UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20132016
or
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-32293
HARTFORD LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
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| Connecticut | | 06-0974148 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
200 Hopmeadow Street, Simsbury,One Hartford Plaza, Hartford, Connecticut 0608906155
(Address of principal executive offices) (Zip Code)
(860) 547-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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| Indicate by check mark: | Yes | | No |
| • if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | ý | | ¨ |
| • if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. | ¨ | | ý |
| • whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | ý | | ¨ |
| • whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). | ý | | ¨ |
| • if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | ý | | ¨ |
| • whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
Large accelerated filer ¨ | Accelerated filer ¨ | Non Accelerated filer x | Smaller reporting company ¨ |
| • whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) | ¨ | | ý |
The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant as of June 30, 20132016 was $0, because all of the outstanding shares of Common Stock were owned by Hartford Life and Accident Insurance Company,Inc., a direct wholly owned subsidiary of Hartford Life,Holdings, Inc.
As of February 28, 2014,24, 2017, there were outstanding 1,000 shares of Common Stock, $5,690 thousand par value per share, of the registrant.
The registrant meets the conditions set forth in General Instruction (I) (1) (a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.
HARTFORD LIFE INSURANCE COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
2016
TABLE OF CONTENTS
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| * | Item prepared in accordance with General Instruction I (2) of Form 10-K. |
Forward-Looking Statements
Certain of the statements contained herein are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “projects,” and similar references to future periods.
Forward-looking statements are based on our current expectations and assumptions regarding economic, competitive, legislative and other developments. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. They have been made based upon management’s expectations and beliefs concerning future developments and their potential effect upon Hartford Life Insurance Company and its subsidiaries (collectively, the “Company”). Future developments may not be in line with management’s expectations or may have unanticipated effects. Actual results could differ materially from expectations, depending on the evolution of various factors, including those set forththe risks and uncertainties identified below, as well as factors described in such forward-looking statements or in Part I, Item 1A. Risk Factors, in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and those identified from time to time in our other filings with the Securities and Exchange Commission. These important risksCommission ("SEC").
Risks Relating to Economic, Political and uncertainties include:Global Market Conditions:
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| ◦ | challenges related to the Company's current operating environment, including economic, political, and global market conditions, and the effect of financial market disruptions, economic downturns or other potentially adverse macroeconomic developments on our products, the returns in our investment portfolios and the hedging costs associated with our run-off annuity block; |
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| ◦ | financial risk related to the continued reinvestment of our investment portfolios and performance of our hedge program for our run-off annuity block; |
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| ◦ | market risks associated with our business, including changes in credit spreads, equity prices, interest rates, market volatility and foreign exchange rates; |
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| ◦ | the impact on our investment portfolio if our investment portfolio is concentrated in any particular segment of the economy; |
Insurance Industry and Product-Related Risks:
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| ◦ | volatility in our statutory earnings and earnings calculated in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and potential material changes to our results resulting from our adjustment of our risk management program to emphasize protection of economic value; |
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| ◦ | the the possibility of a terrorist attack, a pandemic, or other natural or man-made disaster that may increase the Company’s mortality exposure and adversely affect its businesses; |
Financial Strength, Credit and Counterparty Risks:
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| ◦ | risks to our business, financial position, prospects and results associated with negative rating actions or downgrades in the Company's financial strength and credit ratings or negative rating actions or downgrades relating to our investments; |
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| ◦ | the impact on our statutory capital of various factors, including many that are outside the Company’s control, which can in turn affect our credit and financial strength ratings, cost of capital, regulatory compliance and other aspects of our business and results; |
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| ◦ | losses due to nonperformance or defaults by others, including sourcing partners, derivative counterparties and other third parties; |
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| ◦ | the potential for losses due to our reinsurers' unwillingness or inability to meet their obligations under reinsurance contracts and the availability, pricing and adequacy of reinsurance to protect the Company against losses; |
Risks Relating to the Company's current operating environment, including continuing uncertainty about the strengthEstimates, Assumptions and speed of the recovery in the United States and other key economies and the impact of any governmental stimulus or austerity initiatives, sovereign credit concerns, a sustained low interest rate environment, higher tax rates and other potentially adverse developments on financial, commodity and credit markets and consumer and business spending and investment and the effect of these events on the Company's returns in investment portfolios and the Company's hedging costs associated with the Company's variable annuities business;Valuations:
the risks, challenges and uncertainties associated with the strategic realignment of The Hartford Financial Services Group, Inc. ("The Hartford") to focus on its property and casualty, group benefits and mutual fund businesses, and its decision to place the Individual Annuity business into run-off and sell the Individual Life, and Retirement Plans businesses;
the risks, challenges and uncertainties associated with The Hartford's capital management plan, expense reduction initiatives and other actions, which may include acquisitions, divestitures or restructurings;
execution risk related to the continued reinvestment of our investment portfolios and refinement of our hedge program for our run-off annuity block;
market risks associated with our business, including changes in interest rates, credit spreads, equity prices, market volatility and foreign exchange rates, and implied volatility levels, as well as continuing uncertainty in key sectors such as the global real estate market;
the impact on our investment portfolio if our investment portfolio is concentrated in any particular segment of the economy;
volatility in our statutory and U.S. GAAP earnings and potential material changes to our results resulting from our adjustment of our risk management program to emphasize protection of economic value;
the impact on our statutory capital of various factors, including many that are outside the Company’s control, which can in turn affect our credit and financial strength ratings, cost of capital, regulatory compliance and other aspects of our business and results;
risk associated with the use of analytical models in making decisions in key areas such as underwriting, capital, hedging, and reserving;
risks to our business, financial position, prospects and results associated with negative rating actions or downgrades in the Company's financial strength and credit ratings or negative rating actions or downgrades relating to our investments;
the potential for differing interpretations of the methodologies, estimations and assumptions that underlie the valuation of the Company’s financial instruments that could result in changes to investment valuations;
the subjective determinations that underlie the Company’s evaluation of other-than-temporary impairments on available-for-sale securities;
losses due to nonperformance or defaults by others;
the potential for further acceleration of deferred policy acquisition cost amortization;
the potential for further impairments of our goodwill or the potential for changes in valuation allowances against deferred tax assets;
the possible occurrence of terrorist attacks and the Company’s ability to contain its exposure, including the effect of the absence or insufficiency of applicable terrorism legislation on coverage;
the possibility of a pandemic, or other natural or man-made disaster that may adversely affect our businesses;
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| ◦ | risk associated with the use of analytical models in making decisions in key areas such as capital management, hedging, and reserving; |
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| ◦ | the potential for differing interpretations of the methodologies, estimations and assumptions that underlie the Company’s fair value estimates for its investments and the evaluation of other-than-temporary impairments on available-for-sale securities; |
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| ◦ | the potential for further acceleration of deferred policy acquisition cost amortization and an increase in reserve for certain guaranteed benefits in our variable annuities; |
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| ◦ | the potential for valuation allowances against deferred tax assets; |
the response of reinsurance companies under reinsurance contractsStrategic and the availability, pricingOperational Risks:
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| ◦ | risks associated with the run-off of our annuity book of business; |
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| ◦ | the Company’s ability to maintain the availability of its systems and safeguard the security of its data in the event of a disaster, cyber or other information security incident or other unanticipated event; |
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| ◦ | the potential for difficulties arising from outsourcing and similar third-party relationships; and |
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| ◦ | the risks, challenges and uncertainties associated with The Hartford's expense reduction initiatives and other actions, which may include acquisitions, divestitures or restructurings; |
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| ◦ | the Company’s ability to protect its intellectual property and defend against claims of infringement; |
Regulatory and adequacy of reinsurance to protect the Company against losses;Legal Risks:
the cost and other effects of increased regulation as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which, among other effects, vests a Financial Stability Oversight Council with the power to designate “systemically important” institutions, requires central clearing of, and imposes new margin requirements on, certain derivatives transactions, and created a new “Federal Insurance Office” within the U.S. Department of the Treasury;
unfavorable judicial or legislative developments;
the potential effect of other domestic and foreign regulatory developments, including those that could adversely impact the Company’s operating costs and required capital levels;
the Company’s ability to maintain the availability of its systems and safeguard the security of its data in the event of a disaster, cyber or other information security incident or other unanticipated event;
the risk that our framework for managing operational risks may not be effective in mitigating material risk and loss to the Company;
the potential for difficulties arising from outsourcing and similar third-party relationships;
the impact of changes in federal or state tax laws;
the impact of potential changes in accounting principles and related financial reporting requirements;
the Company’s ability to protect its intellectual property and defend against claims of infringement; and
other factors described in such forward-looking statements.
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| ◦ | the cost and other potential effects of increased regulatory and legislative developments, including those that could adversely impact the Company’s operating costs and required capital levels; |
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| ◦ | unfavorable judicial or legislative developments; |
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| ◦ | the impact of changes in federal or state tax laws; and |
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| ◦ | the impact of potential changes in accounting principles and related financial reporting requirements. |
Any forward-looking statement made by the Company in this document speaks only as of the date of the filing of this Form 10-K. Factors or events that could cause the Company’s actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.
PART I
Item 1. Business
(Dollar amounts in millions except for per share data, unless otherwise stated)
General
Hartford Life Insurance Company (together with its subsidiaries, “HLIC”, “the Company”, “we” or “our”), is an indirect wholly-owned subsidiary of The Hartford Financial Services Group, Inc. (“The Hartford”), ana holding company for a group of subsidiaries that provide property and casualty insurance, group benefits and financial services company.mutual funds to individual and business customers in the United States. HLIC is the primary insurance company supporting the domestic business of The Hartford’s Talcott Resolution segment. The Company previously sold fixed and variable annuities, individual life insurance, retirement plans, institutional investment products, and private placement life insurance.insurance and group life and disability products. In 2013, the Company sold its retirement plans business and substantially all of its individual life business. These sales were structured asbusiness via reinsurance transactions resulting in a significant increase in reinsurance recoverable balances in 2013.transactions. The Hartford no longer sells any of the products previously underwritten by the Company. Additionally,
The Company's mission is to efficiently manage the Company reinsures variable annuity riders and fixed annuities from a Japanese affiliate and subsequently reinsures the variable annuity riders as well as allrun-off of the variablebusiness while honoring the Company's obligations to its contractholders. The Company manages approximately 774 thousand annuity riders previously issued by its subsidiary, Hartford Lifecontracts with account value of approximately $64 billion and Annuity Insurance Company to an affiliated captive reinsurer.private placement life insurance with account value of approximately $41 billion as of December 31, 2016.
The Company’s results of operations are primarily influenced by the financial results of the variable and fixed annuity, institutional investment and private placement products as well as the capital gain and loss activity associated with the Company’s variable annuity hedging program. Total assets and total stockholder’s equity were $202.7$170.3 billion and $8.2$7.8 billion,, respectively, at December 31, 2013.
In 2012, The Hartford completed the sale of the Company's U.S. individual annuities new business capabilities to Forethought Financial Group, Inc. ("Forethought Financial Group"), the sale of the administration and operating assets of its private placement life insurance business to Philadelphia Financial Group, Inc. (“Philadelphia Financial Group”) and the sale of Woodbury Financial Services, Inc. ("Woodbury Financial Services", "WFS") to American International Group, Inc. ("AIG Advisor Group"). For further discussion of these transactions, see Note 2 - Business Dispositions and Note 17 - Discontinued Operations of Notes to Consolidated Financial Statements. On January 1, 2013, The Hartford completed the sale of the Company's Retirement Plans business to Massachusetts Mutual Life Insurance Company ("MassMutual") and on January 2, 2013 The Hartford completed the sale of the Company's Individual Life insurance business to The Prudential Insurance Company of America ("Prudential"), a subsidiary of Prudential Financial, Inc. On December 12, 2013, the Company completed the sale of the U.K variable annuity business of Hartford Life International Limited ("HLIL"), an indirect wholly-owned subsidiary.
Reporting Segment
The Company conducts business in a single reporting segment comprised of business from the Company's U.S. annuity, assumed international annuity, and institutional and private-placement life insurance businesses.
The Company's mission is to pursue opportunities to reduce the size and risk of the annuity book of business while honoring the Company's obligations to its annuity contract holders. The Company manages approximately 1.1 million annuity contracts with account values of approximately $127 billion as of December 31, 2013.2016.
Reserves
The Company and its insurance subsidiaries establish and carry as liabilities predominantly, five types of reserves: (1) reserves for its insurance products to estimate for the following:
a liability equal to the balance that accrues to the benefit of the life and annuity insurance policyholder as of the consolidated financial statement date, otherwise known as the account value, (2) a liability for unpaid losses, including those that have been incurred but not yet reported, (3) value;
a liability for future policy benefits, representing the present value of future benefits to be paid to or on behalf of policyholders less the present value of future estimated net premiums, (4) premiums;
a liability for unpaid losses, including those that have been incurred but not yet reported or are in the course of settlement as well as estimates of all expenses associated with processing and settling these claims;
fair value reserves for living benefits embedded derivative guarantees; and (5)
death and living benefit reserves which are computed based on a percentage of revenues less actual claim costs. The liabilities
Reserve for unpaid losses and future policy benefits are calculated based on actuarially recognized methods using morbidity and mortality tables, which are modified to reflect the Company’s actual experience when appropriate. Liabilities for unpaid losses include estimates of amounts to fully settle known reported claims as well as claims related to insured events that the Company estimates have been incurred but have not yet been reported. FutureLiabilities for future policy benefit reserves are computed at amounts that, with additions frombenefits, less the present value of future estimated net premiums to be received and with interest on such reservesthereon compounded annually at certain assumed rates, are calculated at amounts that are expected to be sufficient to meet the Company’s policy obligations at their maturities or in the event of an insured’sthe disability or death.death of an insured. Other insurance liabilities include those for unearned premiums and benefits in excess of account value. Reserves for assumed reinsurance are computed in a manner that is comparable to direct insurance reserves.
Reinsurance
The Company cedes insurance to affiliated and unaffiliated insurers to enable the Company to manage capital and risk exposure. Such arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the risk transfer of its reinsurance contracts, the financial condition of its reinsurers and concentrations of credit risk. Reinsurance accounting is followed for ceded transactions that provide indemnification against loss or liability relating to insurance risk (i.e. risk transfer). If the ceded transactions do not provide risk transfer, the Company accounts for these transactions as financing transactions. The Company’s procedures include careful initial selection of its reinsurers, structuring agreements to provide collateral funds where necessary, and regularly monitoring the financial condition and ratings of its reinsurers. The Company entered into two reinsurance transactions upon completion of the sales of its Retirement Plans and Individual Life businesses in January 2013. See Note 2 - Business Dispositions of Notes to Consolidated Financial Statements for further discussion of these transactions. For further discussion of reinsurance, see Note 5 - Reinsurance of Notes to Consolidated Financial Statements.
Investment Operations
The majority of the Company’s investment portfolios are managed by Hartford Investment Management Company (“HIMCO”). HIMCO manages the Company's portfolios to maximize economic value, while attempting toand generate the incomereturns necessary to support the Company’s various product obligations, within internally established objectives, guidelines and risk tolerances. The portfolio objectives and guidelines are developed based upon the asset/liability profile, including duration, convexity and other characteristics within specified risk tolerances. The risk tolerances considered include, for example,but are not limited to, asset sector, and credit issuer allocation limits and maximum portfolio limits for below investment grade holdings and foreign currency exposure limits.holdings. The Company attempts to minimize adverse impacts to the portfolio and the Company’s results of operations from changes in economic conditions through asset diversification, asset allocation limits, asset/liability duration matching and through the use of derivatives. For further discussion of HIMCO’s portfolio management approach, see Part II, Item 7, MD&A – Enterprise Risk Management.
Enterprise Risk Management
The Company’s risk management function is part of The Hartford’s overall risk management program.Company has insurance, operational and financial risks. For discussion on how The Hartford maintains an enterprise risk management function (“ERM”) that is charged with providing analyses of The Hartford’smanages these risks, on an individual and aggregated basis and with ensuring that The Hartford’s risks remain within its risk appetite and tolerances. ERM plays an integral role at The Hartford by fostering a strong risk management culture and discipline. The mission of ERM is to support The Hartford in achieving its strategic priorities by:
Providing a comprehensive view of the risks facing The Hartford, including risk concentrations and correlations;
Helping management define The Hartford’s overall capacity and appetite for risk by evaluating the risk return profile of the business relative to The Hartford’s strategic intent and financial underpinning;
Assisting management in setting specific risk tolerances and limits that are measurable, actionable, and comply with The Hartford’s overall risk philosophy;
Communicating and monitoring The Hartford’s risk exposures relative to set limits and recommending, or implementing as appropriate, mitigating strategies; and
Providing insight to assist leaders in growing the businesses and achieving optimal risk-adjusted returns within established guidelines.
Enterprise Risk Management Structure and Governance
At The Hartford, the Board of Directors (“the Board”) has ultimate responsibility for risk oversight. It exercises its oversight function through its standing committees, each of which has primary risk oversight responsibility with respect to all matters within the scope of its duties as contemplated by its charter. In addition, the Finance, Investment and Risk Management Committee (“FIRMCo”), which is comprised of all members of the Board, has responsibility for the oversight of the investment, financial, and risk management activities of the Company, and oversight of all risk exposures, including those that do not fall within the responsibility of any other standing committee. The Audit Committee is responsible for, among other things, discussing with management policies with respect to risk assessment and risk management.
At the corporate level, the Company's Enterprise Chief Risk Officer (“Chief Risk Officer”) leads ERM. The Chief Risk Officer reports directly to the Company's Chief Executive Officer (“CEO”). Reporting to the Chief Risk Officer are the Chief Insurance Risk Officer , Chief Operational Risk Officer, Chief Market Risk Officer, Head of Asset Liability Management, HIMCO Chief Risk Officer, and Vice President of Risk Analytics & Governance. The Company has established the Enterprise Risk and Capital Committee (“ERCC”) that includes the Company's CEO, Chief Financial Officer , Chief Investment Officer, Chief Risk Officer, the Presidents and Chief Operating Officers of each business segment, and the General Counsel. The ERCC is responsible for managing the Company's risks and overseeing the enterprise risk management program. The ERCC also manages the capital structure of the enterprise and is responsible for the attribution of capital to the lines of business. The ERCC reports to the Board primarily through FIRMCo and through interactions with the Audit Committee.
The Company also has committees that manage specific risks and recommend risk mitigation strategies to the ERCC. These committees include, but are not limited to, the Company and Division Asset Liability Committees, Catastrophe Risk Committee, Emerging Risk Committees, Model Oversight Committees and Operational Risk Committee.
Risk Management Framework
At the Company, risk is managed at multiple levels. The Hartford utilizes three lines of defense in risk management, to integrate its risk management strategy and appetite into all functional areas of the Company, the Board and senior level risk committees. The first line of defense in risk management is generally the responsibility of the lines of business. Senior business leaders are responsible for managing risks specific to their business objectives and business environment. The second line of defense in risk management is generally owned by ERM. ERM has the responsibility to ensure that the Company has insight into its aggregate risk and that risks are managed within the firm’s overall risk appetite. Legal and Compliance also commonly perform second line of defense risk management. The third line of defense in risk management is owned by Internal Audit. Internal Audit provides independent assurance services to evaluate the effectiveness of management’s controls, informs the risk identification process and provides audit and consultative support to the Company.
The Company's Risk Management Framework consists of five core elements:
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1. | Risk Culture and Governance: The Company has established policies for its major risks and a formal governance structure with leadership oversight and an assignment of accountability and authority. The governance structure starts at the Board and cascades to the ERCC and then to individual risk committees across the Company. In addition, the Company promotes a strong risk management culture and high expectations around ethical behavior. |
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2. | Risk Identification and Assessment: Through its ERM organization, the Company has developed processes for the identification, assessment, and, when appropriate, response to internal and external risks to the Company's operations and business objectives. Risk identification and prioritization has been established within each area, including processes around emerging risks. |
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3. | Risk Appetite, Tolerances, and Limits: The Company has a formal enterprise risk appetite framework that is approved by the ERCC and reviewed by the Board. The risk appetite framework includes an enterprise risk appetite statement, risk preferences, risk tolerances and an associated limit structure for each of the Company’s major risks. These limits, which are encapsulated in formal risk policies, are reviewed by the appropriate governing risk committee. |
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4. | Risk Management and Controls: While the Company utilizes the committee structure to elevate risk discussions and decision-making, there are a variety of working groups that provide decisioning and management of risk within determined tolerances and limits. |
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5. | Risk Reporting and Communication: The Company monitors its major risks at the enterprise level through a number of enterprise reports, including but not limited to, a monthly risk dashboard, tracking the return on risk-capital across products, and regular stress testing. ERM communicates the Company's risk exposures to senior and executive management and the Board, and reviews key business performance metrics, risk indicators, audit reports, risk/control self-assessments and risk event data. |
For further discussion on risk management, see Part II, Item 7, MD&A –- Enterprise Risk Management.
Regulation
Insurance companiesState insurance laws are subjectintended to comprehensivesupervise and detailed regulationregulate insurers with the goal of protecting policyholders and supervision throughoutensuring the United States. The extentsolvency of the insurers. As such, regulation varies, but generally has its source in statutes which delegate regulatory, supervisorythe insurance laws and administrative powersregulations grant broad authority to state insurance departments. Such powers relatedepartments (the “Departments”) to among other things,oversee and regulate the business of insurance. The Departments monitor the financial stability of an insurer by requiring insurers to maintain certain solvency standards and minimum capital and surplus requirements; invested asset requirements; state deposits of solvency that must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on investments; establishing premium rates; claim handling and trade practices;securities; guaranty fund premiums; restrictions on the size of risks which may be insured under a single policy; deposits of securities for the benefit of policyholders; approval of policy forms; periodic examinations of the affairs of companies; annual and other reports required to be filed on the financial condition of companies or for other purposes; fixing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values; and the adequacy ofadequate reserves and other necessary provisions for unearned premiums, unpaid losses and loss adjustment expenses and other liabilities, both reported and unreported. In addition, the Departments perform periodic market and financial examinations of insurers and require insurers to file annual and other reports on the financial condition of the companies. Policyholder protection is also regulated by the Departments through licensing of insurers, agents and brokers and others; approval of premium rates and policy forms; claims administration requirements; and maintenance of minimum rates for accumulation of surrender values.
MostMany states also have enacted legislation that regulateslaws regulating insurance holding company systems such as the Company. This legislation provides that eachsystems. These laws require insurance companycompanies, which are formed and chartered in the system is requiredstate (referred to as “domestic insurers”), to register with the insurancestate department of itsinsurance (referred to as their “domestic state of domicileor regulator”) and furnishfile information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. Insurance holding company regulations principally relate to (i) state insurance approval of the acquisition of domestic insurers, (ii) prior review or approval of certain transactions between the domestic insurer and its affiliates, and (iii) regulation of dividends made by the domestic insurer. All transactions within a holding company system affecting domestic insurers must be determined to be fair and equitable. Notice
The National Association of Insurance Commissioners (“NAIC”), the organization that works to promote standardization of best practices and assists state insurance regulatory authorities and insurers, conducted the “Solvency Modernization Initiative,” (the “Solvency Initiative” ). The effort focused on reviewing the U.S. financial regulatory system and financial regulation affecting insurance companies including: (1) capital requirements; (2) corporate governance and risk management; (3) group supervision; (4) statutory accounting and financial reporting; and (5) reinsurance. As a result of the Solvency Initiative, among other items, the NAIC adopted the Corporate Governance Annual Disclosure Model Act , which was enacted by the Company’s lead domestic state of Connecticut.. The model law requires insurers to make an annual confidential filing regarding their corporate governance policies commencing in 2016. In addition, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment Model Act (“ORSA”), which also has been adopted by Connecticut. ORSA requires insurers to maintain a risk management framework and conduct an internal risk and solvency assessment of the insurer’s material risks in normal and stressed environments. Many state insurance holding company laws, including Connecticut, have also been amended to require insurers to file an annual confidential enterprise risk report with their lead domestic regulator, disclosing material risks within the entire holding company system that could pose an enterprise risk to the insurance departments is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and any entity in its holding company system. In addition, certain of such transactions cannot be consummated without the applicable insurance department’s prior approval. In the jurisdictions in which the Company is domiciled, the acquisition of more than 10% of its outstanding common stock would require the acquiring party to make various regulatory filings.insurer.
The Company and certain of its subsidiaries sold variable life insurance, variable annuity, and some fixed guaranteed products that are “securities” registered with the SEC under the Securities Act of 1933, as amended. Some of the products have separate accounts that are registered as investment companies under the Investment Company Act of 1940, as amended (the “1940 Act”), and/or are regulated by state law. Separate account investment products are also subject to state insurance regulation. Moreover, each registered separate account is generally divided into sub-accounts, each of which invests in an underlying mutual fund that is also registered as an investment company under the 1940 Act (“Underlying Funds”). Act.
In addition, other subsidiaries of the Company sold and distributed the Company’s variable insurance products as broker dealers and are subject to regulation promulgated and enforced by the Financial Industry Regulatory Authority (“FINRA”), the SEC and/or in, some instances, state securities administrators. Other entities operate as investment advisers registered with the SEC under the Investment Advisers Act of 1940 and are registered as investment advisers under certain state laws, as applicable. Because federal and state laws and regulations are primarily intended to protect investors in securities markets, they generally grant regulators broad rulemaking and enforcement authority. Some of these regulations include among other things regulations impacting sales methods, trading practices, suitability of investments, use and safekeeping of customers’ funds, corporate governance, capital, record keeping, and reporting requirements.
Failure to comply with federal and state laws and regulations may result in censure, fines, the issuance of cease-and-desist orders or suspension, termination or limitation of the activities of our operations and/or our employees. We cannot predict the impact of these actions on our businesses, results of operations or financial condition.
Intellectual Property
The Hartford relies on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect our intellectual property.
The Hartford has a trademark portfolio that we consider important in the marketing of our products and services, including, among others, the trademarks of The Hartford name, the Stag Logologo and the combination of these two marks.trademarks. The duration of trademark registrations may be renewed indefinitely subject to country-specific use and registration requirements. We regard our trademarks as extremely valuable assets in marketing our products and services and vigorously seek to protect them against infringement. In addition, we own a number of patents and patent applications, relating to on-line quoting, insurance related processing, insurance telematics, proprietary interface platforms, and other matters, some of which may be important to our business operations. Patents are of varying duration depending on filing date, and will typically expire at the end of their natural term.
Item 1A. RISK FACTORS
In deciding whether to invest in securities of the Company, you should carefully consider the following risk factors, any of which could have an adverse effect on the business, financial condition, results of operations, or liquidity of the Company. However, the Company may also be subject to otherThese risks that are not specificallyexclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our businesses described below, which may have an adverse effect on the business, financial condition, results of operations or liquidity of the Company. This information should be considered carefully together with the other information containedelsewhere in this report and the other reports and materials filed by the Company with the Securities and Exchange Commission (“SEC”). Annual Report on Form 10-K.
The following risk factors have been organized by category for ease of use, however many of the risks may have impacts in more than one category. These categories, therefore, should be viewed asThe occurrence of certain of them may, in turn, cause the emergence or exacerbate the effect of others. Such a starting point for understandingcombination could materially increase the significant risks facing us and not as a limitation onseverity of the potential impact of the matters discussed. Risk factors are not necessarily listed in orderthese risks on our business, results of importance.operations, financial condition or liquidity.
Risks Relating to Economic, MarketPolitical and PoliticalGlobal Market Conditions
Unfavorable economic, political and global market conditions may adversely impact our business and results of operations.
The Company’s investment portfolio and insurance liabilities are sensitive to changes in our operating environment, including general economic, political and global capital market conditions, such as the effect of a weak economy and financial and capital markets risks, including changes in credit spread, equity interest rates, credit spreads, equity prices, market volatility, foreign exchange rates and real estate market deterioration, may have a material adverse effect on our business, financial condition, results of operations, and liquidity. Despite the rise in U.S. equity markets in 2013, there continues to be uncertainty regarding the timing and strength of an economic recovery, which may adversely affect our business, financial condition, results of operations and liquidity in 2014.interest rates. Weak economic conditions, such as continued high unemployment, low labor force participation, lower family income, higher tax rates, including on small business owners,a weak real estate market, lower business investment and lower consumer spending are likely to result inmay impact the persistence of a sustained low interest rate environment as well as volatility in other capital market conditions, which will continue to pressure our investment results.
One important exposure to equity risk relates to the potential for lower earnings associated with our operations in Talcott Resolution, The Hartford's runoff business consisting of its U.S. annuity, international annuity (in Japan),Company's profitability and
institutional and private-placement life insurance businesses ("Talcott Resolution"). Fee income on products may affect policyholder behavior, such as U.S.increased full and Japan variable annuities is earned based uponpartial surrender rates. In addition, the fairCompany’s investment portfolio includes limited partnerships and other alternative investments for which changes in value of the assets under management. Should global equity markets decline from current levels, assets under managementare reported in earnings. These investments may be adversely impacted by political turmoil and related fee income will be reduced. Certain of our products have guaranteed benefits that increase our potential obligation and statutory capital exposure should equity markets decline. Sustained declines in equity markets may result in the need to utilize significant additional capital to support these products and adversely affect our ability to support our other businesses.
While interest rates in recent periods continue to be near historically low levels, recent increases ineconomic volatility, including real estate market rates have marginally reduced our reinvestment risk. However, further reductions in market rates or a sustained low interest rate environment would pressuredeterioration, which could impact our net investment incomereturns and could result in lower marginsan adverse impact on operating results.
Below are several key factors impacted by changes in economic, political, and lower estimated gross profitsglobal market conditions and their potential effect on certain products. In addition, due to the long-term natureCompany’s business and results of the liabilities within our Talcott Resolution operations, such as structured settlements and guaranteed benefits on variable annuities, sustained declines in long-term interest rates subjects us to reinvestment risks, increased hedging costs,operation:
Credit Spread Risk- Credit spread compression and capital volatility. A rise in interest rates,exposure is reflected in the absencemarket prices of other countervailing changes, will reducefixed income instruments where lower rated securities generally trade at a higher credit spread. If issuer credit spreads increase or widen, the market value of our investment portfolio may decline. If the credit spread widening is significant and if long-term interest rates were to rise dramatically within a six-to-twelve month time period, certain products within our Talcott Resolution division might be exposed to disintermediation risk. Disintermediation risk refers to the risk that our policyholders may surrender their contracts in a rising interest rate environment, requiring us to liquidate in an unrealized loss position. An increase in interest rates can also impact our tax planning strategies and in particular our ability to utilize tax benefits to offset certain previously recognized realized capital losses. Assets supporting the liabilities within our property & casualty and group benefits businesses are largely invested in fixed income securities. Changes in interest rates will affect the value of these assets and expose the company to reinvestment risk and disintermediation risk if cash flows differ materially from our projections.
Our exposure to credit spreads primarily relates to market price and cash flow variability associated with changes in credit spreads. If issuer credit spreads widen significantly and retain historically wide levelsoccurs over an extended period of time, the Company may recognize other-than-temporary impairments, and decreasesresulting in the market value of our investment portfolio will likely result. In addition, losses may also occur due to the volatility in credit spreads. When credit spreads widen, we incur losses associated withdecreased earnings. If the credit derivatives where the Company assumes exposure. When credit spreads tighten, we incur losses associated with derivatives where the Company has purchased credit protection. If credit spreads tightenspread tightens significantly, the Company'sCompany’s net investment income associated with new purchases of fixed maturities may be reduced. In addition, a reductionthe value of credit derivatives under which the Company assumes exposure or purchases protection are impacted by changes in market liquidity can make it difficult to value certain of our securitiescredit spreads, with losses occurring when trading becomes less frequent. As such, valuations may include assumptionscredit spreads widen for assumed exposure or, estimates that may be more susceptible to significant period-to-period changes, which could have a material adverse effect on our business, financial condition, results of operations or liquidity.when credit spreads tighten if credit protection has been purchased.
Our statutory surplus is also affected by widening credit spreads as a result of the accounting for the assets and liabilities on our fixed market value adjusted (“MVA”) annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded at fair value. In determining the statutory reserve for the fixed MVA annuitiesannuity payments we owe contract-holders, we are required to use current crediting rates in the U.S. and Japanese LIBOR in Japan.rates. In many capital market scenarios, current crediting rates in the U.S. are highly correlated with market rates implicit in the fair value of statutory separate account assets. As a result, the change in the statutory reserve from period to period will likely substantially offset the change in the fair value of the statutory separate account assets. However, in periods of volatile credit markets, actual credit spreads on investment assets may increase sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value losses. As actual credit spreads are not fully reflected in current crediting rates, in the U.S. or Japanese LIBOR in Japan, the calculation of statutory reserves willmay not substantially offset the change in fair value of the statutory separate account assets, resulting in reductions in statutory surplus. This has resulted in the past and may result in the future in the need to devote significant additional capital to support the fixed MVA product.
Our primary foreign currency exchange riskEquity Markets Risk - A decline in equity markets may result in lower earnings from our operations where fee income is related to certain guaranteed benefits associated withearned based upon the reinsurance of Japan variable annuities. The strengtheningfair value of the yen compared with other currencies would substantially increase our exposure to pay yen-denominated obligations. In addition, the weakening of foreign currencies versus the U.S. dollar will unfavorably affect net income from foreign operations,assets under management. A decline in equity markets may also decrease the value of non-U.S. dollar denominated investments, investments in foreign subsidiariesequity securities and realized gains or losses on yen denominated individual fixed annuity products.
Our real estate market exposure includes investments in commercial mortgage-backed securities, residential mortgage-backed securities, commercial real estate collateralized debt obligations, mortgage and real estatelimited partnerships and mortgage loans. Deteriorationother alternative investments held in the real estate market has adversely affectedCompany’s general account portfolio, thereby, negatively impacting our business, financial condition resultsor reported earnings. In addition, certain of operations and liquidity in the past.our annuity products have guaranteed minimum death benefits ("GMDB") or guaranteed minimum withdrawal benefits ("GMWB") that increase when equity markets decline requiring us to hold more statutory capital. While the real estate market has shown signs of improvement, deteriorating fundamentals (including increases in property vacancy rates, delinquencies and foreclosures) could cause a decline in market values, which would have a negative impact on sources of refinancing, resulting in reduced market liquidity and higher risk premiums. This could result in reductions in market value and impairments of real estate backed securities, a reduction in net investment income associated with real estate partnerships, and increases in our valuation allowance for mortgage loans.
Significant declines in global equity prices, changes in U.S. interest rates, changes in credit spreads, inflation, the strengthening or weakening of foreign currencies against the U.S. dollar and Euro, or real estate market deterioration, individually or in combination, could have a material adverse effect on our business, financial condition, results of operations or liquidity. Our hedging assets seek to reduce the net economic sensitivity of our potential obligations from guaranteed benefits to equity market interest rate, and foreign exchange fluctuations. Becausefluctuations, because of the accounting asymmetries between our economichedging targets and statutory and GAAP accounting principles for our guaranteed benefits, rising equity markets and/or rising interest rates or a strengthening of the U.S. dollar may result in statutory or GAAP losses.
Interest Rate Risk - Global economic conditions may result in the persistence of a low interest rate environment which would continue to pressure our net investment income and could result in lower margins and lower estimated gross profits on certain products. Due to the long-term nature of the Company's liabilities, such as structured settlements and guaranteed benefits on variable annuities, declines in interest rates over an extended period of time would result in our having to reinvest at lower yields, increased hedging costs, reduced spreads on our annuity products and greater capital volatility. On the other hand, a rise in interest rates, in the absence of other countervailing changes, would reduce the market value of our investment portfolio and, if long-term interest rates were to rise dramatically, certain of our products might be exposed to disintermediation risk. Disintermediation risk refers to the risk that our policyholders may surrender their contracts in a rising interest rate environment, requiring us to liquidate assets in an unrealized loss position. A decline in market value of invested assets due to an increase in interest rates could also limit our ability to realize tax benefits from previously recognized capital losses.
Concentration of our investment portfolio in any particular segment ofincreases the economy may have adverse effects on our business, financial condition, results of operations and liquidity.potential for significant losses.
The concentration of our investment portfolios in any particular industry, collateral type, group of related industries or geographic sector could have an adverse effect on our investment portfolios and consequently on our business, financial condition, results of operations, and liquidity. Events or developments that have a negative impact on any particular industry, collateral type, group of related industries or geographic region may have a greater adverse effect on our investment portfolio to the extent that the portfolio is concentrated rather than diversified. Further, if issuers of securities or loans we hold are acquired, merge or otherwise consolidate with other issuers of securities or loans held by the Company, our investment portfolio’s credit concentration risk to issuers could increase for a period of time, until the Company is able to sell securities to get back in compliance with the established investment credit policies.
Insurance Industry and Product Related Risks
Risks RelatingWe are vulnerable to Estimates, Assumptionslosses from catastrophes, both natural and Valuationsman-made.
ActualOur operations are exposed to risk of loss from both natural and man-made catastrophes associated with pandemics, terrorist attacks and other events that could significantly increase our mortality exposures. Claims arising from such events could have a material adverse effect on our results of operations and liquidity, either directly or as a result of their effect on our reinsurers or other counterparties. In addition, the continued threat of terrorism and the occurrence of terrorist attacks, as well as heightened security measures and military action in response to these threats, may cause significant volatility in global financial markets which could materially differ fromhave an adverse effect on the analytical models wevalue of the assets in our investment portfolio and in our separate accounts.
Our program to manage interest rate and equity risk related to our variable annuity guaranteed benefits may be ineffective which could result in statutory and GAAP volatility in our earnings and potentially material charges to net income.
Some of our in-force business, especially variable annuities, offer guaranteed benefits, including GMDBs and GMWBs. These GMDBs and GMWBs expose the Company to interest rate risk and significant equity risk. A decline in equity markets would not only result in lower fee income, but would also increase our exposure to liability for benefit claims. We use to assist our decision making in key areasreinsurance and benefit designs, such as capital, hedgingcaps, to mitigate the exposure associated with GMDB. We also use reinsurance in combination with product management actions, such as rider fee increases, investment restrictions and reserving,buyout offers, as well as derivative instruments to attempt to minimize the claim exposure and to reduce the volatility of net income associated with the GMWB liability. We remain liable for the guaranteed benefits in the event that reinsurers or derivative counterparties are unable or unwilling to pay, which could result in a need for additional capital to support in-force business.
From time to time, we may adjust our risk management program based on contracts in force, market conditions, or other factors. While we believe that these actions improve the efficiency of our risk management related to these benefits, changes to the risk management program may result in greater statutory and GAAP earnings volatility and, based upon the types of hedging instruments used, can result in potentially material charges to net income (loss) in periods of rising equity market pricing levels, higher interest rates and declines in volatility. We are also subject to the risk that these management actions prove ineffective or that unanticipated policyholder behavior, combined with adverse market events, produces economic losses beyond the scope of the risk management techniques employed, which individually or collectively may have a material adverse effect on our business, financial condition, results of operations or liquidity.
We employ various modeling techniques (e.g., scenarios, predictive, stochastic and/or forecasting) to analyze and estimate exposures, loss trends and other risks associated with our assets and liabilities. We use the modeled outputs and related analyses to assist us in decision-making related to capital allocation, reserving, hedging and reinsurance. Both proprietary and third party models we use incorporate numerous assumptions and forecasts about the future level and variability of interest rates, capital requirements, loss frequency and severity, currency exchange rates, policyholder behavior, equity markets and inflation, among others. The modeled outputs and related analyses are subject to the inherent limitations of any statistical analysis, including the use of historical internal and industry data and assumptions, which may be stale, incomplete or erroneous. Consequently, actual results may differ materially from our modeled results. The profitability and financial condition of the Company substantially depends on the extent to which our actual experience is consistent with assumptions we use in our models and ultimate model outputs. If, based upon these models or other factors, our estimates of capital adequacy or the risks we are exposed to prove to be materially inaccurate, our business, financial condition, results of operations or liquidity may be adversely affected.
Our valuations of many of our financial instruments include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our business, results of operations, financial condition and liquidity.
The following financial instruments are carried at fair value in the Company's consolidated financial statements: fixed maturities, equity securities, freestanding and embedded derivatives, certain hedge fund investments, and separate account assets. The determination of fair values is made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts.
During periods of market disruption, including periods of significantly increasing/decreasing interest rates, rapidly widening/narrowing credit spreads or illiquidity, it may be difficult to value certain of our securities if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the financial environment. In such cases, securities may require more subjectivity and management judgment in determining their fair values and those fair values may differ materially from the value at which the investments may be ultimately sold. Further, rapidly changing or unprecedented credit and equity market conditions could materially impact the valuation of securities and the period-to-period changes in value could vary significantly. Decreases in value could have a material adverse effect on our business, results of operations, financial condition and liquidity.
Evaluation of available-for-sale securities for other-than-temporary impairment involves subjective determinations and could materially impact our business, financial condition, results of operations and liquidity.
The evaluation of impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether a credit and/or non-credit impairment exists and whether an impairment should be recognized in current period earnings or in other comprehensive income. The risks and uncertainties include changes in general economic conditions, the issuer's financial condition or future recovery prospects, the effects of changes in interest rates or credit spreads and the expected recovery period. For securitized financial assets with contractual cash flows, the Company currently uses its best estimate of cash flows over the life of the security. In addition, estimating future cash flows involves incorporating information received from third-party sources and making internal assumptions and judgments regarding the future performance of the underlying collateral and assessing the probability that an adverse change in future cash flows has occurred. The determination of the amount of other-than-temporary impairments is based upon our quarterly evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available.
Additionally, our management considers a wide range of factors about the security issuer and uses their best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential.
Impairment losses in earnings could materially adversely affect our results of operations and financial condition.
If assumptions used in estimating future gross profits differ from actual experience, we may be required to accelerate the amortization of DAC and increase reserves for guaranteed minimum death and income benefits, which could have a material adverse effect on our results of operations and financial condition.
The Company deferred acquisition costs associated with the prior sales of its variable annuity products. While deferred acquisition costs related to the Japan block of business were written off in the first quarter of 2013 when the Company amended its hedging strategy, deferred acquisition costs for the U.S. block are amortized over the expected life of the contracts. The remaining deferred but not yet amortized cost is referred to as the Deferred Acquisition Cost (“DAC”) asset. We amortize these costs in proportion to the present value of estimated gross profits (“EGPs”). The Company evaluates the EGPs compared to the DAC asset to determine if an impairment exists. The Company also establishes reserves for GMDB and guaranteed minimum income benefit ("GMIB") using components of EGPs. The projection of EGPs, or components of EGPs, requires the use of certain assumptions, principally related to separate account fund returns, surrender and lapse rates, interest margin (including impairments), mortality, benefit utilization, annuitization and hedging costs. Of these factors, we anticipate that changes in separate account fund returns are most likely to impact the rate of amortization of such costs. However, other factors such as those the Company might employ to reduce risk, such as the cost of hedging or other risk mitigating techniques, as well as the effect of increased surrenders, could also significantly reduce estimates of future gross profits. Estimating future gross profits is a complex process requiring considerable judgment and the forecasting of events well into the future. If our assumptions regarding policyholder behavior, including lapse rates, benefit utilization, surrenders, and annuitization, hedging costs or costs to employ other risk mitigating techniques prove to be inaccurate or if significant or sustained equity market declines occur, we could be required to accelerate the amortization of DAC related to variable annuity contracts, and increase reserves for GMDB and GMIB, which would result in a charge to net income. Such adjustments could have a material adverse effect on our results of operations and financial condition.
If our businesses do not perform well, we may be required to establish a valuation allowance against the deferred income tax asset, which could have a material adverse effect on our results of operations and financial condition.
Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in management's determination include the performance of the business including the ability to generate capital gains, to offset previously recognized capital losses, from a variety of sources and tax planning strategies. If based on available information, it is more likely than not that we are unable to recognize a full tax benefit on realized capital losses, then a valuation allowance will be established with a corresponding charge to net income (loss). Charges to increase our valuation allowance could have a material adverse effect on our results of operations and financial condition.
Financial Strength, Credit and Counterparty Risks
The amount of statutory capital that we have, and the amount of statutory capital that we must hold to maintain our financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors outside of our control, including equity market, credit market, interest rate and foreign currency conditions, changes in policyholder behavior, changes in rating agency models, and changes in regulations.control.
We conduct the vast majority of our business asAs a licensed insurance company, and through our licensed insurance company subsidiaries. Accountingwe are subject to statutory accounting standards and statutory capital and reserve requirements for licensed insurance companies are prescribed by the applicable insurance regulators and the National Association of Insurance Commissioners (“NAIC”). Insurance regulators have established regulations that provideThe minimum capitalization requirementscapital we must hold is based on risk-based capital (“RBC”) formulas for life companies. The RBC formula for life companies establishes capital requirements relating to insurance, business, asset and interest rate risks, including equity, interest rate and expense recovery risks associated with variable annuities and group annuities that contain death benefits or certain livingwithdrawal benefits. Our international operations are subject to regulation in the relevant jurisdiction in which they operate, which in many ways is similar to the state regulation outlined above, with similar related restrictions and obligations.
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors, including including:
the amount of statutory income or losses generated by us and our insurance subsidiaries (which itself is sensitive to equity market and credit market conditions), we generate,
the amount of additional capital we andmust hold,
the amount of dividends made to our insurance subsidiaries must hold to support business growth, parent company,
changes in equity market levels,
the value of certain fixed-income and equity securities in our investment portfolios, portfolio,
the value of certain derivative instruments,
changes in interest rates,
admissibility of deferred tax assets and foreign currency exchange rates, the impact of internal reinsurance arrangements, and
changes to the NAIC RBC formulas.
Most of these factors are outside of the Company's control. The Company's financial strength and credit ratings are significantly influenced by the our statutory surplus amounts and RBC ratios and those of our insurance company subsidiaries.ratios. In addition, rating agencies may implement changes to their internal models that have the effect of increasing the amount of statutory capital we must hold in order to maintain our current ratings. Also, in extreme scenarios of equity market declines and other capital market volatility, the amount of additional statutory reserves that we are required to hold for our variable annuity guarantees increases at a greater than linear rate. This reduces the statutory surplus used in calculating our RBC ratios. When equity markets increase, surplus levels and RBC ratios would generally be expected to increase. However, as a result of a number of factors and market conditions, including the level of hedging costs and other risk transfer activities, statutory reserve requirements for death and livingwithdrawal benefit guarantees and increases in RBC requirements, surplus and RBC ratios may not increase when equity markets increase. Due to these factors, projecting statutory capital and the related RBC ratios is complex. If our statutory capital resources are insufficient to maintain a particular rating and if The Hartford were not to raise additional capital, either at its discretion or because it was unable to do so, our financial strength and credit ratings might be downgraded by one or more rating agencies, we may seekagencies. Downgrades below certain thresholds could trigger counterparty rights to raise capital through public or private equity or debt financing. Rating agency downgradesterminate reinsurance treaties. Downgrades could also begin to trigger potentially material collateral calls on certain of our derivative instruments and counterparty rights to terminate derivative relationships, both of which could limit our ability to purchase additional derivative instruments. These events could materially adversely affect our business, financial condition, results of operations and liquidity. For a further discussion of potential impacts of ratings downgrades on derivative instruments, including potential collateral calls, see Part II, Item 7, MD&A - "Capital Resources and Liquidity - Derivative Commitments."
Losses due to nonperformance or defaults by others, including issuers of investment securities mortgage loans or reinsurance and derivative instrument counterparties couldcan have a material adverse effect on the value of our investments, business, financial condition, resultsreduce our profitability or sources of operationsliquidity.
We have credit risk with counterparties on investments, derivatives, premiums receivable and liquidity.
Issuers orreinsurance recoverables. Among others, our counterparties include issuers of fixed maturity and equity securities we hold, borrowers whose securities orof mortgage loans we hold, customers, trading counterparties, counterparties under swaps and other derivative contracts, reinsurers, clearing agents, exchanges, clearing houses and other financial intermediaries and guarantorsguarantors. These counterparties may default on their obligations to us due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud, government intervention orand other reasons. Such defaultsDefaults by these counterparties on their obligations to us could have a material adverse effect on the value of our investments, business, financial condition, results of operations and liquidity. Additionally, if the underlying assets supporting ourthe structured securities or loans may deteriorate causing thesewe invest in default on their payment obligations, our securities or loans towill incur losses.
Our investment portfolio includes securities backed by real estate assets, the value of which may be adversely impacted if conditions in the real estate market significantly deteriorate, including declines in property values and increases in vacancy rates, delinquencies and foreclosures, ultimately resulting in a reduction in expected future cash flows for certain securities.
The Company also has exposure to foreign-based issuers of securities and providersavailability of reinsurance as well as indirect European exposure resulting from the variable annuity products that it has sold in Japan. These foreign issuers include European issuers as well as certain emerging market issuers. Despite the recent stabilization in the European market, there are still fundamental structural issues that remain and may result in the re-emergence of fiscal and economic issues. In addition, there has been recent volatility within certain emerging market countries spurred by concerns over the U.S. Federal Reserve tapering its monetary stimulus, an economic slowdown in China, and the devaluation of certain currencies. Further details of the European and certain emerging market private and sovereign issuers held within the investment portfolio and indirect variable annuity exposures can be found in Part II, Item 7, MD&A - Enterprise Risk Management - Investment Portfolio Risks and Risk Management. The Company's European based reinsurance arrangements are further described in Part II, Item 7, MD&A - Enterprise Risk Management - Investment Portfolio Risks and Risk Management.
Property value declines and loss rates that exceed our current estimates, as outlined in Part II, Item 7, MD&A - Enterprise Risk Management - Other-Than-Temporary Impairments, or a worsening of global economic conditions could have a material adverse effect on our business, financial condition, results of operations and liquidity.
To the extent the investment portfolio is not adequately diversified, concentrations of credit risk may exist which could negatively impact the Company if significant adverse events or developments occur in any particular industry, group of related industries or geographic regions. The Company’s investment portfolio is not exposedability to any credit concentration risk of a single issuer greater than 10% of the Company's stockholders' equity other than the U.S. government and U.S. government agencies backed by the full faith and credit of the U.S. government, and the Government of Japan. However, if issuers of securities or loans we hold are acquired, merge or otherwise consolidate with other issuers of securities or loans held by the Company, our investment portfolio’s credit concentration risk to issuers could increase above the 10% threshold, for a period of time, until the Company is able to sell securities to get back in compliance with the established investment credit policies. For discussion of the Company’s exposure to credit concentration risk of reinsurers, see the risk factor, “We may incur losses due to our reinsurers' unwillingness or inability to meet their obligationsrecover under reinsurance contracts and the availability, pricing and adequacy of reinsurance may not be sufficient to protect us against losses.”
We may incur losses due to our reinsurers' unwillingness or inability to meet their obligations under reinsurance contracts and the availability, pricing and adequacy of reinsurance may not be sufficient to protect us against losses.
As an insurer, we frequently use reinsurance to reduce the effect of losses transferthat may arise from, among other things, GMDBs under variable annuity contracts, and other risks that can cause unfavorable results of operations or effectadversely affect the sale of a bookline of business to an independent company. Under these reinsurance arrangements, other insurers assume a portion of our losses and related expenses; however, we remain liable as the direct insurer on all risks reinsured. Consequently, ceded reinsurance arrangements do not eliminate our obligation to pay claims, and we are subject to our reinsurers' credit risk with respect to our ability to recover amounts due from them. Although we regularly evaluate the financial condition of our reinsurers to minimize our exposure to significant losses from reinsurer insolvencies, our reinsurers may become financially unsound or dispute their contractual obligations. The inability or unwillingness of any reinsurer to meet its financial obligations to us, including the impact of any insolvency or rehabilitation proceedings involving a reinsurer that could affect the Company's access to collateral held in trust, could have a material adverse effect on our financial condition, results of operations.operations and liquidity. This risk may be magnified by a concentration of reinsurance-related credit risk resulting from the sale of the Company’s Individual Life business.and Retirement Products businesses. Further details of such concentration can be found in Part II, Item 7, MD&A -Credit Risk.- Enterprise Risk Management - Reinsurance.
In addition, market conditions beyond our control determine the availability and cost of the reinsurance we are able to purchase. Reinsurance pricing changes significantly over time, and no assurances can be made that reinsurance will remain continuously available to us to the same extent and on the same terms as are currently available. If we were unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, we would have to either accept an increase in our net liability exposure, reduce the amount of business we write, or develop to the extent possible other alternatives to reinsurance. Further, due to the inherent uncertainties as to collection and the length of time before reinsurance recoverables will be due, it is possible that future adjustments to the Company’s reinsurance recoverables, net of the allowance, could be required, which could have a material adverse effect on the Company’s consolidated results of operations or cash flows in a particular quarterly or annual period.
Risks Relating to Estimates, Assumptions and Valuations
InsuranceActual results could materially differ from the analytical models we use to assist our decision making in key areas such as capital management, hedging, and Product-Related Risksreserving.
Our adjustmentWe use models to help make decisions related to, among other things, capital management, reserving, investments, hedging, and reinsurance. Both proprietary and third party models we use incorporate numerous assumptions and forecasts about the future level and variability of our risk management program relating to products we offered with guaranteed benefits to emphasize protection of economic value will likely result in greater statutory and U.S. GAAP volatility in our earnings and potentially material charges to net income (loss).
Some of the in-force business within our Talcott Resolution operations, especially variable annuities, offer guaranteed benefits which, in the event of a decline ininterest rates, capital requirements, currency exchange rates, policyholder behavior, equity markets would not only result in lower earnings, but will also increase our exposure to liability for benefit claims. Weand inflation, among others. The models are also subject to equity market volatility related to these benefits, including the guaranteed minimum withdrawal ("GMWB"), guaranteed minimum accumulation benefit (“GMAB”), guaranteed minimum death benefit (“GMDB”) and GMIB associated with in-force variable annuities. We use reinsurance structures and have modified benefit features to mitigate the exposure associated with GMDB. We also use reinsurance in combination with a modification of benefit features and derivative instruments to attempt to minimize the claim exposure and to reduce the volatility of net income associated with the GMWB liability. However, due to the severe economic conditions experienced in recent years, we adjusted our risk management program to place greater relative emphasis on the protection of economic value. This shift in relative emphasis has resulted in greater statutory and U.S. GAAP earnings volatility and, based upon the types of hedging instruments used, can result in potentially material charges to net income (loss) in periods of rising equity market pricing levels, higher interest rates, declines in volatility and weakening of the yen against other currencies. While we believe that these actions have improved the efficiency of our risk management related to these benefits, we remain liable for the guaranteed benefits in the event that reinsurers or derivative counterparties are unable or unwilling to pay and, in turn, may need additional capital to support in-force business. We are also subject to the risk that these management procedures prove ineffective or that unanticipated policyholder behavior, combined with adverse market events, produces economic losses beyondinherent limitations of any statistical analysis as the scopehistorical internal and industry data and assumptions used in the models may not be indicative of what will happen in the future. Consequently, actual results may differ materially from our modeled results. The profitability and financial condition of the risk management techniques employed,Company substantially depends on the extent to which individuallyour actual experience is consistent with assumptions we use in our models and ultimate model outputs. If, based upon these models or collectively may have a material adverse effect onother factors, our estimates of capital adequacy or the risks we are exposed to prove to be materially inaccurate, our business, financial condition, results of operations or liquidity may be adversely affected.
