-market.
Impairments are recorded to the lower discounted value between
the top down modeling approach and loan by loan collateral
review.
Impairments on securities for which the Company had the intent
to sell were primarily on corporate financial services
securities where the Company had an active plan to dispose of
the securities. Impairments on equity securities were primarily
on below investment grade hybrid securities that had been
depressed 20% for six continuous months.
In addition to the credit impairments recognized in earnings,
the Company recognized $530 of non-credit impairments in other
comprehensive income, predominately concentrated in RMBS and CRE
CDOs. These non-credit impairments represent the difference
between the fair value and the Companys best estimate of
expected future cash flows discounted at the securitys
effective yield prior to impairment, rather than at current
credit spreads. The non-credit impairments primarily represent
increases in market liquidity premiums and credit spread
widening that occurred after the securities were purchased. In
general, larger liquidity premiums and wider credit spreads are
the result of deterioration of the underlying collateral
performance of the securities, as well as the risk premium
required to reflect future uncertainty in the real estate market.
Future impairments may develop as the result of changes in
intent to sell or if actual results underperform current
modeling assumptions, which may be the result of, but are not
limited to, macroeconomic factors, changes in assumptions used
and property performance below current expectations.
Year
ended December 31, 2008
Impairments were primarily concentrated in subordinated fixed
maturities within the financial services sector, as well as in
sub-prime
RMBS and CRE CDOs. The remaining impairments were primarily
recorded on securities in various sectors that experienced
significant credit spread widening and for which the Company was
uncertain of its intent to retain the investments for a period
of time sufficient to allow for recovery.
Year
ended December 31, 2007
Impairments were primarily concentrated in securitized assets
backed by
sub-prime
RMBS and corporate fixed maturities primarily within the
financial services and home builders sectors. The remaining
impairments were primarily recorded on securities in various
sectors that had declined in value for which the Company was
uncertain of its intent to retain the investments for a period
of time sufficient to allow for recovery.
CAPITAL
MARKETS RISK MANAGEMENT
The 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 the
specific classes of investments, while asset/liability
management is the responsibility of a dedicated risk management
unit supporting the Company. Derivative instruments are utilized
in compliance with established Company policy and regulatory
requirements and are monitored internally and reviewed by senior
management.
The Company utilizes a variety of
over-the-counter
and exchange traded derivative instruments as a part of its
overall risk management strategy, as well as to enter into
replication transactions. Derivative instruments are used to
manage risk associated with interest rate, equity market, credit
spread, issuer default, price, and currency exchange rate risk
or volatility. Replication transactions are used as an
economical means to synthetically replicate the characteristics
and performance of assets that would otherwise be permissible
investments under the Companys investment policies. For
further information, see Note 4 of the Notes to
Consolidated Financial Statements.
Derivative activities are monitored and evaluated by the
Companys risk management team and reviewed by senior
management. In addition, the Company monitors counterparty
credit exposure on a monthly basis to ensure compliance with
Company policies and statutory limitations. The notional amounts
of derivative contracts represent
69
the basis upon which pay or receive amounts are calculated and
are not reflective of credit risk. For further information on
the Companys use of derivatives, see Note 4 of the
Notes to Consolidated Financial Statements.
Market
Risk
The Company is exposed to market risk, primarily relating to the
market price
and/or cash
flow variability associated with changes in interest rates,
credit spreads including issuer defaults, equity prices or
market indices, and foreign currency exchange rates. The Company
is also exposed to credit and counterparty repayment risk.
Interest
Rate Risk
The Companys exposure to interest rate risk relates to the
market price
and/or cash
flow variability associated with changes in market interest
rates. The Company manages its exposure to interest rate risk by
constructing investment portfolios that maintain asset
allocation limits and asset/liability duration matching targets
which include the use of derivatives. The Company analyzes
interest rate risk using various models including parametric
models and cash flow simulation of the liabilities and the
supporting investments, including derivative instruments under
various market scenarios. Measures the Company uses to quantify
its exposure to interest rate risk inherent in its invested
assets and interest rate sensitive liabilities include duration,
convexity and key rate duration. Duration is the weighted
average
term-to-maturity
of a securitys cash flows and is used to approximate the
percentage change in the price of a security for a given change
in market interest rates. For example, a duration of 5 means the
price of the security will change by approximately 5% for a 1%
change in interest rates. Convexity is used to approximate how
the duration of a security changes as interest rates change. As
duration in convexity calculations assume parallel yield curve
shifts, key rate duration analysis considers price sensitivity
to changes in various interest rate
terms-to-maturity.
Key rate duration analysis enables the Company to estimate the
price change of a security assuming non-parallel interest rate
movements.
To calculate duration, convexity and key rate duration,
projections of asset and liability cash flows are discounted to
a present value using interest rate assumptions. These cash
flows are then revalued at alternative interest rate levels to
determine the percentage change in fair value due to an
incremental change in rates. Cash flows from corporate
obligations are assumed to be consistent with the contractual
payment streams on a yield to worst basis. Yield to worst is the
lowest possible yield when all potential call dates prior to
maturity are considered. The primary assumptions used in
calculating cash flow projections include expected asset payment
streams taking into account prepayment speeds, issuer call
options and contract holder behavior. Mortgage-backed and
asset-backed securities are modeled based on estimates of the
rate of future prepayments of principal over the remaining life
of the securities. These estimates are developed by
incorporating collateral surveillance and anticipated future
market dynamics. Actual prepayment experience may vary from
these estimates.
The Company is also exposed to interest rate risk based upon the
discount rate assumption associated with the Parents
pension and other postretirement benefit obligations. The
discount rate assumption is based upon an interest rate yield
curve comprised of bonds rated Aa with maturities primarily
between zero and thirty years. For further discussion of
interest rate risk associated with the benefit obligations, see
Pension and Other Postretirement Benefit Obligations within the
Critical Accounting Estimates Section of the MD&A and
Note 14 of Notes to Consolidated Financial Statements.
In addition, management evaluates performance of certain
products based on net investment spread which is, in part,
influenced by changes in interest rates. For further discussion,
see the Consolidated Results Section of the MD&A.
As interest rates decline, certain mortgage-backed securities
are more susceptible to paydowns and prepayments. During such
periods, the Company generally will not be able to reinvest the
proceeds at comparable yields. Lower interest rates will also
likely result in lower net investment income, increased hedging
cost associated with variable annuities and, if declines are
sustained for a long period of time, it may subject the Company
to reinvestment risks, higher pension costs expense and possibly
reduced profit margins associated with guaranteed crediting
rates on certain products. Conversely, the fair value of the
investment portfolio will increase when interest rates decline
and the Companys interest expense will be lower on its
variable rate debt obligations.
70
The Company believes that an increase in interest rates from the
current levels is generally a favorable development for the
Company. Rate increases are expected to provide additional net
investment income, increase sales of fixed rate investment
products, reduce the cost of the variable annuity hedging
program, limit the potential risk of margin erosion due to
minimum guaranteed crediting rates in certain products and, if
sustained, could reduce the Companys prospective pension
expense. Conversely, a rise in interest rates will reduce the
fair value of the investment portfolio, increase interest
expense on the Companys variable rate debt obligations
and, if long-term interest rates rise dramatically within a six
to twelve month time period, certain businesses may be exposed
to disintermediation risk. Disintermediation risk refers to the
risk that policyholders will surrender their contracts in a
rising interest rate environment requiring the Company to
liquidate assets in an unrealized loss position. In conjunction
with the interest rate risk measurement and management
techniques, certain of the Companys fixed income product
offerings have market value adjustment provisions at contract
surrender. An increase in interest rates may also impact the
Companys tax planning strategies and in particular its
ability to utilize tax benefits to offset certain previously
recognized realized capital losses.
The investments and liabilities primarily associated with
interest rate risk are included in the following discussion.
Certain product liabilities, including those containing GMWB,
GMIB, GMAB, or GMDB, expose the Company to interest rate risk
but also have significant equity risk. These liabilities are
discussed as part of the Equity Risk section below.
Fixed
Maturity Investments
The Companys investment portfolios primarily consist of
investment grade fixed maturity securities. The fair value of
fixed maturities was $40.4 billion and $39.6 billion
at December 31, 2009 and 2008, respectively. The fair value
of fixed maturities and other invested assets fluctuates
depending on the interest rate environment and other general
economic conditions. The weighted average duration of the fixed
maturity portfolio was approximately 5.2 years as of
December 31, 2009 and 2008, respectively.
Liabilities
The Companys investment contracts and certain insurance
product liabilities, other than non-guaranteed separate
accounts, include asset accumulation vehicles such as fixed
annuities, guaranteed investment contracts, other investment and
universal life-type contracts and certain insurance products
such as long-term disability.
Asset accumulation vehicles primarily require a fixed rate
payment, often for a specified period of time. Product examples
include fixed rate annuities with a market value adjustment
feature and fixed rate guaranteed investment contracts. The term
to maturity of these contracts generally range from less than
one year to ten years. In addition, certain products such as
universal life contracts and the general account portion of
variable annuity products, credit interest to policyholders
subject to market conditions and minimum interest rate
guarantees. The term to maturity of these products is short to
intermediate.
While interest rate risk associated with many of these products
has been reduced through the use of market value adjustment
features and surrender charges, the primary risk associated with
these products is that the spread between investment return and
credited rate may not be sufficient to earn targeted returns.
The Company also manages the risk of certain insurance
liabilities similarly to investment type products due to the
relative predictability of the aggregate cash flow payment
streams. Products in this category may contain significant
actuarial (including mortality and morbidity) pricing and cash
flow risks. Product examples include structured settlement
contracts, on-benefit annuities (i.e., the annuitant is
currently receiving benefits thereon) and short-term and
long-term disability contracts. The cash outflows associated
with these policy liabilities are not interest rate sensitive
but do vary based on the timing and amount of benefit payments.
The primary risks associated with these products are that the
benefits will exceed expected actuarial pricing
and/or that
the actual timing of the cash flows will differ from those
anticipated, resulting in an investment return lower than that
assumed in pricing. Average contract duration can range from
less than one year to typically up to fifteen years.
71
Derivatives
The Company utilizes a variety of derivative instruments to
mitigate interest rate risk. Interest rate swaps are primarily
used to convert interest receipts or payments to a fixed or
variable rate. The use of such swaps enables the Company to
customize contract terms and conditions to customer objectives
and satisfies its asset/liability duration matching policy.
Interest rate swaps are also used to hedge the variability in
the cash flow of a forecasted purchase or sale of fixed rate
securities due to changes in interest rates. Forward rate
agreements are used to convert interest receipts on
floating-rate securities to fixed rates. These derivatives are
used to lock in the forward interest rate curve and reduce
income volatility that results from changes in interest rates.
Interest rate caps, floors, swaptions, and futures are primarily
used to manage portfolio duration.
At December 31, 2009 and 2008, notional amounts pertaining
to derivatives utilized to manage interest rate risk totaled
$16.0 billion and $14.2 billion, respectively
($12.6 billion and $12.3 billion, respectively,
related to investments and $3.4 billion and
$1.9 billion, respectively, related to life liabilities).
The fair value of these derivatives was ($47) and $247 as of
December 31, 2009 and 2008, respectively.
Calculated
Interest Rate Sensitivity
The after-tax change in the net economic value of investment
contracts (e.g., guaranteed investment contracts) and certain
insurance product liabilities (e.g., short-term and long-term
disability contracts), for which the payment rates are fixed at
contract issuance and the investment experience is substantially
absorbed by the Company, are included in the following table
along with the corresponding invested assets. Also included in
this analysis are the interest rate sensitive derivatives used
by the Company to hedge its exposure to interest rate risk.
Certain financial instruments, such as limited partnerships and
other alternative investments, have been omitted from the
analysis due to the fact that the investments are accounted for
under the equity method and generally lack sensitivity to
interest rate changes. The calculation of the estimated
hypothetical change in net economic value below assumes a
100 basis point upward and downward parallel shift in the
yield curve.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Net Economic Value as of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Basis point shift
|
|
|
−100
|
|
|
|
+ 100
|
|
|
|
−100
|
|
|
|
+ 100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
(11
|
)
|
|
$
|
(7
|
)
|
|
$
|
(133
|
)
|
|
$
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fixed liabilities included above represented approximately
61% and 59% of the Companys general account liabilities as
of December 31, 2009 and 2008, respectively. The assets
supporting the fixed liabilities are monitored and managed
within rigorous duration guidelines, and are evaluated on a
monthly basis, as well as annually using scenario simulation
techniques in compliance with regulatory requirements.
The following table provides an analysis showing the estimated
after-tax change in the fair value of the Companys fixed
maturity investments and related derivatives, assuming
100 basis point upward and downward parallel shifts in the
yield curve as of December 31, 2009 and 2008. Certain
financial instruments, such as limited partnerships and other
alternative investments, have been omitted from the analysis due
to the fact that the investments are accounted for under the
equity method and generally lack sensitivity to interest rate
changes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value as of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Basis point shift
|
|
|
−100
|
|
|
|
+ 100
|
|
|
|
−100
|
|
|
|
+ 100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
939
|
|
|
$
|
(864
|
)
|
|
$
|
458
|
|
|
$
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The selection of the 100 basis point parallel shift in the
yield curve was made only as an illustration of the potential
hypothetical impact of such an event and should not be construed
as a prediction of future market events. Actual results could
differ materially from those illustrated above due to the nature
of the estimates and assumptions used in the above analysis. The
Companys sensitivity analysis calculation assumes that the
composition of invested assets and liabilities remain materially
consistent throughout the year and that the current relationship
between
72
short-term and long-term interest rates will remain constant
over time. As a result, these calculations may not fully capture
the impact of portfolio re-allocations, significant product
sales or non-parallel changes in interest rates.
Credit
Risk
The Company is exposed to credit risk within our investment
portfolio and through counterparties. Credit risk relates to the
uncertainty of an obligors continued ability to make
timely payments in accordance with the contractual terms of the
instrument or contract. The Company manages credit risk through
established investment credit policies which address quality of
obligors and counterparties, credit concentration limits,
diversification requirements and acceptable risk levels under
expected and stressed scenarios. These policies are regularly
reviewed and approved by senior management.
The derivative counterparty exposure policy establishes
market-based credit limits, favors long-term financial stability
and creditworthiness of the counterparty and typically requires
credit enhancement/credit risk reducing agreements. The Company
minimizes the credit risk in derivative instruments by entering
into transactions with high quality counterparties rated A2/A or
better, which are monitored and evaluated by the Companys
risk management team and reviewed by senior management. In
addition, the Company monitors counterparty credit exposure on a
monthly basis to ensure compliance with Company policies and
statutory limitations. For further information on derivative
counterparty credit risk, see the Investment Credit Risk section
of the MD&A.
In addition to counterparty credit risk, the Company enters into
credit derivative instruments to manage credit exposure. The
Company purchases credit protection through credit default swaps
to economically hedge and manage credit risk of certain fixed
maturity investments across multiple sectors of the investment
portfolio. The Company has also entered into credit default
swaps that assume credit risk to synthetically replicate the
characteristics and performance of assets that would otherwise
be permissible investments under the Companys investment
policies. Credit spread widening will generally result in an
increase in fair value of derivatives that purchase credit
protection and a decrease in fair value of derivatives that
assume credit risk. These derivatives do not receive hedge
accounting treatment and, as such, changes in fair value are
reported through earnings. As of December 31, 2009 and
2008, the notional amount related to credit derivatives that
purchase credit protection was $1.9 billion and
$2.6 billion, respectively, while the fair value was ($34)
and $246, respectively. As of December 31, 2009 and 2008,
the notional amount related to credit derivatives that assume
credit risk was $902 and $940, respectively, while the fair
value was ($176) and ($309), respectively. For further
information on credit derivatives, see the Investment Credit
Risk section of the MD&A and Note 4 of Notes to
Consolidated Financial Statements.
The Company is also exposed to credit spread risk related to
security market price and cash flows associated with changes in
credit spreads. Credit spread widening will reduce the fair
value of the investment portfolio and will increase net
investment income on new purchases. If issuer credit spreads
increase significantly or for an extended period of time, it may
result in higher impairment losses. Credit spread tightening
will reduce net investment income associated with new purchases
of fixed maturities and increase the fair value of the
investment portfolio. For further discussion of sectors most
significantly impacted, see the Investment Credit Risk section
of the MD&A. Also, for a discussion of the movement of
credit spread impacts on the Companys statutory financial
results as it relates to the accounting and reporting for market
value fixed annuities, see the Capital Resources &
Liquidity section of the MD&A.
Equity
Risk
The Company does not have significant equity risk exposure from
invested assets. The Companys primary exposure to equity
risk relates to the potential for lower earnings associated with
certain of its businesses such as variable annuities where fee
income is earned based upon the fair value of the assets under
management. During 2009, the Companys fee income declined
$404 or 10%. In addition, the Company offers certain guaranteed
benefits, primarily associated with variable annuity products,
which increases the Companys potential benefit exposure as
the equity markets decline.
73
Foreign
Currency Exchange Risk
The Companys foreign currency exchange risk is related to
non-U.S. dollar
denominated investments, which primarily consist of fixed
maturity investments, the investment in and net income of the
U.K. Life operations, and
non-U.S. dollar
denominated liability contracts, including its GMDB, GMAB, GMWB
and GMIB benefits associated with its reinsurance of Japanese
variable annuities, and a yen denominated individual fixed
annuity product. A portion of the Companys foreign
currency exposure is mitigated through the use of derivatives.
Fixed
Maturity Investments
The risk associated with the
non-U.S. dollar
denominated fixed maturities relates to potential decreases in
value and income resulting from unfavorable changes in foreign
exchange rates. The fair value of the
non-U.S. dollar
denominated fixed maturities, which are primarily denominated in
euro, sterling, yen and Canadian dollars, at December 31,
2009 and 2008, were approximately $549 and $2.9 billion,
respectively.
In order to manage its currency exposures, the Company enters
into foreign currency swaps and forwards to hedge the
variability in cash flows associated with certain foreign
denominated fixed maturities. These foreign currency swap and
forward agreements are structured to match the foreign currency
cash flows of the hedged foreign denominated securities. At
December 31, 2009 and 2008, the derivatives used to hedge
currency exchange risk related to
non-U.S. dollar
denominated fixed maturities had a total notional amount of $316
and $1.2 billion, respectively, and total fair value of
($22) and $8 respectively.
Based on the fair values of the Companys
non-U.S. dollar
denominated securities and derivative instruments as of
December 31, 2009 and 2008, management estimates that a 10%
unfavorable change in exchange rates would decrease the fair
values by a before-tax total of approximately $21 and $171,
respectively. The estimated impact was based upon a 10% change
in December 31 spot rates. The selection of the 10% unfavorable
change was made only for illustration of the potential
hypothetical impact of such an event and should not be construed
as a prediction of future market events. Actual results could
differ materially from those illustrated above due to the nature
of the estimates and assumptions used in the above analysis.
Liabilities
The Company issues
non-U.S. dollar
denominated funding agreement liability contracts. The Company
hedges the foreign currency risk associated with these liability
contracts with currency rate swaps. At December 31, 2009
and 2008, the derivatives used to hedge foreign currency
exchange risk related to foreign denominated liability contracts
had a total notional amount of $814 and $820, respectively, and
a total fair value of ($2) and ($76), respectively.
The Company enters into foreign currency forward and option
contracts that convert euros to yen in order to economically
hedge the foreign currency risk associated with certain Japanese
variable annuity products. As of December 31, 2009 and
2008, the derivatives used to hedge foreign currency risk
associated with Japanese variable annuity products had a total
notional amount of $257 and $259, respectively, and a total fair
value of ($8) and $35, respectively.
The yen based fixed annuity product is written by HLIKK and
ceded to the Company. The underlying investment involves
investing in U.S. securities markets, which offer favorable
credit spreads. The yen denominated fixed annuity product
(yen fixed annuities) assumed is recorded in the
consolidated balance sheets with invested assets denominated in
U.S. dollars while policyholder liabilities are denominated
in yen and converted to U.S. dollars based upon the
December 31, 2009 yen to U.S. dollar spot rate. The
difference between U.S. dollar denominated investments and
yen denominated liabilities exposes the Company to currency
risk. The Company manages this currency risk associated with the
yen fixed annuities primarily with pay variable U.S. dollar
and receive fixed yen currency swaps. As of December 31,
2009 and 2008, the notional value of the currency swaps was
$2.3 billion and the fair value was $316 and $383,
respectively. Although economically an effective hedge, a
divergence between the yen denominated fixed annuity product
liability and the currency swaps exists primarily due to the
difference in the basis of accounting between the liability and
the derivative instruments (i.e. historical cost versus fair
value). The yen denominated fixed annuity product liabilities
are recorded on a historical cost basis and are only adjusted
for changes in foreign spot rates and accrued income. The
currency swaps are recorded at fair value incorporating
74
changes in value due to changes in forward foreign exchange
rates, interest rates and accrued income. A before-tax net gain
of $47 and $64 for the years ended December 31, 2009 and
2008, respectively, which includes the changes in value of the
currency swaps, excluding net periodic coupon settlements, and
the yen fixed annuity contract remeasurement, was recorded in
net realized capital gains and losses.
Equity
Product Risk
The Companys equity product risk is managed at the Life
Operations level of the Hartford Financial Services Group
(HFSG). The disclosures in the following equity
product risk section are reflective of Life Operations risk
management program, including reinsurance with third parties and
the dynamic and macro derivative hedging programs which are
structured at a parent company level. The following disclosures
are also reflective of the Companys reinsurance of the
majority of variable annuities with living and death benefit
riders to an affiliate, effective October 1, 2009. See
Note 16 Transactions with Affiliates for further
information on the reinsurance transaction.
The Companys operations are significantly influenced by
the U.S., Japanese and other global equity markets. Increases or
decreases in equity markets impact certain assets and
liabilities related to the Companys variable products and
the Companys earnings derived from those products. These
variable products include variable annuities, mutual funds, and
variable life insurance.
Generally, declines in equity markets will:
|
|
|
reduce the value of assets under management and the amount of
fee income generated from those assets;
|
|
|
increase the liability for direct GMWB benefits, and reinsured
GMWB and GMIB benefits, resulting in realized capital losses;
|
|
|
increase the value of derivative assets used to hedge product
guarantees resulting in realized capital gains;
|
|
|
increase costs under the Companys hedging program;
|
|
|
increase the Companys net amount at risk for GMDB benefits;
|
|
|
decrease the Companys actual gross profits, resulting
increased DAC amortization;
|
|
|
increase the amount of required statutory capital necessary to
maintain targeted risk based capital ratios;
|
|
|
turn customer sentiment toward equity-linked products negative,
causing a decline in sales; and
|
|
|
decrease the Companys estimated future gross profits See
Life Estimated Gross Profits Used in the Valuation and
Amortization of Assets and Liabilities Associated with Variable
Annuity and Other Universal Life-Type Contracts within Critical
Accounting Estimates for further information.
|
Generally, increases in equity markets will reduce the value of
derivative assets used to provide a macro hedge on statutory
surplus, resulting in realized capital losses during periods of
market appreciation.
GMWB
and Intercompany Reinsurance of GMWB, GMAB, and
GMIB
The majority of the Companys U.S. and U.K. variable
annuities include a GMWB rider. In the second quarter of 2009,
the Company suspended all new sales in the U.K. and Japan. The
Companys new U.S. variable annuity product, launched
in October 2009, does not offer a GMWB. Declines in the equity
markets will increase the Companys liability for these
benefits. A GMWB contract is in the money if the
contract holders guaranteed remaining benefit
(GRB) becomes greater than the account value. As of
December 31, 2009 and December 31, 2008, 60% and 88%,
respectively, of all unreinsured U.S GMWB in-force
contracts were in the money. For U.S. and U.K.
GMWB contracts that were in the money the
Companys exposure to the GRB, after reinsurance, as of
December 31, 2009 and December 31, 2008, was $775 and
$7.6 billion, respectively. However, the Company expects to
incur these payments in the future only if the policyholder has
an in the money GMWB at their death or their account
value is reduced to a specified minimum level, through
contractually permitted withdrawals
and/or
market declines. If the account value is reduced to the
specified level, the contract holder will receive an annuity
equal to the remaining GRB. For the Companys
life-time GMWB products, this annuity can continue
beyond the
75
GRB. As the account value fluctuates with equity market returns
on a daily basis and the life-time GMWB payments can
exceed the GRB, the ultimate amount to be paid by the Company,
if any, is uncertain and could be significantly more or less
than $775. For additional information on the Companys GMWB
liability, see Note 3 of Notes to Consolidated Financial
Statements.
The Company enters into various reinsurance agreements to
reinsure GMWB, GMAB and GMIB benefits issued by HLIKK, a Japan
affiliate of the Company. In the second quarter of 2009, the
Company suspended new product sales in the Companys Japan
affiliate and in the fourth quarter the Company reinsured 100%
of the assumed benefits to an affiliated captive reinsurer. See
Note 16 Transactions with Affiliates for further discussion.
GMDB
and Intercompany Reinsurance of GMDB
The majority of the Companys variable annuity contracts
include a GMDB rider. Declines in the equity market will
generally increase the Companys liability for GMDB riders.
The Companys total gross exposure (i.e. before
reinsurance) to U.S. GMDBs as of December 31, 2009 is
$18.4 billion. The Company will incur these payments in the
future only if the policyholder has an in-the-money
GMDB at their time of death. The Company currently reinsures 86%
of these GMDB benefit guarantees. Under certain of these
reinsurance agreements, the reinsurers exposure is subject
to an annual cap. The Companys net exposure (i.e. after
reinsurance) is $2.6 billion, as of December 31, 2009.
For additional information on the Companys GMDB liability,
see Note 8 of Notes to Consolidated Financial Statements.
The Company enters into various reinsurance agreements to
reinsure GMDB benefits issued by HLIKK, a Japan affiliate of the
Company. In the second quarter of 2009, the Company suspended
new product sales in the Companys Japan affiliate and in
the fourth quarter the company reinsured 100% of the assumed
benefits to an affiliated captive reinsurer. See Note 16,
Transactions with Affiliates for further discussion.
Equity
Product Risk Management
The Company has made considerable investment in analyzing market
risk exposures arising from: GMDB, GMWB and reinsurance of GMIB,
GMWB, and GMDB); equity market and interest rate risks; and
foreign currency exchange rates. The Company evaluates these
risks both individually and, in the aggregate, to determine the
financial risk of its products and to judge their potential
impacts on U.S. GAAP earnings and statutory surplus. The
Company manages the equity market, interest rate and foreign
currency exchange risks embedded in its products through product
design, reinsurance, customized derivatives, and dynamic hedging
and macro hedging programs. The Company recently launched a new
variable annuity product with reduced equity risk and has
increased GMWB rider fees on new sales of the Companys
legacy variable annuities and the related in-force, as
contractually permitted. Depending upon competitors
reactions with respect to products and related rider charges,
the Companys strategy of reducing product risk and
increasing fees may cause a decline in market share.
Third
Party Reinsurance
The Company uses third party reinsurance for a portion of
U.S. contracts issued with GMWB riders prior to the third
quarter of 2003. The Company also reinsures to a third party
GMWB risks associated with a block of business sold between the
third quarter of 2003 and the second quarter of 2006. The
Company also uses third party reinsurance for a portion of the
GMDB issued in the U.S.
Derivative
Hedging Programs
The Companys derivative hedging programs are structured at
a parent company level, as the Company is a member of a
controlled group of subsidiaries which are consolidated and
reported by their parent company HFSG. Certain portions of the
derivative hedging program are held in the Company for the
purpose of hedging U.S. equity product risk within the
controlled group.
The Company maintains derivative hedging programs for its
product guarantee risk to meet multiple, and in some cases,
competing risk management objectives, including providing
protection against tail scenario equity market
76
events, providing resources to pay product guarantee claims, and
minimizing U.S GAAP earnings volatility, statutory surplus
volatility and other economic metrics.
The Company holds customized derivative contracts to provide
protection from certain capital market risk for the remaining
term of specific blocks of non-reinsured GMWB riders. These
customized derivative contracts provide protection from capital
markets risks based on policyholder behavior assumptions
specified at the inception of the derivative transactions. The
Company retains the risk for actual policyholder behavior that
is different from assumptions within the customized derivatives.
The Companys dynamic hedging program uses derivative
instruments to manage the U.S. GAAP earnings volatility
associated with variable annuity product guarantees including
equity market declines, equity implied volatility, declines in
interest rates and foreign currency exchange risk. The Company
uses hedging instruments including interest rate futures and
swaps, variance swaps, S&P 500, NASDAQ and EAFE index put
options and futures contracts. While the Company actively
manages this dynamic hedging program, increased U.S. GAAP
earnings volatility may result from factors including, but not
limited to, policyholder behavior, capital markets, divergence
between the performance of the underlying funds and the hedging
indices, and the relative emphasis placed on various risk
management objectives.
The Companys macro hedge program uses derivative
instruments to partially hedge the statutory tail scenario risk,
arising from U.S. and Japan GMWB, GMDB, and GMIB statutory
liabilities, on statutory surplus and the associated RBC ratios.
See Capital Resources and Liquidity for additional information.
The macro hedge program will result in additional cost and
U.S. GAAP earnings volatility in times of market increases
as changes in the value of the macro hedge derivatives which
hedge statutory liabilities may not be closely aligned to
U.S. GAAP liabilities.
See Note 4 of Notes to Consolidated Financial Statements
for additional information on hedging derivatives.
The following table summarizes the Companys GMWB account
value by type of risk management strategy as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
GMWB
|
|
|
GMWB
|
|
|
|
|
|
Account
|
|
|
Account
|
|
Risk Management Strategy
|
|
Duration
|
|
Value
|
|
|
Value
|
|
|
Entire GMWB risk reinsured with a third party
|
|
Life of the product
|
|
$
|
5,173
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Dynamic hedging of capital markets risk using various derivative
instruments(1)
|
|
Weighted average of 4 years(2)
|
|
$
|
7,828
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Entire GMWB risk reinsured with an affiliate
|
|
Life of the product
|
|
$
|
32,505
|
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,506
|
|
|
|
100
|
%
|
|
|
|
(1) |
|
During 2009, the Company continued to maintain a reduced level
of dynamic hedge protection on U.S. GAAP earnings while placing
a greater relative emphasis on the protection of statutory
surplus. This shift in emphasis includes the macro hedge program. |
|
(2) |
|
The weighted average of 4 years reflects varying durations
by hedging strategy and the impact of non-parallel shifts will
increase GAAP volatility. |
During the quarter ended December 31, 2009, U.S. GMWB
liabilities, net of the dynamic and macro hedging programs,
reported a net realized pre-tax loss of ($154), net of
reinsurance with third parties and an affiliated captive
reinsurer, primarily driven by increases in U.S. equity
markets offset by model assumption changes of $260, increases in
interest rates, decreases in volatility and the relative
outperformance of the underlying actively managed funds as
compared to their respective indices. During the year ended
December 31, 2009, U.S. GMWB liabilities, net of the
dynamic and macro hedging programs, reported a net realized
pre-tax gain of $267, net of reinsurance with third parties and
an affiliated captive reinsurer, primarily driven by model
assumption changes of $566, increases in interest rates,
decreases in volatility, the relative outperformance of the
underlying actively managed funds as compared to their
respective indices, and the impact of the Companys credit
spread, partially offset by increases in U.S. equity
markets. See Note 3 of the Notes to Consolidated Financial
Statements for description and impact of the Companys
credit spread and liability model assumption changes.
77
Equity
Risk Impact on Statutory Capital and Risked Based
Capital
See Capital Resources and Liquidity, Ratings for information on
the equity risk impact on statutory results.
CAPITAL
RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall strength
of Hartford Life Insurance Company and its ability to generate
strong cash flows from each of the business segments, borrow
funds at competitive rates and raise new capital to meet
operating and growth needs.
Derivative
Commitments
Certain of the Companys derivative agreements contain
provisions that are tied to the financial strength ratings of
the individual legal entity that entered into the derivative
agreement as set by nationally recognized statistical rating
agencies. If the insurance operating entitys financial
strength were to fall below certain ratings, the counterparties
to the derivative agreements could demand immediate and ongoing
full collateralization and in certain instances demand immediate
settlement of all outstanding derivative positions traded under
each impacted bilateral agreement. The settlement amount is
determined by netting the derivative positions transacted under
each agreement. If the termination rights were to be exercised
by the counterparties, it could impact the insurance operating
entitys ability to conduct hedging activities by
increasing the associated costs and decreasing the willingness
of counterparties to transact with the insurance operating
entity. The aggregate fair value of all derivative instruments
with credit-risk-related contingent features that are in a net
liability position as of December 31, 2009, is $473. Of
this $473, the insurance operating entities have posted
collateral of $454 in the normal course of business. Based on
derivative market values as of December 31, 2009, a
downgrade of one level below the current financial strength
ratings by either Moodys or S&P could require
approximately an additional $23 to be posted as collateral.
These collateral amounts could change as derivative market
values change, as a result of changes in our hedging activities
or to the extent changes in contractual terms are negotiated.
The nature of the collateral that we may be required to post is
primarily in the form of U.S. Treasury bills and
U.S. Treasury notes.
The table below presents the aggregate notional amount and fair
value of derivative relationships that could be subject to
immediate termination in the event of further rating agency
downgrades.
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
Ratings levels
|
|
Notional Amount
|
|
|
Fair Value
|
|
|
Either BBB+ or Baa1
|
|
$
|
4,138
|
|
|
$
|
170
|
|
Both BBB+ and Baa1(1)(2)
|
|
$
|
12,373
|
|
|
$
|
351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The notional amount and fair value include both the scenario
where only one rating agency takes action to this level as well
as where both rating agencies take action to this level. |
|
(2) |
|
The notional and fair value amounts include a customized GMWB
derivative with a notional amount of $5.4 billion and a
fair value of $137, for which the Company has a contractual
right to make a collateral payment in the amount of
approximately $61 to prevent its termination. |
Insurance
Operations
As of December 31, 2009, the Companys total assets
under management were $286.4 billion. Of the total assets
under management, approximately $217.8 billion is held in
separate accounts, within mutual funds or were held in
international statutory separate accounts. Mutual funds are not
recorded on the Companys balance sheet. The remaining
$68.5 billion was held in the Companys general
account supported by the Companys general account invested
assets of $53.5 billion including a significant short-term
investment position to meet liquidity needs. As of
December 31, 2009 and December 31, 2008, the Company
held total fixed maturity investments of $45.5 billion and
$45.3 billion, respectively. As of December 31, 2009,
the Companys cash and short-term investments of
$5.9 billion, included $833 of collateral received from,
and held on behalf of, derivative counterparties and $212 of
collateral pledged to derivative counterparties. The Company
also held $2.3 billion of treasury securities, of which
$454 had been pledged to derivative counterparties.
78
In the event customers elect to surrender separate account
assets, international statutory separate accounts or retail
mutual funds, the Company will use the proceeds from the sale of
the assets to fund the surrender and the Companys
liquidity position will not be impacted. In many instances the
Company will receive a percentage of the surrender amount as
compensation for early surrender (surrender charge), increasing
the Companys liquidity position. In addition, a surrender
of variable annuity separate account or general account assets
(see below) will decrease the Companys obligation for
payments on guaranteed living and death benefits.
Capital resources available to fund liquidity, upon contract
holder surrender, is a function of the legal entity in which the
liquidity requirement resides. Generally, obligations of
Individual Annuity and Individual Life will be generally funded
by both Hartford Life Insurance Company and Hartford Life and
Annuity Insurance Company; obligations of Retirement and
Institutional will be generally funded by Hartford Life
Insurance Company; and obligations of the Companys
European insurance operations will be generally funded by the
legal entity in the country in which the obligation was
generated.
$11.0 billion relates to the Companys Retail Fixed
MVA annuities that are held in a statutory separate account, but
under U.S. GAAP are recorded in the general account as
Fixed MVA annuity contract holders are subject to the
Companys credit risk. In the statutory separate account,
the Company is required to maintain invested assets with a fair
value equal to the market value adjusted surrender value of the
Fixed MVA contract. In the event assets decline in value at a
greater rate than the market value adjusted surrender value of
the Fixed MVA contract, the Company is required to contribute
additional capital to the statutory separate account. The
Company will fund these required contributions with operating
cash flows and short-term investments. In the event that
operating cash flows or short-term investments are not
sufficient to fund required contributions, the Company may have
to sell other invested assets at a loss, potentially resulting
in a decrease to statutory surplus. As the fair value of
invested assets in the statutory separate account are generally
equal to the market value adjusted surrender value of the Fixed
MVA contract, surrender of Fixed MVA annuities will have an
insignificant impact on the liquidity requirements of the
Company.
