Attached files
file | filename |
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8-K - FORM 8-K - TALCOTT RESOLUTION LIFE INSURANCE CO | c07521e8vk.htm |
EX-23.1 - EXHIBIT 23.1 - TALCOTT RESOLUTION LIFE INSURANCE CO | c07521exv23w1.htm |
EX-99.2 - EXHIBIT 99.2 - TALCOTT RESOLUTION LIFE INSURANCE CO | c07521exv99w2.htm |
EX-99.1 - EXHIBIT 99.1 - TALCOTT RESOLUTION LIFE INSURANCE CO | c07521exv99w1.htm |
EXHIBIT 99.03
Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page(s) | ||||
Report of Independent Registered Public Accounting Firm |
F-2 | |||
Consolidated Statements of Operations For the Years Ended December 31, 2009, 2008 and 2007 |
F-3 | |||
Consolidated Balance Sheets As of December 31, 2009 and 2008 |
F-4 | |||
Consolidated Statements of Changes in Stockholders Equity For the Years Ended December 31, 2009, 2008 and 2007 |
F-5 | |||
Consolidated Statements of Cash Flows For the Years Ended December 31, 2009, 2008 and 2007 |
F-7 | |||
Notes to Consolidated Financial Statements |
F-8 | |||
Schedule I Summary of Investments Other Than The Investments in Affiliates |
S-1 | |||
Schedule III Supplementary Insurance Information |
S-2 | |||
Schedule IV Reinsurance |
S-3 | |||
Schedule V Valuation and Qualifying Accounts |
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
Hartford Life Insurance Company
Hartford, Connecticut
We have audited the accompanying consolidated balance sheets of Hartford Life Insurance Company and
its 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 these 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 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 its 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
Hartford, Connecticut
February 23, 2010 (November 2, 2010 as to the change in segment composition impacting Note 2, Note
7 and Schedule III)
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
Consolidated Balance Sheets
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
Consolidated Statements of Changes in Stockholders Equity
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 |
F-5
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) | ||||||||||||||||||||||||||||||||||||
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-6
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
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. (HLIKK).
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 HLIKK. |
|
(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-7
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
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 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.
F-8
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. 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 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.
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 |
F-9
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.
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.
F-10
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.
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.
F-11
2. Segment Information
The Company has four reporting segments: Global Annuity, Life Insurance, Retirement Plans, and
Mutual Funds.
| Global Annuity offers variable, fixed market value adjusted (MVA) annuities,
structured settlements, single premium immediate annuities, longevity assurance to
individuals as well as customized investment, insurance, and income solutions to select
markets of institutional investors. Products offered to institutional investors (IIP)
include mutual funds, stable value contracts, institutional annuities (primarily terminal
funding cases) and mutual funds owned by institutional investors. |
||
| Life Insurance sells a variety of life insurance products, including variable universal
life, universal life, interest sensitive whole life, term life, and variable private
placement life insurance (PPLI) owned by corporations and high net worth individuals. |
||
| 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 Internal Revenue Service Code of 1986 as amended (the IRS
Code). |
||
| Mutual Funds offers retail mutual funds and college savings plans under Section 529 of
the IRS Code. |
In addition to the reporting segments noted above, 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, 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, Hartford Life and Accident Insurance Company (HLA).
The accounting policies of the reporting 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 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 reporting
segments.