The valuation of our securities and liquidity.
Weinvestments and the determination of allowances and impairments are particularly vulnerablehighly subjective and based on methodologies, estimations and assumptions that are subject to lossesdiffering interpretations and market conditions.
Estimated fair values of the Company’s investments are based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. During periods of market disruption, it may be difficult to value certain of our securities if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the financial environment. In addition, there may be certain securities whose fair value is based on one or more unobservable inputs, even during normal market conditions. As a result, the determination of the fair values of these securities may include inputs and assumptions that require more estimation and management judgment and the use of complex valuation methodologies. These fair values may differ materially from catastrophes, both naturalthe value at which the investments may be ultimately sold. Further, rapidly changing or unprecedented credit and man-made, whichequity market conditions could materially impact the valuation of securities and adversely affect our business, financial condition, results of operations and liquidity.
Our operations are exposed to risk of loss from catastrophes associated with pandemics and other events thatthe period-to-period changes in value could significantly increase our mortality and morbidity exposures. Policyholders may also be unable to meet their obligations t make deposits on our investment products. Our liquidity could be constrained by a catastrophe, or multiple catastrophes, which could resultvary significantly. Decreases in extraordinary losses. In addition, in part because accounting rules do not permit insurers to reserve for such catastrophic events until they occur, claims from catastrophic eventsvalue could have a material adverse effect on our business, financial condition, results of operations, financial condition and liquidity.
Similarly, management’s decision on whether to record an other-than-temporary impairment or liquidity. Towrite down is subject to significant judgments and assumptions regarding changes in general economic conditions, the extent that lossissuer's financial condition or future recovery prospects, estimated future cash flows, the effects of changes in interest rates or credit spreads, the expected recovery period and the accuracy of third party information used in internal assessments. As a result, management’s evaluations and assessments are highly judgmental and its projections of future cash flows over the life of certain securities may ultimately prove incorrect as facts and circumstances change.
If assumptions used in estimating future gross profits differ from actual experience, unfolds or models improve, we will seekmay be required to reflect any increased riskaccelerate the amortization of DAC and increase reserves for GMDB and GMWB on variable annuities, which could adversely affect our results of operation.
The Company has deferred acquisition costs associated with the prior sales of its variable annuity products. Deferred acquisition costs for the variable annuity products are amortized over the expected life of the contracts. The remaining deferred but not yet amortized cost is referred to as the DAC asset. We amortize these costs based on the ratio of actual gross profits in the designperiod to the present value of current and pricingfuture estimated gross profits (“EGPs”). The Company evaluates the EGPs compared to the DAC asset to determine if an impairment exists. The Company also establishes reserves for GMDB and the life contingent portion of GMWB using components of EGPs. The projection of EGPs, or components of EGPs, requires the use of certain assumptions that may not prove accurate, including those related to changes in the separate account fund returns, full or partial surrender rates, mortality, withdrawal benefit utilization, withdrawal rates, annuitization and hedging costs.
In addition, if our products. However,assumptions about policyholder behavior (e.g., full or partial surrenders, benefit utilization and annuitization) and costs related to mitigating risks, including hedging costs, prove to be inaccurate or if significant or sustained equity market declines occur, we could be required to accelerate the Companyamortization of DAC related to variable annuity contracts, and increase reserves for GMDB and life-contingent GMWB which would result in a charge to net income.
If our businesses do not perform well, we may be exposedrequired to regulatory or legislative actionsestablish a valuation allowance against the deferred income tax asset.
Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities and carry-forwards for foreign tax credits, capital losses, net operating losses and alternative minimum tax credits. Deferred tax assets are assessed periodically by management to determine if it is more likely than not that preventthe deferred income tax assets will be realized. Factors in management's determination include the performance of the business, including the ability to generate, from a variety of sources and tax planning strategies, sufficient future taxable income and capital gains before net operating loss and capital loss carry-forwards expire. If based on available information, it is more likely than not that we are unable to recognize a full accounting of loss expectations in the design or pricing oftax benefit on deferred tax assets, then a valuation allowance will be established with a corresponding charge to net income (loss). Charges to increase our products or result in additional risk-shifting to the insurance industry.
The occurrence of one or more terrorist attacks in the geographic areas we serve or the threat of terrorism in general mayvaluation allowance could have a material adverse effect on our business, financial condition, results of operations and liquidity.financial condition.
Strategic and Operational Risks
As The occurrenceHartford’s Talcott Resolution segment continues to run-off, the Company is exposed to a number of one or more terrorist attacks in the geographic areas we serve could result in substantially higher claims under our insurance policies than we have anticipated. Further, the continued threat of terrorism and the occurrence of terrorist attacks, as well as heightened security measures and military action in response to these threats and attacks or other geopolitical or military crises, may cause significant volatility in global financial markets, disruptions to commerce and reduced economic activity. These consequences could have an adverse effect on the value of the assets in our investment portfolio as well as those in our separate accounts. Terrorist attacks also could disrupt our operations centers in the U.S. or abroad. As a result, it is possible that any, or a combination of all, of these factors may have a material adverse effect on our business, financial condition, results of operations and liquidity.
Regulatory and Legal Risks
The impact of regulatory initiatives and legislative developments, including the enactment of the Dodd-Frank Act of 2010, could have a material adverse impact on our business, financial condition, results of operations and liquidity.
Regulatory initiatives and legislative developments may significantly affect our operations and prospects in ways that we cannot predict. U.S. and overseas governmental and regulatory authorities, including the SEC, the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the Federal Deposit Insurance Corporation (“FDIC”), the NYSE and the Financial Industry Regulatory Authority, Inc. (“FINRA”) are considering enhanced or new regulatory requirements intended to prevent future financial crises or otherwise stabilize the institutions under their supervision. Such measures are likely to lead to stricter regulation of financial institutions generally, and heightened prudential requirements for systemically important companies in particular. Such measures could include taxation of financial transactions and restrictions on employee compensation.
The Dodd-Frank Act was enacted on July 21, 2010, mandating changesrisks related to the regulation of the financial services industry. Implementation of the Dodd-Frank Act is ongoing and may affect our operations and governance in waysrun-off business that could adversely affect our financial condition and results of operations.
Despite being in run-off, Talcott Resolution represents a meaningful share of The Dodd-Frank Act requires central clearing of,Hartford’s earnings. Talcott Resolution’s revenues and imposes new margin requirements on, certain derivatives transactions, which increasesearnings will decline over time as variable and fixed annuity policies lapse. While the costs of our hedging program. Other provisions in the Dodd-Frank Act that may impact us include: the new “Federal Insurance Office” within Treasury; the possible adverse impact on the pricing and liquidity of the securities in which we invest resulting from the proprietary trading and market making limitation of the Volcker Rule; the possible adverse impact on the market for insurance-linked securities resulting from the limitations of banking entity involvement in and ownership of certain asset-backed securities transactions; and enhancements to corporate governance, especially regarding risk management.
The Dodd-Frank Act vests the Financial Stability Oversight Council (“FSOC”)Company has been reducing expenses associated with the powerTalcott Resolution business as the revenues from that business decline, going forward it may become more difficult to designate “systemically important” institutions, which will be subject to special regulatory supervisionreduce expenses, particularly corporate and other provisions intended to prevent, or mitigate the impact of, future disruptions in the U.S. financial system. Based on its most current financial data, The Hartford is below the quantitative thresholds used by the FSOC to determine which nonbank companies merit consideration. However, the FSOC has indicted it will review on a quarterly basis whether nonbank financial institutions meet the metrics for further review. If The Hartford were to be designated as a systemically important institution, it could be subject to heightened regulation under the Federal Reserve, which could impact requirements regarding capital, liquidity and leverage as well as our business and investment conduct. In addition, The Hartford could be subject to assessments to pay for the orderly liquidation of other systemically important financial institutions that have become insolvent. As a result of these requirements, we could incur substantialenterprise shared services costs, and suffer other negative consequences, all of which may have a material adverse effect on our business, financial condition, results of operations and liquidity.
We may experience unfavorable judicial or legislative developments involving claim litigation that could have a material adverse effect on our business, financial condition, results of operations and liquidity.
The Company is involved in claims litigation arising in the ordinary course of business. The Company is also involved in legal actions that do not arise in the ordinary course of business, some of which assert claims for substantial amounts. Pervasive or significant changes in the judicial environment relating to matters such as trends in the size of jury awards, developments in the law relating to the liability of insurers or tort defendants, and rulings concerning the availability or amount of certain types of damages could cause our ultimate liabilities to change from our current expectations. Changes in federal or state tort litigation laws or other applicable law could have a similar effect. It is not possible to predict changes in the judicial and legislative environment and their impact on the outcome of litigation filed against the Company. Our business, financial condition, results of operations and liquidity could also be adversely affected if judicial or legislative developments cause our ultimate liabilities to increase from current expectations.
Potential changes in domestic and foreign regulation may increase our business costs and required capital levels, which could have a material adverse effect on our business, financial condition, results of operations and liquidity.
We are subject to extensive U.S. and non-U.S. laws and regulations that are complex, subject to change and often conflicting in their approach or intended outcomes. Compliance with these laws and regulations is costly and can affect our strategy, as well as the demand for and profitability of the products we offer.
State insurance laws regulate most aspects of our U.S. insurance businesses, and our insurance subsidiaries are regulated by the insurance departments of the states in which they are domiciled, licensed or authorized to conduct business. These regulatory regimes are generally designed to protect the interests of policyholders rather than insurers, their shareholders and other investors. U.S. state laws grant insurance regulatory authorities broad administrative powers with respect to, among other things, licensing and authorization for lines of business, statutory capital and reserve requirements, limitations on the types and amounts of certain investments, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and non-financial components of an insurer's business.
Because these laws and regulations are complex and sometimes inexact, there is also a risk that our business may not fully comply with a particular regulator's or enforcement authority's interpretation of a legal, accounting, or reserving issue or that such regulator’s or enforcement authority’s interpretation may change over time to our detriment, or expose us to different or additional regulatory risks. The application of these regulations and guidelines by insurers involves interpretations and judgments that may not be consistent with the opinion of state insurance departments. We cannot provide assurance that such differences of opinion will not result in regulatory, tax or other challenges to the actions we have taken to date. The result of those potential challenges could require us to increase levels of statutory capital and reserves or incur higher operating and/or tax costs.
In addition, our international operations are subject to regulation in the relevant jurisdictions in which they operate (primarily the Japan Financial Services Agency), which in many ways is similar to the state regulation outlined above, with similar related restrictions and obligations. Our asset management businesses are also subject to extensive regulation in the various jurisdictions where they operate.
These laws and regulations are primarily intended to protect investors in the securities markets or investment advisory clients and generally grant supervisory authorities broad administrative powers. Compliance with these laws and regulations is costly, time consuming and personnel intensive, and may have an adverse effect on our business, financial condition, results of operations and liquidity. See the risk factor, “The impact of regulatory initiatives, including the enactment of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, could have a material adverse impact on our business, financial condition, results of operations and liquidity.”
Changes in federal or state tax laws could adversely affect our business, financial condition, results of operations and liquidity.
Changes in federal or state tax laws could have a material adverse effect on our profitability and financial condition, and could result in our incurring materially higher corporate taxes. The Company’s tax return reflects certain items, including but not limited to, tax-exempt bond interest, dividends received deductions, tax credits (such as foreign tax credits), and insurance reserve deductions. There is an increasing risk that, in the context of deficit reduction or overall tax reform, federal and/or state tax legislation could modify or eliminate these items, impacting the Company, its investments, investment strategies, and/or its policyholders. Although the specific form of any such legislation is uncertain, changes to the taxation of municipal bond interest could materially and adversely impact the value of those bonds, limit our investment choices and depress portfolio yield. Elimination of the dividends received deduction could increase the Company’s actual tax rate, thereby reducing earnings. Conversely, if income tax rates decline itthis could adversely affect the Company's abilityCompany’s results of operations.
Further, while The Hartford continues to realizeactively consider alternatives for reducing the benefits of its deferred tax assets.
Moreover, manysize and risk of the products thatannuity book of business, opportunities to do so may be limited and any initiatives pursued may not achieve the Company previously sold benefit from oneanticipated benefits and may negatively impact our statutory capital, net income, core earnings or more formsshareholders’ equity. The Hartford could pursue transactions or other strategic options to reduce the size and risk of tax-favored status under current federal and state income tax regimes. For example, the Company previously soldTalcott Resolution's annuity contracts that allowed policyholders to defer the recognitionbook of taxable income earned within the contract. Because the Company no longer sells these products, changes in the future taxation of life insurance and/or annuity contracts will not adversely impact future sales. If, however, the treatment of earnings accrued inside an annuity contract was changed prospectively, and the tax-favored status of existing contracts was grandfathered, holders of existing contracts would be less likely to surrender,business which would make running off our existing annuity business more difficult.
Changes in accounting principles and financial reporting requirements could result in material changesa significant loss to our reported results of operationsthe Company.
Our businesses may suffer and financial condition.
U.S. GAAP and related financial reporting requirements are complex, continually evolving andwe may be subject to varied interpretation by the relevant authoritative bodies. Such varied interpretations could result from differing views related to specific facts and circumstances. Changes in U.S. GAAP and financial reporting requirements, or in the interpretation of U.S. GAAP or those requirements, could result in material changes to our reported results and financial condition. Moreover, the SEC is currently evaluating International Financial Reporting Standards (“IFRS”) to determine whether IFRS should be incorporated into the financial reporting system for U.S. issuers. Certain of these standards could result in material changes to our reported results of operations.
Other Operational Risks
The success of the realignment of The Hartford's businesses, its capital management plan, expense reduction initiatives and other actions, which may include acquisitions, divestitures or restructurings, are subject to material challenges, uncertainties and risks which could adversely affect our business, financial condition, results of operations and liquidity.
The success of The Hartford's strategic realignment, capital management plan, and expense reduction initiatives remain subject to material challenges, uncertainties and risks. The Hartford may not achieve all of the benefits it expects to derive from its plan to repurchase $2 billion of its equity and reduce its debt by $656 over the course of 2014 and 2015, its initiatives to reduce expenses may not be successful, and the Company may be adversely affected by The Hartford's decision to focus on its Property and Casualty, Group Benefits and Mutual Fund businesses, place its Individual Annuity business into runoff and sell the Individual Life and Retirement Plans businesses. In addition, The Hartford may take actions beyond its business realignment, capital management plan and expense reduction initiatives, which may include acquisitions, divestitures or restructurings. Any such actions may involve additional risks and uncertainties that could negatively impact the Company’s business, financial condition, results of operations and liquidity.
Ifincur substantial costs if we are unable to maintain the availability ofaccess our systems and safeguard the security of our data due toin the occurrenceevent of disasters or a disaster, cyber breach or other information security incident, our ability to conduct business may be compromised, we may incur substantial costs and suffer other negative consequences, all of which may have a material adverse effect on our business, financial condition, results of operations and liquidity.incident.
We use computer systemstechnology to process, store, retrieve, evaluate and utilize customer and company data and information. Our computer, information technology and telecommunications systems, in turn, interface with and rely upon third-party systems or maintenance. Our business is highly dependent onsystems. We and our ability, and the ability of certain third parties,party vendors must be able to access our systems to perform necessary business functions, including, without limitation, conducting our financial reporting and analysis, providing insurance quotes, processingprocess premium payments, makingmake changes to existing policies, filingfile and payingpay claims administeringand administer variable annuity products, providingprovide customer support, and managingmanage our investment portfolios and hedging programs.hedge programs, report on financial results and perform other necessary business functions.
Systems failures or outages could compromise our ability to perform ourthese business functions in a timely manner, which could harm our ability to conduct business and hurt our relationships with our business partners and customers. In the event of a disaster such as a natural catastrophe, a pandemic, an industrial accident, a cyber-attack, a blackout, a terrorist attack (including conventional, nuclear, biological, chemical or radiological) or war, systems upon which we rely may be inaccessible to our employees, customers or business partners for an extended period of time. Even if our employees and business partners are able to report to work, they may be unable to perform their duties for an extended period of time if our data or systems used to conduct our business are disabled or destroyed.
Moreover, our computer
Our systems have been, and will likely continue to be, subject to computer viruses or other malicious codes, unauthorized access, cyber-attacks or other computer related penetrations. The frequency and sophistication of such threats continue to increase as well. While, to date, The Hartfordthe Company is not aware of having experienced a material breach of cybersecurity,our cyber security systems, administrative and technical controls as well as other preventive actions we take to reduce the risk of cyber incidents and protect our information technology may be insufficient to prevent physical and electronic break-ins, denial of service, cyber-attacks or other security breaches to our computer systems or those of third parties with whom we do business. Such an event could compromise our confidential information as well as that of our clients and third parties, with whom we interact, impede or interrupt our business operations and may result in other negative consequences, including remediation costs, loss of revenue, additional regulatory scrutiny and litigation and reputational damage.
In addition, we routinely transmit, receive and storeto third parties personal, confidential and proprietary information, which may be related to employees and customers, by email and other electronic means.means, along with receiving and storing such information on our systems. Although we attempt to keep such information confidential, we may be unable to utilize such capabilitiessecure the information in all events, especially with clients, vendors, service providers, counterparties and other third parties who may not have or use appropriate controls to protect confidential information.
Furthermore, certain of our businesses are subject to compliancemust comply with regulations enacted by U.S. federal and state governments, the European Union, Japan or other jurisdictions or enacted by various regulatory organizations or exchanges relating to control the privacy of the information of clients, employees or others.customer, employee and third party data. A misuse or mishandling of confidential or proprietary information being sent to or received from an employee or third party could result in legal liability, regulatory action and reputational harm.
Third parties, to whom we outsource certain of our functionsincluding third party administrators, are also subject to cyber-breaches of confidential information, along with the other risks outlined above, any one of which may result in our incurring substantial costs and other negative consequences, including a material adverse effect on our business, reputation, financial condition, results of operations and liquidity.
While we maintain cyber liability insurance that provides both third party liability and first party insurance coverages, our insurance may not be sufficient to protect against all loss.
Our framework for managing operational risks may not be effective in mitigating risk and lossPerformance problems due to us that could adversely affect our businesses.
Our business performance is highly dependent on our ability to manage operational risks that arise from a large number of day-to-day business activities, including claims processing, servicing, investment, financial and tax reporting, compliance with regulatory requirementsoutsourcing and other activities, many of which are very complex and for some of which we rely on third parties. We seek to monitor and control our exposure to risks arising out of these activities through a risk control framework encompassing a variety of reporting systems, internal controls, management review processes and other mechanisms. We cannot be completely confident that these processes and procedures will effectively control all known risks or effectively identify unforeseen risks, or that our employees and third-party agents will effectively implement them. Management of operational risks can fail for a number of reasons, including design failure, systems failure, failures to perform, cyber security attacks, human error, or unlawful activities on the part of employees or third parties. In the event that our controls are not effective or not properly implemented, we could suffer financial or other loss, disruption of our businesses, regulatory sanctions or damage to our reputation. Losses resulting from these failures can vary significantly in size, scope and scale and may have material adverse effects on our financial condition or results of operations.
If we experience difficulties arising from outsourcing and similar third-party relationships may compromise our ability to conduct business may be compromised, which may have an adverse effect on our business and results of operations.business.
We outsource certain business and administrative functions and rely on third-party vendors to perform certain functions or provide certain services on our behalf. As we continue to focus on reducing the expense necessary to support our operations, webehalf and have become increasingly committed to outsourcing strategies for certain technologya significant number of IT and business functions. We may also seekprocesses outsourced with a single vendor. If we are unable to reduce coordination costs and take advantagereach agreement in the negotiation of economies of scale by transitioning multiple functions and services to a small number of third-party providers. We periodically negotiate provisions andagreements or renewals of these relationships, and there can be no assurance that such terms will remain acceptable to us or such third parties. If our continuing relationship with certain third-party providers, particularly those on which we rely for multiple functions or services, is interrupted, or if such third-party providers experience disruptions or do not perform as anticipated, or we experience problems with a transition, we may experience operational difficulties, an inabilitywe may be unable to meet our obligations (including, but not limited to policyholder obligations), increasedcustomers and claimants, and incur higher costs and a loss of business thatwhich may have a material adverse effect on our business and results of operations. For other risks associated with our outsourcing of certain functions, see the immediately preceding risk factor, “If we are unable to maintain the availability of our systems and safeguard the security of our data due to the occurrence of disasters or a cyber or other information security incident, ourfactor.
The Hartford's ability to conduct business may be compromised, we may incur substantial costsexecute on its expense reduction initiatives and suffer other negative consequences, all ofactions, which may have ainclude acquisitions, divestitures or restructurings, is subject to material adverse effectchallenges, uncertainties and risks.
The Hartford's initiative to reduce expenses so that its ongoing businesses, along with the Company's run-off businesses, remain or become cost efficient may not be successful and The Hartford may not be able to reduce corporate and shared services expenses in the manner and on the schedule it currently anticipates. The Hartford may take further actions beyond the capital management plan, which may include acquisitions, divestitures or restructurings, that may involve additional uncertainties and risks that negatively impact our business, financial condition, results of operations and liquidity.”
We may not be able to protect our intellectual property and may be subject to infringement claims.
We rely on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. Although we use a broad range of measures to protect our intellectual property rights, third parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect our copyrights, trademarks, patents, trade secretsintellectual property and know-how or to determine theirits scope, validity or enforceability, which represents a diversion ofcould divert significant resources that may be significant in amount and may not prove successful. The loss ofLitigation to enforce our intellectual property protection or therights may not be successful and cost a lot of money. The inability to secure or enforce the protection of our intellectual property assets could harm our reputation and have a material adverse effect on our business and our ability to compete.
We also may be subject to costly litigation in the event that another party alleges our operations or activities infringe upon their intellectual property rights. Third parties may have,rights, including patent rights, or may eventually be issued, patents that could be infringed by our products, systems, methods, processes or services. Any party that holds such a patent could make a claim of infringement against us. We may be subject to patent claims from certain individuals and companies who have acquired patent portfolios for the sole purpose of asserting such claims against other companies. We may also be subject to claims by third parties for breach of copyright, trademark, trade secret orviolate license usage rights. Any such intellectual property claims and any resulting litigation could result in significant expense and liability for damages. If we were found to have infringed a third-party patent or other intellectual property rights, we could incur substantial liability,damages, and in some circumstances we could be enjoined from providing certain products or services to our customers, or utilizing and benefiting from certain methods, processes, systems,patent, copyrights, trademarks, trade secrets or licenses, or alternatively could be required to enter into costly licensing arrangements with third parties, all of which could have a material adverse effect on our business, results of operations and financial condition.
Regulatory and Legal Risks
Regulatory and legislative developments could have a material adverse impact on our business, financial condition, results of operations and liquidity.
In the U.S., regulatory initiatives and legislative developments may significantly affect our operations in ways that we cannot predict.
For example, potential repeal and replacement of the Affordable Care Act and modification of the Dodd-Frank Act could have unanticipated consequences for The Hartford and its businesses. With respect to the potential repeal and replacement of the Affordable Care Act, see Part II, Item 1B. UNRESOLVED STAFF COMMENTS7, MD&A - Capital Resources and Liquidity - Contingencies - Regulatory and Legal Developments.
None.The Dodd-Frank Act was enacted on July 21, 2010, mandating changes to the regulation of the financial services industry that could adversely affect our financial condition and results of operations. The Dodd-Frank Act requires central clearing of certain derivatives transactions and greater margin requirements for those transactions, which increases the costs of our hedging program. In addition, the proprietary trading and market making limitation of the Volcker Rule could adversely affect the pricing and liquidity of our investment securities and limitations of banking entity involvement in and ownership of certain asset-backed securities transactions could adversely affect the market for insurance-linked securities, including catastrophe bonds. It is unclear whether and to what extent Congress will make changes to the Dodd-Frank Act, and how those changes might impact The Hartford, its business, financial conditions, results of operations and liquidity.
Item 2. PROPERTIESWe are subject to extensive laws and regulations that are complex, subject to change and often conflicting in their approach or intended outcomes. Compliance with these laws and regulations can increase cost, affect our strategy, and constrain our ability to adequately price our products.
The Company has operations located throughoutand its insurance subsidiary are regulated by the insurance departments of the states in which we are domiciled, licensed or authorized to conduct business. State regulations generally seek to protect the interests of policyholders rather than an insurer or the insurer’s shareholders and other investors. U.S. state laws grant insurance regulatory authorities broad administrative powers with respect to, among other things, licensing and authorizing lines of business, approving policy forms and premium rates, setting statutory capital and reserve requirements, limiting the types and amounts of certain investments and restricting underwriting practices. State insurance departments also set constraints on domestic insurer transactions with affiliates and dividends and, in many cases, must approve affiliate transactions and extraordinary dividends as well as strategic transactions such as acquisitions and divestitures.
In addition, future regulatory initiatives could be adopted at the federal or state level that could impact the profitability of our businesses. For example, the NAIC and state insurance regulators are continually reexamining existing laws and regulations, specifically focusing on modifications to statutory accounting principles, interpretations of existing laws and the development of new laws and regulations. The NAIC continues to enhance the U.S. system of insurance solvency regulation, with a particular focus on group supervision, risk-based capital, accounting and financial reporting, enterprise risk management and reinsurance. Any proposed or future legislation or NAIC initiatives, if adopted, may be more restrictive on our ability to conduct business than current regulatory requirements or may result in higher costs or increased statutory capital and reserve requirements. In addition, the Federal Reserve Board and the International Association of Insurance Supervisors ("IAIS") each have initiatives underway to develop insurance group capital standards. While the Company would not currently be subject to either of these capital standard regimes, it is possible that in the future standards similar to what is being contemplated by the Federal Reserve Board or the IAIS could apply to the Company. The NAIC is in the process of developing a U.S. group capital calculation that will employ a methodology based on aggregated risk-based capital.
Further, a particular regulator or enforcement authority may interpret a legal, accounting, or reserving issue differently than we have, exposing us to different or additional regulatory risks. The application of these regulations and guidelines by insurers involves interpretations and judgments that may be challenged by state insurance departments. The result of those potential challenges could require us to increase levels of statutory capital and reserves or incur higher operating and/or tax costs.
In addition, our asset management businesses are also subject to extensive regulation in the various jurisdictions where they operate. These laws and regulations are primarily intended to protect investors in the securities markets or investment advisory clients and generally grant supervisory authorities broad administrative powers. Compliance with these laws and regulations is costly, time consuming and personnel intensive, and may have an adverse effect on our business, financial condition, results of operations and liquidity.
Unfavorable judicial or legislative developments in claim litigation could adversely affect our results of operations or financial condition.
The Company is involved in claims litigation arising in the ordinary course of business and is also involved in legal actions outside of the ordinary course, some of which assert claims for substantial amounts. Significant changes in the legal environment could cause our ultimate liabilities to change from our current expectations. Such changes could be judicial in nature, like trends in the size of jury awards, developments in the law relating to tort liability or the liability of insurers, and rulings concerning the scope of insurance coverage or the amount or types of damages covered by insurance. Legislative developments, like changes in federal or state laws relating to the liability of policyholders or insurers, could have a similar effect. It is impossible to forecast such changes reliably, much less to predict how they might affect our loss reserves or how those changes might adversely affect our ability to price our insurance products appropriately. Thus, significant judicial or legislative developments could adversely affect the Company’s business, financial condition, results of operations and liquidity.
Changes in federal or state tax laws could adversely affect our business, financial condition, results of operations and liquidity.
Changes in federal or state tax laws and tax rates could have a material adverse effect on our profitability and financial condition, and could result in our incurring materially higher corporate taxes. For example, if tax rates decline, our deferred tax asset would be reduced, resulting in a charge against earnings. In addition, a reduction in tax rates or change in laws could adversely affect the Company’s ability to realize the benefits of its net operating loss carryovers and alternative minimum tax credits. In addition, a reduction in tax rates could increase the level of statutory reserves the Company must hold which could adversely affect statutory surplus.
In addition, the Company’s tax return reflects certain items such as dividends received deductions, tax credits, and insurance reserve deductions. There is an increasing risk that, in the context of deficit reduction or overall tax reform, federal and/or state tax legislation could modify or eliminate these items, impacting the Company, its investments, investment strategies, and/or its policyholders. In the context of deficit reduction or overall tax reform, federal and/or state tax legislation could modify or eliminate provisions of current tax law that are beneficial to the Company, including dividends received deduction, tax credits, and insurance reserve deductions, or could impose new taxes such as on goods or services purchased overseas.
Moreover, many of the life and annuity products that the Company previously sold benefit from one or more forms of tax-favored status under current federal and state income tax regimes. For example, the Company previously sold annuity contracts that allowed policyholders to defer the recognition of taxable income earned within the contract. Because the Company no longer sells these products, changes in the future taxation of life insurance and/or annuity contracts will not adversely impact future sales. If, however, the tax treatment of earnings accrued inside an annuity contract changed prospectively, and the tax favored status of existing contracts were grandfathered, holders of existing contracts would be less likely to surrender, which would make running off our existing life and annuity business more difficult.
Changes in accounting principles and financial reporting requirements could adversely affect our results of operations or financial condition.
As an SEC registrant, we are currently required to prepare our financial statements in accordance with U.S. GAAP, as promulgated by the Financial Accounting Standards Board ("FASB"). Accordingly, we are required to adopt new guidance or interpretations which may have a material effect on our results of operations and financial condition that is either unexpected or has a greater impact than expected. For a description of changes in accounting standards that are currently pending and, if known, our estimates of their expected impact, see Note 1 of the consolidated financial statements.
The FASB is working on several projects that could result in significant changes in GAAP, including how we account for our long-duration insurance contracts, which primarily relate to our life and annuity products. In particular, liabilities for life-contingent fixed annuities would be discounted using current high-quality fixed-income instrument yields rather than using historical yields, likely resulting in greater volatility in other comprehensive income. As a result, the adoption of these future accounting standards relating to insurance contracts could have a material adverse effect on our financial condition, including equity.
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| Item 1B. | UNRESOLVED STAFF COMMENTS |
None.
The Company's principal executive offices are located in Simsbury, Connecticut. The executive offices are owned by our parent company, Hartford, LifeConnecticut and Accident Insurance Company (“HLA”). The Companyit owns the facilities located in Windsor, Connecticut. The Company believes its properties and facilities are suitable and adequate for current operations. The Company also owns a facility located in Woodbury, Minnesota used in the operations of various business of The Hartford.
Item 3. LEGAL PROCEEDINGS
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 insuredswith respect to life, disability and as an insurer defending coverage claims brought against it.accidental death and dismemberment insurance policies and with respect to annuity contracts. The Company accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves.reserves for future policy benefits. 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 and in addition to, putative state and federal class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, bad faith in the handling of insurance claims and improper sales practices in connection with the sale of certain life insurance products and improper claim practices with respect to certain group benefits claims. The Companyinvestment products. Some of these actions also is involved in individual actions in whichseek punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims.damages. 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, theit is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows in particular quarterly or annual periods.
Item 4. MINE SAFETY DISCLOSURES
| |
| Item 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| |
| Item 5. | MARKET FOR HARTFORD LIFE INSURANCE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Item 5. MARKET FOR HARTFORD LIFE INSURANCE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
All of the Company’s outstanding shares are ultimately owned by Hartford Life, and Accident Insurance Company,Inc, which is a subsidiary of The Hartford. As of February 28, 2014,24, 2017, the Company had issued and outstanding 1,000 shares of common stock, $5,690 par value per share. There is no established public trading market for the Company’s common stock.
For a discussion regarding the Company’s payment of dividends, and the restrictions related thereto, see the Capital Resources and Liquidity section of the MD&A under “Dividends”.
Item 6. SELECTED FINANCIAL DATA
| |
| Item 6. | SELECTED FINANCIAL DATA |
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in millions except for per share data, unless otherwise stated)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Hartford Life Insurance Company and its subsidiaries (“Hartford Life Insurance Company” or the “Company”) as of and for the year ended December 31, 20132016 compared with the comparable 20122015 periods. Management’s narrative analysis of the results of operations is presented pursuant to General Instruction I (2) (a) of Form 10-K. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes beginning on page F-1. Certain reclassifications have been made to prior year financial information to conform to the current year presentation.
INDEX
CONSOLIDATED RESULTS OF OPERATIONS
Operating Summary
|
| | | | | | |
| | 2013 | 2012 |
| Fee income and other | $ | 1,462 |
| $ | 2,956 |
|
| Earned premiums | 184 |
| 93 |
|
| Net investment income: | | |
| Securities available-for-sale and other | 1,681 |
| 2,535 |
|
| Equity securities, trading | 2 |
| 1 |
|
| Total net investment income | 1,683 |
| 2,536 |
|
| Net realized capital gains (losses) [1] | 326 |
| (1,481 | ) |
| Total revenues | 3,655 |
| 4,104 |
|
| Benefits, losses and loss adjustment expenses | 1,758 |
| 2,900 |
|
| Amortization of deferred policy acquisition costs and present value of future profits | 228 |
| 324 |
|
| Insurance operating costs and other expenses | (401 | ) | 268 |
|
| Reinsurance loss on disposition, including reduction in goodwill of $250 and $61, respectively | 1,491 |
| 61 |
|
| Dividends to policyholders | 18 |
| 20 |
|
| Total benefits, losses and expenses | 3,094 |
| 3,573 |
|
| Income from continuing operations before income taxes | 561 |
| 531 |
|
| Income tax expense | 49 |
| 36 |
|
| Income from continuing operations, net of tax | 512 |
| 495 |
|
| Income (loss) from discontinued operations, net of tax | (41 | ) | 61 |
|
| Net income | 471 |
| 556 |
|
| Net income attributable to the noncontrolling interest | 6 |
| 2 |
|
| Net income attributable to Hartford Life Insurance Company | $ | 465 |
| $ | 554 |
|
|
| | | | | | |
| | 2016 | 2015 |
| Fee income and other | $ | 969 |
| $ | 1,097 |
|
| Earned premiums | 203 |
| 92 |
|
| Net investment income | 1,373 |
| 1,456 |
|
| Net realized capital losses | (163 | ) | (146 | ) |
| Total revenues | 2,382 |
| 2,499 |
|
| Benefits, losses and loss adjustment expenses | 1,437 |
| 1,402 |
|
| Amortization of deferred policy acquisition costs | 114 |
| 69 |
|
| Insurance operating costs and other expenses | 472 |
| 524 |
|
| Reinsurance gain on disposition | — |
| (28 | ) |
| Dividends to policyholders | 3 |
| 2 |
|
| Total benefits, losses and expenses | 2,026 |
| 1,969 |
|
| Income before income taxes | 356 |
| 530 |
|
| Income tax expense | 74 |
| 30 |
|
| Net income | $ | 282 |
| $ | 500 |
|
[1] IncludesDecember 31, 2016 compared to the year ended December 31, 2015
The decrease in net income from 2015 to 2016 was primarily due to higher net realized capital gains (losses) on business dispositions of $1,561losses, lower fee income, lower net investment income and higher benefits, losses and loss adjustment expenses and DAC amortization, partially offset by higher earned premiums and lower insurance operating costs and other expenses.
Fee income and other for the year ended December 31, 2013.
December 31, 20132016, decreased as compared to the prior year primarily due to the continued run-off of the variable annuity block of business. Earned premiums and benefits, losses and loss adjustment expenses increased for the year ended December 31, 20122016, as compared to the prior year period, primarily due to the impact of the recapture of a reinsurance agreement with Hartford Life and Accident Insurance Company ("HLA"). Effective August 1, 2016, the Company recaptured a reinsurance agreement with HLA, a wholly owned subsidiary of Hartford Life, Inc. whereby the Company had ceded a single group annuity contract to HLA under a 100% quota share agreement. As a result of this recapture, the Company received a return of premium of $90 and increased reserves by $63 resulting in a recognized pre-tax gain of approximately $27.
The increase in DAC amortization for the year ended December 31, 2016 was primarily driven by a higher unfavorable unlock due to the reduction of the fixed annuity DAC balance to zero. For further discussion of the unlock, see MD&A - Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and Other Universal Life-Type Contracts.
NetTotal net investment income decreased for the year ended December 31, 20132016, as compared to the prior year primarily due to a decline in net investment incomelower make-whole payments on fixed maturities and prepayment penalties on mortgage loans, as a result of the sale of the Retirement Planswell as lower asset levels and Individual Life businesses in January 2013 and a slight decline in yield offset by the change in the modco reinsurance agreement.reinvesting at lower interest rates. For further discussion, of net investment income, see MD&A - Investments Results, Net Investment Income (Loss). For further discussionIncome.
Net realized capital losses of the reinsurance loss on disposition see Note 2 - Business Dispositions of Notes to the Consolidated Financial Statements.
Hartford Life and Annuity Insurance Company, a subsidiary of the Company, has a modified coinsurance ("modco") and coinsurance with funds withheld reinsurance agreement with White River Life Reinsurance, an affiliated captive insurance company ("affiliate modco reinsurance agreement"). The affiliate modco reinsurance agreement increased earnings by $104$163 for the year ended December 31, 2013, and decreased earnings by $212 for 2012. The most significant fluctuations of the modco agreement were within2016, increased from net realized capital gains (losses) and insurance operating costs and other expenses, which arelosses of $146, for the prior year. Net realized capital losses for 2016 were primarily due to changes in reserves and hedging costs associated with the reinsured block of business. For further discussionlosses on the affiliate modco reinsurance agreement see Note 13 - Transactions with Affiliatesvariable annuity hedge program, driven, in part by a decline in the value of Notesequity derivatives, partially offset by gains resulting from policyholder behavior and the outperformance of the underlying actively managed funds compared to the Consolidated Financial Statements.
their respective indices. Net realized capital gains (losses), excludinglosses for 2015 were primarily due to losses from the impacts of the affiliate modco reinsurance agreement and the net realized gains on business disposition, decreased by $219 for the year ended December 31, 2013, and increased $1,209 for the year ended December 31, 2012.variable annuity hedge program. For further discussion of net realized capital gains (losses),information, see MD&A - Investment Results, Net Realized Capital Gains (Losses).
Insurance operating costs and expenses decreased from 2015 to 2016 largely due to the runoff of the business requiring less staff and other operating expenses.
Income Taxes
The Company's effective tax rate differs from the U.S. Federal statutory rate of 35% for the years ended December 31, 2013in 2016 and 20122015, primarily due to the separate account dividends received deduction (“DRD”).deduction. Income tax expense for the year ended December 31, 2015, included an income tax benefit of $36 related to intercompany tax settlements. For a reconciliation of the income tax provision at the U.S. Federal statutory rate to the provision for income taxes, see Note 119 - Income Taxes of Notes to Consolidated Financial Statements .Statements.
The separate account DRD is estimated for the current year using information from the most recent return, adjusted for current year equity market performance and other appropriate factors, including estimated levels of corporate dividend payments and level of policy owner equity account balances. The actual current year DRD can vary from estimates based on, but not limited to, changes in eligible dividends received in the mutual funds, amounts of distributions from these mutual funds, amounts of short-term capital gains at the mutual fund level and the Company’s taxable income before the DRD. The Company recorded benefits of $135 and $140 related to the separate account DRD for the years ended December 31, 2013 and 2012, respectively. These amounts included benefits (charges) related to prior years’ tax returns of $1 and $(4) in the years ended December 31, 2013 and 2012, respectively.
The Company receives a foreign tax credit for foreign taxes paid including payments from its separate account assets. This credit reduces the company’s U.S. tax liability. The separate account foreign tax credit is estimated for the current year using information from the most recent filed return, adjusted for the change in the allocation of separate account investments to the international equity markets during the current year. The actual current year foreign tax credit can vary from the estimates due to actual foreign tax credits passed through from the mutual funds. The Company recorded benefits of $7 and $9 related to separate account foreign tax credit for the years ended December 31, 2013 and 2012, respectively.
INVESTMENT RESULTS
Composition of Invested Assets
| | | | December 31, 2013 | December 31, 2012 | December 31, 2016 | December 31, 2015 |
| | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent |
| Fixed maturities, available-for-sale ("AFS"), at fair value | 28,163 |
| 74.6 | % | 49,404 |
| 79.8 | % | $ | 23,819 |
| 77.1 | % | $ | 24,657 |
| 77.9 | % |
| Fixed maturities, at fair value using the fair value option ("FVO") | 791 |
| 2.1 | % | 1,010 |
| 1.6 | % | 82 |
| 0.3 | % | 165 |
| 0.5 | % |
| Equity securities, AFS, at fair value | 372 |
| 1.0 | % | 400 |
| 0.6 | % | |
| Equity securities, AFS, at fair value [1] | | 152 |
| 0.5 | % | 459 |
| 1.5 | % |
| Mortgage loans | 3,470 |
| 9.2 | % | 4,935 |
| 8.0 | % | 2,811 |
| 9.1 | % | 2,918 |
| 9.2 | % |
| Policy loans, at outstanding balance | 1,416 |
| 3.7 | % | 1,951 |
| 3.1 | % | 1,442 |
| 4.7 | % | 1,446 |
| 4.6 | % |
| Limited partnerships and other alternative investments | 1,329 |
| 3.5 | % | 1,372 |
| 2.2 | % | 930 |
| 3.0 | % | 1,216 |
| 3.8 | % |
| Other investments [1] | 270 |
| 0.7 | % | 582 |
| 0.9 | % | |
| Other investments [2] | | 293 |
| 0.9 | % | 212 |
| 0.7 | % |
| Short-term investments | 1,952 |
| 5.2 | % | 2,354 |
| 3.8 | % | 1,349 |
| 4.4 | % | 572 |
| 1.8 | % |
| Total investments excluding equity securities, trading | 37,763 |
| 100 | % | 62,008 |
| 100 | % | |
| Equity securities, trading, at fair value [2] | 12 |
| | 1,847 |
| | |
| Total investments | $ | 37,775 |
| | $ | 63,855 |
| | $ | 30,878 |
| 100 | % | $ | 31,645 |
| 100 | % |
| |
| [1] | Primarily relates to derivative instruments.Includes equity securities at fair value using the FVO of $281 as of December 31, 2015. The Company did not hold any equity securities, FVO as of December 31, 2016. |
| |
| [2] | As of December 31, 2012, these assets primarily supported the European variable annuity business which was sold in the fourth quarter of 2013. Changes in these balances are also reflected in the respective liabilities.Primarily relates to derivative instruments. |
Total investments decreased since December 31, 2012, principally due to the sale2015, primarily as a result of the Retirement Plans and Individual Life businesses resulting in the transfer of fixed maturities, AFS, fixed maturities, FVO, equity securities, AFS, mortgage loans, and policy loans with a total carrying value of $16.9 billion in January 2013. In addition, the sale of the U.K. variable annuity business, HLIL, in the fourth quarter of 2013 resulted in a decline in the carrying value of fixed maturities, AFS and equity securities, trading of $469 and $1.7 billion, respectively. Refer to Note 2 - Business Dispositions of Notes to Consolidated Financial Statements for further discussion of these transactions. The remaining decrease in total invested assets is primarily due to decreases in fixed maturities, AFS, short-termequity, AFS and limited partnerships and other alternative investments, and otherpartially offset by an increase in short-term investments. The decrease in fixed maturities, AFS was due to aprimarily the result of the continued runoff of the Company's business. The decline in valuations due to an increase in interest rates, reductions in dollar rolls and repurchase agreements, and capital management activities.equity, AFS was primarily the result of sales which were reinvested into other assets classes. The decrease in limited partnerships and other alternative investments was primarily driven by redemptions in hedge funds which were reinvested into other asset classes. The increase in short-term investments iswas primarily attributable to a decline in derivative collateral held due to decreases in derivative market values. The decline in otherholding more short-term investments was largely due to a decline in derivative market value primarily related to the variable annuity hedge program.until those assets are reinvested into longer duration asset classes.
Net Investment Income
| | | | For the years ended December 31, | For the years ended December 31, |
| | 2013 | 2012 | 2016 | 2015 |
| (Before-tax) | Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] | Amount | Yield [1] |
| Fixed maturities [2] | $ | 1,253 |
| 4.3 | % | $ | 1,953 |
| 4.4 | % | $ | 1,049 |
| 4.6 | % | $ | 1,095 |
| 4.7 | % |
| Equity securities, AFS | 8 |
| 2.1 | % | 11 |
| 2.7 | % | |
| Equity securities | | 8 |
| 3.7 | % | 7 |
| 2.1 | % |
| Mortgage loans | 172 |
| 4.8 | % | 248 |
| 5.2 | % | 135 |
| 4.7 | % | 152 |
| 5.0 | % |
| Policy loans | 82 |
| 5.7 | % | 116 |
| 6.0 | % | 83 |
| 5.8 | % | 82 |
| 5.7 | % |
| Limited partnerships and other alternative investments | 119 |
| 9.2 | % | 85 |
| 6.3 | % | 86 |
| 8.3 | % | 97 |
| 8.1 | % |
| Other investments [3] | 123 |
| | 199 |
| | |
| Other [3] | | 64 |
| | 82 |
| |
| Investment expense | (76 | ) | | (77 | ) | | (52 | ) | | (59 | ) | |
| Total securities AFS and other | $ | 1,681 |
| 4.4 | % | $ | 2,535 |
| 4.5 | % | |
| Equity securities, trading | 2 |
| | 1 |
| | |
| Total net investment income | $ | 1,683 |
| | $ | 2,536 |
| | $ | 1,373 |
| 4.6 | % | $ | 1,456 |
| 4.7 | % |
| Total securities, AFS and other excluding limited partnerships and other alternative investments | 1,562 |
| 4.2 | % | 2,450 |
| 4.4 | % | |
| Total net investment income excluding limited partnerships and other alternative investments | | $ | 1,287 |
| 4.5 | % | $ | 1,359 |
| 4.6 | % |
| |
| [1] | Yields calculated using annualized net investment income (excluding income related to equity securities, trading) divided by the monthly average invested assets at cost, amortized cost, or adjusted carrying value, as applicable, excluding equity securities, trading, repurchase agreement and dollar rollsecurities lending collateral, if any, and consolidated variable interest entity non-controlling interests. Yield calculations for the year ended December 31, 2013 exclude assets transferred due to the sale of the Retirement Plans and Individual Life businesses. Yield calculations for all periods exclude income and assets associated with the disposal of the HLIL business. Yields by asset type exclude investment expenses. derivatives book value. |
| |
| [2] | Includes net investment income on short-term investments. |
| |
| [3] | Primarily includes income from derivatives that qualify for hedge accounting and hedge fixed maturities. |
Year ended December 31, 20132016, compared to the year ended December 31, 20122015
Total net investment income declineddecreased primarily due to a decrease inlower make-whole payments on fixed maturities and prepayment penalties on mortgage loans, as well as lower asset levels as a result of the sale of the Retirement Plans and Individual Life businesses in January 2013, but also reflects a slight decline in yield. Refer to Note 2 - Business Dispositions of the Notes to Consolidated Financial Statements for further discussion of these transactions. This decline was partially offset by higher income from limited partnerships, due to underlying real estate and private equity funds selling underlying investments.reinvesting at lower interest rates.
The annualized net investment income yield, excluding limited partnerships and other alternative investments, has declineddecreased slightly, to 4.2%4.5% in 20132016, versus 4.4%4.6% in 2012.2015. The declinedecrease was primarily attributable to the divestiture of Individual Lifehigher income received in 2015 from previously impaired securities, make-whole payments on fixed maturities and Retirement Plans businesses. The invested assets transferred associated with the divested Individual Life and Retirement Plans businesses had a carrying value of $16.9 billion and an average book yield, including the impact of associated derivatives, of approximately 5.0%. The average reinvestment rate for the year ended December 31, 2013 was approximately 3.6%, excluding treasuryprepayment penalties on mortgage loans. Excluding make-whole payments on fixed maturities, income received from previously impaired securities, and prepayment penalties on mortgage backed securities related to dollar roll transactions which is slightly higher thanloans, the average yield of sales and maturities for the same period. For further discussion on dollar roll transactions see Note 4 - Investments and Derivative Investments of Notes to Consolidated Financial Statements. Based upon current reinvestment rates, we currently expect the portfolioannualized investment income yield, excluding limited partnerships and other alternative investments, was 4.4% in 2016 and 4.3% in 2015.
The new money yield, excluding certain U.S. Treasury securities and cash equivalent securities, for the full year 2014,ended December 31, 2016 was approximately 3.5%, which was below the average yield of sales and maturities of 4.0% for the same period. For the year ended December 31, 2016, the new money yield of 3.5% increased slightly from 3.4% in 2015 largely due to remain relatively consistent withan increase in interest rates.
While interest rates have risen recently, we expect the 2013annualized net investment income yield.yield in 2017, excluding limited partnerships and other alternative investments, to be slightly below the portfolio yield earned in 2016. This assumes the Company earns less income in 2017 from make-whole payments on fixed maturities and prepayment penalties on mortgage loans than it did in 2016 and that reinvestment rates continue to be below the average yield of sales and maturities. The estimated impact on net investment income is subject to change as the composition of the portfolio changes through normal portfolio management and trading activities and changes in market conditions.
Net Realized Capital Gains (Losses)
|
| | | | | | |
| | For the years ended December 31, |
| (Before-tax) | 2013 | 2012 |
| Gross gains on sales | $ | 2,196 |
| $ | 478 |
|
| Gross losses on sales | (700 | ) | (278 | ) |
| Net OTTI losses recognized in earnings [1] | (45 | ) | (255 | ) |
| Valuation allowances on mortgage loans | (1 | ) | 4 |
|
| Japanese fixed annuity contract hedges, net [2] | 6 |
| (36 | ) |
| Periodic net coupon settlements on credit derivatives/Japan | (3 | ) | (8 | ) |
| Results of variable annuity hedge program |
|
|
| U.S. GMWB derivatives, net | 262 |
| 519 |
|
| U.S. macro hedge program | (234 | ) | (340 | ) |
| Total U.S. program | 28 |
| 179 |
|
| International program | (963 | ) | (1,145 | ) |
| Total results of variable annuity hedge program | (935 | ) | (966 | ) |
| GMIB/GMAB/GMWB reinsurance | 1,107 |
| 1,233 |
|
| Coinsurance and modified coinsurance reinsurance contracts | (1,405 | ) | (1,901 | ) |
| Other, net [3] | 106 |
| 248 |
|
| Net realized capital (losses) | $ | 326 |
| $ | (1,481 | ) |
|
| | | | | | |
| | For the years ended December 31, |
| (Before-tax) | 2016 | 2015 |
| Gross gains on sales | $ | 211 |
| $ | 239 |
|
| Gross losses on sales | (93 | ) | (211 | ) |
| Net other-than-temporary impairment ("OTTI") losses recognized in earnings | (28 | ) | (61 | ) |
| Valuation allowances on mortgage loans | — |
| (4 | ) |
| Results of variable annuity hedge program |
|
|
| GMWB derivatives, net | (38 | ) | (87 | ) |
| Macro hedge program | (163 | ) | (46 | ) |
| Total results of variable annuity hedge program | (201 | ) | (133 | ) |
| Modified coinsurance reinsurance contracts | (12 | ) | 46 |
|
| Transactional foreign currency revaluation | (70 | ) | (4 | ) |
| Non-qualifying foreign currency derivatives | 57 |
| (16 | ) |
| Other, net [1] | (27 | ) | (2 | ) |
| Net realized capital gains | $ | (163 | ) | $ | (146 | ) |
| |
| [1] | Includes $173 of intent-to-sell impairments for the year ended December 31, 2012 relating to the sales of the Retirement Plans and Individual Life businesses in 2013. |
| |
[2] | Relates to the Japanese fixed annuity products (adjustment of product liability for changes in spot currency exchange rates, related derivative hedging instruments excluding periodic net coupon settlements, and the change in value related to Japan government FVO securities). |
| |
[3] | Primarily consists of transactional foreign currency re-valuation associated with the internal reinsurancechanges in value of thenon-qualifying derivatives including credit derivatives and interest rate derivatives used to manage duration. |
Japan variable annuity business, which is primarily offset in AOCI,Gross Gains and gains and lossesLosses on non-qualifying derivatives.
Details on the Company’s net realized capital gains and losses are as follows:
Gross gains and losses on sales
Gross gains on sales for the year endedDecember 31, 2013 were predominately from the sales of the Retirement Plans and Individual Life businesses resulting in a gain of $1.5 billion. The remaining gross gains on sales were primarily due to the sales of corporate securities. Gross losses on sales were primarily the result of the sales of U.S. Treasuries and foreign government and government agencies. The sales were predominantly due to the management of duration and liquidity as well as progress towards sector allocation objectives.
SalesGross gains and losses on sales for the year ended December 31, 20122016, were predominately from investment gradeprimarily due to sales of corporate securities, municipal bonds, mortgage backed securities and U.S. Treasuries. TheseTreasuries as a result of duration, liquidity and credit management.
Gross gains and losses on sales for the year ended December 31, 2015, were primarily due to sales of corporate, U.S. treasury, and equity securities. The sales were theprimarily a result of tactical portfolioduration, liquidity and credit management, as well as tactical changes to maintain duration targets.
Net OTTI losses
See Other-Than-Temporary Impairments within the Investment Portfolio Risks and Risk Management sectionportfolio as a result of the MD&A.
Valuation allowances on mortgage loans
See MD&A - Investment Portfolio Risks and Risk Management - Valuation Allowances on Mortgage Loans.
Variable annuity hedge program
For the year ended December 31, 2013 the gain on U.S. GMWB related derivatives, net, was primarily relatedchanging market conditions, including sales to gains of $203 from revaluing the liability for living benefits largely driven by favorable policyholder behavior relatedreduce exposure to increased full surrenders and gains of $38 due to liability assumption updates for partial lapses and withdrawal rates. The loss on the U.S. macro hedge program for the year ended December 31, 2013 was primarily driven by losses of $114 due to an improvement in domestic equity markets, losses of $56 related to an increase in interest rates, and losses of $31 related to a decrease in equity market volatility. The loss on the international program for the year ended December 31, 2013 was primarily driven by an improvement in global equityenergy, emerging markets and depreciation of the Japanese yen in relation to the euro.other below investment grade corporate securities.