Approximately $1.4 billion of GIC contracts are subject to
discontinuance provisions which allow the policyholders to
terminate their contracts prior to scheduled maturity at the
lesser of the book value or market value. Generally, the market
value adjustment is reflective of changes in interest rates and
credit spreads. As a result, the market value adjustment feature
in the GIC contract serves to protect the Company from interest
rate risks and limit the Companys liquidity requirements
in the event of a surrender. At December 31, 2009 all
policyholders with the ability to terminate at book value after
proper notice have exercised that option and have been paid out.
Surrenders of, or policy loans taken from, as applicable, the
remaining $18.4 billion of general account liabilities,
which include the general account option for Retails
individual variable annuities and Individual Lifes
variable life contracts, the general account option for
Retirement Plan annuities and universal life contracts sold by
Individual Life may be funded through operating cash flows of
the Company, available short-term investments, or the Company
may be required to sell fixed maturity investments to fund the
surrender payment. Sales of fixed maturity investments could
result in the recognition of significant realized losses and
insufficient proceeds to fully fund the surrender amount. In
this circumstance, the Company may need to acquire additional
liquidity from the HFSG Holding Company or take other actions,
including enforcing certain contract provisions which could
restrict surrenders
and/or slow
or defer payouts.
Surrenders of term life and group benefits contracts will have
no current effect on the Companys liquidity requirements.
Debt
Consumer
Notes
In 2008, the Company made the decision to discontinue future
issuances of consumer notes; this decision does not impact
consumer notes currently outstanding.
Institutional began issuing consumer notes through its Retail
Investor Notes Program in September 2006. A consumer note is an
investment product distributed through broker-dealers directly
to retail investors as medium-term, publicly traded fixed or
floating rate, or a combination of fixed and floating rate,
notes. Consumer notes are
79
part of the Companys spread-based business and proceeds
are used to purchase investment products, primarily fixed rate
bonds. Proceeds are not used for general operating purposes.
Consumer notes maturities may extend up to 30 years and
have contractual coupons based upon varying interest rates or
indexes (e.g. consumer price index) and may include a call
provision that allows the Company to extinguish the notes prior
to its scheduled maturity date. Certain Consumer notes may be
redeemed by the holder in the event of death. Redemptions are
subject to certain limitations, including calendar year
aggregate and individual limits. The aggregate limit is equal to
the greater of $1 or 1% of the aggregate principal amount of the
notes as of the end of the prior year. The individual limit is
$250 thousand per individual. Derivative instruments are
utilized to hedge the Companys exposure to market risks in
accordance with Company policy.
As of December 31, 2009 and 2008 $1,136 and $1,210,
respectively, of consumer notes were outstanding. As of
December 31, 2009, these consumer notes have interest rates
ranging from 4% to 6% for fixed notes and, for variable notes,
based on December 31, 2009 rates, either consumer price
index plus 80 to 260 basis points, or indexed to the
S&P 500, Dow Jones Industrials, foreign currency, or the
Nikkei 225. The aggregate maturities of Consumer Notes are as
follows: $24 in 2010, $120 in 2011, $274 in 2012 and $200 in
2013, and $518 thereafter. For 2009 and 2008, interest credited
to holders of consumer notes was $51 and $59, and $11
respectively.
Off-Balance
Sheet Arrangements and Aggregate Contractual
Obligations
The following table identifies the Companys contractual
obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
Operating leases(1)
|
|
|
43
|
|
|
|
15
|
|
|
|
20
|
|
|
|
8
|
|
|
|
|
|
Consumer Notes(2)
|
|
|
1,392
|
|
|
|
176
|
|
|
|
471
|
|
|
|
338
|
|
|
|
407
|
|
Other long-term liabilities
|
|
|
2,020
|
|
|
|
1,973
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
Life and Annuity obligations(3)
|
|
|
352,730
|
|
|
|
24,310
|
|
|
|
48,100
|
|
|
|
43,030
|
|
|
|
237,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
356,185
|
|
|
|
26,474
|
|
|
|
48,591
|
|
|
|
43,376
|
|
|
|
237,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes future minimum lease payments on operating lease
agreements. See Note 10 of Notes to Consolidated Financial
Statements for additional discussion on lease commitments. |
|
(2) |
|
Consumer notes include principal payments, contractual interest
for fixed rate notes and, interest based on current rates for
floating rate notes. See Note 12 of Notes to Consolidated
Financial Statements for additional discussion of consumer notes. |
|
(3) |
|
Estimated life and annuity obligations include death claims,
other charges associated with policyholder reserves, policy
surrenders and policyholder dividends, offset by expected future
deposits on in-force contracts. Estimated life and annuity
obligations are based on mortality, morbidity and lapse
assumptions comparable with the Companys historical
experience, modified for recent observed trends. The Company has
also assumed market growth consistent with assumptions used in
amortizing deferred acquisition costs. In contrast to this
table, the majority of the Companys obligations are
recorded on the balance sheet at the current account values and
do not incorporate an expectation of future market growth,
interest crediting, or future deposits. Therefore, the estimated
obligations presented in this table significantly exceed the
liabilities recorded in reserve for future policy benefits and
unpaid loss and loss adjustment expenses, other policyholder
funds and benefits payable and separate account liabilities. Due
to the significance of the assumptions used, the amounts
presented could materially differ from actual results. |
Dividends
The Company declared dividends of $38, $313 and $461 to HLA for
2009, 2008 and 2007, respectively. Future dividend decisions
will be based on, and affected by, a number of factors,
including the operating results and financial requirements of
the Company on a stand-alone basis and the impact of regulatory
restrictions.
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Net cash provided by (used for) operating activities
|
|
$
|
2,522
|
|
|
$
|
1,211
|
|
|
$
|
2,615
|
|
|
|
|
|
Net cash provided by (used for) investing activities
|
|
|
(192
|
)
|
|
|
(6,597
|
)
|
|
|
(4,372
|
)
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
(2,183
|
)
|
|
|
5,752
|
|
|
|
1,865
|
|
|
|
|
|
Cash End of Year
|
|
|
793
|
|
|
|
661
|
|
|
|
423
|
|
|
|
|
|
Year ended December 31, 2009 compared to Year-ended
December 31, 2008 Cash provided by
operating activities increased due to an intercompany deposit
liability in 2008. Refer to Note 16, Transaction with
Affiliates, for further discussion. Cash used for financing
activities increased as there was significant redemption
activity within the Institutional segment, the loss of two large
governmental plans in Retirement, and capital was returned to
the parent company in conjunction with the reinsurance
transaction with a related party during the fourth quarter.
Year ended December 31, 2008 compared to Year-ended
December 31, 2007 The decrease in cash
provided by operating activities was primarily the result of a
decrease in net investment income as a result of lower yields
and reduced fee income as a result of declines in equity
markets. Net purchases of
available-for-sale
securities continue to account for the majority of cash used for
Investing activities. The increase in net cash provided by
financing activities was primarily due to increased transfers
from the separate account to the general account for investment
and universal life-type contracts and issuance of structured
financing and consumer notes. Operating cash flows in both
periods have been more than adequate to meet liquidity
requirements.
Equity
Markets
For a discussion of the potential impact of the equity markets
on capital and liquidity, see the Capital Markets Risk
Management section under Market Risk.
Ratings
Ratings are an important factor in establishing the competitive
position in the insurance and financial services marketplace.
There can be no assurance that the Companys ratings will
continue for any given period of time or that they will not be
changed. In the event the Companys ratings are downgraded,
the level of revenues, or the persistency of the Companys
business may be adversely impacted.
On January 29, 2010, Standard & Poors
Ratings Services withdrew its A financial strength
ratings on Hartford Life Ltd. of Ireland (HLL) at
the request of the parent company.
The following table summarizes Hartford Life Insurance
Companys significant member companies financial
ratings from the major independent rating organizations as of
February 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A.M. Best
|
|
|
Fitch
|
|
|
Standard & Poors
|
|
|
Moodys
|
|
|
Insurance Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hartford Life Insurance Company
|
|
|
A
|
|
|
|
A-
|
|
|
|
A
|
|
|
|
A3
|
|
Hartford Life and Annuity Insurance Company
|
|
|
A
|
|
|
|
A-
|
|
|
|
A
|
|
|
|
A3
|
|
Other Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hartford Life Insurance Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term rating
|
|
|
|
|
|
|
|
|
|
|
A-1
|
|
|
|
P-2
|
|
Consumer notes
|
|
|
a
|
|
|
|
BBB+
|
|
|
|
A
|
|
|
|
Baa1
|
|
These ratings are not a recommendation to buy or hold any of the
Companys securities and they may be revised or revoked at
any time at the sole discretion of the rating organization.
The agencies consider many factors in determining the final
rating of an insurance company. One consideration is the
relative level of statutory surplus necessary to support the
business written. Statutory surplus represents the
81
capital of the insurance company reported in accordance with
accounting practices prescribed by the applicable state
insurance department.
Statutory
Capital
The Companys stockholders equity, as prepared using
U.S. generally accepted accounting principles (US
GAAP) was $6.2 billion as of December 31, 2009. The
Companys estimated aggregate statutory capital and
surplus, as prepared in accordance with the National Association
of Insurance Commissioners Accounting Practices and
Procedures Manual (US STAT) was $5.4 billion as
of December 31, 2009.
In December, 2009 the NAIC issued SSAP 10R which modified the
accounting for deferred income taxes prescribed by the NAIC by
increasing the realization period for deferred tax assets from
one year to three years and increasing the asset recognition
limit from 10% to 15% of adjusted statutory capital and surplus.
SSAP 10R will expire for periods after December 31, 2010.
Significant differences between US GAAP stockholders
equity and aggregate statutory capital and surplus prepared in
accordance with US STAT include the following:
|
|
|
Costs incurred by the Company to acquire insurance policies are
deferred under US GAAP while those costs are expensed
immediately under US STAT.
|
|
|
Temporary differences between the book and tax basis of an asset
or liability which are recorded as deferred tax assets are
evaluated for recoverability under US GAAP while those amounts
deferred are subject to limitations under US STAT.
|
|
|
Certain assumptions used in the determination of Life benefit
reserves are prescribed under US STAT and are intended to be
conservative, while the assumptions used under US GAAP are
generally the Companys best estimates. In addition, the
methodologies used for determining life reserve amounts are
different between U.S. STAT and U.S. GAAP. Annuity
reserving and cash-flow testing for death and living benefit
reserves under US STAT are generally addressed by the
Commissioners Annuity Reserving Valuation Methodology and
the related Actuarial Guidelines. Under these Actuarial
Guidelines, in general, future cash flows associated with the
variable annuity business are included in these methodologies
with estimates of future fee revenues, claim payments, expenses,
reinsurance impacts and hedging impacts. At December 31,
2008, in determining the cash-flow impacts related to future
hedging, assumptions were made in the scenarios that generate
reserve requirements, about the potential future decreases in
the hedge benefits and increases in hedge costs which resulted
in increased reserve requirements. Reserves for death and living
benefits under U.S. GAAP are either considered embedded
derivatives and recorded at fair value, or they may be
considered death and other insurance benefit reserves.
|
|
|
The difference between the amortized cost and fair value of
fixed maturity and other investments, net of tax, is recorded as
an increase or decrease to the carrying value of the related
asset and to equity under US GAAP, while US STAT only records
certain securities at fair value, such as equity securities and
certain lower rated bonds required by the NAIC to be recorded at
the lower of amortized cost or fair value. In the case of the
Companys market value adjusted (MVA) fixed annuity
products, invested assets are marked to fair value (including
the impact of credit spreads) and liabilities are marked to fair
value (but generally excluding the impacts of credited spreads)
for statutory purposes only. In the case of the Companys
market value adjusted (MVA) fixed annuity products, invested
assets are marked to fair value (but generally actual credit
spreads are not fully reflected) for statutory purposes only.
|
|
|
US STAT for life insurance companies establishes a formula
reserve for realized and unrealized losses due to default and
equity risks associated with certain invested assets (the Asset
Valuation Reserve), while US GAAP does not. Also, for those
realized gains and losses caused by changes in interest rates,
US STAT for life insurance companies defers and amortizes the
gains and losses, caused by changes in interest rates, into
income over the original life to maturity of the asset sold (the
Interest Maintenance Reserve) while US GAAP does not.
|
82
|
|
|
Goodwill arising from the acquisition of a business is tested
for recoverability on an annual basis (or more frequently, as
necessary) for US GAAP, while under US STAT goodwill is
amortized over a period not to exceed 10 years and the
amount of goodwill is limited.
|
In addition, certain assets, including a portion of premiums
receivable and fixed assets, are non-admitted (recorded at zero
value and charged against surplus) under US STAT. US GAAP
generally evaluates assets based on their recoverability.
Risk-based
Capital
State insurance regulators and the NAIC have adopted risk-based
capital requirements for life insurance companies to evaluate
the adequacy of statutory capital and surplus in relation to
investment and insurance risks. The requirements provide a means
of measuring the minimum amount of statutory surplus appropriate
for an insurance company to support its overall business
operations based on its size and risk profile. Under risk-based
capital (RBC) requirements, a companys RBC is
calculated by applying factors and performing calculations
relating to various asset, premium, claim, expense and reserve
items. The adequacy of a companys actual capital is
determined by the ratio of a companys total adjusted
capital, as defined by the insurance regulators, to its company
action level of RBC (known as the RBC ratio), also as defined by
insurance regulators. RBC standards are used by regulators to
set in motion appropriate regulatory actions related to insurers
that show indications of inadequate conditions. In addition,
rating agencies consider RBC ratios, along with their
proprietary models, in making ratings determinations.
Sensitivity
In any particular year, statutory surplus amounts and RBC ratios
may increase or decrease depending upon a variety of factors.
The amount of change in the statutory surplus or RBC ratios can
vary based on individual factors and may be compounded in
extreme scenarios or if multiple factors occur at the same time.
At times the impact of changes in certain market factors or a
combination of multiple factors on RBC ratios can be varied and
in some instances counterintuitive. Factors include:
|
|
|
In general, as equity market levels decline, our reserves for
death and living benefit guarantees associated with variable
annuity contracts increases, sometimes at a greater than linear
rate, reducing statutory surplus levels. In addition, as equity
market levels increase, generally surplus levels will increase.
RBC ratios will also tend to increase when equity markets
increase. However, as a result of a number of factors and market
conditions, including the level of hedging costs and other risk
transfer activities, reserve requirements for death and living
benefit guarantees and RBC requirements could increase resulting
in lower RBC ratios.
|
|
|
As the value of certain fixed-income and equity securities in
our investment portfolio decreases, due in part to credit
|
|
|
spread widening, statutory surplus and RBC ratios may decrease.
|
|
|
As the value of certain derivative instruments that do not get
hedge accounting decreases, statutory surplus and RBC ratios may
decrease.
|
|
|
Our statutory surplus is also impacted by widening credit
spreads as a result of the accounting for the assets and
liabilities in our fixed market value adjusted (MVA)
annuities. Statutory separate account assets supporting the
fixed MVA annuities are recorded at fair value. In determining
the statutory reserve for the fixed MVA annuities, we are
required to use current crediting rates. In many capital market
scenarios, current crediting rates are highly correlated with
market rates implicit in the fair value of statutory separate
account assets. As a result, the change in statutory reserve
from period to period will likely substantially offset the
change in the fair value of the statutory separate account
assets. However, in periods of volatile credit markets, such as
we are now experiencing, actual credit spreads on investment
assets may increase sharply for certain
sub-sectors
of the overall credit market, resulting in statutory separate
account asset market value losses. As actual credit spreads are
not fully reflected in the current crediting rates, the
calculation of statutory reserves will not substantially offset
the change in fair value of the statutory separate account
assets resulting in reductions in statutory surplus. This has
resulted and may continue to result in the need to devote
significant additional capital to support the product.
|
83
Most of these factors are outside of the Companys control.
The Companys financial strength and credit ratings are
significantly influenced by the statutory surplus amounts and
RBC ratios of our insurance company subsidiaries. Due to all of
these factors, projecting statutory capital and the related
projected RBC ratios is complex. In addition, rating agencies
may implement changes to their internal models that have the
effect of increasing or decreasing the amount of statutory
capital we must hold in order to maintain our current ratings.
The Company has reinsured approximately 11% of its risk
associated with GMWB with a third party and 72% of its risk
associated with GMWB with an affiliated captive reinsurer. The
Company has also reinsured 86% of its risk associated with the
aggregate GMDB exposure. These reinsurance agreements serve to
reduce the Companys exposure to changes in the statutory
reserves and the related capital and RBC ratios associated with
changes in the equity markets. The Company also continues to
explore other solutions for mitigating the capital market risk
effect on surplus, such as internal and external reinsurance
solutions, migrating towards a more statutory based hedging
program, changes in product design, increasing pricing and
expense management.
Contingencies
Legal Proceedings For a discussion regarding
contingencies related to the Companys legal proceedings,
please see Item 3, Legal Proceedings.
Regulatory Developments For a discussion
regarding contingencies related to regulatory developments that
affect the Company, please see Note 10 of the Notes to the
Consolidated Financial Statements.
For further information on other contingencies, see Note 10
of Notes to Consolidated Financial Statements
Legislative
Initiatives
Tax proposals and regulatory initiatives which have been or are
being considered by Congress
and/or the
United States Treasury Department could have a material effect
on the insurance business. These proposals and initiatives
include, or could include, changes pertaining to the income tax
treatment of insurance companies and life insurance products and
annuities, repeal or reform of the estate tax and comprehensive
federal tax reform. The nature and timing of any Congressional
or regulatory action with respect to any such efforts is unclear.
Guaranty
Fund and Other Insurance-related Assessments
In all states, insurers licensed to transact certain classes of
insurance are required to become members of a guaranty fund. In
most states, in the event of the insolvency of an insurer
writing any such class of insurance in the state, members of the
funds are assessed to pay certain claims of the insolvent
insurer. A particular states fund assesses its members
based on their respective written premiums in the state for the
classes of insurance in which the insolvent insurer was engaged.
Assessments are generally limited for any year to one or two
percent of premiums written per year depending on the state.
Liabilities for guaranty fund and other insurance-related
assessments are accrued when an assessment is probable, when it
can be reasonably estimated, and when the event obligating the
Company to pay an imposed or probable assessment has occurred.
Liabilities for guaranty funds and other insurance-related
assessments are not discounted and are included as part of other
liabilities in the Consolidated Balance Sheets. As of
December 31, 2009 and 2008, the liability balance was $7
and $4, respectively. As of December 31, 2009 and 2008, $10
and $11, respectively, related to premium tax offsets were
included in other assets.
IMPACT OF
NEW ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of
Notes to Consolidated Financial Statements.
|
|
Item 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The information required by this item is set forth in the
Capital Markets Risk Management section of Item 7,
Managements Discussion and Analysis of Financial Condition
and Results of Operations and is incorporated herein by
reference.
84
|
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
See Index to Consolidated Financial Statements and Schedules
elsewhere herein.
|
|
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
Item 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of disclosure controls and procedures
The Companys principal executive officer and its principal
financial officer, based on their evaluation of the
Companys disclosure controls and procedures (as defined in
Exchange Act
Rule 13a-15(e))
have concluded that the Companys disclosure controls and
procedures are effective for the purposes set forth in the
definition thereof in Exchange Act
Rule 13a-15(e)
as of December 31, 2009.
Managements
annual report on internal control over financial
reporting
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting for the Company as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States. A
companys internal control over financial reporting
includes policies and procedures that (1) pertain to the
maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles
generally accepted in the United States, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or
disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
The Companys management assessed its internal controls
over financial reporting as of December 31, 2009 in
relation to criteria for effective internal control over
financial reporting described in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment under those criteria, The
Companys management concluded that its internal control
over financial reporting was effective as of December 31,
2009.
This annual report does not include an attestation report of the
companys registered public accounting firm regarding
internal control over financial reporting. Managements
report was not subject to attestation by the companys
registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the Company
to provide only managements report in this annual report.
Changes
in internal control over financial reporting
There were no changes in the Companys internal control
over financial reporting that occurred during the Companys
fourth fiscal quarter of 2009 that have materially affected, or
are reasonably likely to materially affect, the Companys
internal control over financial reporting.
85
|
|
Item 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
Item 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The following table presents fees for professional services
rendered by Deloitte & Touche LLP, the member firms of
Deloitte Touche Tohmatsu, and their respective affiliates
(collectively, the Deloitte Entities) for the audit
of the Companys annual financial statements, audit-related
services, tax services and all other services for the years
ended December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
(1) Audit fees
|
|
$
|
9,036,682
|
|
|
$
|
8,867,018
|
|
(2) Audit-related fees(a)
|
|
|
735,674
|
|
|
|
564,131
|
|
(3) Tax fees(b)
|
|
|
14,000
|
|
|
|
|
|
(4) All other fees(c)
|
|
$
|
30,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,816,356
|
|
|
$
|
9,431,149
|
|
|
|
|
(a) |
|
Principally consisted of internal control reviews. |
|
(b) |
|
Fees for the year ended December 31, 2009 principally
consisted of domestic and international tax compliance services
and tax examination assistance. |
|
(c) |
|
Fees for the year ended December 31, 2009 consisted of
benchmark studies. |
The Hartfords Audit Committee (the Committee)
concluded that the provision of the non-audit services provided
to The Hartford by the Deloitte Entities during 2009 and 2008
was compatible with maintaining the Deloitte Entities
independence.
The Committee has established policies requiring its
pre-approval of audit and non-audit services provided by the
independent registered public accounting firm. The policies
require that the Committee pre-approve specifically described
audit, audit-related and tax services, annually. For the annual
pre-approval, the Committee approves categories of audit
services, audit-related services and tax services, and related
fee budgets. For all pre-approvals, the Committee considers
whether such services are consistent with the rules of the
Securities and Exchange Commission and the Public Company
Accounting Oversight Board on auditor independence. The
independent registered public accounting firm and management
report to the Committee on a timely basis regarding the services
rendered by and actual fees paid to the independent registered
public accounting firm to ensure that such services are within
the limits approved by the Committee. The Committees
policies require specific pre-approval of all internal
control-related services and all other permitted services on an
individual project basis. As provided by the Committees
policies, the Committee has delegated to its Chairman the
authority to address any requests for pre-approval of services
between Committee meetings, up to a maximum of $100,000. The
Chairman must report any pre-approvals to the full Committee at
its next scheduled meeting.
PART IV
|
|
Item 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a) Documents filed as a part of this report:
1. Consolidated Financial Statements. See Index to
Consolidated Financial Statements and Schedules elsewhere herein.
86
2. Consolidated Financial Statement Schedules. See
Index to Consolidated Financial Statement and Schedules
elsewhere herein.
3. Exhibits. See Exhibit Index elsewhere herein.
87
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
|
|
|
|
|
|
|
Page(s)
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
S-1
|
|
|
|
|
S-2
|
|
|
|
|
S-3
|
|
|
|
|
S-4
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Hartford Life Insurance Company
Hartford, Connecticut
We have audited the accompanying consolidated balance sheets of
Hartford Life Insurance Company and subsidiaries (the
Company) as of December 31, 2009 and 2008, and
the related consolidated statements of operations, changes in
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2009. Our audits
also included the consolidated financial statement schedules
listed in the Index at Item 15. These consolidated
financial statements and financial statement schedules are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits
included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Hartford Life Insurance Company and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such consolidated financial
statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth
therein.
As discussed in Note 1 of the consolidated financial
statements, the Company changed its method of accounting and
reporting for
other-than-temporary
impairments in 2009 and for the fair value measurement of
financial instruments in 2008.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 23, 2010
F-2
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee income and other
|
|
$
|
3,752
|
|
|
$
|
4,155
|
|
|
$
|
4,470
|
|
Earned premiums
|
|
|
377
|
|
|
|
984
|
|
|
|
983
|
|
Net investment income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
and other
|
|
|
2,505
|
|
|
|
2,588
|
|
|
|
3,056
|
|
Equity securities held for trading
|
|
|
343
|
|
|
|
(246
|
)
|
|
|
1
|
|
Total net investment income
|
|
|
2,848
|
|
|
|
2,342
|
|
|
|
3,057
|
|
Net realized capital gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment (OTTI) losses
|
|
|
(1,722
|
)
|
|
|
(1,888
|
)
|
|
|
(339
|
)
|
OTTI losses recognized in other comprehensive income
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OTTI losses recognized in earnings
|
|
|
(1,192
|
)
|
|
|
(1,888
|
)
|
|
|
(339
|
)
|
Net realized capital gains (losses), excluding net OTTI losses
recognized in earnings
|
|
|
315
|
|
|
|
(3,875
|
)
|
|
|
(595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized capital losses
|
|
|
(877
|
)
|
|
|
(5,763
|
)
|
|
|
(934
|
)
|
Total revenues
|
|
|
6,100
|
|
|
|
1,718
|
|
|
|
7,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, loss and loss adjustment expenses
|
|
|
3, 716
|
|
|
|
4,047
|
|
|
|
3,982
|
|
Benefits, loss and loss adjustment expenses returns
credited on International unit-linked bonds and pension products
|
|
|
343
|
|
|
|
(246
|
)
|
|
|
1
|
|
Insurance expenses and other
|
|
|
1,850
|
|
|
|
1,940
|
|
|
|
1,832
|
|
Amortization of deferred policy acquisition costs and present
value of future profits
|
|
|
3,727
|
|
|
|
1,620
|
|
|
|
605
|
|
Goodwill impairment
|
|
|
|
|
|
|
184
|
|
|
|
|
|
Dividends to policyholders
|
|
|
12
|
|
|
|
13
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
9,648
|
|
|
|
7,558
|
|
|
|
6,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(3,548
|
)
|
|
|
(5,840
|
)
|
|
|
1,145
|
|
Income tax expense (benefit)
|
|
|
(1,401
|
)
|
|
|
(2,181
|
)
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,147
|
)
|
|
$
|
(3,659
|
)
|
|
$
|
893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net (income) loss attributable to the noncontrolling
interest
|
|
|
(10
|
)
|
|
|
105
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Hartford Life Insurance
Company
|
|
$
|
(2,157
|
)
|
|
$
|
(3,554
|
)
|
|
$
|
886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-3
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions,
|
|
|
|
except for share data)
|
|
|
ASSETS
|
Investments
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale,
at fair value (amortized cost of $44,284 and $48,444)
|
|
$
|
40,403
|
|
|
$
|
39,560
|
|
Equity securities, held for trading, at fair value (cost of
$2,359 and $1,830)
|
|
|
2,443
|
|
|
|
1,634
|
|
Equity securities, available for sale, at fair value (cost of
$447 and $614)
|
|
|
419
|
|
|
|
434
|
|
Policy loans, at outstanding balance
|
|
|
2,120
|
|
|
|
2,154
|
|
Mortgage loans (net of allowances for loan losses of $260 and
$13)
|
|
|
4,304
|
|
|
|
4,896
|
|
Limited partnership and other alternative investments
|
|
|
759
|
|
|
|
1,033
|
|
Other investments
|
|
|
338
|
|
|
|
1,237
|
|
Short-term investments
|
|
|
5,128
|
|
|
|
5,742
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
55,914
|
|
|
|
56,690
|
|
Cash
|
|
|
793
|
|
|
|
661
|
|
Premiums receivable and agents balances, net
|
|
|
69
|
|
|
|
25
|
|
Reinsurance recoverables, net
|
|
|
3,140
|
|
|
|
3,195
|
|
Deferred income taxes, net
|
|
|
3,066
|
|
|
|
3,444
|
|
Deferred policy acquisition costs and present value of future
profits
|
|
|
5,779
|
|
|
|
9,944
|
|
Goodwill
|
|
|
470
|
|
|
|
462
|
|
Other assets
|
|
|
1,709
|
|
|
|
3,267
|
|
Separate account assets
|
|
|
150,380
|
|
|
|
130,171
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
221, 320
|
|
|
$
|
207,859
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Reserve for future policy benefits and unpaid losses and loss
adjustment expenses
|
|
|
11,318
|
|
|
|
10,602
|
|
Other policyholder funds and benefits payable
|
|
|
43,526
|
|
|
|
52,647
|
|
Other policyholder funds and benefits payable
International unit-liked bonds and pension products
|
|
|
2,419
|
|
|
|
1,613
|
|
Consumer notes
|
|
|
1,136
|
|
|
|
1,210
|
|
Other liabilities
|
|
|
6,245
|
|
|
|
8,373
|
|
Separate account liabilities
|
|
|
150,380
|
|
|
|
130,171
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
215,024
|
|
|
|
204,616
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock 1,000 shares authorized, issued
and outstanding, par value $5,690
|
|
|
6
|
|
|
|
6
|
|
Capital surplus
|
|
|
8,457
|
|
|
|
6,157
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
(1,941
|
)
|
|
|
(4,531
|
)
|
Retained earnings
|
|
|
(287
|
)
|
|
|
1,446
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
6,235
|
|
|
|
3,078
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
61
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
6,296
|
|
|
|
3,243
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
221,320
|
|
|
$
|
207,859
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-4
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized
|
|
|
Net (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Gain On Cash
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
Flow Hedging
|
|
|
Currency
|
|
|
|
|
|
Total
|
|
|
Controlling
|
|
|
|
|
|
|
Common
|
|
|
Capital
|
|
|
On Securities,
|
|
|
Instruments,
|
|
|
Translation
|
|
|
Retained
|
|
|
Stockholders
|
|
|
Interest
|
|
|
Total
|
|
|
|
Stock
|
|
|
Surplus
|
|
|
Net of Tax
|
|
|
Net of Tax
|
|
|
Adjs
|
|
|
Earnings
|
|
|
Equity
|
|
|
(Note 17)
|
|
|
Equity
|
|
|
|
(In millions)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
6
|
|
|
$
|
6,157
|
|
|
$
|
(4,806
|
)
|
|
$
|
440
|
|
|
$
|
(165
|
)
|
|
$
|
1,446
|
|
|
$
|
3,078
|
|
|
$
|
165
|
|
|
$
|
3,243
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,157
|
)
|
|
|
(2,157
|
)
|
|
|
|
|
|
|
(2,157
|
)
|
Other comprehensive income, net of tax(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized capital gains (losses) on securities(2)
|
|
|
|
|
|
|
|
|
|
|
3,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,229
|
|
|
|
|
|
|
|
3,229
|
|
Net gains on cash flow hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(292
|
)
|
|
|
|
|
|
|
|
|
|
|
(292
|
)
|
|
|
|
|
|
|
(292
|
)
|
Cumulative translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
|
|
|
|
|
|
|
|
115
|
|
|
|
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,052
|
|
|
|
|
|
|
|
3,052
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
895
|
|
|
|
|
|
|
|
895
|
|
Capital contribution from parent(3)
|
|
|
|
|
|
|
2,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,300
|
|
|
|
|
|
|
|
2,300
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
(38
|
)
|
Cumulative effect of accounting changes, net of tax
|
|
|
|
|
|
|
|
|
|
|
(462
|
)
|
|
|
|
|
|
|
|
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in noncontrolling interest ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
6
|
|
|
$
|
8,457
|
|
|
$
|
(2,039
|
)
|
|
$
|
148
|
|
|
$
|
(50
|
)
|
|
$
|
(287
|
)
|
|
$
|
6,235
|
|
|
$
|
61
|
|
|
|
6,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
6
|
|
|
$
|
3,746
|
|
|
$
|
(318
|
)
|
|
$
|
(137
|
)
|
|
$
|
8
|
|
|
$
|
5,315
|
|
|
$
|
8,620
|
|
|
$
|
255
|
|
|
$
|
8,875
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,554
|
)
|
|
|
(3,554
|
)
|
|
|
|
|
|
|
(3,554
|
)
|
Other comprehensive income, net of tax(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net change in unrealized capital gains (losses) on securities(2)
|
|
|
|
|
|
|
|
|
|
|
(4,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,488
|
)
|
|
|
|
|
|
|
(4,488
|
)
|
Net loss on cash flow hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
|
|
577
|
|
|
|
|
|
|
|
577
|
|
Cumulative translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(173
|
)
|
|
|
|
|
|
|
(173
|
)
|
|
|
|
|
|
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,084
|
)
|
|
|
|
|
|
|
(4,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,638
|
)
|
|
|
|
|
|
|
(7,638
|
)
|
Capital contribution from parent(3)
|
|
|
|
|
|
|
2,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,411
|
|
|
|
|
|
|
|
2,411
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(313
|
)
|
|
|
(313
|
)
|
|
|
|
|
|
|
(313
|
)
|
Cumulative effect of accounting changes, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in noncontrolling interest ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105
|
)
|
|
|
(105
|
)
|
Balance, December 31, 2008
|
|
$
|
6
|
|
|
$
|
6,157
|
|
|
$
|
(4,806
|
)
|
|
$
|
440
|
|
|
$
|
(165
|
)
|
|
$
|
1,446
|
|
|
$
|
3,078
|
|
|
$
|
165
|
|
|
$
|
3,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
6
|
|
|
$
|
3,317
|
|
|
$
|
503
|
|
|
$
|
(210
|
)
|
|
$
|
(4
|
)
|
|
$
|
4,894
|
|
|
$
|
8,506
|
|
|
$
|
142
|
|
|
$
|
8,648
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
886
|
|
|
|
886
|
|
|
|
|
|
|
|
886
|
|
Other comprehensive income, net of tax(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net change in unrealized capital gains (losses) on securities(2)
|
|
|
|
|
|
|
|
|
|
|
(821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(821
|
)
|
|
|
|
|
|
|
(821
|
)
|
Net loss on cash flow hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
73
|
|
Cumulative translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(736
|
)
|
|
|
|
|
|
|
(736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
150
|
|
Capital contribution from parent
|
|
|
|
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
429
|
|
|
|
|
|
|
|
429
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(461
|
)
|
|
|
(461
|
)
|
|
|
|
|
|
|
(461
|
)
|
Cumulative effect of accounting changes, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in noncontrolling interest ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
6
|
|
|
$
|
3,746
|
|
|
$
|
(318
|
)
|
|
$
|
(137
|
)
|
|
$
|
8
|
|
|
$
|
5,315
|
|
|
$
|
8,620
|
|
|
$
|
255
|
|
|
$
|
8,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Net change in unrealized capital
gain on securities is reflected net of tax provision (benefit)
and other items of $(1,739), $2,416 and $443 for the years ended
December 31, 2009, 2008 and 2007, respectively. Net (loss)
gain on cash flow hedging instruments is net of tax provision
(benefit) of $157, $(310) and $(39) for the years ended
December 31, 2009, 2008 and 2007, respectively. There is no
tax effect on cumulative translation adjustments.
|
|
(2)
|
|
There were reclassification
adjustments for after-tax gains (losses) realized in net income
of $(1,076), $(1,396), and $(135) for the years ended
December 31, 2009, 2008 and 2007, respectively.
|
|
(3)
|
|
The Company received
$2.1 billion in capital contributions from its parent and
returned capital of $700 to its parent. The Company received
noncash capital contributions of $887 as a result of valuations
associated with the October 1st reinsurance transaction
with an affiliated captive reinsurer. Refer to Note 16
Transactions with Affiliates. The Company received a noncash
asset capital contribution of $180 from its parent company
during 2008.
|
See Notes to Consolidated Financial Statements.