F-12
Revenues by Product Line | For the years ended December 31, | |||||||||||
Revenues | 2009 | 2008 | 2007 | |||||||||
Earned premiums, fees, and other considerations |
||||||||||||
Global Annuity |
||||||||||||
Individual variable annuity |
$ | 1,589 | $ | 1,981 | $ | 2,248 | ||||||
Fixed / MVA
and other annuity |
28 | 13 | 11 | |||||||||
IIP |
386 | 929 | 1,018 | |||||||||
Total Global Annuity |
$ | 2,003 | $ | 2,923 | $ | 3,277 | ||||||
Life Insurance |
||||||||||||
Variable life |
503 | 374 | 379 | |||||||||
Universal life |
362 | 376 | 343 | |||||||||
Term life |
37 | 42 | 48 | |||||||||
PPLI |
115 | 119 | 224 | |||||||||
Total Life Insurance |
$ | 1,017 | $ | 911 | $ | 994 | ||||||
Retirement Plans |
||||||||||||
401(k) |
286 | 290 | 187 | |||||||||
403(b)/457 |
38 | 48 | 55 | |||||||||
Total Retirement Plans |
$ | 324 | $ | 338 | $ | 242 | ||||||
Mutual Funds |
||||||||||||
Retail mutual funds |
423 | 538 | 565 | |||||||||
Other |
32 | 32 | 30 | |||||||||
Total Mutual Funds |
$ | 455 | $ | 570 | $ | 595 | ||||||
Other |
330 | 397 | 345 | |||||||||
Total 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 Revenues |
$ | 6,100 | $ | 1,718 | 7,576 | |||||||
For the years ended December 31, | ||||||||||||
Net income (loss) attributable to shareholder | 2009 | 2008 | 2007 | |||||||||
Global Annuity |
$ | (2,620 | ) | $ | (1,866 | ) | $ | 701 | ||||
Life Insurance |
28 | (22 | ) | 208 | ||||||||
Retirement Plans |
(222 | ) | (157 | ) | 60 | |||||||
Mutual Funds |
32 | 37 | 62 | |||||||||
Other |
625 | (1,546 | ) | (145 | ) | |||||||
Total net income (loss) |
$ | (2,157 | ) | $ | (3,554 | ) | $ | 886 | ||||
Net investment income (loss) |
||||||||||||
Global Annuity |
$ | 1,929 | $ | 1,539 | $ | 2,032 | ||||||
Life Insurance |
317 | 313 | 354 | |||||||||
Retirement Plans |
315 | 342 | 355 | |||||||||
Mutual Funds |
(16 | ) | (12 | ) | (5 | ) | ||||||
Other |
303 | 160 | 321 | |||||||||
Total net investment income |
$ | 2,848 | $ | 2,342 | $ | 3,057 | ||||||
Amortization of deferred policy acquisition and present value of future profits |
||||||||||||
Global Annuity |
$ | 3,300 | $ | 1,272 | $ | 342 | ||||||
Life Insurance |
315 | 168 | 119 | |||||||||
Retirement Plans |
56 | 91 | 59 | |||||||||
Mutual Funds |
58 | 92 | 85 | |||||||||
Other |
(2 | ) | (3 | ) | | |||||||
Total amortization of DAC |
$ | 3,727 | $ | 1,620 | $ | 605 | ||||||
Income tax expense (benefit) |
||||||||||||
Global Annuity |
$ | (1,604 | ) | $ | (1,196 | ) | $ | 169 | ||||
Life Insurance |
(27 | ) | (35 | ) | 92 | |||||||
Retirement Plans |
(143 | ) | (133 | ) | 17 | |||||||
Mutual Funds |
18 | 20 | 34 | |||||||||
Other |
355 | (837 | ) | (60 | ) | |||||||
Total income tax expense (benefit) |
$ | (1,401 | ) | $ | (2,181 | ) | $ | 252 | ||||
F-13
December 31, | ||||||||
2009 | 2008 | |||||||
Assets |
||||||||
Global Annuity |
$ | 126,326 | $ | 122,307 | ||||
Life Insurance |
54,376 | 50,041 | ||||||
Retirement Plans |
28,180 | 22,668 | ||||||
Mutual Funds |
140 | 380 | ||||||
Other |
12,298 | 12,463 | ||||||
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 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.
F-14
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 | ) | ||||
(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. |
F-15
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 | ) | ||||||
(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.
F-16
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 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.
F-17
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.
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 HLIKK 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 Note 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-18
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:
U.S. 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-19
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. |
|
(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-20
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. |
|
(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) |
F-21
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. |
F-22
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 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 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.
F-23
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.
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.
F-24
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.
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.