Variable Annuity Hedge Program
For the year ended December 31, 20122016, the gain on U.S.loss related to the combined GMWB related derivatives, net, which include the GMWB product, reinsurance, and hedging derivatives, was primarily driven by liability losses of $53 due to liability/model assumption updates, $22 due to the effect of $274,increases in equity markets and losses of $12 resulting from regression updates and other changes, partially offset by gains of $106$40 resulting from policyholder behavior and $29 related to an outperformance of the underlying actively managed funds compared to their respective indices,indices. The macro hedge program loss was primarily due to a loss of $96 due to an increase in equity markets and gainsa loss of $83$58 driven by lower equity market volatility.time decay on options.
For the year ended December 31, 2015, the loss related to the combined GMWB derivatives, net, which include the GMWB product, reinsurance, and hedging derivatives, was primarily driven by losses of $42 due to liability/model assumption updates, and losses of $18 resulting from an underperformance of the underlying actively managed funds compared to their respective indices. The loss on the U.S. macro hedge program for the year ended December 31, 20122015 was primarily due to a loss of $44 driven by losses of $167 related to the passage of time losses of $118 due to an improvement in domestic equity markets, and losses of $60 related to a decrease in equity market volatility. decay on options.
Modified Coinsurance Reinsurance
The net loss on the international program for the year ended December 31, 20122016, was primarily driven by an improvement in global equity marketstightening of credit spreads, partially offset by higher interest rates. Modified coinsurance reinsurance contracts are accounted for as embedded derivatives and depreciation of the Japanese yen in relationtransfer to the euro andreinsurer the U.S. dollar.investment experience related to the assets supporting the reinsured policies.
Other, net
Other,The net gain for the year ended December 31, 20132015, was partially related to gains of $71 onprimarily driven by widening credit spreads and an increase in interest derivatives largely associated with fixed rate bonds sold as part of the Individual Life and Retirement Plans business dispositions. For further information on the business dispositions, see Note 2 - Business Dispositions of Notes to the Consolidated Financial Statements. Additional gains included $295rates.
Other, net
Other, net loss for the year ended December 31, 20132016, was primarily due to losses of $17 on interest rate derivatives and losses of $13 related to transactional foreign currency re-valuation primarily associated withequity derivatives which were hedging against a decline in the internal reinsurance ofequity market on the Japan variable annuity business, which is offset in AOCI, due to depreciation of the Japanese yen versus the U.S. dollar.
investment portfolio.Other, net gainloss for the year ended December 31, 20122015, was primarily relateddue to gainslosses of $249$8 on interest rate derivatives driven by an increase in interest rates and losses of $7 on credit derivatives due to credit spreads tightening, and gains of $104 on interest derivatives largely driven by the de-designation of the cash flow hedges associated with bonds included in the sale of Individual Life and Retirement Plans businesses. For further information on the business dispositions, see Note 2 - Business Dispositions of Notes to the Consolidated Financial Statements. These gains were partially offset by losses of $111 related to Japan 3Win foreign currency swaps primarily driven by the strengthening of the currency basis swap spread between the U.S. dollar and Japanese yen and the decline in U.S. interest rates.widening credit spreads.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ, and in the past have differed, from those estimates.
The Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
estimated gross profits used in the valuation and amortization of assets and liabilities associated with variable annuity and other universal life typelife-type contracts;
living benefits required to be fair valued (in other policyholder funds and benefits payable);
valuation of investments and derivative instruments;
instruments including evaluation of other-than-temporary impairments on available-for-sale securities and valuation allowances on mortgage loans;
goodwill impairment;
valuation allowance on deferred tax assets; and
contingencies relating to corporate litigation and regulatory matters.
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. In developing these estimates management makes subjective and complex judgments that are inherently uncertain and subject to material change as facts and circumstances develop. Although variability is inherent in these estimates, management believes the amounts provided are appropriate based upon the facts available upon compilation of the financial statements.
Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and Other Universal Life-Type Contracts
Estimated gross profits (“EGPs”) are used in the valuation and amortization of: the DAC asset, which includes the present value of future profits; sales inducement assets, (“SIA”); and unearned revenue reserves (“URR”including deferred policy acquisition cost ("DAC"). Portions of EGPs are also used in the valuation of reserves for death and other insurance benefit features on variable annuity and other universal life type contracts. URR associated with the Individual Life business is no longer included in EGP based
The most significant EGP-based balances due to the sale of this business in 2013.are as follows:
For additional information regarding business dispositions, see Note 2 - Business Dispositions and Note 5 - Reinsurance of Notes to Consolidated Financial Statements. For additional information on DAC, see Note 6 - Deferred Policy Acquisition Costs and Present Value of Future Profits of Notes to Consolidated Financial Statements. For additional information on SIA, see Note 9 - Sales Inducements of Notes to Consolidated Financial Statements. For additional information on death and other insurance benefit reserves, see Note 8 - Separate Accounts, Death Benefits and Other Insurance Benefit Features of Notes to Consolidated Financial Statements. |
| | | | | | |
| | As of December 31, |
| | 2016 | 2015 |
| DAC [1] | $ | 463 |
| $ | 542 |
|
| Death and Other Insurance Benefit Reserves, net of reinsurance [2] | $ | 354 |
| $ | 340 |
|
| |
| [1] | For additional information on DAC, see Note 6 - Deferred Policy Acquisition Costs of Notes to Consolidated Financial Statements. |
| |
| [2] | For additional information on death and other insurance benefit reserves, see Note 7 - Reserves for Future Policy Benefits and Separate Account Liabilities of Notes to Consolidated Financial Statements. |
Unlocks
The benefit (charge) benefit to income, net income by asset and liabilityof tax, as a result of the Unlock is as follows:
| | | | For the years ended December 31, | For the years ended December 31, |
| | 2013 | 2012 | 2016 | 2015 |
| DAC | $ | (104 | ) | $ | (44 | ) | $ | (74 | ) | $ | 13 |
|
| SIA | (3 | ) | (59 | ) | |
| URR | 8 |
| 2 |
| |
| Death and Other Insurance Benefit Reserves | 29 |
| 52 |
| 14 |
| 28 |
|
| Total (before tax) | (70 | ) | (49 | ) | |
| Total (pre-tax) | | (60 | ) | 41 |
|
| Income tax effect | (25 | ) | (18 | ) | (21 | ) | 14 |
|
| Total (after-tax) | $ | (45 | ) | $ | (31 | ) | $ | (39 | ) | $ | 27 |
|
The Unlock charge after-tax for the yearsyear ended December 31, 20132016 was primarily due to the reduction of the fixed annuity DAC balance to zero, updates to the macro hedging program cost to reflect 2016 activity, and the effect of assumption updates for variable annuities, including to mortality. These impacts were partially offset by separate account returns being above our aggregated estimated returns during the period, largely due to an increase in equity markets, as well as the effect of reducing the assumption about expected future lapses of variable annuities.
The Unlock benefit, after tax, for the year ended December 31, 20122015 was primarily due to assumption changes in connection with the annual policyholder behavior assumption study,related to benefit utilization and lower assumed lapse rates, partially offset by actual separatea lower assumed general account returns above our aggregated estimated returns during these periods. Assumption changes for the year ended December 31, 2013 were driven by an increasespread and higher assumed withdrawal rates.
Use of Estimated Gross Profits in lapsesAmortization and partial withdrawals and a reduction in the spread between assumed investment income and contract crediting rates. Assumption changes for the year ended December 31, 2012 were driven by lower estimated gross profits due to increased unit costs and changes to benefit utilization assumptions.Reserving
For most life insurance productannuity contracts, the Company estimates gross profits over 20 years as EGPs emerging subsequent to that timeframetime frame 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 holder’s account balance; surrender and lapse rates; interest margin; mortality; and the extent and duration of hedging activities and hedging costs.
Changes in these assumptions and in addition, changes to other policyholder behavior assumptions such as resets, partial surrenders, reaction to price increases, and asset allocations causescause EGPs to fluctuate which impacts earnings.
The Company 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 Company’s DAC model is adjusted to reflect actual account values at the end of each quarter. Through 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. Thiscaps.
Annual Unlock for future separate account returns, is determined each quarter. Under RTM, the expected long term rate of return is 8.3%.Assumptions
In the thirdfourth quarter of each year,2016, the Company completescompleted a comprehensive non-market related policyholder behavior assumption study which resulted in a non-market related after-tax charge of $17 and incorporatesincorporated the results of those studiesthat study into its projection of future gross profits. Additionally, throughout the year, the Company evaluates various aspects of policyholder behavior and periodically reviseswill revise its policyholder assumptions asif credible emerging data indicates that changes are warranted. The Company will continue to evaluate ourits assumptions related to policyholder behavior as we begin to implement initiatives to reduce the size of the variable annuity business.business are implemented by management. Upon completion of thean annual assumption study or evaluation of credible new information, the Company will revise its assumptions to reflect its current best estimate. These assumption revisions will change the projected account values and the related EGPs in the DAC SIA and URR amortization models, as well as the death and other insurance benefit reserving model.
All assumption changes that affect the estimate of future EGPs including: the update of current account values; the use of the RTM estimation technique; and policyholder behavior assumptions are considered an Unlock in the period of revision. An Unlock adjusts DAC SIA, URR and death and other insurance benefit reserve balances in the Consolidated Balance Sheets with an offsetting benefit or charge in the Consolidated Statements of Operations in the period of the revision. An Unlock that results in an after-tax benefit generally occurs as a result of actual experience or future expectations of product profitability being favorable compared to previous estimates. An Unlock that results in an after-tax charge generally occurs as a result of actual experience or future expectations of product profitability being unfavorable compared to previous estimates.
EGPs are also used to determine the expected excess benefits and assessments included in the measurement of death and other insurance benefit reserves. These excess benefits and assessments are derived from a range of stochastic scenarios that have been calibrated to the Company’s RTM separate account returns. The determination of death and other insurance benefit reserves is also impacted by discount rates, lapses, volatilities, and mortality assumptions and benefit utilization, including assumptions around annuitization rates.
AnMarket Unlocks
In addition to updating assumptions in the fourth quarter of each year, an Unlock revises EGPs, on a quarterly basis, to reflect the Company’s current best estimate assumptions and market updates of policyholder account valuevalue. The Unlock for future separate account returns is determined each quarter. Under RTM, the expected long term rate of return is 8.3%. The annual return assumed over the next five years of approximately 1.5% was calculated based on the return needed over that period to produce an 8.3% return since March of 2009, the date the Company adopted the RTM estimation technique to project future separate account returns. Based on the expected trend of policy lapses and annuitizations, the Company’s current best estimate assumptions. ModificationsCompany expects approximately 50% of its block of variable annuities to runoff in the Company’s hedging programs may impact EGPs, and correspondingly impact DAC recoverability. next 5 years.
Aggregate Recoverability
After each quarterly Unlock, the Company also tests the aggregate recoverability of DAC by comparing the DAC balance to the present value of future EGPs. As of December 31, 2013, theThe margin between the DAC balance and the present value of future EGPs for U.S. individual variable annuities was 26%.34% as of December 31, 2016. If the margin between the DAC asset and the present value of future EGPs is exhausted, then further reductions in EGPs would cause portions of DAC to be unrecoverable and the DAC asset would be written down to equal future EGPs.
Living Benefits Required to be Fair Valued (in Other Policyholder Funds and Benefits Payable)
Fair values for direct, assumedGMWBs classified as embedded derivatives and ceded GMWB, GMIBincluded in other policyholder funds and GMAB contractsbenefits payable, are calculated using the income approach based upon internally developed models, because active, observable markets do not exist for those items. The fair value of those guaranteed benefit liabilities classified as embedded derivatives,these GMWBs and the related reinsurance and customized freestanding derivatives isare calculated as an aggregation of the following components: Best Estimate Claims Costs;Claim Payments; Credit Standing Adjustment; and Margins. The resulting aggregation is reconciled or calibrated, if necessary, to market information that is, or may be, available to the Company, but may not be observable by other market participants, including reinsurance discussions and transactions. The Company believes the aggregation of each of these components, as necessary and as reconciled or calibrated to the market information, available to the Company, results in an amount that the Company would be required to transfer to or receive to or from market participants in an active liquid market, if one existed, for those market participants to assume the risks associated with the guaranteed minimum benefits and the related reinsurance and customized derivatives. The fair value is likely to materially diverge from the ultimate settlement of the liability as the Company believes settlement will be based on our best estimate assumptions rather than those best estimate assumptions plus risk margins. In the absence of any transfer of the guaranteed benefit liability to a third party, the release of risk margins is likely to be reflected as realized gains in future periods’ net income.
A multidisciplinary group of finance, actuarial and risk management professionals reviews and approves changes to the Company's valuation model as well as associated controls.
For further discussion on the impact of fair value changes from living benefits see Note 32 - Fair Value Measurements of Notes to the Consolidated Financial Statements, and for a discussion on the sensitivities of certain living benefits due to capital market factors see Part II, Item 7, MD&A - Variable Product Guarantee Risks and Risk Management.
Valuation of Investments and Derivative Instruments
Available-for-Sale Securities, Fixed Maturities, FVO, Equity Securities, Trading,Short-term Investments and Short-term InvestmentsFree-standing Derivatives
The Company generally determines fair values using valuation techniques that use prices, rates, and other relevant information evident from market transactions involving identical or similar instruments. Valuation techniques also include, where appropriate, estimates of future cash flows that are converted into a single discounted amount using current market expectations. The Company uses a "waterfall" approach comprised of the following pricing sources which are listed in priority order: quoted prices, prices from third-party pricing services, internal matrix pricing, and independent broker quotes. The fair value of AFS securities, fixed maturities at fair value using the fair value option (“FVO”), equity securities, trading, and short-term investments in an active and orderly market (i.e., not distressed or forced liquidation)free-standing derivative instruments are 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 appliedprimarily 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,discounted cash flow model or lastly, securities are priced using a pricing matrix. Typical inputs used by these pricing methods include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flows, prepayments speedsoption model technique and default rates. Based on the typical trading volumes and the lack ofincorporate counterparty credit risk. In some cases, quoted market prices for fixed maturities, third-party pricing services will normally derive the security prices through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recent reported trades, the third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of asset-backed-securities ("ABS") and residential mortgage-backed securities ("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. For further discussion, see the AFS Securities, Fixed Maturities, FVO, Equity Securities, Trading, and Short-Term Investments section in Note 3 - Fair Value Measurements of Notes to Consolidated Financial Statements.
The Company has analyzed the third-party pricing services' valuation methodologies and related inputs, and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. For further discussion of fair value measurement, see Note 3 - Fair Value Measurements of Notes to Consolidated Financial Statements.
Derivative Instruments, excluding embedded derivatives within liability contracts and reinsurance related derivatives
The fair value of derivative instruments is determined using pricing valuation models for over-the-counter ("OTC") derivatives that utilize market data inputs, quoted market prices for exchanged-traded derivativesexchange-traded transactions and transactions cleared through central clearing houses ("OTC-cleared"), or may be used and in other cases independent broker quotations. Excluding embedded and reinsurance related derivatives, as of December 31, 2013 and 2012, 97% and 98%, respectively, of derivatives, based upon notional values, were priced by valuation models or quoted market prices. The remaining derivatives were priced by broker quotations. The derivatives are valued using mid-market level inputs that are predominantly observable in the market with the exception of the customized swap contracts that hedge guaranteed minimum withdrawal benefits (“GMWB”) liabilities. Inputs used to value derivatives include, but are not limited to, swap interest rates, foreign currency forward and spot rates, credit spreads and correlations, interest and equity volatility and equity index levels.quotes may be used. For further discussion, on derivative instrument valuation methodologies, see the Derivative Instruments, including embedded derivatives within the investmentsFixed Maturities, Equity Securities, Short-term Investments and Free-standing Derivatives section in Note 32 - Fair Value Measurements of Notes to Consolidated Financial Statements. For further discussion on the GMWB and other guaranteed living benefits,customized derivative valuation methodologies,methodology, see the Living Benefits Required to be Fair ValuedGMWB Embedded, Customized and Reinsurance Derivatives section in Note 3 of the Notes to Consolidated Financial Statements.
Limited partnerships and other alternative investments
Limited partnerships and other alternative investments include hedge funds where investment company accounting has been applied to a wholly-owned fund of funds measured at fair value. These funds are fair valued using the net asset value per share or equivalent (“NAV”), as a practical expedient, calculated on a monthly basis and is the amount at which a unit or shareholder may redeem their investment, if redemption is allowed. Certain impediments to redemption include, but are not limited to the following: 1) redemption notice periods vary and may be as long as 90 days, 2) redemption may be restricted (e.g. only be allowed on a quarter-end), 3) a holding period referred to as a lock-up may be imposed whereby an investor must hold their investment for a specified period of time before they can make a notice for redemption, 4) gating provisions may limit all redemptions in a given period to a percentage of the entities' equity interests, or may only allow an investor to redeem a portion of their investment at one time and 5) early redemption penalties may be imposed that are expressed as a percentage of the amount redeemed. The Company assesses impediments to redemption and current market conditions that will restrict the redemption at the end of the notice period. For further discussion of fair value measurement, see Note 32 - Fair Value Measurements of Notes to Consolidated Financial Statements. In addition, certain limited partnerships and other alternative investments are accounted for under the equity method of accounting. For further discussion, see the Investments - Overview section of Note 1 of Notes to the Consolidated Financial Statements.
Evaluation of Other-Than-Temporary Impairments on Available-for-Sale Securities and Valuation Allowances on Mortgage Loans
The Company has a monitoring process overseen byEach quarter, a committee of investment and accounting professionals that identifiesevaluates investments that are subject to an enhanced evaluation on a quarterly basis to determine if an other-than-temporary impairment (“impairment”) is present for AFS securities or a valuation allowance is required for mortgage loans. This evaluation is a quantitative and qualitative process, which is subject to risks and uncertainties. For further discussion of the accounting policies, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements. For a discussion of impairments recorded, see the Other-Than-Temporary Impairments within the Investment Portfolio Risks and Risk Management section of the MD&A.
Goodwill Impairment
Goodwill balances are reviewed for impairment at least annually or more frequently if events occur or circumstances change that would indicate that a triggering event for a potential impairment has occurred.
The reporting units of the Company for which goodwill was allocated include Mutual Funds, Retirement Plans and Individual Life.
During the first quarter of 2013, the Company completed the sale of its Retirement Plans business to Mass Mutual and its Individual Life business to Prudential. Accordingly, the carrying value of each reporting unit's goodwill of $87 and $163, respectively, was reduced and included in reinsurance loss on disposition in the Company's Consolidated Statement of Operations.
In 2012, the Company wrote off $159 of goodwill associated with the Mutual Funds reporting unit including goodwill of $10 due to the sale of Woodbury Financial Services and $149 of remaining goodwill as a result of the Mutual Funds reorganization. For further discussion of the reorganization of the Mutual Funds business, see Note1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements.
For information on the results of goodwill impairment tests performed in 2012 and 2011, see Note 7 - Goodwill of Notes to Consolidated Financial Statements. For further information on the disposition of the Retirement Plans and Individual Life businesses, see Note 2 - Business Dispositions of Notes to Consolidated Financial Statements.
Valuation Allowance on Deferred Tax Assets
Deferred tax assets represent the tax benefit of future deductible temporary differences and operating loss and tax credit carryforwards. Deferred tax assets are measured using the enacted tax rates expected to be in effect when such benefits are realized if there is no change in tax law. Under U.S. GAAP, we test the value of deferred tax assets for impairment on a quarterly basis at the entity level within each tax jurisdiction, consistent with our filed tax returns. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The determination of the valuation allowance for our deferred tax assets requires management to make certain judgments and assumptions. In evaluating the ability to recover deferred tax assets, we have considered all available evidence as of December 31, 20132016 including past operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. In the event we determine it is not more likely than not that we will not be able to realize all or part of our deferred tax assets in the future, an increase to the valuation allowance would be charged to earnings in the period such determination is made. Likewise, if it is later determined that it is more likely than not that those deferred tax assets would be realized, the previously provided valuation allowance would be reversed. Our judgments and assumptions are subject to change given the inherent uncertainty in predicting future performance and specific industry and investment market conditions.
The Company recorded a deferred tax asset valuation allowance that is adequate to reduce the total deferred tax asset to an amount that will more likely than not be realized. As of December 31, 20132016 and 2012,2015, the deferred tax assetCompany had no valuation allowance was $0 and $53, relating mostly to foreign net operating losses.allowance. In assessing the need for a valuation allowance, management considered future taxable temporary difference reversals, future taxable income exclusive of reversing temporary differences and carryforwards,carryovers, taxable income in open carrybackcarry back years as well asand other tax planning strategies. TheseFrom time to time, tax planning strategies could include holding a portion of debt securities with market value losses until recovery, selling appreciatedaltering the level of tax exempt securities to offset capital losses,held, making investments which have specific tax characteristics, and business considerations such as asset-liability matching, and the sales of certain corporate assets.matching. Management views such tax planning strategies as prudent and feasible and willwould implement them, if necessary, to realize the deferred tax asset. Based on the availability of additional tax planning strategies identified in 2011 and as a result of the sale of the U.K. variable annuity business, the Company released $56, or 100% of the valuation allowance associated with investment realized capital losses. Future economic conditions and debt market volatility, including increases in interest rates, can adversely impact the Company’s tax planning strategies and in particular the Company’s ability to utilize tax benefits on previously recognized realized capital losses.assets.
Contingencies Relating to Corporate Litigation and Regulatory Matters
Management evaluates each contingent matter separately. A loss is recorded if probable and reasonably estimable. Management establishes reserves for these contingencies at its “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 at the low end of the range of losses.
The Company has a quarterly monitoring process involving legal and accounting professionals. Legal personnel first identify outstanding corporate litigation and regulatory matters posing a reasonable possibility of loss. These matters are then jointly reviewed by accounting and legal personnel to evaluate the facts and changes since the last review in order to determine if a provision for loss should be recorded or adjusted, the amount that should be recorded, and the appropriate disclosure. The outcomes of certain contingencies currently being evaluated by the Company, which relate to corporate litigation and regulatory matters, are inherently difficult to predict, and the reserves that have been established for the estimated settlement amounts are subject to significant changes. 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. In view of the uncertainties regarding the outcome of these matters, as well as the tax-deductibility of payments, it is possible that the ultimate cost to the Company of these matters could exceed the reserve by an amount that would have a material adverse effect on the Company’s consolidated results of operations and liquidity in a particular quarterly or annual period.
ENTERPRISE RISK MANAGEMENT
The Company’sHartford’s Board of Directors (“the Board”) has ultimate responsibility for risk oversight, as described more fully in The Hartford's Proxy Statement, while management function is parttasked with the day-to-day management of the Hartford’s risks.
The Hartford’s overallCompany manages and monitors risk through risk policies, controls and limits. At the senior management program. The Hartford maintainslevel, an enterprise risk management function (“ERM”) that is charged with providing analysis of The Hartford’s risks on an individual and aggregated basis and with ensuring that The Hartford’s risks remain within its risk appetite and tolerances. The Hartford has established the Enterprise Risk and Capital Committee (“ERCC”) that includes The Hartford’sHartford's CEO, President, Chief Financial Officer, (“CFO”), Chief Investment Officer, (“CIO”), Chief Risk Officer, General Counsel and others as deemed necessary by the divisional Presidentscommittee chair. The ERCC oversees the risk profile and risk management practices of the Company. A number of functional committees sit underneath the ERCC, providing oversight of specific risk areas and recommending risk mitigation strategies to the ERCC. These committees include, but are not limited to, Asset Liability Committees, Catastrophe Risk Committee, Economic Capital Executive Committee, Emerging Risk Committees, Model Oversight Committees and the General Counsel.Operational Risk Committee. The ERCC is responsible for managing The Hartford’s risks and overseeing theHartford's enterprise risk management program.("ERM") function supports the ERCC and functional committees, and is tasked with, among other things:
risk identification and assessment;
the development of risk appetites, tolerances, and limits;
risk monitoring; and
internal and external risk reporting.
The Company categorizes its main risks as insurance risk, operational risk and financial risk.
Financial Risk Management
Financial risks include direct and indirect risks to the Company's financial objectives coming from events that impact market conditions or prices. Some events may cause correlated movement in multiple risk factors. The primary sources of financial risks are the Company's general account assets and the liabilities and the guarantees which the company has written over various liability products, particularly its fixed and variable annuity guarantees. Consistent with its risk appetite, the Company establishes financial risk limits to control potential loss on a U.S. GAAP, statutory, and economic basis. Exposures are actively monitored, and mitigated where appropriate. The Company is exposeduses various risk management strategies, including reinsurance and over-the-counter and exchange traded derivatives with counterparties meeting the appropriate regulatory and due diligence requirements. Derivatives are utilized to financialachieve one of four Company-approved objectives: hedging risk associated with changes inarising from interest rates,rate, equity market, commodity market, credit spreads includingspread and issuer defaults, equity pricesdefault, price or market indices, and foreign currency exchange rates. The Company is also exposed to credit and counterparty repayment risk.rate risk or volatility; managing liquidity; controlling transaction costs; or entering into synthetic replication transactions. Derivative instruments are utilized in compliance with established Company policy and regulatory requirements andactivities are monitored internallyand evaluated by the Company’s compliance and risk management teams and reviewed by senior management.
Liquidity Risk
Liquidity risk is the risk to current or prospective earnings or capital arising from the Company's inability or perceived inability to meet its contractual funding obligations when they come due.
Sources of Liquidity Risk include funding risk, company-specific liquidity risk and market liquidity risk resulting from differences in the amount and timing of sources and uses of cash as well as company-specific and general market conditions. Stressed market conditions may impact the ability to sell assets or otherwise transact business and may result in a significant loss in value.
Inadequate capital resources and liquidity could negatively affect the Company’s overall financial strength and its ability to generate cash flows from its businesses, borrow funds at competitive rates, and raise new capital to meet operating and growth needs.
The Company has defined ongoing monitoring and reporting requirements to assess liquidity across the enterprise under both current and stressed market conditions. The Company measures and manages liquidity risk exposures and funding needs within prescribed limits across legal entities, taking into account legal, regulatory and operational limitations to the transferability of liquidity. The Company also monitors internal and external conditions, and identifies material risk changes and emerging risks that may impact liquidity. The Company's CFO has primary responsibility for liquidity risk.
For further discussion on liquidity see the section on Capital Resources and Liquidity.
Interest Rate Risk
Interest rate risk is the risk of financial loss due to adverse changes in the value of assets and liabilities arising from movements in interest rates. Interest rate risk encompasses exposures with respect to changes in the level of interest rates, the shape of the term structure of rates and the volatility of interest rates. Interest rate risk does not include exposure to changes in credit spreads.
The Company has exposure to interest rates arising from its fixed incomematurity securities and interest sensitive liabilities. In addition, certain product liabilities, including those containing GMWB or GMDB, expose the Company to interest rate risk but also have significant equity risk. These liabilities are discussed as part of the Variable Product Guarantee Risks and discount rate assumptions associated with the Hartford’s pension and other post retirement benefit obligations.Risk Management section. Management also evaluates performance of certain products based on net investment spread which is, in part, influenced by changes in interest rates.
An increase in interest rates from current levels is generally a favorable development for the Company. Interest rate increases are expected to provide additional net investment income, reduce the cost of the variable annuity hedging program, and limit the potential risk of margin erosion due to minimum guaranteed crediting rates in certain products and, if sustained, could reduce the Company’s prospective pension expense. Conversely, a rise in interest rates will reduce the fair value of the investment portfolio, increase interest expense on the Company’s variable rate debt obligations and,products. However, if long-term interest rates rise dramatically within a six to twelve month time period, certain businesses may be exposed to disintermediation risk.
Disintermediation risk refers to the risk that policyholders will surrender their contracts in a rising interest rate environment requiring the Company to liquidate assets in an unrealized loss position. In conjunction with the interest rate risk measurement and management techniques, certain fixed income product offerings have market value adjustment provisions at contract surrender. An increase in interest rates may also impact the Company’s tax planning strategies and in particular its ability to utilize tax benefits to offset certainof previously recognized realized capital losses.
A decline in interest rates results in certain mortgage-backed and municipal securities being more susceptible to paydowns and prepayments or calls. During such periods, the Company generally will not be able to reinvest the proceeds at comparable yields. Lower interest rates will also likely result in lower net investment income, increased hedging costcosts associated with variable annuities and, if declines are sustained for a long period of time, it may subject the Company to reinvestment risk higher pension costs expense and possibly reduced profit margins associated with guaranteed crediting rates on certain products. Conversely, the fair value of the investment portfolio will increase when interest rates decline and the Company’s interest expense will be lower on its variable rate debt obligations.decline.
The Company manages its exposure to interest rate risk by constructing investment portfolios that maintain asset allocation limits and asset/liability duration matching targets which may include the use of derivatives. The Company analyzes interest rate risk using various models including parametric models and cash flowflows simulation under various market scenarios of the liabilities and their supporting investment portfolios, which may include derivative instruments. Measuresportfolios. Key metrics that the Company uses to quantify its exposure to interest rate risk inherent in its invested assets and interest rate sensitive liabilities include duration, convexity and key rate duration. Duration is the price sensitivity
The Company also utilizes a variety of a financial instrumentderivative instruments to mitigate interest rate risk associated with its investment portfolio or series of cash flowsto hedge liabilities. Interest rate caps, floors, swaps, swaptions, and futures may be used to manage portfolio duration. Interest rate swaps are primarily used to convert interest receipts or payments to a parallel change in the underlying yield curve used to value the financial instrumentfixed or seriesvariable rate. The use of cash flows. For example, a duration of 5 means the price of the security will change by approximately 5% for a 100 basis point change in interest rates. Convexity is used to approximate how the duration of a security changes as interest rates change in a parallel manner. Key rate duration analysis measures the price sensitivity of a security or series of cash flows to each point along the yield curve andsuch swaps enables the Company to estimatecustomize contract terms and conditions to desired objectives and manage the price changeduration profile within established tolerances. Interest rate swaps are also used to hedge the variability in the cash flow of a security assuming non-parallel interestforecasted purchase or sale of fixed rate movements.
To calculate duration, convexity, and key rate durations, projections of asset and liability cash flows are discounted to a present value using interest rate assumptions. These cash flows are then revalued at alternative interest rate levels to determine the percentage change in fair valuesecurities due to an incremental changechanges in the entire yield curve for durationinterest rates. As of December 31, 2016 and convexity, or a particular point on the yield curve for key rate duration. Cash flows from corporate obligations are assumed2015, notional amounts pertaining to be consistent with the contractual payment streams on a yieldderivatives utilized to worst basis. Yield to worst is a basis that represents the lowest potential yield that can be received without the issuer actually defaulting. The primary assumptions used in calculating cash flow projections include expected asset payment streams taking into account prepayment speeds, issuer call options and contract holder behavior. Mortgage-backed and asset-backed securities are modeled based on estimates of the rate of future prepayments of principal over the remaining life of the securities. These estimates are developed by incorporating collateral surveillance and anticipated future market dynamics. Actual prepayment experience may vary from these estimates.
The investments and liabilities primarily associated withmanage interest rate risk, are included inincluding offsetting positions, totaled $4.6 billion and $6.5 billion, respectively ($4.5 billion and $6.4 billion, respectively, related to investments and $100 and $100, respectively, related to liabilities). The fair value of these derivatives was $(404) and $(377) as of December 31, 2016 and 2015, respectively. These amounts do not include derivatives associated with the following discussion. Certain product liabilities, including those containing GMWB, GMIB, GMAB, or GMDB, expose the Company to interest rate risk but also have significant equity risk. These liabilities are discussed as part of the Equity Risk section below.Variable Annuity Hedging Program.
Fixed Maturity Investments
The Company’s investment portfolios primarily consist of investment grade fixed maturity securities. The fair value of fixed maturity securities was $29.0$23.9 billion and $49.4$24.8 billion at December 31, 20132016 and 2012,2015, respectively. The fair value of these and other invested assets fluctuates depending on the interest rate environment and other general economic conditions. The weighted average duration of the portfolio, including fixed maturities, commercial mortgage loans, certain derivatives, and cash equivalents, was approximately 5.26.8 years and 5.96.6 years as of December 31, 20132016 and 2012,2015, respectively. As of December 31, 2012, the weighted average duration of the portfolio, excluding the Retirement Plans and Individual Life businesses, was approximately 5.5 years.
Liabilities
The Company’s issued investment contracts and certain insurance product liabilities, other than non-guaranteed separate accounts, include asset accumulation vehicles such as fixed annuities, guaranteed investment contracts,products, and other investment and universal life-type contractscontracts. The primary risk associated with these products is that, despite the use of market value adjustment features and certain insurance products such as long-term disability.surrender charges, the spread between investment return and credited rate may not be sufficient to earn targeted returns.
Asset accumulation vehicles primarily require a fixed rate payment, often for a specified period of time, such asand fixed rate annuities withcontain surrender values that are based upon a market value adjustment feature. The term to maturity of these contracts generally range from less than one year to ten years.adjusted formula if held for shorter periods. In addition, certain products such as corporate owned life insurance contracts and the general account portion of variable annuity products credit interest to policyholders subject to market conditions and minimum interest rate guarantees. The term to maturityAs of December 31, 2016 and 2015, the asset portfolio supporting these products may range from short to intermediate.Company had $5,187 and $5,613, respectively, of liabilities for fixed annuities and $194 and $192, respectively, of liabilities for guaranteed investment products.
While interest rate risk associated with many of these products has been reduced through the use of market value adjustment features and surrender charges, the primary risk associated with these products is that the spread between investment return and credited rate may not be sufficient to earn targeted returns.
The Company also manages the risk of certain insurance liabilities similarly to investmentCompany's issued non-investment type products due to the relative predictability of the aggregate cash flow payment streams. Products in this category may contain significant reliance upon actuarial (including mortality and morbidity) pricing assumptions and do have some element of cash flow uncertainty. Product examplescontracts include structured settlement contracts, andterminal funding agreements, on-benefit annuities (i.e., the annuitant is currently receiving benefits thereon)benefits). The cash outflows associated with these policy liabilities are not interest rate sensitive but do vary based on the timing and amount of benefit payments. The primary risks associated with thesetiming. Similar to investment-type products, the aggregate cash flow payment streams are that the benefits will exceed expectedrelatively predictable. Products in this category may rely upon actuarial pricing and/or that the actual timingassumptions (including mortality and morbidity) and have an element of the cash flows will differ from those anticipated, or interest rate levels may deviate from those assumed in product pricing, ultimately resulting in an investment return lower than that assumed in pricing. The average duration of the liability cash flow payments can range from less than one year to in excessuncertainty. As of fifteen years.
Derivatives
The Company utilizes a variety of derivative instruments to mitigate interest rate risk associated with its investment portfolio or hedge liabilities. Interest rate swaps are primarily used to convert interest receipts or payments to a fixed or variable rate. The use of such swaps enablesDecember 31, 2016 and 2015, the Company to customize contract termshad $6,887 and conditions to desired objectives$6,934, respectively of liabilities for structured settlements and manage the interest rate risk profile within established tolerances. Interest rate swaps are also used to hedge the variability in the cash flowterminal funding agreements and $1,636 and $1,647, respectively, of a forecasted purchase or sale of fixed rate securities due to changes in interest rates. Interest rate caps, floors, swaps, swaptions, and futures may be used to manage portfolio duration.
At December 31, 2013 and 2012, notional amounts pertaining to derivatives utilized to manage interest rate risk totaled $9.1 billion and $18.0 billion, respectively ($8.9 billion and $17.8 billion, respectively, related to investments and $0.2 billion and $0.2 billion, respectively, related liabilities). The fair value of these derivatives was $(376) and $(251) as of December 31, 2013 and 2012, respectively. The decline in notional amounts related to investments of $8.9 billion primarily relates to the termination of interest rate swaptions designed to hedge the interest rate risk of the securities that were transferred related to the sale of the Retirement Plan business segment. These amounts do not include derivatives associated with the Variable Annuity Hedging Program. For further information, see the Variable Product Guarantee Risks and Risk Management section.liabilities for on-benefit payout annuities.
Interest Rate Sensitivity
Invested Assets Supporting Fixed Liabilities
Included in the following table is the before-tax change in the net economic value of investment contracts (e.g.,including structured settlements, fixed annuity contracts)contracts and certain insurance product liabilities (e.g., disability contracts)terminal funding agreements for which the payment rates are fixed at contract issuance andand/or the investment experience is substantially absorbed by the Company’s operations, along with the corresponding invested assets. Also included in this analysis are the interest rate sensitive derivatives used by the Company to hedge its exposure to interest rate risk in the investment portfolios supporting these contracts. This analysis does not include the assets and corresponding liabilities of certain insurance products such as certain life contingent annuities. Certain financial instruments, such as limited partnerships and other alternative investments, have been omitted from the analysis due to the fact that thethese investments generally lack sensitivity to interest rate changes. SeparateInsulated separate account assets and liabilities equity securities, trading and the corresponding liabilities associated with the variable annuity products are excluded from the analysis because gains and losses in separate accounts accrue to policyholders.
The calculation of the estimated hypothetical change in net economic value below assumes a 100 basis point upward and downward parallel shift in the yield curve.
| | | | Change in Net Economic Value as of December 31, | |
| Interest rate sensitivity of fixed liabilities and invested assets supporting them | | Change in Net Economic Value as of December 31, |
| | 2013 | 2012 | 2016 | 2015 |
| Basis point shift | -100 |
| +100 |
| -100 |
| +100 |
| -100 |
| +100 |
| -100 |
| +100 |
|
| Increase (decrease) in economic value | $ | (301 | ) | $ | 168 |
| $ | (255 | ) | $ | 141 |
| |
| Increase (decrease) in economic value, before tax | | $ | (634 | ) | $ | 409 |
| $ | (429 | ) | $ | 261 |
|
The carrying value of fixed liabilitiesmaturities, commercial mortgage loans and short-term investments related to the businesses included in the table above represented approximately 51%was $18.3 billion and 52% of the Company’s general account liabilities$18.3 billion, as of December 31, 20132016 and 2012,2015, respectively. The assets supporting the fixed liabilities are monitored and managed within set duration guidelines, and are evaluated on a daily basis, as well as annually using scenario simulation techniques in compliance with regulatory requirements.
Invested Assets Not Supporting Fixed Liabilities
33
The following table provides an analysis showing the estimated before-tax change in the fair value of the Company’s fixed maturity investments and related derivatives, notexcluding assets supporting fixed liabilities which are included in the table above, assuming 100 basis point upward and downward parallel shifts in the yield curve as of December 31, 20132016 and 2012.2015. Certain financial instruments, such as limited partnerships and other alternative investments, have been omitted from the analysis due to the fact that thethese investments are accounted for under the equity method and generally lack sensitivity to interest rate changes. The decline in the estimated change in fair value assuming a 100 basis point shift since 2012 is due to the sales of the Retirement Plans and Individual Life businesses in January of 2013.
| | | | Change in Fair Value as of December 31, | |
| Interest rate sensitivity of invested assets not supporting fixed liabilities | | Change in Fair Value as of December 31, |
| | 2013 | 2012 | 2016 | 2015 |
| Basis point shift | -100 |
| +100 |
| -100 |
| +100 |
| -100 |
| +100 |
| -100 |
| +100 |
|
| Increase (decrease) in fair value | $ | 496 |
| $ | (476 | ) | $ | 1,968 |
| $ | (1,765 | ) | |
| Increase (decrease) in fair value, before tax | | $ | 453 |
| $ | (409 | ) | $ | 454 |
| $ | (405 | ) |
The carrying value of fixed maturities, commercial mortgage loans and short-term investments related to the businesses included in the table above was $9.8 billion and $10.0 billion, as of December 31, 2016 and 2015, respectively. The selection of the 100 basis point parallel shift in the yield curve was made only as an illustration of the potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results could differ materially from those illustrated above due to the nature of the estimates and assumptions used in the above analysis. The Company’s sensitivity analysis calculation assumes that the composition of invested assets and liabilities remain materially consistent throughout the year and that the current relationship between short-term and long-term interest rates will remain constant over time. As a result, these calculations may not fully capture the impact of portfolio re-allocations, significant product sales or non-parallel changes in interest rates.
Equity Risk
Equity risk is defined as the risk of financial loss due to changes in the value of global equities or equity indices. The Company has exposure to equity risk from assets under management and embedded derivatives within the Company’s variable annuities and assets that support the Company’s pension plans.annuities. Equity Risk on the Company’s Variable Annuity products is mitigated through various hedging programs. For further information, see therefer to Enterprise Risk Management, Managing Equity Risk on Variable Annuity Hedging Program Section.Products.
The Company does not have significant equity risk exposure from invested assets. The Company’s exposure to equity risk includes the potential for lower earnings associated with certain of its businesses such as variable annuities where fee income is earned based upon the fair value of the assets under management. For further discussionDeclines in equity markets may also decrease the value of equity risk, see the Variable Product Guarantee Risklimited partnerships and Risk Management section.other alternative investments. In addition, the Company offers certain guaranteed benefits, primarily associated with variable annuity products, which increases the Company’s potential benefit exposure as thein periods that equity markets decline. For further discussion of equity risk, see the Managing Equity Risk on Variable Annuity Products section.
Reinsurance as a Risk Management Strategy
The Company utilizes reinsurance to transfer risk to affiliated and unaffiliated insurers. Reinsurance is used to transfer certain risk to reinsurance companies based on specific risk concentrations. All reinsurance processes are aligned under a single enterprise reinsurance risk management policy. Reinsurance purchasing is a centralized function across The Hartford to support a consistent strategy and to ensure that the reinsurance activities are fully integrated into the organization's risk management processes.
The Company uses third-party reinsurance for a portion of U.S. contracts issued with GMWB riders issued prior to the third quarter of 2003 and GMWB risks associated with a block of business sold between the third quarter of 2003 and the second quarter of 2006. The Company also uses third party reinsurance for a majority of the GMDB issued in the U.S.NAR.
The Company cedes insurance to affiliated and unaffiliated insurers in order to limit its maximum lossesenable the Company to manage capital and to diversify its exposures and provide statutory surplus relief.risk exposure. Such arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company.
The Company entered into two reinsurance transactions in connection withcomponents of the sales of its Retirement Plansgross and Individual Life businesses in January 2013. For further discussion of these transactions, see Note 2 - Business Dispositions of Notes to the Consolidated Financial Statements.
Life insurance product reinsurance recoverables represent loss and loss adjustment expense recoverable from a number of reinsurers. The Company'snet reinsurance recoverables are summarized as follows:
|
| | | | | | |
| | December 31, |
| Reinsurance Recoverable | 2013 | 2012 |
| Unpaid loss and loss adjustment expenses | 19,794 |
| 2,893 |
|
| Gross reinsurance recoverable | 19,794 |
| 2,893 |
|
| Less: allowance for uncollectible reinsurance | — |
| — |
|
| Net reinsurance recoverable | $ | 19,794 |
| $ | 2,893 |
|
|
| | | | | | |
| | As of December 31, |
| Reinsurance Recoverables | 2016 | 2015 |
| Reserve for future policy benefits and other policyholder funds and benefits payable | $ | 20,725 |
| $ | 20,499 |
|
| Gross reinsurance recoverables | 20,725 |
| 20,499 |
|
| Less: Allowance for uncollectible reinsurance [1] | — |
| — |
|
| Net reinsurance recoverables | $ | 20,725 |
| $ | 20,499 |
|
| |
| [1] | No allowance for uncollectible reinsurance is required as of December 31, 2016 and 2015. |
As of December 31, 2013,2016, the Company has reinsurance recoverables of $9.5 billion each from MassMutual and Prudential. ThesePrudential of $8.6 billion and $10.8 billion, respectively. As of December 31, 2015, the Company has reinsurance recoverables from MassMutual and Prudential of $8.6 billion and $10.4 billion, respectively. The Company's obligations to its direct policyholders that have been reinsured to MassMutual and Prudential are secured by invested assets held in trust for the benefittrust. Net of the Company in the event of a default by the reinsurers. As of December 31, 2013, the fair value ofinvested assets held in trust, securing the reinsurance recoverables from MassMutual and Prudential were $9.5 billion and $7.1 billion, respectively. Asas of December 31, 2013,2016, the netCompany has $1.2 billion of reinsurance recoverables from Prudential representsrepresenting approximately 29%15% of the Company's consolidated stockholders'stockholder's equity. As of December 31, 2013,2016, the Company has no other reinsurance-related concentrations of credit risk greater than 10% of the Company’s consolidated stockholder's equity.Consolidated Stockholder's Equity.
Managing Equity Risk on Variable Product Guarantee Risks and Risk ManagementAnnuity Products
The Company’s equity product risk is managed at the Life Operations level of The Hartford. The disclosures in the following equity product risk section are reflective of the risk management program, including reinsurance with third parties and the dynamic and macro derivative hedging programs which are structured at the parent company level. The following disclosures are also reflectiveMost of the Company’s reinsurance of the majority of variable annuities include GMDB and certain contracts with living and death benefit riders to an affiliated captive reinsurer. For further information onGMDB also include GMWB features. Declines in the affiliate reinsurance transaction, see Note 5 - Reinsurance of Notes to the Consolidated Financial Statements.
The Company’s variable products are significantly influenced by the U.S., Japanese, and other equity markets. Increases or declines in equity markets impact certain assets and liabilities related to the Company’s variable products and the Company’s earnings derived from those products. The Company's variable products currently include variable annuity contracts and mutual funds.
Generally, declines in equity markets will:
reduce the value of assets under management and the amount of fee income generated from those assets;
reduce the value of equity securities trading supporting the international variable annuities, the related policyholder funds and benefits payable, and the amount of fee income generated from those variable annuities;
increase the liability for direct GMWB benefits, and reinsured GMWB and GMIB benefits, resulting in realized capital losses;
increase the value of derivative assets used to hedge product guarantees resulting in realized capital gains;
increase the costs of the hedging instruments we use in our hedging program;
will increase the Company’s net amount at riskliability for these benefits. Many contracts with a GMDB and GMIB benefits;
decreaseinclude a maximum anniversary value ("MAV"), which in rising markets resets the Company’s actual gross profits, resulting in increased DAC amortization;
guarantee on the anniversary to be 'at the money'. As the MAV increases, it can increase the amount of required assets to be held backing variable annuity guarantees to maintain required regulatory reserve levels and targeted risk based capital ratios; andNAR for subsequent declines in account value. Generally, a GMWB contract is ‘in the money’ if the contractholder’s guaranteed remaining balance ("GRB") becomes greater than the account value.
decrease the Company’s estimated future gross profits. For further information, see Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and Other Universal Life-Type Contracts within the Critical Accounting Estimates section of the MD&A.
Generally, increases in equity markets will reduce the value of the macro hedge derivative assets, resulting in realized capital losses, and will generally have the inverse impact of those listed above. For more information, see Risk Hedging - Variable Annuity Hedging Program section.
Variable Annuity Guaranteed Benefits
The Company’s U.S. and Japan variable annuities include guaranteed minimum death benefits and certain contracts include optional living benefit features. A majority of the Company’s GMDB benefits, both direct and assumed, are reinsured with an affiliated captive reinsurer and an external reinsurer. The net amount at risk (“NAR”)NAR is generally defined as the guaranteed minimum benefit amount in excess of the contract holder’scontractholder’s current account value. Variable annuity account values with guarantee features were $74.5$40.7 billion and $82.8$44.2 billion as of December 31, 20132016 and December 31, 2012,2015, respectively.
The Company’s U.S. variable annuities include a GMWB rider. Declines in the equity markets will increase the Company’s liability for these benefits. A GMWB contract is ‘in the money’ if the contract holder’s guaranteed remaining benefit (“GRB”) becomes greater than the account value. The Company reinsures a majority of the GMWB benefits with an affiliated captive reinsurer.
The following tables summarize the account values of the Company’s U.S. direct variable annuities with guarantee features and Japan assumed guarantee features and the NAR split between various guarantee features (retained net amount at risk does not take into consideration the effects of the variable annuity hedge programs currently in place)place as of each balance sheet date):
| | Total Variable Annuity Guarantees | | As of December 31, 2013 | |
| As of December 31, 2016 | | As of December 31, 2016 |
| ($ in billions) | Account Value | Gross Net Amount at Risk | Retained Net Amount at Risk | % of Contracts In the Money[4] | % In the Money[4][5] | Account Value | Gross Net Amount at Risk | Retained Net Amount at Risk | % of Contracts In the Money[2] | % In the Money[2][3] |
| U. S. Variable Annuity [1] | | | |
| Variable Annuity [1] | | | |
| GMDB | $ | 61.8 |
| $ | 4.3 |
| $ | 1.0 |
| 16 | % | 26 | % | $ | 40.7 |
| $ | 3.3 |
| $ | 0.7 |
| 28 | % | 14 | % |
| GMWB | 30.3 |
| 0.2 |
| 0.1 |
| 5 | % | 12 | % | 18.3 |
| 0.2 |
| 0.1 |
| 7 | % | 13 | % |
| Japan Variable Annuity [1] | | | |
| GMDB | 12.7 |
| 0.2 |
| 0.2 |
| 31 | % | 4 | % | |
| GMIB [3] | 12.5 |
| 0.1 |
| 0.1 |
| 27 | % | 3 | % | |
| | Total Variable Annuity Guarantees | | As of December 31, 2012 | |
| As of December 31, 2015 | | As of December 31, 2015 |
| ($ in billions) | Account Value | Gross Net Amount at Risk | Retained Net Amount at Risk | % of Contracts In the Money[4] | % In the Money[4][5] | Account Value | Gross Net Amount at Risk | Retained Net Amount at Risk | % of Contracts In the Money[2] | % In the Money[2][3] |
| U. S. Variable Annuity [1] | | | |
| GMDB [2] | $ | 64.8 |
| $ | 6.6 |
| $ | 0.7 |
| 47 | % | 13 | % | |
| GMWB | 34.2 |
| 0.7 |
| 0.1 |
| 9 | % | 27 | % | |
| Japan Variable Annuity [1] | | | |
| GMDB | 16.1 |
| 2.6 |
| — |
| 97 | % | 14 | % | |
| GMIB [3] | 15.9 |
| 2.4 |
| — |
| 99 | % | 14 | % | |
| U.K. Variable Annuity [1] [6] | | | |
| Variable Annuity [1] | | | |
| GMDB | 1.9 |
| 0.04 |
| — |
| 100 | % | 2 | % | $ | 44.2 |
| $ | 4.2 |
| $ | 1.1 |
| 55 | % | 9 | % |
| GMWB | 1.7 |
| 0.03 |
| — |
| 24 | % | 7 | % | 20.2 |
| 0.2 |
| 0.2 |
| 11 | % | 9 | % |
| |
| [1] | Policies with a guaranteed living benefit (a GMWB in the US, or a GMIB in Japan) also have a guaranteed death benefit. The NAR for each benefit is shown; however these benefits are not additive. When a policy terminates due to death, any NAR related to GMWB or GMIB is released. Similarly, when a policy goes into benefit status on a GMWB, or GMIB, itsthe GMDB NAR is released.reduced to zero. |
| |
| [2] | Excludes group annuity contracts with GMDB benefits previously sold by Retirement Plans business. For further discussion of the sale of the Retirement Plans business, see Note 2 - Business Dispositions. |
| |
[3] | Includes small amount of GMWB and GMAB. |
| |
[4] | Excludes contracts that are fully reinsured. |
| |
[5]3] | For all contracts that are “in the money”, this represents the percentage by which the average contract was in the money. |
[6] On December 12, 2013, the Company completed the sale of the U.K variable annuity business of Hartford Life International Limited ("HLIL"), an indirect wholly-owned subsidiary. For further discussion of the sale of the U.K. variable annuity business, HLIL in 2013, see Note 2 - Business Dispositions and Note 17 - Discontinued Operations of Notes to Consolidated Financial Statements.
Many policyholders with a GMDB also have a GMWB in the U.S. or GMIB in Japan.GMWB. Policyholders that have a product that offeroffers both guarantees can only receive the GMDB or the GMIB benefit in Japan or the GMDB or GMWB in the U.S.GMWB. The GMDB NAR disclosed in the preceding tables above is a point in time measurement and assumes that all participants utilize the GMDB benefit on that measurement date. For additional information on the Company's GMDB liability, see Note 8 - Separate Accounts, Death Benefits and Other Insurance Benefit Features of Notes to Consolidated Financial Statements.
The Company expects to incur GMDB payments in the future only if the policyholder has an “in the money” GMDB at their death. IfFor policies with a GMWB rider, the company expects to incur GMWB payments in the future only if the account value is reduced over time to thea specified level through a combination of market performance and periodic withdrawals, at which point the contract holdercontractholder will receive an annuity equal to the GRB.GRB which is generally equal to premiums less withdrawals. For the Company’s “life-time” GMWB products, this annuity can exceed the GRB. As the account value fluctuates with equity market returns on a daily basis and the “life-time” GMWB payments may exceed the GRB, the ultimate amount to be paid by the Company, if any, is uncertain and could be significantly more or less than the Company’s current carried liability. For additional information on the Company’s GMWB liability, see Note 32 - Fair Value Measurements of Notes to Consolidated Financial Statements.
For GMIB contracts, in general, the policyholder has the right to elect to annuitize benefits, beginning (for certain products) on the tenth or fifteenth anniversary year of contract commencement, receive lump sum payment of the then current account value, or remain in the variable sub-account. For GMIB contracts, if the policyholder makes the annuitization election, the policyholder is entitled to receive the original investment value over a 10- to 15- year annuitization period. If the policyholder defers this election, the policyholder has the right to revisit the election annually on the policy anniversary date. In general, GMIB contracts will first become eligible to elect annuitization beginning in 2015. Because policyholders have various contractual rights to defer their annuitization election, the period over which annuitization election can take place is subject to policyholder behavior and therefore indeterminate. In addition, upon annuitization the contractholder surrenders access to the account value and the account value is transferred to the Company’s general account where it is invested and the additional investment proceeds are used towards payment of the original investment value. If the original investment value exceeds the account value upon annuitization then the contract is “in the money”. As of December 31, 2013, approximately 80% of the Japan GMIB contracts were “out of the money”. The Company reinsures a majority of the GMIB benefits with an affiliated captive reinsurer. For additional information on the Company’s GMIBCompany's GMDB liability, see Note 87 - Separate Accounts, DeathReserves for Future Policy Benefits and Other Insurance Benefit FeaturesSeparate Account Liabilities of Notes to Consolidated Financial Statements.