F-5
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(loss)
|
|
$
|
(2,147
|
)
|
|
$
|
(3,659
|
)
|
|
$
|
893
|
|
Adjustments to reconcile net income(loss) to net cash
provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs and present
value of future profits
|
|
|
3,727
|
|
|
|
1,620
|
|
|
|
605
|
|
Additions to deferred policy acquisition costs and present value
of future profits
|
|
|
(674
|
)
|
|
|
(1,258
|
)
|
|
|
(1,557
|
)
|
Change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for future policy benefits, unpaid losses and loss
adjustment expenses
|
|
|
574
|
|
|
|
1,161
|
|
|
|
1,228
|
|
Reinsurance recoverables
|
|
|
66
|
|
|
|
(29
|
)
|
|
|
(235
|
)
|
Receivables and other assets
|
|
|
(20
|
)
|
|
|
66
|
|
|
|
188
|
|
Payables and accruals
|
|
|
420
|
|
|
|
(369
|
)
|
|
|
585
|
|
Accrued and deferred income taxes
|
|
|
(797
|
)
|
|
|
(2,166
|
)
|
|
|
(112
|
)
|
Net realized capital losses
|
|
|
877
|
|
|
|
5,763
|
|
|
|
934
|
|
Net receipts from investment contracts related to policyholder
funds International unit-linked bonds and pension
products
|
|
|
804
|
|
|
|
396
|
|
|
|
867
|
|
Net increase in equity securities held for trading
|
|
|
(809
|
)
|
|
|
(386
|
)
|
|
|
(877
|
)
|
Depreciation and amortization
|
|
|
173
|
|
|
|
78
|
|
|
|
441
|
|
Goodwill impairment
|
|
|
|
|
|
|
184
|
|
|
|
|
|
Other, net
|
|
|
328
|
|
|
|
(190
|
)
|
|
|
(345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities
|
|
$
|
2,522
|
|
|
$
|
1,211
|
|
|
$
|
2,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale/maturity/prepayment of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities and short-term investments, available for sale
|
|
$
|
37,224
|
|
|
$
|
12,104
|
|
|
$
|
19,094
|
|
Equity securities,
available-for-sale
|
|
|
162
|
|
|
|
140
|
|
|
|
315
|
|
Mortgage loans
|
|
|
413
|
|
|
|
325
|
|
|
|
958
|
|
Partnerships
|
|
|
173
|
|
|
|
250
|
|
|
|
175
|
|
Payments for the purchase of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities and short-term investments, available for sale
|
|
|
(35,519
|
)
|
|
|
(18,216
|
)
|
|
|
(22,027
|
)
|
Equity securities,
available-for-sale
|
|
|
(61
|
)
|
|
|
(144
|
)
|
|
|
(484
|
)
|
Mortgage loans
|
|
|
(197
|
)
|
|
|
(1,067
|
)
|
|
|
(2,492
|
)
|
Partnerships
|
|
|
(121
|
)
|
|
|
(330
|
)
|
|
|
(607
|
)
|
Derivative net
|
|
|
(520
|
)
|
|
|
1,170
|
|
|
|
(274
|
)
|
Purchase price of businesses acquired
|
|
|
|
|
|
|
(78
|
)
|
|
|
(10
|
)
|
Change in policy loans, net
|
|
|
34
|
|
|
|
(139
|
)
|
|
|
(6
|
)
|
Change in payables for collateral under securities lending, net
|
|
|
(1,805
|
)
|
|
|
(974
|
)
|
|
|
1,306
|
|
Change in all other, net
|
|
|
25
|
|
|
|
362
|
)
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities
|
|
$
|
(192
|
)
|
|
$
|
(6,597
|
)
|
|
$
|
(4,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits and other additions to investment and universal
life-type contracts
|
|
|
13,398
|
|
|
|
22,449
|
|
|
|
.33,282
|
|
Withdrawals and other deductions from investment and universal
life-type contracts
|
|
|
(23,487
|
)
|
|
|
(28,105
|
)
|
|
|
(31,299
|
)
|
Net transfers (to)/from separate accounts related to investment
and universal life-type contracts
|
|
|
6,805
|
|
|
|
7,074
|
|
|
|
(607
|
)
|
Issuances (repayments) of structured financing
|
|
|
(189
|
)
|
|
|
2,001
|
|
|
|
|
|
Capital contributions(1),(2)
|
|
|
1,397
|
|
|
|
2,231
|
|
|
|
397
|
|
Dividends paid(1)
|
|
|
(33
|
)
|
|
|
(299
|
)
|
|
|
(459
|
)
|
Net Issuances/(Repayments) at maturity or settlement of consumer
notes
|
|
|
(74
|
)
|
|
|
401
|
|
|
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
$
|
(2,183
|
)
|
|
$
|
5,752
|
|
|
$
|
1,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of foreign exchange
|
|
|
(15
|
)
|
|
|
(128
|
)
|
|
|
3
|
|
Net (decrease) increase in cash
|
|
|
132
|
|
|
|
238
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash beginning of year
|
|
|
661
|
|
|
|
423
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash end of year
|
|
$
|
793
|
|
|
$
|
661
|
|
|
$
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Paid (Received) During the Year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
(282
|
)
|
|
$
|
(183
|
)
|
|
$
|
329
|
|
See Notes to Consolidated Financial Statements.
Supplemental schedule of noncash operating and financing
activities:
|
|
|
(1)
|
|
The Company made noncash dividends
of $5 related to the assumed reinsurance agreements with
Hartford Life Insurance K.K. The Company made noncash dividends
of $54 and received a noncash capital contributions of $180 from
its parent company during 2008 related to the assumed
reinsurance agreement with Hartford Life Insurance K.K.
|
|
(2)
|
|
The Company received noncash
capital contributions of $887 as a result of valuations
associated with an October 1st reinsurance transaction with
an affiliated captive reinsurer. Refer to Note 16
Transactions with Affiliates for further discussion of this
transaction.
|
F-6
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
(Dollar amounts in millions, unless otherwise stated)
|
|
1.
|
Basis of
Presentation and Accounting Policies
|
Hartford Life Insurance Company (together with its subsidiaries,
HLIC, Company, we or
our) is a provider of insurance and investment
products in the United States (U.S.) and is an
indirect wholly-owned subsidiary of The Hartford Financial
Services Group, Inc. (The Hartford).
The Consolidated Financial Statements have been prepared on the
basis of accounting principles generally accepted in the
U.S. (U.S. GAAP), which differ materially
from the accounting practices prescribed by various insurance
regulatory authorities.
Consolidation
The Consolidated Financial Statements include the accounts of
Hartford Life Insurance Company, companies in which the Company
directly or indirectly has a controlling financial interest and
those variable interest entities (VIEs) in which the
Company is required to consolidate. Entities in which HLIC has
significant influence over the operating and financing decisions
but are not required to consolidate are reported using the
equity method. Material intercompany transactions and balances
between HLIC and its subsidiaries have been eliminated. For
further information on VIEs, see Note 4.
Use of
Estimates
The preparation of financial statements, in conformity with
U.S. GAAP, requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The most significant estimates include those used in determining
estimated gross profits used in the valuation and amortization
of assets and liabilities associated with variable annuity and
other universal life-type contracts; living benefits required to
be fair valued; valuation of investments and derivative
instruments, evaluation of
other-than-temporary
impairments on
available-for-sale
securities; and contingencies relating to corporate litigation
and regulatory matters; goodwill impairment and valuation
allowance on deferred tax assets. Certain of these estimates are
particularly sensitive to market conditions, and deterioration
and/or
volatility in the worldwide debt or equity markets could have a
material impact on the Consolidated Financial Statements.
Subsequent
Events
The Company has evaluated events subsequent to December 31,
2009 and through the Consolidated Financial Statement issuance
date of February 23, 2010. The Company has not evaluated
subsequent events after that date for presentation in these
Consolidated Financial Statements.
Reclassifications
Certain reclassifications have been made to prior year financial
information to conform to the current year presentation.
Adoption
of New Accounting Standards
Other-Than-Temporary
Impairments
In April 2009, the Financial Accounting Standards Board
(FASB) updated the guidance related to the
recognition and presentation of
other-than-temporary
impairments. The Company adopted this new guidance for its
interim reporting period ending on June 30, 2009 and upon
adoption of this guidance, the Company recognized a $462, net
F-7
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of tax and deferred acquisition costs, increase to Retained
Earnings with an offsetting decrease in Accumulated Other
Comprehensive Income. See Note 4 for the Companys
accounting policy and disclosures.
Noncontrolling
Interests in Consolidated Financial Statements
A noncontrolling interest refers to the minority interest
portion of the equity of a subsidiary that is not attributable
directly or indirectly to a parent. This updated guidance
establishes accounting and reporting standards that require
for-profit entities that prepare consolidated financial
statements to: (a) present noncontrolling interests as a
component of equity, separate from the parents equity,
(b) separately present the amount of consolidated net
income attributable to noncontrolling interests in the income
statement, (c) consistently account for changes in a
parents ownership interests in a subsidiary in which the
parent entity has a controlling financial interest as equity
transactions, (d) require an entity to measure at fair
value its remaining interest in a subsidiary that is
deconsolidated, and (e) require an entity to provide
sufficient disclosures that identify and clearly distinguish
between interests of the parent and interests of noncontrolling
owners. This guidance applies to all for-profit entities that
prepare consolidated financial statements, and affects those
for-profit entities that have outstanding noncontrolling
interests in one or more subsidiaries or that deconsolidate a
subsidiary. This guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008 with earlier adoption prohibited. Upon
adoption of this guidance on January 1, 2009, the Company
reclassified $142 of noncontrolling interest, recorded in other
liabilities, to equity as of January 1, 2007. The adoption
of this guidance resulted in certain reclassifications of
noncontrolling interests within the Companys Consolidated
Statements of Operations. See Note 4 for the Companys
accounting policy and disclosures.
Future
Adoption of New Accounting Standards
Amendments
to Consolidation Guidance for VIEs
In June 2009, the FASB issued accounting guidance which amends
the current quantitative consolidation requirements applicable
to variable interest entities (VIE). Under this new
guidance, an entity would consolidate a VIE when the entity has
both the (a) the power to direct the activities of a VIE
that most significantly impact the entitys economic
performance and (b) The obligation to absorb losses of the
entity that could potentially be significant to the VIE or the
right to receive benefits from the entity that could potentially
be significant to the VIE. The FASB also issued a proposed
amendment to this guidance in January 2010 which defers
application of this guidance to certain entities that apply
specialized accounting guidance for investment companies.
The Company adopted this updated guidance on January 1,
2010, the effective date. As a result of adoption, in addition
to those VIEs the Company currently consolidates under the old
guidance, the Company determined it will consolidate a Company
sponsored collateralized debt obligation (CDO) and a
Company sponsored collateralized loan obligation
(CLO) that are VIEs. The Company expects the impact
of these consolidations on its consolidated financial statements
to be an increase in assets and increase in liabilities of
approximately $350 million. The Company concluded that it
has control over the activities that most significantly impact
the economic performance of these VIEs as they provide
collateral management services, earn a fee for these services
and also have investments issued by the entities. These vehicles
issued debt and the debt holders have no recourse to the general
credit of the Company. The Companys maximum exposure to
loss for these vehicles is their investment in the entities,
fair valued at $240 million as of December 31, 2009.
The Companys has investments in mutual funds, limited
partnerships and other alternative investments including hedge
funds, mortgage and real estate funds, mezzanine debt funds, and
private equity and other funds which may be VIEs. The accounting
for these investments will remain unchanged as they fall within
the scope of the proposed deferral of this new consolidation
guidance.
F-8
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant
Accounting Policies
The Companys significant accounting policies are described
below or are referenced below to the applicable Note where the
description is included.
|
|
|
|
|
Accounting Policy
|
|
Note
|
|
|
Fair Value Measurements
|
|
|
3
|
|
Investments and Derivative Instruments
|
|
|
4
|
|
Reinsurance
|
|
|
5
|
|
Deferred Policy Acquisition Costs and Present Value of Future
Profits
|
|
|
6
|
|
Goodwill and Other Intangible Assets
|
|
|
7
|
|
Separate Accounts
|
|
|
8
|
|
Sales Inducements
|
|
|
9
|
|
Commitments and Contingencies
|
|
|
10
|
|
Income Taxes
|
|
|
11
|
|
Dividends
to Policyholders
Policyholder dividends are paid to certain policies, which are
referred to as participating policies. Such dividends are
accrued using an estimate of the amount to be paid based on
underlying contractual obligations under policies and applicable
state laws.
Participating life insurance in-force accounted for 7% as of
December 31, 2009, 2008 and 2007 of total life insurance
in-force. Dividends to policyholders were $12, $13 and $11 for
the years ended December 31, 2009, 2008 and 2007,
respectively. There were no additional amounts of income
allocated to participating policyholders. If limitations exist
on the amount of net income from participating life insurance
contracts that may be distributed to stockholders, the
policyholders share of net income on those contracts that
cannot be distributed is excluded from stockholders equity
by a charge to operations and a credit to a liability.
Foreign
Currency Translation
Foreign currency translation gains and losses are reflected in
stockholders equity as a component of accumulated other
comprehensive income. The Companys foreign
subsidiaries balance sheet accounts are translated at the
exchange rates in effect at each year end and income statement
accounts are translated at the average rates of exchange
prevailing during the year. The national currencies of the
international operations are generally their functional
currencies.
Mutual
Funds
The Company maintains a retail mutual fund operation, whereby
the Company, through wholly-owned subsidiaries, provides
investment management and administrative services to series of
The Hartford Mutual Funds, Inc.; The Hartford Mutual Funds II,
Inc.; and The Hartford Income Shares Fund, Inc.
(collectively, mutual funds), consisting of 52
mutual funds and 1 closed-end fund, as of December 31,
2009. The Company charges fees to these funds, which are
recorded as revenue by the Company. These funds are registered
with the Securities and Exchange Commission under the Investment
Company Act of 1940. The Company, through its wholly-owned
subsidiaries, also provides investment management and
administrative services (for which it receives revenue) for 18
mutual funds established under the laws of the Province of
Ontario, Canada, and registered with the Ontario Securities
Commission.
F-9
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The mutual funds are owned by the shareholders of those funds
and not by the Company. As such, the mutual fund assets and
liabilities and related investment returns are not reflected in
the Companys consolidated financial statements since they
are not assets, liabilities and operations of the Company.
Other
Policyholder Funds and Benefits Payable
The Company has classified its fixed and variable annuities,
401(k), certain governmental annuities, private placement life
insurance, variable universal life insurance, universal life
insurance and interest sensitive whole life insurance as
universal life-type contracts. The liability for universal
life-type contracts is equal to the balance that accrues to the
benefit of the policyholders as of the financial statement date
(commonly referred to as the account value), including credited
interest, amounts that have been assessed to compensate the
Company for services to be performed over future periods, and
any amounts previously assessed against policyholders that are
refundable on termination of the contract.
The Company has classified its institutional and governmental
products, without life contingencies, including funding
agreements, certain structured settlements and guaranteed
investment contracts, as investment contracts. The liability for
investment contracts is equal to the balance that accrues to the
benefit of the contract holder as of the financial statement
date, which includes the accumulation of deposits plus credited
interest, less withdrawals and amounts assessed through the
financial statement date. Contract holder funds include funding
agreements held by VIEs issuing medium-term notes.
Reserve
for Future Policy Benefits and Unpaid Losses and Loss
Adjustment
Liabilities for the Companys group life and disability
contracts as well as its individual term life insurance policies
include amounts for unpaid losses and future policy benefits.
Liabilities for unpaid losses include estimates of amounts to
fully settle known reported claims as well as claims related to
insured events that the Company estimates have been incurred but
have not yet been reported. Liabilities for future policy
benefits are calculated by the net level premium method using
interest, withdrawal and mortality assumptions appropriate at
the time the policies were issued. The methods used in
determining the liability for unpaid losses and future policy
benefits are standard actuarial methods recognized by the
American Academy of Actuaries. For the tabular reserves,
discount rates are based on the Companys earned investment
yield and the morbidity/mortality tables used are standard
industry tables modified to reflect the Companys actual
experience when appropriate. In particular, for the
Companys group disability known claim reserves, the
morbidity table for the early durations of claim is based
exclusively on the Companys experience, incorporating
factors such as gender, elimination period and diagnosis. These
reserves are computed such that they are expected to meet the
Companys future policy obligations. Future policy benefits
are computed at amounts that, with additions from estimated
premiums to be received and with interest on such reserves
compounded annually at certain assumed rates, are expected to be
sufficient to meet the Companys policy obligations at
their maturities or in the event of an insureds death.
Changes in or deviations from the assumptions used for
mortality, morbidity, expected future premiums and interest can
significantly affect the Companys reserve levels and
related future operations and, as such, provisions for adverse
deviation are built into the long-tailed liability assumptions.
Certain contracts classified as universal life-type may also
include additional death or other insurance benefit features,
such as guaranteed minimum death benefits offered with variable
annuity contracts and no lapse guarantees offered with universal
life insurance contracts. An additional liability is established
for these benefits by estimating the expected present value of
the benefits in excess of the projected account value in
proportion to the present value of total expected assessments.
Excess benefits are accrued as a liability as actual assessments
are recorded. Determination of the expected value of excess
benefits and assessments are based on a range of scenarios and
assumptions including those related to market rates of return
and volatility, contract surrender rates and mortality
experience. Revisions to assumptions are made consistent with
the Companys process for a DAC unlock.
F-10
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For further information, see MD&A, Critical Accounting
Estimates, Life Deferred Policy Acquisition Costs and Present
Value of Future Benefits.
Revenue
Recognition
For investment and universal life-type contracts, the amounts
collected from policyholders are considered deposits and are not
included in revenue. Fee income for universal life-type
contracts consists of policy charges for policy administration,
cost of insurance charges and surrender charges assessed against
policyholders account balances and are recognized in the
period in which services are provided. For the Companys
traditional life and group disability products premiums are
recognized as revenue when due from policyholders.
Income
Taxes
The Company recognizes taxes payable or refundable for the
current year and deferred taxes for the tax consequences of
differences between the financial reporting and tax basis of
assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years the temporary differences are expected to
reverse. See Note 11 for a further discussion of the
account for income taxes.
The Company has four reporting segments: the Retail Products
Group (Retail) , Individual Life (Individual
Life), Retirement Plans (Retirement Plans)
segment, and Institutional Solutions Group
(Institutional).
Retail offers individual variable and fixed market value
adjusted (MVA) annuities and retail mutual funds,
529 college savings plans, Canadian and offshore
investments products.
Retirement Plans provides products and services to corporations
pursuant to Section 401(k) and products and services to
municipalities and
not-for-profit
organizations under Section 457 and 403(b) of the IRS code.
Retirement Plans also offers mutual funds to institutional
investors.
Institutional provides customized investment, insurance, and
income solutions to select markets. Products include stable
value contracts, institutional annuities (primarily terminal
funding cases), variable Private Placement Life Insurance
(PPLI) owned by corporations and high net worth
individuals, and mutual funds owned by institutional investors.
Furthermore, Institutional offers individual products including
structured settlements, single premium immediate annuities, and
longevity assurance.
Individual Life sells a variety of life insurance products,
including variable universal life, universal life, interest
sensitive whole life and term life.
The Company includes in an Other category its leveraged PPLI
product line of business; corporate items not directly allocated
to any of its reporting segments; intersegment eliminations,
direct and assumed guaranteed minimum income benefit
(GMIB), guaranteed minimum death benefit
(GMDB), guaranteed minimum accumulation benefit
(GMAB) and guaranteed minimum withdrawal benefit
(GMWB) which is subsequently ceded to an affiliated
captive reinsurer. In addition, Other includes certain group
benefit products, including group life and group disability
insurance that is directly written by the Company and for which
nearly half is ceded to its parent, HLA, as well as other
International operations.
The accounting policies of the reportable operating segments are
the same as those described in the summary of significant
accounting policies in Note 1. The Company evaluates
performance of its segments based on revenues, net income and
the segments return on allocated capital. Each operating
segment is allocated corporate surplus as needed to support its
business.
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.
Inter-segment revenues primarily occur
F-11
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
between the Companys Other category and the reporting
segments. These amounts primarily include interest income on
allocated surplus and interest charges on excess separate
account surplus. Consolidated net investment income is
unaffected by such transactions.
The following tables represent summarized financial information
concerning the Companys segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
Revenues by Product Line
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums, fees, and other considerations
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual annuity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual variable annuity
|
|
$
|
1,552
|
|
|
$
|
1,943
|
|
|
$
|
2,225
|
|
Fixed / MVA Annuity
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
1
|
|
Other
|
|
|
138
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail mutual funds
|
|
|
423
|
|
|
|
736
|
|
|
|
751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail
|
|
|
2,110
|
|
|
|
2,677
|
|
|
|
2,977
|
|
Individual Life
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Life
|
|
|
503
|
|
|
|
374
|
|
|
|
379
|
|
Universal Life
|
|
|
362
|
|
|
|
376
|
|
|
|
344
|
|
Term Life
|
|
|
37
|
|
|
|
42
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Individual Life
|
|
|
902
|
|
|
|
792
|
|
|
|
771
|
|
Retirement Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k)
|
|
|
286
|
|
|
|
290
|
|
|
|
187
|
|
403(b)/457
|
|
|
38
|
|
|
|
48
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retirement Plans
|
|
|
324
|
|
|
|
338
|
|
|
|
242
|
|
Institutional
|
|
|
|
|
|
|
|
|
|
|
|
|
IIP
|
|
|
386
|
|
|
|
929
|
|
|
|
1,018
|
|
PPLI
|
|
|
115
|
|
|
|
118
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Institutional
|
|
|
501
|
|
|
|
1,047
|
|
|
|
1,242
|
|
Other
|
|
|
292
|
|
|
|
285
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life premiums, fees, and other considerations
|
|
|
4,129
|
|
|
|
5,139
|
|
|
|
5,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
2,848
|
|
|
|
2,342
|
|
|
|
3,057
|
|
Net realized capital losses
|
|
|
(877
|
)
|
|
|
(5,763
|
)
|
|
|
(934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life
|
|
$
|
6,100
|
|
|
$
|
1,718
|
|
|
$
|
7,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
(1,929
|
)
|
|
$
|
(1,248
|
)
|
|
$
|
809
|
|
Individual Life
|
|
|
8
|
|
|
|
(47
|
)
|
|
|
175
|
|
Retirement Plans
|
|
|
(222
|
)
|
|
|
(157
|
)
|
|
|
61
|
|
Institutional
|
|
|
(527
|
)
|
|
|
(504
|
)
|
|
|
12
|
|
Other
|
|
|
513
|
|
|
|
(1,598
|
)
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loss
|
|
$
|
(2,157
|
)
|
|
$
|
(3,554
|
)
|
|
$
|
886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
756
|
|
|
$
|
755
|
|
|
$
|
810
|
|
Individual Life
|
|
|
304
|
|
|
|
308
|
|
|
|
331
|
|
Retirement Plans
|
|
|
315
|
|
|
|
342
|
|
|
|
355
|
|
Institutional
|
|
|
817
|
|
|
|
988
|
|
|
|
1,227
|
|
Other
|
|
|
656
|
|
|
|
(51
|
)
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income
|
|
$
|
2,848
|
|
|
$
|
2,342
|
|
|
$
|
3,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition and present value
of future profits
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
3,239
|
|
|
$
|
1,347
|
|
|
$
|
404
|
|
Individual Life
|
|
|
312
|
|
|
|
166
|
|
|
|
117
|
|
Retirement Plans
|
|
|
56
|
|
|
|
91
|
|
|
|
58
|
|
Institutional
|
|
|
17
|
|
|
|
19
|
|
|
|
23
|
|
Other
|
|
|
103
|
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization of DAC
|
|
$
|
3,727
|
|
|
$
|
1,620
|
|
|
$
|
605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
(1,281
|
)
|
|
$
|
(894
|
)
|
|
$
|
213
|
|
Individual Life
|
|
|
(27
|
)
|
|
|
(36
|
)
|
|
|
85
|
|
Retirement Plans
|
|
|
(143
|
)
|
|
|
(132
|
)
|
|
|
18
|
|
Institutional
|
|
|
(295
|
)
|
|
|
(283
|
)
|
|
|
(2
|
)
|
Other
|
|
|
345
|
|
|
|
(836
|
)
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
(1,401
|
)
|
|
$
|
(2,181
|
)
|
|
$
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
100,946
|
|
|
$
|
97,453
|
|
Individual Life
|
|
|
14,527
|
|
|
|
13,347
|
|
Retirement Plans
|
|
|
28,180
|
|
|
|
22,668
|
|
Institutional
|
|
|
61,925
|
|
|
|
59,638
|
|
Other
|
|
|
15,742
|
|
|
|
14,753
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
221, 320
|
|
|
$
|
207,859
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
Fair
Value Measurements
|
Fair
Value Disclosures
The following financial instruments are carried at fair value in
the Companys Consolidated Financial Statements: fixed
maturities and equity securities,
available-for-sale
(AFS), equity securities, trading, short-term
investments, freestanding and embedded derivatives, and separate
account assets.
The following section applies the fair value hierarchy and
disclosure requirements for the Companys financial
instruments that are carried at fair value. The fair value
hierarchy prioritizes the inputs in the valuation techniques
used to measure fair value into three broad Levels
(Level 1, 2, and 3).
|
|
Level 1
|
Observable inputs that reflect quoted prices for identical
assets or liabilities in active markets that the Company has the
ability to access at the measurement date. Level 1
securities include highly liquid U.S. Treasuries, money
market funds, and exchange traded equity and derivative
securities.
|
|
Level 2
|
Observable inputs, other than quoted prices included in
Level 1, for the asset or liability or prices for similar
assets and liabilities. Most debt securities and some preferred
stocks are model priced by vendors using observable inputs and
are classified within Level 2. Also included in the
Level 2 category are derivative instruments that are priced
using models with observable market inputs, including interest
rate, foreign currency and certain credit default swap contracts
and have no significant unobservable market inputs.
|
|
Level 3
|
Valuations that are derived from techniques in which one or more
of the significant inputs are unobservable (including
assumptions about risk). Level 3 securities include less
liquid securities such as highly structured
and/or lower
quality asset-backed securities (ABS), commercial
mortgage-backed securities (CMBS), commercial real
estate (CRE) collateralized debt obligations
(CDOs), residential mortgage-backed securities
(RMBS) primarily below prime loans, and private
placement securities. Also included in Level 3 are
guaranteed product embedded and reinsurance derivatives and
other complex derivatives securities, including customized GMWB
hedging derivatives, equity derivatives, longer dated
derivatives, swaps with optionality, and certain complex credit
derivatives. Because Level 3 fair values, by their nature,
contain unobservable market inputs as there is little or no
observable market for these assets and liabilities, considerable
judgment is used to determine the Level 3 fair values.
Level 3 fair values represent the Companys best
estimate of an amount that could be realized in a current market
exchange absent actual market exchanges.
|
In many situations, inputs used to measure the fair value of an
asset or liability position may fall into different levels of
the fair value hierarchy. In these situations, the Company will
determine the level in which the fair value falls based upon the
lowest level input that is significant to the determination of
the fair value. In most cases, both observable (e.g., changes in
interest rates) and unobservable (e.g., changes in risk
assumptions) inputs are used in the determination of fair values
that the Company has classified within Level 3.
Consequently, these values and the related gains and losses are
based upon both observable and unobservable inputs. The
Companys fixed maturities
F-14
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
included in Level 3 are classified as such as they are
primarily priced by independent brokers
and/or
within illiquid markets (i.e., below-prime RMBS).
These disclosures provide information as to the extent to which
the Company uses fair value to measure financial instruments and
information about the inputs used to value those financial
instruments to allow users to assess the relative reliability of
the measurements. The following tables present assets and
(liabilities) carried at fair value by hierarchy level.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets accounted for at fair value on a recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS
|
|
$
|
1,903
|
|
|
$
|
|
|
|
$
|
1,406
|
|
|
$
|
497
|
|
CDOs
|
|
|
2,165
|
|
|
|
|
|
|
|
56
|
|
|
|
2,109
|
|
CMBS
|
|
|
5,365
|
|
|
|
|
|
|
|
5,096
|
|
|
|
269
|
|
Corporate
|
|
|
23,667
|
|
|
|
|
|
|
|
18,428
|
|
|
|
5,239
|
|
Foreign government/government agencies
|
|
|
846
|
|
|
|
|
|
|
|
766
|
|
|
|
80
|
|
States, municipalities and political subdivisions
(Municipal)
|
|
|
780
|
|
|
|
|
|
|
|
562
|
|
|
|
218
|
|
RMBS
|
|
|
3,336
|
|
|
|
|
|
|
|
2,341
|
|
|
|
995
|
|
U.S. Treasuries
|
|
|
2,341
|
|
|
|
325
|
|
|
|
2,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
40,403
|
|
|
|
325
|
|
|
|
30,671
|
|
|
|
9,407
|
|
Equity securities, trading
|
|
|
2,443
|
|
|
|
2,443
|
|
|
|
|
|
|
|
|
|
Equity securities, AFS
|
|
|
419
|
|
|
|
113
|
|
|
|
274
|
|
|
|
32
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable annuity hedging derivatives and macro hedge program
|
|
|
212
|
|
|
|
8
|
|
|
|
16
|
|
|
|
188
|
|
Other derivatives(1)
|
|
|
8
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other investments
|
|
|
220
|
|
|
|
8
|
|
|
|
12
|
|
|
|
200
|
|
Short-term investments
|
|
|
5,128
|
|
|
|
3,785
|
|
|
|
1,343
|
|
|
|
|
|
Reinsurance recoverable for U.S. GMWB and Japan GMWB, GMIB, and
GMAB(2)
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
|
|
1,108
|
|
Separate account assets(3)
|
|
|
147,418
|
|
|
|
112,863
|
|
|
|
33,593
|
|
|
|
962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value on a recurring
basis
|
|
$
|
197,139
|
|
|
$
|
119,537
|
|
|
$
|
65,893
|
|
|
$
|
11,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities accounted for at fair value on a recurring
basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed living benefits
|
|
$
|
(3,439
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3,439
|
)
|
Institutional notes
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Equity linked notes
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other policyholder funds and benefits payable
|
|
|
(3,451
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,451
|
)
|
Other liabilities(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable annuity hedging derivatives and macro hedge program
|
|
|
158
|
|
|
|
(2
|
)
|
|
|
(178
|
)
|
|
|
338
|
|
Other derivative liabilities
|
|
|
(45
|
)
|
|
|
|
|
|
|
125
|
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
|
113
|
|
|
|
(2
|
)
|
|
|
(53
|
)
|
|
|
168
|
|
Consumer notes(5)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value on a recurring
basis
|
|
$
|
(3,343
|
)
|
|
$
|
(2
|
)
|
|
$
|
(53
|
)
|
|
$
|
(3,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
Includes
over-the-counter
derivative instruments in a net asset value position which may
require the counterparty to pledge collateral to the Company. At
December 31, 2009, $104 was the amount of cash collateral
liability that was netted against the derivative asset value on
the Consolidated Balance Sheet, and is excluded from the table
above. See footnote 3 below for derivative liabilities. |
|
(2) |
|
Includes fair value of reinsurance recoverables of approximately
$761 related to a transaction entered into on October 1,
2009 with an affiliated captive reinsurer. Please see
note 16 Transactions with Affiliates for more information. |
|
(3) |
|
As of December 31 ,2009 excludes approximately $3 billion
of investment sales receivable that are not subject to fair
value accounting. |
|
(4) |
|
Includes
over-the-counter
derivative instruments in a net negative market value position
(derivative liability). In the Level 3 roll forward table
included below in this Note, the derivative asset and liability
are referred to as freestanding derivatives and are
presented on a net basis. |
|
(5) |
|
Represents embedded derivatives associated with non-funding
agreement-backed consumer equity-linked notes. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets accounted for at fair value on a recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
39,560
|
|
|
$
|
3,502
|
|
|
$
|
27,316
|
|
|
$
|
8,742
|
|
Equity securities, trading
|
|
|
1,634
|
|
|
|
1,634
|
|
|
|
|
|
|
|
|
|
Equity securities, AFS
|
|
|
434
|
|
|
|
148
|
|
|
|
227
|
|
|
|
59
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable annuity hedging derivatives and macro hedge program
|
|
|
600
|
|
|
|
|
|
|
|
13
|
|
|
|
587
|
|
Other derivatives(1)
|
|
|
522
|
|
|
|
|
|
|
|
588
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other investments
|
|
|
1,122
|
|
|
|
|
|
|
|
601
|
|
|
|
521
|
|
Short-term investments
|
|
|
5,742
|
|
|
|
4,030
|
|
|
|
1,712
|
|
|
|
|
|
Reinsurance recoverable for U.S. GMWB
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
1,302
|
|
Separate account assets(2)
|
|
|
126,367
|
|
|
|
94,394
|
|
|
|
31,187
|
|
|
|
786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value on a recurring
basis
|
|
$
|
176,161
|
|
|
$
|
103,708
|
|
|
$
|
61,043
|
|
|
$
|
11,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities accounted for at fair value on a recurring
basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed living benefits
|
|
$
|
(9,206
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(9,206
|
)
|
Institutional notes
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
(41
|
)
|
Equity linked notes
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other policyholder funds and benefits payable
|
|
|
(9,255
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,255
|
)
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable annuity hedging derivatives and macro hedge program
|
|
|
2,201
|
|
|
|
|
|
|
|
14
|
|
|
|
2,187
|
|
Other derivative liabilities
|
|
|
5
|
|
|
|
|
|
|
|
173
|
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other liabilities(3)
|
|
|
2,206
|
|
|
|
|
|
|
|
187
|
|
|
|
2,019
|
|
Consumer notes(4)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value on a recurring
basis
|
|
$
|
(7,054
|
)
|
|
$
|
|
|
|
$
|
187
|
|
|
$
|
(7,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
Includes
over-the-counter
derivative instruments in a net asset value position which may
require the counterparty to pledge collateral to the Company. At
December 31, 2008, $507 of cash collateral liability was
netted against the derivative asset value on the Consolidated
Balance Sheet, and is excluded from the table above. See
footnote 3 below for derivative liabilities. |
|
(2) |
|
As of December 31, 2008 excludes approximately
$3 billion of investment sales receivable net of investment
purchases payable that are not subject to fair value accounting. |
|
(3) |
|
Includes
over-the-counter
derivative instruments in a net negative market value position
(derivative liability). In the Level 3 roll-forward table
included below in this Note, the derivative asset and liability
are referred to as freestanding derivatives and are
presented on a net basis. |
|
(4) |
|
Represents embedded derivatives associated with non-funding
agreement-backed consumer equity-linked notes. |
Determination
of fair values
The valuation methodologies used to determine the fair values of
assets and liabilities under the exit price notion,
reflect market-participant objectives and are based on the
application of the fair value hierarchy that prioritizes
relevant observable market inputs over unobservable inputs. The
Company determines the fair values of certain financial assets
and financial liabilities based on quoted market prices where
available and where prices represent a reasonable estimate of
fair value. The Company also determines fair value based on
future cash flows discounted at the appropriate current market
rate. Fair values reflect adjustments for counterparty credit
quality, the Companys default spreads, liquidity, and,
where appropriate, risk margins on unobservable parameters. The
following is a discussion of the methodologies used to determine
fair values for the financial instruments listed in the above
tables.
Available-for-Sale
Securities and Short-Term Investments
The fair value of AFS securities and short-term investments in
an active and orderly market (e.g. not distressed or forced
liquidation) is determined by management after considering one
of three primary sources of information: third party pricing
services, independent broker quotations or pricing matrices.
Security pricing is applied using a waterfall
approach whereby publicly available prices are first sought from
third party pricing services, the remaining unpriced securities
are submitted to independent brokers for prices, or lastly,
securities are priced using a pricing matrix. Typical inputs
used by these three pricing methods include, but are not limited
to, reported trades, benchmark yields, issuer spreads, bids,
offers,
and/or
estimated cash flows and prepayments speeds. Based on the
typical trading volumes and the lack of quoted market prices for
fixed maturities, third party pricing services will normally
derive the security prices from recent reported trades for
identical or similar securities making adjustments through the
reporting date based upon available market observable
information as outlined above. If there are no recent reported
trades, the third party pricing services and brokers may use
matrix or model processes to develop a security price where
future cash flow expectations are developed based upon
collateral performance and discounted at an estimated market
rate. Included in the pricing of ABS and RMBS are estimates of
the rate of future prepayments of principal over the remaining
life of the securities. Such estimates are derived based on the
characteristics of the underlying structure and prepayment
speeds previously experienced at the interest rate levels
projected for the underlying collateral. Actual prepayment
experience may vary from these estimates.
Prices from third party pricing services are often unavailable
for securities that are rarely traded or are traded only in
privately negotiated transactions. As a result, certain
securities are priced via independent broker quotations which
utilize inputs that may be difficult to corroborate with
observable market based data. Additionally, the majority of
these independent broker quotations are non-binding. A pricing
matrix is used to price securities for which the Company is
unable to obtain either a price from a third party pricing
service or an independent broker quotation, by discounting the
expected future cash flows from the security by a developed
market discount rate utilizing current credit spread levels.
Credit spreads are developed each month using market based data
for public securities adjusted
F-17
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for credit spread differentials between public and private
securities which are obtained from a survey of multiple private
placements brokers.