F-25
Net Investment in a Foreign Operation Hedges
Changes in fair value of a derivative used as a hedge of a net investment in a foreign operation,
to the extent effective as a hedge, are recorded in the foreign currency translation adjustments
account within AOCI. Cumulative changes in fair value recorded in AOCI are reclassified into
earnings upon the sale or complete, or substantially complete, liquidation of the foreign entity.
Any hedge ineffectiveness is recorded immediately in current period earnings 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 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.
F-26
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).
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. |
F-27
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.
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-28
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.
F-29
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 | ) | ||||||||||||||||||||||||
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.
F-30
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. |
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 | % | ||||||||
F-31
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.
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.
F-32
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 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-33
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.
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.
F-34
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.
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.
F-35
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 | ) | |||||||||||||
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. |
F-36
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. |
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.
F-37
Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss
on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the
hedged risk are recognized in current earnings. The Company includes the gain or loss on the
derivative in the same line item as the offsetting loss or gain on the hedged item. All components
of each 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)
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 | ) | |||||||
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 |
F-38
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. |
| 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.
F-39
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.
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-40
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-41
5. Reinsurance
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 Insurance segment 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.
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 | ||||||
F-42
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 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.
F-43
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. |
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 | ||
F-44
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 a triggering event for a potential impairment 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 units 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 | |||||||||||||||||||||
Gross | Impairments | Value | Gross | Impairments | Value | |||||||||||||||||||
Global Annuity |
$ | 184 | $ | (184 | ) | $ | | $ | 184 | $ | (184 | ) | $ | | ||||||||||
Life Insurance |
224 | | 224 | 224 | | 224 | ||||||||||||||||||
Retirement Plans [1] |
87 | | 87 | 79 | | 79 | ||||||||||||||||||
Mutual funds |
159 | | 159 | 159 | | 159 | ||||||||||||||||||
Total |
$ | 654 | $ | (184 | ) | $ | 470 | $ | 646 | $ | (184 | ) | $ | 462 | ||||||||||
[1] | In 2009, the Company added $8 of goodwill related to a contingent earn out provision. |
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 and concluded 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. In performing step one of the impairment test, the fair value of the Retirement Plans and
Mutual Funds reporting units was determined to be in excess of their carrying value. For the
Individual Life reporting unit within Life Insurance, the fair value was not in excess of the
carrying value and the step two impairment analysis was required to be performed. The fair value
in step two of the goodwill impairment analysis for the Individual Life reporting unit was
determined to be in excess of its carrying value.
The Companys interim goodwill impairment test performed in connection with the preparation of its
year end 2008 financial statements resulted in a pre-tax impairment charge of $184 in the U.S.
Individual Annuity reporting unit within Global Annuity . The impairment charge taken in 2008 was
primarily due to the Companys estimate of the U.S. 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 U.S 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.
F-45
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 were $1 and $1,
respectively, 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.
The following details 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.
F-46
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 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-47
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. |
|
(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. |
F-48
9. Sales Inducements
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 |
(286 | ) | (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.
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.
F-49
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 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.
F-50
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 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 Insurance Company (Hartford Fire), a wholly-owned subsidiary of
The Hartford, 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, 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 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.
F-51
11. Income Tax
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 | ||||
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.
F-52
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 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 | ||||
12. Debt
In 2008, the Company made the decision to discontinue future issuances of consumer notes; this
decision does not impact consumer notes currently outstanding.
In September 2006, the Company began issuing consumer notes through its Investor Notes Program. 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.
F-53
13. Statutory Results
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 U.S. 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 U.S. 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 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 (loss) 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 loss
amount for the year ended December 31, 2009 and the statutory capital and surplus amount 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 (loss) |
$ | (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 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.
F-54
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, $18 and $21 for the years ended December
31, 2009, 2008 and 2007, respectively. Hartford Lifes income tax benefit recognized for
stock-based compensation plans were $7, $5 and $7 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.
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.
F-55
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
Harfords 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-56
16. Transactions with Affiliates
Parent Company Transactions
Transactions of the Company with Hartford Fire, Hartford Holdings and its affiliates relate
principally to tax settlements, reinsurance, insurance coverage, rental and service fees, payment
of dividends and capital contributions. In addition, 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 and $49 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 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 HLIKK. 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 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.