The following table represents the timing of account values eligible for annuitization under the assumed Japan GMIB as well as the NAR. The account values reflect 100% annuitization at the earliest point allowed by the contract and no adjustments for future market returns and policyholder behaviors. Future market returns, changes in the value of the Japanese yen and policyholder behaviors will impact account values eligible for annuitization in the years presented.
|
| | | | | | |
| GMIB [1] | As of December 31, 2013 |
| ($ in billions) | Account Value | Net Amount at Risk |
| 2014 | $ | — |
| $ | — |
|
| 2015 | 3.2 |
| — |
|
| 2016 | 1.9 |
| — |
|
| 2017 | 2.4 |
| 0.1 |
|
| 2018 | 1.1 |
| — |
|
| 2019 & beyond [2] | 3.5 |
| — |
|
| Total | $ | 12.1 |
| $ | 0.1 |
|
| |
[1] | Excludes certain non-GMIB living benefits of $0.4 billion of account value and $0.0 billion of NAR. |
| |
[2] | In 2019 & beyond, $2.0 billion of the $3.5 billion is associated with account value that is eligible in 2021. |
Variable Annuity Market Risk Exposures
The following table summarizes the broad Variable Annuity Guarantees offered by the Company and the market risks to which the guarantee is most exposed from a U.S. GAAP accounting perspective.
|
| | |
| Variable Annuity Guarantees [1] | U.S. GAAP Treatment [1] | Primary Market Risk Exposures [1] |
U. S. GMDB | Accumulation and life-contingent component of the portion of fees required to cover expected claims, less accumulation of actual claims paid | Equity Market Levels |
Japan GMDB (Assumed) | Accumulation of the portion of fees required to cover expected claims, less accumulation of actual claims paid | Equity Market Levels/Interest Rates/Foreign Currency |
GMWB | Fair Value | Equity Market Levels / Implied Volatility / Interest Rates |
For Life Component of GMWB | Accumulation of the portion of fees required to cover expected claims, less accumulation of actual claims paid | Equity Market Levels |
Japan GMIB (Assumed) | Fair Value | Equity Market Levels / Interest Rates / Foreign Currency |
Japan GMAB (Assumed)GMWB (excluding life-contingent portions) | Fair Value | Equity Market Levels / Implied Volatility / Interest Rates |
| |
| [1] | Each of these guarantees and the related U.S. GAAP accounting volatility will also be influenced by actual and estimated policyholder behavior. |
Risk Hedging
Variable Annuity Hedging Program
The Company’s variable annuity hedging program is primarily focused, through the use of reinsurance and capital market derivative instruments, on reducing the economic exposure to market risks associated with guaranteed benefits that are embedded in our global variable annuity contracts through the use of reinsurance and capital market derivative instruments.contracts. The variable annuity hedging program also considers the potential impacts on Statutory accounting results.statutory capital.
Reinsurance
The Company uses reinsurance for a portion of contracts with GMWB riders issued prior to the second quarter of 2006. The Company also uses reinsurance for a majority of the GMDB NAR.
Capital Market Derivatives
GMWB Hedge ProgramFixed Maturity Investments
The Company enters into derivative contracts to hedge market risk exposures associated with the GMWB liabilities that are not reinsured. These derivative contracts include customized swaps, interest rate swapsfair value of fixed maturity securities was $23.9 billion and futures,$24.8 billion at December 31, 2016 and equity swaps, options, and futures, on certain indices including the S&P 500 index, EAFE index, and NASDAQ index.
Additionally, the Company holds customized derivative contracts to provide protection from certain capital market risks for the remaining term of specified blocks of non-reinsured GMWB riders. These customized derivative contracts are based on policyholder behavior assumptions specified at the inception2015, respectively. The weighted average duration of the derivative contracts. The Company retains the risk for differences between assumedportfolio, including fixed maturities, commercial mortgage loans, certain derivatives, and actual policyholder behaviorcash equivalents, was approximately 6.8 years and between the performance6.6 years as of the actively managed funds underlying the separate accountsDecember 31, 2016 and their respective indices.2015, respectively.
While the Company actively manages this dynamic hedging program, increased U.S. GAAP earnings volatility may result from factors including, but not limited to: policyholder behavior, capital markets, divergence between the performance of the underlying funds and the hedging indices, changes in hedging positions and the relative emphasis placed on various risk management objectives.
Macro Hedge ProgramLiabilities
The Company’s macro hedging program uses derivativeissued investment contracts and certain insurance product liabilities, other than non-guaranteed separate accounts, include asset accumulation vehicles such as fixed annuities, guaranteed investment products, and other investment and universal life-type contracts. The primary risk associated with these products is that, despite the use of market value adjustment features and surrender charges, the spread between investment return and credited rate may not be sufficient to earn targeted returns.
Asset accumulation vehicles primarily require a fixed rate payment, often for a specified period of time, and fixed rate annuities contain surrender values that are based upon a market value adjusted formula if held for shorter periods. In addition, certain products such as corporate owned life insurance contracts and the general account portion of variable annuity products credit interest to policyholders subject to market conditions and minimum interest rate guarantees. As of December 31, 2016 and 2015, the Company had $5,187 and $5,613, respectively, of liabilities for fixed annuities and $194 and $192, respectively, of liabilities for guaranteed investment products.
The Company's issued non-investment type contracts include structured settlement contracts, terminal funding agreements, on-benefit annuities (i.e., the annuitant is currently receiving benefits). The cash outflows associated with these policy liabilities are not interest rate sensitive but do vary based on the timing. Similar to investment-type products, the aggregate cash flow payment streams are relatively predictable. Products in this category may rely upon actuarial pricing assumptions (including mortality and morbidity) and have an element of cash flow uncertainty. As of December 31, 2016 and 2015, the Company had $6,887 and $6,934, respectively of liabilities for structured settlements and terminal funding agreements and $1,636 and $1,647, respectively, of liabilities for on-benefit payout annuities.
Interest Rate Sensitivity
Invested Assets Supporting Fixed Liabilities
Included in the following table is the before-tax change in the net economic value of investment contracts including structured settlements, fixed annuity contracts and terminal funding agreements for which the payment rates are fixed at contract issuance and/or the investment experience is substantially absorbed by the Company’s operations, along with the corresponding invested assets. Also included in this analysis are the interest rate sensitive derivatives used by the Company to hedge its exposure to interest rate risk in the investment portfolios supporting these contracts. This analysis does not include the assets and corresponding liabilities of certain insurance products such as certain life contingent annuities. Certain financial instruments, such as optionslimited partnerships and futures on equities and interest ratesother alternative investments, have been omitted from the analysis due to provide protection against the statutory tail scenario risk arising from U.S., GMWB and GMDB liabilities, on the Company’s statutory surplus. These macro hedges cover some of the residual risks not otherwise covered by specific dynamic hedging programs. Management assesses this residual risk under various scenarios in designing and executing the macro hedge program. The macro hedge program will result in additional U.S. GAAP earnings volatility as changes in the value of the macro hedge derivatives, which are designedfact that these investments generally lack sensitivity to reduce statutory reserve and capital volatility, may not be closely aligned to changes in U.S. GAAP liabilities.
Japan Hedge Program
The Company enters into derivative contracts to hedge market risk exposures associated with the guaranteed benefits which are embedded in the international variable annuity contracts. These derivative contracts include foreign currency forwards and options, interest rate swaps, swaptions and futures, and equity swaps, options, and futures on certain broadly traded global equity indices including the S&P500 index, Nikkei 225 index, Topix index, FTSE 100 index, and Euro Stoxx 50. During 2013, the Company expanded its hedging program to substantially reduce equity and foreign currency exchange risk. The program is primarily focused on the risks that have been reinsured to the Company’s U.S. legal entities although certain hedges, predominantly options, are also held directly in HLIKK.
Equity Risk on Statutory Capital and Risk Based Capital
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending upon a variety of factors. The amount of change in the statutory surplus or RBC ratios can vary based on individual factors and may be compounded in extreme scenarios or if multiple factors occur at the same time. At times the impact of changes in certain market factors or a combination of multiple factors on RBC ratios can be varied and in some instances counterintuitive. Factors include:
In general, as equity market levels decline, our reserves for death and living benefit guarantees associated with variable annuity contracts increases, sometimes at a greater than linear rate, reducing statutory surplus levels. In addition, as equity market levels increase, generally surplus levels will increase. RBC ratios will also tend to increase when equity markets increase. However, as a result of a number of factors and market conditions, including the level of hedging costs and other risk transfer activities, reserve requirements for death and living benefit guarantees and RBC requirements could increase resulting in lower RBC ratios.
As the value of certain fixed-income and equity securities in our investment portfolio decreases, due in part to credit spread widening, statutory surplus and RBC ratios may decrease.
As the value of certain derivative instruments that do not get hedge accounting decreases, statutory surplus and RBC ratios may decrease.
Our statutory surplus is also impacted by widening credit spreads as a result of the accounting for thechanges. Insulated separate account assets and liabilities are excluded from the analysis because gains and losses in ourseparate accounts accrue to policyholders.
The calculation of the estimated hypothetical change in net economic value below assumes a 100 basis point upward and downward parallel shift in the yield curve.
|
| | | | | | | | | | | | |
| Interest rate sensitivity of fixed liabilities and invested assets supporting them | Change in Net Economic Value as of December 31, |
| | 2016 | 2015 |
| Basis point shift | -100 |
| +100 |
| -100 |
| +100 |
|
| Increase (decrease) in economic value, before tax | $ | (634 | ) | $ | 409 |
| $ | (429 | ) | $ | 261 |
|
The carrying value of fixed MVA annuities. Statutory separate accountmaturities, commercial mortgage loans and short-term investments related to the businesses included in the table above was $18.3 billion and $18.3 billion, as of December 31, 2016 and 2015, respectively. The assets supporting the fixed MVA annuitiesliabilities are recorded at fair value. In determiningmonitored and managed within set duration guidelines, and are evaluated on a daily basis, as well as annually using scenario simulation techniques in compliance with regulatory requirements.
Invested Assets Not Supporting Fixed Liabilities
The following table provides an analysis showing the statutory reserve for the fixed MVA annuities, we are required to use current crediting rates. In many capital market scenarios, current crediting rates are highly correlated with market rates implicit in the fair value of statutory separate account assets. As a result, the change in statutory reserve from period to period will likely substantially offset theestimated before-tax change in the fair value of the statutory separate account assets. However,Company’s investments and related derivatives, excluding assets supporting fixed liabilities which are included in periodsthe table above, assuming 100 basis point upward and downward parallel shifts in the yield curve as of volatile credit markets,December 31, 2016 and 2015. Certain financial instruments, such as welimited partnerships and other alternative investments, have experienced, actual credit spreads on investment assets may increase sharply for certain sub-sectorsbeen omitted from the analysis due to the fact that these investments generally lack sensitivity to interest rate changes.
|
| | | | | | | | | | | | |
| Interest rate sensitivity of invested assets not supporting fixed liabilities | Change in Fair Value as of December 31, |
| | 2016 | 2015 |
| Basis point shift | -100 |
| +100 |
| -100 |
| +100 |
|
| Increase (decrease) in fair value, before tax | $ | 453 |
| $ | (409 | ) | $ | 454 |
| $ | (405 | ) |
The carrying value of fixed maturities, commercial mortgage loans and short-term investments related to the businesses included in the table above was $9.8 billion and $10.0 billion, as of December 31, 2016 and 2015, respectively. The selection of the overall credit100 basis point parallel shift in the yield curve was made only as an illustration of the potential hypothetical impact of such an event and should not be construed as a prediction of future market resultingevents. Actual results could differ materially from those illustrated above due to the nature of the estimates and assumptions used in statutory separate account asset market value losses.the above analysis. The Company’s sensitivity analysis calculation assumes that the composition of invested assets and liabilities remain materially consistent throughout the year and that the current relationship between short-term and long-term interest rates will remain constant over time. As actual credit spreads area result, these calculations may not fully reflected incapture the current crediting rates, the calculationimpact of statutory reserves will not substantially offset the change in fair value of the statutory separate account assets resulting in reductions in statutory surplus and can create funding obligations to the statutory separate account.
Most of these factors are outside of the Company’s control. The Company’s financial strength and credit ratings are significantly influenced by the statutory surplus amounts and RBC ratios of our insurance company subsidiaries. Due to all of these factors, projecting statutory capital and the related projected RBC ratios is complex. In addition, rating agencies may implement changes to their internal models that have the effect of increasingportfolio re-allocations, significant product sales or decreasing the amount of statutory capital we must hold in order to maintain our current ratings.
The Company has reinsured approximately 20% of its risk associated with GMWB and 76% of its risk associated with the aggregate GMDB exposure. These reinsurance agreements serve to reduce the Company’s exposure tonon-parallel changes in the statutory reserves and the related capital and RBC ratios associated with changes in the equity markets. The Company also continues to explore other solutions for mitigating the capital market risk effect on surplus, such as internal and external reinsurance solutions, modifications to our hedging program, changes in product design, increasing pricing and expense management.interest rates.
Foreign Currency Exchange
Equity Risk
Foreign currency exchangeEquity risk is defined as the risk of financial loss due to changes in the relative value between currencies. of global equities or equity indices. The Company has exposure to equity risk from assets under management and embedded derivatives within the Company’s variable annuities. Equity Risk on the Company’s Variable Annuity products is mitigated through various hedging programs. For further information, refer to Enterprise Risk Management, Managing Equity Risk on Variable Annuity Products.
The Company’s foreign currency exchangeexposure to equity risk is related to non-U.S. dollar denominated liability contracts, including its GMDB, GMAB, GMWB and GMIB benefitsincludes the potential for lower earnings associated with certain of its reinsurance of Japanbusinesses such as variable annuities where fee income is earned based upon the investment in and net incomefair value of the Japanese operations, non-U.S. dollar denominated investments, which primarily consistassets under management. Declines in equity markets may also decrease the value of fixed maturity investments,limited partnerships and a yen denominated individual fixed annuity product.other alternative investments. In addition, the Company offers certain guaranteed benefits, primarily associated with variable annuity products, which increases the Company’s operationspotential benefit exposure in periods that equity markets decline. For further discussion of equity risk, see the Managing Equity Risk on Variable Annuity Products section.
Reinsurance as a Risk Management Strategy
The Company utilizes reinsurance to transfer risk to affiliated and unaffiliated insurers. Reinsurance is used to transfer certain risk to reinsurance companies based on specific risk concentrations. All reinsurance processes are aligned under a single enterprise reinsurance risk management policy. Reinsurance purchasing is a centralized function across The Hartford to support a consistent strategy and to ensure that the reinsurance activities are fully integrated into the organization's risk management processes.
The Company uses reinsurance for a portion of contracts with GMWB riders issued non-U.S. dollar denominated funding agreementprior to the second quarter of 2006. The Company also uses reinsurance for a majority of the GMDB NAR.
The Company cedes insurance to affiliated and unaffiliated insurers to enable the Company to manage capital and risk exposure. Such arrangements do not relieve the Company of its primary liability contracts. A portionto policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company.
The components of the gross and net reinsurance recoverables are summarized as follows: |
| | | | | | |
| | As of December 31, |
| Reinsurance Recoverables | 2016 | 2015 |
| Reserve for future policy benefits and other policyholder funds and benefits payable | $ | 20,725 |
| $ | 20,499 |
|
| Gross reinsurance recoverables | 20,725 |
| 20,499 |
|
| Less: Allowance for uncollectible reinsurance [1] | — |
| — |
|
| Net reinsurance recoverables | $ | 20,725 |
| $ | 20,499 |
|
| |
| [1] | No allowance for uncollectible reinsurance is required as of December 31, 2016 and 2015. |
As of December 31, 2016, the Company has reinsurance recoverables from MassMutual and Prudential of $8.6 billion and $10.8 billion, respectively. As of December 31, 2015, the Company has reinsurance recoverables from MassMutual and Prudential of $8.6 billion and $10.4 billion, respectively. The Company's obligations to its direct policyholders that have been reinsured to MassMutual and Prudential are secured by invested assets held in trust. Net of invested assets held in trust, as of December 31, 2016, the Company has $1.2 billion of reinsurance recoverables from Prudential representing approximately 15% of the Company's consolidated stockholder's equity. As of December 31, 2016, the Company has no other reinsurance-related concentrations of credit risk greater than 10% of the Company’s foreign currency exposureConsolidated Stockholder's Equity.
Managing Equity Risk on Variable Annuity Products
Most of the Company’s variable annuities include GMDB and certain contracts with GMDB also include GMWB features. Declines in the equity markets will increase the Company’s liability for these benefits. Many contracts with a GMDB include a maximum anniversary value ("MAV"), which in rising markets resets the guarantee on the anniversary to be 'at the money'. As the MAV increases, it can increase the NAR for subsequent declines in account value. Generally, a GMWB contract is mitigated‘in the money’ if the contractholder’s guaranteed remaining balance ("GRB") becomes greater than the account value.
The NAR is generally defined as the guaranteed minimum benefit amount in excess of the contractholder’s current account value. Variable annuity account values with guarantee features were $40.7 billion and $44.2 billion as of December 31, 2016 and December 31, 2015, respectively.
The following tables summarize the account values of the Company’s variable annuities with guarantee features and the NAR split between various guarantee features (retained net amount at risk does not take into consideration the effects of the variable annuity hedge programs currently in place as of each balance sheet date):
|
| | | | | | | | | | | | | |
| Total Variable Annuity Guarantees |
| As of December 31, 2016 |
| ($ in billions) | Account Value | Gross Net Amount at Risk | Retained Net Amount at Risk | % of Contracts In the Money[2] | % In the Money[2][3] |
| Variable Annuity [1] | | | | | |
| GMDB | $ | 40.7 |
| $ | 3.3 |
| $ | 0.7 |
| 28 | % | 14 | % |
| GMWB | 18.3 |
| 0.2 |
| 0.1 |
| 7 | % | 13 | % |
|
| | | | | | | | | | | | | |
| Total Variable Annuity Guarantees |
| As of December 31, 2015 |
| ($ in billions) | Account Value | Gross Net Amount at Risk | Retained Net Amount at Risk | % of Contracts In the Money[2] | % In the Money[2][3] |
| Variable Annuity [1] | | | | | |
| GMDB | $ | 44.2 |
| $ | 4.2 |
| $ | 1.1 |
| 55 | % | 9 | % |
| GMWB | 20.2 |
| 0.2 |
| 0.2 |
| 11 | % | 9 | % |
| |
| [1] | Policies with a guaranteed living benefit also have a guaranteed death benefit. The NAR for each benefit is shown; however these benefits are not additive. When a policy terminates due to death, any NAR related to GMWB is released. Similarly, when a policy goes into benefit status on a GMWB, the GMDB NAR is reduced to zero. |
| |
| [2] | Excludes contracts that are fully reinsured. |
| |
| [3] | For all contracts that are “in the money”, this represents the percentage by which the average contract was in the money. |
Many policyholders with a GMDB also have a GMWB. Policyholders that have a product that offers both guarantees can only receive the GMDB or GMWB. The GMDB NAR disclosed in the preceding tables is a point in time measurement and assumes that all participants utilize the GMDB on that measurement date.
The Company expects to incur GMDB payments in the future only if the policyholder has an “in the money” GMDB at their death. For policies with a GMWB rider, the company expects to incur GMWB payments in the future only if the account value is reduced over time to a specified level through a combination of market performance and periodic withdrawals, at which point the contractholder will receive an annuity equal to the GRB which is generally equal to premiums less withdrawals. For the Company’s “life-time” GMWB products, this annuity can exceed the GRB. As the account value fluctuates with equity market returns on a daily basis and the “life-time” GMWB payments may exceed the GRB, the ultimate amount to be paid by the Company, if any, is uncertain and could be significantly more or less than the Company’s current carried liability. For additional information on the Company’s GMWB liability, see Note 2 - Fair Value Measurements of Notes to Consolidated Financial Statements. For additional information on the Company's GMDB liability, see Note 7 - Reserves for Future Policy Benefits and Separate Account Liabilities of Notes to Consolidated Financial Statements.
Variable Annuity Market Risk Exposures
The following table summarizes the broad Variable Annuity Guarantees offered by the Company and the market risks to which the guarantee is most exposed from a U.S. GAAP accounting perspective.
|
| | |
| Variable Annuity Guarantees [1] | U.S. GAAP Treatment [1] | Primary Market Risk Exposures [1] |
| GMDB and life-contingent component of the GMWB | Accumulation of the portion of fees required to cover expected claims, less accumulation of actual claims paid | Equity Market Levels |
| GMWB (excluding life-contingent portions) | Fair Value | Equity Market Levels / Implied Volatility / Interest Rates |
| |
| [1] | Each of these guarantees and the related U.S. GAAP accounting volatility will also be influenced by actual and estimated policyholder behavior. |
Risk Hedging
Variable Annuity Hedging Program
The Company’s variable annuity hedging program is primarily focused, through the use of derivatives.
The company managesreinsurance and capital market derivative instruments, on reducing the economic exposure to market risk, including foreign currency exchange risk,risks associated with the guaranteed benefits relatedthat are embedded in our variable annuity contracts. The variable annuity hedging program also considers the potential impacts on statutory capital.
Reinsurance
The Company uses reinsurance for a portion of contracts with GMWB riders issued prior to the Japanese variable annuities through its comprehensive International Hedge Program. For more information on the International Hedge Program, including the foreign currency exchange risk sensitivity analysis, see the Variable Product Guarantee Risks and Risk Management section.
Liabilities
second quarter of 2006. The Company issued non-U.S. dollar denominated funding agreement liability contracts. The Company hedges the foreign currency risk associated with these liability contracts with currency rate swaps. At December 31, 2013 and 2012 the derivatives used to hedge foreign currency exchange risk related to foreign denominated liability contracts hadalso uses reinsurance for a total notional amount of $94 and $134 and a total fair value of $(1) and less than $1, respectively.
Hartford Life Insurance K.K. (“HLIKK”), a wholly-owned Japanese subsidiary of Hartford Life, Inc. (“HLI”), previously issued a yen-denominated fixed annuity product and subsequently reinsured it to the Company. During 2009, the Company suspended new salesmajority of the Japan business. The underlying investment involves investing in U.S. securities markets, which offer favorable credit spreads. The yen denominated fixed annuity product (“yen fixed annuities”) is recorded in the consolidated balance sheets with invested assets denominated in dollars while policyholder liabilities are denominated in yen and converted to U.S. dollars based upon the December 31 yen to U.S. dollar spot rate. The difference between U.S. dollar denominated investments and yen denominated liabilities exposes the Company to currency risk. The Company manages this currency risk associated with the yen fixed annuities primarily with pay variable U.S. dollar and receive fixed yen currency swaps.GMDB NAR.
As of December 31, 2013 and 2012 the notional value of the currency swaps was $1.4 billion and $1.7 billion and the fair value was $(6) and $224, respectively. The currency swaps are recorded at fair value, incorporating changes in value due to changes in forward foreign exchange rates, interest rates and accrued income. Included in net realized capital gains and losses was a before-tax net gain of $6 and a net loss $(36) for the years ended December 31, 2013, and 2012, respectively, which includes the changes in value of the currency swaps, excluding net periodic coupon settlements, and the yen fixed annuity contract remeasurement.
Fixed Maturity Investments
The risk associated with the non-U.S. dollar denominated fixed maturities relates to potential decreases in value and income resulting from unfavorable changes in foreign exchange rates. The fair value of the non-U.S. dollar denominated fixed maturities, which are primarily denominated in yen, at December 31, 2013 and 2012, were approximately $1.0 billion and $1.5 billion, respectively. Included in these amounts are $0.9 billion and $1.4 billion at December 31, 2013 and 2012, respectively, related to non-U.S. dollar denominated fixed maturity securities was $23.9 billion and $24.8 billion at December 31, 2016 and 2015, respectively. The weighted average duration of the portfolio, including fixed maturities, commercial mortgage loans, certain derivatives, and cash equivalents, was approximately 6.8 years and 6.6 years as of December 31, 2016 and 2015, respectively.
Liabilities
The Company’s issued investment contracts and certain insurance product liabilities, other than non-guaranteed separate accounts, include asset accumulation vehicles such as fixed annuities, guaranteed investment products, and other investment and universal life-type contracts. The primary risk associated with these products is that, directly supportdespite the use of market value adjustment features and surrender charges, the spread between investment return and credited rate may not be sufficient to earn targeted returns.
Asset accumulation vehicles primarily require a fixed rate payment, often for a specified period of time, and fixed rate annuities contain surrender values that are based upon a market value adjusted formula if held for shorter periods. In addition, certain products such as corporate owned life insurance contracts and the general account portion of variable annuity products credit interest to policyholders subject to market conditions and minimum interest rate guarantees. As of December 31, 2016 and 2015, the Company had $5,187 and $5,613, respectively, of liabilities denominatedfor fixed annuities and $194 and $192, respectively, of liabilities for guaranteed investment products.
The Company's issued non-investment type contracts include structured settlement contracts, terminal funding agreements, on-benefit annuities (i.e., the annuitant is currently receiving benefits). The cash outflows associated with these policy liabilities are not interest rate sensitive but do vary based on the timing. Similar to investment-type products, the aggregate cash flow payment streams are relatively predictable. Products in this category may rely upon actuarial pricing assumptions (including mortality and morbidity) and have an element of cash flow uncertainty. As of December 31, 2016 and 2015, the Company had $6,887 and $6,934, respectively of liabilities for structured settlements and terminal funding agreements and $1,636 and $1,647, respectively, of liabilities for on-benefit payout annuities.
Interest Rate Sensitivity
Invested Assets Supporting Fixed Liabilities
Included in the same currencies. At December 31, 2013following table is the before-tax change in the net economic value of investment contracts including structured settlements, fixed annuity contracts and 2012,terminal funding agreements for which the payment rates are fixed at contract issuance and/or the investment experience is substantially absorbed by the Company’s operations, along with the corresponding invested assets. Also included in this analysis are the interest rate sensitive derivatives used by the Company to hedge currency exchangeits exposure to interest rate risk in the investment portfolios supporting these contracts. This analysis does not include the assets and corresponding liabilities of certain insurance products such as certain life contingent annuities. Certain financial instruments, such as limited partnerships and other alternative investments, have been omitted from the analysis due to the fact that these investments generally lack sensitivity to interest rate changes. Insulated separate account assets and liabilities are excluded from the analysis because gains and losses in separate accounts accrue to policyholders.
The calculation of the estimated hypothetical change in net economic value below assumes a 100 basis point upward and downward parallel shift in the yield curve.
|
| | | | | | | | | | | | |
| Interest rate sensitivity of fixed liabilities and invested assets supporting them | Change in Net Economic Value as of December 31, |
| | 2016 | 2015 |
| Basis point shift | -100 |
| +100 |
| -100 |
| +100 |
|
| Increase (decrease) in economic value, before tax | $ | (634 | ) | $ | 409 |
| $ | (429 | ) | $ | 261 |
|
The carrying value of fixed maturities, commercial mortgage loans and short-term investments related to the remaining non-U.S. dollar denominatedbusinesses included in the table above was $18.3 billion and $18.3 billion, as of December 31, 2016 and 2015, respectively. The assets supporting the fixed maturities hadliabilities are monitored and managed within set duration guidelines, and are evaluated on a total notional amount of $125 and $161, respectively, and totaldaily basis, as well as annually using scenario simulation techniques in compliance with regulatory requirements.
Invested Assets Not Supporting Fixed Liabilities
The following table provides an analysis showing the estimated before-tax change in the fair value of $(7) and $(10), respectively.
Based on the fair values of the Company’s non-U.S. dollar denominated securities, includinginvestments and related derivatives, excluding assets supporting fixed liabilities which are included in the associated yen denominated fixed annuity product liabilities,table above, assuming 100 basis point upward and derivative instrumentsdownward parallel shifts in the yield curve as of December 31, 20132016 and 2012; management estimates2015. Certain financial instruments, such as limited partnerships and other alternative investments, have been omitted from the analysis due to the fact that a 10% unfavorable changethese investments generally lack sensitivity to interest rate changes.
|
| | | | | | | | | | | | |
| Interest rate sensitivity of invested assets not supporting fixed liabilities | Change in Fair Value as of December 31, |
| | 2016 | 2015 |
| Basis point shift | -100 |
| +100 |
| -100 |
| +100 |
|
| Increase (decrease) in fair value, before tax | $ | 453 |
| $ | (409 | ) | $ | 454 |
| $ | (405 | ) |
The carrying value of fixed maturities, commercial mortgage loans and short-term investments related to the businesses included in exchange rates would decrease the fair values by a before-tax totaltable above was $9.8 billion and $10.0 billion, as of approximately $21 and $67, respectively. The estimated impact was based upon a 10% change in December 31, spot rates.2016 and 2015, respectively. The selection of the 10% unfavorable change100 basis point parallel shift in the yield curve was made only foras an illustration of the potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results could differ materially from those illustrated above due to the nature of the estimates and assumptions used in the above analysis. The Company’s sensitivity analysis calculation assumes that the composition of invested assets and liabilities remain materially consistent throughout the year and that the current relationship between short-term and long-term interest rates will remain constant over time. As a result, these calculations may not fully capture the impact of portfolio re-allocations, significant product sales or non-parallel changes in interest rates.
Equity Risk
Equity risk is the risk of financial loss due to changes in the value of global equities or equity indices. The Company has exposure to equity risk from assets under management and embedded derivatives within the Company’s variable annuities. Equity Risk on the Company’s Variable Annuity products is mitigated through various hedging programs. For further information, refer to Enterprise Risk Management, Managing Equity Risk on Variable Annuity Products.
The Company’s exposure to equity risk includes the potential for lower earnings associated with certain of its businesses such as variable annuities where fee income is earned based upon the fair value of the assets under management. Declines in equity markets may also decrease the value of limited partnerships and other alternative investments. In addition, the Company offers certain guaranteed benefits, primarily associated with variable annuity products, which increases the Company’s potential benefit exposure in periods that equity markets decline. For further discussion of equity risk, see the Managing Equity Risk on Variable Annuity Products section.
Reinsurance as a Risk Management Strategy
The Company utilizes reinsurance to transfer risk to affiliated and unaffiliated insurers. Reinsurance is used to transfer certain risk to reinsurance companies based on specific risk concentrations. All reinsurance processes are aligned under a single enterprise reinsurance risk management policy. Reinsurance purchasing is a centralized function across The Hartford to support a consistent strategy and to ensure that the reinsurance activities are fully integrated into the organization's risk management processes.
The Company uses reinsurance for a portion of contracts with GMWB riders issued prior to the second quarter of 2006. The Company also uses reinsurance for a majority of the GMDB NAR.
The Company cedes insurance to affiliated and unaffiliated insurers to enable the Company to manage capital and risk exposure. Such arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company.
The components of the gross and net reinsurance recoverables are summarized as follows: |
| | | | | | |
| | As of December 31, |
| Reinsurance Recoverables | 2016 | 2015 |
| Reserve for future policy benefits and other policyholder funds and benefits payable | $ | 20,725 |
| $ | 20,499 |
|
| Gross reinsurance recoverables | 20,725 |
| 20,499 |
|
| Less: Allowance for uncollectible reinsurance [1] | — |
| — |
|
| Net reinsurance recoverables | $ | 20,725 |
| $ | 20,499 |
|
| |
| [1] | No allowance for uncollectible reinsurance is required as of December 31, 2016 and 2015. |
As of December 31, 2016, the Company has reinsurance recoverables from MassMutual and Prudential of $8.6 billion and $10.8 billion, respectively. As of December 31, 2015, the Company has reinsurance recoverables from MassMutual and Prudential of $8.6 billion and $10.4 billion, respectively. The Company's obligations to its direct policyholders that have been reinsured to MassMutual and Prudential are secured by invested assets held in trust. Net of invested assets held in trust, as of December 31, 2016, the Company has $1.2 billion of reinsurance recoverables from Prudential representing approximately 15% of the Company's consolidated stockholder's equity. As of December 31, 2016, the Company has no other reinsurance-related concentrations of credit risk greater than 10% of the Company’s Consolidated Stockholder's Equity.
Managing Equity Risk on Variable Annuity Products
Most of the Company’s variable annuities include GMDB and certain contracts with GMDB also include GMWB features. Declines in the equity markets will increase the Company’s liability for these benefits. Many contracts with a GMDB include a maximum anniversary value ("MAV"), which in rising markets resets the guarantee on the anniversary to be 'at the money'. As the MAV increases, it can increase the NAR for subsequent declines in account value. Generally, a GMWB contract is ‘in the money’ if the contractholder’s guaranteed remaining balance ("GRB") becomes greater than the account value.
The NAR is generally defined as the guaranteed minimum benefit amount in excess of the contractholder’s current account value. Variable annuity account values with guarantee features were $40.7 billion and $44.2 billion as of December 31, 2016 and December 31, 2015, respectively.
The following tables summarize the account values of the Company’s variable annuities with guarantee features and the NAR split between various guarantee features (retained net amount at risk does not take into consideration the effects of the variable annuity hedge programs currently in place as of each balance sheet date):
|
| | | | | | | | | | | | | |
| Total Variable Annuity Guarantees |
| As of December 31, 2016 |
| ($ in billions) | Account Value | Gross Net Amount at Risk | Retained Net Amount at Risk | % of Contracts In the Money[2] | % In the Money[2][3] |
| Variable Annuity [1] | | | | | |
| GMDB | $ | 40.7 |
| $ | 3.3 |
| $ | 0.7 |
| 28 | % | 14 | % |
| GMWB | 18.3 |
| 0.2 |
| 0.1 |
| 7 | % | 13 | % |
|
| | | | | | | | | | | | | |
| Total Variable Annuity Guarantees |
| As of December 31, 2015 |
| ($ in billions) | Account Value | Gross Net Amount at Risk | Retained Net Amount at Risk | % of Contracts In the Money[2] | % In the Money[2][3] |
| Variable Annuity [1] | | | | | |
| GMDB | $ | 44.2 |
| $ | 4.2 |
| $ | 1.1 |
| 55 | % | 9 | % |
| GMWB | 20.2 |
| 0.2 |
| 0.2 |
| 11 | % | 9 | % |
| |
| [1] | Policies with a guaranteed living benefit also have a guaranteed death benefit. The NAR for each benefit is shown; however these benefits are not additive. When a policy terminates due to death, any NAR related to GMWB is released. Similarly, when a policy goes into benefit status on a GMWB, the GMDB NAR is reduced to zero. |
| |
| [2] | Excludes contracts that are fully reinsured. |
| |
| [3] | For all contracts that are “in the money”, this represents the percentage by which the average contract was in the money. |
Many policyholders with a GMDB also have a GMWB. Policyholders that have a product that offers both guarantees can only receive the GMDB or GMWB. The GMDB NAR disclosed in the preceding tables is a point in time measurement and assumes that all participants utilize the GMDB on that measurement date.
The Company expects to incur GMDB payments in the future only if the policyholder has an “in the money” GMDB at their death. For policies with a GMWB rider, the company expects to incur GMWB payments in the future only if the account value is reduced over time to a specified level through a combination of market performance and periodic withdrawals, at which point the contractholder will receive an annuity equal to the GRB which is generally equal to premiums less withdrawals. For the Company’s “life-time” GMWB products, this annuity can exceed the GRB. As the account value fluctuates with equity market returns on a daily basis and the “life-time” GMWB payments may exceed the GRB, the ultimate amount to be paid by the Company, if any, is uncertain and could be significantly more or less than the Company’s current carried liability. For additional information on the Company’s GMWB liability, see Note 2 - Fair Value Measurements of Notes to Consolidated Financial Statements. For additional information on the Company's GMDB liability, see Note 7 - Reserves for Future Policy Benefits and Separate Account Liabilities of Notes to Consolidated Financial Statements.
Variable Annuity Market Risk Exposures
The following table summarizes the broad Variable Annuity Guarantees offered by the Company and the market risks to which the guarantee is most exposed from a U.S. GAAP accounting perspective.
|
| | |
| Variable Annuity Guarantees [1] | U.S. GAAP Treatment [1] | Primary Market Risk Exposures [1] |
| GMDB and life-contingent component of the GMWB | Accumulation of the portion of fees required to cover expected claims, less accumulation of actual claims paid | Equity Market Levels |
| GMWB (excluding life-contingent portions) | Fair Value | Equity Market Levels / Implied Volatility / Interest Rates |
| |
| [1] | Each of these guarantees and the related U.S. GAAP accounting volatility will also be influenced by actual and estimated policyholder behavior. |
Risk Hedging
Variable Annuity Hedging Program
The Company’s variable annuity hedging program is primarily focused, through the use of reinsurance and capital market derivative instruments, on reducing the economic exposure to market risks associated with guaranteed benefits that are embedded in our variable annuity contracts. The variable annuity hedging program also considers the potential impacts on statutory capital.
Reinsurance
The Company uses reinsurance for a portion of contracts with GMWB riders issued prior to the second quarter of 2006. The Company also uses reinsurance for a majority of the GMDB NAR.
Capital Market Derivatives
GMWB Hedge Program
Under the dynamic hedging program, the Company enters into derivative contracts to hedge market risk exposures associated with the GMWB liabilities that 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.
Additionally, the Company holds customized derivative contracts to provide protection from certain capital market risks for the remaining term of specified blocks of non-reinsured GMWB riders. These customized derivative contracts are based on policyholder behavior assumptions specified at the inception of the derivative contracts. The Company retains the risk for differences between assumed and actual policyholder behavior and between the performance of the actively managed funds underlying the separate accounts and their respective indices.
While the Company actively manages this dynamic hedging program, increased U.S. GAAP earnings volatility may result from factors including, but not limited to: policyholder behavior, capital markets, divergence between the performance of the underlying funds and the hedging indices, changes in hedging positions and the relative emphasis placed on various risk management objectives.
Macro Hedge Program
The Company’s macro hedging program uses derivative instruments, such as options and futures on equities and interest rates, to provide protection against the statutory tail scenario risk arising from GMWB and GMDB liabilities on the Company’s statutory surplus. These macro hedges cover some of the residual risks not otherwise covered by the dynamic hedging program. Management assesses this residual risk under various scenarios in designing and executing the macro hedge program. The macro hedge program will result in additional U.S. GAAP earnings volatility as changes in the value of the macro hedge derivatives, which are designed to reduce statutory reserve and capital volatility, may not be closely aligned to changes in U.S. GAAP liabilities.
Variable Annuity Hedging Program Sensitivities
The underlying guaranteed withdrawal benefit liabilities (excluding the life contingent GMWB contracts) and hedge assets within the GMWB hedge and Macro hedge programs are carried at fair value.
The following table presents our estimates of the potential instantaneous impacts from sudden market stresses related to equity market prices, interest rates, and implied market volatilities. The following sensitivities represent: (1) the net estimated difference between the change in the fair value of GMWB liabilities and the underlying hedge instruments and (2) the estimated change in fair value of the hedge instruments for the macro program, before the impacts of amortization of DAC, and taxes. As noted in the preceding discussion, certain hedge assets are used to hedge liabilities that are not carried at fair value and will not have a liability offset in the U.S. GAAP sensitivity analysis. All sensitivities are measured as of December 31, 2016 and are related to the fair value of liabilities and hedge instruments in place at that date for the Company’s variable annuity hedge programs. The impacts presented in the table that follows are estimated individually and measured without consideration of any correlation among market risk factors.
|
| | | | | | | | | | | | | | | | | | |
| GAAP Sensitivity Analysis | As of December 31, 2016 |
| (before tax and DAC) [1] | GMWB | Macro |
| Equity Market Return | -20 | % | -10 | % | 10 | % | -20 | % | -10 | % | 10 | % |
| Potential Net Fair Value Impact | $ | (3 | ) | $ | 1 |
| $ | (5 | ) | $ | 265 |
| $ | 112 |
| $ | (80 | ) |
| Interest Rates | -50bps |
| -25bps |
| +25bps |
| -50bps |
| -25bps |
| +25bps |
|
| Potential Net Fair Value Impact | $ | (3 | ) | $ | (1 | ) | $ | (1 | ) | $ | 6 |
| $ | 3 |
| $ | (2 | ) |
| Implied Volatilities | 10 | % | 2 | % | -10 | % | 10 | % | 2 | % | -10 | % |
| Potential Net Fair Value Impact | $ | (69 | ) | $ | (14 | ) | $ | 67 |
| $ | 136 |
| $ | 27 |
| $ | (125 | ) |
| |
| [1] | These sensitivities are based on the following key market levels as of December 31, 2016: 1) S&P of 2,239; 2) 10yr US swap rate of 2.38%; and 3) S&P 10yr volatility of 27.06%. |
The preceding sensitivity analysis is an estimate and should not be used to predict the future financial performance of the Company's variable annuity hedge programs. The actual net changes in the fair value liability and the hedging assets illustrated in the preceding table may vary materially depending on a variety of factors which include but are not limited to:
The sensitivity analysis is only valid as of the measurement date and assumes instantaneous changes in the capital market factors and no ability to rebalance hedge positions prior to the market changes;
Changes to the underlying hedging program, policyholder behavior, and variation in underlying fund performance relative to the hedged index, which could materially impact the liability; and
The impact of elapsed time on liabilities or hedge assets, any non-parallel shifts in capital market factors, or correlated moves across the sensitivities.
Foreign Currency Exchange Risk
Foreign currency exchange risk is the risk of financial loss due to changes in the relative value between currencies. The Company has foreign currency exchange risk in non-U.S. dollar denominated investments, which primarily consist of fixed maturity and equity investments, foreign denominated cash and a yen denominated fixed payout annuity.
Changes in relative values between currencies can create variability in cash flows and realized or unrealized gains and losses on changes in the fair value of assets and liabilities. Based on the fair values of the Company’s non-U.S. dollar denominated securities and derivative instruments as of December 31, 2016 and 2015, management estimates that a hypothetical 10% unfavorable change in exchange rates would decrease the fair values by an immaterial amount.
The open foreign currency exposure of non-U.S. dollar denominated investments will most commonly be reduced through the sale of the assets or through hedges using currency futures/forwards/swaps. In order to manage the currency risk related to any non-U.S. dollar denominated liability contracts, the Company enters into foreign currency swaps or holds non-U.S. dollar denominated investments.
Non-U.S. dollar denominated fixed maturities, equities and cash
The fair values of the non-U.S. dollar denominated fixed maturities and equities at December 31, 2016 and 2015 were approximately $77 and $366, respectively. Included in these amounts are $5 and $6 at December 31, 2016 and 2015, respectively, related to non-U.S. dollar denominated fixed maturities and equities that directly support liabilities denominated in the same currencies. The currency risk of the remaining non-U.S. dollar denominated fixed maturities and equities are hedged with foreign currency swaps. In addition, the Company holds $533 of yen-denominated cash, of which $327 is hedged with foreign currency forwards and $206 is derivative cash collateral pledged by counterparties and has an offsetting collateral liability.
The Company has entered into pay U.S. dollar, receive yen swap contracts to hedge the currency exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments.
Non-U.S. dollar denominated funding agreement liability contracts
The Company hedged the foreign currency risk associated with these liability contracts with currency rate swaps. At December 31, 2016 and 2015, the derivatives used to hedge foreign currency exchange risk related to foreign denominated liability contracts had a total notional amount of $94 and $94, and a total fair value of $(25) and $(26), respectively.
Financial Risk on Statutory Capital
Statutory surplus amounts and RBC ratios may increase or decrease in any period depending upon a variety of factors and may be compounded in extreme scenarios or if multiple factors occur at the same time. In general, as equity market levels and interest rates decline, the amount and volatility of both our actual or potential obligation, as well as the related statutory surplus and capital margin can be materially negatively affected, sometimes at a greater than linear rate. At times the impact of changes in certain market factors or a combination of multiple factors on RBC ratios can be counterintuitive. Factors include:
Differences in performance of variable subaccounts relative to indices and/or realized equity and interest rate volatilities may affect RBC ratios.
Rising equity markets will generally result in an increase in statutory surplus and RBC ratios. However, as a result of a number of factors and market conditions, including the level of hedging costs and other risk transfer activities, reserve requirements for death and living benefit guarantees and RBC requirements could increase with rising equity markets, resulting in lower RBC ratios. The Company has reinsured approximately 39% of its risk associated with GMWB and 79% of its risk associated with the aggregate GMDB exposure. These reinsurance agreements reduce the Company’s exposure to changes in the statutory reserves and the related capital and RBC ratios associated with changes in the capital markets.
A decrease in the value of certain fixed-income and equity securities in our investment portfolio, due in part to credit spreads widening, may result in a decrease in statutory surplus and RBC ratios.
Credit spreads on invested assets may increase sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value losses. As actual credit spreads are not fully reflected in the current crediting rates, the calculation of statutory reserves for fixed MVA annuities will not substantially offset the change in fair value of the statutory separate account assets resulting in reductions in statutory surplus.
Decreases in the value of certain derivative instruments that do not get hedge accounting, may reduce statutory surplus and RBC ratios.
Sustained low interest rates with respect to the fixed annuity business may result in a reduction in statutory surplus and an increase in NAIC required capital.
Non-market factors, which can also impact the amount and volatility of both our actual potential obligation, as well as the related statutory surplus and capital margin, include actual and estimated policyholder behavior experience as it pertains to lapsation, partial withdrawals, and mortality.
Most of these factors are outside of the Company’s control. The Company’s financial strength and credit ratings are significantly influenced by its statutory surplus amounts and RBC ratios of our insurance company subsidiaries. In addition, rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of statutory capital we must hold in order to maintain our current ratings.
Credit Risk
Credit risk is defined as the risk of financial lossto earnings or capital due to uncertainty of an obligor’s or counterparty’s ability or willingness to meet its obligations in accordance with contractually agreed upon terms. The majority of the Company’s credit risk is concentrated in its investment holdings but is also present in reinsurance and insurance portfolios. Credit risk is comprised of three major factors: the risk of change in credit quality, or credit migration risk; the risk of default; and the risk of a change in value of a financial instrument due to changes in credit spread that are unrelated to changesspread.
The majority of the Company’s credit risk is concentrated in obligor credit quality.its investment holdings but it is also present in the Company's reinsurance and insurance portfolios. A decline in creditworthiness is typically associated with an increase in an investment’s credit spread, potentially resulting in an increase in other-than-temporary impairments and an increased probability of a realized loss upon sale. Premiums receivable and reinsurance recoverables are also subject to credit risk based on the counterparty’s unwillingness or inability to pay.
The objective of the Company’s enterprise credit risk management strategy is to identify, quantify, and manage credit risk on an aggregate portfolio basis and to limit potential losses in accordance with an established credit risk appetite.management policy. The Company primarily manages to its credit risk appetite by primarily holding a diversified mix of investment grade issuers and counterparties across its investment, reinsurance, and insurance portfolios. Potential losses are also limited within portfolios by diversifying across geographic regions, asset types, and sectors.
The Company manages a credit exposure from its inception to its maturity or sale. Both the investment and reinsurance areas have formulated and implemented policies and procedures for counterparty approvals and authorizations. Although approval processes may vary by area and type of credit risk approval processes establish minimum levels of creditworthiness and financial stability. Eligible credits are subjected to prudent and conservative underwriting reviews. Within the investment portfolio, private securities, such as commercial mortgages, and private placements, must be presented to their respective review committees for approval.
Credit risks are managed on an on-going basis through the use of various processes and analyses. At the investment, reinsurance, and insurance product levels, fundamental credit analyses are performed at the issuer/counterparty level on a regular basis. To provide a holistic review within the investment portfolio, fundamental analyses are supported by credit ratings, assigned by nationally recognized rating agencies or internally assigned, and by quantitative credit analyses. The Company utilizes a credit Value at Risk (“VaR”) to measure default and migration risk on a monthly basis. Issuer and security level risk measures are also utilized. In the event of deterioration in credit quality, the Company maintains watch lists of problem counterparties withinBoth the investment and reinsurance portfolios. The watch listsareas have formulated procedures for counterparty approvals and authorizations, which establish minimum levels of creditworthiness and financial stability. Credits considered for investment are updated based on regularsubjected to underwriting reviews. Within the investment portfolio, private securities are subject to committee review for approval. Mitigation strategies vary across the three sources of credit examinationsrisk, but may include:
Investing in a portfolio of high-quality and management reviews. diverse securities;
Selling investments subject to credit risk;
Hedging through use of single name or basket credit default swaps;
Clearing transactions through central clearing houses that require daily variation margin;
Entering into contracts only with strong creditworthy institutions
Requiring collateral; and
Non-renewing policies/contracts or reinsurance treaties.
The Company also performs quarterly assessments of probable expected losses in the investment portfolio. The process is conducted on a sector basis and is intended to promptly assess and identify potential problems in the portfolio and to recognize necessary impairments.
Credit risk policies at the enterprise and operation level ensure comprehensive and consistent approaches to quantifying, evaluating, and managinghas developed credit risk under expected and stressed conditions. These policies define the scope of the risk, authorities, accountabilities, terms, and limits, andexposure thresholds which are regularly reviewed and approved by senior management and ERM.based upon counterparty ratings. Aggregate counterparty credit quality and exposure is monitored on a daily basis utilizing an enterprise-wide credit exposure information system that contains data on issuers, ratings, exposures, and credit limits. Exposures are tracked on a current and potential basis. Credit exposures are reported regularly to the ERCCbasis and to FIRMCo. Exposures are aggregated by the ultimate parent across investments, reinsurance receivables, insurance products with credit risk, and derivative counterparties. The credit database and reporting system are available to all key credit practitioners in the enterprise.
The Company exercises various and differing methods to mitigate its credit risk exposure within its investment and reinsurance portfolios. Some of the reasons for mitigating credit risk include financial instability or poor credit, avoidance of arbitration or litigation, future uncertainty, and exposure in excess of risk tolerances. Credit risk within the investment portfolio is most commonly mitigated through asset sales or the use of derivative instruments. Counterparty credit risk is mitigated through the practice of entering into contracts only with highly creditworthy institutions and through the practice of holding and posting of collateral. In addition, transactions cleared through a central clearing house reduce risk due to their ability to require daily variation margin, monitor the Company's ability to request additional collateral in the event of a counterparty downgrade, and be an independent valuation source. Systemic credit risk is mitigated through the construction of high-quality, diverse portfolios that are subject to regular underwriting of credit risks. For further discussion of the Company’s investment and derivative instruments, see Investment Management section and Note 4 - Investments and Derivative Instruments of Notes to Consolidated Financial Statements. See Reinsurance section for further discussion on managing and mitigating credit risk from the use of reinsurance via an enterprise security review process.
As of December 31, 2013,2016, the Company's onlyCompany had no investment exposure to any credit concentration risk of a single issuer, or counterparty greater than 10% of the Company's stockholders'stockholder's equity, other than the U.S. government and certain U.S. government securities, was the Government of Japan and Prudential. The Government of Japan securities represented $853, or 10% of stockholders' equity, and 2% of total invested assets.securities. For further discussion of concentration of credit risk in the investment portfolio, see the Concentration of Credit Risk section in Note 43 - Investments and Derivative Instruments of Notes to Consolidated Financial Statements. The net unsecured reinsurance recoverable from Prudential of $2.4 billion represented approximately 29% of stockholder's equity. For further discussion of reinsurance recoverables, see Note 5 - Reinsurance of Notes to Consolidated Financial Statements.
Derivative InstrumentsCredit Risk of Derivatives
The Company utilizes a variety of OTC, OTC-cleared and exchange-tradeduses various derivative instruments as a part ofcounterparties in executing its overall risk management strategy, as well as to enter into replicationderivative 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 be permissible investments under the Company’s investment policies. For further information on the Company’sThe use of derivatives, see Note 4 - Investments and Derivative Instrumentscounterparties creates credit risk that the counterparty may not perform in accordance with the terms of Notes to Consolidated Financial Statements.
Derivative activities are monitored and evaluated by the Company’s compliance and risk management teams and reviewed by senior management.derivative transaction. Downgrades to the credit ratings of The Hartford’sthe Company’s insurance operating companies may have adverse implications for its use of derivatives including those used to hedge benefit guarantees of variable annuities. In some cases, downgrades may give derivative counterparties for OTCover-the-counter ("OTC") derivatives and clearing brokers for OTC-cleared derivatives the unilateral contractual right to cancel and settle outstanding derivative trades or require additional collateral to be posted. In addition, downgrades may result in counterparties and clearing brokers becoming unwilling to engage in or clear additional OTC derivatives or may require collateralization before entering into any new trades. This willwould restrict the supply of derivative instruments commonly used to hedge variable annuity guarantees, particularly long-dated equity derivatives and interest rate swaps. Under these circumstances,
Managing the Company’s operating subsidiaries could conduct hedging activity using a combinationCredit Risk of cash, OTC-cleared and exchange-traded instruments, in additionCounterparties to using the available OTC derivatives.Derivative Instruments
The Company uses various derivative counterparties in executing its derivative transactions. The use of counterparties creates credit risk that the counterparty may not perform in accordance with the contractual terms of the derivative transaction. The Company has derivative counterparty exposure policies which limit the Company’s exposure to credit risk andrisk. The Company monitors counterparty credit exposure on a monthly basis to ensure compliance with companyCompany policies and statutory limitations. The Company’s policies with respect to derivative counterparty exposure establishes market-based credit limits, favors long-term financial stability and creditworthiness of the counterparty and typically requires credit enhancement/credit risk reducing agreements. agreements, which are monitored and evaluated by the Company’s risk management team and reviewed by senior management.
The Company minimizes the credit risk of derivative instruments by entering into transactions with high quality counterparties primarily rated A or better, which are monitored and evaluated by the Company’s risk management team and reviewed by senior management.better. The Company also generally requires that OTC derivative contracts, other than certain forward contracts be governed by an International Swaps and Derivatives Association ("ISDA") Master Agreement, which is structured by legal entity and by counterparty and reduces risk by permittingpermits right of offset. The Company enters into credit support annexes in conjunction with the closeout and netting of transactionsISDA agreements, which require daily collateral settlement based upon the occurrence of certain events.agreed upon thresholds.