The Company performs a monthly analysis of the prices and credit
spreads received from third parties to ensure that the prices
represent a reasonable estimate of the fair value. As a part of
this analysis, the Company considers trading volume and other
factors to determine whether the decline in market activity is
significant when compared to normal activity in an active
market, and if so, whether transactions may not be orderly
considering the weight of available evidence. If the available
evidence indicates that pricing is based upon transactions that
are stale or not orderly, the Company places little, if any,
weight on the transaction price and will estimate fair value
utilizing an internal pricing model. This process involves
quantitative and qualitative analysis and is overseen by
investment and accounting professionals. Examples of procedures
performed include, but are not limited to, initial and on-going
review of third party pricing services methodologies, review of
pricing statistics and trends, back testing recent trades, and
monitoring of trading volumes, new issuance activity and other
market activities. In addition, the Company ensures that prices
received from independent brokers represent a reasonable
estimate of fair value through the use of internal and external
cash flow models developed based on spreads, and when available,
market indices. As a result of this analysis, if the Company
determines that there is a more appropriate fair value based
upon the available market data, the price received from the
third party is adjusted accordingly. The Companys internal
pricing model utilizes the Companys best estimate of
expected future cash flows discounted at a rate of return that a
market participant would require. The significant inputs to the
model include, but are not limited to, current market inputs,
such as credit loss assumptions, estimated prepayment speeds and
market risk premiums.
The Company has analyzed the third party pricing services
valuation methodologies and related inputs, and has also
evaluated the various types of securities in its investment
portfolio to determine an appropriate fair value hierarchy level
based upon trading activity and the observability of market
inputs. Most prices provided by third party pricing services are
classified into Level 2 because the inputs used in pricing
the securities are market observable. Due to a general lack of
transparency in the process that brokers use to develop prices,
most valuations that are based on brokers prices are
classified as Level 3. Some valuations may be classified as
Level 2 if the price can be corroborated. Internal matrix
priced securities, primarily consisting of certain private
placement securities, are also classified as Level 3 due to
significant non-observable inputs.
Derivative
Instruments, including embedded derivatives within
investments
Freestanding derivative instruments are reported in the
Consolidated Balance Sheets at fair value and are reported in
other investments and other liabilities. Embedded derivatives
are reported with the host instruments in the Consolidated
Balance Sheets. Derivative instruments are fair valued using
pricing valuation models, which utilize market data inputs or
independent broker quotations. Excluding embedded and
reinsurance related derivatives, as of December 31, 2009
and 2008, 96% and 95%, respectively, of derivatives, based upon
notional values, were priced by valuation models, which utilize
independent market data. The remaining derivatives were priced
by broker quotations. The derivatives are valued using
mid-market inputs that are predominantly observable in the
market. Inputs used to value derivatives include, but are not
limited to, swap interest rates, foreign currency forward and
spot rates, credit spreads and correlations, interest and equity
volatility and equity index levels. The Company performs a
monthly analysis on derivative valuations which includes both
quantitative and qualitative analysis. Examples of procedures
performed include, but are not limited to, review of pricing
statistics and trends, back testing recent trades, analyzing the
impacts of changes in the market environment, and review of
changes in market value for each derivative including those
derivatives priced by brokers.
The Company utilizes derivative instruments to manage the risk
associated with certain assets and liabilities. However, the
derivative instrument may not be classified with the same fair
value hierarchy level as the associated assets and liabilities.
Therefore the realized and unrealized gains and losses on
derivatives reported in Level 3 may not reflect the
offsetting impact of the realized and unrealized gains and
losses of the associated assets and liabilities.
F-18
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Product
Derivatives
The Company currently offers certain variable annuity products
with a guaranteed minimum withdrawal benefit (GMWB)
rider in the U.S., and formerly offered GMWBs in the U.K. and
Japan. The Company has also assumed, through reinsurance, from
HLIKK GMIB, GMWB and GMAB. The GMWB represents an embedded
derivative in the variable annuity contract. When it is
determined that (1) the embedded derivative possesses
economic characteristics that are not clearly and closely
related to the economic characteristics of the host contract,
and (2) a separate instrument with the same terms would
qualify as a derivative instrument, the embedded derivative is
bifurcated from the host for measurement purposes. The embedded
derivative, which is reported with the host instrument in the
consolidated balance sheets, is carried at fair value with
changes in fair value reported in net realized capital gains and
losses. The Companys GMWB liability is carried at fair
value and reported in other policyholder funds.
In valuing the embedded derivative, the Company attributes to
the derivative a portion of the fees collected from the contract
holder equal to the present value of future GMWB claims (the
Attributed Fees). All changes in the fair value of
the embedded derivative are recorded in net realized capital
gains and losses. The excess of fees collected from the contract
holder over the Attributed Fees are associated with the host
variable annuity contract reported in fee income.
The reinsurance assumed on the HLIK.K. GMIB, GMWB, and GMAB meet
the characteristics of a free-standing derivative instrument. As
a result, the derivative asset or liability is recorded at fair
value with changes in the fair value reported in net realized
capital gains and losses.
U.S. GMWB
Ceded Reinsurance Derivative
The fair value of the U.S. GMWB reinsurance derivative is
calculated as an aggregation of the components described in the
Living Benefits Required to be Fair Valued discussion below and
is modeled using significant unobservable policyholder behavior
inputs, identical to those used in calculating the underlying
liability, such as lapses, fund selection, resets and withdrawal
utilization and risk margins.
During 2009, the Company entered into a reinsurance arrangement
with an affiliated captive reinsurer to transfer a portion of
its risk of loss associated with direct US GMWB and assumed
HLIKK GMIB, GMWB, and GMAB. This arrangement is recognized as a
derivative and carried at fair value in reinsurance
recoverables. Changes in the fair value of the reinsurance
agreement are reported in net realized capital gains and losses.
Please see Footnote 16 for more information on this transaction.
Adoption
of Fair Value Accounting
The impact on January 1, 2008 of adopting fair value
measurement guidance for guaranteed benefits and the related
reinsurance was a reduction to net income of $311, after the
effects of DAC amortization and income taxes.
The adoption of fair value accounting resulted in lower variable
annuity fee income for new business issued as Attributed Fees
increased consistent with incorporating additional risk margins
and other indicia of exit value in the valuation of
the embedded derivative. The level of Attributed Fees for new
business each quarter also depends on the level of equity index
volatility, as well as other factors, including interest rates.
As equity index volatility increased, interest rates have
declined and fees ascribed to new business cohorts issued have
risen to levels above the rider fee for most products. The
extent of any excess of Attributed Fee over rider fee will vary
by product.
Separate
Account Assets
Separate account assets are primarily invested in mutual funds
but also have investments in fixed maturity and equity
securities. The separate account investments are valued in the
same manner, and using the same pricing sources and inputs, as
the fixed maturity, equity security, and short-term investments
of the Company.
F-19
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Living
Benefits Required to be Fair Valued (in Other Policyholder Funds
and Benefits Payable)
Fair values for GMWB and guaranteed minimum accumulation benefit
(GMAB) contracts are calculated based upon
internally developed models because active, observable markets
do not exist for those items. The fair value of the
Companys guaranteed benefit liabilities, classified as
embedded derivatives, and the related reinsurance and customized
freestanding derivatives is calculated as an aggregation of the
following components: Best Estimate Claims Costs calculated
based on actuarial and capital market assumptions related to
projected cash flows over the lives of the contracts; Credit
Standing Adjustment; and Margins representing an amount that
market participants would require for the risk that the
Companys assumptions about policyholder behavior could
differ from actual experience. The resulting aggregation is
reconciled or calibrated, if necessary, to market information
that is, or may be, available to the Company, but may not be
observable by other market participants, including reinsurance
discussions and transactions. The Company believes the
aggregation of these components, as necessary and as reconciled
or calibrated to the market information available to the
Company, results in an amount that the Company would be required
to transfer or receive, for an asset, to or from market
participants in an active liquid market, if one existed, for
those market participants to assume the risks associated with
the guaranteed minimum benefits and the related reinsurance and
customized derivatives. The fair value is likely to materially
diverge from the ultimate settlement of the liability as the
Company believes settlement will be based on our best estimate
assumptions rather than those best estimate assumptions plus
risk margins. In the absence of any transfer of the guaranteed
benefit liability to a third party, the release of risk margins
is likely to be reflected as realized gains in future
periods net income. Each component is unobservable in the
marketplace and requires subjectivity by the Company in
determining their value.
The Company recognized the following non-market based assumption
updates to the living benefits models for the U.S. and
International guaranteed living benefits, net of reinsurance:
US
GMWB
|
|
|
The relative outperformance (underperformance) of the underlying
actively managed funds as compared to their respective indices
resulting in a pre-tax gain (loss) of approximately $481 and
$(355), for 2009 and 2008; and
|
|
|
Assumption updates, including policyholder behavior assumptions,
affected best estimates and margins for a total realized gain
before-tax of $495 and $470 for 2009 and 2008; and
|
|
|
The credit standing adjustment, resulting in a pre-tax gain of
approximately $135 and $6 for 2009 and 2008.
|
International
GMWB, GMAB, and GMIB
|
|
|
Assumption updates, including policyholder behavior assumptions,
affected best estimates and margins for a total realized gain
(loss) before-tax of $(264) and $0 for 2009 and 2008; and
|
|
|
The credit standing adjustment, resulting in a pre-tax gain
(loss) of approximately $155 and $(115) for 2009 and 2008.
|
F-20
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
Using Significant Unobservable Inputs
(Level 3)
The tables below provide a fair value roll forward for the
twelve months ending December 31, 2009 and 2008, for the
financial instruments classified as Level 3.
Roll-forward of Financial Instruments Measured at Fair Value
on a Recurring Basis Using Significant Unobservable Inputs
(Level 3) for the twelve months from January 1,
2009 to December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
|
|
|
|
Total realized/unrealized
|
|
|
|
|
|
|
|
|
|
|
|
unrealized
|
|
|
|
|
|
|
gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses)
|
|
|
|
Fair value
|
|
|
included in:
|
|
|
Purchases,
|
|
|
Transfers in
|
|
|
Fair value
|
|
|
included in net
|
|
|
|
as of
|
|
|
Net
|
|
|
|
|
|
issuances,
|
|
|
and/or
|
|
|
as of
|
|
|
income related
|
|
|
|
January 1,
|
|
|
income
|
|
|
|
|
|
and
|
|
|
(out) of
|
|
|
December 31,
|
|
|
to financial
|
|
Asset (Liability)
|
|
2009
|
|
|
(1),(2),(8)
|
|
|
OCI(3)
|
|
|
settlements
|
|
|
Level 3(4)
|
|
|
2009
|
|
|
Asset (Liability)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS
|
|
$
|
429
|
|
|
$
|
(39
|
)
|
|
$
|
148
|
|
|
$
|
(21
|
)
|
|
$
|
(20
|
)
|
|
$
|
497
|
|
|
$
|
(29
|
)
|
CDO
|
|
|
1,981
|
|
|
|
(426
|
)
|
|
|
720
|
|
|
|
(118
|
)
|
|
|
(48
|
)
|
|
|
2,109
|
|
|
|
(382
|
)
|
CMBS
|
|
|
263
|
|
|
|
(170
|
)
|
|
|
196
|
|
|
|
(53
|
)
|
|
|
33
|
|
|
|
269
|
|
|
|
(37
|
)
|
Corporate
|
|
|
4,421
|
|
|
|
(56
|
)
|
|
|
723
|
|
|
|
552
|
|
|
|
(401
|
)
|
|
|
5,239
|
|
|
|
(45
|
)
|
Foreign govt./govt. agencies
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
(13
|
)
|
|
|
80
|
|
|
|
|
|
Municipal
|
|
|
155
|
|
|
|
|
|
|
|
4
|
|
|
|
29
|
|
|
|
30
|
|
|
|
218
|
|
|
|
|
|
RMBS
|
|
|
1,419
|
|
|
|
(344
|
)
|
|
|
136
|
|
|
|
(174
|
)
|
|
|
(42
|
)
|
|
|
995
|
|
|
|
(220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
8,742
|
|
|
|
(1,035
|
)
|
|
|
1,927
|
|
|
|
234
|
|
|
|
(461
|
)
|
|
|
9,407
|
|
|
|
(713
|
)
|
Equity securities, AFS
|
|
|
59
|
|
|
|
(1
|
)
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
(33
|
)
|
|
|
32
|
|
|
|
(1
|
)
|
Derivatives(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable annuity hedging derivatives and macro hedge program
|
|
|
2,774
|
|
|
|
(1,643
|
)
|
|
|
|
|
|
|
(605
|
)
|
|
|
|
|
|
|
526
|
|
|
|
(1,170
|
)
|
Other freestanding derivatives
|
|
|
(234
|
)
|
|
|
73
|
|
|
|
(4
|
)
|
|
|
16
|
|
|
|
(9
|
)
|
|
|
(158
|
)
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freestanding derivatives
|
|
|
2,540
|
|
|
|
(1,570
|
)
|
|
|
(4
|
)
|
|
|
(589
|
)
|
|
|
(9
|
)
|
|
|
368
|
|
|
|
(1,041
|
)
|
Reinsurance recoverable for U.S. GMWB and Japan GMWB, GMIB, and
GMAB(1),(7),(9)
|
|
|
1,302
|
|
|
|
(1,565
|
)
|
|
|
(51
|
)
|
|
|
1,422
|
|
|
|
|
|
|
|
1,108
|
|
|
|
(1,565
|
)
|
Separate accounts(6)
|
|
|
786
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
344
|
|
|
|
(103
|
)
|
|
|
962
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed living benefits
|
|
$
|
(9,206
|
)
|
|
|
5,833
|
|
|
|
174
|
|
|
|
(240
|
)
|
|
|
|
|
|
|
(3,439
|
)
|
|
|
5,833
|
|
Institutional notes
|
|
|
(41
|
)
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
39
|
|
Equity linked notes
|
|
|
(8
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other policyholder funds and benefits payable(1)
|
|
|
(9,255
|
)
|
|
|
5,870
|
|
|
|
174
|
|
|
|
(240
|
)
|
|
|
|
|
|
|
(3,451
|
)
|
|
|
5,870
|
|
Consumer notes
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company classifies gains and losses on GMWB reinsurance
derivatives and Guaranteed Living Benefit embedded derivatives
as unrealized gains (losses) for purposes of disclosure in this
table because it is impracticable to track on a
contract-by-contract
basis the realized gains (losses) for these derivatives and
embedded derivatives. |
|
(2) |
|
All amounts in these columns are reported in net realized
capital gains (losses) except for $3, which is reported in
benefits, losses and loss adjustment expenses. All amounts are
before income taxes and amortization of DAC. |
|
(3) |
|
All amounts are before income taxes and amortization of DAC. |
F-21
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(4) |
|
Transfers in and/or (out) of Level 3 are attributable to a
change in the availability of market observable information and
re-evaluation of the observability of pricing inputs primarily
for certain long-dated corporate bonds and preferred stocks. |
|
(5) |
|
Derivative instruments are reported in this table on a net basis
for asset/(liability) positions and reported in the Consolidated
Balance Sheet in other investments and other liabilities. |
|
(6) |
|
The realized/unrealized gains (losses) included in net income
for separate account assets are offset by an equal amount for
separate account liabilities, which results in a net zero impact
on net income for the Company. |
|
(7) |
|
Includes fair value of reinsurance recoverables of approximately
$761 related to a transaction entered into on October 1,
2009 with an affiliated captive reinsurer. Please see
Note 16 Transactions with Affiliates for more information. |
|
(8) |
|
Includes both market and non-market impacts in deriving realized
and unrealized gains (losses) |
|
(9) |
|
During July 2008, the Company reinsured, with a third party,
U.S. GMWB risks associated with approximately $7.8 billion
of account value sold between 2003 and 2006. The reinsurance
agreement is an 80% quota-share agreement. The third
partys financial strength is rated A+ by A.M. Best,
AA- by Standard and Poors and Aa2 by Moodys. The
reinsurance agreement will be accounted for as a freestanding
derivative |
F-22
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Roll-forward
of Financial Instruments Measured at Fair Value on a Recurring
Basis Using Significant Unobservable Inputs
(Level 3) for the twelve months from January 1,
2008 to December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses)
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
included in net
|
|
|
|
|
|
|
realized/unrealized
|
|
|
|
|
|
|
|
|
|
|
|
income related
|
|
|
|
|
|
|
gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
to financial
|
|
|
|
Fair value
|
|
|
included in:
|
|
|
Purchases,
|
|
|
Transfers in
|
|
|
Fair value
|
|
|
instruments
|
|
|
|
as of
|
|
|
Net
|
|
|
|
|
|
issuances,
|
|
|
and/or
|
|
|
as of
|
|
|
still held at
|
|
|
|
January 1,
|
|
|
income
|
|
|
|
|
|
and
|
|
|
(out) of
|
|
|
December 31,
|
|
|
December 31,
|
|
Asset (Liability)
|
|
2008
|
|
|
(1),(2),(11)
|
|
|
OCI(3)
|
|
|
settlements
|
|
|
Level 3(4)
|
|
|
2008
|
|
|
2008(2)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
13,558
|
|
|
$
|
(659
|
)
|
|
$
|
(3,382
|
)
|
|
$
|
526
|
|
|
$
|
(1,301
|
)
|
|
$
|
8,742
|
|
|
$
|
(515
|
)
|
Equity securities, AFS
|
|
|
563
|
|
|
|
1
|
|
|
|
(27
|
)
|
|
|
3
|
|
|
|
(481
|
)
|
|
|
59
|
|
|
|
(2
|
)
|
Freestanding derivatives(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable annuity hedging derivatives and macro hedge program
|
|
|
673
|
|
|
|
2,096
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
2,774
|
|
|
|
1,995
|
|
Other freestanding derivatives
|
|
|
(303
|
)
|
|
|
(316
|
)
|
|
|
16
|
|
|
|
271
|
|
|
|
98
|
|
|
|
(234
|
)
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freestanding derivatives
|
|
|
370
|
|
|
|
1,780
|
|
|
|
16
|
|
|
|
276
|
|
|
|
98
|
|
|
|
2,540
|
|
|
|
1,770
|
|
Reinsurance recoverable(1),(2),(9)
|
|
|
238
|
|
|
|
962
|
|
|
|
|
|
|
|
102
|
|
|
|
|
|
|
|
1,302
|
|
|
|
962
|
|
Separate accounts(6)
|
|
|
701
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
(26
|
)
|
|
|
315
|
|
|
|
786
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Asset Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total freestanding derivatives used to hedge U.S. GMWB including
those in Levels 1, 2 and 3(10)
|
|
|
643
|
|
|
|
3,374
|
|
|
|
|
|
|
|
(1,353
|
)
|
|
|
|
|
|
|
2,664
|
|
|
|
3,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed living benefits
|
|
$
|
(1,692
|
)
|
|
$
|
(7,019
|
)
|
|
$
|
(248
|
)
|
|
$
|
(247
|
)
|
|
$
|
|
|
|
$
|
(9,206
|
)
|
|
$
|
(7,019
|
)
|
Institutional notes
|
|
|
(24
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41
|
)
|
|
|
(17
|
)
|
Equity linked notes
|
|
|
(21
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other policyholder funds and benefits payable accounted
for at fair value(2)
|
|
|
(1,737
|
)
|
|
|
(7,023
|
)
|
|
|
(248
|
)
|
|
|
(247
|
)
|
|
|
|
|
|
|
(9,255
|
)
|
|
|
(7,023
|
)
|
Consumer notes
|
|
|
(5
|
)
|
|
|
5
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net U.S. GMWB (Embedded derivatives, freestanding derivatives
including those in Levels 1, 2 and 3 and reinsurance
recoverable)(8)
|
|
$
|
(552
|
)
|
|
$
|
(631
|
)
|
|
$
|
|
|
|
$
|
(1,377
|
)
|
|
$
|
|
|
|
$
|
(2,560
|
)
|
|
$
|
(631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The January 1, 2008 fair value of $238 includes the pre
fair value amount of $128 and transitional adjustment of $110. |
|
(2) |
|
The Company classifies all the gains and losses on GMWB
reinsurance derivatives and GMWB embedded derivatives and
reinsured GMWB, GMIB and GMAB free standing derivatives as
unrealized gains/losses for purposes of disclosure in this table
because it is impracticable to track on a
contract-by-contract
basis the realized gains/losses for these derivatives and
embedded derivatives. |
|
(3) |
|
All amounts in these columns are reported in net realized
capital gains/losses, except for $6 for the twelve months ending
December 31, 2009, which is reported in benefits, losses
and loss adjustment expenses. All amounts are before income
taxes and amortization of DAC. |
|
(4) |
|
The freestanding derivatives, excluding reinsurance derivatives
instruments, are reported in this table on a net basis for
asset/ (liability) positions and reported on the Consolidated
Balance Sheet in other investments and other liabilities. |
F-23
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(5) |
|
All amounts are before income taxes and amortization of DAC. |
|
(6) |
|
The realized/unrealized gains (losses) included in net income
for separate account assets are offset by an equal amount for
separate account liabilities which results in a net zero impact
on net income for the Company. |
|
(7) |
|
Transfers in and/or (out) of Level 3 are attributable to a
change in the availability of market observable information for
individual securities within respective categories. |
|
(8) |
|
The net loss on U.S. GMWB since January 1, 2008 was
primarily related to liability model assumption updates for
mortality in the first quarter and market-based hedge
ineffectiveness in the third and fourth quarters due to
extremely volatile capital markets, partially offset by gains in
the fourth quarter related to liability model assumption updates
for lapse rates. |
|
(9) |
|
During July 2008, the Company reinsured, with a third party,
U.S. GMWB risks associated with approximately $7.8 billion
of account value sold between 2003 and 2006. The reinsurance
agreement is an 80% quota-share agreement. The third
partys financial strength is rated A+ by A.M. Best,
AA- by Standard and Poors and Aa2 by Moodys. The
reinsurance agreement will be accounted for as a freestanding
derivative. |
|
(10) |
|
The Purchases, issuances, and settlements primarily
relates to the receipt of cash on futures and option contracts
classified as Level 1 and interest rate, currency and
credit default swaps classified as Level 2. |
|
(11) |
|
Includes both market and non-market impacts in deriving realized
and unrealized gains (losses) |
Financial
Instruments Not Carried at Fair Value
The following presents carrying amounts and fair values of the
Companys financial instruments not carried at fair value,
and not included in the above fair value discussion as of
December 31, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy loans
|
|
$
|
2,120
|
|
|
$
|
2,252
|
|
|
$
|
2,154
|
|
|
$
|
2,366
|
|
Mortgage loans
|
|
|
4,304
|
|
|
|
3,645
|
|
|
|
4,896
|
|
|
|
4,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable(1)
|
|
$
|
11,919
|
|
|
$
|
12,101
|
|
|
$
|
14,421
|
|
|
$
|
14,158
|
|
Consumer notes
|
|
|
1,131
|
|
|
|
1,194
|
|
|
|
1,210
|
|
|
|
1,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes group accident and health and universal life insurance
contracts, including corporate owned life insurance. |
|
|
|
Fair value for policy loans and consumer notes were estimated
using discounted cash flow calculations. |
|
|
|
Fair values for mortgage loans were estimated using discounted
cash flow calculations based on current lending rates for
similar type loans. Current incremental lending rates reflect
changes in credit spreads and the remaining terms of the loans. |
|
|
|
Other policyholder funds and benefits payable, not carried at
fair value, is determined by estimating future cash flows,
discounted at the current market rate. |
|
|
4.
|
Investments
and Derivative Instruments
|
Significant
Investment Accounting Policies
The Companys investments in fixed maturities include
bonds, redeemable preferred stock and commercial paper. These
investments, along with certain equity securities, which include
common and non-redeemable preferred stocks, are classified as
AFS and are carried at fair value. The after-tax difference from
cost or amortized cost is
F-24
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reflected in stockholders equity as a component of Other
Comprehensive Income (Loss) (OCI), after adjustments
for the effect of deducting the life and pension
policyholders share of the immediate participation
guaranteed contracts and certain life and annuity deferred
policy acquisition costs and reserve adjustments. The equity
investments associated with the variable annuity products
offered in the United Kingdom are recorded at fair value and are
classified as trading with changes in fair value recorded in net
investment income. Policy loans are carried at outstanding
balance. Mortgage loans are recorded at the outstanding
principal balance adjusted for amortization of premiums or
discounts and net of valuation allowances. Short-term
investments are carried at amortized cost, which approximates
fair value. Limited partnerships and other alternative
investments are reported at their carrying value with the change
in carrying value accounted for under the equity method and
accordingly the Companys share of earnings are included in
net investment income. Recognition of limited partnerships and
other alternative investment income is delayed due to the
availability of the related financial information, as private
equity and other funds are generally on a three-month delay and
hedge funds are on a one-month delay. Accordingly, income for
the years ended December 31, 2009, 2008 and 2007 may
not include the full impact of current year changes in valuation
of the underlying assets and liabilities, which are generally
obtained from the limited partnerships and other alternative
investments general partners. Other investments primarily
consist of derivatives instruments which are carried at fair
value.
Recognition
and Presentation of
Other-Than-Temporary
Impairments
In April 2009, the FASB updated the guidance related to the
recognition and presentation of
other-than-temporary
impairments which modifies the recognition of
other-than-temporary
impairment (impairment) losses for debt securities.
This new guidance is also applied to certain equity securities
with debt-like characteristics (collectively debt
securities). Under the new guidance, a debt security is
deemed to be
other-than-temporarily
impaired if it meets the following conditions: 1) the
Company intends to sell or it is more likely than not the
Company will be required to sell the security before a recovery
in value, or 2) the Company does not expect to recover the
entire amortized cost basis of the security. If the Company
intends to sell or it is more likely than not that the Company
will be required to sell the security before a recovery in
value, a charge is recorded in net realized capital losses equal
to the difference between the fair value and amortized cost
basis of the security. For those
other-than-temporarily
impaired debt securities which do not meet the first condition
and for which the Company does not expect to recover the entire
amortized cost basis, the difference between the securitys
amortized cost basis and the fair value is separated into the
portion representing a credit impairment, which is recorded in
net realized capital losses, and the remaining impairment, which
is recorded in OCI. Generally, the Company determines a
securitys credit impairment as the difference between its
amortized cost basis and its best estimate of expected future
cash flows discounted at the securitys effective yield
prior to impairment. The remaining non-credit impairment, which
is recorded in OCI, is the difference between the
securitys fair value and the Companys best estimate
of expected future cash flows discounted at the securitys
effective yield prior to the impairment. The remaining
non-credit impairment typically represents current market
liquidity and risk premiums. The previous amortized cost basis
less the impairment recognized in net realized capital losses
becomes the securitys new cost basis. The Company accretes
the new cost basis to the estimated future cash flows over the
expected remaining life of the security by prospectively
adjusting the securitys yield, if necessary. Prior to the
adoption of this accounting guidance, the Company recorded the
entire difference between the fair value and cost or amortized
cost basis of the security in net realized capital losses unless
the Company could assert the intent and ability to hold the
security for a period sufficient to allow for recovery of fair
value to its amortized cost basis.
The Company evaluates whether a credit impairment exists for
debt securities by considering primarily the following factors:
(a) the length of time and extent to which the fair value
has been less than the amortized cost of the security,
(b) changes in the financial condition, credit rating and
near-term prospects of the issuer, (c) whether the issuer
is current on contractually obligated interest and principal
payments, (d) changes in the financial condition of the
securitys underlying collateral and (e) the payment
structure of the security. The Companys best estimate of
expected future cash flows used to determine the credit loss
amount is a quantitative and qualitative process that
F-25
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
incorporates information received from third-party sources along
with certain internal assumptions and judgments regarding the
future performance of the security. The Companys best
estimate of future cash flows involves assumptions including,
but not limited to, various performance indicators, such as
historical and projected default and recovery rates, credit
ratings, current delinquency rates,
loan-to-value
ratios and the possibility of obligor re-financing. In addition,
for securitized debt securities, the Company considers factors
including, but not limited to, commercial and residential
property value declines that vary by property type and location
and average cumulative collateral loss rates that vary by
vintage year. These assumptions require the use of significant
management judgment and include the probability of issuer
default and estimates regarding timing and amount of expected
recoveries which may include estimating the underlying
collateral value. In addition, projections of expected future
debt security cash flows may change based upon new information
regarding the performance of the issuer
and/or
underlying collateral such as changes in the projections of the
underlying property value estimates.
For equity securities where the decline in the fair value is
deemed to be
other-than-temporary,
a charge is recorded in net realized capital losses equal to the
difference between the fair value and cost basis of the
security. The previous cost basis less the impairment becomes
the securitys new cost basis. The Company asserts its
intent and ability to retain those equity securities deemed to
be temporarily impaired until the price recovers. Once
identified, these securities are systematically restricted from
trading unless approved by a committee of investment and
accounting professionals (Committee). The Committee
will only authorize the sale of these securities based on
predefined criteria that relate to events that could not have
been reasonably foreseen. Examples of the criteria include, but
are not limited to, the deterioration in the issuers
financial condition, security price declines, a change in
regulatory requirements or a major business combination or major
disposition.
The primary factors considered in evaluating whether an
impairment exists for an equity security include, but are not
limited to: (a) the length of time and extent to which the
fair value has been less than the cost of the security,
(b) changes in the financial condition, credit rating and
near-term prospects of the issuer, (c) whether the issuer
is current on contractually obligated payments and (d) the
intent and ability of the Company to retain the investment for a
period of time sufficient to allow for recovery.
Mortgage
Loan Valuation Allowances
Mortgage loans are considered to be impaired when management
estimates that based upon current information and events, it is
probable that the Company will be unable to collect amounts due
according to the contractual terms of the loan agreement.
Criteria used to determine if an impairment exists include, but
are not limited to: current and projected macroeconomic factors,
such as unemployment rates, as well as rental rates, occupancy
levels, delinquency rates and property values, and debt service
coverage ratios. These assumptions require the use of
significant management judgment and include the probability and
timing of borrower default and loss severity estimates. In
addition, projections of expected future cash flows may change
based upon new information regarding the performance of the
borrower
and/or
underlying collateral such as changes in the projections of the
underlying property value estimates.
For mortgage loans that are deemed impaired, a valuation
allowance is established for the difference between the carrying
amount and the Companys share of either (a) the
present value of the expected future cash flows discounted at
the loans original effective interest rate, (b) the
loans observable market price or (c) the fair value
of the collateral. Additionally, a loss contingency valuation
allowance is established for estimated probable credit losses on
certain homogenous groups of loans. Changes in valuation
allowances are recorded in net realized capital gains and
losses. Interest income on an impaired loan is accrued to the
extent it is deemed collectable and the loan continues to
perform under its original or restructured terms. Interest
income on defaulted loans is recognized when received.
F-26
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net
Realized Capital Gains and Losses
Net realized capital gains and losses from investment sales,
after deducting the life and pension policyholders share
for certain products, are reported as a component of revenues
and are determined on a specific identification basis. Net
realized capital gains and losses also result from fair value
changes in derivatives contracts (both free-standing and
embedded) that do not qualify, or are not designated, as a hedge
for accounting purposes, and the change in value of derivatives
in certain fair-value hedge relationships. Impairments are
recognized as net realized capital losses in accordance with the
Companys impairment policy previously discussed. Foreign
currency transaction remeasurements are also included in net
realized capital gains and losses.
Net
Investment Income
Interest income from fixed maturities and mortgage loans is
recognized when earned on the constant effective yield method
based on estimated timing of cash flows. The amortization of
premium and accretion of discount for fixed maturities also
takes into consideration call and maturity dates that produce
the lowest yield. For securitized financial assets subject to
prepayment risk, yields are recalculated and adjusted
periodically to reflect historical
and/or
estimated future repayments using the retrospective method;
however, if these investments are impaired, any yield
adjustments are made using the prospective method. Prepayment
fees on fixed maturities and mortgage loans are recorded in net
investment income when earned. For limited partnerships and
other alternative investments, the equity method of accounting
is used to recognize the Companys share of earnings. For
impaired debt securities, the Company accretes the new cost
basis to the estimated future cash flows over the expected
remaining life of the security by prospectively adjusting the
securitys yield, if necessary. The Companys
non-income producing investments were not material for the years
ended December 31, 2009, 2008 and 2007.
Net investment income on equity securities, trading includes
dividend income and the changes in market value of the
securities associated with the variable annuity products sold in
the United Kingdom. The returns on these policyholder-directed
investments inure to the benefit of the variable annuity
policyholders but the underlying funds do not meet the criteria
for separate account reporting. Accordingly, these assets are
reflected in the Companys general account and the returns
credited to the policyholders are reflected in interest
credited, a component of benefits, losses and loss adjustment
expenses.
Significant
Derivative Instruments Accounting Policies
Overview
The Company utilizes a variety of derivative instruments,
including swaps, caps, floors, forwards, futures and options
through one of four Company-approved objectives: to hedge risk
arising from interest rate, equity market, credit spread and
issuer default, price or currency exchange rate risk or
volatility; to manage liquidity; to control transaction costs;
or to enter into replication transactions.
Interest rate, volatility, dividend, credit default and index
swaps involve the periodic exchange of cash flows with other
parties, at specified intervals, calculated using agreed upon
rates or other financial variables and notional principal
amounts. Generally, no cash or principal payments are exchanged
at the inception of the contract. Typically, at the time a swap
is entered into, the cash flow streams exchanged by the
counterparties are equal in value.
Interest rate cap and floor contracts entitle the purchaser to
receive from the issuer at specified dates, the amount, if any,
by which a specified market rate exceeds the cap strike interest
rate or falls below the floor strike interest rate, applied to a
notional principal amount. A premium payment is made by the
purchaser of the contract at its inception and no principal
payments are exchanged.
Forward contracts are customized commitments that specify a rate
of interest or currency exchange rate to be paid or received on
an obligation beginning on a future start date and are typically
settled in cash.
F-27
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Financial futures are standardized commitments to either
purchase or sell designated financial instruments, at a future
date, for a specified price and may be settled in cash or
through delivery of the underlying instrument. Futures contracts
trade on organized exchanges. Margin requirements for futures
are met by pledging securities or cash, and changes in the
futures contract values are settled daily in cash.
Option contracts grant the purchaser, for a premium payment, the
right to either purchase from or sell to the issuer a financial
instrument at a specified price, within a specified period or on
a stated date.
Foreign currency swaps exchange an initial principal amount in
two currencies, agreeing to re-exchange the currencies at a
future date, at an agreed upon exchange rate. There may also be
a periodic exchange of payments at specified intervals
calculated using the agreed upon rates and exchanged principal
amounts.
The Companys derivative transactions are used in
strategies permitted under the derivative use plans required by
the State of Connecticut and the State of New York insurance
departments.
Accounting
and Financial Statement Presentation of Derivative Instruments
and Hedging Activities
Derivative instruments are recognized on the Consolidated
Balance Sheets at fair value. For balance sheet presentation
purposes, the Company offsets the fair value amounts, income
accruals, and cash collateral held, related to derivative
instruments executed in a legal entity and with the same
counterparty under a master netting agreement, which provides
the Company with the legal right of offset.
On the date the derivative contract is entered into, the Company
designates the derivative as (1) a hedge of the fair value
of a recognized asset or liability (fair value
hedge), (2) a hedge of the variability in cash flows of a
forecasted transaction or of amounts to be received or paid
related to a recognized asset or liability (cash
flow hedge), (3) a hedge of a net investment in a
foreign operation (net investment hedge) or
(4) held for other investment
and/or risk
management purposes, which primarily involve managing asset or
liability related risks which do not qualify for hedge
accounting.
Fair
Value Hedges
Changes in the fair value of a derivative that is designated and
qualifies as a fair value hedge, including foreign-currency fair
value hedges, along with the changes in the fair value of the
hedged asset or liability that is attributable to the hedged
risk, are recorded in current period earnings with any
differences between the net change in fair value of the
derivative and the hedged item representing the hedge
ineffectiveness. Periodic cash flows and accruals of
income/expense (periodic derivative net coupon
settlements) are recorded in the line item of the
Consolidated Statement of Operations in which the cash flows of
the hedged item are recorded.
Cash
Flow Hedges
Changes in the fair value of a derivative that is designated and
qualifies as a cash flow hedge, including foreign-currency cash
flow hedges, are recorded in AOCI and are reclassified into
earnings when the variability of the cash flow of the hedged
item impacts earnings. Gains and losses on derivative contracts
that are reclassified from AOCI to current period earnings are
included in the line item in the Consolidated Statements of
Operations in which the cash flows of the hedged item are
recorded. Any hedge ineffectiveness is recorded immediately in
current period earnings as net realized capital gains and
losses. Periodic derivative net coupon settlements are recorded
in the line item of the consolidated statements of operations in
which the cash flows of the hedged item are recorded.
Net
Investment in a Foreign Operation Hedges
Changes in fair value of a derivative used as a hedge of a net
investment in a foreign operation, to the extent effective as a
hedge, are recorded in the foreign currency translation
adjustments account within AOCI. Cumulative changes in fair
value recorded in AOCI are reclassified into earnings upon the
sale or complete, or substantially complete,
F-28
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
liquidation of the foreign entity. Any hedge ineffectiveness is
recorded immediately in current period earnings as net realized
capital gains and losses. Periodic derivative net coupon
settlements are recorded in the line item of the Consolidated
Statements of Operations in which the cash flows of the hedged
item are recorded.