F-57
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, which 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.
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 $1.9
billion, $93 and $218, respectively, related to the direct U.S. variable annuity business of HLAI.
In addition, the consolidated 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 consolidated 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.
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
Consolidated 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 U.S. GAAP. A
standby unaffiliated third party Letter of Credit (LOC) supports a portion of the statutory
reserves that have been ceded to the Reinsurer.
F-58
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 European operations and that it was evaluating strategic options with respect to its
institutional markets businesses. The Company has also executed 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.
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 for segment reporting in the Companys Other
category 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-59
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
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
For the Years Ended December 31, 2009, 2008 and 2007
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- | Goodwill | ||||||||||||||||||||||||||||
Reporting Segment | Other | Premiums | Income | (Losses) | Expenses | Other | Costs | Holders | Impairment | |||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||||||
2009 |
||||||||||||||||||||||||||||||||||||
Global Annuity |
1,654 | 349 | 1,929 | (1,245 | ) | 2,964 | 647 | 3,300 | | | ||||||||||||||||||||||||||
Life Insurance |
1,104 | (87 | ) | 317 | (148 | ) | 659 | 210 | 315 | 1 | | |||||||||||||||||||||||||
Retirement Plans |
321 | 3 | 315 | (333 | ) | 269 | 346 | 56 | | | ||||||||||||||||||||||||||
Mutual Funds |
455 | | (16 | ) | 1 | | 332 | 58 | | | ||||||||||||||||||||||||||
Other |
218 | 112 | 303 | 848 | 167 | 315 | (2 | ) | 11 | | ||||||||||||||||||||||||||
Consolidated operations |
$ | 3,752 | $ | 377 | $ | 2,848 | $ | (877 | ) | $ | 4,059 | $ | 1,850 | $ | 3,727 | $ | 12 | $ | | |||||||||||||||||
2008 |
||||||||||||||||||||||||||||||||||||
Global Annuity |
2,033 | 890 | 1,539 | (2,744 | ) | 2,600 | 724 | 1,272 | | 184 | ||||||||||||||||||||||||||
Life Insurance |
976 | (65 | ) | 313 | (252 | ) | 633 | 226 | 168 | 2 | | |||||||||||||||||||||||||
Retirement Plans |
334 | 4 | 342 | (272 | ) | 271 | 336 | 91 | | | ||||||||||||||||||||||||||
Mutual Funds |
570 | | (12 | ) | (1 | ) | | 408 | 92 | | | |||||||||||||||||||||||||
Other |
242 | 155 | 160 | (2,494 | ) | 297 | 246 | (3 | ) | 11 | | |||||||||||||||||||||||||
Consolidated operations |
$ | 4,155 | $ | 984 | $ | 2,342 | $ | (5,763 | ) | $ | 3,801 | $ | 1,940 | $ | 1,620 | $ | 13 | $ | 184 | |||||||||||||||||
2007 |
||||||||||||||||||||||||||||||||||||
Global Annuity |
2,349 | 928 | 2,032 | (573 | ) | 2,805 | 719 | 342 | | | ||||||||||||||||||||||||||
Life Insurance |
1,050 | (56 | ) | 354 | (28 | ) | 595 | 303 | 119 | 3 | | |||||||||||||||||||||||||
Retirement Plans |
238 | 4 | 355 | (42 | ) | 249 | 170 | 59 | | | ||||||||||||||||||||||||||
Mutual Funds |
595 | | (5 | ) | | | 409 | 85 | | | ||||||||||||||||||||||||||
Other |
238 | 107 | 321 | (291 | ) | 334 | 231 | | 8 | | ||||||||||||||||||||||||||
Consolidated operations |
$ | 4,470 | $ | 983 | $ | 3,057 | $ | (934 | ) | $ | 3,983 | $ | 1,832 | $ | 605 | $ | 11 | $ | | |||||||||||||||||
S-2
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
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
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
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