The Company has developed credit exposure thresholds which are based upon counterparty ratings. Credit exposures are measured using the market value of the derivatives, resulting in amounts owed to the Company by its counterparties or potential payment obligations from the Company to its counterparties. The Company generally enters intonotional amounts of derivative contracts represent the basis upon which pay or receive amounts are calculated and are not reflective of credit support annexes in conjunction with the ISDA agreements, which require daily collateral settlement based upon agreed upon thresholds.risk. For purposes of daily derivative collateral maintenance, credit exposures are generally quantified based on the prior business day’s market value and collateral is pledged to and held by, or on behalf of, the Company to the extent the current value of the derivatives exceed the contractual thresholds. In accordance with industry standard and the contractual agreements, collateral is typically settled on the next business day. The Company has exposure to credit risk for amounts below the exposure thresholds which are uncollateralized, as well as for market fluctuations that may occur between contractual settlement periods of collateral movements.
For the company's domestic derivative programs, the maximum uncollateralized threshold for a derivative counterparty for a single legal entity is $10.$10. The Company currently transacts OTC derivatives in two legal entities that have a threshold greater than zero; and therefore thezero. The maximum combined threshold for a single counterparty across all legal entities that use derivatives is $20.$20. In addition, the Company may have exposure to multiple counterparties in a single corporate family due to a common credit support provider. As of December 31, 2013provider; however, the maximum combined thresholdthresholds for all counterparties under a single credit support provider across all legal entities that use derivatives is $40.these relationships are zero. Based on the contractual terms of the collateral agreements, these thresholds may be immediately reduced due to a downgrade in either party’s credit rating. For further discussion, see the Derivative Commitments section of Note 10 - Commitments and Contingencies of Notes to Consolidated Financial Statements.
For the year ended December 31, 20132016, the Company has incurred no losses on derivative instruments due to counterparty default. For further discussion, see the Derivative Commitments section
Use of Note 12 - Commitments and Contingencies of Notes to Consolidated Financial Statements.Credit Derivatives
In addition to counterparty credit risk, theThe Company may also introduce credit risk through the use of credit default swaps that are entered into to manage credit exposure. Credit default swaps involve a transfer ofexposure or to assume credit risk of one or many referenced entities from one party to another in exchange for periodic payments. The party that purchases credit protection will make periodic payments based on an agreed upon rate and notional amount, and for certain transactions there will also be an upfront premium payment. The second party, who assumes credit risk, will typically only make a payment if there is a credit event as defined in the contract and such payment will be typically equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation. A credit event is generally defined as default on contractually obligated interest or principal payments or bankruptcy of the referenced entity.
enhance yield. The Company uses credit derivatives to purchase credit protection and to assume credit risk with respect to a single entity, referenced index, or asset pool. The Company purchases credit protection through credit default swaps to economically hedge and manage credit risk of certain fixed maturity investments across multiple sectors of the investment portfolio. As of December 31, 2016 and 2015, the notional amount related to credit derivatives that purchase credit protection was $131 and $249, respectively, while the fair value was $(3) and $10, respectively. These amounts do not include positions that are in offsetting relationships.
The Company also enters into credit default swaps that assume credit risk as part of replication transactions. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that would otherwise beare permissible investments under the Company’s investment policies. These swaps reference investment grade single corporate issuers and baskets, which include customized diversified portfolios of corporate issuers, which are established within sector concentration limits and may be divided into tranches which possess different credit ratings.
As of December 31, 20132016 and 2012, the notional amount related to credit derivatives that purchase credit protection was $0.6 billion and $1.9 billion, respectively, while the fair value was $1 and $23. As of December 31, 2013 and 2012, the credit derivatives that purchase credit protection included notional of $0.4 billion and fair value of $5 and $28, respectively, that are part of the international program hedging instruments. As of December 31, 2013 and 2012,2015, the notional amount related to credit derivatives that assume credit risk was $1.5$458 and $1.4 billion, and $2.0 billion, respectively, while the fair value was $27$4 and $(8)$(10), respectively. These amounts do not include positions that are in offsetting relationships.
For further information on credit derivatives, see Note 4 - Investments and4- Derivative Instruments of Notes to Consolidated Financial Statements.
Investment Portfolio Risks and Risk Management
Investment Portfolio Composition
The following table presents the Company’s fixed maturities, AFS, by credit quality. The average credit ratings referenced below and throughout this section are based on availability, and are generally the midpoint of the applicableavailable ratings among Moody’s, S&P, Fitch and Morningstar. If no rating is available from a rating agency, then an internally developed rating is used.
| | Fixed Maturities by Credit Quality | | | December 31, 2013 | December 31, 2012 | December 31, 2016 | December 31, 2015 |
| | Amortized Cost | Fair Value | Percent of Total Fair Value | Amortized Cost | Fair Value | Percent of Total Fair Value | Amortized Cost | Fair Value | Percent of Total Fair Value | Amortized Cost | Fair Value | Percent of Total Fair Value |
| United States Government/Government agencies | $ | 3,714 |
| $ | 3,728 |
| 13.2 | % | $ | 6,312 |
| $ | 6,659 |
| 13.5 | % | $ | 3,125 |
| $ | 3,275 |
| 13.7 | % | $ | 3,263 |
| $ | 3,476 |
| 14.1 | % |
| AAA | 2,110 |
| 2,152 |
| 7.6 | % | 4,126 |
| 4,393 |
| 8.9 | % | 1,596 |
| 1,650 |
| 6.9 | % | 1,849 |
| 1,894 |
| 7.7 | % |
| AA | 3,216 |
| 3,202 |
| 11.4 | % | 5,283 |
| 5,618 |
| 11.4 | % | 2,427 |
| 2,561 |
| 10.8 | % | 2,492 |
| 2,612 |
| 10.6 | % |
| A | 7,688 |
| 8,204 |
| 29.2 | % | 13,466 |
| 15,061 |
| 30.4 | % | 7,288 |
| 7,857 |
| 33.0 | % | 7,180 |
| 7,668 |
| 31.1 | % |
| BBB | 8,483 |
| 8,824 |
| 31.3 | % | 13,521 |
| 14,769 |
| 29.9 | % | 6,650 |
| 7,019 |
| 29.5 | % | 7,248 |
| 7,479 |
| 30.3 | % |
| BB & below | 1,977 |
| 2,053 |
| 7.3 | % | 3,045 |
| 2,904 |
| 5.9 | % | 1,421 |
| 1,457 |
| 6.1 | % | 1,527 |
| 1,528 |
| 6.2 | % |
| Total fixed maturities, AFS | $ | 27,188 |
| $ | 28,163 |
| 100 | % | $ | 45,753 |
| $ | 49,404 |
| 100 | % | $ | 22,507 |
| $ | 23,819 |
| 100 | % | $ | 23,559 |
| $ | 24,657 |
| 100 | % |
The movement in the overall credit qualityfair value of the Company’s portfolio was primarily attributable to the sale of the Retirement Plans and Individual Life businesses in January 2013. Refer to Note 2 - Business Dispositions of Notes to Consolidated Financial Statements for further discussion of these transactions. Excluding the impact of the sales, United States government and government agencies declinedAFS securities decreased, as compared with December 31, 2015, due to the salecontinued run-off of agency RMBS securities associated with the termination of repurchase agreements, see Note 4 - Investments and Derivative Instruments of Notes to Consolidated Financial Statements.Company's business. Fixed maturities, FVO, are not included in the abovepreceding table. For further discussion on fair value optionFVO securities, see Note 32 - Fair Value Measurements of Notes to Consolidated Financial Statements.
The following table presents the Company’s AFS securities by type, as well as fixed maturities and equity, FVO.
| | Securities by Type | | | December 31, 2013 | December 31, 2012 | December 31, 2016 | December 31, 2015 |
| | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized losses | Fair Value | Percent of Total Fair Value | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized losses | Fair Value | Percent of Total Fair Value | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized losses | Fair Value | Percent of Total Fair Value | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized losses | Fair Value | Percent of Total Fair Value |
| ABS | | | | | |
| Asset backed securities ("ABS") | | | | | |
| Consumer loans | 913 |
| 3 |
| (43 | ) | 873 |
| 3.1 | % | 1,331 |
| 11 |
| (114 | ) | 1,228 |
| 2.5 | % | 828 |
| 4 |
| (26 | ) | 806 |
| 3.4 | % | 667 |
| 2 |
| (30 | ) | 639 |
| 2.6 | % |
| Small business | 153 |
| 4 |
| (13 | ) | 144 |
| 0.5 | % | 276 |
| 4 |
| (58 | ) | 222 |
| 0.4 | % | 76 |
| 3 |
| (1 | ) | 78 |
| 0.3 | % | 105 |
| 11 |
| (4 | ) | 112 |
| 0.5 | % |
| Other | 106 |
| 6 |
| — |
| 112 |
| 0.4 | % | 200 |
| 23 |
| — |
| 223 |
| 0.5 | % | 107 |
| 2 |
| — |
| 109 |
| 0.5 | % | 92 |
| 3 |
| — |
| 95 |
| 0.4 | % |
| Collateralized debt obligations ("CDOs") | | | | | | | | |
| Collateralized loan obligations (“CLOs”) | 1,054 |
| 1 |
| (21 | ) | 1,034 |
| 3.7 | % | 1,513 |
| — |
| (43 | ) | 1,470 |
| 3.0 | % | 742 |
| 2 |
| (2 | ) | 742 |
| 3.1 | % | 1,085 |
| 2 |
| (10 | ) | 1,077 |
| 4.3 | % |
| Commercial real estate ("CREs") | 155 |
| 79 |
| (16 | ) | 218 |
| 0.8 | % | 370 |
| 44 |
| (69 | ) | 345 |
| 0.7 | % | 13 |
| 17 |
| — |
| 30 |
| 0.1 | % | 85 |
| 35 |
| (1 | ) | 119 |
| 0.5 | % |
| Other [1] | 183 |
| 18 |
| (4 | ) | 196 |
| 0.7 | % | 353 |
| 17 |
| (5 | ) | 345 |
| 0.7 | % | 138 |
| 30 |
| — |
| 168 |
| 0.7 | % | 184 |
| 30 |
| — |
| 212 |
| 0.8 | % |
| Commercial mortgage-backed securities ("CMBS") | | | | | | | | |
| Agency backed [2] | 332 |
| 8 |
| (3 | ) | 337 |
| 1.2 | % | 492 |
| 45 |
| — |
| 537 |
| 1.1 | % | 584 |
| 8 |
| (8 | ) | 584 |
| 2.5 | % | 362 |
| 12 |
| (2 | ) | 372 |
| 1.5 | % |
| Bonds | 1,679 |
| 81 |
| (22 | ) | 1,738 |
| 6.2 | % | 2,920 |
| 189 |
| (96 | ) | 3,013 |
| 6.1 | % | 1,242 |
| 32 |
| (19 | ) | 1,255 |
| 5.3 | % | 1,304 |
| 33 |
| (14 | ) | 1,323 |
| 5.4 | % |
| Interest only (“IOs”) | 264 |
| 17 |
| (9 | ) | 272 |
| 1.0 | % | 345 |
| 28 |
| (11 | ) | 362 |
| 0.7 | % | 309 |
| 5 |
| (7 | ) | 307 |
| 1.3 | % | 270 |
| 7 |
| (8 | ) | 269 |
| 1.1 | % |
| Corporate | | | | | | | | |
| Basic industry | 1,173 |
| 60 |
| (15 | ) | 1,218 |
| 4.3 | % | 2,627 |
| 263 |
| (5 | ) | 2,885 |
| 5.8 | % | 651 |
| 46 |
| (6 | ) | 691 |
| 2.9 | % | 640 |
| 38 |
| (24 | ) | 654 |
| 2.7 | % |
| Capital goods | 1,244 |
| 104 |
| (7 | ) | 1,341 |
| 4.8 | % | 2,182 |
| 281 |
| (1 | ) | 2,462 |
| 5.0 | % | 846 |
| 79 |
| (6 | ) | 919 |
| 3.9 | % | 1,014 |
| 77 |
| (10 | ) | 1,081 |
| 4.4 | % |
| Consumer cyclical | 987 |
| 82 |
| (7 | ) | 1,062 |
| 3.8 | % | 1,695 |
| 197 |
| (3 | ) | 1,889 |
| 3.8 | % | 751 |
| 54 |
| (3 | ) | 802 |
| 3.4 | % | 963 |
| 54 |
| (13 | ) | 1,004 |
| 4.0 | % |
| Consumer non-cyclical | 2,138 |
| 184 |
| (12 | ) | 2,310 |
| 8.2 | % | 4,199 |
| 567 |
| (4 | ) | 4,761 |
| 9.6 | % | 2,155 |
| 159 |
| (18 | ) | 2,296 |
| 9.6 | % | 2,233 |
| 146 |
| (15 | ) | 2,364 |
| 9.6 | % |
| Energy | 1,496 |
| 127 |
| (8 | ) | 1,615 |
| 5.7 | % | 2,758 |
| 395 |
| (2 | ) | 3,152 |
| 6.4 | % | 1,336 |
| 110 |
| (9 | ) | 1,437 |
| 6.0 | % | 1,447 |
| 61 |
| (71 | ) | 1,437 |
| 5.8 | % |
| Financial services | 2,981 |
| 201 |
| (91 | ) | 3,091 |
| 11.0 | % | 4,856 |
| 440 |
| (166 | ) | 5,130 |
| 10.4 | % | 2,774 |
| 200 |
| (15 | ) | 2,959 |
| 12.4 | % | 3,184 |
| 187 |
| (34 | ) | 3,337 |
| 13.5 | % |
| Tech./comm. | 1,736 |
| 136 |
| (11 | ) | 1,861 |
| 6.6 | % | 2,692 |
| 372 |
| (12 | ) | 3,052 |
| 6.2 | % | 1,863 |
| 185 |
| (8 | ) | 2,040 |
| 8.5 | % | 1,914 |
| 163 |
| (30 | ) | 2,047 |
| 8.3 | % |
| Transportation | 664 |
| 45 |
| (5 | ) | 704 |
| 2.5 | % | 1,068 |
| 135 |
| (1 | ) | 1,202 |
| 2.4 | % | 524 |
| 34 |
| (4 | ) | 554 |
| 2.3 | % | 531 |
| 33 |
| (5 | ) | 559 |
| 2.3 | % |
| Utilities | 3,368 |
| 246 |
| (35 | ) | 3,579 |
| 12.6 | % | 5,477 |
| 743 |
| (27 | ) | 6,193 |
| 12.6 | % | 2,665 |
| 233 |
| (25 | ) | 2,873 |
| 12.1 | % | 2,419 |
| 206 |
| (22 | ) | 2,603 |
| 10.6 | % |
| Other | 126 |
| 11 |
| (1 | ) | 136 |
| 0.5 | % | 220 |
| 33 |
| — |
| 253 |
| 0.5 | % | 112 |
| 11 |
| (1 | ) | 122 |
| 0.5 | % | 80 |
| 10 |
| (1 | ) | 89 |
| 0.4 | % |
| Foreign govt./govt. agencies | 1,267 |
| 27 |
| (117 | ) | 1,177 |
| 4.2 | % | 1,369 |
| 120 |
| (29 | ) | 1,460 |
| 3.0 | % | 337 |
| 18 |
| (10 | ) | 345 |
| 1.4 | % | 328 |
| 14 |
| (11 | ) | 331 |
| 1.3 | % |
| Municipal taxable | | | | | |
| Municipal bonds | | | | | |
| Taxable | 981 |
| 26 |
| (48 | ) | 959 |
| 3.4 | % | 1,808 |
| 204 |
| (14 | ) | 1,998 |
| 4.0 | % | 1,098 |
| 97 |
| (6 | ) | 1,189 |
| 5.0 | % | 1,056 |
| 80 |
| (5 | ) | 1,131 |
| 4.6 | % |
| Tax-exempt | 7 |
| — |
| (1 | ) | 6 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1 |
| — |
| — |
| 1 |
| — |
|
| RMBS | | | | | |
| Residential mortgage-backed securities ("RMBS") | | | | | |
| Agency | 1,620 |
| 34 |
| (12 | ) | 1,642 |
| 5.8 | % | 3,408 |
| 164 |
| (1 | ) | 3,571 |
| 7.2 | % | 927 |
| 22 |
| (11 | ) | 938 |
| 3.9 | % | 774 |
| 32 |
| — |
| 806 |
| 3.3 | % |
| Non-agency | 27 |
| — |
| — |
| 27 |
| 0.1 | % | — |
| — |
| — |
| — |
| — |
| 69 |
| — |
| (1 | ) | 68 |
| 0.3 | % | 38 |
| 1 |
| — |
| 39 |
| 0.2 | % |
| Alt-A | — |
| — |
| — |
| — |
| — |
| 39 |
| — |
| (1 | ) | 38 |
| 0.1 | % | 48 |
| 2 |
| — |
| 50 |
| 0.2% |
| 27 |
| 1 |
| — |
| 30 |
| 0.1 | % |
| Sub-prime | 772 |
| 26 |
| (36 | ) | 762 |
| 2.7 | % | 1,143 |
| 32 |
| (113 | ) | 1,062 |
| 2.1 | % | 698 |
| 10 |
| (4 | ) | 704 |
| 3.0 | % | 629 |
| 9 |
| (8 | ) | 628 |
| 2.5 | % |
| U.S. Treasuries | 1,762 |
| 1 |
| (14 | ) | 1,749 |
| 6.2 | % | 2,412 |
| 151 |
| (12 | ) | 2,551 |
| 5.2 | % | 1,614 |
| 153 |
| (14 | ) | 1,753 |
| 7.4 | % | 2,127 |
| 184 |
| (13 | ) | 2,298 |
| 9.3 | % |
| Fixed maturities, AFS | 27,188 |
| 1,527 |
| (551 | ) | 28,163 |
| 100 | % | 45,753 |
| 4,458 |
| (787 | ) | 49,404 |
| 100 | % | 22,507 |
| 1,516 |
| (204 | ) | 23,819 |
| 100 | % | 23,559 |
| 1,431 |
| (331 | ) | 24,657 |
| 100 | % |
| Equity securities | | | | | | | | |
| Financial services | 93 |
| 7 |
| (9 | ) | 91 |
| 24.5 | % | 143 |
| 8 |
| (25 | ) | 126 |
| 31.5 | % | 69 |
| 1 |
| (1 | ) | 69 |
| 45.4 | % | 58 |
| 1 |
| — |
| 59 |
| 33.1 | % |
| Other | 269 |
| 28 |
| (16 | ) | 281 |
| 75.5 | % | 265 |
| 20 |
| (11 | ) | 274 |
| 68.5 | % | 73 |
| 11 |
| (1 | ) | 83 |
| 54.6 | % | 120 |
| 10 |
| (11 | ) | 119 |
| 66.9 | % |
| Equity securities, AFS [3] | 362 |
| 35 |
| (25 | ) | 372 |
| 100 | % | 408 |
| 28 |
| (36 | ) | 400 |
| 100 | % | |
| Equity securities, AFS | | 142 |
| 12 |
| (2 | ) | 152 |
| 100 | % | 178 |
| 11 |
| (11 | ) | 178 |
| 100 | % |
| Total AFS securities | $ | 27,550 |
| $ | 1,562 |
| $ | (576 | ) | $ | 28,535 |
| | $ | 46,161 |
| $ | 4,486 |
| $ | (823 | ) | $ | 49,804 |
| | $ | 22,649 |
| $ | 1,528 |
| $ | (206 | ) | $ | 23,971 |
| | $ | 23,737 |
| $ | 1,442 |
| $ | (342 | ) | $ | 24,835 |
| |
| Fixed maturities, FVO [3] | | $ | 791 |
| | | $ | 1,010 |
| | |
| Fixed maturities, FVO | | | $ | 82 |
| | | $ | 165 |
| |
| Equity securities, FVO [3] | | | $ | — |
| | | $ | 281 |
| |
| |
| [1] | Gross unrealized gains (losses) exclude the fair value of bifurcated embedded derivative features ofderivatives within certain securities. Subsequent changesChanges in value will beare recorded in net realized capital gains (losses). |
| |
| [2] | Includes securities with pools of loans issued by the Small Business Administration which are backed by the full faith and credit of the U.S. government. |
| |
| [3] | Included in equity securities, AFS on the Consolidated Balance Sheets. The Company did not hold any equity securities, FVO as of December 31, 2016. |
The overall decreasedecline in the fair value of AFS and FVO securities is attributedas compared to December 31, 2015 was due to the salescontinued run-off of the Retirement Plans and Individual Life businesses in January 2013. Refer to Note 2 - Business Dispositions of the Notes to Consolidated Financial Statements for further discussion of these transactions.Company's business. The Company continuesalso reduced its allocation to invest in a diversified portfolio that is primarily comprised of investment grade securities. Due to the type of securities transferred in connection with the sold businesses, a higher percentage of securities held at December 31, 2013 were infinancial services and U.S. Treasuries and foreign and U.S. government agency securities and a lower percentage in corporates. Apart from the impact of the business sales, during 2013, the Company sold agency RMBS associated with repurchase agreements and modestly increased allocations to emerging market and high yield securities, which offer attractive risk-adjusted returns. For further information on repurchase agreements, see Note 4 - Investments and Derivative Instruments of Notes to Consolidated Financial Statements. The Company's AFS net unrealized gain position declined primarily due to an increase in interest rates and the disposition of the Retirement Plans and Individual Life businesses, as discussed above.purchased RMBS.
Fixed maturities, FVO, primarily represents Japan government securities supporting the Japan fixed annuity product, as well as securities containing an embedded credit derivative for which the Company elected the fair value option. The underlying credit risk of the securities containing credit derivatives are primarily investment grade CRE CDOs. For further discussion on fair value option securities, see Note 3 - Fair Value Measurements of Notes to Consolidated Financial Statements.
European Exposure
Although there has been continued improvementCertain economies in fundamental conditions in Europe, certain economiesthe European region have experienced adverse economic conditions that were precipitated in part byrecent years, specifically in Europe’s peripheral region (Greece, Ireland, Italy, Portugal and Spain). While some economic conditions have improved, continued slow GDP growth, elevated unemployment rateslevels and government debt levels. As a result,increased volatility in the past issuers in several European countries experienced credit deterioration and rating downgrades and a reduced abilityfinancial markets following the United Kingdom’s referendum to access capital markets and/or higher borrowing costs. Austerity measures aimed at reducing sovereign debt levels, along with steps taken bywithdraw from the European Central Bank to provide liquidity and credit support to certain countries issuing debt, have helped to stabilize markets. In addition, the European economy has experienced two consecutive quarters of positive, although weak, growth. In general, these economies continue to show signs of stabilization, including improved credit and reduced borrowing costs. Further contraction of gross domestic product along with elevated unemployment levelsUnion may continue to put pressure on sovereign debt.
The Company manages the credit risk associated with the European securities within the investment portfolio on an on-going basis using several processes which are supported by macroeconomic analysis and issuer credit analysis. For additional details regarding the Company’s management of credit risk, see the Credit Risk section of this MD&A. The Company periodically considers alternate scenarios, including a base-case
As of December 31, 2016, the Company’s European investment exposure had an amortized cost and both a positivefair value of $1.8 billion and negative “tail” scenarios that includes a partial$1.9 billion, respectively, or full break-up of the Eurozone. The outlook for key factors is evaluated, including the economic prospects for key countries, the potential for the spread of sovereign debt contagion, and the likelihood that policymakers and politicians pursue sufficient fiscal discipline and introduce appropriate backstops. Given the inherent uncertainty in the outcome of developments in the Eurozone, however, the Company has been focused on controlling both absolute levels of exposure and the composition of that exposure through both bond and derivative transactions.
The Company has limited direct European exposure, totaling only 8%6% of total invested assetsassets; as of December 31, 2013.2015, amortized cost and fair value totaled $2.1 billion and $2.2 billion, respectively. The following tables present the Company’s European securities included in the Securities by Type table above. The Company identifies exposures with the issuers’ ultimate parent country of domicile, which may not be the country of the security issuer. Certain European countries were separately listed below, specifically, Greece, Italy, Ireland, Portugal and Spain (“GIIPS”), because of the current economic strains persisting in these countries. The criteria used for identifying the countries separately listed includes countries on the iTraxx SovX Western Europe Series 6 index with credit default spreads that exceed their respective index level as of December 31, 2013, an S&P credit quality rating of BBB+ or below, and a gross domestic product ("GDP") greater than $200 billion.
The following tables present the Company’s European securities included in the Securities by Type table above.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2013 |
| | Corporate & Equity, AFS Non-Finan. [1] | Corporate & Equity, AFS Financials | Foreign Govt./ Govt. Agencies | Total |
| | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value |
| Italy | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Spain [3] | 20 |
| 19 |
| 20 |
| 20 |
| — |
| — |
| 40 |
| 39 |
|
| Ireland | 40 |
| 41 |
| — |
| — |
| — |
| — |
| 40 |
| 41 |
|
| Portugal | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Greece | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Higher risk | 60 |
| 60 |
| 20 |
| 20 |
| — |
| — |
| 80 |
| 80 |
|
| Europe excluding higher risk | 1,763 |
| 1,910 |
| 527 |
| 571 |
| 275 |
| 277 |
| 2,565 |
| 2,758 |
|
| Total Europe | $ | 1,823 |
| $ | 1,970 |
| $ | 547 |
| $ | 591 |
| $ | 275 |
| $ | 277 |
| $ | 2,645 |
| $ | 2,838 |
|
| Europe exposure net of credit default swap protection [2] | | | | | | | $ | 2,564 |
| $ | 2,837 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2012 |
| | Corporate & Equity, AFS Non-Finan. [1] | Corporate & Equity, AFS Financials | Foreign Govt./ Govt. Agencies | Total |
| | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value |
| Italy | $ | 2 |
| $ | 2 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 2 |
| $ | 2 |
|
| Spain [3] | 37 |
| 35 |
| 20 |
| 20 |
| — |
| — |
| 57 |
| 55 |
|
| Ireland | 125 |
| 125 |
| — |
| — |
| — |
| — |
| 125 |
| 125 |
|
| Portugal | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Greece | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Higher risk | 164 |
| 162 |
| 20 |
| 20 |
| — |
| — |
| 184 |
| 182 |
|
| Europe excluding higher risk | 2,687 |
| 3,057 |
| 671 |
| 682 |
| 478 |
| 535 |
| 3,836 |
| 4,274 |
|
| Total Europe | $ | 2,851 |
| $ | 3,219 |
| $ | 691 |
| $ | 702 |
| $ | 478 |
| $ | 535 |
| $ | 4,020 |
| $ | 4,456 |
|
| Europe exposure net of credit default swap protection [2] | | | | | | | $ | 3,750 |
| $ | 4,455 |
|
| |
[1] | Includes amortized cost and fair value of $19 as of December 31, 2013 and $38 as of December 31, 2012 related to limited partnerships and other alternative investments, the majority of which is domiciled in the United Kingdom.
|
| |
[2] | Includes a notional amount and fair value of $81 and $(1), respectively, as of December 31, 2013 and $270 and $(1), respectively, as of December 31, 2012 related to credit default swap protection. This includes a notional amount of $33 and $41 as of December 31, 2013 and 2012, respectively, related to single name corporate issuers in the financial services sector.
|
| |
[3] | The Company has credit default swap protection with a notional amount of $20 related to the Corporate and Equity, AFS Financial Services. |
The Company’s European investment exposure largely relates to corporate entities which are domiciled in or generatedgenerate a significant portion of itstheir revenue within the United Kingdom, Germany, the Netherlands, Germany and Switzerland. As of December 31, 2013 and 2012The Company does not hold any sovereign exposure to the peripheral region and does not hold any exposure to issuers in Greece. As of both December 31, 2016 and 2015, the weighted average credit quality of European investments was A-. Entities domiciled in the United Kingdom comprise the Company's largest exposure; as of December 31, 2016 and 2015, the U.K exposure totals less than 3% and 4% of total invested assets.assets and largely relates to industrial and financial services corporate securities and has an average credit rating of BBB+. The majority of the European investments are U.S. dollar-denominated, and those securities that are British pound andor euro-denominated are hedged to U.S. dollars or support foreign-denominated liabilities.dollars. For a discussion of foreign currency risks, see the Foreign Currency Exchange Risk section of this MD&A. The Company does not hold any sovereign exposure to the higher risk countries and does not hold any exposure to issuers in Greece. As of December 31, 2013and 2012, the Company’s unfunded commitments associated with its investment portfolio was immaterial, and the weighted average credit quality of European investments was A- and A- respectively.
As of December 31, 2013 and 2012, the Company’s total credit default swaps that provide credit protection on European issuers had a notional amount of $81 and $270, respectively, and a fair value of $(1) and $(1), respectively. Included in those notional amounts as of December 31, 2013 and 2012 were $33 and $270, respectively, on credit default swaps referencing single name corporate and financial European issuers, of which $20 and $23, respectively, related to the higher risk countries. The maturity dates of the credit defaults swaps are primarily consistent with the hedged bonds. For further information on the use of the Company’s credit derivatives and counterparty credit quality, see Derivative Instruments within the Credit Risk section in this MD&A.
Emerging Market Exposure
Emerging market securities have been negatively impacted due to softer-than-expected economic growth as well as trade and budget deficits raising the potential for destabilizing capital outflows and rapid currency depreciation, causing bondholders to demand a higher yield which would depress the fair value of securities held. We expect continued sensitivity to the ongoing evolution of Fed policy and other economic and political factors, including contagion risk.
The Company has limited direct exposure within its investment portfolio to emerging market issuers, totaling only 3% of total invested assets as of December 31, 2013, and is primarily comprised of sovereign and corporate debt issued in US dollars. The Company identifies exposures with the issuers’ ultimate parent country of domicile, which may not be the country of the security issuer. The following table presents the Company’s exposure to securities within certain emerging markets currently under the greatest stress, defined as countries with a current account deficit and an inflation level greater than 5% or that have a sovereign S&P credit rating of B- or below.
|
| | | | | | | | | | | | |
| | December 31, 2013 | December 31, 2012 |
| | Amortized Cost | Fair Value | Amortized Cost | Fair Value |
| Argentina | $ | 18 |
| $ | 20 |
| $ | 6 |
| $ | 6 |
|
| Brazil | 126 |
| 118 |
| 161 |
| 175 |
|
| India | 37 |
| 37 |
| 56 |
| 60 |
|
| Indonesia | 51 |
| 45 |
| 20 |
| 21 |
|
| Lebanon | 13 |
| 13 |
| 4 |
| 4 |
|
| South Africa | 34 |
| 32 |
| 20 |
| 21 |
|
| Turkey | 43 |
| 39 |
| 16 |
| 18 |
|
| Ukraine | 23 |
| 23 |
| 6 |
| 6 |
|
| Uruguay | 13 |
| 12 |
| 4 |
| 4 |
|
| Venezuela | 32 |
| 29 |
| 13 |
| 14 |
|
| Total | $ | 390 |
| $ | 368 |
| $ | 306 |
| $ | 329 |
|
The Company manages the credit risk associated with emerging market securities within the investment portfolio on an on-going basis using macroeconomic analysis and issuer credit analysis subject to diversification and individual credit risk management limits. For additional details regarding the Company’s management of credit risk, see the Credit Risk section of this MD&A.
Financial Services
The Company’s exposure toinvestment in the financial services sector is predominantly through investment grade banking and insurance institutions. The following table presents the Company’s exposure to the financial services sector included in the Securities by Type table above.
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2013 | December 31, 2012 |
| | Amortized Cost | Fair Value | Net Unrealized | Amortized Cost | Fair Value | Net Unrealized |
| AAA | $ | 22 |
| $ | 23 |
| $ | 1 |
| $ | 29 |
| $ | 31 |
| $ | 2 |
|
| AA | 323 |
| 342 |
| 19 |
| 806 |
| 875 |
| 69 |
|
| A | 1,443 |
| 1,525 |
| 82 |
| 2,382 |
| 2,548 |
| 166 |
|
| BBB | 1,182 |
| 1,168 |
| (14 | ) | 1,568 |
| 1,571 |
| 3 |
|
| BB & below | 104 |
| 124 |
| 20 |
| 214 |
| 231 |
| 17 |
|
| Total | $ | 3,074 |
| $ | 3,182 |
| $ | 108 |
| $ | 4,999 |
| $ | 5,256 |
| $ | 257 |
|
The overall decrease infixed maturities and equity, AFS securities in the financial services sector isthat are included in the preceding Securities by Type table.
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | December 31, 2015 |
| | Amortized Cost | Fair Value | Net Unrealized Gain/(Loss) | Amortized Cost | Fair Value | Net Unrealized Gain/(Loss) |
| AAA | $ | 5 |
| $ | 5 |
| $ | — |
| $ | 18 |
| $ | 18 |
| $ | — |
|
| AA | 319 |
| 335 |
| 16 |
| 313 |
| 326 |
| 13 |
|
| A | 1,360 |
| 1,462 |
| 102 |
| 1,616 |
| 1,703 |
| 87 |
|
| BBB | 971 |
| 1,028 |
| 57 |
| 1,078 |
| 1,123 |
| 45 |
|
| BB & below | 188 |
| 198 |
| 10 |
| 217 |
| 226 |
| 9 |
|
| Total [1] | $ | 2,843 |
| $ | 3,028 |
| $ | 185 |
| $ | 3,242 |
| $ | 3,396 |
| $ | 154 |
|
| |
| [1] | Includes equity, AFS securities with an amortized cost and fair value of $69 and $69, respectively as of December 31, 2016 and an amortized cost and fair value of $58 and $59, respectively, as of December 31, 2015 included in the AFS by type table above. |
The Company's investment in the financial services sector decreased, as compared to December 31, 2015, primarily attributeddue to the sales of the Retirement Plans and Individual Life businesses in January 2013. Refer to Note 2 - Business Dispositions of the Notes to Consolidated Financial Statements for further discussion of these transactions. Excluding the impact of the disposed businesses, the decline in value of financial services securities resulted from sales as a result of portfolio management activities and an increase in interest rates, partially offset by credit spread tightening. Credit spreads for corporate financial services securities have narrowed significantly during 2013 as the overall economy continues to improve.securities.
Commercial Real Estate
TheThrough December 31, 2016, commercial real estate market continued to show signs of improving fundamentals such as firmingconditions, including property prices, increases inoccupancies, financial conditions, transaction volume, and modestly easing financial conditions. While delinquencies, still remain at elevated levels as comparedcontinued to previous cycle, they have improved since cycle highs.improve. In addition, the availability of credit has increased and there is now less concern about the ability of borrowers to refinance as loans come due. In spite of improved fundamentals, credit spreads widened mid year due to concerns over potential tapering of quantitative easing. Credit spreads trended downward in the second half of the year and ended the year flat as compared to 2012.
The following tables presenttable presents the Company’s exposure to CMBS bonds by current credit quality and vintage year included in the preceding Securities by Type table above.table. Credit protection represents the current weighted average percentage of the outstanding capital structure subordinated to the Company’s investment holding that is available to absorb losses before the security incurs the first dollar loss of principal and excludes any equity interest or property value in excess of outstanding debt.
Exposure to CMBS – Bonds [1]
| | | December 31, 2013 | |
| | AAA | AA | A | BBB | BB and Below | Total | December 31, 2016 |
| | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | AAA | AA | A | BBB | BB and Below | Total |
| 2003 & Prior | $ | 1 |
| $ | 1 |
| $ | 15 |
| $ | 16 |
| $ | — |
| $ | — |
| $ | 9 |
| $ | 9 |
| $ | 20 |
| $ | 21 |
| $ | 45 |
| $ | 47 |
| |
| 2004 | 45 |
| 46 |
| 61 |
| 67 |
| 19 |
| 19 |
| 13 |
| 13 |
| — |
| — |
| 138 |
| 145 |
| |
| 2005 | 143 |
| 150 |
| 36 |
| 38 |
| 31 |
| 32 |
| 11 |
| 11 |
| 29 |
| 34 |
| 250 |
| 265 |
| |
| Vintage Year [1] | | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value |
| 2005 & Prior | | $ | 68 |
| $ | 76 |
| $ | 37 |
| $ | 43 |
| $ | — |
| $ | — |
| $ | 5 |
| $ | 5 |
| $ | 2 |
| $ | 1 |
| $ | 112 |
| $ | 125 |
|
| 2006 | 201 |
| 216 |
| 56 |
| 60 |
| 99 |
| 105 |
| 83 |
| 87 |
| 141 |
| 140 |
| 580 |
| 608 |
| 10 |
| 11 |
| 5 |
| 5 |
| 1 |
| 1 |
| — |
| — |
| — |
| — |
| 16 |
| 17 |
|
| 2007 | 125 |
| 132 |
| 150 |
| 151 |
| 63 |
| 70 |
| — |
| — |
| 66 |
| 63 |
| 404 |
| 416 |
| 64 |
| 66 |
| 53 |
| 53 |
| 52 |
| 52 |
| — |
| — |
| — |
| — |
| 169 |
| 171 |
|
| 2008 | 18 |
| 20 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 18 |
| 20 |
| 14 |
| 15 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 14 |
| 15 |
|
| 2009 | 11 |
| 11 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 11 |
| 11 |
| 8 |
| 9 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 8 |
| 9 |
|
| 2010 | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 8 |
| 8 |
| — |
| — |
| — |
| — |
| — |
| — |
| 8 |
| 8 |
|
| 2011 | 15 |
| 15 |
| — |
| — |
| — |
| — |
| 6 |
| 5 |
| — |
| — |
| 21 |
| 20 |
| 14 |
| 15 |
| — |
| — |
| 5 |
| 5 |
| — |
| — |
| — |
| — |
| 19 |
| 20 |
|
| 2012 | 25 |
| 24 |
| — |
| — |
| 8 |
| 8 |
| 11 |
| 10 |
| — |
| — |
| 44 |
| 42 |
| 22 |
| 22 |
| — |
| — |
| 18 |
| 18 |
| 14 |
| 13 |
| — |
| — |
| 54 |
| 53 |
|
| 2013 | 24 |
| 24 |
| 84 |
| 81 |
| 51 |
| 50 |
| 9 |
| 9 |
| — |
| — |
| 168 |
| 164 |
| 16 |
| 16 |
| 84 |
| 87 |
| 69 |
| 71 |
| 4 |
| 4 |
| — |
| — |
| 173 |
| 178 |
|
| 2014 | | 16 |
| 17 |
| 23 |
| 23 |
| 30 |
| 31 |
| — |
| — |
| — |
| — |
| 69 |
| 71 |
|
| 2015 | | 114 |
| 113 |
| 89 |
| 87 |
| 50 |
| 50 |
| 30 |
| 30 |
| — |
| — |
| 283 |
| 280 |
|
| 2016 | | 94 |
| 92 |
| 140 |
| 134 |
| 38 |
| 37 |
| 45 |
| 45 |
| — |
| — |
| 317 |
| 308 |
|
| Total | $ | 608 |
| $ | 639 |
| $ | 402 |
| $ | 413 |
| $ | 271 |
| $ | 284 |
| $ | 142 |
| $ | 144 |
| $ | 256 |
| $ | 258 |
| $ | 1,679 |
| $ | 1,738 |
| $ | 440 |
| $ | 452 |
| $ | 439 |
| $ | 440 |
| $ | 263 |
| $ | 265 |
| $ | 98 |
| $ | 97 |
| $ | 2 |
| $ | 1 |
| $ | 1,242 |
| $ | 1,255 |
|
| Credit protection | 31.9% | 24.3% | 20.3% | 23.0% | 12.9% | 24.5% | 33.2% | 21.5% | 19.3% | 14.5% | 6.0% | 24.6% |
| | | December 31, 2012 | |
| | AAA | AA | A | BBB | BB and Below | Total | December 31, 2015 |
| | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | AAA | AA | A | BBB | BB and Below | Total |
| 2003 & Prior | $ | 83 |
| $ | 87 |
| $ | 24 |
| $ | 25 |
| $ | 26 |
| $ | 26 |
| $ | 5 |
| $ | 5 |
| $ | 28 |
| $ | 28 |
| $ | 166 |
| $ | 171 |
| |
| 2004 | 100 |
| 104 |
| 59 |
| 68 |
| 26 |
| 26 |
| 24 |
| 24 |
| 6 |
| 5 |
| 215 |
| 227 |
| |
| 2005 | 249 |
| 273 |
| 59 |
| 59 |
| 46 |
| 46 |
| 88 |
| 79 |
| 54 |
| 44 |
| 496 |
| 501 |
| |
| Vintage Year [1] | | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value |
| 2005 & Prior | | $ | 72 |
| $ | 81 |
| $ | 44 |
| $ | 49 |
| $ | — |
| $ | — |
| $ | 5 |
| $ | 5 |
| $ | 1 |
| $ | 2 |
| $ | 122 |
| $ | 137 |
|
| 2006 | 512 |
| 571 |
| 129 |
| 136 |
| 109 |
| 114 |
| 170 |
| 168 |
| 226 |
| 200 |
| 1,146 |
| 1,189 |
| 99 |
| 100 |
| 59 |
| 60 |
| 89 |
| 90 |
| 60 |
| 61 |
| 18 |
| 18 |
| 325 |
| 329 |
|
| 2007 | 274 |
| 298 |
| 215 |
| 217 |
| 94 |
| 95 |
| 31 |
| 31 |
| 94 |
| 81 |
| 708 |
| 722 |
| 130 |
| 131 |
| 80 |
| 82 |
| 45 |
| 46 |
| 7 |
| 7 |
| 16 |
| 17 |
| 278 |
| 283 |
|
| 2008 | 30 |
| 35 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 30 |
| 35 |
| 15 |
| 16 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 15 |
| 16 |
|
| 2009 | 28 |
| 30 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 28 |
| 30 |
| 9 |
| 9 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 9 |
| 9 |
|
| 2010 | — |
| — |
| — |
| — |
| 16 |
| 17 |
| — |
| — |
| — |
| — |
| 16 |
| 17 |
| — |
| — |
| 8 |
| 8 |
| — |
| — |
| — |
| — |
| — |
| — |
| 8 |
| 8 |
|
| 2011 | 57 |
| 61 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 57 |
| 61 |
| 14 |
| 15 |
| — |
| — |
| — |
| — |
| 5 |
| 5 |
| — |
| — |
| 19 |
| 20 |
|
| 2012 | 58 |
| 60 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 58 |
| 60 |
| 22 |
| 22 |
| — |
| — |
| 18 |
| 18 |
| 24 |
| 23 |
| — |
| — |
| 64 |
| 63 |
|
| 2013 | | 16 |
| 16 |
| 84 |
| 86 |
| 57 |
| 58 |
| 9 |
| 9 |
| — |
| — |
| 166 |
| 169 |
|
| 2014 | | 16 |
| 17 |
| 26 |
| 26 |
| 28 |
| 28 |
| 6 |
| 6 |
| 1 |
| 1 |
| 77 |
| 78 |
|
| 2015 | | 107 |
| 102 |
| 62 |
| 60 |
| 39 |
| 37 |
| 13 |
| 12 |
| — |
| — |
| 221 |
| 211 |
|
| Total | $ | 1,391 |
| $ | 1,519 |
| $ | 486 |
| $ | 505 |
| $ | 317 |
| $ | 324 |
| $ | 318 |
| $ | 307 |
| $ | 408 |
| $ | 358 |
| $ | 2,920 |
| $ | 3,013 |
| $ | 500 |
| $ | 509 |
| $ | 363 |
| $ | 371 |
| $ | 276 |
| $ | 277 |
| $ | 129 |
| $ | 128 |
| $ | 36 |
| $ | 38 |
| $ | 1,304 |
| $ | 1,323 |
|
| Credit protection | 29.7% | 24.6% | 25.7% | 18.2% | 8.5% | 24.2% | 34.2% | 24.8% | 19.5% | 16.7% | 12.4% | 26.1% |
| |
| [1] | The vintagevintage year represents the year the pool of loans was originated. |
The Company also has AFS exposure to CRE CDOs with an amortized cost and fair value of $155$13 and $218,$30, respectively, as of December 31, 20132016, and $370$85 and $345,$119, respectively, as of December 31, 2012.2015. These securities are comprised of diversified pools of commercial mortgage loans or equity positions of other CMBS securitizations. We continue to monitor these investments as economic and market uncertainties regarding future performance impact market liquidity and security premiums.
In addition to CMBS bonds and CRE CDOs, the Company has exposure to commercial mortgage loans as presented in the following table. These loans are collateralized by a variety of commercial properties and are diversified both geographically throughout the United States and by property type. These loans are primarily in the form of a whole loan,loans, where the Company is the sole lender, orbut may include a loan participation.participations. Loan participations are loans where the Company has purchased or retained a portion of an outstanding loan or package of loans and participates on a pro-rata basis in collecting interest and principal pursuant to the terms of the participation agreement. In general, A-Note participations have senior payment priority, followed by B-Note participations and then mezzanine loan participations. As of December 31, 2013,2016, loans within the Company’s mortgage loan portfolio that have had extensions or restructurings other than what is allowable under the original terms of the contract are immaterial.
Commercial Mortgage Loans
| | | December 31, 2013 | December 31, 2012 | December 31, 2016 | December 31, 2015 |
| | Amortized Cost [1] | Valuation Allowance | Carrying Value | Amortized Cost [1] | Valuation Allowance | Carrying Value | Amortized Cost [1] | Valuation Allowance | Carrying Value | Amortized Cost [1] | Valuation Allowance | Carrying Value |
| Agricultural | $ | 96 |
| $ | (3 | ) | $ | 93 |
| $ | 114 |
| $ | (5 | ) | $ | 109 |
| |
| Whole loans | 3,206 |
| (9 | ) | 3,197 |
| 4,391 |
| (9 | ) | 4,382 |
| $ | 2,711 |
| $ | (19 | ) | $ | 2,692 |
| $ | 2,816 |
| $ | (19 | ) | $ | 2,797 |
|
| A-Note participations | 171 |
| — |
| 171 |
| 235 |
| — |
| 235 |
| 119 |
| — |
| 119 |
| 121 |
| — |
| 121 |
|
| B-Note participations | 9 |
| — |
| 9 |
| 140 |
| — |
| 140 |
| |
| Mezzanine loans | — |
| — |
| — |
| 69 |
| — |
| 69 |
| |
| Total | $ | 3,482 |
| $ | (12 | ) | $ | 3,470 |
| $ | 4,949 |
| $ | (14 | ) | $ | 4,935 |
| $ | 2,830 |
| $ | (19 | ) | $ | 2,811 |
| $ | 2,937 |
| $ | (19 | ) | $ | 2,918 |
|
| |
| [1] | Amortized cost represents carrying value prior to valuation allowances, if any. |
The overall decrease in mortgage loans is attributed to the sales of the Retirement Plans and Individual Life businesses in January 2013. Refer to Note 2 - Business Dispositions of the Notes to Consolidated Financial Statements for further discussion of these transactions. Since December 31, 2012,During 2016, the Company funded $430$217 of commercial whole loans with a weighted average loan-to-value (“LTV”) ratio of 63%60% and a weighted average yield of 3.6%. The Company continues to originate commercial whole loans within primary markets, such as office, industrial and multi-family, focusing on loans with strong LTV ratios and high quality property collateral. There were no mortgage loans held for sale as of December 31, 2016 or December 31, 2015.
Valuation Allowances on Mortgage Loans
Year ended December 31, 2016
For the year ended December 31, 2016, there was no change in valuation allowances on mortgage loans.
Year ended December 31, 2015
For the year ended December 31, 2015, the change in valuation allowances on mortgage loan additions of $4 was largely driven by individual property performance.
Municipal Bonds
The following table presents the Company’s exposure to municipal bonds by type and weighted average credit quality included in the preceding Securities by Type tables.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Amortized Cost | | Fair Value | | Weighted Average Credit Quality | | Amortized Cost | | Fair Value | | Weighted Average Credit Quality |
| General Obligation | $ | 201 |
| | $ | 222 |
| | AA- | | $ | 234 |
| | $ | 255 |
| | AA- |
| Pre-Refunded [1] | 10 |
| | 10 |
| | AAA | | 10 |
| | 10 |
| | AAA |
| Revenue | | |
|
| |
| | | |
|
| |
|
| Transportation | 220 |
| | 239 |
| | A | | 203 |
| | 213 |
| | A |
| Health Care | 37 |
| | 39 |
| | AA | | 42 |
| | 43 |
| | AA |
| Water & Sewer | 41 |
| | 41 |
| | AA- | | 31 |
| | 31 |
| | AA |
| Education | 136 |
| | 149 |
| | AA | | 126 |
| | 140 |
| | AA |
| Sales Tax | 64 |
| | 72 |
| | AA- | | 66 |
| | 70 |
| | AA- |
| Leasing [2] | 93 |
| | 106 |
| | A+ | | 91 |
| | 101 |
| | A+ |
| Power | 150 |
| | 154 |
| | A | | 144 |
| | 148 |
| | A |
| Housing | 53 |
| | 56 |
| | A+ | | 29 |
| | 31 |
| | AA |
| Other | 93 |
| | 101 |
| | A | | 81 |
| | 90 |
| | A |
| Total Revenue | 887 |
| | 957 |
| | A+ | | 813 |
| | 867 |
| | A+ |
| Total Municipal | $ | 1,098 |
| | $ | 1,189 |
| | A+ | | $ | 1,057 |
| | $ | 1,132 |
| | AA- |
| |
| [1] | Pre-Refunded bonds are bonds for which an irrevocable trust containing sufficient U.S. treasury, agency, or other securities has been established to fund the remaining payments of principal and interest. |
| |
| [2] | Leasing revenue bonds are generally the obligations of a financing authority established by the municipality that leases facilities back to a municipality. The notes are typically secured by lease payments made by the municipality that is leasing the facilities financed by the issue. Lease payments may be subject to annual appropriation by the municipality or the municipality may be obligated to appropriate general tax revenues to make lease payments. |
As of December 31, 2013, the Company had mortgage loans held-for-sale with a carrying value2016 and valuation allowance of $53 and $3, respectively, and $47 and $3, respectively, as of December 31, 2012.2015, the largest issuer concentrations were the state of California, the Oregon School Boards Association, and Ohio American Municipal Power, Inc., which each comprised less than 6% of the municipal bond portfolio and were comprised of general obligation and revenue bonds.
Limited Partnerships and Other Alternative InvestmentsValuation Allowances on Mortgage Loans
Year ended December 31, 2016
For the year ended December 31, 2016, there was no change in valuation allowances on mortgage loans.
Year ended December 31, 2015
For the year ended December 31, 2015, the change in valuation allowances on mortgage loan additions of $4 was largely driven by individual property performance.
Municipal Bonds
The following table presents the Company’s investmentsexposure to municipal bonds by type and weighted average credit quality included in limited partnerships and other alternative investments which include hedge funds, mortgage and real estate funds, mezzanine debt funds, and private equity and other funds. Hedge funds include investments in funds of funds and direct funds. These hedge funds invest in a variety of strategies including global macro and long/short credit and equity. Mortgage and real estate funds consist of investments in funds whose assets consist of mortgage loans, mortgage loan participations, mezzanine loans or other notes which may be below investment grade, as well as equity real estate and real estate joint ventures. Mezzanine debt funds include investments in funds whose assets consist of subordinated debt that often incorporate equity-based options such as warrants and a limited amount of direct equity investments. Private equity and other funds primarily consist of investments in funds whose assets typically consist of a diversified pool of investments in small to mid-sized non-public businesses with high growth potential.
the preceding Securities by Type tables.
|
| | | | | | | | | | |
| | December 31, 2013 | December 31, 2012 |
| | Amount | Percent | Amount | Percent |
| Hedge funds | $ | 501 |
| 37.7 | % | $ | 501 |
| 36.5 | % |
| Mortgage and real estate funds | 193 |
| 14.5 | % | 185 |
| 13.5 | % |
| Mezzanine debt funds | 40 |
| 3.0 | % | 56 |
| 4.1 | % |
| Private equity and other funds | 595 |
| 44.8 | % | 630 |
| 45.9 | % |
| Total | $ | 1,329 |
| 100 | % | $ | 1,372 |
| 100 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Amortized Cost | | Fair Value | | Weighted Average Credit Quality | | Amortized Cost | | Fair Value | | Weighted Average Credit Quality |
| General Obligation | $ | 201 |
| | $ | 222 |
| | AA- | | $ | 234 |
| | $ | 255 |
| | AA- |
| Pre-Refunded [1] | 10 |
| | 10 |
| | AAA | | 10 |
| | 10 |
| | AAA |
| Revenue | | |
|
| |
| | | |
|
| |
|
| Transportation | 220 |
| | 239 |
| | A | | 203 |
| | 213 |
| | A |
| Health Care | 37 |
| | 39 |
| | AA | | 42 |
| | 43 |
| | AA |
| Water & Sewer | 41 |
| | 41 |
| | AA- | | 31 |
| | 31 |
| | AA |
| Education | 136 |
| | 149 |
| | AA | | 126 |
| | 140 |
| | AA |
| Sales Tax | 64 |
| | 72 |
| | AA- | | 66 |
| | 70 |
| | AA- |
| Leasing [2] | 93 |
| | 106 |
| | A+ | | 91 |
| | 101 |
| | A+ |
| Power | 150 |
| | 154 |
| | A | | 144 |
| | 148 |
| | A |
| Housing | 53 |
| | 56 |
| | A+ | | 29 |
| | 31 |
| | AA |
| Other | 93 |
| | 101 |
| | A | | 81 |
| | 90 |
| | A |
| Total Revenue | 887 |
| | 957 |
| | A+ | | 813 |
| | 867 |
| | A+ |
| Total Municipal | $ | 1,098 |
| | $ | 1,189 |
| | A+ | | $ | 1,057 |
| | $ | 1,132 |
| | AA- |
Available-for-Sale Securities — Unrealized Loss Aging
The total gross unrealized losses were $576 million as of December 31, 2013, which have improved $247 million, or 30%, from December 31, 2012 due to gross trading losses, partially offset by an increase in interest rates.
As of December 31, 2013, $408 of the gross unrealized losses were associated with securities depressed less than 20% of cost or amortized cost.
The remaining $168 of gross unrealized losses were associated with securities depressed greater than 20%, which includes $1 associated with securities depressed over 50% for twelve months or more. The securities depressed more than 20% are primarily foreign government securities and floating rate corporate financial securities. Unrealized losses on foreign government securities are primarily due to depreciation of the Japanese yen in relation to the U.S. dollar. Corporate financial securities are primarily depressed because the securities have floating-rate coupons and/or long-dated maturities. Based on the Company’s cash flow modeling and current market and collateral performance assumptions, these securities have sufficient credit protection levels to receive contractually obligated principal and interest payments.