Other
Investment and/or Risk Management Activities
The Companys other investment
and/or risk
management activities primarily relate to strategies used to
reduce economic risk or replicate permitted investments and do
not receive hedge accounting treatment. Changes in the fair
value, including periodic derivative net coupon settlements, of
derivative instruments held for other investment
and/or risk
management purposes are reported in current period earnings as
net realized capital gains and losses.
Hedge
Documentation and Effectiveness Testing
To qualify for hedge accounting treatment, a derivative must be
highly effective in mitigating the designated changes in fair
value or cash flow of the hedged item. At hedge inception, the
Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management
objective and strategy for undertaking each hedge transaction.
The documentation process includes linking derivatives that are
designated as fair value, cash flow, or net investment hedges to
specific assets or liabilities on the balance sheet or to
specific forecasted transactions and defining the effectiveness
and ineffectiveness testing methods to be used. The Company also
formally assesses both at the hedges inception and ongoing
on a quarterly basis, whether the derivatives that are used in
hedging transactions have been and are expected to continue to
be highly effective in offsetting changes in fair values or cash
flows of hedged items. Hedge effectiveness is assessed using
qualitative and quantitative methods. Qualitative methods may
include comparison of critical terms of the derivative to the
hedged item. Quantitative methods include regression or other
statistical analysis of changes in fair value or cash flows
associated with the hedge relationship. Hedge ineffectiveness of
the hedge relationships are measured each reporting period using
the Change in Variable Cash Flows Method, the
Change in Fair Value Method, the Hypothetical
Derivative Method, or the Dollar Offset Method.
Discontinuance
of Hedge Accounting
The Company discontinues hedge accounting prospectively when
(1) it is determined that the derivative is no longer
highly effective in offsetting changes in the fair value or cash
flows of a hedged item; (2) the derivative is de-designated
as a hedging instrument; or (3) the derivative expires or
is sold, terminated or exercised.
When hedge accounting is discontinued because it is determined
that the derivative no longer qualifies as an effective
fair-value hedge, the derivative continues to be carried at fair
value on the balance sheet with changes in its fair value
recognized in current period earnings.
When hedge accounting is discontinued because the Company
becomes aware that it is not probable that the forecasted
transaction will occur, the derivative continues to be carried
on the balance sheet at its fair value, and gains and losses
that were accumulated in AOCI are recognized immediately in
earnings.
In other situations in which hedge accounting is discontinued on
a cash-flow hedge, including those where the derivative is sold,
terminated or exercised, amounts previously deferred in AOCI are
reclassified into earnings when earnings are impacted by the
variability of the cash flow of the hedged item.
Embedded
Derivatives
The Company purchases and issues financial instruments and
products that contain embedded derivative instruments. When it
is determined that (1) the embedded derivative possesses
economic characteristics that are not clearly and closely
related to the economic characteristics of the host contract,
and (2) a separate instrument with the same terms would
qualify as a derivative instrument, the embedded derivative is
bifurcated from the host for
F-29
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
measurement purposes. The embedded derivative, which is reported
with the host instrument in the consolidated balance sheets, is
carried at fair value with changes in fair value reported in net
realized capital gains and losses.
Credit
Risk
The Companys derivative counterparty exposure policy
establishes market-based credit limits, favors long-term
financial stability and creditworthiness and typically requires
credit enhancement/credit risk reducing agreements. Credit risk
is measured as the amount owed to the Company based on current
market conditions and potential payment obligations between the
Company and its counterparties. For each legal entity of the
Company credit exposures are generally quantified daily, netted
by counterparty and collateral is pledged to and held by, or on
behalf of, the Company to the extent the current value of
derivatives exceeds the contractual thresholds which do not
exceed $10. The Company also minimizes the credit risk in
derivative instruments by entering into transactions with high
quality counterparties rated A2/A or better, which are monitored
and evaluated by the Companys risk management team and
reviewed by senior management. In addition, the Company monitors
counterparty credit exposure on a monthly basis to ensure
compliance with Company policies and statutory limitations. The
Company also maintains a policy of requiring that derivative
contracts, other than exchange traded contracts, certain
currency forward contracts, and certain embedded derivatives, be
governed by an International Swaps and Derivatives Association
Master Agreement which is structured by legal entity and by
counterparty and permits right of offset.
Net
Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(Before-tax)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Fixed maturities
|
|
$
|
2,094
|
|
|
$
|
2,458
|
|
|
$
|
2,714
|
|
Equity securities, AFS
|
|
|
43
|
|
|
|
65
|
|
|
|
54
|
|
Mortgage loans
|
|
|
232
|
|
|
|
251
|
|
|
|
227
|
|
Policy loans
|
|
|
136
|
|
|
|
136
|
|
|
|
132
|
|
Limited partnerships and other alternative investments
|
|
|
(171
|
)
|
|
|
(224
|
)
|
|
|
112
|
|
Other investments
|
|
|
242
|
|
|
|
(33
|
)
|
|
|
(120
|
)
|
Investment expenses
|
|
|
(71
|
)
|
|
|
(65
|
)
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income excluding equity securities, trading
|
|
|
2,505
|
|
|
|
2,588
|
|
|
|
3,056
|
|
Equity securities, trading
|
|
|
343
|
|
|
|
(246
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net investment income
|
|
$
|
2,848
|
|
|
$
|
2,342
|
|
|
$
|
3,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net unrealized gain (loss) on equity securities, trading,
included in net investment income during the years ended
December 31, 2009, 2008 and 2007, was $276, $(250) and
$(17), respectively, substantially all of which have
corresponding amounts credited to policyholders. These amounts
were not included in gross unrealized gains (losses).
F-30
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net
Realized Capital Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
(Before-tax)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Gross gains on sales
|
|
$
|
364
|
|
|
$
|
383
|
|
|
$
|
187
|
|
Gross losses on sales
|
|
|
(828
|
)
|
|
|
(398
|
)
|
|
|
(142
|
)
|
Net OTTI losses recognized in earnings
|
|
|
(1,192
|
)
|
|
|
(1,888
|
)
|
|
|
(339
|
)
|
Japanese fixed annuity contract hedges, net(1)
|
|
|
47
|
|
|
|
64
|
|
|
|
18
|
|
Periodic net coupon settlements on credit derivatives/Japan
|
|
|
(33
|
)
|
|
|
(34
|
)
|
|
|
(40
|
)
|
Fair value measurement transition impact
|
|
|
|
|
|
|
(798
|
)
|
|
|
|
|
Results of variable annuity hedge program
|
|
|
|
|
|
|
|
|
|
|
|
|
GMWB derivatives, net
|
|
|
1,505
|
|
|
|
(687
|
)
|
|
|
(286
|
)
|
Macro hedge program
|
|
|
(895
|
)
|
|
|
74
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total results of variable annuity hedge program
|
|
|
610
|
|
|
|
(613
|
)
|
|
|
(298
|
)
|
GMIB/GMAB/GMWB reinsurance assumed
|
|
|
1,106
|
|
|
|
(1,986
|
)
|
|
|
(155
|
)
|
Coinsurance and modified coinsurance ceded reinsurance contracts
|
|
|
(577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net(2)
|
|
|
(374
|
)
|
|
|
(493
|
)
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital losses
|
|
$
|
(877
|
)
|
|
$
|
(5,763
|
)
|
|
$
|
(934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Relates to derivative hedging instruments, excluding periodic
net coupon settlements, and is net of the Japanese fixed annuity
product liability adjustment for changes in the dollar/yen
exchange spot rate. |
|
(2) |
|
Consists of changes in fair value on non-qualifying derivatives,
hedge ineffectiveness on qualifying derivative instruments,
foreign currency gains and losses related to the internal
reinsurance of the Japan variable annuity business, which is
offset in AOCI, valuation allowances and other investment gains
and losses. |
Sales of
Available-for-Sale
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale proceeds
|
|
$
|
27,809
|
|
|
$
|
9,366
|
|
|
$
|
12,415
|
|
Gross gains
|
|
|
495
|
|
|
|
291
|
|
|
|
246
|
|
Gross losses
|
|
|
(830
|
)
|
|
|
(472
|
)
|
|
|
(135
|
)
|
Equity securities, AFS
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale proceeds
|
|
$
|
162
|
|
|
$
|
126
|
|
|
$
|
296
|
|
Gross gains
|
|
|
2
|
|
|
|
11
|
|
|
|
12
|
|
Gross losses
|
|
|
(27
|
)
|
|
|
(21
|
)
|
|
|
(7
|
)
|
Sales of AFS securities were the result of the Companys
repositioning of its investment portfolio throughout 2009.
F-31
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other-Than-Temporary
Impairment Losses
The following table presents a roll-forward of the
Companys cumulative credit impairments on debt securities
held as of December 31, 2009.
|
|
|
|
|
|
|
Credit Impairment
|
|
|
Balance as of January 1, 2009
|
|
$
|
|
|
Credit impairments remaining in retained earnings related to
adoption of new accounting guidance in April 2009
|
|
|
(941
|
)
|
Additions for credit impairments recognized on(1):
|
|
|
|
|
Securities not previously impaired
|
|
|
(690
|
)
|
Securities previously impaired
|
|
|
(201
|
)
|
Reductions for credit impairments previously recognized on:
|
|
|
|
|
Securities that matured or were sold during the period
|
|
|
196
|
|
Securities that the Company intends to sell or more likely than
not will be required to sell before recovery
|
|
|
1
|
|
Securities due to an increase in expected cash flows
|
|
|
3
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
(1,632
|
)
|
|
|
|
|
|
(1) These additions are included in the net OTTI losses
recognized in earnings of $1.2 billion in the Consolidated
Statements of Operations, as well as impairments on debt
securities for which the Company intended to sell and on equity
securities.
Available-for-Sale
Securities
The following table presents the Companys AFS securities
by type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Non-Credit
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
OTTI(1)
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
ABS
|
|
$
|
2,344
|
|
|
$
|
31
|
|
|
$
|
(472
|
)
|
|
$
|
1,903
|
|
|
$
|
(26
|
)
|
|
$
|
2,790
|
|
|
$
|
5
|
|
|
$
|
(819
|
)
|
|
$
|
1,976
|
|
CDOs
|
|
|
3,158
|
|
|
|
19
|
|
|
|
(1,012
|
)
|
|
|
2,165
|
|
|
|
(123
|
)
|
|
|
3,692
|
|
|
|
2
|
|
|
|
(1,713
|
)
|
|
|
1,981
|
|
CMBS
|
|
|
6,844
|
|
|
|
76
|
|
|
|
(1,555
|
)
|
|
|
5,365
|
|
|
|
(8
|
)
|
|
|
8,243
|
|
|
|
21
|
|
|
|
(2,915
|
)
|
|
|
5,349
|
|
Corporate
|
|
|
23,621
|
|
|
|
985
|
|
|
|
(939
|
)
|
|
|
23,667
|
|
|
|
(11
|
)
|
|
|
21,252
|
|
|
|
441
|
|
|
|
(2,958
|
)
|
|
|
18,735
|
|
Foreign govt./govt. agencies
|
|
|
824
|
|
|
|
35
|
|
|
|
(13
|
)
|
|
|
846
|
|
|
|
|
|
|
|
2,094
|
|
|
|
86
|
|
|
|
(33
|
)
|
|
|
2,147
|
|
Municipal
|
|
|
971
|
|
|
|
3
|
|
|
|
(194
|
)
|
|
|
780
|
|
|
|
|
|
|
|
917
|
|
|
|
8
|
|
|
|
(220
|
)
|
|
|
705
|
|
RMBS
|
|
|
3,965
|
|
|
|
68
|
|
|
|
(697
|
)
|
|
|
3,336
|
|
|
|
(166
|
)
|
|
|
4,423
|
|
|
|
57
|
|
|
|
(882
|
)
|
|
|
3,598
|
|
U.S. Treasuries
|
|
|
2,557
|
|
|
|
5
|
|
|
|
(221
|
)
|
|
|
2,341
|
|
|
|
|
|
|
|
5,033
|
|
|
|
75
|
|
|
|
(39
|
)
|
|
|
5,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
44,284
|
|
|
|
1,222
|
|
|
|
(5,103
|
)
|
|
|
40,403
|
|
|
|
(334
|
)
|
|
|
48,444
|
|
|
|
695
|
|
|
|
(9,579
|
)
|
|
|
39,560
|
|
Equity securities
|
|
|
447
|
|
|
|
38
|
|
|
|
(66
|
)
|
|
|
419
|
|
|
|
|
|
|
|
614
|
|
|
|
4
|
|
|
|
(184
|
)
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS securities
|
|
$
|
44,731
|
|
|
$
|
1,260
|
|
|
$
|
(5,169
|
)
|
|
$
|
40,822
|
|
|
$
|
(334
|
)
|
|
$
|
49,058
|
|
|
$
|
699
|
|
|
$
|
(9,763
|
)
|
|
$
|
39,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the amount of cumulative non-credit OTTI losses
recognized in OCI on securities that also had a credit
impairment. These losses are included in gross unrealized losses
as of December 31, 2009. |
F-32
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the Companys fixed maturities
by contractual maturity year.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
Maturity
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
One year or less
|
|
$
|
828
|
|
|
$
|
844
|
|
Over one year through five years
|
|
|
8,555
|
|
|
|
8,786
|
|
Over five years through ten years
|
|
|
7,436
|
|
|
|
7,511
|
|
Over ten years
|
|
|
11,154
|
|
|
|
10,493
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
27,973
|
|
|
|
27,634
|
|
Mortgage-backed and asset-backed securities
|
|
|
16,311
|
|
|
|
12,769
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44,284
|
|
|
$
|
40,403
|
|
|
|
|
|
|
|
|
|
|
Estimated maturities may differ from contractual maturities due
to security call or prepayment provisions. Due to the potential
for variability in payment spreads (i.e. prepayments or
extensions), mortgage-backed and asset-backed securities are not
categorized by contractual maturity.
Concentration
of Credit Risk
The Company aims to maintain a diversified investment portfolio
including issuer, sector and geographic stratification, where
applicable, and has established certain exposure limits,
diversification standards and review procedures to mitigate
credit risk.
As of December 31, 2009, the Company was not exposed to any
concentration of credit risk of a single issuer greater than 10%
of the Companys stockholders equity other than
U.S. government and certain U.S. government agencies.
Other than U.S. government and certain U.S. government
agencies, the Companys three largest exposures by issuer
were JP Morgan Chase & Co., Bank of America
Corporation and Wells Fargo & Co. which each comprised
less than 0.6% of total invested assets. As of December 31,
2008, the Companys only exposure to any credit
concentration risk of a single issuer greater than 10% of the
Companys stockholders equity was the Government of
Japan, which represented $1.9 billion, or 61% of
stockholders equity, and approximately 3.3% of total
invested assets. The Companys second and third largest
exposures by issuer were JPMorgan Chase & Company and
General Electric Company, which each comprised approximately
0.5% and 0.4%, respectively, of total invested assets.
The Companys three largest exposures by sector as of
December 31, 2009 were commercial real estate, basic
industry and financial services, which comprised approximately
18%, 13% and 9%, respectively, of total invested assets. The
Companys three largest exposures by sector as of
December 31, 2008 were commercial real estate, basic
industry and U.S. government/government agencies which
comprised approximately 19%, 12% and 9%, respectively, of total
invested assets.
Security
Unrealized Loss Aging
The following tables present the Companys unrealized loss
aging for AFS securities by type and length of time the security
was in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
ABS
|
|
$
|
278
|
|
|
$
|
230
|
|
|
$
|
(48
|
)
|
|
$
|
1,364
|
|
|
$
|
940
|
|
|
$
|
(424
|
)
|
|
$
|
1,642
|
|
|
$
|
1,170
|
|
|
$
|
(472
|
)
|
CDOs
|
|
|
990
|
|
|
|
845
|
|
|
|
(145
|
)
|
|
|
2,158
|
|
|
|
1,291
|
|
|
|
(867
|
)
|
|
|
3,148
|
|
|
|
2,136
|
|
|
|
(1,012
|
)
|
CMBS
|
|
|
1,207
|
|
|
|
1,016
|
|
|
|
(191
|
)
|
|
|
4,001
|
|
|
|
2,637
|
|
|
|
(1,364
|
)
|
|
|
5,208
|
|
|
|
3,653
|
|
|
|
(1,555
|
)
|
Corporate
|
|
|
3,434
|
|
|
|
3,207
|
|
|
|
(227
|
)
|
|
|
4,403
|
|
|
|
3,691
|
|
|
|
(712
|
)
|
|
|
7,837
|
|
|
|
6,898
|
|
|
|
(939
|
)
|
F-33
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
Foreign govt./govt. agencies
|
|
|
316
|
|
|
|
307
|
|
|
|
(9
|
)
|
|
|
30
|
|
|
|
26
|
|
|
|
(4
|
)
|
|
|
346
|
|
|
|
333
|
|
|
|
(13
|
)
|
Municipal
|
|
|
119
|
|
|
|
113
|
|
|
|
(6
|
)
|
|
|
791
|
|
|
|
603
|
|
|
|
(188
|
)
|
|
|
910
|
|
|
|
716
|
|
|
|
(194
|
)
|
RMBS
|
|
|
664
|
|
|
|
600
|
|
|
|
(64
|
)
|
|
|
1,688
|
|
|
|
1,055
|
|
|
|
(633
|
)
|
|
|
2,352
|
|
|
|
1,655
|
|
|
|
(697
|
)
|
U.S. Treasuries
|
|
|
1,573
|
|
|
|
1,534
|
|
|
|
(39
|
)
|
|
|
628
|
|
|
|
446
|
|
|
|
(182
|
)
|
|
|
2,201
|
|
|
|
1,980
|
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
8,581
|
|
|
|
7,852
|
|
|
|
(729
|
)
|
|
|
15,063
|
|
|
|
10,689
|
|
|
|
(4,374
|
)
|
|
|
23,644
|
|
|
|
18,541
|
|
|
|
(5,103
|
)
|
Equity securities
|
|
|
65
|
|
|
|
49
|
|
|
|
(16
|
)
|
|
|
246
|
|
|
|
196
|
|
|
|
(50
|
)
|
|
|
311
|
|
|
|
245
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities in an unrealized loss
|
|
$
|
8,646
|
|
|
$
|
7,901
|
|
|
$
|
(745
|
)
|
|
$
|
15,309
|
|
|
$
|
10,885
|
|
|
$
|
(4,424
|
)
|
|
$
|
23,955
|
|
|
$
|
18,786
|
|
|
$
|
(5,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
Cost
|
|
|
Value
|
|
|
Losses
|
|
|
ABS
|
|
$
|
873
|
|
|
$
|
705
|
|
|
$
|
(168
|
)
|
|
$
|
1,790
|
|
|
$
|
1,139
|
|
|
$
|
(651
|
)
|
|
$
|
2,663
|
|
|
$
|
1,844
|
|
|
$
|
(819
|
)
|
CDOs
|
|
|
608
|
|
|
|
394
|
|
|
|
(214
|
)
|
|
|
3,068
|
|
|
|
1,569
|
|
|
|
(1,499
|
)
|
|
|
3,676
|
|
|
|
1,963
|
|
|
|
(1,713
|
)
|
CMBS
|
|
|
3,875
|
|
|
|
2,907
|
|
|
|
(968
|
)
|
|
|
3,978
|
|
|
|
2,031
|
|
|
|
(1,947
|
)
|
|
|
7,853
|
|
|
|
4,938
|
|
|
|
(2,915
|
)
|
Corporate
|
|
|
11,101
|
|
|
|
9,500
|
|
|
|
(1,601
|
)
|
|
|
4,757
|
|
|
|
3,400
|
|
|
|
(1,357
|
)
|
|
|
15,858
|
|
|
|
12,900
|
|
|
|
(2,958
|
)
|
Foreign govt./govt. agencies
|
|
|
788
|
|
|
|
762
|
|
|
|
(26
|
)
|
|
|
29
|
|
|
|
22
|
|
|
|
(7
|
)
|
|
|
817
|
|
|
|
784
|
|
|
|
(33
|
)
|
Municipal
|
|
|
524
|
|
|
|
381
|
|
|
|
(143
|
)
|
|
|
297
|
|
|
|
220
|
|
|
|
(77
|
)
|
|
|
821
|
|
|
|
601
|
|
|
|
(220
|
)
|
RMBS
|
|
|
564
|
|
|
|
415
|
|
|
|
(149
|
)
|
|
|
2,210
|
|
|
|
1,477
|
|
|
|
(733
|
)
|
|
|
2,774
|
|
|
|
1,892
|
|
|
|
(882
|
)
|
U.S. Treasuries
|
|
|
3,952
|
|
|
|
3,913
|
|
|
|
(39
|
)
|
|
|
38
|
|
|
|
38
|
|
|
|
|
|
|
|
3,990
|
|
|
|
3,951
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
22,285
|
|
|
|
18,977
|
|
|
|
(3,308
|
)
|
|
|
16,167
|
|
|
|
9,896
|
|
|
|
(6,271
|
)
|
|
|
38,452
|
|
|
|
28,873
|
|
|
|
(9,579
|
)
|
Equity securities
|
|
|
433
|
|
|
|
296
|
|
|
|
(137
|
)
|
|
|
136
|
|
|
|
89
|
|
|
|
(47
|
)
|
|
|
569
|
|
|
|
385
|
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities in an unrealized loss
|
|
$
|
22,718
|
|
|
$
|
19,273
|
|
|
$
|
(3,445
|
)
|
|
$
|
16,303
|
|
|
$
|
9,985
|
|
|
$
|
(6,318
|
)
|
|
$
|
39,021
|
|
|
$
|
29,258
|
|
|
$
|
(9,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, AFS securities in an unrealized
loss position, comprised of 2,473 securities, primarily related
to CMBS, CDOs, corporate securities primarily within the
financial services sector and RMBS which have experienced
significant price deterioration. As of December 31, 2009,
66% of these securities were depressed less than 20% of
amortized cost. The decline in unrealized losses during 2009 was
primarily attributable to credit spread tightening, impairments
and, to a lesser extent, sales, partially offset by rising
interest rates. The Company neither has an intention to sell nor
does it expect to be required to sell the securities outlined
above.
Mortgage
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Valuation
|
|
|
|
|
|
|
|
|
Valuation
|
|
|
|
|
|
|
Amortized Cost(1)
|
|
|
Allowance
|
|
|
Carrying Value
|
|
|
Amortized Cost(1)
|
|
|
Allowance
|
|
|
Carrying Value
|
|
|
Agricultural
|
|
$
|
369
|
|
|
$
|
(3
|
)
|
|
$
|
366
|
|
|
$
|
446
|
|
|
$
|
(11
|
)
|
|
$
|
435
|
|
Commercial
|
|
|
4,195
|
|
|
|
(257
|
)
|
|
|
3,938
|
|
|
|
4,463
|
|
|
|
(2
|
)
|
|
|
4,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
$
|
4,564
|
|
|
$
|
(260
|
)
|
|
$
|
4,304
|
|
|
$
|
4,909
|
|
|
$
|
(13
|
)
|
|
$
|
4,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amortized cost represents carrying value prior to
valuation allowances, if any.
F-34
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the activity within the
Companys valuation allowance for mortgage loans. Included
in the 2009 Additions are valuation allowances of $79 on
mortgage loans held for sale, which have a carrying value of
$161 and are included in mortgage loans in the Companys
Consolidated Balance Sheet as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance as of January 1
|
|
$
|
(13
|
)
|
|
$
|
|
|
Additions
|
|
|
(292
|
)
|
|
|
(13
|
)
|
Deductions
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
(260
|
)
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans by Region
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
Percent of
|
|
|
Carrying
|
|
|
Percent of
|
|
|
|
Value
|
|
|
Total
|
|
|
Value
|
|
|
Total
|
|
|
East North Central
|
|
$
|
76
|
|
|
|
1.8
|
%
|
|
$
|
121
|
|
|
|
2.5
|
%
|
Middle Atlantic
|
|
|
592
|
|
|
|
13.8
|
%
|
|
|
664
|
|
|
|
13.6
|
%
|
Mountain
|
|
|
51
|
|
|
|
1.2
|
%
|
|
|
115
|
|
|
|
2.3
|
%
|
New England
|
|
|
368
|
|
|
|
8.6
|
%
|
|
|
407
|
|
|
|
8.3
|
%
|
Pacific
|
|
|
1,102
|
|
|
|
25.5
|
%
|
|
|
1,205
|
|
|
|
24.6
|
%
|
South Atlantic
|
|
|
615
|
|
|
|
14.3
|
%
|
|
|
665
|
|
|
|
13.6
|
%
|
West North Central
|
|
|
22
|
|
|
|
0.5
|
%
|
|
|
56
|
|
|
|
1.1
|
%
|
West South Central
|
|
|
172
|
|
|
|
4.0
|
%
|
|
|
205
|
|
|
|
4.2
|
%
|
Other(1)
|
|
|
1,306
|
|
|
|
30.3
|
%
|
|
|
1,458
|
|
|
|
29.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
$
|
4,304
|
|
|
|
100.0
|
%
|
|
$
|
4,896
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Primarily represents multi-regional properties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans by Property Type
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
Percent of
|
|
|
Carrying
|
|
|
Percent of
|
|
|
|
Value
|
|
|
Total
|
|
|
Value
|
|
|
Total
|
|
|
Agricultural
|
|
$
|
366
|
|
|
|
8.5
|
%
|
|
$
|
435
|
|
|
|
8.9
|
%
|
Industrial
|
|
|
784
|
|
|
|
18.2
|
%
|
|
|
790
|
|
|
|
16.1
|
%
|
Lodging
|
|
|
329
|
|
|
|
7.6
|
%
|
|
|
383
|
|
|
|
7.8
|
%
|
Multifamily
|
|
|
582
|
|
|
|
13.5
|
%
|
|
|
798
|
|
|
|
16.3
|
%
|
Office
|
|
|
1,387
|
|
|
|
32.3
|
%
|
|
|
1,456
|
|
|
|
29.8
|
%
|
Retail
|
|
|
602
|
|
|
|
14.0
|
%
|
|
|
764
|
|
|
|
15.6
|
%
|
Other
|
|
|
254
|
|
|
|
5.9
|
%
|
|
|
270
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans
|
|
$
|
4,304
|
|
|
|
100.0
|
%
|
|
$
|
4,896
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
Interest Entities
The Company is involved with VIEs primarily as a collateral
manager and as an investor through normal investment activities,
as well as a means of accessing capital. This involvement
includes providing investment management and administrative
services for a fee and holding ownership or other interests as
an investor.
F-35
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Primary
Beneficiary
The Company has performed a quantitative analysis and concluded
that for those VIEs for which it will absorb a majority of the
expected losses or residual returns, it is the primary
beneficiary and therefore these VIEs were consolidated in the
Companys Consolidated Financial Statements. Creditors have
no recourse against the Company in the event of default by these
VIEs. The Company has no implied or unfunded commitments to
these VIEs. The following table presents the carrying value of
assets and liabilities and the maximum exposure to loss relating
to these VIEs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
Total
|
|
|
Total
|
|
|
Exposure
|
|
|
Total
|
|
|
Total
|
|
|
Exposure
|
|
|
|
Assets
|
|
|
Liabilities(1)
|
|
|
to Loss(2)
|
|
|
Assets
|
|
|
Liabilities(1)
|
|
|
to Loss(2)
|
|
|
CDO
|
|
$
|
226
|
|
|
$
|
47
|
|
|
$
|
181
|
|
|
$
|
339
|
|
|
$
|
89
|
|
|
$
|
237
|
|
Limited partnerships
|
|
|
31
|
|
|
|
13
|
|
|
|
18
|
|
|
|
151
|
|
|
|
72
|
|
|
|
79
|
|
Other investments
|
|
|
75
|
|
|
|
40
|
|
|
|
32
|
|
|
|
249
|
|
|
|
103
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
332
|
|
|
$
|
100
|
|
|
$
|
231
|
|
|
$
|
739
|
|
|
$
|
264
|
|
|
$
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes noncontrolling interest in limited partnerships and
other investments of $41 and $154 as of December 31, 2009
and 2008, respectively, that is reported as a separate component
of equity in the Companys Consolidated Balance Sheets. |
|
(2) |
|
The maximum exposure to loss represents the maximum loss amount
that the Company could recognize as a reduction in net
investment income or as a realized capital loss and is the
consolidated assets at cost net of liabilities. |
The CDO represents a cash flow CLO for which the Company
provides collateral management services, earns a fee for those
services and also holds investments in the debt issued by the
CLO. Limited partnerships represent hedge funds for which the
Company holds a majority interest in the equity of the funds as
an investment. Other investments primarily represent investment
trusts for which the Company provides investment management
services, earns a fee for those services and also holds
investments in the equity issued by the trusts. In 2009, a hedge
fund and investment trust were liquidated and, therefore, the
Company was no longer deemed to be the primary beneficiary.
Accordingly, these two VIEs were deconsolidated.
Non-Primary
Beneficiary
The Company has performed a quantitative analysis and concluded
that for those VIEs for which it holds a significant variable
interest but will not absorb a majority of the expected losses
or residual returns, the Company is not the primary beneficiary
and therefore, these VIEs were not consolidated in the
Companys Consolidated Financial Statements. The Company
has no implied or unfunded commitments to these VIEs. Each of
these investments has been held by the Company for three years
or less. The total carrying value of assets and liabilities for
the CDOs as of December 31, 2009 was $239 and $0,
respectively, with a maximum exposure to loss of $248, and as of
December 31, 2008 was $283 and $0, respectively, with a
maximum exposure to loss of $329. The maximum exposure to loss
represents the Companys investment in securities issued by
CDOs at cost.
CDOs represent a cash flow CLO and a CDO for which the Company
provides collateral management services, earns fees for those
services and holds investments in the debt
and/or
preferred equity issued by the CDOs.
Derivative
instruments
The Company utilizes a variety of
over-the-counter
and exchange traded derivative instruments as a part of its
overall risk management strategy, as well as to enter into
replication transactions. Derivative instruments are used to
manage risk associated with interest rate, equity market, credit
spread, issuer default, price, and currency exchange rate risk
or volatility. Replication transactions are used as an
economical means to synthetically replicate the
F-36
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
characteristics and performance of assets that would otherwise
be permissible investments under the Companys investment
policies. The Company also purchases and issues financial
instruments and products that either are accounted for as
free-standing derivatives, such as certain reinsurance
contracts, or may contain features that are deemed to be
embedded derivative instruments, such as the GMWB rider included
with certain variable annuity products.
Cash flow
hedges
Interest
rate swaps
Interest rate swaps are primarily used to convert interest
receipts on floating-rate fixed maturity securities or interest
payments on floating-rate guaranteed investment contracts to
fixed rates. These derivatives are predominantly used to better
match cash receipts from assets with cash disbursements required
to fund liabilities.
The Company also enters into forward starting swap agreements to
hedge the interest rate exposure related to the purchase of
fixed-rate securities or the anticipated future cash flows of
floating-rate fixed maturity securities due to changes in
interest rates. These derivatives are primarily structured to
hedge interest rate risk inherent in the assumptions used to
price certain liabilities.
Forward
rate agreements
Forward rate agreements are used to convert interest receipts on
floating-rate securities to fixed rates. These derivatives are
used to lock in the forward interest rate curve and reduce
income volatility that results from changes in interest rates.
Foreign
currency swaps
Foreign currency swaps are used to convert foreign denominated
cash flows related to certain investment receipts and liability
payments to U.S. dollars in order to minimize cash flow
fluctuations due to changes in currency rates.
Fair
value hedges
Interest
rate swaps
Interest rate swaps are used to hedge the changes in fair value
of certain fixed rate liabilities and fixed maturity securities
due to fluctuations in interest rates.
Foreign
currency swaps
Foreign currency swaps are used to hedge the changes in fair
value of certain foreign denominated fixed rate liabilities due
to changes in foreign currency rates by swapping the fixed
foreign payments to floating rate U.S. dollar denominated
payments.
Non-qualifying
strategies
Interest
rate swaps, caps, floors, and futures
The Company uses interest rate swaps, caps, floors, and futures
to manage duration between assets and liabilities in certain
investment portfolios. In addition, the Company enters into
interest rate swaps to terminate existing swaps, thereby
offsetting the changes in value of the original swap. As of
December 31, 2009 and 2008, the notional amount of interest
rate swaps in offsetting relationships was $4.5 billion and
$4.4 billion, respectively.
F-37
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Foreign
currency swaps and forwards
The Company enters into foreign currency swaps and forwards to
convert the foreign currency exposures to U.S. dollars in
certain of its foreign denominated fixed maturity investments.
The Company also enters into foreign currency forward contracts
that convert Euros to Yen in order to economically hedge the
foreign currency risk associated with certain assumed Japanese
variable annuity products.
Japan
3Win related foreign currency swaps
During the first quarter of 2009, the Company entered into
foreign currency swaps to hedge the foreign currency exposure
related to the Japan 3Win product guaranteed minimum income
benefit (GMIB) fixed liability payments.
Japanese
fixed annuity hedging instruments
The Company enters into currency rate swaps and forwards to
mitigate the foreign currency exchange rate and Yen interest
rate exposures associated with the Yen denominated individual
fixed annuity product.
Credit
derivatives that purchase credit protection
Credit default swaps are used to purchase credit protection on
an individual entity or referenced index to economically hedge
against default risk and credit-related changes in value on
fixed maturity securities. These contracts require the Company
to pay a periodic fee in exchange for compensation from the
counterparty should the referenced security issuers experience a
credit event, as defined in the contract.
Credit
derivatives that assume credit risk
Credit default swaps are used to assume credit risk related to
an individual entity, referenced index, or asset pool, as a part
of replication transactions. These contracts entitle the Company
to receive a periodic fee in exchange for an obligation to
compensate the derivative counterparty should the referenced
security issuers experience a credit event, as defined in the
contract. The Company is also exposed to credit risk due to
embedded derivatives associated with credit linked notes.
Credit
derivatives in offsetting positions
The Company enters into credit default swaps to terminate
existing credit default swaps, thereby offsetting the changes in
value of the original swap going forward.
Equity
index swaps, options, and futures
The Company offers certain equity indexed products, which may
contain an embedded derivative that requires bifurcation. The
Company enters into S&P index swaps, futures and options to
economically hedge the equity volatility risk associated with
these embedded derivatives. In addition, the Company is exposed
to bifurcated options embedded in certain fixed maturity
investments.
GMWB
product derivatives
The Company offers certain variable annuity products with a GMWB
rider in the U.S. and formerly in the U.K. and Japan. The
GMWB is a bifurcated embedded derivative that provides the
policyholder with a GRB if the account value is reduced to zero
through a combination of market declines and withdrawals. The
GRB is generally equal to premiums less withdrawals. Certain
contract provisions can increase the GRB at contractholder
election or after the passage of time. The notional value of the
embedded derivative is the GRB balance.
F-38
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
GMWB
reinsurance contracts
The Company has entered into reinsurance arrangements to offset
a portion of its risk exposure to the GMWB for the remaining
lives of covered variable annuity contracts. Reinsurance
contracts covering GMWB are accounted for as free-standing
derivatives. The notional amount of the reinsurance contracts is
the GRB amount.
GMWB
hedging instruments
The Company enters into derivative contracts to partially hedge
exposure to the income volatility associated with the portion of
the GMWB liabilities which are not reinsured. These derivative
contracts include customized swaps, interest rate swaps and
futures, and equity swaps, options, and futures, on certain
indices including the S&P 500 index, EAFE index, and NASDAQ
index. As of December 31, 2009, the notional amount related
to the GMWB hedging instruments is $15.6 billion and
consists of $10.8 billion of customized swaps,
$1.8 billion of interest rate swaps and futures, and
$3.0 billion of equity swaps, options, and futures.
Macro
hedge program
The Company utilizes equity options, currency options, and
equity futures contracts to partially hedge the statutory
reserve impact of equity risk and foreign currency risk arising
primarily from guaranteed minimum death benefit
(GMDB), GMIB and GMWB obligations against a decline
in the equity markets or changes in foreign currency exchange
rates. As of December 31, 2009, the notional amount related
to the macro hedge program is $27.4 billion and consists of
$25.1 billion of equity options, $2.1 billion of
currency options, and $0.2 billion of equity futures. The
$27.4 billion of notional includes $1.2 billion of
short put option contracts, therefore resulting in a net
notional amount for the macro hedge program of approximately
$26.2 billion.