As part of the Company’s ongoing security monitoring process, the Company has reviewed its AFS securities in an unrealized loss position and concluded that these securities are temporarily depressed and are expected to recover in value as the securities approach maturity. For these securities in an unrealized loss position where a credit impairment has not been recorded, the Company’s best estimate of expected future cash flows are sufficient to recover the amortized cost basis of the security. Furthermore, the Company neither has an intention to sell nor does it expect to be required to sell these securities. For further information regarding the Company’s impairment analysis, see Other-Than-Temporary Impairments in the Investment Portfolio Risks and Risk Management section of this MD&A.
The following table presents the Company’s unrealized loss aging for AFS securities by length of time the security was in a continuous unrealized loss position.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 | December 31, 2012 |
| | Items | Cost or Amortized Cost | Fair Value | Unrealized Loss [1] | Items | Cost or Amortized Cost | Fair Value | Unrealized Loss |
| Three months or less | 503 |
| $ | 3,957 |
| $ | 3,909 |
| $ | (48 | ) | 423 |
| $ | 1,268 |
| $ | 1,219 |
| $ | (49 | ) |
| Greater than three to six months | 135 |
| 417 |
| 402 |
| (15 | ) | 165 |
| 579 |
| 550 |
| (29 | ) |
| Greater than six to nine months | 273 |
| 2,206 |
| 2,069 |
| (137 | ) | 63 |
| 112 |
| 99 |
| (13 | ) |
| Greater than nine to eleven months | 33 |
| 163 |
| 152 |
| (11 | ) | 45 |
| 27 |
| 24 |
| (3 | ) |
| Greater than twelve months | 63 |
| 3,806 |
| 3,440 |
| (365 | ) | 548 |
| 5,588 |
| 4,851 |
| (729 | ) |
| Total | 1,007 |
| $ | 10,549 |
| $ | 9,972 |
| $ | (576 | ) | 1,244 |
| $ | 7,574 |
| $ | 6,743 |
| $ | (823 | ) |
| |
| [1] | Unrealized losses excludePre-Refunded bonds are bonds for which an irrevocable trust containing sufficient U.S. treasury, agency, or other securities has been established to fund the fair valueremaining payments of bifurcated embedded derivative features of certain securities as changes in value are recorded in net realized capital gains (losses).principal and interest. |
The following table presents the Company’s unrealized loss aging for AFS securities continuously depressed over 20% by length of time (included in the table above).
|
| | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 | December 31, 2012 |
| Consecutive Months | Items | Cost or Amortized Cost | Fair Value | Unrealized Loss [1] | Items | Cost or Amortized Cost | Fair Value | Unrealized Loss |
| Three months or less | 42 |
| $ | 108 |
| $ | 83 |
| $ | (25 | ) | 48 |
| $ | 35 |
| $ | 26 |
| $ | (9 | ) |
| Greater than three to six months | 12 |
| 25 |
| 18 |
| (7 | ) | 14 |
| 21 |
| 16 |
| (5 | ) |
| Greater than six to nine months | 16 |
| 413 |
| 309 |
| (104 | ) | 15 |
| 69 |
| 53 |
| (16 | ) |
| Greater than nine to eleven months | 4 |
| — |
| — |
| — |
| 7 |
| 29 |
| 22 |
| (6 | ) |
| Greater than twelve months | 37 |
| 110 |
| 78 |
| (32 | ) | 130 |
| 1,114 |
| 739 |
| (375 | ) |
| Total | 111 |
| $ | 656 |
| $ | 488 |
| $ | (168 | ) | 214 |
| $ | 1,268 |
| $ | 856 |
| $ | (411 | ) |
| |
[1]2] | Unrealized losses excludeLeasing revenue bonds are generally the fair valueobligations of bifurcated embedded derivative features of certain securities as changes in valuea financing authority established by the municipality that leases facilities back to a municipality. The notes are recorded in net realized capital gains (losses).
|
The following table presents the Company’s unrealized loss aging for AFS securities continuously depressed over 50% by length of time (included in the tables above).
|
| | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 | December 31, 2012 |
| Consecutive Months | Items | Cost or Amortized Cost | Fair Value | Unrealized Loss | Items | Cost or Amortized Cost | Fair Value | Unrealized Loss |
| Three months or less | 4 |
| $ | — |
| $ | — |
| $ | — |
| 12 |
| $ | 22 |
| $ | 10 |
| $ | (12 | ) |
| Greater than three to six months | 3 |
| 2 |
| 1 |
| (1 | ) | 1 |
| — |
| — |
| — |
|
| Greater than six to nine months | — |
| — |
| — |
| — |
| 4 |
| 1 |
| — |
| (1 | ) |
| Greater than nine to eleven months | — |
| — |
| — |
| — |
| 5 |
| — |
| — |
| — |
|
| Greater than twelve months | 12 |
| 1 |
| — |
| (1 | ) | 20 |
| 107 |
| 39 |
| (68 | ) |
| Total | 19 |
| $ | 3 |
| $ | 1 |
| $ | (2 | ) | 42 |
| $ | 130 |
| $ | 49 |
| $ | (81 | ) |
Other-Than-Temporary Impairments
The following table presents the Company’s impairments recognized in earnings by security type excluding intent-to-sell impairments relating to the sales of Retirement Plans and Individual Life businesses.
|
| | | | | | |
| | For the years ended December 31, |
| | 2013 | 2012 [1] |
| ABS | $ | 10 |
| $ | 24 |
|
| CDOs | — |
| 9 |
|
| CMBS | | |
| Bonds | 5 |
| 4 |
|
| IOs | 2 |
| 1 |
|
| Corporate | 14 |
| 18 |
|
| Equity | 9 |
| 15 |
|
| RMBS | | |
| Alt-A | — |
| 1 |
|
| Sub-prime | 5 |
| 10 |
|
| Total | $ | 45 |
| $ | 82 |
|
| |
[1]
| Excludes $173 of intent-to-sell impairments relatedtypically secured by lease payments made by the municipality that is leasing the facilities financed by the issue. Lease payments may be subject to annual appropriation by the sales ofmunicipality or the Retirement Plans and Individual Life businesses.municipality may be obligated to appropriate general tax revenues to make lease payments. |
Year endedAs of December 31, 2013
For the year ended2016 and December 31, 2013, impairments recognized in earnings2015, the largest issuer concentrations were the state of California, the Oregon School Boards Association, and Ohio American Municipal Power, Inc., which each comprised less than 6% of the municipal bond portfolio and were comprised of credit impairments of $18, securities that the Company intends to sell of $18,general obligation and impairments on equity securities of $9.revenue bonds.
Credit impairments were primarily concentrated in corporate and CMBS bonds and interest only securities. The corporate bonds were impaired due to issuers that have experienced financial difficulty and either defaulted or are expected to default on contractually obligated principal and interest payments. The structured securities were impaired primarily due to actual performance or property-specific deterioration of the underlying collateral. The Company calculated these impairments utilizing both a top down modeling approach and a security-specific collateral review. The top down modeling approach used discounted cash flow models that considered losses under current and expected future economic conditions. Assumptions used over the current period included macroeconomic factors, such as the unemployment rate, as well as sector specific factors such as property values, delinquency levels, servicer behavior, and severity rates. The macroeconomic assumptions considered by the Company did not materially change during 2013 and, as such, the credit impairments recognized for the year ended December 31, 2013 were primarily driven by actual or expected collateral deterioration, largely as a result of the Company’s security-specific collateral review.
The security-specific collateral review is performed to estimate potential future losses. This review incorporates assumptions about expected future collateral cash flows, including projected default rates and severities. The results of the security-specific collateral review allowed the Company to estimate the expected timing of a security’s first loss, if any, and the probability and severity of potential ultimate losses. The Company then discounted these anticipated future cash flows at the security’s book yield prior to impairment.
Intent-to-sell impairments were primarily related to structured securities with exposure to commercial and residential real estate and corporate securities, as a result of the Company's desire to reduce exposure to certain higher risk securities that are currently trading at relatively attractive valuations. Impairments on equity securities were comprised of securities that have been in an unrealized loss position and the Company no longer believes the securities will recover within the foreseeable future.
In addition to the credit impairments recognized in earnings, the Company recognized non-credit impairments in other comprehensive income of $9 for the year ended December 31, 2013, predominantly concentrated in CMBS and corporate securities. These non-credit impairments represent the difference between fair value and the Company’s best estimate of expected future cash flows discounted at the security’s effective yield prior to impairment, rather than at current market implied credit spreads. These non-credit impairments primarily represent increases in market liquidity premiums and credit spread widening that occurred after the securities were purchased, as well as a discount for variable-rate coupons which are paying less than at purchase date. In general, despite credit spread tightening in 2013, larger liquidity premiums and wider credit spreads are the result of deterioration of the underlying collateral performance of the securities, as well as the risk premium required to reflect future uncertainty in the real estate market.
Future impairments may develop as the result of changes in intent to sell specific securities or if actual results underperform current modeling assumptions, which may be the result of, but are not limited to, macroeconomic factors and security-specific performance below current expectations. Ultimate loss formation will be a function of macroeconomic factors and idiosyncratic security-specific performance.
Year ended December 31, 2012
For the year ended December 31, 2012, impairments recognized in earnings were comprised of intent-to-sell impairments of $198, which included $173 related to the sale of the Retirement Plans and Individual Life businesses. Also included were credit impairments of $42 primarily concentrated in structured securities associated with commercial real estate, as well as ABS small business, as well as impairments on equity securities of $15.
Valuation Allowances on Mortgage Loans
The following table presents (additions)/reversals toYear ended December 31, 2016
For the year ended December 31, 2016, there was no change in valuation allowances on mortgage loans.
|
| | | | | | |
| For the years ended December 31, |
| | 2013 | 2012 |
| Credit-related concerns | $ | (2 | ) | $ | 4 |
|
| Held for sale | | |
| Agricultural loans | — |
| — |
|
| B-note participations | — |
| — |
|
| Mezzanine loans | — |
| — |
|
| Total | $ | (2 | ) | $ | 4 |
|
Year ended December 31, 20132015
For the year ended December 31, 2013,2015, the change in valuation allowances on mortgage loan additions of $(2)$4 was largely driven by individual property performance. Continued improvement
Municipal Bonds
The following table presents the Company’s exposure to municipal bonds by type and weighted average credit quality included in the preceding Securities by Type tables.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Amortized Cost | | Fair Value | | Weighted Average Credit Quality | | Amortized Cost | | Fair Value | | Weighted Average Credit Quality |
| General Obligation | $ | 201 |
| | $ | 222 |
| | AA- | | $ | 234 |
| | $ | 255 |
| | AA- |
| Pre-Refunded [1] | 10 |
| | 10 |
| | AAA | | 10 |
| | 10 |
| | AAA |
| Revenue | | |
|
| |
| | | |
|
| |
|
| Transportation | 220 |
| | 239 |
| | A | | 203 |
| | 213 |
| | A |
| Health Care | 37 |
| | 39 |
| | AA | | 42 |
| | 43 |
| | AA |
| Water & Sewer | 41 |
| | 41 |
| | AA- | | 31 |
| | 31 |
| | AA |
| Education | 136 |
| | 149 |
| | AA | | 126 |
| | 140 |
| | AA |
| Sales Tax | 64 |
| | 72 |
| | AA- | | 66 |
| | 70 |
| | AA- |
| Leasing [2] | 93 |
| | 106 |
| | A+ | | 91 |
| | 101 |
| | A+ |
| Power | 150 |
| | 154 |
| | A | | 144 |
| | 148 |
| | A |
| Housing | 53 |
| | 56 |
| | A+ | | 29 |
| | 31 |
| | AA |
| Other | 93 |
| | 101 |
| | A | | 81 |
| | 90 |
| | A |
| Total Revenue | 887 |
| | 957 |
| | A+ | | 813 |
| | 867 |
| | A+ |
| Total Municipal | $ | 1,098 |
| | $ | 1,189 |
| | A+ | | $ | 1,057 |
| | $ | 1,132 |
| | AA- |
| |
| [1] | Pre-Refunded bonds are bonds for which an irrevocable trust containing sufficient U.S. treasury, agency, or other securities has been established to fund the remaining payments of principal and interest. |
| |
| [2] | Leasing revenue bonds are generally the obligations of a financing authority established by the municipality that leases facilities back to a municipality. The notes are typically secured by lease payments made by the municipality that is leasing the facilities financed by the issue. Lease payments may be subject to annual appropriation by the municipality or the municipality may be obligated to appropriate general tax revenues to make lease payments. |
As of December 31, 2016 and December 31, 2015, the largest issuer concentrations were the state of California, the Oregon School Boards Association, and Ohio American Municipal Power, Inc., which each comprised less than 6% of the municipal bond portfolio and were comprised of general obligation and revenue bonds.
Limited Partnerships and Other Alternative Investments
The following table presents the Company’s investments in limited partnerships and other alternative investments which include hedge funds, real estate funds, and private equity and other funds. Since December 31, 2015, the Company has reduced the allocation to hedge funds. Real estate funds consist of investments primarily in real estate equity funds, including some funds with public market exposure, and real estate joint ventures. Private equity and other funds primarily consist of investments in funds whose assets typically consist of a diversified pool of investments in small to mid-sized non-public businesses with high growth potential as well as limited exposure to public markets.
|
| | | | | | | | | | |
| | December 31, 2016 | December 31, 2015 |
| | Amount | Percent | Amount | Percent |
| Hedge funds | $ | 141 |
| 15.2 | % | $ | 425 |
| 35.0 | % |
| Real estate funds | 141 |
| 15.2 | % | 157 |
| 12.9 | % |
| Private equity and other funds | 648 |
| 69.6 | % | 634 |
| 52.1 | % |
| Total | $ | 930 |
| 100 | % | $ | 1,216 |
| 100 | % |
Available-for-Sale Securities — Unrealized Loss Aging
Total gross unrealized losses were $206 as of December 31, 2016, and have decreased $136, or 40%, from December 31, 2015, due to tighter credit spreads, partially offset by a rise in interest rates. As of December 31, 2016, $202 of the gross unrealized losses were associated with securities depressed less than 20% of cost or amortized cost. The remaining $4 of gross unrealized losses were associated with securities depressed greater than 20%. The securities depressed more than 20% are primarily securities with exposure to commercial real estate property valuations will positively impact futureand corporate securities in the energy sector that decreased in value primarily due to wider credit spreads since the securities were purchased.
As part of the Company’s ongoing security monitoring process, the Company has reviewed its AFS securities in an unrealized loss development, with future impairments driven by idiosyncratic loan-specific performance, as wellposition and concluded that these securities are temporarily depressed and are expected to recover in value as the necessitysecurities approach maturity or as market spreads tighten. For these securities in an unrealized loss position where a credit impairment has not been recorded, the Company’s best estimate of risk reductionexpected future cash flows are sufficient to recover the amortized cost basis of the security. Furthermore, the Company neither has an intention to sell nor does it expect to be required to sell these securities. For further information regarding the Company’s impairment analysis, see Other-Than-Temporary Impairments in the portfolio, rather than overall deteriorating market fundamentals.Investment Portfolio Risks and Risk Management section of this MD&A.
The following tables present the Company’s unrealized loss aging for AFS securities by length of time the security was in a continuous unrealized loss position.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | December 31, 2015 |
| Consecutive Months | Items | Cost or Amortized Cost | Fair Value | Unrealized Loss [1] | Items | Cost or Amortized Cost | Fair Value | Unrealized Loss |
| Three months or less | 1,142 |
| $ | 4,359 |
| $ | 4,264 |
| $ | (95 | ) | 1,199 |
| $ | 4,168 |
| $ | 4,112 |
| $ | (56 | ) |
| Greater than three to six months | 290 |
| 770 |
| 738 |
| (32 | ) | 473 |
| 1,315 |
| 1,266 |
| (49 | ) |
| Greater than six to nine months | 62 |
| 190 |
| 178 |
| (12 | ) | 587 |
| 2,192 |
| 2,086 |
| (106 | ) |
| Greater than nine to eleven months | 45 |
| 170 |
| 165 |
| (5 | ) | 172 |
| 504 |
| 473 |
| (31 | ) |
| Twelve months or more | 358 |
| 1,225 |
| 1,163 |
| (62 | ) | 383 |
| 1,545 |
| 1,443 |
| (100 | ) |
| Total | 1,897 |
| $ | 6,714 |
| $ | 6,508 |
| $ | (206 | ) | 2,814 |
| $ | 9,724 |
| $ | 9,380 |
| $ | (342 | ) |
| |
| [1] | Unrealized losses exclude the fair value of bifurcated embedded derivative features of certain securities as changes in value are recorded in net realized capital gains (losses). |
The following table presents the Company’s unrealized loss aging for AFS securities continuously depressed over 20% by length of time (also included in the table above).
|
| | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | December 31, 2015 |
| Consecutive Months | Items | Cost or Amortized Cost | Fair Value | Unrealized Loss [1] | Items | Cost or Amortized Cost | Fair Value | Unrealized Loss |
| Three months or less | 39 |
| $ | 2 |
| $ | 2 |
| $ | — |
| 132 |
| $ | 147 |
| $ | 109 |
| $ | (38 | ) |
| Greater than three to six months | 13 |
| 1 |
| 1 |
| — |
| 66 |
| 45 |
| 30 |
| (15 | ) |
| Greater than six to nine months | 10 |
| 4 |
| 3 |
| (1 | ) | 5 |
| 2 |
| 1 |
| (1 | ) |
| Greater than nine to eleven months | 5 |
| — |
| — |
| — |
| 3 |
| 9 |
| 7 |
| (2 | ) |
| Twelve months or more | 26 |
| 7 |
| 4 |
| (3 | ) | 26 |
| 17 |
| 12 |
| (5 | ) |
| Total | 93 |
| $ | 14 |
| $ | 10 |
| $ | (4 | ) | 232 |
| $ | 220 |
| $ | 159 |
| $ | (61 | ) |
| |
| [1] | Unrealized losses exclude the fair value of bifurcated embedded derivatives features of certain securities as changes in value are recorded in net realized capital gains (losses). |
Other-Than-Temporary Impairments
The following table presents the Company’s impairments recognized in earnings by security type.
|
| | | | | | |
| | For the years ended December 31, |
| | 2016 | 2015 |
| CRE CDOs | $ | — |
| $ | 1 |
|
| CMBS | 1 |
| 1 |
|
| Corporate | 25 |
| 42 |
|
| Equity | 2 |
| 14 |
|
| Municipal | — |
| 2 |
|
| RMBS | — |
| 1 |
|
| Total | $ | 28 |
| $ | 61 |
|
Year ended December 31, 20122016
For the year ended December 31, 2012,2016, impairments recognized in earnings were comprised of credit impairments of $22, securities that the change in valuation allowancesCompany intends to sell ("intent-to-sell impairments") of $4 and impairments on mortgage loan reversalsequity securities of $4 was largely driven by recovery of property collateralizing a B-Note. The valuation allowance was reversed due$2.
For the year ended December 31, 2016, credit impairments were primarily related to an increasecorporate securities and were identified through security specific reviews and resulted from changes in the valuationfinancial condition of the underlying collateralissuer. The Company incorporates its best estimate of future performance using internal assumptions and judgments that are informed by economic and industry specific trends, as awell as our expectations with respect to security specific developments. Impairments on equity securities were comprised of securities in an unrealized loss position that the Company does not believe will recover in the foreseeable future. Intent-to-sell impairments for the year ended December 31, 2016 were primarily comprised of securities in the corporate sector.
Non-credit impairments recognized in other comprehensive income were $1 for the year ended December 31, 2016. These non-credit impairments represent the excess of the Company’s best estimate of the discounted future cash flows over the fair value.
Future impairments may develop as the result of improved occupancy rateschanges in intent-to-sell specific securities or if actual results underperform current modeling assumptions, which may be the result of, but are not limited to, macroeconomic factors and security-specific performance below current expectations.
Year ended December 31, 2015
For the year ended December 31, 2015, impairments recognized in earnings were comprised of intent-to-sell impairments of $24 and credit impairments of $23, both of which were primarily concentrated in corporate securities. Also, impairments recognized in earnings included impairments on equity securities of $14 that were in an unrealized loss position and the property. Continued improvementCompany no longer believed the securities would recover in commercial real estate property valuations will positively impact future loss development, with future impairments driven by idiosyncratic loan-specific performance.the foreseeable future.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall strength of Hartford Life Insurance Company and its ability to generate strong cash flows, from each of the business segments, borrow funds at competitive rates and raise new capital to meet operating and growth needs over the next twelve months.
Liquidity Requirements and Sources of Capital
The Hartford has an intercompany liquidity agreement that allows for short-term advances of funds among the The Hartford Financial Services Group, Inc. (“HFSG Holding CompanyCompany”) and certain affiliates of up to $2.0 billion for liquidity and other general corporate purposes. The Connecticut Insurance Department ("CTDOI") granted approval for certain affiliated insurance companies that are parties to the agreement to treat receivables from a parent, including the HFSG Holding Company, as admitted assets for statutory accounting purposes. On April 29, 2013 The Company issued a revolving note (the "Note") in the principal amount of $100 to Hartford Life and Accident Insurance Company ("HLA"), the Company's parent, under the intercompany liquidity agreement. The Note bears interest at 0.92% and matures on April 29, 2014. On May 29, 2013 Hartford Life and Annuity Insurance Company ("HLAI"), a wholly-owned subsidiary of the Company, issued a Note in the principal amount of $225 to HLA, under the intercompany liquidity agreement. The Note bears interest at 1.00% and matures on May 29, 2014. On February 28, 2014, the total outstanding balances on these notes were repaid in full.
HLAI cedes certain variable annuity contracts and their associated riders as well as certain payout annuities issued by HLAI or assumed by it to White River Life Reinsurance Company ("WRR"), an affiliate captive reinsurer. The economic purpose of the WRR arrangement is to provide the Company and its subsidiaries with a more efficient vehicle to manage risks in connection with these products. The reinsurance transaction between HLAI and WRR is mainly structured as modified coinsurance ("modco"). Accordingly, the assets and reinsured reserves remain on the books of HLAI and all insurance and investment experience is passed to WRR through modco adjustments. The reinsurance arrangement between HLAI and WRR does not impact the Company's reserving methodology or the amount of required regulatory capital associated with the reinsured business. In the first half of 2014, The Hartford expects to dissolve WRR and recapture all reinsured risks to HLAI. The Hartford will take appropriate action to ensure that its life insurance subsidiaries are adequately capitalized. This transaction is subject to regulatory approvals.
Pursuant to an intercompany note agreement between WRR and the Company's ultimate parent, WRR may borrow up to $1 billion from HFSG in order to maintain certain statutory capital levels required by its plan of operations and which can be used by WRR to settle outstanding payables with HLAI. As of December 31, 2013, WRR has borrowed $655 under2016, there were no amounts outstanding from the intercompany note agreement.HFSG Holding Company.
Derivative Commitments
Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings, as set by nationally recognized statistical rating agencies, of the individual legal entity that entered into the derivative agreement as set by nationally recognized statistical rating agencies.agreement. If the legal entity’s 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 legal entity’s ability to conduct hedging activities by increasing the associated costs and decreasing the willingness of counterparties to transact with the legal 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, 2013,2016, was $844.$794. Of this $844$794 the legal entities have posted collateral of $945$939 in the normal course of business. In addition, the Company has posted collateral of $44$31 associated with a customized GMWB derivative. Based on derivative market values as of December 31, 2013,2016, a downgrade of one level below the current financial strength ratings by either Moody’s or S&P could require approximately an additional $5 to be posted as collateral. Based on derivative market values as of December 31, 2013, a downgrade of two levels below the current financial strength ratings by either Moody’s or S&P would not require additional assets 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 would post, if required, would be primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities.
As of December 31, 2013, there were no2016, the aggregate notional amount and fair value of derivative relationships that could be subject to immediate termination in the event of rating agency downgradesa downgrade of one level below the current financial strength ratings was $1.1 billion and $23, respectively. These amounts could change as derivative market values change, as a result of changes in our hedging activities or to either BBB+ or Baa1, or both BBB+ and Baa1.the extent changes in contractual terms are negotiated.
Insurance Operations
In the event customers elect to surrender separate account assets, the Company will use the proceeds from the sale of the assets to fund the surrender and the Company’s liquidity position will not be impacted. In many instances the Company will receive a percentage of the surrender amount as compensation for early surrender (surrender charge), increasing the Company’s liquidity position. In addition, a surrender of variable annuity separate account or general account assets will decrease the Company’s obligation for payments on guaranteed living and death benefits.
The Company may from time to time retire or repurchase its funding agreement backed notes through cash repurchases, in the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. In 2013, the Company did not repurchase any funding agreements. The amounts of any future repurchases may be material.
As of December 31, 2013, the Company’s cash and short-term investments of $2.4 billion, included $171 of collateral received from, and held on behalf of, derivative counterparties and $40 of collateral pledged to derivative counterparties. The Company also held $1.7 billion of treasury securities, of which $380 had been pledged to derivative counterparties and $2.0 billion of government agency securities of which $445 had been pledged to derivative counterparties.
Total general account contractholder obligations are supported by $38$32 billion of cash and total general account invested assets excluding equity securities, trading, which includes a significant short-term investment position, as depicted below, to meet liquidity needs.
As of December 31, 2013,2016, the Company’sCompany's fixed maturities, short-term investments, and cash are summarized as follows: | | | Fixed maturities | $ | 28,954 |
| $ | 23,901 |
|
| Short-term investments | 1,952 |
| 1,349 |
|
| Cash | 446 |
| 554 |
|
| Less: Derivative collateral | 1,036 |
| 1,164 |
|
| Total | $ | 30,316 |
| $ | 24,640 |
|
Capital resources available to fund liquidity upon contract holdercontractholder surrender or termination are a function of the legal entity in which the liquidity requirement resides. Obligations related to life and annuity insurance products will be generally funded by both Hartford Life Insurance Company ("HLIC") and Hartford Life and Annuity Insurance Company;Company ("HLAI"); obligations related to retirement and institutional investment products will be generally funded by Hartford Life Insurance Company; and obligations of the Company’s international annuity subsidiary and affiliate will generally be funded by the legal entity in the country in which the obligation was generated.Company.
The Company is a member of the Federal Home Loan Bank of Boston (“FHLBB”). Membership allows the Company access to collateralized advances, which may be used to support various spread-based business and enhance liquidity management. The Connecticut DepartmentFHLBB membership requires the company to own member stock and advances require the purchase of Insurance (“CTDOI”) will permit the Company to pledge up to $1.25 billion in qualifying assets to secure FHLBB advances for 2014.activity stock. The amount of advances that can be taken are dependent on the asset types pledged to secure the advances. The Connecticut Department of Insurance (“CTDOI”) will permit the Company to pledge up to $1.1 billion in qualifying assets to secure FHLBB advances for 2017. The pledge limit is recalculated annually based on statutory admitted assets and capital and surplus. The Company would need to seek the prior approval of the CTDOI if there were a desirein order to exceed these limits. As of December 31, 2013, the Company2016, HLIC had no advances outstanding under the FHLBB facility.
| | | Contractholder Obligations | As of December 31, 2013 | As of December 31, 2016 |
| Total Contractholder obligations | $ | 190,688 |
| $ | 160,273 |
|
| Less: Separate account assets [1] | 140,874 |
| 115,665 |
|
| General account contractholder obligations | $ | 49,814 |
| $ | 44,608 |
|
| Composition of General Account Contractholder Obligations | | |
| Contracts without a surrender provision and/or fixed payout dates [2] | $ | 17,546 |
| $ | 18,712 |
|
| Fixed MVA annuities [3] | 7,979 |
| 5,153 |
|
| International fixed MVA annuities | 1,514 |
| |
| Guaranteed investment contracts (“GIC”) [4] | 31 |
| |
| Other [5] | 22,744 |
| |
| Other [4] | | 20,743 |
|
| General account contractholder obligations | $ | 49,814 |
| $ | 44,608 |
|
| |
| [1] | In the event customers elect to surrender separate account assets, the Company will use the proceeds from the sale of the assets to fund the surrender, and the Company’s liquidity position will not be impacted. In many instances the Company will receive a percentage of the surrender charge,amount as compensation for early surrender (surrender charge), increasing the Company’s liquidity position. In addition, a surrender of variable annuity separate account or general account assets (see the following) will decrease the Company’s obligation for payments on guaranteed living and death benefits. |
| |
| [2] | Relates to contracts such as payout annuities, or institutional notes, other than guaranteed investment products with an MVA feature (discussed below) or surrenders of term life, group benefit contracts, or death and living benefit reserves, which cannot be surrendered for which surrenders will have no current effect on the Company’s liquidity requirements.cash. |
| |
| [3] | Relates to annuities that are recorded in the general account (underunder U.S. GAAP),GAAP as the contractholders are subject to the Company's credit risk, although these annuities are held in a statutory separate account, as the contractholders are subject to the Company's credit risk.account. In the statutory separate account, the Company is required to maintain invested assets with a fair value greater than or equal to the MVA surrender value of the Fixed MVA contract. In the event assets decline in value at a greater rate than the MVA surrender value of the Fixed MVA contract, the Company is required to contribute additional capital to the statutory separate account. The Company will fund these required contributions with operating cash flows or short-term investments. In the event that operating cash flows or short-term investments are not sufficient to fund required contributions, the Company may have to sell other invested assets at a loss, potentially resulting in a decrease in statutory surplus. As the fair value of invested assets in the statutory separate account are generallyat least equal to the MVA surrender value of the Fixed MVA contract, surrender of Fixed MVA annuities will have an insignificant impact on the liquidity requirements of the Company. |
| |
| [4] | GICs are subject to discontinuance provisions which allow the policyholders to terminate their contracts prior to scheduled maturity at the lesser of the book value or market value. Generally, the market value adjustment reflects changes in interest rates and credit spreads. As a result, the market value adjustment feature in the GIC serves to protect the Company from interest rate risks and limit the Company’s liquidity requirements in the event of a surrender. |
| |
[5] | Surrenders of, or policy loans taken from, as applicable, these general account liabilities, which include the general account option for Individual Annuity individual variable annuities and the variable life contracts of the former Individual Life business, the general account option for annuities of the former Retirement Plans business and universal life contracts sold by the former Individual Life business, may be funded through operating cash flows of the Company, available short-term investments, or the Company may be required to sell fixed maturity investments to fund the surrender payment. Sales of fixed maturity investments could result in the recognition of significant realized losses and insufficient proceeds to fully fund the surrender amount. In this circumstance, the Company may need to take other actions, including enforcing certain contract provisions which could restrict surrenders and/or slow or defer payouts. See Note 2 - Business DispositionsThe Company has ceded reinsurance in connection with the sales of Notes to the Consolidated Financial Statements as to the sale of theits Retirement Plans and Individual Life businesses to MassMutual and related transfer of invested assets in January 2013. Prudential, respectively. The reinsurance transactions do not extinguish the Company's primary liability on the insurance policies issued under these businesses. |
The Company issued consumer notes through its Retail Investor Notes Program prior to 2009. 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 Company’s 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 Company’s exposure to market risks in accordance with Company policy.
As of December 31, 2013, these consumer notes have interest rates ranging from 4% to 6% for fixed notes and, for variable notes, based on December 31, 2013 rates, either consumer price index plus 102 to 247 basis points, or indexed to the S&P 500, Dow Jones Industrials, or the Nikkei 225. The aggregate maturities of Consumer Notes are as follows: $14 in 2014, $32 in 2015, $18 in 2016, $12 in 2017 and $8 thereafter. For 2013, 2012 and 2011, interest credited to holders of consumer notes was $6, $10, and $15, respectively.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
The Company does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on the financial condition, results of operations, liquidity, or capital resources of the Company, except for unfunded commitments to purchase investments in limited partnerships and other alternative investments, private placements, and mortgage loans of $645 as disclosed in Note 10 - Commitments and Contingencies of Notes to Consolidated Financial Statements.
The following table identifiessummarizes the Company’s contractual obligations as of December 31, 20132016::
| | | | Payments due by period | Payments due by period |
| | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
| Life and annuity obligations [1] | $ | 289,860 |
| $ | 22,439 |
| $ | 36,394 |
| $ | 31,233 |
| $ | 199,794 |
| $ | 241,553 |
| $ | 16,335 |
| $ | 27,875 |
| $ | 23,299 |
| $ | 174,044 |
|
| Operating lease obligations [2] | 4 |
| 1 |
| 2 |
| 1 |
| — |
| 4 |
| 2 |
| 2 |
| — |
| — |
|
| Consumer notes [3] | 90 |
| 16 |
| 53 |
| 21 |
| — |
| |
| Purchase obligations [4] | 362 |
| 325 |
| 37 |
| — |
| — |
| |
| Other long-term liabilities | 184 |
| 171 |
| 13 |
| — |
| — |
| |
| Purchase obligations [3] | | 761 |
| 740 |
| 17 |
| 4 |
| — |
|
| Other liabilities reflected on the balance sheet [4] | | 1,434 |
| 1,061 |
| 372 |
| 1 |
| — |
|
| Total | $ | 290,500 |
| $ | 22,952 |
| $ | 36,499 |
| $ | 31,255 |
| $ | 199,794 |
| $ | 243,752 |
| $ | 18,138 |
| $ | 28,266 |
| $ | 23,304 |
| $ | 174,044 |
|
| |
| [1] | Estimated life and annuity obligations include death claims, other charges associated with policyholder reserves, policy surrenders and policyholder dividends, offset by expected future deposits on in-force contracts. Estimated life and annuity obligations are based on mortality, morbidity and lapse assumptions comparable with the Company’s historical experience, modified for recent observed trends. The Company has also assumed market growth and interest crediting consistent with other assumptions. In contrast to this table, the majority of the Company’s obligations are recorded on the balance sheet at the current account values and do not incorporate an expectation of future market growth, interest crediting, or future deposits. Therefore, the estimated obligations presented in this table significantly exceed the liabilities recorded in reserve for future policy benefits, and unpaid loss and loss adjustment expenses, other policyholder funds and benefits payable, and separate account liabilities. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. |
| |
| [2] | Includes future minimum lease payments on operating lease agreements. See Note 12 - Commitments and Contingencies of Notes to Consolidated Financial Statements for additional discussion on lease commitments. |
| |
| [3] | Consumer notes include principal payments, contractual interest for fixed rate notes and, interest based on current rates for floating rate notes. See Note 10 - Debt of Notes to Consolidated Financial Statements for additional discussion of consumer notes.
|
| |
[4] | Included in purchase obligations is $77$30 relating to contractual commitments to purchase various goods and services such as maintenance and information technology in the normal course of business. Purchase obligations exclude contracts that are cancelable without penalty, or contracts that do not specify minimum levels of goods or services to be purchased. |
| |
| [4] | Includes consumer notes of $21. Consumer notes include principal payments, contractual interest for fixed rate notes, and interest based on current rates for floating rate notes. |
Dividends
Dividends to the Company from its insurance subsidiaries are restricted as is the ability of the Company to pay dividends to its parent company. Future dividend decisions will be based on, and affected by a number of factors, including the operating results and financial requirements of the Company on a stand-alone basis and the impact of regulatory restrictions.
insurance regulation. The payment of dividends by Connecticut-domiciled insurers is limited under the insurance holding company laws of Connecticut. These laws require notice to and approval by the state insurance commissioner for the declaration or payment of any dividend, which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer’s policyholder surplus as of December 31 of the preceding year or (ii) net income (or net gain from operations, if such company is a life insurance company) for the twelve-month period ending on the thirty-first day of December last preceding, in each case determined under statutory insurance accounting principles. In addition, if any dividend of a Connecticut-domicileddomiciled insurer exceeds the insurer’s earned surplus itor certain other thresholds as calculated under applicable state insurance law, the dividend requires the prior approval of the Connecticut Insurance Commissioner. The insurance holding company lawsdomestic regulator. In addition to statutory limitations on paying dividends, the Company also takes other items into consideration when determining dividends from subsidiaries. These considerations include, but are not limited to, expected earnings and capitalization of the other jurisdictionssubsidiary, regulatory capital requirements and liquidity requirements of the individual operating company.
In 2016, HLAI paid dividends of $750 to the Company which were subsequently paid to the Company's parent.
In 2017, the Company is permitted to pay up to a maximum of $1 billion in whichdividends and the Company’s insurance subsidiaries are incorporated (or deemed commercially domiciled) generally contain similar (although in certain instances somewhat more restrictive) limitations on the payment of dividends.
The Company’s subsidiaries are permitted to pay up to a maximum of approximately $1 billion$345 in dividends in 2014 without prior approval from the applicable insurance commissioner. With respectHowever, to meet the liquidity needed to pay dividends up to its parent, the Company’s dividend limitation under the holding company laws of Connecticut is $919 in 2014. However, because the Company’s earned surplus is negative as of December 31, 2013,HFSG Holding Company, the Company will not be permitted to pay anymay require receiving regulatory approval for extraordinary dividends to its parent in 2014 without prior approval from the Connecticut
Insurance Commissioner. During 2013, The Hartford initiated a plan to make Hartford Life and Accident Insurance Company the single nationwide underwriting company for its Group Benefits business by capitalizing it to support the Group Benefits business and separating it from the legal entities that support its Talcott Resolution operating segment.HLAI. On January 30, 2014, The Hartford received approval from the State2017, HLAI paid a dividend of Connecticut Insurance Department ("CTDOI")$300 to dividend approximately $800 of cash and invested assets from HLAI and the Company which was subsequently paid as a dividend to HLA and then distribute HLAI and the Company's parent.
The Company to HLI. The Hartford believes this initiative will enhance the ability of its Group Benefits business to compete more effectively and will also allow for greater operational efficiencies and financial transparency to its customers.
On February 5, 2013 the Company received approval from the State of Connecticut Insurance Department to receive a $1.1 billion extraordinary dividend from its Connecticut domiciled life insurance subsidiaries, and to pay a $1.2 billion extraordinaryanticipates paying an additional $300 dividend to its parent company. These dividends were received and paid on February 22, 2013.during 2017.
Cash Flows
|
| | | | | | |
| | 2013 | 2012 |
| Net cash (used for) provided by operating activities | $ | (365 | ) | $ | 2,027 |
|
| Net cash (used for) provided by investing activities | $ | 4,251 |
| $ | (1,922 | ) |
| Net cash (used for) provided by financing activities | $ | (4,791 | ) | $ | 54 |
|
| Cash — End of Year | $ | 446 |
| $ | 1,342 |
|
|
| | | | | | |
| | 2016 | 2015 |
| Net cash provided by operating activities | $ | 784 |
| $ | 682 |
|
| Net cash provided by investing activities | $ | 864 |
| $ | 1,446 |
|
| Net cash used for financing activities | $ | (1,399 | ) | $ | (2,081 | ) |
| Cash - end of year | $ | 554 |
| $ | 305 |
|
Year ended December 31, 2013 compared to Year-ended December 31, 2012
Net cash provided by operating activities decreasedincreased in 2016 as compared to 2015 primarily due to changesthe receipt of income tax refunds and decreases in account activity of $3.8 billion offset by reinsurance loss on dispositions of $1.5 billionclaims paid and operating expenses paid in 2013. Net cash provided by operating activities in 2012 decreased due to settlements of a modified coinsurance agreement, partially offset by an increase in income taxes received of $395.2016.
Net cash provided by investing activities in 20132016 primarily relates to net proceeds offrom available-for-sale securities of $4.7approximately $1.5 billion, and proceeds on business sold of $745 partially offset by net payments on derivativesfor short-term investments of $1.9$769. Net cash provided by investing activities in 2015 primarily relates to net proceeds from short-term investments of approximately $1.6 billion.
Net cash used for investingfinancing activities in 2012 primarily2016 relates to net payments on derivativesfor deposits, transfers and withdrawals for investment and universal life-type contracts of $2.2approximately $0.9 billion net purchases of mortgage loans of of $750, and net purchases of partnerships of $307, partially offset by net proceeds of available-for-sale securities of $1.2 billion.
Net cash provided by financing activities in 2013 relates to athe return of capital to the parent of $1.2 billion, net outflows on investment and universal life-type contracts of $1.6 billion, decrease in securities loaned or sold of $1.6 billion, and fee repayment to recapture affiliate reinsurance of $347.approximately $0.8 billion. Net cash used for financing activities in 2012 primarily2015 relates to the return of capital to the parent of approximately $1.0 billion and net increase in securities loaned or sold of $1.6 billion, partially offset by net outflows onpayments for deposits, transfers and withdrawals for investment and universal life-type contracts of $1.4 billion and repayments of consumer notes of $153.approximately $1.3 billion.
Operating cash flows in both periods have been adequate to meet liquidity requirements.
Ratings
Ratings can have an impact on the Company’s cost of borrowingCompany's reinsurance and its ability to access financing and are an important factor in establishing competitive position in the insurance and financial services marketplace.derivative contracts. There can be no assurance that the Company’s ratings will continue for any given period of time or that they will not be changed. In the event the Company’s ratings are downgraded, the Company’s cost of borrowing and ability to access financing, as well as the level of revenues or the persistency of its businessreinsurance contracts may be adversely impacted.impacted and the Company may be required to post additional collateral on certain derivative contracts.
The following table summarizes Hartford Life Insurance Company’s significant member companies’ financial ratings from the major independent rating organizations as of February 25, 2014 :22, 2017:
|
| | | | |
| Insurance Financial Strength Ratings: | A.M. Best | Fitch | Standard & Poor’s | Moody’s |
| Hartford Life Insurance Company | A- | A- | BBB+ | A3Baa2 |
| Hartford Life and Annuity Insurance Company | A- | A- | BBB+ | Baa2 |
These ratings are not a recommendation to buy or hold any of the Company’s securities and they may be revised or revoked at any time at the sole discretion of the rating organization.
The agencies consider many factors in determining the final rating of an insurance company. One consideration is the relative level of statutory capital and surplus, (referred to collectively as "statutory capital") necessary to support the business written. Statutory surplus represents the capital of the insurance companywritten and is reported in accordance with accounting practices prescribed by the applicable state insurance department.
Statutory Capital
The Company’s stockholder’sstockholder's equity, as prepared using U.S. GAAP, was $8.27.8 billion as of December 31, 20132016. The Company’s estimated aggregate statutory capital and surplus, as prepared in accordance with the National Association of Insurance Commissioners’ Accounting Practices and Procedures Manual (“U.S. STAT”), was $5$4.4 billion as of December 31, 20132016.
Significant differences between U.S. GAAP stockholder’s equity and aggregate statutory capital and surplus prepared in accordance with U.S. STAT include the following:
U.S. STAT excludes equity of non insurancenon-insurance and foreign insurance subsidiaries not held by U.S. insurance subsidiaries.
Costs incurred by the Company to acquire insurance policies are deferred under USU.S. GAAP while those costs are expensed immediately under USU.S. STAT.
Temporary differences between the book and tax basis of an asset or liability which are recorded as deferred tax assets are evaluated for recoverability under USU.S. GAAP while those amounts deferred are subject to limitations under USU.S. STAT.
The assumptions used in the determination of benefit reserves isare prescribed under USU.S. STAT, while the assumptions used under USU.S. GAAP are generally the Company’s best estimates. The methodologies for determining life insurance reserve amounts mayare also be different. For example, reserving for living benefit reserves under USU.S. STAT is generally addressed by the Commissioners’ Annuity Reserving Valuation Methodology and the related Actuarial Guidelines, while under USU.S. GAAP, those same living benefits may be consideredare either embedded derivatives and recorded at fair value or they may be considered SOP 03-1are recorded as additional minimum guarantee benefit reserves. The sensitivity of these life insurance reserves to changes in equity markets, as applicable, will be different between USU.S. GAAP and USU.S. STAT.
The difference between the amortized cost and fair value of fixed maturity and other investments, net of tax, is recorded as an increase or decrease to the carrying value of the related asset and to equity under USU.S. GAAP, while USU.S. STAT only records certain securities at fair value, such as equity securities and certain lower rated bonds required by the NAIC to be recorded at the lower of amortized cost or fair value. In the case of the Company’s market value adjusted (MVA) fixed annuity products, invested assets are marked to fair value (including the impact of audit spreads) and liabilities are marked to fair value (but generally excluding the impacts of credit spreads) for statutory purposes only. In the case of the Company’s market value adjusted (MVA) fixed annuity products, invested assets are marked to fair value (but generally actual credit spreads are not fully reflected) for statutory purposes only.
USU.S. STAT for life insurance companies establishes a formula reserve for realized and unrealized losses due to default and equity risks associated with certain invested assets (the Asset Valuation Reserve), while USU.S. GAAP does not. Also, for those realized gains and losses caused by changes in interest rates, USU.S. STAT for life insurance companies defers and amortizes the gains and losses, caused by changes in interest rates, into income over the original life to maturity of the asset sold (the Interest Maintenance Reserve) while USU.S. GAAP does not.
In addition, certain assets, including a portion of premiums receivable and fixed assets, are non-admitted (recorded at zero value and charged against surplus) under U.S.STAT. U.S.GAAPU.S. STAT. U.S. GAAP generally evaluates assets based on their recoverability.
Risk-based Capital
The Company's U.S. insurance companies' states of domicile impose risk-based capital (“RBC”) requirements. The requirements provide a means of measuring the minimum amount of statutory capital and surplus, referred to collectively as capital appropriate for an insurance company to support its overall business operations, based on its size and risk profile. Regulatory compliance is determined by a ratio of a company's total adjusted capital (“TAC”) to its authorized control level RBC (“ACL RBC”). Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The minimum level of TAC before corrective action commences (“Company Action Level”) is two times the ACL RBC (“Company Action Level”). The adequacy of a company's capital is determined by the ratio of a company's TAC to its Company Action Level, (knownknown as the RBC ratio)"RBC ratio". AllThe Company and all of the Company'sits operating insurance subsidiaries had RBC ratios in excess of the minimum levels required by the applicable insurance regulations. The RBC ratios for the Company'sCompany and its principal life insurance operating subsidiaries were all in excess of 500%400% of their Company Action LevelLevels as of December 31, 20132016 and 2012. In addition, all other domestic life insurance subsidiaries, comprising less than 10% of the capital of the Company's U.S. life insurance subsidiaries, have RBC ratios that exceed the minimum level required by the applicable insurance regulations.2015. The reporting of RBC ratios is not intended for the purpose of ranking any insurance company, or for use in connection with any marketing, advertising or promotional activities.
Similar to the RBC ratios that are employed by U.S. insurance regulators, regulatory authorities in the international jurisdictions in which the Company operates generally establish minimum solvency requirements for insurance companies. All of the Company's international insurance subsidiaries have solvency margins in excess of the minimum levels required by the applicable regulatory authorities.
Contingencies
Legal Proceedings
For further information on other contingencies, see Note 1210 - Commitments and Contingencies of Notes to Consolidated Financial Statements.
Legislative Initiativesand Regulatory Developments
The Dodd-Frank Wall StreetTax Reform
Tax proposals and Consumer Protection Actregulatory initiatives which have been or are being considered by Congress and/or the United States Treasury Department could have a material effect on the Company. These proposals and initiatives include, or could include, changes pertaining to the income tax treatment of 2010 (the “Dodd-Frank Act”) was enacted on July 21, 2010, mandatinginsurance companies and life insurance products and annuities, repeal or reform of the estate tax and comprehensive federal tax reform, and changes to the regulationregulatory structure for financial institutions. The nature and timing of any Congressional or regulatory action with respect to any such efforts is unclear. For additional information on risks to the financial services industry. Implementation ofCompany related to tax reform, please see the Dodd-Frank Act is ongoing and may affect our operations and governancerisk factor entitled "Changes in ways thatfederal or state tax laws could adversely affect our business, financial condition, and results of operations.operations and liquidity" under "Risk Factors" in Part I.
The Dodd-Frank Act vests the Financial Stability Oversight Council (“FSOC”) with the power to designate “systemically important” financial institutions, which will be subject to special regulatory supervision and other provisions intended to prevent, or mitigate the impact of, future disruptions in the U.S. financial system. Systemically important institutions are limited to large bank holding companies and nonbank financial companies that are so important that their potential failure could “pose a threat to the financial stability of the United States.” The FSOC finalized its rule for designating systemically important nonbank financial institutions in April 2012. Based on its most current financial data, The Hartford is below the quantitative thresholds that will be used to determine which nonbank companies merit consideration. The FSOC has indicated it will review on a quarterly basis whether non-bank financial institutions meet the metrics for further review.
If The Hartford is designated as a systemically important institution, it could be subject to higher capital requirements and additional regulatory oversight imposed by the Federal Reserve, as well as to post-event assessments imposed by the Federal Deposit Insurance Corporation (“FDIC”) to recoup the costs associated with the orderly liquidation of other systemically important institutions in the event one or more such institutions fails. Further, in certain circumstances, the FDIC is authorized to petition a state court to commence an insolvency proceeding to liquidate an insurance company that fails in the event the insurer's state regulator fails to act. If designated, The Hartford could also be subject to increased capital requirements or quantitative limits with respect to our sponsorship of and investments in private equity and hedge funds, which could limit our discretion in managing our general account.
Other provisions in the Dodd-Frank Act that may impact us include: the requirement for central clearing of, and/or new margin and capital requirements on, derivatives transactions, which we expect will increase the costs of our hedging program; the new “Federal Insurance Office” within Treasury; the possible adverse impact on the pricing and liquidity of the securities in which we invest resulting from the proprietary trading and market making limitation of the Volcker Rule; the possible prohibition of certain asset-backed securities transactions that could adversely impact our ability to offer insurance-linked securities; and enhancements to corporate governance, especially regarding risk management.
Budget of the United States Government
The Obama Administration has not yet released its proposed federal budget for FY 2014. Last year's proposal, entitled “FY 2013, Budget of the United States Government” (the “Budget”) includes proposals that if enacted, would have affected the taxation of life insurance companies and certain life insurance products. In particular, the proposals would have changed the method used to determine the amount of dividend income received by a life insurance company on assets held in separate accounts used to support products, including variable life insurance and variable annuity contracts, which are eligible for the dividends received deduction (“DRD”). The DRD reduces the amount of dividend income subject to tax and is a significant component of the difference between the Company's actual tax expense and expected amount determined using the federal statutory tax rate of 35%. If this proposal is included in the proposed federal budget for FY 2014 and subsequently enacted, the Company's actual tax expense could increase, reducing earnings.
Guaranty Fund and Other Insurance-related Assessments
For a discussion regarding Guaranty Fund and Other Insurance-related Assessments, see Note 1210 - Commitments and Contingencies of Notes to Consolidated Financial Statements.
IMPACT OF NEW ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
| |
| Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The information required by this item is set forth in the Enterprise Risk Management section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| |
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See Index to Consolidated Financial Statements and Schedules elsewhere herein.
| |
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
Item 9A. CONTROLS AND PROCEDURES
| |
| Item 9A. | CONTROLS AND PROCEDURES |
Evaluation of disclosure controlsDisclosure Controls and proceduresProcedures
The Company's principal executive officer and its principal financial officer, based on their evaluation of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) have concluded that the Company's disclosure controls and procedures are effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of December 31, 20132016.
Management’s annual reportAnnual Report on internal control over financial reportingInternal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. A company’s internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed its internal controls over financial reporting as of December 31, 20132016 in relation to criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework (1992)(2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment under those criteria, The Company’s management concluded that its internal control over financial reporting was effective as of December 31, 20132016.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in internal control over financial reportingInternal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting that occurred during the Company's fourth fiscal quarter of 20132016 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
| |
| Item 9B. | OTHER INFORMATION |
None.
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF HARTFORD LIFE INSURANCE COMPANY
| |
| Item 10. | DIRECTORS, AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF HARTFORD LIFE INSURANCE COMPANY |
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 11. EXECUTIVE COMPENSATION
| |
| Item 11. | EXECUTIVE COMPENSATION |
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
| |
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
| |
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
| |
| Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The following table presents fees for professional services rendered by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, the “Deloitte Entities”) for the audit of the Company’s annual financial statements, audit-related services, tax services and all other services for the years ended December 31, 20132016 and 2012.
2015.
|
| | | | | | |
| (amounts are in whole dollars) | Year Ended December 31, 2016 | Year Ended December 31, 2015 |
| (1) Audit fees | $ | 5,877,000 |
| $ | 6,249,000 |
|
| (2) Audit-related fees [1] | 12,500 |
| — |
|
| (3) Tax fees | — |
| — |
|
| (4) All other fees | — |
| — |
|
| Total [2] | $ | 5,889,500 |
| $ | 6,249,000 |
|
|
| | | | | | |
| | Year Ended December 31, 2013 | Year Ended December 31, 2012 |
| (1) Audit fees | $ | 8,420,488 |
| $ | 10,181,610 |
|
| (2) Audit-related fees (a) | 437,013 |
| 362,806 |
|
| (3) Tax fees (b) | 63,250 |
| — |
|
| (3) All other fees (c) | 272,839 |
| 177,467 |
|
| Total | $ | 9,193,590 |
| $ | 10,721,883 |
|
| |
(a) | Fees for the year ended December 31, 2013 and 2012 principally consisted of divestiture related services. |
| |
(b) | Fees for the year ended December 31, 2013 and December 31, 2012 principally consisted of international tax compliance services and tax examination assistance. |
| |
(c) | Fees for the year ended December 31, 2013 principally consisted of an internal controls project. Fees for the year ended December 31, 2012 principally consisted of an enterprise risk management project. |
The Hartford’s Audit Committee (the “Committee”) concluded that the provision of the non-audit services provided to The Hartford by the Deloitte Entities during 20132016 and 20122015 was compatible with maintaining the Deloitte Entities’ independence.
The Committee has established policies requiring pre-approval of audit and non-audit services provided by the independent registered public accounting firm. The policies require that the Committee pre-approve specifically described audit, and audit-related services, annually. For the annual pre-approval, the Committee approves categories of audit services, audit-related services and related fee budgets. For all pre-approvals, the Committee considers whether such services are consistent with the rules of the SEC and the Public Company Accounting Oversight Board on auditor independence. The independent registered public accounting firm and management report to the Committee on a timely basis regarding the services rendered by and actual fees paid to the independent registered public accounting firm to ensure that such services are within the limits approved by the Committee. The Committee’s policies require specific pre-approval of all tax services, internal control-related services and all other permitted services on an individual project basis. As provided by the Committee’s policies, the Committee has delegated to its Chairman the authority to address any requests for pre-approval of services between Committee meetings, up to a maximum of $100 thousand for non-tax services and up to a maximum of $5 thousand for tax services. The Chairman must report any pre-approvals to the full Committee at its next scheduled meeting.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as a part of this report:
| |
| Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| |
| (a) | Documents filed as a part of this report: |
| |
| (1) | Consolidated Financial Statements. See Index to Consolidated Financial Statements and Schedules elsewhere herein. |
| |
| (2) | Consolidated Financial Statement Schedules. See Index to Consolidated Financial Statement and Schedules elsewhere herein. |
| |
| (3) | Exhibits. See Exhibit Index elsewhere herein. |
HARTFORD LIFE INSURANCE COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
|
| | |
| Description | | Page(s)Page |
| | F-2 |
| | |
| | F-3 |
| | |
| | F-4 |
| | |
| | F-5 |
| | |
| | F-6 |
| | |
| | F-7 |
| | |
| | F-8 - F-73 |
| | |
| | S-1 |
| | |
| | S-2 |
| | |
| | S-3 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Hartford Life Insurance Company
Hartford, Connecticut
We have audited the accompanying consolidated balance sheets of Hartford Life Insurance Company and subsidiaries (the "Company") as of December 31, 20132016 and 2012,2015, and the related consolidated statements of operations, comprehensive income, changes in stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2013.2016. 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 Company's management. Our responsibility is to express an opinion on the consolidated 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 Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Hartford Life Insurance Company and subsidiaries as of December 31, 20132016 and 2012,2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013,2016, 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.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 28, 2014
24, 2017
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
| | | | For the years ended December 31, | For the years ended December 31, |
| (In millions) | 2013 | 2012 | 2011 | 2016 | 2015 | 2014 |
| Revenues | | |
| Fee income and other | $ | 1,462 |
| $ | 2,956 |
| $ | 3,183 |
| $ | 969 |
| $ | 1,097 |
| $ | 1,210 |
|
| Earned premiums | 184 |
| 93 |
| 244 |
| 203 |
| 92 |
| 32 |
|
| Net investment income (loss): | | |
| Securities available-for-sale and other | 1,681 |
| 2,535 |
| 2,572 |
| |
| Equity securities, trading | 2 |
| 1 |
| — |
| |
| Total net investment income | 1,683 |
| 2,536 |
| 2,572 |
| |
| Net investment income | | 1,373 |
| 1,456 |
| 1,543 |
|
| Net realized capital gains (losses): | | |
| Total other-than-temporary impairment (“OTTI”) losses | (54 | ) | (293 | ) | (196 | ) | (29 | ) | (63 | ) | (31 | ) |
| OTTI losses recognized in other comprehensive income | 9 |
| 38 |
| 71 |
| |
| OTTI losses recognized in other comprehensive income (losses) ("OCI") | | 1 |
| 2 |
| 2 |
|
| Net OTTI losses recognized in earnings | (45 | ) | (255 | ) | (125 | ) | (28 | ) | (61 | ) | (29 | ) |
| Net realized capital gains on business dispositions | 1,561 |
| — |
| — |
| |
| Net realized capital gains (losses), excluding net OTTI losses recognized in earnings | (1,190 | ) | (1,226 | ) | 48 |
| |
| Other net realized capital gains (losses) | | (135 | ) | (85 | ) | 606 |
|
| Total net realized capital gains (losses) | 326 |
| (1,481 | ) | (77 | ) | (163 | ) | (146 | ) | 577 |
|
| Total revenues | 3,655 |
| 4,104 |
| 5,922 |
| 2,382 |
| 2,499 |
| 3,362 |
|
| Benefits, losses and expenses | | |
| Benefits, loss and loss adjustment expenses | 1,758 |
| 2,900 |
| 3,108 |
| 1,437 |
| 1,402 |
| 1,460 |
|
| Amortization of deferred policy acquisition costs and present value of future profits | 228 |
| 324 |
| 427 |
| |
| Amortization of deferred policy acquisition costs ("DAC") | | 114 |
| 69 |
| 206 |
|
| Insurance operating costs and other expenses | (401 | ) | 268 |
| 2,507 |
| 472 |
| 524 |
| 851 |
|
| Reinsurance loss on disposition, including reduction in goodwill of $250 and $61, respectively | 1,491 |
| 61 |
| — |
| |
| Reinsurance gain on disposition | | — |
| (28 | ) | (23 | ) |
| Dividends to policyholders | 18 |
| 20 |
| 17 |
| 3 |
| 2 |
| 7 |
|
| Total benefits, losses and expenses | 3,094 |
| 3,573 |
| 6,059 |
| 2,026 |
| 1,969 |
| 2,501 |
|
| Income (loss) from continuing operations before income taxes | 561 |
| 531 |
| (137 | ) | |
| Income tax expense (benefit) | 49 |
| 36 |
| (323 | ) | |
| Income from continuing operations, net of tax | 512 |
| 495 |
| 186 |
| |
| Income (loss) from discontinued operations, net of tax | (41 | ) | 61 |
| 58 |
| |
| Income before income taxes | | 356 |
| 530 |
| 861 |
|
| Income tax expense | | 74 |
| 30 |
| 184 |
|
| Net income | 471 |
| 556 |
| 244 |
| 282 |
| 500 |
| 677 |
|
| Net income attributable to the noncontrolling interest | 6 |
| 2 |
| — |
| |
| Net income attributable to noncontrolling interest | | — |
| — |
| 1 |
|
| Net income attributable to Hartford Life Insurance Company | $ | 465 |
| $ | 554 |
| $ | 244 |
| $ | 282 |
| $ | 500 |
| $ | 676 |
|
See Notes to Consolidated Financial Statements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Loss)
|
| | | | | | | | | |
| | December 31, |
| |
| (In millions) | 2013 | 2012 | 2011 |
| | |
| Comprehensive Income | | | |
| Net income | $ | 471 |
| $ | 556 |
| $ | 244 |
|
| Other comprehensive income (loss): | | | |
| Change in net unrealized gain/loss on securities | (1,257 | ) | 1,120 |
| 1,174 |
|
| Change in net gain/loss on cash-flow hedging instruments | (179 | ) | (110 | ) | 103 |
|
| Change in foreign currency translation adjustments | 23 |
| 24 |
| (2 | ) |
| Total other comprehensive income/(loss) | (1,413 | ) | 1,034 |
| 1,275 |
|
| Total comprehensive income/(loss) | (942 | ) | 1,590 |
| 1,519 |
|
| Less: Comprehensive income attributable to noncontrolling interest | 6 |
| 2 |
| — |
|
| Total comprehensive income/(loss) attributable to Hartford Life Insurance Company | $ | (948 | ) | $ | 1,588 |
| $ | 1,519 |
|
|
| | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2016 | 2015 | 2014 |
| Net income | $ | 282 |
| $ | 500 |
| $ | 677 |
|
| Other comprehensive income (loss): | | | |
| Change in net unrealized gain on securities | 154 |
| (615 | ) | 659 |
|
| Change in net gain on cash-flow hedging instruments | (25 | ) | (13 | ) | (9 | ) |
| Change in foreign currency translation adjustments | — |
| — |
| (3 | ) |
| OCI, net of tax | 129 |
| (628 | ) | 647 |
|
| Comprehensive income (loss) | 411 |
| (128 | ) | 1,324 |
|
| Less: Comprehensive income attributable to noncontrolling interest | — |
| — |
| 1 |
|
| Comprehensive income (loss) attributable to Hartford Life Insurance Company | $ | 411 |
| $ | (128 | ) | $ | 1,323 |
|
See Notes to Consolidated Financial Statements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
| | | | As of December 31, | As of December 31, |
| (In millions, except for share data) | 2013 | 2012 | 2016 | 2015 |
| Assets | | |
| Investments: | | |
| Fixed maturities, available-for-sale, at fair value (amortized cost of $27,188 and $45,753) (includes variable interest entity assets, at fair value, of $12 and $89) | $ | 28,163 |
| $ | 49,404 |
| |
| Fixed maturities, at fair value using the fair value option (includes variable interest entity assets, at fair value, of $131 and $132) | 791 |
| 1,010 |
| |
| Equity securities, trading, at fair value (cost of $10 and $1,614) | 12 |
| 1,847 |
| |
| Equity securities, available for sale, at fair value (cost of $362 and $408) | 372 |
| 400 |
| |
| Mortgage loans (net of allowances for loan losses of $12 and $14) | 3,470 |
| 4,935 |
| |
| Fixed maturities, available-for-sale, at fair value (amortized cost of $22,507 and $23,559) | | $ | 23,819 |
| $ | 24,657 |
|
| Fixed maturities, at fair value using the fair value option (includes variable interest entity assets, at fair value, of $0 and $49) | | 82 |
| 165 |
|
| Equity securities, available-for-sale, at fair value (cost of $142 and $471) (includes equity securities, at fair value using the fair value option, of $0 and $281, and variable interest entity assets of $0 and $1) | | 152 |
| 459 |
|
| Mortgage loans (net of allowance for loan losses of $19 and $19) | | 2,811 |
| 2,918 |
|
| Policy loans, at outstanding balance | 1,416 |
| 1,951 |
| 1,442 |
| 1,446 |
|
| Limited partnership and other alternative investments (includes variable interest entity assets of $4 and $6) | 1,329 |
| 1,372 |
| |
| Limited partnerships and other alternative investments (includes variable interest entity assets of $0 and $2) | | 930 |
| 1,216 |
|
| Other investments | 270 |
| 582 |
| 293 |
| 212 |
|
| Short-term investments (includes variable interest entity assets, at fair value, of $3 as of December 31, 2013) | 1,952 |
| 2,354 |
| |
| Short-term investments (includes variable interest entity assets of $0 and $2) | | 1,349 |
| 572 |
|
| Total investments | 37,775 |
| 63,855 |
| 30,878 |
| 31,645 |
|
| Cash | 446 |
| 1,342 |
| 554 |
| 305 |
|
| Premiums receivable and agents’ balances | 33 |
| 58 |
| |
| Premiums receivable and agents’ balances, net | | 18 |
| 19 |
|
| Reinsurance recoverables | 19,794 |
| 2,893 |
| 20,725 |
| 20,499 |
|
| Deferred policy acquisition costs and present value of future profits | 689 |
| 3,072 |
| |
| Deferred policy acquisition costs | | 463 |
| 542 |
|
| Deferred income taxes, net | 2,110 |
| 1,557 |
| 1,437 |
| 1,581 |
|
| Goodwill | — |
| 250 |
| |
| Other assets | 994 |
| 1,306 |
| 606 |
| 648 |
|
| Separate account assets | 140,874 |
| 141,558 |
| 115,665 |
| 120,111 |
|
| Total assets | $ | 202,715 |
| $ | 215,891 |
| $ | 170,346 |
| $ | 175,350 |
|
| Liabilities | | |
| Reserve for future policy benefits and unpaid losses and loss adjustment expenses | $ | 12,874 |
| $ | 11,916 |
| |
| Reserve for future policy benefits | | $ | 14,000 |
| $ | 13,850 |
|
| Other policyholder funds and benefits payable | 36,856 |
| 40,501 |
| 30,588 |
| 31,157 |
|
| Other policyholder funds and benefits payable – international unit-linked bonds and pension products | — |
| 1,837 |
| |
| Consumer notes | 84 |
| 161 |
| |
| Other liabilities (includes variable interest entity liabilities of $35 and $111 ) | 3,788 |
| 9,535 |
| |
| Other liabilities (includes variable interest entity liabilities of $0 and $12) | | 2,272 |
| 2,070 |
|
| Separate account liabilities | 140,874 |
| 141,558 |
| 115,665 |
| 120,111 |
|
| Total liabilities | 194,476 |
| 205,508 |
| 162,525 |
| 167,188 |
|
| Commitments and Contingencies (Note 10) |
|
|
|
|
|
|
|
|
| Stockholder’s Equity | | |
| Common stock — 1,000 shares authorized, issued and outstanding, par value $5,690 | 6 |
| 6 |
| |
| Common stock—1,000 shares authorized, issued and outstanding, par value $5,690 | | 6 |
| 6 |
|
| Additional paid-in capital | 6,959 |
| 8,155 |
| 4,935 |
| 5,687 |
|
| Accumulated other comprehensive income, net of tax | 574 |
| 1,987 |
| 722 |
| 593 |
|
| Retained earnings | 700 |
| 235 |
| 2,158 |
| 1,876 |
|
| Total stockholder’s equity | 8,239 |
| 10,383 |
| 7,821 |
| 8,162 |
|
| Total liabilities and stockholder’s equity | $ | 202,715 |
| $ | 215,891 |
| $ | 170,346 |
| $ | 175,350 |
|
See Notes to Consolidated Financial Statements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholder's Equity
|
| | | | | | | | | | | | | | | | | | |
| (In millions) | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Deficit) | Non- Controlling Interest | Total Stockholder’s Equity |
| Balance, December 31, 2012 | $ | 6 |
| $ | 8,155 |
| $ | 1,987 |
| $ | 235 |
| $ | — |
| $ | 10,383 |
|
| Capital contributions to parent | — |
| (1,196 | ) |
|
|
|
|
|
| (1,196 | ) |
| Dividends declared | — |
|
|
|
|
| — |
|
|
| — |
|
| Net income | — |
|
|
|
|
| 465 |
| 6 |
| 471 |
|
| Change in noncontrolling interest ownership | — |
|
|
|
|
|
|
| (6 | ) | (6 | ) |
| Total other comprehensive income | — |
|
|
| (1,413 | ) |
|
|
|
| (1,413 | ) |
| Balance, December 31, 2013 | $ | 6 |
| $ | 6,959 |
| $ | 574 |
| $ | 700 |
| $ | — |
| $ | 8,239 |
|
| Balance, December 31, 2011 | $ | 6 |
| $ | 8,271 |
| $ | 953 |
| $ | (319 | ) | $ | — |
| $ | 8,911 |
|
| Capital contributions to parent | — |
| (116 | ) | — |
| — |
| — |
| (116 | ) |
| Net income | — |
| — |
| — |
| 554 |
| 2 |
| 556 |
|
| Change in noncontrolling interest ownership | — |
| — |
| — |
| — |
| (2 | ) | (2 | ) |
| Total other comprehensive income | — |
| — |
| 1,034 |
| — |
| — |
| 1,034 |
|
| Balance, December 31, 2012 | $ | 6 |
| $ | 8,155 |
| $ | 1,987 |
| $ | 235 |
| $ | — |
| $ | 10,383 |
|
| Balance, December 31, 2010 | $ | 6 |
| $ | 8,265 |
| $ | (322 | ) | $ | (562 | ) | $ | — |
| $ | 7,387 |
|
| Capital contributions from parent | — |
| 6 |
| — |
| — |
| — |
| 6 |
|
| Dividends declared | — |
| — |
| — |
| (1 | ) | — |
| (1 | ) |
| Net income | — |
| — |
| — |
| 244 |
| — |
| 244 |
|
| Total other comprehensive income | — |
| — |
| 1,275 |
| — |
| — |
| 1,275 |
|
| Balance, December 31, 2011 | $ | 6 |
| $ | 8,271 |
| $ | 953 |
| $ | (319 | ) | $ | — |
| $ | 8,911 |
|
|
| | | | | | | | | | | | | | | | | | |
| (In millions) | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Non-Controlling Interest | Total Stockholder's Equity |
| Balance, December 31, 2015 | $ | 6 |
| $ | 5,687 |
| $ | 593 |
| $ | 1,876 |
| $ | — |
| $ | 8,162 |
|
| Return of capital to parent | — |
| (752 | ) | — |
| — |
| — |
| (752 | ) |
| Net income | — |
| — |
| — |
| 282 |
| — |
| 282 |
|
| Total other comprehensive income | — |
| — |
| 129 |
| — |
| — |
| 129 |
|
| Balance, December 31, 2016 | $ | 6 |
| $ | 4,935 |
| $ | 722 |
| $ | 2,158 |
| $ | — |
| $ | 7,821 |
|
| Balance, December 31, 2014 | $ | 6 |
| $ | 6,688 |
| $ | 1,221 |
| $ | 1,376 |
| $ | — |
| $ | 9,291 |
|
| Return of capital to parent | — |
| (1,001 | ) | — |
| — |
| — |
| (1,001 | ) |
| Net income | — |
| — |
| — |
| 500 |
| — |
| 500 |
|
| Total other comprehensive loss | — |
| — |
| (628 | ) | — |
| — |
| (628 | ) |
| Balance, December 31, 2015 | $ | 6 |
| $ | 5,687 |
| $ | 593 |
| $ | 1,876 |
| $ | — |
| $ | 8,162 |
|
| Balance, December 31, 2013 | $ | 6 |
| $ | 6,959 |
| $ | 574 |
| $ | 700 |
| $ | — |
| $ | 8,239 |
|
| Return of capital to parent | — |
| (271 | ) | — |
| — |
| — |
| (271 | ) |
| Net income | — |
| — |
| — |
| 676 |
| 1 |
| 677 |
|
| Change in non-controlling interest ownership | | | | | (1 | ) | (1 | ) |
| Total other comprehensive income | — |
| — |
| 647 |
| — |
| — |
| 647 |
|
| Balance, December 31, 2014 | $ | 6 |
| $ | 6,688 |
| $ | 1,221 |
| $ | 1,376 |
| $ | — |
| $ | 9,291 |
|
See Notes to Consolidated Financial StatementsStatements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
| | | | | | | | | |
| | For the years ended December 31, |
| (In millions) | 2013 | 2012 | 2011 |
| Operating Activities | | | |
| Net income | 471 |
| $ | 556 |
| $ | 244 |
|
| 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 | 228 |
| 359 |
| 474 |
|
| Additions to deferred policy acquisition costs and present value of future profits | (16 | ) | (329 | ) | (381 | ) |
| Change in: | | | |
| Reserve for future policy benefits and unpaid losses and loss adjustment expenses | 230 |
| (44 | ) | 252 |
|
| Reinsurance recoverables | (795 | ) | (47 | ) | 57 |
|
| Receivables and other assets | (80 | ) | 158 |
| 9 |
|
| Payables and accruals | (1,532 | ) | (1,035 | ) | 2,402 |
|
| Accrued and deferred income taxes | 589 |
| 392 |
| (125 | ) |
| Net realized capital (gains) losses | (678 | ) | 1,413 |
| 1 |
|
| Net receipts (disbursements) from investment contracts related to policyholder funds – international unit-linked bonds and pension products | (1,833 | ) | (92 | ) | (323 | ) |
| Net (increase) decrease in equity securities, trading | 1,835 |
| 120 |
| 312 |
|
| Goodwill Impairment | — |
| 149 |
| — |
|
| Reinsurance loss on disposition | 1,491 |
| 61 |
| — |
|
| Depreciation and amortization | 53 |
| 164 |
| 194 |
|
| Other, net | (328 | ) | 202 |
| (108 | ) |
| Net cash provided by operating activities | (365 | ) | 2,027 |
| 3,008 |
|
| Investing Activities | | | |
| Proceeds from the sale/maturity/prepayment of: | | | |
| Fixed maturities, available-for-sale | 19,206 |
| 23,759 |
| 19,801 |
|
| Fixed maturities, fair value option | 322 |
| 283 |
| 37 |
|
| Equity securities, available-for-sale | 81 |
| 133 |
| 147 |
|
| Mortgage loans | 355 |
| 306 |
| 332 |
|
| Partnerships | 127 |
| 110 |
| 128 |
|
| Payments for the purchase of: | | | |
| Fixed maturities and short-term investments, available-for-sale | (14,532 | ) | (23,949 | ) | (20,517 | ) |
| Fixed maturities, fair value option | (134 | ) | (182 | ) | (661 | ) |
| Equity securities, available-for-sale | (79 | ) | (97 | ) | (230 | ) |
| Mortgage loans | (177 | ) | (1,056 | ) | (1,246 | ) |
| Partnerships | (99 | ) | (417 | ) | (436 | ) |
| Proceeds from business sold | 745 |
| 58 |
| — |
|
| Change in derivatives, net | (1,900 | ) | (2,275 | ) | 938 |
|
| Change in policy loans, net | (7 | ) | 1 |
| 176 |
|
| Change in short-term investments, net | 363 |
| 1,404 |
| (598 | ) |
| Change in all other, net | (20 | ) | — |
| 1 |
|
| Net cash provided by (used for) investing activities | 4,251 |
| (1,922 | ) | (2,128 | ) |
| Financing Activities | | | |
| Deposits and other additions to investment and universal life-type contracts | 5,943 |
| 10,004 |
| 12,124 |
|
| Withdrawals and other deductions from investment and universal life-type contracts | (24,473 | ) | (24,608 | ) | (22,720 | ) |
| Net transfers from (to) separate accounts related to investment and universal life-type contracts | 16,978 |
| 13,196 |
| 10,439 |
|
| Net (decrease) increase in securities loaned or sold under agreements to repurchase | (1,615 | ) | 1,615 |
| — |
|
| Capital contributions (to) from parent | (1,200 | ) | — |
| — |
|
| Fee to recapture affiliate reinsurance | (347 | ) | — |
| — |
|
| Net repayments at maturity or settlement of consumer notes | (77 | ) | (153 | ) | (68 | ) |
| Net cash (used for) provided by financing activities | (4,791 | ) | 54 |
| (225 | ) |
| Foreign exchange rate effect on cash | 9 |
| — |
| (3 | ) |
| Net increase (decrease) in cash | (896 | ) | 159 |
| 652 |
|
| Cash — beginning of year | 1,342 |
| 1,183 |
| 531 |
|
| Cash — end of year | $ | 446 |
| $ | 1,342 |
| $ | 1,183 |
|
| Supplemental Disclosure of Cash Flow Information: | | | |
| Net cash paid (received) during the year for income taxes | (181 | ) | (395 | ) | (105 | ) |
| Noncash return of capital | (4 | ) | (126 | ) | — |
|
| Supplemental Disclosure of Non-Cash Investing Activity | | | |
| Conversion of fixed maturities, available-for-sale to equity securities, available-for-sale | — |
| 43 |
| — |
|
|
| | | | | | | | | |
| | For the years ended December 31, |
| (In millions) | 2016 | 2015 | 2014 |
| Operating Activities | | | |
| Net income | $ | 282 |
| $ | 500 |
| $ | 677 |
|
| Adjustments to reconcile net income to net cash provided by operating activities | | | |
| Net realized capital (gains) losses | 163 |
| 146 |
| (577 | ) |
| Amortization of deferred policy acquisition costs | 114 |
| 69 |
| 206 |
|
| Additions to deferred policy acquisition costs | (7 | ) | (7 | ) | (14 | ) |
| Reinsurance gain on disposition | — |
| (28 | ) | (23 | ) |
| Depreciation and amortization (accretion), net | 9 |
| (14 | ) | 6 |
|
| Other operating activities, net | 33 |
| 38 |
| 248 |
|
| Change in assets and liabilities: | | | |
| Decrease (increase) in reinsurance recoverables | 117 |
| (14 | ) | 170 |
|
| Increase (decrease) in accrued and deferred income taxes | 278 |
| (62 | ) | 302 |
|
| Increase in reserve for future policy benefits and unearned premiums | 111 |
| 276 |
| 586 |
|
| Net changes in other assets and other liabilities | (316 | ) | (222 | ) | (912 | ) |
| Net cash provided by operating activities | 784 |
| 682 |
| 669 |
|
| Investing Activities | | | |
| Proceeds from the sale/maturity/prepayment of: | | | |
| Fixed maturities, available-for-sale | 10,152 |
| 11,465 |
| 10,333 |
|
| Fixed maturities, fair value option | 68 |
| 107 |
| 358 |
|
| Equity securities, available-for-sale | 321 |
| 586 |
| 107 |
|
| Mortgage loans | 371 |
| 467 |
| 377 |
|
| Partnerships | 395 |
| 252 |
| 152 |
|
| Payments for the purchase of: | | | |
| Fixed maturities and short-term investments, available-for-sale | (8,889 | ) | (11,755 | ) | (7,385 | ) |
| Fixed maturities, fair value option | (29 | ) | (67 | ) | (217 | ) |
| Equity securities, available-for-sale | (58 | ) | (535 | ) | (363 | ) |
| Mortgage loans | (263 | ) | (282 | ) | (146 | ) |
| Partnerships | (151 | ) | (199 | ) | (104 | ) |
| Net payments for derivatives | (261 | ) | (167 | ) | (66 | ) |
| Net increase (decrease) in policy loans | 2 |
| (31 | ) | (14 | ) |
| Net (payments for) proceeds from short-term investments | (769 | ) | 1,604 |
| (556 | ) |
| Other investing activities, net | (25 | ) | 1 |
| 34 |
|
| Net cash provided by investing activities | 864 |
| 1,446 |
| 2,510 |
|
| Financing Activities | | | |
| Deposits and other additions to investment and universal life-type contracts | 4,162 |
| 4,674 |
| 4,567 |
|
| Withdrawals and other deductions from investment and universal life-type contracts | (14,871 | ) | (16,972 | ) | (21,810 | ) |
| Net transfers from separate accounts related to investment and universal life-type contracts | 9,811 |
| 10,987 |
| 14,167 |
|
| Net increase in securities loaned or sold under agreements to repurchase | 268 |
| 264 |
| — |
|
| Return of capital to parent | (752 | ) | (1,001 | ) | (275 | ) |
| Net repayments at maturity or settlement of consumer notes | (17 | ) | (33 | ) | (13 | ) |
| Net cash used for financing activities | (1,399 | ) | (2,081 | ) | (3,364 | ) |
| Foreign exchange rate effect on cash | — |
| — |
| (3 | ) |
| Net increase (decrease) in cash | 249 |
| 47 |
| (188 | ) |
| Cash — beginning of year | 305 |
| 258 |
| 446 |
|
| Cash — end of year | $ | 554 |
| $ | 305 |
| $ | 258 |
|
| Supplemental Disclosure of Cash Flow Information | | | |
| Income tax refunds received/(payments) | 210 |
| (80 | ) | 187 |
|
| Noncash return of capital | — |
| — |
| (4 | ) |
See Notes to Consolidated Financial Statements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
1.1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
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 a wholly-owned subsidiary of Hartford Life, and Accident Insurance Company (“HLA”). Hartford Life, Inc., a Delaware corporation ("HLI") is the parent of HLA.. The Hartford Financial Services Group, Inc. (“The Hartford”) is the ultimate parent of the Company.
On January 1, 2013,June 30, 2014, HLI completed the sale of its Retirement Plans business to Massachusetts Mutualthe issued and outstanding equity of Hartford Life Insurance CompanyKK, a Japanese company ("MassMutual"HLIKK") and on January 2, 2013 HLI completed the sale of its Individual, to ORIX Life insurance business to The Prudential Insurance Company of America,Corporation ("Buyer"), a subsidiary of Prudential Financial, Inc. ("Prudential"). On December 12, 2013,ORIX Corporation, a Japanese company. Upon closing HLIKK recaptured certain risks reinsured to the Company completed the saleand Hartford Life and Annuity Insurance Company ("HLAI"), a wholly owned subsidiary of the U.K variable annuity business of Hartford Life International Limited ("HLIL"), an indirect wholly-owned subsidiary. As a result of this transaction,Company, by terminating intercompany agreements. The Buyer is responsible for all liabilities related to the operations of the Company's U.K. variable annuity business meet the criteriarecaptured business. However, HLAI has continued to provide reinsurance for reporting as discontinued operations as further discussed in Note 17 - Discontinued Operations of Notes to Consolidated Financial Statements.yen denominated fixed payout annuities. For further discussion of these and other such transactions,this transaction, see Note 211 - Business DispositionsTransactions with Affiliates of Notes to Consolidated Financial Statements.
On December 10, 2012, HLA received regulatory approval to reorganize its Mutual Funds business for the purpose of streamlining the business by consolidating the entities that provide services to the Mutual Funds business under Hartford Funds Management Group, Inc., also a subsidiary of HLI, thereby separating its Mutual Funds business from its insurance business. The Company effected the reorganization by distributing certain Mutual Funds subsidiaries to HLA in the form of a return of capital effective December 31, 2012. The reorganization was accounted for byEffective April 1, 2014, the Company as a transferterminated its modified coinsurance ("modco") and coinsurance with funds withheld reinsurance agreement with White River Life Reinsurance ("WRR"), following receipt of net assets at book value between entities under common control.
In connection withapproval from the reorganizationState of the Mutual Funds business, investment advisory agreements between the Company's Mutual Funds subsidiariesConnecticut Insurance Department ("CTDOI") and HL Investment Advisors, LLC, an indirect subsidiaryVermont Department of the Company, were terminated effective December 31, 2012. Following the reorganization,Financial Regulation. On April 30, 2014 The Hartford Funds Management Company, LLC, an indirect subsidiary of HLI, will replace HL Investment Advisors, LLC as the investment advisor for The Hartford's mutual funds. The Mutual Funds reporting segment contributed less than 10% of the net income attributable to HLIC for the year ended December 31, 2012. The carrying value of the subsidiaries distributed was $203 and $116 as of December 31, 2012 and 2011, respectively.dissolved WRR. For further discussion of the reorganization of the Mutual Funds business,this transaction, see Note 7 - Goodwill , Note 1311 - Transactions with Affiliates and Note 17 - Discontinued Operations of Notes to Consolidated Financial Statements.
Effective March 3, 2014, The Hartford made Hartford Life and Accident Insurance Company ("HLA") the single nationwide underwriting company for its Group Benefits business by capitalizing HLA to support the Group Benefits business and separating it from the legal entities that support The Hartford's Talcott Resolution operating segment. On January 30, 2014, The Hartford received approval from the CTDOI for HLAI and the Company to dividend approximately $800 of cash and invested assets to HLA and this dividend was paid on February 27, 2014. All of the issued and outstanding equity of the Company was then distributed from HLA to HLI and the Company became a direct subsidiary of HLI.
The Consolidated Financial Statements have been prepared on the basis of accounting principles generally accepted in the United States of America (“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 HLIC companies in whichand entities 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 areis not required to consolidate are reported using the equity method. For further discussions on VIEs, see Note 4 of Notes to Consolidated Financial Statements. MaterialAll intercompany transactions and balances between HLIC and its subsidiaries have been eliminated.
Discontinued Operations
The results of operations of a component of the Company that either has been disposed of or is classified as held-for-sale are reported in discontinued operations if the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the Company as a result of the disposal transaction and the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction.
The Company is presenting the operations of certain businesses that meet the criteria for reporting as discontinued operations. Amounts for prior periods have been retrospectively reclassified. For information on the specific businesses and related impacts, see Note 17 - Discontinued Operations of Notes to Consolidated Financial Statements.
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.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Significant Accounting Policies (continued)
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; evaluation of other-than-temporary impairments on available-for-sale securities and valuation allowances on investments; living benefits required to be fair valued; goodwill impairment; valuation of investments and derivative instruments; valuation allowance on deferred tax assets; and contingencies relating to corporate litigation and regulatory matters (see Note 12). The related accounting policies are summarized in the Significant Accounting Policies section of this footnote unless indicated otherwise herein.matters. 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
On January 1, 2016 the Company adopted new consolidation guidance issued by the Financial Accounting Standards Board ("FASB"). The updates revise when to consolidate variable interest entities ("VIEs") and general partners’ investments in limited partnerships, end the deferral granted for applying the VIE guidance to certain investment companies, and reduce the number of circumstances where a decision maker’s or service provider’s fee arrangement is deemed to be a variable interest in an entity. The updates also modify guidance for determining whether limited partnerships are VIEs or voting interest entities. The new guidance did not have a material effect on the Company’s Consolidated Financial Statements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Significant Accounting Policies (continued)
Future Adoption of New Accounting Standards
Financial Instruments - Credit Losses
The FASB issued updated guidance for recognition and measurement of credit losses on financial instruments. The new guidance will replace the “incurred loss” approach with an “expected loss” model for recognizing credit losses for instruments carried at other than fair value, which will initially result in the recognition of greater allowances for losses. The allowance will be an estimate of credit losses expected over the life of debt instruments, such as mortgage loans, reinsurance recoverables and receivables. Credit losses on available-for-sale (“AFS”) debt securities carried at fair value will continue to be measured as other-than-temporary impairments (“OTTI”) when incurred; however, the losses will be recognized through an allowance and no longer as an adjustment to the cost basis. Recoveries of OTTI will be recognized as reversals of valuation allowances and no longer accreted as investment income through an adjustment to the investment yield. The allowance on AFS securities cannot cause the net carrying value to be below fair value and, therefore, it is possible that increases in fair value due to decreases in market interest rates could cause the reversal of a valuation allowance and increase net income. The new guidance will also require purchased financial assets with a more-than-insignificant amount of credit deterioration since original issuance to be recorded based on contractual amounts due and an initial allowance recorded at the date of purchase. The guidance is effective January 1, 2020 through a cumulative-effect adjustment to retained earnings for the change in the allowance for credit losses for debt instruments carried at other than fair value. No allowance will be recognized at adoption for AFS debt securities; rather, their cost basis will be evaluated for an allowance for OTTI prospectively. Early adoption is permitted as of January 1, 2019. The Company has not yet determined the timing for adoption or estimated the effect on the Company’s consolidated financial statements. Significant implementation matters yet to be addressed include estimating lifetime expected losses on debt instruments carried at other than fair value, determining the impact of valuation allowances on the effective interest method for recognizing interest income from AFS securities, updating our investment accounting system functionality to adjust valuation allowances based on changes in fair value and developing an implementation plan.
Financial Instruments - Recognition and Measurement
The FASB issued updated guidance for the recognition and measurement of financial instruments. The new guidance will require investments in equity securities to be measured at fair value with any changes in valuation reported in net income except for those equity securities that result in consolidation or are accounted for under the equity method of accounting. The new guidance will also require a deferred tax asset resulting from net unrealized losses on available-for-sale fixed maturities that are recognized in accumulated other comprehensive income (loss) ("AOCI") to be evaluated for recoverability in combination with the Company’s other deferred tax assets. Under existing guidance, the Company measures investments in equity securities, available-for-sale, at fair value with changes in fair value reported in other comprehensive income. As required, the Company will adopt the guidance effective January 1, 2018 through a cumulative effect adjustment to retained earnings. Early adoption is not allowed. The impact to the Company will be increased volatility in net income beginning in 2018. Any difference in the evaluation of deferred tax assets may also affect stockholder's equity. Cash flows will not be affected. The impact will depend on the composition of the Company’s investment portfolio in the future and changes in fair value of the Company’s investments. As of December 31, 2016, equity securities available-for-sale totaled $152, with unrealized gains of $7 in AOCI, that would have been classified in retained earnings. Had the new accounting guidance been in place since the beginning of 2016, the Company would have recognized mark-to-market gains of $7 after-tax in net income for the year ended December 31, 2016.
Revenue Recognition
The FASB issued updated guidance for recognizing revenue. The guidance excludes insurance contracts and financial instruments. Revenue is to be recognized when, or as, goods or services are transferred to customers in an amount that reflects the consideration that an entity is expected to be entitled in exchange for those goods or services, and this accounting guidance is similar to current accounting for many transactions. This guidance is effective retrospectively on January 1, 2018, with a choice of restating prior periods or recognizing a cumulative effect for contracts in place as of the adoption. Early adoption is permitted as of January 1, 2017. The Company will adopt on January 1, 2018 and has not determined its method for adoption. The adoption is not expected to have a material effect on the Company’s Consolidated Financial Statements.
Significant Accounting Policies
The Company’s significant accounting policies are as follows:
Segment Information
The Company currently conducts business in a single reporting segmenthas no reportable segments and is comprised of business from the Company's U.S.run-off operations of annuity, international annuity, and institutional and private-placement life insurance businesses following the sale of the Retirement Plans and Individual Life businesses in January 2013. In addition, the Company no longer has a Mutual Funds reporting segment following the reorganization of its Mutual Funds business effective December 31, 2012. For further discussion of the Retirement Plans and Individual Life transactions, see Note 2 - Business Dispositions of Notes to Consolidated Financial Statements. For further discussion of the reorganization of the Mutual Funds business, see the Basis of Presentation section of this footnote.businesses. The Company's determination that it operates in a single reporting segmenthas no reportable segments is based on the fact that the Company's chief operating decision maker reviews the Company's financial performance at a consolidated level.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Significant Accounting Policies (continued)
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 variable annuity and other 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 Company’s 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 temporary 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. A deferred tax provision is recorded for the tax effects of differences between the Company's current taxable income and its income before tax under generally accepted accounting principles in the Consolidated Statements of Operations. For deferred tax assets, the Company records a valuation allowance that is adequate to reduce the total deferred tax asset to an amount that will more likely than not be realized.
The Company is included in The Hartford’s consolidated U.S. 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 Company’s 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.
Dividends to Policyholders
Policyholder dividends are paid to certain life insurance policyholders. Policies that receive dividends are referred to as participating policies. SuchParticipating dividends to policyholders are accrued and reported in other liabilities using an estimate of the amount to be paid based on underlying contractual obligations under policies and applicable state laws.
Participating policies were 2%, 5% and 2% of the total life insurance policies as of December 31, 2013, 2012, and 2011, respectively. Dividends to policyholders were $18, $20 and $17 for the years ended December 31, 2013, 2012, and 2011, 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 stockholder’s,stockholders, the policyholder’s share of net income on those contracts that cannot be distributed is excluded from stockholder’sstockholder's equity by a charge to operations and a creditan increase to a liability.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Significant Accounting Policies (continued)
Fair Value
The following financial instruments are carried at fair value in the Company’s Consolidated Financial Statements: fixed maturity and equity securities, available-for-sale (“AFS”); fixed maturities at fair value using fair value option (“FVO”); equity securities, trading; short-term investments; freestanding and embedded derivatives; certain limited partnerships and other alternative investments; separate account assets and certain other liabilities. For further discussion of fair value, see Note 3 - Fair Value Measurements of Notes to Consolidated Financial Statements.
Investments
Overview
The Company’s investments in fixed maturities include bonds, structured securities, redeemable preferred stock and commercial paper. TheseMost of these investments, along with certain equity securities, which include common and non-redeemable preferred stocks, are classified as AFSavailable-for-sale ("AFS") and are carried at fair value. The after-tax difference frombetween fair value and cost or amortized cost is reflected in stockholders’ equity as a component of Accumulated Other Comprehensive Income (Loss) (“AOCI”),AOCI, 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. Also included in equity securities, AFS are certain equity securities for which the Company elected the fair value option. These equity securities are carried at fair value with changes in value recorded in realized capital gains and losses on the Company's Consolidated Statements of Operations. Fixed maturities for which the Company elected the fair value option are classified as FVO and are carried at fair value with changes in value recorded in realized capital gains and losses on the Company's Consolidated Statements of Operations. The equity investments associated with the variable annuity products are recorded at fair value and are classified as trading with changes in fair value recorded in net investment income.losses. 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 primarilyand accounted for under the equity method and accordinglywith the Company’s share of earnings are included in net investment income; however, the Company also uses investment fund accounting applied to a wholly-owned fund of funds.income. Recognition of income related to limited partnerships and other alternative investmentinvestments 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, 2013, 20122016, 2015, and 20112014 may not include the full impact of current year changes in valuation of the underlying assets and liabilities of the funds, which are generally obtained from the limited partnerships and other alternative investments’ general partners. In addition, for investments in a hedge fund of funds which was liquidated during 2016, the Company recognizes changes in the fair value of the underlying funds in net investment income, which is consistent with accounting requirements for investment companies. Other investments primarily consist of derivativesderivative instruments which are carried at fair value.
Recognition and Presentation of Other-Than-Temporary Impairments
The Company deems bonds and certain equity securities with debt-like characteristics (collectively “debt securities”) to be other-than-temporarily impaired (“impaired”) if a security meets the following conditions: a) 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 b) 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 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 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 security’s amortized cost basis and the fair value is separated into the portion representing a credit other-than-temporary impairment (“impairment”), which is recorded in net realized capital losses, and the remaining impairment, which is recorded in OCI. Generally, the Company determines a security’s credit impairment as the difference between its amortized cost basis and its best estimate of expected future cash flows discounted at the security’s effective yield prior to impairment. The remaining non-credit impairment, which is recorded in OCI, is the difference between the security’s fair value and the Company’s best estimate of expected future cash flows discounted at the security’s effective yield prior to the impairment, which typically represents current market liquidity and risk premiums. The previous amortized cost basis less the impairment recognized in net realized capital losses becomes the security’s 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 security’s yield, if necessary.
The Company’s evaluation of whether a credit impairment exists for debt securities includes but is not limited to, the following factors: (a) changes in the financial condition of the security’s underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) changes in the financial condition, credit rating and near-term prospects of the issuer, (d) the extent to which the fair value has been less than the amortized cost of the security and (e) the payment structure of the security. The Company’s 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 Company’s 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 and projected delinquency rates, and loan-to-value (“LTV”) ratios. In addition, for structured securities, the Company considers factors including, but not limited to, average cumulative collateral loss rates that vary by vintage year, commercial and residential property value declines that vary by property type and location and commercial real estate delinquency levels.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Significant Accounting Policies (continued)
These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries which may include estimating the underlying collateral value. In addition, projections of expected future debt security cash flows may change based upon new information regarding the performance of the issuer and/or underlying collateral such as changes in the projections of the underlying property value estimates.
For equity securities where the decline in the fair value is deemed to be other-than-temporary, a charge is recorded in net realized capital losses equal to the difference between the fair value and cost basis of the security. The previous cost basis less the impairment becomes the security’s 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 investment and accounting professionals. The investment and accounting professionals 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 issuer’s 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 preferred stock dividends 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
The Company’s security monitoring process reviews mortgage loans on a quarterly basis to identify potential credit losses. Commercial 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, and property-specific factors such as rental rates, occupancy levels, LTV ratios and debt service coverage ratios (“DSCR”). In addition, the Company considers historic, current and projected delinquency rates and property values. 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 Company’s share of either (a) the present value of the expected future cash flows discounted at the loan’s effective interest rate, (b) the loan’s observable market price or, most frequently, (c) the fair value of the collateral. A valuation allowance has been established for either individual loans or as a projected loss contingency for loans with an LTV ratio of 90% or greater and consideration of other credit quality factors, including DSCR. Changes in valuation allowances are recorded in net realized capital gains and losses. Interest income on impaired loans is accrued to the extent it is deemed collectible and the loans continue to perform under the original or restructured terms. Interest income ceases to accrue for loans when it is probable that the Company will not receive interest and principal payments according to the contractual terms of the loan agreement. Loans may resume accrual status when it is determined that sufficient collateral exists to satisfy the full amount of the loan and interest payments, as well as when it is probable cash will be received in the foreseeable future. Interest income on defaulted loans is recognized when received.
Net Realized Capital Gains and Losses
Net realized capital gains and losses from investment sales are reported as a component of revenues and are determined on a specific identification basis, as well as changes in value associated with fixed maturities for which the fair value option was elected.basis. Net realized capital gains and losses also result from fair value changes in fixed maturities and equity securities FVO, and derivatives contracts (both free-standing and embedded) that do not qualify, or are not designated, as a hedge for accounting purposes, ineffectiveness on derivatives that qualify for hedge accounting treatment, and the change in value of derivatives in certain fair-value hedge relationshipshedging instruments and their associated hedged assetitem. Impairments and mortgage loan valuation allowances are recognized as net realized capital losses in accordance with the Company’s impairment and mortgage loan valuation allowance policies previously discussed.as discussed in Note 3 - Investments of Notes to Consolidated Financial Statements. Foreign currency transaction remeasurements are also included in net realized capital gains and losses.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Significant Accounting Policies (continued)
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 and make-whole payments on fixed maturities and mortgage loans are recorded in net investment income when earned. For equity securities, available-for-sale, dividends will beare recognized as investment income on the ex-dividend date. Limited partnerships and other alternative investments primarily use the equity method of accounting to recognize the Company’s share of earnings; however, for a portion of those investments, the Company also uses investment fund accounting applied to a wholly-owned fund of funds.funds which was liquidated during 2016. 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 security’s yield, if necessary. The Company’s non-income producing investments were not material for the years ended December 31, 2013, 20122016, 2015 and 2014.2011.
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. 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 Company’s general account and the returns credited to the policyholders are reflected in interest credited, a component of benefits, losses and loss adjustment expenses.
Derivative Instruments
Overview
The Company utilizes a variety of over-the-counter ("OTC") derivatives, including transactions cleared through a central clearing househouses ("OTC-cleared"), and exchange-traded derivative instruments as part of its overall risk management strategy.strategy as well as to enter into replication transactions. The types of instruments may include swaps, caps, floors, forwards, futures and options to achieve one of four Company-approved objectives:
to hedge risk arising from interest rate, equity market, commodity 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 synthetic 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, little to 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. The contracts may reference commodities, which grant the purchaser the right to either purchase from or sell to the issuer commodities at a specified price, within a specified period or on a stated date. Option contracts are typically settled in cash.
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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 Company’s derivative transactions conducted in insurance company subsidiaries 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 and are reported in Other Investments and Other Liabilities. For balance sheet presentation purposes, the Company has elected to offset the fair value amounts, income accruals, and related cash collateral receivables and payables of OTC derivative instruments executed in a legal entity and with the same counterparty or under a master netting agreement, which provides the Company with the legal right of offset.
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During 2013, theThe Company began clearingalso clears interest rate swap and certain credit default swap derivative transactions through central clearing houses. OTC-cleared derivatives require initial collateral at the inception of the trade in the form of cash or highly liquid collateral,securities, such as U.S. Treasuries and government agency investments. Central clearing houses also require additional cash collateral as variation margin based on daily market value movements. For information on collateral, see the derivative collateral arrangements section in Note 4 - Investments and Derivative Instruments.Instruments of Notes to Consolidated Financial Statements. In addition, OTC-cleared transactions include price alignment interest either received or paid on the variation margin, which is reflected in net investment income. The Company has also elected to offset the fair value amounts, income accruals and related cash collateral receivables and payables of OTC-cleared derivative instruments based on clearing house agreements.
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 and do not qualify for hedge accounting.
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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 as net realized capital gains and losses 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 statementsConsolidated Statements of operationsOperations 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 statementsConsolidated Statements of operationsOperations 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 statementsConsolidated Statements of operationsOperations in which the cash flows of the hedged item are recorded.
Net Investment in a Foreign Operation Hedges
- Changes in fair value of a derivative used as a hedge of a net investment in a foreign operation, to the extent effective as a hedge, are recorded in the foreign currency translation adjustments account within AOCI. Cumulative changes in fair value recorded in AOCI are reclassified into earnings upon the sale or complete, or substantially complete, 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 statementsConsolidated Statements of operationsOperations in which the cash flows of the hedged item are recorded.
Other Investment and/or Risk Management Activities
- The Company’s 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 hedge’s 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 or net investment in foreign operations of hedged items. Hedge effectiveness is assessed primarily using quantitative methods as well as using qualitative methods. Quantitative methods include regression or other statistical analysis of changes in fair value or cash flows associated with the hedge relationship. Qualitative methods may include comparison of critical terms of the derivative to the hedged item. 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”.
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Discontinuance of Hedge Accounting
The Company discontinues hedge accounting prospectively when (1) it is determined that the qualifying criteria are no longer met; (2)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-designateddesignated 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-valuefair 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. Changes in the fair value of the hedged item attributable to the hedged risk is no longer adjusted through current period earnings and the existing basis adjustment is amortized to earnings over the remaining life of the hedged item through the applicable earnings component associated with the hedged item.
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 variabilityhedged item.
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1. Basis of the hedged item.Presentation and Significant Accounting Policies (continued)
Embedded Derivatives
The Company purchases and issueshas previously issued 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,Consolidated Balance Sheets, is carried at fair value with changes in fair value reported in net realized capital gains and losses.
Credit Risk
Credit risk is defined as the risk of financial loss due to uncertainty of an obligor’s or counterparty’s ability or willingness to meet its obligations in accordance with agreed upon terms. Credit exposures are measured using the market value of the derivatives, resulting in amounts owed to the Company by its counterparties or potential payment obligations from the Company to its counterparties. The Company generally requires that OTC derivative contracts, other than certain forward contracts, be governed by International Swaps and Derivatives Association ("ISDA") agreements which are structured by legal entity and by counterparty, and permit right of offset. These agreements require daily collateral settlement based upon agreed upon thresholds. For purposes of daily derivative collateral maintenance, credit exposures are generally quantified based on the prior business day’s market value and collateral is pledged to and held by, or on behalf of, the Company to the extent the current value of the derivatives exceed the contractual thresholds. For the Company’s domestic derivative programs, the maximum uncollateralized threshold for a derivative counterparty for a single legal entity is $10.$10. The Company also minimizes the credit risk of derivative instruments by entering into transactions with high quality counterparties primarily rated A or better, which are monitored and evaluated by the Company’s risk management team and reviewed by senior management. OTC-cleared derivatives are governed by clearing house rules. Transactions cleared through a central clearing house reduce risk due to their ability to require daily variation margin monitor the Company's ability to request additional collateral in the event of a counterparty downgrade, and act as an independent valuation source. In addition, the Company monitors counterparty credit exposure on a monthly basis to ensure compliance with Company policies and statutory limitations.
Cash
Cash represents cash on hand and demand deposits with banks or other financial institutions.
Reinsurance
The Company cedes insurance to affiliated and unaffiliated insurers in order to limit its maximum losses and to diversify its exposures and provide statutory surplus relief. Such arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company also assumes reinsurance from other insurers. Reinsurance accounting is followed for ceded and assumed transactions that provide indemnification against loss or liability relating to insurance risk (i.e. risk transfer). If the ceded transactions do not provide risk transfer, the Company accounts for these transactions as financing transactions.
Reinsurance accounting is followed for ceded and assumed transactions that provide indemnification against loss or liability relating to insurance risk (i.e. risk transfer). To meet risk transfer requirements, a reinsurance agreement must include insurance risk, consisting of underwriting, investment, and timing risk, and a reasonable possibility of a significant loss to the reinsurer. If the ceded and assumed transactions do not meet risk transfer requirements, the Company accounts for these transactions as financing transactions.
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Premiums, 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 agreements. Included in reinsurance recoverables are balances due from reinsurance companies for paid and unpaid losses and loss adjustment expenses and are presented net of anany necessary allowance for uncollectible reinsurance.
The Company reinsures certain of its risks to other reinsurers under yearly renewable term, coinsurance, and modified coinsurance arrangements, and variations thereof. 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.
The Company evaluates the financial condition of its reinsurers and concentrations of credit risk. Reinsurance is placed with reinsurers that meet strict financial criteria established by the Company. The Company entered into two reinsurance transactions upon completion of the sales of its Retirement Plans and Individual Life businesses in January 2013. For further discussion of these transactions, see Note 2 - Business Dispositions and Note 5 - Reinsurance of Notes to Consolidated Financial Statements.
Deferred Policy Acquisition Costs and Present Value of Future Profits
Deferred policy acquisition costs ("DAC") represent costs that are directly related to the successful acquisition of new and renewal insurance contracts and incremental direct costs of contract acquisition that are incurred in transactions with either independent third parties or employees. Such costs primarily include commissions, premium taxes, costs of policy issuance and underwriting, and certain other expenses that are directly related to successfully issued contracts.
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For life insurance products, the DAC asset which includes the present value of future profits, related to most universal life-type contracts (primarily(including variable annuities) and 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 Company’s Consolidated Balance Sheets, such as sales inducement assets and unearned revenue reserves.(“SIA”). Components of EGPs are also used to determine reserves for universal life type contracts (including variable annuities) with death or other insurance benefits such as guaranteed minimum death, life-contingent guaranteed minimum incomewithdrawal and universal life insurance 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 life insurance product contracts, including variable annuities, the Company estimates gross profits over 20 years as EGPs emerging subsequent to that timeframetime frame 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 holder’s account balance; full surrender and lapsepartial withdrawal rates; interest margin; mortality; and the extent and duration of hedging activities and hedging costs.
The Company 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 Company’s DAC model is adjusted to reflect actual account values at the end of each quarter. Through a consideration of recent market returns, the Company will unlock ("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.caps. This Unlock for future separate account returns is determined each quarter.
In the thirdfourth quarter of each year,2016, the Company completescompleted a comprehensive non-market related policyholder behavior assumption study which resulted in a non-market related after-tax charge and incorporatesincorporated the results of those studiesthat study into its projection of future gross profits. Additionally, throughout the year, the Company evaluates various aspects of policyholder behavior and periodically reviseswill revise its policyholder assumptions asif credible emerging data indicates that changes are warranted. The Company will continue to evaluate its assumptions related to policyholder behavior as initiatives to reduce the size of the variable annuity business are implemented by management. Upon completion of an annual 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, EGPs used in 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, and 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 revises EGPs to reflect the Company's current best estimate assumptions. The Company also tests the aggregate recoverability of DAC by comparing the existing DAC balance to the present value of future EGPs. 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.
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1. Basis of PresentationPolicyholders may exchange contracts or make modifications to existing contracts. If the new contract or the modification results in a substantially changed replacement contract, DAC is established for the new contract and Significant Accounting Policies (continued)
Goodwill
Goodwill represents the excess of costs overexisting DAC is written off through income. If the fair value of net assets acquired. Goodwillnew or modified contract is not amortized but is reviewed for impairment at least annually or more frequently if events occur or circumstances change that would indicate that a triggering event for a potential impairment has occurred. During the fourth quarter of 2011, the Companysubstantially changed, the date of its annual impairment test for all reporting units to October 31st from January 1st. As a result, all reporting units performed an impairment test on October 31, 2011 in addition to the annual impairment test performed on January 1, 2011. The change was madeexisting DAC continues to be consistent across all of the parent company’s reporting unitsamortized and to more closely align the impairment testing date with the long-range planning and forecasting process. The Company determined that this change in accounting principle is preferable under the circumstances and does not result in any delay, acceleration or avoidance of impairment. As it was impracticable to objectively determine projected cash flows and related valuation estimates as of each October 31 for periods prior to October 31, 2011 without applying information that has been learned since those periods, the Company prospectively applied the changeincremental costs are expensed in the annual goodwill impairment testing date from October 31, 2011.period incurred. Additions to coverage or benefits that are underwritten separately are considered non-integrated features for which DAC is established if additional acquisition costs are incurred. Reductions to coverage or benefits that have a commensurate reduction in price are treated as partial terminations and DAC is reduced through a charge to income.
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 performedReserve 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. If the carrying amount of the reporting unit’s goodwill exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that excess.Future Policy Benefits
Management’s determination of the fair value of each reporting unit incorporates multiple inputs into discounted cash flow calculations, including assumptions that market participants would make in valuing the reporting unit. Assumptions include levels of economic capital, future business growth, earnings projections, assets under managementReserve for certain reporting units, 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 a reporting unit’s fair value to decrease.