GMAB,
GMWB and GMIB reinsurance contracts
The Company reinsured the GMAB, GMWB, and GMIB embedded
derivatives for host variable annuity contracts written by its
affiliate, HLIKK, in Japan. The reinsurance contracts are
accounted for as free-standing derivative contracts. The
notional amount of the reinsurance contracts is the Yen
denominated GRB balance value converted at the period-end Yen to
U.S. dollar foreign spot exchange rate.
Coinsurance
and modified coinsurance reinsurance contracts
During 2009, a subsidiary entered into a coinsurance with funds
withheld and modified coinsurance reinsurance agreement with an
affiliated captive reinsurer, which creates an embedded
derivative. In addition, provisions of this agreement include
reinsurance to cede a portion of direct written U.S. GMWB
riders, which is accounted for as an embedded derivative.
Additional provisions of this agreement cede variable annuity
contract GMAB, GMWB and GMIB riders reinsured by the Company
that have been assumed from an affiliate, HLIKK, and is
accounted for as a free-standing derivative. Refer to
note 16 Transactions with Affiliates for more
information on this transaction.
During 2007, a subsidiary insurance company entered into a
coinsurance with funds withheld and modified coinsurance
reinsurance agreement with an affiliate reinsurance company to
provide statutory surplus relief for certain life insurance
policies. This agreement is accounted for as a financing
transaction and includes a compound embedded derivative.
F-39
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Derivative
Balance Sheet Classification
The table below summarizes the balance sheet classification of
the Companys derivative related fair value amounts, as
well as the gross asset and liability fair value amounts. The
fair value amounts presented do not include income accruals or
cash collateral held amounts, which are netted with derivative
fair value amounts to determine balance sheet presentation.
Derivatives in the Companys separate accounts are not
included because the associated gains and losses accrue directly
to policyholders. The Companys derivative instruments are
held for risk management purposes, unless otherwise noted in the
table below. The notional amount of derivative contracts
represents the basis upon which pay or receive amounts are
calculated and is presented in the table to quantify the volume
of the Companys derivative activity. Notional amounts are
not necessarily reflective of credit risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Liability
|
|
|
|
Net Derivatives
|
|
|
Derivatives
|
|
|
Derivatives
|
|
|
|
Notional Amount
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
Hedge Designation/Derivative Type
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
8,729
|
|
|
$
|
6,798
|
|
|
$
|
53
|
|
|
$
|
422
|
|
|
$
|
201
|
|
|
$
|
425
|
|
|
$
|
(148
|
)
|
|
$
|
(3
|
)
|
Forward rate agreements
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swaps
|
|
|
301
|
|
|
|
1,005
|
|
|
|
(4
|
)
|
|
|
(21
|
)
|
|
|
21
|
|
|
|
126
|
|
|
|
(25
|
)
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges
|
|
$
|
12,030
|
|
|
$
|
7,803
|
|
|
$
|
49
|
|
|
$
|
401
|
|
|
$
|
222
|
|
|
$
|
551
|
|
|
$
|
(173
|
)
|
|
$
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
1,744
|
|
|
$
|
2,138
|
|
|
$
|
(21
|
)
|
|
$
|
(86
|
)
|
|
$
|
16
|
|
|
$
|
41
|
|
|
$
|
(37
|
)
|
|
$
|
(127
|
)
|
Foreign currency swaps
|
|
|
696
|
|
|
|
696
|
|
|
|
(9
|
)
|
|
|
(57
|
)
|
|
|
53
|
|
|
|
48
|
|
|
|
(62
|
)
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value hedges
|
|
$
|
2,440
|
|
|
$
|
2,834
|
|
|
$
|
(30
|
)
|
|
$
|
(143
|
)
|
|
$
|
69
|
|
|
$
|
89
|
|
|
$
|
(99
|
)
|
|
$
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualifying strategies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps, caps, floors, and futures
|
|
$
|
5,511
|
|
|
$
|
5,269
|
|
|
$
|
(79
|
)
|
|
$
|
(90
|
)
|
|
$
|
157
|
|
|
$
|
687
|
|
|
$
|
(236
|
)
|
|
$
|
(777
|
)
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swaps and forwards
|
|
|
484
|
|
|
|
648
|
|
|
|
(19
|
)
|
|
|
45
|
|
|
|
|
|
|
|
52
|
|
|
|
(19
|
)
|
|
|
(7
|
)
|
Japan 3Win related foreign currency swaps
|
|
|
2,514
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
Japanese fixed annuity hedging instruments
|
|
|
2,271
|
|
|
|
2,334
|
|
|
|
316
|
|
|
|
383
|
|
|
|
319
|
|
|
|
383
|
|
|
|
(3
|
)
|
|
|
|
|
Credit contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives that purchase credit protection
|
|
|
1,887
|
|
|
|
2,633
|
|
|
|
(34
|
)
|
|
|
246
|
|
|
|
36
|
|
|
|
262
|
|
|
|
(70
|
)
|
|
|
(16
|
)
|
Credit derivatives that assume credit risk(1)
|
|
|
902
|
|
|
|
940
|
|
|
|
(176
|
)
|
|
|
(309
|
)
|
|
|
2
|
|
|
|
|
|
|
|
(178
|
)
|
|
|
(309
|
)
|
Credit derivatives in offsetting positions
|
|
|
3,591
|
|
|
|
1,453
|
|
|
|
(52
|
)
|
|
|
(8
|
)
|
|
|
114
|
|
|
|
85
|
|
|
|
(166
|
)
|
|
|
(93
|
)
|
Equity contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity index swaps, options, and futures
|
|
|
221
|
|
|
|
249
|
|
|
|
(16
|
)
|
|
|
(14
|
)
|
|
|
3
|
|
|
|
3
|
|
|
|
(19
|
)
|
|
|
(17
|
)
|
Variable annuity hedge program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMWB product derivatives(2)
|
|
|
46,906
|
|
|
|
48,406
|
|
|
|
(1,991
|
)
|
|
|
(6,590
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,991
|
)
|
|
|
(6,590
|
)
|
GMWB reinsurance contracts
|
|
|
10,301
|
|
|
|
11,437
|
|
|
|
347
|
|
|
|
1,302
|
|
|
|
347
|
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
GMWB hedging instruments
|
|
|
15,567
|
|
|
|
18,620
|
|
|
|
52
|
|
|
|
2,664
|
|
|
|
264
|
|
|
|
2,697
|
|
|
|
(212
|
)
|
|
|
(33
|
)
|
Macro hedge program
|
|
|
27,448
|
|
|
|
2,188
|
|
|
|
318
|
|
|
|
137
|
|
|
|
558
|
|
|
|
137
|
|
|
|
(240
|
)
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMAB, GMWB, and GMIB reinsurance contracts
|
|
|
19,618
|
|
|
|
20,553
|
|
|
|
(1,448
|
)
|
|
|
(2,616
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,448
|
)
|
|
|
(2,616
|
)
|
Coinsurance and modified coinsurance reinsurance contracts
|
|
|
49,545
|
|
|
|
1,068
|
|
|
|
761
|
|
|
|
|
|
|
|
1,226
|
|
|
|
|
|
|
|
(465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-qualifying strategies
|
|
$
|
186,766
|
|
|
$
|
115,798
|
|
|
$
|
(2,040
|
)
|
|
$
|
(4,850
|
)
|
|
$
|
3,061
|
|
|
$
|
5,608
|
|
|
$
|
(5,101
|
)
|
|
$
|
(10,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow hedges, fair value hedges, and non-qualifying
strategies
|
|
$
|
201,236
|
|
|
$
|
126,435
|
|
|
$
|
(2,021
|
)
|
|
$
|
(4,592
|
)
|
|
$
|
3,352
|
|
|
$
|
6,248
|
|
|
$
|
(5,373
|
)
|
|
$
|
(10,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Liability
|
|
|
|
Net Derivatives
|
|
|
Derivatives
|
|
|
Derivatives
|
|
|
|
Notional Amount
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
Hedge Designation/Derivative Type
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Balance Sheet Location
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities,
available-for-sale
|
|
$
|
170
|
|
|
$
|
204
|
|
|
$
|
(8
|
)
|
|
$
|
(3
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
$
|
(3
|
)
|
Other investments
|
|
|
18,049
|
|
|
|
12,197
|
|
|
|
220
|
|
|
|
1,122
|
|
|
|
270
|
|
|
|
1,576
|
|
|
|
(50
|
)
|
|
|
(454
|
)
|
Other liabilities
|
|
|
56,524
|
|
|
|
32,442
|
|
|
|
113
|
|
|
|
2,206
|
|
|
|
1,509
|
|
|
|
3,370
|
|
|
|
(1,396
|
)
|
|
|
(1,164
|
)
|
Consumer notes
|
|
|
64
|
|
|
|
70
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Reinsurance recoverables
|
|
|
58,380
|
|
|
|
11,437
|
|
|
|
1,108
|
|
|
|
1,302
|
|
|
|
1,573
|
|
|
|
1,302
|
|
|
|
(465
|
)
|
|
|
|
|
Other policyholder funds and benefits payable
|
|
|
68,049
|
|
|
|
70,085
|
|
|
|
(3,449
|
)
|
|
|
(9,214
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,449
|
)
|
|
|
(9,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
$
|
201,236
|
|
|
$
|
126,435
|
|
|
$
|
(2,021
|
)
|
|
$
|
(4,592
|
)
|
|
$
|
3,352
|
|
|
$
|
6,248
|
|
|
$
|
(5,373
|
)
|
|
$
|
(10,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The derivative instruments related to these hedging strategies
are held for other investment purposes. |
|
(2) |
|
These derivatives are embedded within liabilities and are not
held for risk management purposes. |
Change in Notional Amount
The increase in notional amount of derivatives since
December 31, 2008, was primarily due to the following:
|
|
|
During the fourth quarter of 2009, the Company entered into a
reinsurance agreement with an affiliated captive reinsurer,
which is accounted for as a derivative instrument and resulted
in a $48.1 billion increase in notional. For a discussion
related to the reinsurance agreement refer to Note 16.
|
|
|
The Company increased the notional amount of derivatives
associated with the macro hedge program, while GMWB related
derivatives decreased, as a result of the Company rebalancing
its risk management strategy to place a greater relative
emphasis on the protection of statutory surplus. Approximately
$1.2 billion of the $25.3 billion increase in the
macro hedge notional amount represents short put option
contracts therefore resulting in a net increase in notional of
approximately $24.1 billion.
|
Change in Fair Value
The increase in the total fair value of derivative instruments
since December 31, 2008, was primarily due to the following:
|
|
|
The fair value of GMAB, GMWB and GMIB product assumed
reinsurance contracts, was primarily due to an increase in
interest rates, an increase in the Japan equity markets, a
decline in Japan equity market volatility, and liability model
assumption updates for credit standing.
|
|
|
The net improvement in the fair value of GMWB related
derivatives is primarily due to liability model assumption
updates related to favorable policyholder experience, the
relative outperformance of the underlying actively managed funds
as compared to their respective indices, the impacts of the
Companys own credit standing. Additional improvements in
the net fair value of GMWB derivatives include lower implied
market volatility and a general increase in long-term interest
rates, partially offset by rising equity markets. For more
information on the policyholder behavior and liability model
assumption updates, refer to Note 3.
|
|
|
The increase in fair value of the coinsurance and modified
coinsurance reinsurance contracts was due to the execution of a
transaction with an affiliated captive reinsurer on
October 1, 2009. This transaction consisted of a
freestanding derivative and an embedded derivative which are
required to be held at fair value.
|
F-41
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash Flow
Hedges
For derivative instruments that are designated and qualify as
cash flow hedges, the effective portion of the gain or loss on
the derivative is reported as a component of OCI and
reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings. Gains and losses
on the derivative representing hedge ineffectiveness are
recognized in current earnings. All components of each
derivatives gain or loss were included in the assessment
of hedge effectiveness.
The following table presents the components of the gain or loss
on derivatives that qualify as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
Gain (Loss) Recognized in OCI
|
|
|
Net Realized Capital Gains (Losses) Recognized
|
|
|
|
on Derivative (Effective Portion)
|
|
|
in Income on Derivative (Ineffective Portion)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Interest rate swaps
|
|
$
|
(357
|
)
|
|
$
|
648
|
|
|
$
|
70
|
|
|
$
|
1
|
|
|
$
|
7
|
|
|
$
|
2
|
|
Foreign currency swaps
|
|
|
(177
|
)
|
|
|
193
|
|
|
|
(41
|
)
|
|
|
75
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(534
|
)
|
|
$
|
841
|
|
|
$
|
29
|
|
|
$
|
76
|
|
|
$
|
8
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
Gain (Loss) Reclassified from AOCI
|
|
|
|
|
|
into Income (Effective Portion)
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Interest rate swaps
|
|
Net realized capital gains (losses)
|
|
$
|
|
|
|
$
|
34
|
|
|
$
|
|
|
Interest rate swaps
|
|
Net investment income (loss)
|
|
|
28
|
|
|
|
(20
|
)
|
|
|
(21
|
)
|
Foreign currency swaps
|
|
Net realized capital gains (losses)
|
|
|
(115
|
)
|
|
|
(60
|
)
|
|
|
(64
|
)
|
Foreign currency swaps
|
|
Net investment income (loss)
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(85
|
)
|
|
$
|
(45
|
)
|
|
$
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the before-tax deferred net gains
on derivative instruments recorded in AOCI that are expected to
be reclassified to earnings during the next twelve months are
$25. 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
forecasted transactions, excluding interest payments on existing
variable-rate financial instruments) is 3 years.
For the year ended December 31, 2009 and 2008, the Company
had before-tax gains of $1 and $198, respectively, related to
net reclassifications from AOCI to earnings resulting from the
discontinuance of cash flow hedges due to forecasted
transactions that were no longer probable of occurring. For the
year ended December 31, 2007, the Company had no net
reclassifications from AOCI to earnings resulting from the
discontinuance of cash flow hedges due to forecasted
transactions that were no longer probable of occurring.
Fair
Value Hedges
For derivative instruments that are designated and qualify as a
fair value hedge, the gain or loss on the derivative, as well as
the offsetting loss or gain on the hedged item attributable to
the hedged risk are recognized in current earnings. The Company
includes the gain or loss on the derivative in the same line
item as the offsetting loss or gain
F-42
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
on the hedged item. All components of each derivatives
gain or loss were included in the assessment of hedge
effectiveness.
The Company recognized in income gains (losses) representing the
ineffective portion of all fair value hedges as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Fair Value Hedging Relationships
|
|
|
|
Gain (Loss) Recognized in Income(1)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Hedged
|
|
|
|
|
|
Hedged
|
|
|
|
|
|
Hedged
|
|
|
|
Derivative
|
|
|
Item
|
|
|
Derivative
|
|
|
Item
|
|
|
Derivative
|
|
|
Item
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital gains (losses)
|
|
$
|
72
|
|
|
$
|
(68
|
)
|
|
$
|
(140
|
)
|
|
$
|
132
|
|
|
$
|
(73
|
)
|
|
$
|
69
|
|
Benefits, losses and loss adjustment expenses
|
|
|
(37
|
)
|
|
|
40
|
|
|
|
25
|
|
|
|
(18
|
)
|
|
|
32
|
|
|
|
(28
|
)
|
Foreign currency swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital gains (losses)
|
|
|
51
|
|
|
|
(51
|
)
|
|
|
(124
|
)
|
|
|
124
|
|
|
|
25
|
|
|
|
(25
|
)
|
Benefits, losses and loss adjustment expenses
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
42
|
|
|
|
(42
|
)
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
88
|
|
|
$
|
(81
|
)
|
|
$
|
(197
|
)
|
|
$
|
196
|
|
|
$
|
(7
|
)
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts presented do not include the periodic net coupon
settlements of the derivative or the coupon income (expense)
related to the hedged item. The net of the amounts presented
represents the ineffective portion of the hedge. |
Non-qualifying
Strategies
For non-qualifying strategies, including embedded derivatives
that are required to be bifurcated from their host contracts and
accounted for as derivatives, the gain or loss on the derivative
is recognized currently in earnings within net realized capital
gains or losses. The following table presents the gain or loss
recognized in income on non-qualifying strategies:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualifying Strategies
|
|
Gain (Loss) Recognized within Net Realized Capital Gains
(Losses)
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps, caps, floors, and forwards
|
|
$
|
32
|
|
|
$
|
3
|
|
|
$
|
21
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swaps and forwards
|
|
|
(54
|
)
|
|
|
67
|
|
|
|
(18
|
)
|
Japan 3Win related foreign currency swaps(1)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
Japanese fixed annuity hedging instruments(2)
|
|
|
(12
|
)
|
|
|
487
|
|
|
|
53
|
|
Credit contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives that purchase credit protection
|
|
|
(379
|
)
|
|
|
211
|
|
|
|
59
|
|
Credit derivatives that assume credit risk
|
|
|
137
|
|
|
|
(412
|
)
|
|
|
(202
|
)
|
F-43
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualifying Strategies
|
|
Gain (Loss) Recognized within Net Realized Capital Gains
(Losses)
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Equity contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity index swaps, options, and futures
|
|
|
(3
|
)
|
|
|
(23
|
)
|
|
|
2
|
|
Variable annuity hedge program
|
|
|
|
|
|
|
|
|
|
|
|
|
GMWB product derivatives
|
|
|
4,727
|
|
|
|
(5,760
|
)
|
|
|
(670
|
)
|
GMWB reinsurance contracts
|
|
|
(988
|
)
|
|
|
1,073
|
|
|
|
127
|
|
GMWB hedging instruments
|
|
|
(2,234
|
)
|
|
|
3,374
|
|
|
|
257
|
|
Macro hedge program
|
|
|
(895
|
)
|
|
|
74
|
|
|
|
(12
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
GMAB, GMWB, and GMIB reinsurance contracts
|
|
|
1,106
|
|
|
|
(2,158
|
)
|
|
|
(155
|
)
|
Coinsurance and modified coinsurance reinsurance contracts
|
|
|
(577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
838
|
|
|
$
|
(3,064
|
)
|
|
$
|
(538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The associated liability is adjusted for changes in dollar/yen
exchange spot rates through realized capital gains and losses
and was $64 for the year ended December 31, 2009. There was
no Japan 3Win related foreign currency swaps for the years ended
December 31, 2008 and 2007. |
|
(2) |
|
The associated liability is adjusted for changes in dollar/yen
exchange spot rates through realized capital gains and losses
and was $67, $450 and $(102) for the years ended
December 31, 2009, 2008 and 2007, respectively |
For the year ended December 31, 2009, the net realized
capital gain related to derivatives used in non-qualifying
strategies was primarily due to the following:
|
|
|
The net gain on GMWB related derivatives for the year ended
December 31, 2009, was primarily due to liability model
assumption updates, the relative outperformance of the
underlying actively managed funds as compared to their
respective indices, and the impact of the Companys own
credit standing. Additional net gains on GMWB related
derivatives include lower implied market volatility and a
general increase in long-term interest rates, partially offset
by rising equity markets. For more information on the
policyholder behavior and liability model assumption updates,
refer to Note 3.
|
|
|
The net gain on derivatives associated with assumed GMAB, GMWB,
and GMIB product reinsurance contracts, which are reinsured to
an affiliated captive reinsurer, was primarily due to an
increase in interest rates, an increase in the Japan equity
markets, a decline in Japan equity market volatility, and
liability model assumption updates for credit standing.
|
|
|
The net loss on the macro hedge program was primarily the result
of an increase in the equity markets and the impact of trading
activity.
|
|
|
During the fourth quarter of 2009, the Company entered into a
reinsurance agreement, which is accounted for as a derivative
instrument and resulted in a loss. For a discussion related to
the reinsurance agreement refer to Note 16.
|
For the year ended December 31, 2008, the net realized
capital loss related to derivatives used in non-qualifying
strategies was primarily due to the following:
|
|
|
The net loss on GMWB related derivatives was primarily due to
liability model assumption updates related to market-based hedge
ineffectiveness due to extremely volatile capital markets, and
the relative underperformance of the underlying actively managed
funds as compared to their respective indices, partially offset
by gains in the fourth quarter related to liability model
assumption updates for lapse rates.
|
F-44
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
The net loss on derivatives associated with GMAB, GMWB, and GMIB
product reinsurance contracts was primarily due to a decrease in
Japan equity markets, a decrease in interest rates, an increase
in Japan equity market volatility, and the impact of the fair
value measurements transition.
|
In addition, for the year ended December 31, 2008, the
Company has incurred losses of $39 on derivative instruments due
to counterparty default related to the bankruptcy of Lehman
Brothers Inc. These losses were a result of the contractual
collateral threshold amounts and open collateral calls in excess
of such amounts immediately prior to the bankruptcy filing, as
well as interest rate and credit spread movements from the date
of the last collateral call to the date of the bankruptcy filing.
For the year ended December 31, 2007, net realized capital
loss related to derivatives used in non-qualifying strategies
was primarily due to the following:
|
|
|
The net loss on GMWB related derivatives was primarily due to
liability model assumption updates and model refinements made
during the year, including those for dynamic lapse behavior and
correlations of market returns across underlying indices, as
well as other assumption updates made during the second quarter
to reflect newly reliable market inputs for volatility.
|
|
|
The net loss on credit derivatives that assume credit risk was
due to credit spreads widening.
|
|
|
The net losses on derivatives associated with the internal
reinsurance of GMIB were primarily driven by liability model
refinements, a decrease in interest rates, and changes in Japan
equity volatility levels.
|
|
|
The gain on the Japanese fixed annuity hedging instruments was
primarily a result of the Japanese Yen strengthening against the
U.S. dollar.
|
Refer to Note 9 for additional disclosures regarding
contingent credit related features in derivative agreements.
Credit
Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit
risk from a single entity, referenced index, or asset pool in
order to synthetically replicate investment transactions. The
Company will receive periodic payments based on an agreed upon
rate and notional amount and will only make a payment if there
is a credit event. A credit event payment will typically be
equal to the notional value of the swap contract less the value
of the referenced security issuers debt obligation. A
credit event is generally defined as a default on contractually
obligated interest or principal payments or bankruptcy of the
referenced entity. The credit default swaps in which the Company
assumes credit risk primarily reference investment grade single
corporate issuers and baskets, which include trades ranging from
baskets of up to five corporate issuers to standard and
customized diversified portfolios of corporate issuers. The
diversified portfolios of corporate issuers are established
within sector concentration limits and are typically divided
into tranches that possess different credit ratings.
F-45
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables present the notional amount, fair value,
weighted average years to maturity, underlying referenced credit
obligation type and average credit ratings, and offsetting
notional amounts and fair value for credit derivatives in which
the Company is assuming credit risk as of December 31, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Underlying Referenced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Credit Obligation(s)(1)
|
|
Offsetting
|
|
|
Offsetting
|
|
Credit Derivative type
|
|
Notional
|
|
|
Fair
|
|
|
Years to
|
|
|
|
|
|
Average
|
|
Notional
|
|
|
Fair
|
|
by derivative risk exposure
|
|
Amount(2)
|
|
|
Value
|
|
|
Maturity
|
|
|
Type
|
|
|
Credit Rating
|
|
Amount(3)
|
|
|
Value(3)
|
|
|
Single name credit default swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
|
$
|
755
|
|
|
$
|
4
|
|
|
|
4 years
|
|
|
|
Corporate Credit
|
|
|
AA-
|
|
$
|
742
|
|
|
$
|
(43
|
)
|
Below investment grade risk exposure
|
|
|
114
|
|
|
|
(4
|
)
|
|
|
4 years
|
|
|
|
Corporate Credit
|
|
|
B+
|
|
|
75
|
|
|
|
(11
|
)
|
Basket credit default swaps(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
|
|
1,276
|
|
|
|
(57
|
)
|
|
|
4 years
|
|
|
|
Corporate Credit
|
|
|
BBB+
|
|
|
626
|
|
|
|
(11
|
)
|
Investment grade risk exposure
|
|
|
352
|
|
|
|
(91
|
)
|
|
|
7 years
|
|
|
|
CMBS Credit
|
|
|
A
|
|
|
352
|
|
|
|
91
|
|
Below investment grade risk exposure
|
|
|
125
|
|
|
|
(98
|
)
|
|
|
5 years
|
|
|
|
Corporate Credit
|
|
|
BBB+
|
|
|
|
|
|
|
|
|
Credit linked notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
|
|
76
|
|
|
|
73
|
|
|
|
2 years
|
|
|
|
Corporate Credit
|
|
|
BBB+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,698
|
|
|
$
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,795
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Underlying Referenced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Credit Obligation(s)(1)
|
|
Offsetting
|
|
|
Offsetting
|
|
Credit Derivative type
|
|
Notional
|
|
|
Fair
|
|
|
Years to
|
|
|
|
|
|
Average
|
|
Notional
|
|
|
Fair
|
|
by derivative risk exposure
|
|
Amount(2)
|
|
|
Value
|
|
|
Maturity
|
|
|
Type
|
|
|
Credit Rating
|
|
Amount(3)
|
|
|
Value(3)
|
|
|
Single name credit default swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
|
$
|
47
|
|
|
$
|
|
|
|
|
4 years
|
|
|
|
Corporate Credit
|
|
|
A-
|
|
$
|
35
|
|
|
$
|
(9
|
)
|
Below investment grade risk exposure
|
|
|
46
|
|
|
|
(12
|
)
|
|
|
4 years
|
|
|
|
Corporate Credit
|
|
|
CCC+
|
|
|
|
|
|
|
|
|
Basket credit default swaps(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
|
|
1,139
|
|
|
|
(196
|
)
|
|
|
5 years
|
|
|
|
Corporate Credit
|
|
|
A-
|
|
|
489
|
|
|
|
8
|
|
Investment grade risk exposure
|
|
|
203
|
|
|
|
(70
|
)
|
|
|
8 years
|
|
|
|
CMBS Credit
|
|
|
AAA
|
|
|
203
|
|
|
|
70
|
|
Below investment grade risk exposure
|
|
|
125
|
|
|
|
(104
|
)
|
|
|
6 years
|
|
|
|
Corporate Credit
|
|
|
BB+
|
|
|
|
|
|
|
|
|
Credit linked notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
|
|
106
|
|
|
|
95
|
|
|
|
2 years
|
|
|
|
Corporate Credit
|
|
|
BBB+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,666
|
|
|
$
|
(287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
727
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The average credit ratings are based on availability and the
midpoint of the applicable ratings among Moodys, S&P,
and Fitch. If no rating is available from a rating agency, then
an internally developed rating is used. |
|
(2) |
|
Notional amount is equal to the maximum potential future loss
amount. There is no specific collateral related to these
contracts or recourse provisions included in the contracts to
offset losses. |
|
(3) |
|
The Company has entered into offsetting credit default swaps to
terminate certain existing credit default swaps, thereby
offsetting the future changes in value of or losses paid related
to the original swap. |
|
(4) |
|
Includes $1.6 billion and $1.3 billion as of
December 31, 2009 and 2008, respectively, of standard
market indices of diversified portfolios of corporate issuers
referenced through credit default swaps. These swaps are
subsequently valued based upon the observable standard market
index. Also includes $175 as of December 31, 2009 and 2008,
of customized diversified portfolios of corporate issuers
referenced through credit default swaps. |
F-46
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Securities
Lending and Collateral Arrangements
The Company participates in securities lending programs to
generate additional income. Through these programs, certain
domestic fixed income securities are loaned from the
Companys portfolio to qualifying third party borrowers in
return for collateral in the form of cash or
U.S. Treasuries. Borrowers of these securities provide
collateral of 102% of the fair value of the loaned securities at
the time of the loan and can return the securities to the
Company for cash at varying maturity dates. The fair value of
the loaned securities is monitored and additional collateral is
obtained if the fair value of the collateral falls below 100% of
the fair value of the loaned securities. As of December 31,
2009 and 2008, under terms of securities lending programs, the
fair value of loaned securities was approximately $45 and
$1.8 billion, respectively and the associated collateral
held was $46 and $1.8 billion, respectively. The decrease
in both the fair value of loaned securities and the associated
collateral is attributable to the maturation of the loans in the
term lending portion of the securities lending program in 2009.
The Company earns income from the cash collateral or receives a
fee from the borrower. The Company recorded before-tax income
from securities lending transactions, net of lending fees, of
$14 and $18 for the years ended December 31, 2009 and 2008,
respectively, which was included in net investment income.
The Company enters into various collateral arrangements in
connection with its derivative instruments, which require both
the pledging and accepting of collateral. As of
December 31, 2009 and 2008, collateral pledged having a
fair value of $667 and $821, respectively, was included in fixed
maturities in the Consolidated Balance Sheets.
The following table presents the classification and carrying
amount of loaned securities and derivative instruments
collateral pledged.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Fixed maturities
|
|
$
|
712
|
|
|
$
|
1,975
|
|
Equity securities, AFS
|
|
|
|
|
|
|
9
|
|
Short-term investments
|
|
|
14
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
Total loaned securities and collateral pledged
|
|
$
|
726
|
|
|
$
|
2,601
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company had accepted
collateral with a fair value of $906, of which $833 was
derivative cash collateral which was invested and recorded in
the Consolidated Balance Sheets in fixed maturities and
short-term investments with a corresponding amount predominately
recorded in other liabilities. As of December 31, 2008, the
Company had accepted collateral of $5.6 billion, of which
$5.1 billion was cash collateral, including
$3.3 billion of derivative cash collateral. The Company
offsets the fair value amounts, income accruals and cash
collateral held related to derivative instruments, as discussed
above in the Significant Derivative Instruments Accounting
Policies section and accordingly a portion of the
liability associated with the derivative cash collateral was
reclassed out of other liabilities and into other assets of $104
and $507 as of December 31, 2009 and 2008, respectively.
The Company is only permitted by contract to sell or repledge
the noncash collateral in the event of a default by the
counterparty. As of December 31, 2009 and 2008, noncash
collateral accepted was held in separate custodial accounts and
were not included in the Companys Consolidated Balance
Sheets.
Securities
on Deposit with States
The Company is required by law to deposit securities with
government agencies in states where it conducts business. As of
December 31, 2009 and 2008, the fair value of securities on
deposit was approximately $14 and $15, respectively.
F-47
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounting
Policy
The Company cedes a share of the risks it has underwritten to
other insurance companies through reinsurance treaties. The
Company also assumes reinsurance of certain insurance risks that
other insurance companies have underwritten. Reinsurance
accounting is followed for ceded and assumed transactions when
the risk transfer provisions have been met including insurance
risk, consisting of both underwriting and timing risk, and the
reasonable possibility of significant loss to the reinsurer.
Premiums and benefits, losses and loss adjustment expenses
reflect the net effects of ceded and assumed reinsurance
transactions. Included in other assets are prepaid reinsurance
premiums, which represent the portion of premiums ceded to
reinsurers applicable to the unexpired terms of the reinsurance
contracts. Reinsurance recoverables include balances due from
reinsurance companies for paid and unpaid losses and loss
adjustment expenses and are presented net of an allowance for
uncollectible reinsurance.
The Company cedes insurance to other insurers in order to limit
its maximum losses and to diversify its exposures and provide
surplus relief. Such transfers do not relieve the Company of its
primary liability under policies it wrote and, as such, failure
of reinsurers to honor their obligations could result in losses
to the Company. The Company also assumes reinsurance from other
insurers and is a member of and participates in reinsurance
pools and associations. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of
credit risk. As of December 31, 2009 there were no
reinsurance-related concentrations of credit risk greater than
10% of the Companys stockholders equity. As of
December 31, 2009 and 2008, the Companys policy for
the largest amount retained on any one life by the life
operations was $10.
The Company reinsures certain of its risks to other reinsurers
under yearly renewable term, coinsurance, and modified
coinsurance arrangements. Yearly renewable term and coinsurance
arrangements result in passing all or a portion of the risk to
the reinsurer. Generally, the reinsurer receives a proportionate
amount of the premiums less an allowance for commissions and
expenses and is liable for a corresponding proportionate amount
of all benefit payments. Modified coinsurance is similar to
coinsurance except that the cash and investments that support
the liabilities for contract benefits are not transferred to the
assuming company, and settlements are made on a net basis
between the companies. Coinsurance with funds withheld is a form
of coinsurance except that the investment assets that support
the liabilities are withheld by the ceding company. The cost of
reinsurance related to long-duration contracts is accounted for
over the life of the underlying reinsured policies using
assumptions consistent with those used to account for the
underlying policies.
Insurance recoveries on ceded reinsurance contracts, which
reduce death and other benefits were $450, $465 and $285 for the
years ended December 31, 2009, 2008 and 2007, respectively.
The Company reinsures a portion of GMDB as well as 27% of the
GMWB, on contracts issued prior to July 2007, offered in
connection with its variable annuity contracts. The Company
maintains certain reinsurance agreements with HLA, whereby the
Company cedes both group life and group accident and health
risk. Under these treaties, the Company ceded group life premium
of $178, $148, and $132 in 2009, 2008 and 2007, respectively,
and accident and health premium of $232, $236 and $243,
respectively, to HLA. In addition, the Company entered into a
reinsurance transaction with an affiliated captive reinsurer on
October 1, 2009 which ceded a portion of the Companys
direct variable annuity policies with GMWB and GMDB and all of
the Companys other assumed GMAB, GMWB, GMDB and GMIB
exposures. Under this transaction, the Company ceded $62 of
premiums during the fourth quarter. Refer to Note 16,
Transactions with Affiliates for further information.
F-48
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net fee income, earned premiums and other were comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Gross fee income, earned premiums and other
|
|
$
|
4,919
|
|
|
$
|
5,773
|
|
|
$
|
6,134
|
|
Reinsurance assumed
|
|
|
70
|
|
|
|
48
|
|
|
|
13
|
|
Reinsurance ceded
|
|
|
(860
|
)
|
|
|
(682
|
)
|
|
|
(694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net fee income, earned premiums and other
|
|
$
|
4,129
|
|
|
$
|
5,139
|
|
|
$
|
5,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Deferred
Policy Acquisition Costs and Present Value of Future
Profits
|
Accounting
Policy
The Company capitalizes acquisition costs that vary with and are
primarily related to the acquisition of new and renewal
insurance contracts. The Companys deferred policy
acquisition cost (DAC) asset, which includes the
present value of future profits, related to most universal
life-type contracts (including variable annuities) is amortized
over the estimated life of the contracts acquired in proportion
to the present value of estimated gross profits
(EGPs). EGPs are also used to amortize other assets
and liabilities in the Companys Consolidated Balance
Sheets, such as, sales inducement assets (SIA) and
unearned revenue reserves (URR). Components of EGPs
are used to determine reserves for universal life type contracts
(including variable annuities) with death or other insurance
benefits such as guaranteed minimum death, guaranteed minimum
income and universal life secondary guarantee benefits. These
benefits are accounted for and collectively referred to as death
and other insurance benefit reserves and are held in addition to
the account value liability representing policyholder funds.
For most contracts, the Company estimates gross profits over
20 years as EGPs emerging subsequent to that timeframe are
immaterial. Products sold in a particular year are aggregated
into cohorts. Future gross profits for each cohort are projected
over the estimated lives of the underlying contracts, based on
future account value projections for variable annuity and
variable universal life products. The projection of future
account values requires the use of certain assumptions
including: separate account returns; separate account fund mix;
fees assessed against the contract holders account
balance; surrender and lapse rates; interest margin; mortality;
and hedging costs.
Prior to the second quarter of 2009, the Company determined EGPs
using the mean derived from stochastic scenarios that had been
calibrated to the estimated separate account return. The Company
also completed a comprehensive assumption study, in the third
quarter of each year and revised best estimate assumptions used
to estimate future gross profits when the EGPs in the
Companys models fell outside of an independently
determined reasonable range of EGPs. The Company also
considered, on a quarterly basis, other qualitative factors such
as product, regulatory and policyholder behavior trends and
would also revise EGPs if those trends were expected to be
significant.
Beginning with the second quarter of 2009, the Company now
determines EGPs from a single deterministic reversion to mean
(RTM) separate account return projection which is an
estimation technique commonly used by insurance entities to
project future separate account returns. Through this estimation
technique, the Companys DAC model is adjusted to reflect
actual account values at the end of each quarter and through a
consideration of recent market returns, the Company will
unlock or adjust projected returns over a future
period so that the account value returns to the long-term
expected rate of return, providing that those projected returns
do not exceed certain caps or floors. This DAC Unlock, for
future separate account returns, is determined each quarter.
In the third quarter of each year, the Company completes a
comprehensive non-market related policyholder behavior
assumption study and incorporates the results of those studies
into its projection of future gross profits. Additionally,
throughout the year, the Company evaluates various aspects of
policyholder behavior and periodically
F-49
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
revises its policyholder assumptions as credible emerging data
indicates that changes are warranted. Upon completion of an
assumption study or evaluation of credible new information, the
Company will revise its assumptions to reflect its current best
estimate. These assumption revisions will change the projected
account values and the related EGPs in the DAC, SIA and URR
amortization models, as well as the death and other insurance
benefit reserving models.
All assumption changes that affect the estimate of future EGPs
including: the update of current account values; the use of the
RTM estimation technique; or policyholder behavior assumptions,
are considered an Unlock in the period of revision. An Unlock
adjusts the DAC, SIA, URR and death and other insurance benefit
reserve balances in the Consolidated Balance Sheets with an
offsetting benefit or charge in the Consolidated Statements of
Operations in the period of the revision. An Unlock that results
in an after-tax benefit generally occurs as a result of actual
experience or future expectations of product profitability being
favorable compared to previous estimates. An Unlock that results
in an after-tax charge generally occurs as a result of actual
experience or future expectations of product profitability being
unfavorable compared to previous estimates.
An Unlock revises EGPs to reflect current best estimate
assumptions. The Company must also test the aggregate
recoverability of DAC and SIA by comparing the existing DAC and
SIA balance to the present value of future EGPs.
Effective October 1, 2009, a subsidiary of HLIC, Hartford
Life and Annuity Insurance Company (HLAI) entered
into a reinsurance agreement with an affiliated captive
reinsurer. This agreement provides that HLAI will cede, and the
affiliated captive reinsurer will assume 100% of the in-force
and prospective U.S. variable annuities and the associated
GMDB and GMWB riders. This transaction resulted in a DAC Unlock
of $2.0 billion, pre-tax and $1.3 billion, after-tax.
See Note 16 Transactions with Affiliates for further
information on the transaction.
Changes in the DAC balance are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance, January 1, before cumulative effect of
accounting change, pre-tax
|
|
$
|
9,944
|
|
|
$
|
8,601
|
|
|
$
|
7,474
|
|
Cumulative effect of accounting change, pre-tax
|
|
|
(54
|
)
|
|
|
|
|
|
|
(20
|
)
|
Balance, January 1, as adjusted
|
|
|
9,890
|
|
|
|
8,601
|
|
|
|
7,454
|
|
Deferred costs
|
|
|
674
|
|
|
|
1,258
|
|
|
|
1,557
|
|
Amortization DAC
|
|
|
(824
|
)
|
|
|
(509
|
)
|
|
|
(907
|
)
|
Amortization Unlock, pre-tax (1),(2)
|
|
|
(2,905
|
)
|
|
|
(1,111
|
)
|
|
|
302
|
|
Adjustments to unrealized gains and losses on securities
available-for-sale
and other(3)
|
|
|
(1,080
|
)
|
|
|
1,747
|
|
|
|
194
|
|
Effect of currency translation
|
|
|
24
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
5,779
|
|
|
$
|
9,944
|
|
|
$
|
8,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes for 2009, $1.9 billion DAC Unlock resulting from
reinsurance agreement with an affiliated captive reinsurer. |
|
(2) |
|
Additional contributors to the Unlock amount recorded for the
year ended 2009 was a result of actual separate account returns
being significantly below our aggregated estimated return for
the period from October 1, 2008 to March 31, 2009,
offset by actual returns being greater than our aggregated
estimated return for the period from April 1, 2009 to
December 31, 2009. |
|
(3) |
|
The adjustment reflects the effect of credit spreads tightening,
resulting in unrealized gains on securities in 2009. |
F-50
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Estimated future net amortization expense of present value of
future profits for the succeeding five years is as follows.
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2010
|
|
$
|
22
|
|
2011
|
|
$
|
20
|
|
2012
|
|
$
|
18
|
|
2013
|
|
$
|
16
|
|
2014
|
|
$
|
15
|
|
|
|
|
|
|
|
|
7.
|
Goodwill
and Other Intangible Assets
|
Accounting
Policy
Goodwill represents the excess of costs over the fair value of
net assets acquired. Goodwill is not amortized but is reviewed
for impairment at least annually or more frequently if events
occur or circumstances change that would indicate that a
triggering event has occurred. The goodwill impairment test
follows a two step process. In the first step, the fair value of
a reporting unit is compared to its carrying value. If the
carrying value of a reporting unit exceeds its fair value, the
second step of the impairment test is performed for purposes of
measuring the impairment. In the second step, the fair value of
the reporting unit is allocated to all of the assets and
liabilities of the reporting unit to determine an implied
goodwill value. This allocation is similar to a purchase price
allocation performed in purchase accounting. If the carrying
amount of the reporting unit goodwill exceeds the implied
goodwill value, an impairment loss shall be recognized in an
amount equal to that excess.
The carrying amount of goodwill allocated to reporting segments
as of December 31 is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
|
Accumulated
|
|
|
Carrying
|
|
Reporting Unit
|
|
Gross
|
|
|
Impairments
|
|
|
Value
|
|
|
Gross
|
|
|
Impairments
|
|
|
Value
|
|
|
Retail
|
|
$
|
343
|
|
|
$
|
(184
|
)
|
|
$
|
159
|
|
|
$
|
343
|
|
|
$
|
(184
|
)
|
|
$
|
159
|
|
Retirement Plans(1)
|
|
|
87
|
|
|
|
|
|
|
|
87
|
|
|
|
79
|
|
|
|
|
|
|
|
79
|
|
Individual Life
|
|
|
224
|
|
|
|
|
|
|
|
224
|
|
|
|
224
|
|
|
|
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
654
|
|
|
$
|
(184
|
)
|
|
$
|
470
|
|
|
|
646
|
|
|
|
(184
|
)
|
|
$
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company recorded a purchase price adjustment in 2009
associated with these acquisitions resulting in additional
goodwill of $8. |
Managements determination of the fair value of each
reporting unit incorporates multiple inputs including cash flow
calculations, price to earnings multiples, the level of The
Hartfords share price and assumptions that market
participants would make in valuing the reporting unit. Other
assumptions include levels of economic capital, future business
growth, earnings projections, assets under management and the
weighted average cost of capital used for purposes of
discounting. Decreases in the amount of economic capital
allocated to a reporting unit, decreases in business growth,
decreases in earnings projections and increases in the weighted
average cost of capital will all cause the reporting units
fair value to decrease.
The Company completed its annual goodwill assessment for the
individual reporting units of the Company as of January 1,
2009. The conclusion reached as a result of the annual goodwill
impairment testing was that the fair value of each reporting
unit, for which goodwill had been allocated, was in excess of
the respective reporting units carrying value (the first
step of the goodwill impairment test).
F-51
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
However, as noted above, goodwill is reassessed at an interim
date if certain circumstances occur which would cause the entity
to conclude that it was more likely than not that the carrying
value of one or more of its reporting units would be in excess
of the respective reporting units fair value. As a result
of the continued decline in the equity markets from
January 1, 2009, rating agency downgrades, and a decline in
The Hartfords share price, the Company concluded, during
the first quarter of 2009, that the conditions had been met to
warrant an interim goodwill impairment test.
As a result of the first quarter 2009 interim goodwill
impairment test which included the effects of decreasing sales
outlooks and declining equity markets on future earnings, the
fair value in step two of the goodwill impairment analysis for
the Individual Life reporting unit continued to be in excess of
its carrying value.
The Companys interim goodwill impairment test performed in
connection with the preparation of our yearend 2008 financial
statements, resulted in a pre-tax impairment charge of $184 in
the Individual Annuity reporting unit. The impairment charge
taken in 2008 was primarily due to the Companys estimate
of the Individual Annuity reporting units fair value
falling significantly below its book value. The fair value of
this reporting unit declined as the statutory and capital risks
associated with the death and living benefit guarantees sold
with products offered by this reporting unit increased. These
concerns had a comparable impact on The Hartfords share
price. The determination of fair value for the Individual
Annuity reporting unit incorporated multiple inputs including
discounted cash flow calculations, market participant
assumptions and The Hartfords share price.
The Companys goodwill impairment test performed for the
year ended December 31, 2007 resulted in no write-downs.
Other
Intangible Assets
The following table shows the Companys acquired intangible
assets that continue to be subject to amortization and aggregate
amortization expense, net of interest accretion, if any.
Acquired intangible assets are included in other assets in the
consolidated balance sheet. Except for goodwill, the Company has
no intangible assets with indefinite useful lives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
Carrying
|
|
|
Net
|
|
|
Carrying
|
|
|
Net
|
|
Acquired Intangible Assets
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Servicing intangibles
|
|
$
|
13
|
|
|
$
|
1
|
|
|
$
|
14
|
|
|
$
|
1
|
|
Other
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Acquired Intangible Assets
|
|
$
|
14
|
|
|
$
|
1
|
|
|
$
|
15
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amortization expense for the years ended December 31,
2009 and 2008 was $1 and $1, and included in other expense in
the consolidated statement of operations. As of
December 31, 2009, the weighted average amortization period
was 20 years for servicing intangibles, 20 years for
other and 20 years for total acquired intangible assets.
F-52
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is detail of the net acquired intangible asset
activity for the years ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2009
|
|
Intangibles
|
|
|
Other
|
|
|
Total
|
|
|
Balance, beginning of year
|
|
$
|
13
|
|
|
$
|
1
|
|
|
$
|
14
|
|
Acquisition of business
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization, net of the accretion of interest
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
12
|
|
|
$
|
1
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of business
|
|
|
14
|
|
|
|
1
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization, net of the accretion of interest
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
13
|
|
|
$
|
1
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated future net amortization expense for the succeeding
five years is as follows:
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2010
|
|
$
|
1
|
|
2011
|
|
|
1
|
|
2012
|
|
|
1
|
|
2013
|
|
|
1
|
|
2014
|
|
|
1
|
|
For a discussion of present value of future profits that
continue to be subject to amortization and aggregate
amortization expense, see Note 6.
|
|
8.
|
Separate
Accounts, Death Benefits and Other Insurance Benefit
Features
|
Accounting
Policy
The Company records the variable portion of individual variable
annuities, 401(k), institutional, 403(b)/457, private placement
life and variable life insurance products within separate
accounts. Separate account assets are reported at fair value and
separate account liabilities are reported at amounts consistent
with separate account assets. Investment income and gains and
losses from those separate account assets accrue directly to the
policyholder, who assumes the related investment risk, and are
offset by the related liability changes reported in the same
line item in the Consolidated Statements of Operations. The
Company earns fees for investment management, certain
administrative expenses, and mortality and expense risks assumed
which are reported in fee income.
Certain contracts classified as universal life-type include
death and other insurance benefit features including guaranteed
minimum death benefits (GMDB) offered with variable
annuity contracts, or secondary guarantee benefits offered with
universal life (UL) insurance contracts. GMDBs have
been written in various forms as described in this note. UL
secondary guarantee benefits ensure that the policy will not
terminate, and will continue to provide a death benefit, even if
there is insufficient policy value to cover the monthly
deductions and charges. These death and other insurance benefit
features require an additional liability be held above the
account value liability representing the policyholders
funds. This liability is reported in reserve for future policy
benefits in the Companys Consolidated Balance Sheets.
Changes in the death and other insurance benefit reserves are
recorded in benefits, losses and loss adjustment expenses in the
Companys Consolidated Statements of Operations.
Consistent with the Companys policy on DAC Unlock, the
Company regularly evaluates estimates used and adjusts the
additional liability balance, with a related charge or credit to
benefits, losses and loss adjustment expense. For
F-53
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
further information on the DAC Unlock, see Note 6 Deferred
Policy Acquisition Costs and Present Value of Future Benefits.
The Company reinsures the GMDBs associated with its in-force
block of business. The Company also assumes, through
reinsurance, minimum death, income, withdrawal and accumulation
benefits offered by an affiliate. The death and other insurance
benefit liability is determined by estimating the expected
present value of the benefits in excess of the
policyholders expected account value in proportion to the
present value of total expected assessments. The additional
death and other insurance benefits and net reinsurance costs are
recognized ratably over the accumulation period based on total
expected assessments.
Changes in the gross GMDB and UL secondary guarantee benefits
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UL Secondary
|
|
|
|
GMDB(1)
|
|
|
Guarantees(1)
|
|
|
Liability balance as of January 1, 2009
|
|
$
|
882
|
|
|
$
|
40
|
|
Incurred
|
|
|
378
|
|
|
|
41
|
|
Unlock
|
|
|
547
|
|
|
|
(5
|
)
|
Paid
|
|
|
(503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance as of December 31, 2009
|
|
$
|
1,304
|
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The reinsurance recoverable asset related to the GMDB was $787
as of December 31, 2009. The reinsurance recoverable asset
related to the UL Secondary Guarantees was $22 as of
December 31, 2009. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UL Secondary
|
|
|
|
GMDB(1)
|
|
|
Guarantees(1)
|
|
|
Liability balance as of January 1, 2008
|
|
$
|
531
|
|
|
$
|
19
|
|
Incurred
|
|
|
231
|
|
|
|
21
|
|
Unlock
|
|
|
389
|
|
|
|
|
|
Paid
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability balance as of December 31, 2008
|
|
$
|
882
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The reinsurance recoverable asset related to the GMDB was $593
as of December 31, 2008. The reinsurance recoverable asset
related to the UL Secondary Guarantees was $16 as of
December 31, 2008. |
During 2009, 2008 and 2007, there were no gains or losses on
transfers of assets from the general account to the separate
account.
F-54
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides details concerning GMDB exposure as
of December 31, 2009:
Breakdown
of Variable Annuity Account Value by GMDB Type at
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Net
|
|
|
|
|
|
|
Account
|
|
|
Net Amount
|
|
|
Amount
|
|
|
Weighted Average
|
|
|
|
Value
|
|
|
at Risk
|
|
|
at Risk
|
|
|
Attained Age of
|
|
Maximum anniversary value (MAV)(1)
|
|
(AV)
|
|
|
(NAR)(9)
|
|
|
(RNAR)(9)
|
|
|
Annuitant
|
|
|
MAV only
|
|
$
|
27,423
|
|
|
$
|
8,408
|
|
|
$
|
789
|
|
|
|
67
|
|
With 5% rollup(2)
|
|
|
1,868
|
|
|
|
664
|
|
|
|
52
|
|
|
|
67
|
|
With Earnings Protection Benefit Rider (EPB)(3)
|
|
|
6,567
|
|
|
|
1,409
|
|
|
|
29
|
|
|
|
63
|
|
With 5% rollup & EPB
|
|
|
784
|
|
|
|
224
|
|
|
|
9
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MAV
|
|
|
36,642
|
|
|
|
10,705
|
|
|
|
879
|
|
|
|
64
|
|
Asset Protection Benefit (APB)(4)
|
|
|
28,612
|
|
|
|
5,508
|
|
|
|
1,067
|
|
|
|
64
|
|
Lifetime Income Benefit (LIB)(5)
|
|
|
1,330
|
|
|
|
214
|
|
|
|
66
|
|
|
|
62
|
|
Reset(6) (5-7 years)
|
|
|
3,790
|
|
|
|
490
|
|
|
|
266
|
|
|
|
67
|
|
Return of Premium(7)/Other
|
|
|
21,446
|
|
|
|
1,445
|
|
|
|
331
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal U.S. GMDB(8)
|
|
$
|
91,820
|
|
|
$
|
18,362
|
|
|
$
|
2,609
|
|
|
|
65
|
|
Less: General Account Value with U.S. GMDB
|
|
|
6,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Separate Account Liabilities with GMDB
|
|
|
85,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separate Account Liabilities without U.S. GMDB
|
|
|
65,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Separate Account Liabilities
|
|
$
|
150,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan GMDB and GMIB(10)
|
|
$
|
16,953
|
|
|
|
2,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
MAV: the GMDB is the greatest of current AV, net premiums paid
and the highest AV on any anniversary before age 80
(adjusted for withdrawals). |
|
(2) |
|
Rollup: the GMDB is the greatest of the MAV, current AV, net
premium paid and premiums (adjusted for withdrawals) accumulated
at generally 5% simple interest up to the earlier of age 80
or 100% of adjusted premiums. |
|
(3) |
|
EPB GMDB is the greatest of the MAV, current AV, or contract
value plus a percentage of the contracts growth. The
contracts growth is AV less premiums net of withdrawals,
subject to a cap of 200% of premiums net of withdrawals. |
|
(4) |
|
APB GMDB is the greater of current AV or MAV, not to exceed
current AV plus 25% times the greater of net premiums and MAV
(each adjusted for premiums in the past 12 months). |
|
(5) |
|
LIB GMDB is the greatest of current AV, net premiums paid, or
for certain contracts a benefit amount that ratchets over time,
generally based on market performance. |
|
(6) |
|
Reset GMDB is the greatest of current AV, net premiums paid and
the most recent five to seven year anniversary AV before
age 80 (adjusted for withdrawals). |
|
(7) |
|
ROP: the GMDB is the greater of current AV and net premiums paid. |
|
(8) |
|
AV includes the contract holders investment in the
separate account and the general account. |
F-55
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(9) |
|
NAR is defined as the guaranteed benefit in excess of the
current AV. RNAR is NAR reduced for reinsurances. NAR and RNAR
are highly sensitive to equity market movements and increase
when equity markets decline. |
|
(10) |
|
Assumed GMDB includes a ROP and MAV (before
age 80) paid in a single lump sum. GMIB is a guarantee
to return initial investment, adjusted for earnings liquidity,
paid through a fixed annuity, after a minimum deferral period of
10, 15 or 20 years. The guaranteed remaining balance
(GRB) related to the Japan GMIB was
$19.1 billion and $20.1 billion as of
December 31, 2009 and 2008, respectively. The GRB related
to the Japan GMAB and GMWB was $522.2 and $490.5 as of
December 31, 2009 and December 31, 2008. These
liabilities are not included in the Separate Account as they are
not legally insulated from the general account liabilities of
the insurance enterprise. As of December 31, 2009, 59% of
the AV and 52% of RNAR is reinsured to an affiliate. See
Note 16 Transaction with Affiliates for further discussion. |
See Note 3 for a description of the Companys
guaranteed living benefits that are accounted for at fair value.
Account balances of contracts with guarantees were invested in
variable separate accounts as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
Asset type
|
|
2009
|
|
|
2008
|
|
|
|
|
|
Equity securities (including mutual funds)(1)
|
|
$
|
75,720
|
|
|
$
|
63,114
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
9,298
|
|
|
|
10,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,018
|
|
|
$
|
73,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2009 and December 31, 2008,
approximately 16% and 16%, respectively, of the equity
securities above were invested in fixed income securities
through these funds and approximately 84% and 84%, respectively,
were invested in equity securities. |
The Company currently offers enhanced crediting rates or bonus
payments to contract holders on certain of its individual and
group annuity products. The expense associated with offering a
bonus is deferred and amortized over the life of the related
contract in a pattern consistent with the amortization of
deferred policy acquisition costs. The Company unlocks the
amortization of the sales inducement asset consistent with the
DAC Unlock.
Changes in deferred sales inducement activity were as follows
for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance, January 1
|
|
$
|
533
|
|
|
$
|
459
|
|
Sales inducements deferred
|
|
|
43
|
|
|
|
137
|
|
Unlock
|
|
|
(886
|
)
|
|
|
(43
|
)
|
Amortization charged to income
|
|
|
(96
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
|
|
$
|
194
|
|
|
$
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Commitments
and Contingencies
|
Contingencies
Management follows the requirements of accounting for
contingencies. This statement requires management to evaluate
each contingent matter separately. A loss is recorded if
probable and reasonably estimable. Management establishes
reserves for these contingencies at the best
estimate, or, if no one number within the range of
possible losses is more probable than any other, the Company
records an estimated reserve of the low end of the range of
losses.
F-56
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounting
Policy
Management evaluates each contingent matter separately. A loss
is recorded if probable and reasonably estimable. Management
establishes reserves for these contingencies at the best
estimate, or, if no one number within the range of
possible losses is more probable than any other, the Company
records an estimated reserve of the low end of the range of
losses.
Litigation
The Company is involved in claims litigation arising in the
ordinary course of business, both as a liability insurer
defending or providing indemnity for third-party claims brought
against insureds and as an insurer defending coverage claims
brought against it. The Company accounts for such activity
through the establishment of unpaid loss and loss adjustment
expense reserves. Management expects that the ultimate
liability, if any, with respect to such ordinary-course claims
litigation, after consideration of provisions made for potential
losses and costs of defense, will not be material to the
consolidated financial condition, results of operations or cash
flows of the Company.
The Company is also involved in other kinds of legal actions,
some of which assert claims for substantial amounts. These
actions include, among others, putative state and federal class
actions seeking certification of a state or national class. Such
putative class actions have alleged, for example, improper sales
practices in connection with the sale of life insurance and
other investment products; and improper fee arrangements in
connection with investment products and structured settlements.
The Company also is involved in individual actions in which
punitive damages are sought, such as claims alleging bad faith
in the handling of insurance claims. Management expects that the
ultimate liability, if any, with respect to such lawsuits, after
consideration of provisions made for estimated losses, will not
be material to the consolidated financial condition of the
Company. Nonetheless, given the large or indeterminate amounts
sought in certain of these actions, and the inherent
unpredictability of litigation, an adverse outcome in certain
matters could, from time to time, have a material adverse effect
on the Companys consolidated results of operations or cash
flows in particular quarterly or annual periods.
Broker Compensation Litigation Following the
New York Attorney Generals filing of a civil complaint
against Marsh & McLennan Companies, Inc., and Marsh,
Inc. (collectively, Marsh) in October 2004 alleging
that certain insurance companies, including The Hartford,
participated with Marsh in arrangements to submit inflated bids
for business insurance and paid contingent commissions to ensure
that Marsh would direct business to them, private plaintiffs
brought several lawsuits against The Hartford predicated on the
allegations in the Marsh complaint, to which The Hartford was
not party. Among these is a multidistrict litigation in the
United States District Court for the District of New Jersey.
There are two consolidated amended complaints filed in the
multidistrict litigation, one related to conduct in connection
with the sale of property-casualty insurance and the other
related to alleged conduct in connection with the sale of group
benefits products. The Company is named in the group benefits
products complaint. The complaints assert, on behalf of a
putative class of persons who purchased insurance through broker
defendants, claims under the Sherman Act, the Racketeer
Influenced and Corrupt Organizations Act (RICO),
state law, and in the case of the group benefits products
complaint, claims under the Employee Retirement Income Security
Act of 1974 (ERISA). The claims are predicated upon
allegedly undisclosed or otherwise improper payments of
contingent commissions to the broker defendants to steer
business to the insurance company defendants. The district court
has dismissed the Sherman Act and RICO claims in both complaints
for failure to state a claim and has granted the
defendants motions for summary judgment on the ERISA
claims in the group-benefits products complaint. The district
court further has declined to exercise supplemental jurisdiction
over the state law claims, has dismissed those state law claims
without prejudice, and has closed both cases. The plaintiffs
have appealed the dismissal of claims in both consolidated
amended complaints, except the ERISA claims.
Structure Settlement Class Action In
October 2005, a putative nationwide class action was filed in
the United States District Court for the District of Connecticut
against the Company and several of its subsidiaries on behalf of
persons who had asserted claims against an insured of a Hartford
property & casualty insurance company that
F-57
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
resulted in a settlement in which some or all of the settlement
amount was structured to afford a schedule of future payments of
specified amounts funded by an annuity from a Hartford life
insurance company (Structured Settlements). The
operative complaint alleges that since 1997 the Company has
systematically deprived the settling claimants of the value of
their damages recoveries by secretly deducting 15% of the
annuity premium of every Structured Settlement to cover
brokers commissions, other fees and costs, taxes, and a
profit for the annuity provider, and asserts claims under the
Racketeer Influenced and Corrupt Organizations Act
(RICO) and state law. The plaintiffs seek
compensatory damages, punitive damages, pre-judgment interest,
attorneys fees and costs, and injunctive or other
equitable relief. The Company vigorously denies that any
claimant was misled or otherwise received less than the amount
specified in the structured-settlement agreements. In March
2009, the district court certified a class for the RICO and
fraud claims composed of all persons, other than those
represented by a plaintiffs broker, who entered into a
Structured Settlement since 1997 and received certain written
representations about the cost or value of the settlement. The
district court declined to certify a class for the
breach-of-contract
and unjust-enrichment claims. The Companys petition to the
United States Court of Appeals for the Second Circuit for
permission to file an interlocutory appeal of the
class-certification
ruling was denied in October 2009. A trial on liability and the
methodology for computing
class-wide
damages is scheduled to commence in September 2010. It is
possible that an adverse outcome could have a material adverse
effect on the Companys financial condition and
consolidated results of operations or cash flows. The Company is
defending this litigation vigorously.
Derivative
Commitments
Certain of the Companys derivative agreements contain
provisions that are tied to the financial strength ratings of
the individual legal entity that entered into the derivative
agreement as set by nationally recognized statistical rating
agencies. If the insurance operating entitys financial
strength were to fall below certain ratings, the counterparties
to the derivative agreements could demand immediate and ongoing
full collateralization and in certain instances demand immediate
settlement of all outstanding derivative positions traded under
each impacted bilateral agreement. The settlement amount is
determined by netting the derivative positions transacted under
each agreement. If the termination rights were to be exercised
by the counterparties, it could impact the insurance operating
entitys ability to conduct hedging activities by
increasing the associated costs and decreasing the willingness
of counterparties to transact with the insurance operating
entity. The aggregate fair value of all derivative instruments
with credit-risk-related contingent features that are in a net
liability position as of December 31, 2009, is $473. Of
this $473, the insurance operating entities have posted
collateral of $454 in the normal course of business. Based on
derivative market values as of December 31, 2009, a
downgrade of one level below the current financial strength
ratings by either Moodys or S&P could require
approximately an additional $23 to be posted as collateral.
These collateral amounts could change as derivative market
values change, as a result of changes in our hedging activities
or to the extent changes in contractual terms are negotiated.
The nature of the collateral that we may be required to post is
primarily in the form of U.S. Treasury bills and
U.S. Treasury notes.
Regulatory
Developments
On July 23, 2007, The Hartford entered into an agreement
(the Agreement) with the New York Attorney
Generals Office, the Connecticut Attorney Generals
Office, and the Illinois Attorney Generals Office to
resolve (i) the previously disclosed investigations by
these Attorneys General regarding, among other things, The
Hartfords compensation agreements with brokers, alleged
participation in arrangements to submit inflated bids,
compensation arrangements in connection with the administration
of workers compensation plans and reporting of workers
compensation premiums participants in finite reinsurance
transactions, sale of fixed and individual annuities used to
fund structured settlements, and marketing and sale of
individual and group variable annuity products and (ii) the
previously disclosed investigation by the New York Attorney
Generals Office of aspects of The Hartfords variable
annuity and mutual fund operations related to market timing. In
light of the Agreement, the Staff of the Securities and Exchange
Commission has informed The Hartford that it has determined to
conclude its previously disclosed investigation into market
timing without recommending any enforcement action. Under the
terms of the
F-58
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Agreement, The Hartford paid $115, of which $84 represents
restitution for market timing, $5 represents restitution for
issues relating to the compensation of brokers, and $26 is a
civil penalty.
Hartford Life recorded charges of $54, after-tax, in the
aggregate, none of which was attributed to the Company, through
the first quarter of 2007 to establish a reserve for the market
timing matters and, based on the settlement discussed above,
Hartford Life recorded an additional charge of $21, after-tax,
in the second quarter of 2007. In the second quarter of 2007,
$75, after-tax, representing all of the charges that had been
recorded at Hartford Life, was attributed to and recorded at the
Company.
Commitments
The rent paid to Hartford Fire for operating leases entered into
by the Company was $25, $14 and $27 for the years ended
December 31, 2009, 2008 and 2007, respectively. Included in
Hartford Fires operating leases are the principal
executive offices of Hartford Life Insurance Company, together
with its parent, which are located in Simsbury, Connecticut.
Rental expense for the facility located in Simsbury,
Connecticut, which expired on December 31, 2008, as this
operating lease has been be replaced by a capital lease between
its parent Company HLA and Hartford Fire Insurance Company,
amounted to approximately $0, $0 and $6 for the years ended
December 31, 2009, 2008 and 2007, respectively.
Future minimum rental commitments on all operating leases are as
follows:
|
|
|
|
|
2010
|
|
$
|
17
|
|
2011
|
|
|
14
|
|
2012
|
|
|
9
|
|
2013
|
|
|
6
|
|
2014
|
|
|
2
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48
|
|
|
|
|
|
|
Unfunded
Commitments
As of December 31, 2009, the Company has outstanding
commitments totaling $595, of which $437 is committed to fund
limited partnerships and other alternative investments. These
capital commitments may be called by the partnership during the
commitment period (on average two to five years) to fund the
purchase of new investments and partnership expenses. Once the
commitment period expires, the Company is under no obligation to
fund the remaining unfunded commitment but may elect to do so.
The remaining outstanding commitments are primarily related to
various funding obligations associated with private placement
securities and mortgage loans. These have a commitment period of
one month to three years.
Guaranty
Fund and Other Insurance-related Assessments
In all states, insurers licensed to transact certain classes of
insurance are required to become members of a guaranty fund. In
most states, in the event of the insolvency of an insurer
writing any such class of insurance in the state, members of the
funds are assessed to pay certain claims of the insolvent
insurer. A particular states fund assesses its members
based on their respective written premiums in the state for the
classes of insurance in which the insolvent insurer was engaged.
Assessments are generally limited for any year to one or two
percent of premiums written per year depending on the state.
The Company accounts for guaranty fund and other insurance
assessments in accordance with Statement of Position
No. 97-3,
Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments. Liabilities for guaranty
fund and other insurance-related assessments are accrued when an
assessment is probable, when it can be
F-59
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reasonably estimated, and when the event obligating the Company
to pay an imposed or probable assessment has occurred.
Liabilities for guaranty funds and other insurance-related
assessments are not discounted and are included as part of other
liabilities in the Consolidated Balance Sheets. As of
December 31, 2009 and 2008, the liability balance was $7
and $4, respectively. As of December 31, 2009 and 2008, $10
and $11, respectively, related to premium tax offsets were
included in other assets.
The Company is included in The Hartfords consolidated
Federal income tax return. The Company and The Hartford have
entered into a tax sharing agreement under which each member in
the consolidated U.S. Federal income tax return will make
payments between them such that, with respect to any period, the
amount of taxes to be paid by the Company, subject to certain
tax adjustments, is consistent with the parent down
approach. Under this approach, the Companys deferred tax
assets and tax attributes are considered realized by it so long
as the group is able to recognize (or currently use) the related
deferred tax asset or attribute. Thus the need for a valuation
allowance is determined at the consolidated return level rather
than at the level of the individual entities comprising the
consolidated group.
Income tax expense (benefit) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current U.S. Federal
|
|
$
|
298
|
|
|
$
|
(686
|
)
|
|
$
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred U.S. Federal Excluding NOL Carryforward
|
|
|
(2,387
|
)
|
|
|
(776
|
)
|
|
|
75
|
|
Net
Operating Loss Carryforward
|
|
|
688
|
|
|
|
(719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred
|
|
|
(1,699
|
)
|
|
|
(1,495
|
)
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income tax expense (benefit)
|
|
$
|
(1,401
|
)
|
|
$
|
(2,181
|
)
|
|
$
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-60
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets (liabilities) include the following as of
December 31:
|
|
|
|
|
|
|
|
|
Deferred Tax Assets
|
|
2009
|
|
|
2008
|
|
|
Tax basis deferred policy acquisition costs
|
|
$
|
596
|
|
|
$
|
660
|
|
Net unrealized loss on investments
|
|
|
1,258
|
|
|
|
2,924
|
|
Investment-related items
|
|
|
1,637
|
|
|
|
2,424
|
|
NOL Carryover
|
|
|
80
|
|
|
|
768
|
|
Minimum tax credit
|
|
|
514
|
|
|
|
241
|
|
Capital Loss Carryforward
|
|
|
256
|
|
|
|
24
|
|
Foreign tax credit carryovers
|
|
|
50
|
|
|
|
18
|
|
Depreciable & Amortizable assets
|
|
|
59
|
|
|
|
64
|
|
Other
|
|
|
35
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets
|
|
|
4,485
|
|
|
|
7,142
|
|
Valuation Allowance
|
|
|
(80
|
)
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
|
4,405
|
|
|
|
7,093
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Financial statement deferred policy acquisition costs and
reserves
|
|
|
(1,302
|
)
|
|
|
(3,614
|
)
|
Employee benefits
|
|
|
(37
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Liabilities
|
|
|
(1,339
|
)
|
|
|
(3,649
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Asset (Liability)
|
|
$
|
3,066
|
|
|
$
|
3,444
|
|
|
|
|
|
|
|
|
|
|
The Company had current federal income tax (payable)/
recoverable of $(15) and $566 as of December 31, 2009 and
2008, respectively.
In managements judgment, the net deferred tax asset will
more likely than not be realized. Included in the deferred tax
asset is the expected tax benefit attributable to foreign net
operating losses of $290, which have no expiration. A valuation
allowance of $80 has been recorded which relates to foreign
operations. No valuation allowance has been recorded for
realized or unrealized losses. In assessing the need for a
valuation allowance, management considered taxable income in
prior carryback years, future taxable income and tax planning
strategies that include holding debt securities with market
value losses until recovery, selling appreciated securities to
offset capital losses, and sales of certain corporate assets.
Such tax planning strategies are viewed by management as prudent
and feasible and will be implemented if necessary to realize the
deferred tax asset. However, we anticipate limited ability,
going forward, to recognize a full tax benefit on realized
losses which will result in additional valuation allowances.
If the Company were to follow a separate entity
approach, it would have to record a valuation allowance of $387
related to realized capital losses. In addition, the current tax
benefit related to any of the Companys tax attributes
realized by virtue of its inclusion in The Hartfords
consolidated tax return would have been recorded directly to
surplus rather than income. These benefits were $65, $500 and $0
for 2009, 2008 and 2007 respectively.
The Company or one of its subsidiaries files income tax returns
in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. With few exceptions, the Company is no
longer subject to U.S. federal, state and local, or
non-U.S. income
tax examinations by tax authorities for years before 2004.
During the first quarter of 2009, the Company received
notification of the approval by the Joint Committee on Taxation
of the results of the 2002 through 2003 examination. As a
result, the Company recorded a tax benefit of $4. The IRS
examination of 2004 through 2006 was concluded in the fourth
quarter of 2009. As a result, the Company recorded a tax benefit
of $35. In addition, the Company is working with the IRS on a
possible settlement of a DRD issue related to prior periods
which, if settled, may result in the booking of tax benefits.
Such benefits are not expected to be material to the
F-61
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
statement of operations. The Company does not anticipate that
any of these items will result in a significant change in the
balance of unrecognized tax benefits within 12 months.
A reconciliation of the tax provision at the U.S. Federal
statutory rate to the provision (benefit) for income taxes is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Tax provision at the U.S. federal statutory rate
|
|
$
|
(1,245
|
)
|
|
$
|
(2,007
|
)
|
|
$
|
398
|
|
Dividends received deduction
|
|
|
(181
|
)
|
|
|
(176
|
)
|
|
|
(155
|
)
|
Penalties
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Foreign related investments
|
|
|
28
|
|
|
|
3
|
|
|
|
(4
|
)
|
Other
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,401
|
)
|
|
$
|
(2,181
|
)
|
|
$
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008, the Company made the decision to discontinue future
issuances of consumer notes; this decision does not impact
consumer notes currently outstanding.
Institutional began issuing consumer notes through its Retail
Investor Notes Program in September 2006. A consumer note is an
investment product distributed through broker-dealers directly
to retail investors as medium-term, publicly traded fixed or
floating rate, or a combination of fixed and floating rate,
notes. Consumer notes are part of the Companys
spread-based business and proceeds are used to purchase
investment products, primarily fixed rate bonds. Proceeds are
not used for general operating purposes. Consumer notes
maturities may extend up to 30 years and have contractual
coupons based upon varying interest rates or indexes (e.g.
consumer price index) and may include a call provision that
allows the Company to extinguish the notes prior to its
scheduled maturity date. Certain Consumer notes may be redeemed
by the holder in the event of death. Redemptions are subject to
certain limitations, including calendar year aggregate and
individual limits. The aggregate limit is equal to the greater
of $1 or 1% of the aggregate principal amount of the notes as of
the end of the prior year. The individual limit is
$250 thousand per individual. Derivative instruments are
utilized to hedge the Companys exposure to market risks in
accordance with Company policy.
As of December 31, 2009 and 2008 $1,136 and $1,210,
respectively, of consumer notes were outstanding. As of
December 31, 2009, these consumer notes have interest rates
ranging from 4% to 6% for fixed notes and, for variable notes,
based on December 31, 2009 rates, either consumer price
index plus 80 to 260 basis points, or indexed to the
S&P 500, Dow Jones Industrials, foreign currency, or the
Nikkei 225. The aggregate maturities of Consumer Notes are as
follows: $24 in 2010, $120 in 2011, $274 in 2012 and $200 in
2013, and $518 thereafter. For 2009 and 2008, interest credited
to holders of consumer notes was $51 and $59, respectively.
The domestic insurance subsidiaries of the Company prepare their
statutory financial statements in conformity with statutory
accounting practices prescribed or permitted by the applicable
state insurance department which vary materially from GAAP.
Prescribed statutory accounting practices include publications
of the National Association of Insurance Commissioners
(NAIC), as well as state laws, regulations and
general administrative rules. The differences between statutory
financial statements and financial statements prepared in
accordance with GAAP vary between domestic and foreign
jurisdictions. The principal differences are that statutory
financial statements do not reflect deferred policy acquisition
costs and limit deferred income taxes, life benefit reserves
predominately use
F-62
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interest rate and mortality assumptions prescribed by the NAIC,
bonds are generally carried at amortized cost and reinsurance
assets and liabilities are presented net of reinsurance.
The statutory net income amounts for the years ended
December 31, 2008 and 2007, and the statutory capital and
surplus amounts as of December 31, 2008 and 2007 in the
table below are based on actual statutory filings with the
applicable regulatory authorities. The statutory net income
amounts for the year ended December 31, 2009 the statutory
capital and surplus amounts as of December 31, 2009 are
estimates, as the respective 2009 statutory filings have not yet
been made.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Statutory net income
|
|
$
|
(539
|
)
|
|
$
|
(2,533
|
)
|
|
$
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory capital and surplus
|
|
$
|
5,365
|
|
|
$
|
4,073
|
|
|
$
|
4,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company received approval from with the Connecticut
Insurance Department regarding the use of two permitted
practices in its statutory financial statements and those of its
Connecticut-domiciled life insurance subsidiaries as of
December 31, 2008. The first permitted practice related to
the statutory accounting for deferred income taxes.
Specifically, this permitted practice modified the accounting
for deferred income taxes prescribed by the NAIC by increasing
the realization period for deferred tax assets from one year to
three years and increasing the asset recognition limit from 10%
to 15% of adjusted statutory capital and surplus. The benefits
of this permitted practice could not be considered by the
Company when determining surplus available for dividends. The
second permitted practice related to the statutory reserving
requirements for variable annuities with guaranteed living
benefit riders. Actuarial guidelines prescribed by the NAIC
required a stand-alone asset adequacy analysis reflecting only
benefits, expenses and charges that are associated with the
riders for variable annuities with guaranteed living benefits.
The permitted practice allowed for all benefits, expenses and
charges associated with the variable annuity contract to be
reflected in the stand-alone asset adequacy test. These
permitted practices resulted in an increase to the
Companys estimated statutory surplus of $956 as of
December 31, 2008. The effects of these permitted practices
are included in the 2008 amounts in the table above.
In December, 2009 the NAIC issued SSAP 10R which modified the
accounting for deferred income taxes prescribed by the NAIC by
increasing the realization period for deferred tax assets from
one year to three years and increasing the asset recognition
limit from 10% to 15% of adjusted statutory capital and surplus.
SSAP 10R will expire for periods after December 31, 2010.
|
|
14.
|
Pension
Plans, Postretirement, Health Care and Life Insurance Benefit
and Savings Plans
|
Pension
Plans
Hartford Lifes employees are included in The
Hartfords non-contributory defined benefit pension and
postretirement health care and life insurance benefit plans.
Defined benefit pension expense, postretirement health care and
life insurance benefits expense allocated by The Hartford to the
Company, was $32, $24 and $22 for the years ended
December 31, 2009, 2008 and 2007, respectively.
Investment
and Savings Plan
Substantially all U.S. employees are eligible to
participate in The Hartfords Investment and Savings Plan
under which designated contributions may be invested in common
stock of The Hartford or certain other investments. These
contributions are matched, up to 3% of compensation, by the
Company. In 2004, the Company began allocating a percentage of
base salary to the Plan for eligible employees. In 2009,
employees whose prior year earnings were less than $105,000
received a contribution of 1.5% of base salary and employees
whose prior year
F-63
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
earnings were more than $105,000 received a contribution of 0.5%
of base salary. The cost to Hartford Life for this plan was
approximately $13, $10 and $11 for the years ended
December 31, 2009, 2008 and 2007, respectively.
|
|
15.
|
Stock
Compensation Plans
|
Hartford Lifes employees are included in The Hartford 2005
Incentive Stock Plan, The Hartford Employee Stock Purchase Plan
and The Hartford Deferred Stock Unit Plan.
The Hartford has three primary stock-based compensation plans
which are described below. Shares issued in satisfaction of
stock-based compensation may be made available from authorized
but unissued shares, shares held by The Hartford in treasury or
from shares purchased in the open market. In 2009 and 2008, The
Hartford issued shares from treasury in satisfaction of
stock-based compensation. In 2007, The Hartford issued new
shares in satisfaction of stock-based compensation. Hartford
Life was allocated compensation expense of $25 million,
$18 million and $21 million for the years ended
December 31, 2009, 2008 and 2007, respectively. Hartford
Lifes income tax benefit recognized for stock-based
compensation plans was $7 million, $5 million and
$7 million for the years ended December 31, 2009, 2008
and 2007, respectively. Hartford Life did not capitalize any
cost of stock-based compensation.
Stock
Plan
In 2005, the shareholders of The Hartford approved The Hartford
2005 Incentive Stock Plan (the 2005 Stock Plan),
which superseded and replaced The Hartford Incentive Stock Plan
and The Hartford Restricted Stock Plan for Non-employee
Directors. The terms of the 2005 Stock Plan are substantially
similar to the terms of these superseded plans.
The 2005 Stock Plan provides for awards to be granted in the
form of non-qualified or incentive stock options qualifying
under Section 422 of the Internal Revenue Code, stock
appreciation rights, restricted stock units, restricted units,
restricted stock, performance shares, or any combination of the
foregoing.
The fair values of awards granted under the 2005 Stock Plan are
generally measured as of the grant date and expensed ratably
over the awards vesting periods, generally three years.
For stock option awards granted or modified in 2006 and later,
the Company began expensing awards to retirement-eligible
employees hired before January 1, 2002 immediately or over
a period shorter than the stated vesting period because the
employees receive accelerated vesting upon retirement and
therefore the vesting period is considered non-substantive. All
awards provide for accelerated vesting upon a change in control
of The Hartford as defined in the 2005 Stock Plan.
Stock
Option Awards
Under the 2005 Stock Plan, options granted have generally an
exercise price equal to the market price of The Hartfords
common stock on the date of grant, and an options maximum
term is ten years. Certain options become exercisable over a
three year period commencing one year from the date of grant,
while certain other options become exercisable at the later of
the three years from the date of grant or upon the attainment of
specified market appreciation of The Hartfords common
shares. For any year, no individual employee may receive an
award of options for more than 1,000,000 shares. As of
December 31, 2008, The Hartford had not issued any
incentive stock options under any plans.
For all options granted or modified on or after January 1,
2004, The Hartford uses a hybrid lattice/Monte-Carlo based
option valuation model (the valuation model) that
incorporates the possibility of early exercise of options into
the valuation. The valuation model also incorporates The
Hartfords historical termination and exercise experience
to determine the option value.
F-64
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Share
Awards
Share awards are valued equal to the market price of The
Hartfords common stock on the date of grant, less a
discount for those awards that do not provide for dividends
during the vesting period. Share awards granted under the 2005
Plan and outstanding include restricted stock units, restricted
stock and performance shares. Generally, restricted stock units
vest after three years and restricted stock vests in three to
five years. Performance shares become payable within a range of
0% to 200% of the number of shares initially granted based upon
the attainment of specific performance goals achieved over a
specified period, generally three years. The maximum award of
restricted stock units, restricted stock or performance shares
for any individual employee in any year is 200,000 shares
or units.
Restricted
Unit awards
In 2009, The Hartford began issuing restricted units as part of
The Hartfords 2005 Stock Plan. Restricted stock unit
awards under the plan have historically been settled in shares,
but under this award will be settled in cash and are thus
referred to as Restricted Units. The economic value
recipients will ultimately realize will be identical to the
value that would have been realized if the awards had been
settled in shares, i.e., upon settlement, recipients will
receive cash equal to The Hartfords share price multiplied
by the number of restricted units awards.
Deferred
Stock Unit Plan
Effective July 31, 2009, the Compensation and Personnel
Committee of the Board authorized The Hartford Deferred Stock
Unit Plan (Deferred Stock Unit Plan), and, on
October 22, 2009, it was amended. The Deferred Stock Unit
Plan provides for contractual rights to receive cash payments
based on the value of a specified number of shares of stock. The
Deferred Stock Unit Plan provides for two award types, Deferred
Units and Restricted Units. Deferred Units are earned ratably
over a year, based on the number of regular pay periods
occurring during such year. Deferred Units are credited to the
participants account on a quarterly basis based on the market
price of the Companys common stock on the date of grant
and are fully vested at all times. Deferred Units credited to
employees prior to January 1, 2010 (other than senior
executive officers hired on or after October 1,
2009) are not paid until after two years from their grant
date. Deferred Units credited on or after January 1, 2010
(and any credited to senior executive officers hired on or after
October 1, 2009) are paid in three equal installments
after the first, second and third anniversaries of their grant
date. Restricted Units are intended to be incentive compensation
and unlike Deferred Units, vest over time, generally three
years, and are subject to forfeiture. The Deferred Stock Unit
Plan is structured consistent with the limitations and
restrictions on employee compensation arrangements imposed by
the Emergency Economic Stabilization Act of 2008 and the TARP
Standards for Compensation and Corporate Governance Interim
Final Rule issued by the U.S. Department of Treasury on
June 10, 2009.
Employee
Stock Purchase Plan
In 1996, The Hartford established The Hartford Employee Stock
Purchase Plan (ESPP). Under this plan, eligible
employees of The Hartford may purchase common stock of The
Hartford at a 15% discount from the lower of the closing market
price at the beginning or end of the offering period. Employees
purchase a variable number of shares of stock through payroll
deductions elected as of the beginning of the period. The fair
value is estimated based on the 15% discount off of the
beginning stock price plus the value of six-month European call
and put options on shares of stock at the beginning stock price
calculated using the Black-Scholes model.
Effective with the offering period beginning January 2010, the
discount rate will change to 5% and the discounted price will be
based on the market price per share on the last trading day of
the offering period.
F-65
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
16.
|
Transactions
with Affiliates
|
Parent
Company Transactions
Transactions of the Company with Hartford Fire Insurance
Company, Hartford Holdings and its affiliates relate principally
to tax settlements, reinsurance, insurance coverage, rental and
service fees, payment of dividends and capital contributions. In
addition, an affiliated entity purchased group annuity contracts
from the Company to fund structured settlement periodic payment
obligations assumed by the affiliated entity as part of claims
settlements with property casualty insurance companies and
self-insured entities. As of December 31, 2009 and 2008 the
Company had $50 billion and $49 billion of reserves
for claim annuities purchased by affiliated entities. For the
year ended December 31, 2009, 2008 and 2007, the Company
recorded earned premiums of $285, $461 and $525 for these
intercompany claim annuities. Substantially all general
insurance expenses related to the Company, including rent and
employee benefit plan expenses are initially paid by The
Hartford. Direct expenses are allocated to the Company using
specific identification, and indirect expenses are allocated
using other applicable methods. Indirect expenses include those
for corporate areas which, depending on type, are allocated
based on either a percentage of direct expenses or on
utilization.
The Company has issued a guarantee to retirees and vested
terminated employees (Retirees) of The Hartford
Retirement Plan for U.S. Employees (the Plan)
who retired or terminated prior to January 1, 2004. The
Plan is sponsored by The Hartford. The guarantee is an
irrevocable commitment to pay all accrued benefits which the
Retiree or the Retirees designated beneficiary is entitled
to receive under the Plan in the event the Plan assets are
insufficient to fund those benefits and The Hartford is unable
to provide sufficient assets to fund those benefits. The Company
believes that the likelihood that payments will be required
under this guarantee is remote.
Reinsurance
Assumed from Affiliates
Hartford Life sells fixed market value adjusted
(MVA) annuity products to customers in Japan. The
yen based MVA product is written by the Hartford Life Insurance
KK (HLIKK), a wholly owned Japanese subsidiary of
Hartford Life and subsequently reinsured to the Company. As of
December 31, 2009 and 2008, $2.6 billion and
$2.8 billion, respectively, of the account value had been
assumed by the Company.
Effective August 31, 2005, a subsidiary of the Company,
Hartford Life and Annuity Insurance Company (HLAI),
entered into a reinsurance agreement with Hartford Life
Insurance KK (HLIKK) a wholly owned Japanese
subsidiary of Hartford Life, Inc. (Hartford Life).
Through this agreement, HLIKK agreed to cede and HLAI agreed to
reinsure 100% of the risks associated with the in-force and
prospective GMIB riders issued by HLIKK on its variable annuity
business. Effective July 31, 2006, the agreement was
modified to include the GMDB on covered contracts that have an
associated GMIB rider. The modified reinsurance agreement
applies to all contracts, GMIB riders and GMDB riders in-force
and issued as of July 31, 2006 and prospectively, except
for policies and GMIB riders issued prior to April 1, 2005,
which were recaptured. Additionally, a tiered reinsurance
premium structure was implemented. GMIB riders issued by HLIKK
subsequent to April 1, 2005 continue to be reinsured by
HLAI. While the form of the agreement between HLAI and HLIKK for
GMIB business is reinsurance, in substance and for accounting
purposes the agreement is a free standing derivative. As such,
the reinsurance agreement for GMIB business is recorded at fair
value on the Companys balance sheet, with prospective
changes in fair value recorded in net realized capital gains
(losses) in net income. The fair value of GMIB liability at
December 31, 2009 and December 31, 2008 is
$1.4 billion and $2.6 billion (of which $148 relates
to the adoption of fair value), respectively.
Effective September 30, 2007, HLAI entered into another
reinsurance agreement where HLIKK agreed to cede and HLAI agreed
to reinsure 100% of the risks associated with the in-force and
prospective GMAB, GMIB and GMDB riders issued by HLIKK on
certain of its variable annuity business. The reinsurance of the
GMAB riders is accounted for as a free-standing derivative
recorded at fair value on the Companys balance sheet, with
prospective changes in fair value recorded in net realized
capital gains (losses) in net income. Accordingly, the
reinsurance of the GMAB is recorded at fair value on the
Companys balance sheet, with prospective changes in fair
value recorded
F-66
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in net realized capital gains (losses) in net income. The fair
value of the GMAB is a liability of $1 and $1 at
December 31, 2009, and 2008, respectively. This treaty
covered HLIKKs 3 Win annuity. This
product contains a GMIB feature that triggers at a float value
of 80% of original premium and gives the policyholder an option
to receive either an immediate withdrawal of account value
without surrender charges or a payout annuity of the original
premium over time. As a result of capital markets
underperformance, 97% of contracts, a total of $3.1 billion
triggered during the fourth quarter of 2008, and of this amount
$2.2 billion have elected the payout annuity. The Company
received the proceeds of this triggering impact, net of the
first annuity payout, through a structured financing transaction
with HLIKK and will pay the associated benefits to HLIKK over a
12-year
payout.
Effective February 29, 2008, HLAI entered into another
reinsurance agreement where HLIKK agreed to cede and HLAI agreed
to reinsure 100% of the risks associated with the in-force and
prospective GMWB riders issued by HLIKK on certain variable
annuity business. The reinsurance of the GMWB riders is
accounted for as a free-standing derivative recorded at fair
value on the Companys balance sheet, with prospective
changes in fair value recorded in net realized capital gains
(losses) in net income. The fair value of the GMWB was a
liability of $13 and $34 at December 31, 2009 and 2008,
respectively.
The Reinsurance Agreement for GMDB business is accounted for as
a Death Benefit and Other Insurance Benefit Reserves which is
not reported at fair value. As of December 31, 2009 the
liability for the assumed reinsurance of the GMDB and the net
amount at risk was $52 and $2.7 billion respectively. As of
December 31, 2008 the liability for the assumed reinsurance
of the GMDB and the net amount at risk was $14 and
$4.3 billion, respectively.
Reinsurance
Ceded to Affiliates
Effective October 1, 2009, HLAI entered into a modified
coinsurance and coinsurance with funds withheld reinsurance
agreement with an affiliated captive reinsurer, White River Life
Reinsurance (WRR). The agreement provides that HLAI
will cede, and the affiliated captive reinsurer will reinsure
100% of the in-force and prospective variable annuities and
riders written or reinsured by HLAI summarized below:
|
|
|
Direct written variable annuities and the associated GMDB and
GMWB riders.
|
|
|
Variable annuity contract rider benefits written by HLIKK, which
are reinsured to HLAI.
|
|
|
Annuity contracts and riders written by Union Security Insurance
Company, an affiliate, that are reinsured to HLAI.
|
|
|
Annuitizations of and certain other settlement options offered
under deferred annuity contracts
|
Under modified coinsurance, the assets and the liabilities
associated with the reinsured business will remain on the
consolidated balance sheet of HLIC in segregated portfolios, and
the affiliated reinsurer will receive the economic risks and
rewards related to the reinsured business through modco
adjustments.
The consolidated balance sheet as of December 31, 2009
reflects the unlock of deferred policy acquisition costs,
unearned revenue reserves and sales inducement assets which were
reduced by $1,883, $93 and $218, respectively related to the
direct U.S. variable annuity business of HLAI. In addition,
the balance sheet reflects a modco reinsurance receivable of
$182 and a deposit liability of $600 from the affiliated captive
reinsurer as well as a net reinsurance recoverable of $761
related to this agreement. This reinsurance recoverable is
comprised of an embedded derivative.
Under the coinsurance funds withheld portion of the agreement,
HLICs balance sheet as of December 31, 2009 reflected
a reduction in reserves of $143 which were passed to WRR and an
offsetting funds withheld liability.
The initial fair value of the derivative associated with the
ceded business was recorded as an in substance capital
contribution between these related parties of $887 after-tax.
F-67
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At inception of the contract, HLIC recognized in net income the
unlock of the unearned revenue reserve, sales inducement asset
and deferred policy acquisition costs related to the direct
U.S. variable annuity business of HLAI as well as the
impact of remitting the premiums and reserves to WRR. The
following table illustrates the transactions impact at
inception on the Companys Statement of Operations:
|
|
|
|
|
Fee income and other
|
|
$
|
84
|
|
Earned premiums
|
|
|
(50
|
)
|
|
|
|
|
|
Total revenues
|
|
|
34
|
|
|
|
|
|
|
Benefits, losses and loss adjustment expenses
|
|
|
168
|
|
Amortization of deferred policy acquisition value of future
profits
|
|
|
1,883
|
|
Other expenses
|
|
|
(9
|
)
|
|
|
|
|
|
Total expenses
|
|
|
2,042
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(2,008
|
)
|
|
|
|
|
|
Income tax benefit
|
|
|
(703
|
)
|
|
|
|
|
|
Net loss
|
|
$
|
(1,305
|
)
|
|
|
|
|
|
In addition to these impacts upon inception, this transaction
transfers the economics of a portion of the Companys
direct and all of the Companys assumed GMIB, GMAB, and
GMWB exposures to WRR. In the fourth quarter, the Company
recognized a reduction of the direct and assumed liability ceded
in this transaction along with a corresponding realized capital
loss associated with the reduction in value of the embedded and
freestanding derivative.
Effective November 1, 2007, a subsidiary insurance company
(Ceding Company) entered into a coinsurance with
funds withheld and modified coinsurance reinsurance agreement
(Agreement) with an affiliate reinsurance company
(Reinsurer) to provide statutory surplus relief for
certain life insurance policies. The Agreement is accounted for
as a financing transaction for GAAP. A standby unaffiliated
third party Letter of Credit (LOC) supports a
portion of the statutory reserves that have been ceded to the
Reinsurer.
|
|
17.
|
Restructuring,
Severance and Other Costs
|
In the year ended December 31, 2009, the Company completed
a review of several strategic alternatives with a goal of
preserving capital, reducing risk and stabilizing its ratings.
These alternatives included the potential restructuring,
discontinuation or disposition of various business lines.
Following that review, the Company announced that it would
suspend all new sales in the Europeans operations and that
it was evaluating strategic options with respect to its
Institutional Markets businesses. The Company has also executed
on plans to change the management structure of the organization
and fundamentally reorganized the nature and focus of the
Companys operations. These plans resulted in termination
benefits to current employees, costs to terminate leases and
other contracts and asset impairment charges. The Company will
complete these restructuring activities and execute final
payment by December 2010.
Termination benefits related to workforce reductions and lease
and other contract terminations have been accrued through
December 31, 2009. Asset impairment charges have also been
recorded in 2009. No significant additional costs are expected.
F-68
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following pre-tax charges were incurred during the
year-ended December 31, 2009 in connection with the
restructuring initiatives previously announced:
|
|
|
|
|
Total restructuring costs
|
|
|
|
|
Severance benefits
|
|
$
|
19
|
|
Asset impairment charges
|
|
|
26
|
|
Other contract termination charges
|
|
|
5
|
|
|
|
|
|
|
Total restructuring, severance and other costs for the year
ended December 31, 2009
|
|
$
|
50
|
|
|
|
|
|
|
As of December 31, 2009 the liability for other contract
termination charges was $5 as there were no payments made during
the year ended December 31, 2009 for these charges. Amounts
incurred during the year ended December 31, 2009 were
recorded in the Life Other segment as other expenses.
|
|
18.
|
Sale of
Joint Venture Interest in ICATU Hartford Seguros, S.A.
|
On November 23, 2009, in keeping with the Companys
June 2009 announcement to return to its historical strengths as
a
U.S.-centric
insurance company, the Company entered into a Share Purchase
Agreement to sell its joint venture interest in ICATU Hartford
Seguros, S.A., (IHS), its Brazilian insurance
operation, to its partner, ICATU Holding S.A., for $135. The
transaction is expected to close in the first quarter of 2010.
IHS primarily sells life insurance policies, capitalization
products and private pension plans. The investment in IHS was
reported by the Company as an equity method investment in Other
Assets. As a result of the asset impairment charge, net of
unrealized capital gains and foreign currency translation
adjustments, the Company incurred an approximate $51 loss,
pre-tax, or $44 loss, after-tax.
|
|
19.
|
Quarterly
Results for 2009 and 2008 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
3,149
|
|
|
$
|
202
|
|
|
$
|
1,714
|
|
|
$
|
2,070
|
|
|
$
|
392
|
|
|
$
|
(77
|
)
|
|
$
|
845
|
|
|
$
|
(477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims and expenses
|
|
|
3,529
|
|
|
|
1,187
|
|
|
|
1,403
|
|
|
|
1,630
|
|
|
|
1,549
|
|
|
|
2,804
|
|
|
|
3,167
|
|
|
|
1,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(213
|
)
|
|
|
(568
|
)
|
|
|
216
|
|
|
|
362
|
|
|
|
(713
|
)
|
|
|
(1,823
|
)
|
|
|
(1,447
|
)
|
|
|
(1,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-69
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN
AFFILIATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
Amount at
|
|
|
|
|
|
|
|
|
|
Which Shown on
|
|
Type of Investment
|
|
Cost
|
|
|
Fair Value
|
|
|
Balance Sheet
|
|
|
|
($ in millions)
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and notes
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies and authorities
(guaranteed and sponsored)
|
|
$
|
4,707
|
|
|
$
|
4,552
|
|
|
$
|
4,552
|
|
States, municipalities and political subdivisions
|
|
|
971
|
|
|
|
780
|
|
|
|
780
|
|
Foreign governments
|
|
|
824
|
|
|
|
846
|
|
|
|
846
|
|
Public utilities
|
|
|
3,790
|
|
|
|
3,899
|
|
|
|
3,899
|
|
All other corporate bonds
|
|
|
19,831
|
|
|
|
19,768
|
|
|
|
19,768
|
|
All other mortgage-backed and asset-backed securities
|
|
|
14,161
|
|
|
|
10,558
|
|
|
|
10,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
44,284
|
|
|
|
40,403
|
|
|
|
40,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial, miscellaneous and all other
|
|
|
102
|
|
|
|
134
|
|
|
|
134
|
|
Non-redeemable preferred stocks
|
|
|
345
|
|
|
|
285
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities,
available-for-sale
|
|
|
447
|
|
|
|
419
|
|
|
|
419
|
|
Equity securities, trading
|
|
|
2,359
|
|
|
|
2,443
|
|
|
|
2,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
2,806
|
|
|
|
2,862
|
|
|
|
2,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
4,304
|
|
|
|
3,645
|
|
|
|
4,304
|
|
Real estate
|
|
|
105
|
|
|
|
105
|
|
|
|
105
|
|
Policy loans
|
|
|
2,120
|
|
|
|
2,252
|
|
|
|
2,120
|
|
Investments in partnerships and trusts
|
|
|
759
|
|
|
|
759
|
|
|
|
759
|
|
Futures, options and miscellaneous
|
|
|
506
|
|
|
|
233
|
|
|
|
233
|
|
Short-term investments
|
|
|
5,128
|
|
|
|
5,128
|
|
|
|
5,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
60,012
|
|
|
$
|
55,387
|
|
|
$
|
55,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-1
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
For the Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Benefits,
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
Fee
|
|
|
|
|
|
|
|
|
Realized
|
|
|
Claims and
|
|
|
|
|
|
of Deferred
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
Net
|
|
|
Capital
|
|
|
Claim
|
|
|
Insurance
|
|
|
Policy
|
|
|
Dividends
|
|
|
|
|
|
|
and
|
|
|
Earned
|
|
|
Investment
|
|
|
Gains
|
|
|
Adjustment
|
|
|
Expenses and
|
|
|
Acquisition
|
|
|
to Policy-
|
|
|
|
|
Segment
|
|
Other
|
|
|
Premiums
|
|
|
Income
|
|
|
(Losses)
|
|
|
Expenses
|
|
|
Other
|
|
|
Costs
|
|
|
Holders
|
|
|
Goodwill
|
|
|
|
(In millions)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Products Group
|
|
$
|
2,117
|
|
|
$
|
(7
|
)
|
|
$
|
756
|
|
|
$
|
(491
|
)
|
|
$
|
1,374
|
|
|
$
|
972
|
|
|
$
|
3,239
|
|
|
$
|
|
|
|
$
|
|
|
Retirement Plans
|
|
|
321
|
|
|
|
3
|
|
|
|
315
|
|
|
|
(333
|
)
|
|
|
269
|
|
|
|
346
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
Institutional Solutions Group
|
|
|
145
|
|
|
|
356
|
|
|
|
817
|
|
|
|
(738
|
)
|
|
|
1,296
|
|
|
|
89
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Individual Life
|
|
|
989
|
|
|
|
(87
|
)
|
|
|
304
|
|
|
|
(144
|
)
|
|
|
584
|
|
|
|
184
|
|
|
|
312
|
|
|
|
1
|
|
|
|
|
|
Other
|
|
|
180
|
|
|
|
112
|
|
|
|
656
|
|
|
|
829
|
|
|
|
536
|
|
|
|
259
|
|
|
|
103
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operations
|
|
$
|
3,752
|
|
|
$
|
377
|
|
|
$
|
2,848
|
|
|
$
|
(877
|
)
|
|
$
|
4,059
|
|
|
$
|
1,850
|
|
|
$
|
3,727
|
|
|
$
|
12
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Products Group
|
|
$
|
2,681
|
|
|
$
|
(4
|
)
|
|
$
|
755
|
|
|
$
|
(1,911
|
)
|
|
$
|
1,008
|
|
|
$
|
1,124
|
|
|
$
|
1,347
|
|
|
$
|
|
|
|
$
|
184
|
|
Retirement Plans
|
|
|
334
|
|
|
|
4
|
|
|
|
342
|
|
|
|
(272
|
)
|
|
|
271
|
|
|
|
355
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
Institutional Solutions Group
|
|
|
153
|
|
|
|
894
|
|
|
|
988
|
|
|
|
(784
|
)
|
|
|
1,899
|
|
|
|
120
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
Individual Life
|
|
|
857
|
|
|
|
(65
|
)
|
|
|
308
|
|
|
|
(247
|
)
|
|
|
569
|
|
|
|
201
|
|
|
|
166
|
|
|
|
2
|
|
|
|
|
|
Other
|
|
|
130
|
|
|
|
155
|
|
|
|
(51
|
)
|
|
|
(2,549
|
)
|
|
|
55
|
|
|
|
160
|
|
|
|
(3
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operations
|
|
$
|
4,155
|
|
|
$
|
984
|
|
|
$
|
2,342
|
|
|
$
|
(5,763
|
)
|
|
$
|
3,801
|
|
|
$
|
1,940
|
|
|
$
|
1,620
|
|
|
$
|
13
|
|
|
$
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Products Group
|
|
$
|
3,039
|
|
|
$
|
(62
|
)
|
|
$
|
810
|
|
|
$
|
(381
|
)
|
|
$
|
820
|
|
|
$
|
1,160
|
|
|
$
|
404
|
|
|
$
|
|
|
|
$
|
|
|
Retirement Plans
|
|
|
238
|
|
|
|
4
|
|
|
|
355
|
|
|
|
(41
|
)
|
|
|
249
|
|
|
|
170
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
Institutional Solutions Group
|
|
|
252
|
|
|
|
990
|
|
|
|
1,227
|
|
|
|
(187
|
)
|
|
|
2,066
|
|
|
|
183
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
Individual Life
|
|
|
827
|
|
|
|
(56
|
)
|
|
|
331
|
|
|
|
(27
|
)
|
|
|
510
|
|
|
|
185
|
|
|
|
117
|
|
|
|
3
|
|
|
|
|
|
Other
|
|
|
114
|
|
|
|
107
|
|
|
|
334
|
|
|
|
(304
|
)
|
|
|
337
|
|
|
|
134
|
|
|
|
2
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operations
|
|
$
|
4,470
|
|
|
$
|
983
|
|
|
$
|
3,057
|
|
|
$
|
(934
|
)
|
|
$
|
3,982
|
|
|
$
|
1,832
|
|
|
$
|
605
|
|
|
$
|
11
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-2
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent-
|
|
|
|
|
|
|
|
|
|
Assumed
|
|
|
|
|
|
age of
|
|
|
|
|
|
|
Ceded to
|
|
|
from
|
|
|
|
|
|
Amount
|
|
|
|
Gross
|
|
|
Other
|
|
|
Other
|
|
|
Net
|
|
|
Assumed
|
|
|
|
Amount
|
|
|
Companies
|
|
|
Companies
|
|
|
Amount
|
|
|
to Net
|
|
|
|
(In millions)
|
|
|
For the year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
356,432
|
|
|
|
145,639
|
|
|
|
2,157
|
|
|
|
212,951
|
|
|
|
1.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance and annuities
|
|
$
|
4,581
|
|
|
|
628
|
|
|
|
70
|
|
|
|
4,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident and health insurance
|
|
|
338
|
|
|
|
232
|
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance Revenues
|
|
|
4,919
|
|
|
|
860
|
|
|
|
70
|
|
|
|
4,129
|
|
|
|
1.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
353,030
|
|
|
$
|
142,912
|
|
|
$
|
2,264
|
|
|
$
|
212,382
|
|
|
|
1.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance and annuities
|
|
$
|
5,467
|
|
|
$
|
446
|
|
|
$
|
48
|
|
|
$
|
5,069
|
|
|
|
0.9
|
%
|
Accident and health insurance
|
|
|
305
|
|
|
|
236
|
|
|
|
|
|
|
|
69
|
|
|
|
1.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance Revenues
|
|
$
|
5,773
|
|
|
$
|
682
|
|
|
$
|
48
|
|
|
$
|
5,139
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
346,205
|
|
|
$
|
147,021
|
|
|
$
|
2,349
|
|
|
$
|
201,533
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance and annuities
|
|
$
|
5,829
|
|
|
$
|
451
|
|
|
$
|
9
|
|
|
$
|
5,387
|
|
|
|
0.2
|
%
|
Accident and health insurance
|
|
|
306
|
|
|
|
243
|
|
|
|
4
|
|
|
|
67
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance Revenues
|
|
$
|
6,134
|
|
|
$
|
694
|
|
|
$
|
13
|
|
|
$
|
5,453
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-3
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
Deductions
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
|
|
|
Write-
|
|
|
|
|
|
|
Balance
|
|
|
Costs and
|
|
|
Translation
|
|
|
offs/Payments/
|
|
|
Balance,
|
|
|
|
January 1
|
|
|
Expenses
|
|
|
Adjustment
|
|
|
Other
|
|
|
December 31
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation of property and equipment
|
|
$
|
11
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
14
|
|
Valuation allowance on deferred tax asset
|
|
$
|
49
|
|
|
$
|
31
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
80
|
|
Valuation allowance on mortgage loans
|
|
$
|
13
|
|
|
$
|
292
|
|
|
$
|
|
|
|
$
|
(45
|
)
|
|
$
|
260
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance on deferred tax asset
|
|
$
|
19
|
|
|
$
|
30
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
49
|
|
Valuation allowance on mortgage loans
|
|
$
|
|
|
|
$
|
13
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance on deferred tax asset
|
|
$
|
20
|
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19
|
|
S-4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HARTFORD LIFE INSURANCE COMPANY
|
|
|
|
|
/s/ Ernest
M. McNeill, Jr.
|
Ernest M. McNeill, Jr.
Senior Vice President and Chief Accounting Officer
Date: February 23, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ John
C. Walters
John
C. Walters
|
|
Chairman, President, Chief Executive Officer
|
|
February 23, 2010
|
|
|
|
|
|
/s/ Glenn
D. Lammey
Glenn
D. Lammey
|
|
Executive Vice President, Chief Financial Officer and Director
|
|
February 23, 2010
|
|
|
|
|
|
/s/ Ernest
M. McNeill, Jr.
Ernest
M. McNeill, Jr.
|
|
Senior Vice President and Chief Accounting Officer
|
|
February 23, 2010
|
|
|
|
|
|
/s/ Gregory
McGreevey
Gregory
McGreevey
|
|
Chief Investment Officer, Executive Vice President and Director
|
|
February 23, 2010
|
II-1
HARTFORD
LIFE INSURANCE COMPANY AND SUBSIDIARIES
For the Fiscal Year Ended December 31, 2009
EXHIBITS INDEX
|
|
|
|
|
Exhibit #
|
|
|
|
|
3
|
.01
|
|
Restated Certificate of Incorporation of Hartford Life Insurance
Company was filed as Exhibit 3.01 to Hartford Life
Insurance Companys
Form 10-K
filed for the year ended December 31, 2008 and is
incorporated herein by reference.
|
|
3
|
.02
|
|
By-Laws of Hartford Life Insurance Company was filed as
Exhibit 3.02 to Hartford Life Insurance Companys
Form 10-K
filed for the year ended December 31, 2008 and is
incorporated herein by reference.
|
|
4
|
.01
|
|
Restated Certificate of Incorporation and By-Laws of Hartford
Life Insurance Company (included as Exhibits 3.01 and 3.02,
respectively).
|
|
10
|
.01
|
|
Management Agreement among Hartford Life Insurance Company,
certain of its affiliates and Hartford Investment Services, Inc.
was filed as Exhibit 10.4 to Hartford Life, Inc.s
Form 10-Q
filed for the quarter ended June 30, 1997 (File
No. 1-12749)
and is incorporated herein by reference.
|
|
10
|
.02
|
|
Management Agreement between Hartford Life Insurance Company and
The Hartford Investment Management Company was filed as
Exhibit 10.3 to Hartford Life, Inc.s
Form 10-Q
filed for the quarter ended June 30, 1997 (File
No. 1-12749)
and is incorporated herein by reference.
|
|
12
|
.01
|
|
Computation of Ratio of Earnings to Fixed Charges is filed
herewith.
|
|
23
|
.01
|
|
Consent of Deloitte & Touche, LLP, filed herewith.
|
|
31
|
.02
|
|
Certification of John C. Walters, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
31
|
.03
|
|
Certification of Glenn D. Lammey, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.02
|
|
Certification of John C. Walters, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.03
|
|
Certification of Glenn D. Lammey, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
II-2