Separate Accounts, DeathFuture Policy Benefits and Other Insurance Benefit Features
The Company records the variable account value portion of variable annuity and variable life insurance products and institutional and governmental investment contracts 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.on Universal Life-type Contracts
Certain contracts classified as universal life-type include death and other insurance benefit features including GMDBguaranteed minimum death benefit ("GMDB"), guaranteed minimum income benefit ("GMIB"), and the life-contingent portion of guaranteed minimum withdrawal benefit ("GMWB") riders offered with variable annuity contracts, oras well as secondary guarantee benefits offered with universal life (“UL”) insurance contracts. GMDBs have been written in various forms as described in this note. ULUniversal life insurance 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. TheseGMDB riders on variable annuities provide a death benefit during the accumulation phase that is generally equal to the greater of (a) the contract value at death or (b) premium payments less any prior withdrawals and may include adjustments that increase the benefit, such as for maximum anniversary value (MAV). For the Company's products with GMWB riders, the withdrawal benefit can exceed the guaranteed remaining balance ("GRB"), which is generally equal to premiums less withdrawals. In addition to recording an account value liability that
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1. Basis of Presentation and Significant Accounting Policies (continued)
represents policyholder funds, the Company records a death and other insurance benefit features require an additional liability be held abovefor GMDBs, GMIBs, the account value liability representinglife-contingent portion of GMWBs and the policyholders’ funds.universal life insurance secondary guarantees. This death and other insurance benefit liability is reported in reserve for future policy benefits in the Company’s Consolidated Balance Sheets. Changes in the death and other insurance benefit reserves are recorded in benefits, losses and loss adjustment expenses in the Company’s Consolidated Statements of Operations.
Consistent with the Company’s 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 policyholder’s expected account value in proportion to the present value of total expected assessments.assessments and investment margin. Total expected assessments are the aggregate of all contract charges, including those for administration, mortality, expense, and surrender. The additional death and other insuranceliability is accrued as actual assessments are earned. The expected present value of benefits and netassessments are generally derived from a set of stochastic scenarios that have been calibrated to our RTM separate account returns and assumptions including market rates of return, volatility, discount rates, lapse rates and mortality experience. Consistent with the Company’s policy on the Unlock, the Company regularly evaluates estimates used and adjusts the liability, with a related charge or credit to benefits, losses and loss adjustment expenses. For further information on the Unlock, see the Deferred Policy Acquisition Costs accounting policy section within this footnote.
The Company reinsures a portion of its in-force GMDB and all of its universal life insurance secondary guarantees. Net reinsurance costs are recognized ratably over the accumulation period based on total expected assessments.
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Reserve for Future Policy Benefits on Traditional Annuity and Unpaid Losses and Loss Adjustment ExpensesOther Contracts
Liabilities forTraditional annuities recorded within the Company’s group life and disability contracts as well 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. Liabilitiesreserve for future policy benefits areprimarily include life-contingent contracts in the payout phase such as structured settlements and terminal funding agreements. Other contracts within the reserve for policyholder benefits include whole life and guaranteed term life insurance contracts. The reserve for future policy benefits is calculated byusing standard actuarial methods as the net level premium methodpresent value of future benefits and related expenses to be paid less the present value of the portion of future premiums required using interest, withdrawal and mortality assumptions appropriate“locked in” at the time the policies were issued. The methods used in determiningissued, including discount rate, withdrawal, mortality and expense assumptions deemed appropriate at 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 Company’s earned investment yield and the morbidity/mortality tables used are standard industry tables modified to reflect the Company’s actual experience when appropriate. In particular, for the Company’s group disability known claim reserves, the morbidity table for the early durations of claim is based exclusively on the Company’s experience, incorporating factors such as gender, elimination period and diagnosis. These reserves are computed such that they are expected to meet the Company’s future policy obligations.issue date. Future policy benefits are computed at amounts that, with additions from any estimated premiums to be received and with interest on such reserves compounded annually at certain assumed rates, are expected to be sufficient to meet the Company’s policy obligations at their maturities or in the event of an insured’s death. While assumptions are locked in upon issuance of new contracts and annuitizations of existing contracts, significant changes in experience or assumptions may require the Company to establish premium deficiency reserves. Premium deficiency reserves, if any, are established based on current assumptions without considering a provision for adverse deviation. Changes in or deviations from the assumptions used for mortality, morbidity, expected future premiums and interest can significantly affect the Company’s reserve levels and related futureresults from operations.
Other Policyholder Funds and Benefits Payable
Other policyholder funds and benefits payable consist ofprimarily include the non-variable account values associated with variable annuity and other universal life-type contracts, and investment contracts.
The Company has classified its fixed and variable annuities and universalcontracts, the non-life contingent portion of GMWBs that are accounted for as embedded derivatives at fair value as well as other policyholder account balances associated with our life insurance as universal life-type contracts. The liability for universal life-typebusinesses. Investment contracts is equal to the balance that accrues to the benefit of the policyholders as of the financial statement date, including credited interest, amounts that have been assessed to compensate the Company for services to be performed over future periods,are non-life contingent and any amounts previously assessed against policyholders that are refundable on termination of the contract.
The Company has classified itsinclude institutional and governmental products, without life contingencies, including funding agreements, certaindeposits, structured settlements and guaranteed investment contracts, as investment contracts.fixed annuities. 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, payments and amounts assessedassessments through the financial statement date. Contract holder funds include funding agreements heldFor discussion of fair value of GMWBs that represent embedded derivatives, see Note 2 - Fair Value Measurements of Notes to Consolidated Financial Statements.
Separate Account Liabilities
The Company records the variable account value portion of variable annuities, variable life insurance products and institutional and governmental investment contracts 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 Variable Interest Entities issuing medium-term notes.change in the related liability. Changes in the value of separate account assets and separate account liabilities are reported in the same line item in the Consolidated Statements of Operations. The Company earns fee income for investment management, certain administrative services and mortality and expense risks.
Foreign Currency Translation
Foreign currency translation gains and losses are reflected in stockholders’stockholder's equity as a component of accumulated other comprehensive income.AOCI. The Company’s foreign subsidiaries’ balance sheet accounts are translated at the exchange rates in effect at each year end and income statement accounts are translated at the average rates of exchange prevailing during the year. The national currencies of the international operations are generally their functional currencies.
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(Dollar amounts Gains and losses resulting from the remeasurement of foreign currency transactions are reflected in millions, unless otherwise stated)
2. Business Dispositions
Sale of Hartford Life International Limited ("HLIL")
On December 12, 2013, the Company completed the sale of HLIL, an indirect wholly-owned subsidiary of the Company, in a cash transaction to Columbia Insurance Company, a Berkshire Hathaway company, for approximately $285. At closing, HLIL’s sole asset was its subsidiary, Hartford Life Limited ("HLL"), a Dublin-based company that sold variable annuities in the U.K. from 2005 to 2009. The sale transaction resulted in an after-tax loss of $51 upon disposition in the year ended December 31, 2013. The operations of the Company's U.K. variable annuity business meet the criteria for reporting as discontinued operations. For further information regarding discontinued operations, see Note 17 - Discontinued Operations of Notes to Consolidated Financial Statements.
Sale of Retirement Plans
On January 1, 2013, HLI completed the sale of its Retirement Plans business to MassMutual for a ceding commission of $355. The business sold included products and services to corporations pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), and products and services to municipalities and not-for-profit organizations under Sections 457 and 403(b) of the Code, collectively referred to as government plans. The sale was structured as a reinsurance transaction and resulted in an after-tax gain of $45 in the year ended December 31, 2013. The Company recognized $565 in reinsurance loss on disposition including a reduction in goodwill of $87, offset by $634earnings in realized capital gains for a $69 impact to income, pre-tax.(losses) in the period in which they occur.
Upon closing, the Company reinsured $9.2 billion of policyholder liabilities and $26.3 billion of separate account liabilities under an indemnity reinsurance arrangement. The reinsurance transaction does not extinguish the Company's primary liability on the insurance policies issued under the Retirement Plans business. The Company also transferred invested assets with a carrying value of $9.3 billion, net of the ceding commission, to MassMutual and recognized other non-cash decreases in assets totaling $100 relating to deferred acquisition costs, deferred income taxes, goodwill, and other assets associated with the disposition. The Company will continue to sell retirement plans during a transition period of 18-24 months and MassMutual will assume all expenses and risk for these sales through the reinsurance agreement.
For the years ended December 31, 2012 and 2011, Retirement Plans total revenue was $706 and $766, respectively and net income (loss)was $(39) and $3, respectively.
Sale of Individual Life
On January 2, 2013 HLI completed the sale of its Individual Life insurance business to Prudential for consideration of $615, consisting primarily of a ceding commission, of which $590 is attributable to the Company. The business sold included variable universal life, universal life, and term life insurance. The sale was structured as a reinsurance transaction and resulted in a loss on business disposition consisting of a reinsurance loss partially offset by realized capital gains. In 2012, the Company recognized a reinsurance loss on business disposition of $61, pre-tax, which included a goodwill impairment of the same amount. For further information regarding the goodwill impairment, see Note 7 - Goodwill of Notes to Consolidated Financial Statements. Upon closing the Company recognized an additional reinsurance loss on disposition of $927, including a reduction in goodwill of $163 offset by realized capital gains of $927 for a $0 impact on income, pre-tax.
Upon closing, the Company reinsured $8.3 billion of policyholder liabilities and $5.3 billion of separate account liabilities under indemnity reinsurance arrangements. The reinsurance transaction does not extinguish the Company's primary liability under the Individual Life business. The Company also transferred invested assets with a carrying value of $7.6 billion, exclusive of $1.4 billion assets supporting the modified coinsurance agreement, net of cash transferred in place of short-term investments, to Prudential and recognized other non-cash decreases in assets totaling $1.8 billion of deferred acquisition costs, deferred income taxes, goodwill and other assets, and other non-cash decreases in liabilities totaling $1.9 billion relating to other liabilities associated with the disposition. The Company will continue to sell life insurance products and riders during a transition period of 18-24 months and Prudential will assume all expenses and risk for these sales through the reinsurance agreement.
For the years ended December 31, 2012 and 2011, Individual Life total revenue was $1,303 and $1,300, respectively and net income was $21 and $85, respectively.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Business Dispositions (continued)
Composition of Invested Assets Transferred
The following table presents invested assets transferred by the Company in connection with the sale of the Retirement Plans and Individual Life businesses in January 2013. In December 2012, the Company recognized intent-to-sell impairments of $173 and gains on derivatives hedging of $108 associated with the sale of these assets.
|
| | | |
| | As of December 31, 2012 |
| | Carrying Value |
| Total fixed maturities, AFS, at fair value (amortized cost of $13,596) [1] | $ | 15,015 |
|
| Equity securities, AFS, at fair value (cost of $27) [2] | 28 |
|
| Fixed maturities, at fair value using the FVO [3] | 16 |
|
| Mortgage loans (net of allowances for loan losses of $1) | 1,288 |
|
| Policy loans, at outstanding balance | 542 |
|
| Total invested assets transferred | $ | 16,889 |
|
[1] The market value includes the fair value of bifurcated embedded derivative features of certain securities. Changes in fair value are recorded in the net unrealized capital gains (losses).
[2] Includes $14.4 billion and $657 of securities in level 2 and 3 of the fair value hierarchy, respectively.
[3] All equity securities transferred are included in level 2 of the fair value hierarchy.
[4] All FVO securities transferred are included in level 3 of the fair value hierarchy.
Purchase Agreement with Forethought Financial Group, Inc.
On December 31, 2012, The Hartford completed the sale of its U.S. individual annuity new business capabilities to Forethought Financial Group. Effective May 1, 2012, all new U.S. annuity policies sold by the Company are reinsured to Forethought Life Insurance Company. The Company ceased the sale of such annuity policies and the reinsurance agreement terminated as to new business in the second quarter of 2013. The reinsurance agreement has no impact on in-force policies issued on or before April 27, 2012 and the impact of this transaction was not material to the Company's results of operations, financial position or liquidity.
Sale of Woodbury Financial Services, Inc.
On November 30, 2012, The Hartford completed the sale of Woodbury Financial Services, an indirect wholly-owned subsidiary, to AIG Advisor Group, a subsidiary of American International Group, Inc. The impact of the disposition of this business was not material to the Company's results of operations, financial position or liquidity.
Servicing Agreement of Hartford Life Private Placement LLC
On July 13, 2012, The Hartford closed a sale transaction with Philadelphia Financial Group whereby Philadelphia Financial Group acquired certain assets used to administer the Company's private placement life insurance (“PPLI”) businesses and will service the PPLI businesses. The Company retained certain corporate functions associated with this business as well as the mortality risk on the insurance policies. Upon closing, the Company recorded a deferred gain of $61 after-tax, which will be amortized over the estimated life of the underlying insurance policies.
See Note 17 - Discontinued Operations of Notes to Consolidated Financial Statements for the sale of certain subsidiaries that are being reported as discontinued operations.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements
The following section appliesCompany carries certain financial assets and liabilities at estimated fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants. Our fair value framework includes a hierarchy and disclosure requirements forthat gives the Company’s financial instruments that are carried at fair value.highest priority to the use of quoted prices in active markets, followed by the use of market observable inputs, followed by the use of unobservable inputs. The fair value hierarchy prioritizes the inputs in the valuation techniques used to measure fair value into three broad Levels (Level 1, 2 or 3).levels are as follows:
| |
| Level 1 | Observable inputs that reflectFair values based primarily on unadjusted 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 securities, open-ended mutual funds reported in separate account assets and exchange-traded derivative securities. |
| |
| Level 2 | ObservableFair values primarily based on observable inputs, other than quoted prices included in Level 1, for the asset or liability orbased on prices for similar assets and liabilities. Most fixed maturities and preferred stocks, including those reported in separate account assets, are model priced by vendors using observable inputs and are classified within Level 2. Also included are limited partnerships and other alternative assets measured at fair value where an investment can be redeemed, or substantially redeemed, at the NAV at the measurement date or in the near-term, not to exceed 90 days; as well as, derivative instruments.
|
| |
| Level 3 | Valuations that areFair values derived from techniques in whichwhen one or more of the significant inputs are unobservable (including assumptions about risk). Level 3 securities include less liquid securities, guaranteed product embedded and reinsurance derivatives and other complex derivative securities, as well as limited partnerships and other alternative investments carried at fair value that cannot be redeemed in the near-term at the NAV. Because Level 3 fair values, by their nature, contain one or more significant unobservable inputs as there isWith little or no observable market, for these assets and liabilities,the determination of fair values uses considerable judgment is used to determine the Level 3 fair values. Level 3 fair values representand represents the Company’s best estimate of an amount that could be realized in a current market exchange absent actual market exchanges.for the asset or liability. Also included are securities that are traded within illiquid markets and/or priced by independent brokers. |
In many situations, inputs used to measureThe Company will classify the fair value of anfinancial asset or liability position may fall into different levels of the fair value hierarchy. In these situations, the Company will determine theby level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value. Transfers of securities among the levels occur at the beginning of the reporting period. For the year ended December 31, 2013, transfers from Level 1 to Level 2 were $287, which represented previously on-the-run U.S. Treasury securities that are now off-the-run, and there were no transfers from Level 2 to Level 1. In most cases, both observable inputs (e.g., changes in interest rates) and unobservable inputs (e.g., changes in risk assumptions) inputs are used in the determination ofto determine 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 Company’s fixed maturities included in Level 3 are classified as such because these securities are primarily priced by independent brokers and/or are within illiquid markets.
Table of ContentsHARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3.2. Fair Value Measurements (continued)
The following tables present assets and (liabilities) carried at fair value by hierarchy level. 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 table presents assets and (liabilities) carried at fair value by hierarchy level. | | | | December 31, 2013 | |
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2016 | | Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2016 |
| | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| Assets accounted for at fair value on a recurring basis | | |
| Fixed maturities, AFS | | |
| ABS | $ | 1,129 |
| $ | — |
| $ | 1,021 |
| $ | 108 |
| |
| CDOs | 1,448 |
| — |
| 1,020 |
| 428 |
| |
| CMBS | 2,347 |
| — |
| 1,987 |
| 360 |
| |
| Asset backed securities ("ABS") | | $ | 993 |
| $ | — |
| $ | 956 |
| $ | 37 |
|
| Collateralized debt obligations ("CDOs") | | 940 |
| — |
| 680 |
| 260 |
|
| Commercial mortgage-backed securities ("CMBS") | | 2,146 |
| — |
| 2,125 |
| 21 |
|
| Corporate | 16,917 |
| — |
| 16,127 |
| 790 |
| 14,693 |
| — |
| 14,127 |
| 566 |
|
| Foreign government/government agencies | 1,177 |
| — |
| 1,139 |
| 38 |
| 345 |
| — |
| 328 |
| 17 |
|
| States, municipalities and political subdivisions (“Municipal”) | 965 |
| — |
| 916 |
| 49 |
| |
| RMBS | 2,431 |
| — |
| 1,633 |
| 798 |
| |
| Municipal | | 1,189 |
| — |
| 1,117 |
| 72 |
|
| Residential mortgage-backed securities ("RMBS") | | 1,760 |
| — |
| 1,049 |
| 711 |
|
| U.S. Treasuries | 1,749 |
| 1,077 |
| 672 |
| — |
| 1,753 |
| 230 |
| 1,523 |
| — |
|
| Total fixed maturities | 28,163 |
| 1,077 |
| 24,515 |
| 2,571 |
| 23,819 |
| 230 |
| 21,905 |
| 1,684 |
|
| Fixed maturities, FVO | 791 |
| — |
| 613 |
| 178 |
| 82 |
| — |
| 82 |
| — |
|
| Equity securities, trading | 12 |
| 12 |
| — |
| — |
| |
| Equity securities, trading [1] | | 11 |
| 11 |
| — |
| — |
|
| Equity securities, AFS | 372 |
| 207 |
| 114 |
| 51 |
| 152 |
| 20 |
| 88 |
| 44 |
|
| Derivative assets | | |
| Credit derivatives | 9 |
| — |
| 11 |
| (2 | ) | (1 | ) | — |
| (1 | ) | — |
|
| Foreign exchange derivatives | 14 |
| — |
| 14 |
| — |
| 4 |
| — |
| 4 |
| — |
|
| Interest rate derivatives | (57 | ) | — |
| (57 | ) | — |
| 30 |
| — |
| 30 |
| — |
|
| U.S. guaranteed minimum withdrawal benefit ("GMWB") hedging instruments | 26 |
| — |
| (42 | ) | 68 |
| |
| U.S. macro hedge program | 109 |
| — |
| — |
| 109 |
| |
| International program hedging instruments | 171 |
| — |
| 173 |
| (2 | ) | |
| Total derivative assets [1] | 272 |
| — |
| 99 |
| 173 |
| |
| GMWB hedging instruments | | 74 |
| — |
| 14 |
| 60 |
|
| Macro hedge program | | 128 |
| — |
| 8 |
| 120 |
|
| Total derivative assets [2] | | 235 |
| — |
| 55 |
| 180 |
|
| Short-term investments | 1,952 |
| 228 |
| 1,724 |
| — |
| 1,349 |
| 637 |
| 712 |
| — |
|
| Limited partnerships and other alternative investments [2] | 468 |
| — |
| 414 |
| 54 |
| |
| Reinsurance recoverable for U.S. GMWB and Japan GMWB, GMIB, and GMAB | (398 | ) | — |
| 67 |
| (465 | ) | |
| Reinsurance recoverable for GMWB | | 73 |
| — |
| — |
| 73 |
|
| Modified coinsurance reinsurance contracts | | 68 |
| — |
| 68 |
| — |
|
| Separate account assets [3] | 138,482 |
| 99,917 |
| 37,828 |
| 737 |
| 111,634 |
| 71,606 |
| 38,856 |
| 201 |
|
| Total assets accounted for at fair value on a recurring basis | $ | 170,114 |
| $ | 101,441 |
| $ | 65,374 |
| $ | 3,299 |
| $ | 137,423 |
| $ | 72,504 |
| $ | 61,766 |
| $ | 2,182 |
|
| Percentage of level to total | 100 | % | 60 | % | 38 | % | 2 | % | |
| Liabilities accounted for at fair value on a recurring basis | | |
| Other policyholder funds and benefits payable | | |
| Guaranteed living benefits | $ | (576 | ) | $ | — |
| $ | — |
| $ | (576 | ) | |
| GMWB embedded derivative | | $ | (241 | ) | $ | — |
| $ | — |
| $ | (241 | ) |
| Equity linked notes | (18 | ) | — |
| — |
| (18 | ) | (33 | ) | — |
| — |
| (33 | ) |
| Total other policyholder funds and benefits payable | (594 | ) | — |
| — |
| (594 | ) | (274 | ) | — |
| — |
| (274 | ) |
| Derivative liabilities | | |
| Credit derivatives | 11 |
| — |
| 7 |
| 4 |
| 1 |
| — |
| 1 |
| — |
|
| Equity derivatives | 18 |
| — |
| 16 |
| 2 |
| 33 |
| — |
| 33 |
| — |
|
| Foreign exchange derivatives | (382 | ) | — |
| (382 | ) | — |
| (247 | ) | — |
| (247 | ) | — |
|
| Interest rate derivatives | (319 | ) | — |
| (295 | ) | (24 | ) | (434 | ) | — |
| (404 | ) | (30 | ) |
| U.S. GMWB hedging instruments | 15 |
| — |
| (63 | ) | 78 |
| |
| U.S. macro hedge program | 30 |
| — |
| — |
| 30 |
| |
| International program hedging instruments | (198 | ) | — |
| (139 | ) | (59 | ) | |
| GMWB hedging instruments | | 20 |
| — |
| (1 | ) | 21 |
|
| Macro hedge program | | 50 |
| — |
| 3 |
| 47 |
|
| Total derivative liabilities [4] | (825 | ) | — |
| (856 | ) | 31 |
| (577 | ) | — |
| (615 | ) | 38 |
|
| Consumer notes [5] | (2 | ) | — |
| — |
| (2 | ) | |
| Total liabilities accounted for at fair value on a recurring basis | $ | (1,421 | ) | $ | — |
| $ | (856 | ) | $ | (565 | ) | $ | (851 | ) | $ | — |
| $ | (615 | ) | $ | (236 | ) |
Table of ContentsHARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3.2. Fair Value Measurements (continued)
| | | | December 31, 2012 | |
| Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2015 | | Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2015 |
| | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
| Assets accounted for at fair value on a recurring basis | | |
| Fixed maturities, AFS | | |
| ABS | $ | 1,673 |
| $ | — |
| $ | 1,435 |
| $ | 238 |
| $ | 846 |
| $ | — |
| $ | 841 |
| $ | 5 |
|
| CDOs | 2,160 |
| — |
| 1,437 |
| 723 |
| 1,408 |
| — |
| 1,078 |
| 330 |
|
| CMBS | 3,912 |
| — |
| 3,380 |
| 532 |
| 1,964 |
| — |
| 1,902 |
| 62 |
|
| Corporate | 30,979 |
| — |
| 29,639 |
| 1,340 |
| 15,175 |
| — |
| 14,641 |
| 534 |
|
| Foreign government/government agencies | 1,460 |
| — |
| 1,426 |
| 34 |
| 331 |
| — |
| 314 |
| 17 |
|
| States, municipalities and political subdivisions (“Municipal”) | 1,998 |
| — |
| 1,829 |
| 169 |
| |
| Municipal | | 1,132 |
| — |
| 1,083 |
| 49 |
|
| RMBS | 4,671 |
| — |
| 3,538 |
| 1,133 |
| 1,503 |
| — |
| 875 |
| 628 |
|
| U.S. Treasuries | 2,551 |
| 78 |
| 2,473 |
| — |
| 2,298 |
| 123 |
| 2,175 |
| — |
|
| Total fixed maturities | 49,404 |
| 78 |
| 45,157 |
| 4,169 |
| 24,657 |
| 123 |
| 22,909 |
| 1,625 |
|
| Fixed maturities, FVO | 1,010 |
| 6 |
| 805 |
| 199 |
| 165 |
| 1 |
| 162 |
| 2 |
|
| Equity securities, trading | 1,847 |
| 1,847 |
| — |
| — |
| |
| Equity securities, trading [1] | | 11 |
| 11 |
| — |
| — |
|
| Equity securities, AFS | 400 |
| 203 |
| 142 |
| 55 |
| 459 |
| 396 |
| 25 |
| 38 |
|
| Derivative assets | | |
| Credit derivatives | (10 | ) | — |
| — |
| (10 | ) | 7 |
| — |
| 7 |
| — |
|
| Equity derivatives | 30 |
| — |
| — |
| 30 |
| — |
| — |
| — |
| — |
|
| Foreign exchange derivatives | 104 |
| — |
| 104 |
| — |
| 4 |
| — |
| 4 |
| — |
|
| Interest rate derivatives | 108 |
| — |
| 144 |
| (36 | ) | 54 |
| — |
| 54 |
| — |
|
| U.S. GMWB hedging instruments | 36 |
| — |
| (53 | ) | 89 |
| |
| U.S. macro hedge program | 186 |
| — |
| — |
| 186 |
| |
| International program hedging instruments | 127 |
| — |
| 142 |
| (15 | ) | |
| Total derivative assets [1] | 581 |
| — |
| 337 |
| 244 |
| |
| GMWB hedging instruments | | 111 |
| — |
| 27 |
| 84 |
|
| Macro hedge program | | 74 |
| — |
| — |
| 74 |
|
| Total derivative assets [2] | | 250 |
| — |
| 92 |
| 158 |
|
| Short-term investments | 2,354 |
| 242 |
| 2,112 |
| — |
| 572 |
| 131 |
| 441 |
| — |
|
| Limited partnerships and other alternative investments | 414 |
| — |
| 264 |
| 150 |
| |
| Reinsurance recoverable for U.S. GMWB and Japan GMWB, GMIB, and GMAB | 1,081 |
| — |
| — |
| 1,081 |
| |
| Reinsurance recoverable for GMWB | | 83 |
| — |
| — |
| 83 |
|
| Modified coinsurance reinsurance contracts | | 79 |
| — |
| 79 |
| — |
|
| Separate account assets [3] | 138,497 |
| 97,976 |
| 39,938 |
| 583 |
| 118,163 |
| 78,099 |
| 38,700 |
| 140 |
|
| Total assets accounted for at fair value on a recurring basis | $ | 195,588 |
| $ | 100,352 |
| $ | 88,755 |
| $ | 6,481 |
| $ | 144,439 |
| $ | 78,761 |
| $ | 62,408 |
| $ | 2,046 |
|
| Liabilities accounted for at fair value on a recurring basis | | |
| Other policyholder funds and benefits payable | | |
| Guaranteed living benefits | $ | (3,119 | ) | $ | — |
| $ | — |
| $ | (3,119 | ) | |
| GMWB embedded derivative | | $ | (262 | ) | $ | — |
| $ | — |
| $ | (262 | ) |
| Equity linked notes | (8 | ) | — |
| — |
| (8 | ) | (26 | ) | — |
| — |
| (26 | ) |
| Total other policyholder funds and benefits payable | (3,127 | ) | — |
| — |
| (3,127 | ) | (288 | ) | — |
| — |
| (288 | ) |
| Derivative liabilities | | |
| Credit derivatives | (6 | ) | — |
| (20 | ) | 14 |
| (7 | ) | — |
| (7 | ) | — |
|
| Equity derivatives | 15 |
| — |
| — |
| 15 |
| 41 |
| — |
| 41 |
| — |
|
| Foreign exchange derivatives | (17 | ) | — |
| (17 | ) | — |
| (376 | ) | — |
| (376 | ) | — |
|
| Interest rate derivatives | (359 | ) | — |
| (338 | ) | (21 | ) | (431 | ) | — |
| (402 | ) | (29 | ) |
| U.S. GMWB hedging instruments | 536 |
| — |
| 106 |
| 430 |
| |
| U.S. macro hedge program | 100 |
| — |
| — |
| 100 |
| |
| International program hedging instruments | (231 | ) | — |
| (171 | ) | (60 | ) | |
| GMWB hedging instruments | | 47 |
| — |
| (4 | ) | 51 |
|
| Macro hedge program | | 73 |
| — |
| — |
| 73 |
|
| Total derivative liabilities [4] | 38 |
| — |
| (440 | ) | 478 |
| (653 | ) | — |
| (748 | ) | 95 |
|
| Other liabilities | — |
| — |
| — |
| — |
| |
| Consumer notes [5] | (2 | ) | — |
| — |
| (2 | ) | |
| Total liabilities accounted for at fair value on a recurring basis | $ | (3,091 | ) | $ | — |
| $ | (440 | ) | $ | (2,651 | ) | $ | (941 | ) | $ | — |
| $ | (748 | ) | $ | (193 | ) |
| |
| [1] | Included in other investments on the Consolidated Balance Sheets. |
| |
| [2] | Includes OTC and OTC-cleared derivative instruments in a net assetpositive fair value position after consideration of the accrued interest and impact of collateral posting requirements which may be imposed by agreements, clearinghouseclearing house rules, and applicable law. At December 31, 2013 and December 31, 2012, $120 and $92, respectively, was netted against theSee footnote 4 to this table for derivative asset value in the Consolidated Balance Sheet and is excluded from the table above. For further information on derivative liabilities, see below in this Note 3. |
| |
[2] | Represents hedge funds where investment company accounting has been applied to a wholly-owned fund of funds measured at fair value.liabilities. |
| |
| [3] | As of December 31, 2013Approximately $4.0 billion and 2012, excludes approximately $2.4$1.8 billion and $3.1 billion, respectively, of investment sales receivable, thatas of December 31, 2016 and December 31, 2015, respectively, are not subject toexcluded from this disclosure requirement because they are trade receivables in the ordinary course of business where the carrying amount approximates fair value. Included in the total fair value accounting.
amount are $1.0 billion and $1.2 billion of investments, as of December 31, 2016 and December 31, 2015 for which the fair value is estimated using the net asset value per unit as a practical expedient which are excluded from the disclosure requirement to classify amounts in the fair value hierarchy. |
| |
| [4] | Includes OTC and OTC-cleared derivative instruments in a net negative marketfair value position (derivative liability). In the Level 3 roll forward table included below in this Note, the sum after consideration of the derivative assetaccrued interest and liability positions are referred to as “freestanding derivatives”impact of collateral posting requirements which may be imposed by agreements, clearing house rules and are presented on a net basis.applicable law. |
| |
[5] | Represents embedded derivatives associated with non-funding agreement-backed consumer equity-linked notes. |
Table of ContentsHARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3.2. Fair Value Measurements (continued)
Determination of Fair ValuesFixed Maturities, Equity Securities, Short-term Investments, and Free-standing Derivatives
Valuation Techniques
The valuation methodologies used to determine theCompany generally determines fair values of assetsusing valuation techniques that use prices, rates, and liabilities under the “exit price” notion, reflect market-participant objectives and are based on the applicationother relevant information evident from market transactions involving identical or similar instruments. Valuation techniques also include, where appropriate, estimates 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 that are converted into a single discounted at the appropriateamount using current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s default spreads, liquidity and, where appropriate, risk margins on unobservable parameters.expectations. The following isCompany uses a discussion"waterfall" approach comprised of the methodologies used to determine fair values for the financial instrumentsfollowing pricing sources and techniques, which are listed in the above tables.priority order:
The fair value process is monitored by the Valuation Committee,Quoted prices, unadjusted, for identical assets or liabilities in active markets, which is a cross-functional group of senior management within the Company that meets at least quarterly. The Valuation Committee is co-chaired by the Heads of Investment Operations and Accounting, and has representation from various investment sector professionals, accounting, operations, legal, compliance and risk management. The purpose of the committee is to oversee the pricing policy and procedures by ensuring objective and reliable valuation practices and pricing of financial instruments,are classified as well as addressing fair valuation issues and approving changes to valuation methodologies and pricing sources. There are also two working groups, a Securities Fair Value Working Group (“Securities Working Group”) and a Derivatives Fair Value Working Group ("Derivatives Working Group"), which include the Heads of Investment Operations and Accounting, as well as other investment, operations, accounting and risk management professionals that meet monthly to review market data trends, pricing and trading statistics and results, and any proposed pricing methodology changes described in more detail in the following paragraphs.Level 1.
The Company also has an enterprise-wide Operational Risk Management function, led by the Chief Operational Risk Officer, which is responsible for establishing, maintaining and communicating the framework, principles and guidelines of the Company's operational risk management program. This includes model risk management which provides an independent review of the suitability, characteristics and reliability of model inputs; as well as, an analysis of significant changes to current models.
AFS Securities, Fixed Maturities, FVO, Equity Securities, Trading, and Short-term Investments
The fair value of AFS securities, fixed maturities, FVO, equity securities, trading, and short-term investments in an active and orderly market (e.g. not distressed or forced liquidation) are 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 soughtPrices from third-party pricing services, the remaining unpriced securities are submitted to independent brokers for prices, or lastly, securities are priced usingwhich primarily utilize a pricing matrix. If nonecombination of these pricing sources are available, the Company will estimate fair value utilizing an internal pricing model. Typical inputs used by these pricing methods include, but are not limited to,techniques. These services utilize recently reported trades benchmark yields, issuer spreads, bids, offers, and/of identical, similar, or estimated cash flows, prepayments speeds and default rates. 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 similarbenchmark securities making adjustments for market observable inputs available through the reporting date based upon available market observable information as outlined above.date. If there are no recently reported trades, the third-party pricing services and independent brokersthey may use matrix or model processesa discounted cash flow technique to develop a security price where futureusing expected cash flow expectations are developedflows based upon collateralthe anticipated future performance andof the underlying collateral discounted at an estimated market rate. Included inBoth techniques develop prices that consider the pricing of ABS and RMBS are estimates of the ratetime value of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structurecash flows and prepayment speeds previously experienced at the interest rate levels projectedprovide a margin for the underlying collateral. Actual prepayment experience may vary from these estimates.
Prices fromrisk, including liquidity and credit risk. Most prices provided by third-party pricing services are often unavailable forclassified as Level 2 because the inputs used in pricing the securities are observable. However, some securities that are rarely tradedless liquid or trade less actively are traded onlyclassified as Level 3. Additionally, certain long-dated securities, including certain municipal securities, foreign government/government agency securities, and bank loans, include benchmark interest rate or credit spread assumptions that are not observable in privately negotiated transactions. Asthe marketplace and are thus classified as Level 3.
Internal matrix pricing, which is 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 pricevaluation process internally developed for private placement securities for which the Company is unable to obtain a price from a third-party pricing service by discounting the expected futureservice. Internal pricing matrices determine credit spreads that, when combined with risk-free rates, are applied to contractual cash flows from the security byto develop a developed market discount rate utilizing currentprice. The Company develops credit spreads. 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 placement brokers. The appropriatemarket-based reference credit spreads determined through this survey approach are based uponspread considers the issuer’s financial strength and term to maturity, utilizingusing an independent public security index and trade information, and adjusting forwhile the credit spread differential considers the non-public nature of the security. Securities priced using internal matrix pricing are classified as Level 2 because the inputs are observable or can be corroborated with observable data.
Independent broker quotes, which are typically non-binding and use inputs that can be difficult to corroborate with observable market based data. Brokers may use present value techniques using assumptions specific to the security types, or they may use recent transactions of similar securities. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on independent broker quotes are classified as Level 3.
The fair value of free-standing derivative instruments are determined primarily using a discounted cash flow model or option model technique and incorporate counterparty credit risk. In some cases, quoted market prices for exchange-traded and OTC-cleared derivatives may be used and in other cases independent broker quotes may be used. The pricing valuation models primarily use inputs that are observable in the market or can be corroborated by observable market data. The valuation of certain derivatives may include significant inputs that are unobservable, such as volatility levels, and reflect the Company’s view of what other market participants would use when pricing such instruments. Unobservable market data is used in the valuation of customized derivatives that are used to hedge certain GMWB variable annuity riders. See the section “GMWB Embedded, Customized, and Reinsurance Derivatives” below for further discussion of the valuation model used to value these customized derivatives.
Valuation Controls
The fair value process for investments is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company that meets at least quarterly. The purpose of the committee is to oversee the pricing policy and procedures, as well as approving changes to valuation methodologies and pricing sources. Controls and procedures used to assess third-party pricing services are reviewed by the Valuation Committee, including the results of annual due-diligence reviews.
There are also two working groups under the Valuation Committee: a Securities Fair Value Working Group (“Securities Working Group”) and a Derivatives Fair Value Working Group ("Derivatives Working Group"). The working groups, which include various investment, operations, accounting and risk management professionals, meet monthly to review market data trends, pricing and trading statistics and results, and any proposed pricing methodology changes.
Table of ContentsHARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3.2. Fair Value Measurements (continued)
The Securities Working Group performs an ongoing analysis of thereviews prices and credit spreads received from third parties to ensure that the prices represent a reasonable estimate of the fair value. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. As a part of this analysis, the CompanyThe group considers trading volume, new issuance activity, market trends, new regulatory rulings and other factors to determine whether the market activity is significantly different than 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. 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 and approved by the Valuation Committee. The Company’s internal pricing model utilizes the Company’s 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 conducts other specific activities to monitor controls around pricing. Daily analyses identify price changes over 3-5%, sale trade prices that differ over 3% from the prior day’s price and purchase trade prices that differ more than 3% from the current day’s price. Weekly analyses identify prices that differ more than 5% from published bond prices of a corporate bond index. Monthly analyses identify price changes over 3%, prices that have not changed, missing prices and second source validation on most sectors. Analyses are conducted by amarket. A dedicated pricing unit that follows up with trading and investment sector professionals and challenges prices with vendorsof third-party pricing services when the estimated assumptions used differ from what the Company feelsunit believes a market participant would use. Any changesIf the available evidence indicates that pricing from the identified pricing source are verified by further confirmation of assumptions used. Examples of other 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 and back testing recent trades.
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 valuationsor broker quotes is based upon transactions that are basedstale or not from trades made in an orderly market, the Company places little, if any, weight on brokers’ prices are classifiedthe third party service’s transaction price and will estimate fair value using an internal process, such as Level 3. Some valuations may be classified as Level 2 if the price can be corroborated with observable market data.
Derivative Instruments, including embedded derivatives within investments
Derivative instruments are fair valued usinga pricing valuation models for OTC derivatives that utilize independent market data inputs, quoted market prices for exchange-traded and OTC-cleared derivatives, or independent broker quotations. Excluding embedded and reinsurance related derivatives, as of December 31, 2013 and December 31, 2012, 97% and 98%, respectively, of derivatives, based upon notional values, were priced by valuation models or quoted market prices. The remaining derivatives were priced by broker quotations.matrix.
The Derivatives Working Group performs ongoing analysis ofreviews the valuations,inputs, assumptions and methodologies used to ensure that the prices represent a reasonable estimate of the fair value. The Company performs various controls on derivative valuations which include both quantitative and qualitative analysis. Analyses are conducted by aA dedicated derivative pricing team that works directly with investment sector professionals to analyzeinvestigate the impacts of changes in the market environment on prices or valuations of derivatives. New models and investigate variances. There is a monthly analysisany changes to identify market value changes greater than pre-defined thresholds, stale prices, missing prices and zero prices. Also on a monthly basis, a second source validation, typicallycurrent models are required to broker quotations, is performed for certain of the more complex derivatives as well as for any existing deals with a market value greater than $10 and all new deals during the month. A model validation review is performed on any new models, which typically includeshave detailed documentation and validationare validated to a second source. The model validation documentation and results of validation are presented to the Valuation Committee for approval. There is a monthly control to review changes in pricing sources to ensure that new models are not moved to production until formally approved.
The Company utilizesconducts other monitoring controls around securities and derivatives pricing including, but not limited to, the following:
Review of daily price changes over specific thresholds and new trade comparison to third-party pricing services.
Daily comparison of OTC derivative instrumentsmarket valuations to managecounterparty valuations.
Review of weekly price changes compared to published bond prices of a corporate bond index.
Monthly reviews of price changes over thresholds, stale prices, missing prices, and zero prices.
Monthly validation of prices to a second source for securities in most sectors and for certain derivatives.
In addition, the Company’s enterprise-wide Operational Risk Management function, led by the Chief Risk Officer, is responsible for model risk associated with certain assetsmanagement 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 impactprovides an independent review of the realizedsuitability and unrealized gainsreliability of model inputs, as well as an analysis of significant changes to current models.
Valuation Inputs
Quoted prices for identical assets in active markets are considered Level 1 and lossesconsist of the associated assetson-the-run U.S. Treasuries, money market funds, exchange-traded equity securities, open-ended mutual funds, short-term investments, and liabilities.exchange traded futures and option contracts.
Table of ContentsHARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3.2. Fair Value Measurements (continued)
Limited partnerships and other alternative investments
Limited partnerships and other alternative investments include hedge funds where investment company accounting has been applied to a wholly-owned fund of funds measured at fair value. These funds are fair valued using the net asset value per share or equivalent (“NAV”), as a practical expedient, calculated on a monthly basis and is the amount at which a unit or shareholder may redeem their investment, if redemption is allowed. Certain impediments to redemption include, but are not limited to the following: 1) redemption notice periods vary and may be as long as 90 days, 2) redemption may be restricted (e.g. only be allowed on a quarter-end), 3) a holding period referred to as a lock-up may be imposed whereby an investor must hold their investment for a specified period of time before they can make a notice for redemption, 4) gating provisions may limit all redemptions in a given period to a percentage of the entities' equity interests, or may only allow an investor to redeem a portion of their investment at one time and 5) early redemption penalties may be imposed that are expressed as a percentage of the amount redeemed. The Company will assess impediments to redemption and current market conditions that will restrict the redemption at the end of the notice period. Any funds that are subject to significant liquidity restrictions are reported in Level 3; all others have been classified as Level 2.Valuation Techniques and Inputs for Investments
Generally, the Company determines the estimated fair value of its AFS securities, fixed maturities, FVO, equity securities, trading, and short-term investments using the market approach. The income approach is used for securities priced using a pricing matrix, as well as for derivative instruments. Certain limited partnerships and other alternative investments are measured at fair value using a NAV as a practical expedient. For Level 1 investments, which are comprised of on-the-run U.S. Treasuries, exchange-traded equity securities, short-term investments, exchange traded futures and option contracts, valuations are based on observable inputs that reflect quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date.
For most of the Company’s debt securities, the following inputs are typically used in the Company’s pricing methods: reported trades, benchmark yields, bids and/or estimated cash flows. For securities except U.S. Treasuries, inputs also include issuer spreads, which may consider credit default swaps. Derivative instruments are valued using mid-market inputs that are predominantly observable in the market.
A description of additional inputs used in the Company’s Level 2 and Level 3 measurements is listed below:
|
| | |
| Level 2
Primary Observable Inputs | The fair valuesLevel 3
Primary Unobservable Inputs |
| Fixed Maturity Investments |
| Structured securities (includes ABS, CDOs CMBS and RMBS) |
| • Benchmark yields and spreads
• Monthly payment information
• Collateral performance, which varies by vintage year and includes delinquency rates, loss severity rates and refinancing assumptions
• Credit default swap indices
Other inputs for ABS and RMBS:
• Estimate of mostfuture principal prepayments, derived based on the characteristics of the Company’s Level 2 investmentsunderlying structure
• Prepayment speeds previously experienced at the interest rate levels projected for the collateral | • Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for less liquid securities or those that trade less actively, including subprime RMBS:
• Estimated cash flows
• Credit spreads, which include illiquidity premium
• Constant prepayment rates
• Constant default rates
• Loss severity |
| Corporates |
| • Benchmark yields and spreads
• Reported trades, bids, offers of the same or similar securities
• Issuer spreads and credit default swap curves
Other inputs for investment grade privately placed securities that utilize internal matrix pricing :
• Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature | • Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for below investment grade privately placed securities:
• Independent broker quotes
• Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature |
| U.S Treasuries, Municipals, and Foreign government/government agencies |
| • Benchmark yields and spreads
• Issuer credit default swap curves
• Political events in emerging market economies
• Municipal Securities Rulemaking Board reported trades and material event notices
• Issuer financial statements | • Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve |
| Equity Securities |
| • Quoted prices in markets that are determined by management after considering prices received from third party pricing services. These investments include most fixed maturitiesnot active | • For privately traded equity securities, internal discounted cash flow models utilizing earnings multiples or other cash flow assumptions that are not observable; or they may be held at cost |
| Short Term Investments |
| • Benchmark yields and preferred stocks, including those reported in separate account assets; as well as, certain limited partnershipsspreads
• Reported trades, bids, offers
• Issuer spreads and other alternative investmentscredit default swap curves
• Material event notices and derivative instruments.new issue money market rates | Not applicable |
| Derivatives |
| Credit derivatives |
| • The swap yield curve
• Credit default swap curves | • Independent broker quotes
• Yield curves beyond observable limits |
| Equity derivatives |
| • Equity index levels
• The swap yield curve | • Independent broker quotes
• Equity volatility |
| Foreign exchange derivatives |
| • Swap yield curve
• Currency spot and forward rates
• Cross currency basis curves | • Independent broker quotes |
| Interest rate derivatives |
| • Swap yield curve | • Independent broker quotes
• Interest rate volatility |
ABS, CDOs, CMBS and RMBS – Primary inputs also include monthly payment information, collateral performance, which varies by vintage year and includes delinquency rates, collateral valuation loss severity rates, collateral refinancing assumptions, credit default swap indices and, for ABS and RMBS, estimated prepayment rates.
Corporates, including investment grade private placements – Primary inputs also include observations of credit default swap curves related to the issuer.
Foreign government/government agencies—Primary inputs also include observations of credit default swap curves related to the issuer and political events in emerging markets.
Municipals – Primary inputs also include Municipal Securities Rulemaking Board reported trades and material event notices, and issuer financial statements.
Short-term investments – Primary inputs also include material event notices and new issue money market rates.
Equity securities, trading – Consist of investments in mutual funds. Primary inputs include net asset values obtained from third party pricing services.
Credit derivatives – Primary inputs include the swap yield curve and credit default swap curves.
Foreign exchange derivatives – Primary inputs include the swap yield curve, currency spot and forward rates, and cross currency basis curves.
Interest rate derivatives – Primary input is the swap yield curve.
Limited partnerships and other alternative investments — Primary inputs include a NAV for investment companies with no redemption restrictions as reported on their U.S. GAAP financial statements.
Table of ContentsHARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3.2. Fair Value Measurements (continued)
| |
Level 3 | Most of the Company’s securities classified as Level 3 include less liquid securities such as lower quality ABS, CMBS, commercial real estate (“CRE”) CDOs and RMBS primarily backed by below-prime loans. Securities included in level 3 are primarily valued based on broker prices or broker spreads, without adjustments. Primary inputs for non-broker priced investments, including structured securities, are consistent with the typical inputs used in Level 2 measurements noted above, but are Level 3 due to their less liquid markets. Additionally, certain long-dated securities are priced based on third party pricing services, including municipal securities, foreign government/government agencies, bank loans and below investment grade private placement securities. Primary inputs for these long-dated securities are consistent with the typical inputs used in Level 1 and Level 2 measurements noted above, but include benchmark interest rate or credit spread assumptions that are not observable in the marketplace. Level 3 investments also include certain limited partnerships and other alternative investments measured at fair value where the Company does not have the ability to redeem the investment in the near-term at the NAV. Also included in Level 3, are certain derivative instruments that either have significant unobservable inputs or are valued based on broker quotations. Significant inputs for these derivative contracts primarily include the typical inputs used in the Level 1 and Level 2 measurements noted above; but also include equity and interest rate volatility and swap yield curves beyond observable limits. |
Significant Unobservable Inputs for Level 3 Assets Measured at Fair Values
The following tables present information about significant unobservable inputs used in Level 3 assets measured at fair value.- Securities
|
| | | | | | | | | | | | |
| Assets accounted for at fair value on a recurring basis | Fair Value | Predominant Valuation Technique | Significant Unobservable Input | Minimum | Maximum | Weighted Average [1] | Impact of Increase in Input on Fair Value [2] |
| As of December 31, 2016 |
| CMBS [3] | $ | 9 |
| Discounted cash flows | Spread (encompasses
prepayment, default risk and loss severity) | 10bps | 1,273bps | 249bps | Decrease |
| Corporate [4] | 265 |
| Discounted cash flows | Spread | 122bps | 1,021bps | 373bps | Decrease |
| Municipal [3] | 56 |
| Discounted cash flows | Spread | 135bps | 286bps | 195bps | Decrease |
| RMBS [3] | 704 |
| Discounted cash flows | Spread | 16bps | 1,830bps | 189bps | Decrease |
| | | | Constant prepayment rate | — | % | 20 | % | 4 | % | Decrease [5] |
| | | | Constant default rate | 1 | % | 10 | % | 5 | % | Decrease |
| | | | Loss severity | — | % | 100 | % | 75 | % | Decrease |
|
| | | | | | | | | | | | |
| | As of December 31, 2013 |
| Securities | | | | Unobservable Inputs | |
| Assets accounted for at fair value on a recurring basis | Fair Value | Predominant Valuation Method | Significant Unobservable Input | Minimum | Maximum | Weighted Average [1] | Impact of Increase in Input on Fair Value [2] |
| CMBS | $ | 360 |
| Discounted cash flows | Spread (encompasses
prepayment, default risk and loss severity) | 99bps | 2,511bps | 446bps | Decrease |
| Corporate [3] | 398 |
| Discounted cash flows | Spread | 119bps | 5,594bps | 332bps | Decrease |
| Municipal [3] | 29 |
| Discounted cash flows | Spread | 184bps | 184bps | 184bps | Decrease |
| RMBS | 798 |
| Discounted cash flows | Spread | 62bps | 1,748bps | 245bps | Decrease |
| | | | Constant prepayment rate | — | % | 10 | % | 3 | % | Decrease [4] |
| | | | Constant default rate | 1 | % | 22 | % | 8 | % | Decrease |
| | | | Loss severity | — | % | 100 | % | 80 | % | Decrease |
|
| | | | | | | | | | | | |
| As of December 31, 2015 |
| CMBS [3] | $ | 61 |
| Discounted cash flows | Spread (encompasses
prepayment, default risk and loss severity) | 31bps | 1,505bps | 230bps | Decrease |
| Corporate [4] | 213 |
| Discounted cash flows | Spread | 63bps | 800bps | 290bps | Decrease |
| Municipal [3] | 31 |
| Discounted cash flows | Spread | 193bps | 193bps | 193bps | Decrease |
| RMBS | 628 |
| Discounted cash flows | Spread | 30bps | 1,696bps | 172bps | Decrease |
| | | | Constant prepayment rate | — | % | 20 | % | 3 | % | Decrease [5] |
| | | | Constant default rate | 1 | % | 10 | % | 6 | % | Decrease |
| | | | Loss severity | — | % | 100 | % | 79 | % | Decrease |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
|
| | | | | | | | | | | | |
| | As of December 31, 2012 |
| Securities | | | | Unobservable Inputs | |
| Assets accounted for at fair value on a recurring basis | Fair Value | Predominant Valuation Method | Significant Unobservable Input | Minimum | Maximum | Weighted Average [1] | Impact of Increase in Input on Fair Value [2] |
| CMBS | $ | 532 |
| Discounted cash flows | Spread (encompasses
prepayment, default risk and loss severity) | 320bps | 3,615bps | 1,013bps | Decrease |
| Corporate [3] | 888 |
| Discounted cash flows | Spread | 145bps | 900bps | 333bps | Decrease |
| Municipal | 169 |
| Discounted cash flows | Spread | 227bps | 344bps | 254bps | Decrease |
| RMBS | 1,133 |
| Discounted cash flows | Spread | 54bps | 1,689bps | 379bps | Decrease |
| | | | Constant prepayment rate | — | % | 12 | % | 2 | % | Decrease [4] |
| | | | Constant default rate | 1 | % | 24 | % | 8 | % | Decrease |
| | | | Loss severity | — | % | 100 | % | 80 | % | Decrease |
| |
| [1] | The weighted average is determined based on the fair value of the securities. |
| |
| [2] | Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table above.table. |
| |
| [3] | Level 3 corporate and municipalExcludes securities excludes thosefor which the Company based fair value on broker quotations. |
| |
| [4] | Excludes securities for which the Company bases fair value on broker quotations as discussed below.quotations; however, included are broker-priced lower-rated private placement securities for which the Company receives spread and yield information to corroborate the fair value. |
| |
[4]5] | Decrease for above market rate coupons and increase for below market rate coupons. |
|
| | | | | | | |
| | As of December 31, 2013 |
| Freestanding Derivatives | | | | Unobservable Inputs | |
| | Fair Value | Predominant Valuation Method | Significant Unobservable Input | Minimum | Maximum | Impact of Increase in Input on Fair Value [1] |
| Interest rate derivative | | | | | | |
| Interest rate swaps | (24 | ) | Discounted cash flows | Swap curve
beyond 30 years | 4% | 4% | Increase |
| U.S. GMWB hedging instruments | | | | | | |
| Equity options | 72 |
| Option model | Equity volatility | 21% | 29% | Increase |
| Customized swaps | 74 |
| Discounted cash flows | Equity volatility | 10% | 50% | Increase |
| U.S. macro hedge program | | | | | | |
| Equity options | 139 |
| Option model | Equity volatility | 24% | 31% | Increase |
| International hedging program [2] | | | | | | |
| Equity options | (66 | ) | Option model | Equity volatility | 29% | 37% | Increase |
| Short interest rate swaptions | (12 | ) | Option model | Interest rate volatility | —% | 1% | Decrease |
| Long interest rate swaptions | 48 |
| Option model | Interest rate volatility | 1% | 1% | Increase |
Table of ContentsHARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3.2. Fair Value Measurements (continued)
Significant Unobservable Inputs for Level 3 - Freestanding Derivatives
|
| | | | | | | |
| | As of December 31, 2012 |
| Freestanding Derivatives | | | | Unobservable Inputs | |
| | Fair Value | Predominant Valuation Method | Significant Unobservable Input | Minimum | Maximum | Impact of Increase in Input on Fair Value [1] |
| Equity derivatives | | | | | | |
| Equity options | 45 |
| Option model | Equity volatility | 13.0% | 24% | Increase |
| Interest rate derivative | | | | | | |
| Interest rate swaps | (57 | ) | Discounted cash flows | Swap curve
beyond 30 years | 2.8% | 2.8% | Increase |
| U.S. GMWB hedging instruments | | | | | | |
| Equity options | 281 |
| Option model | Equity volatility | 10% | 31% | Increase |
| Customized swaps | 238 |
| Discounted cash flows | Equity volatility | 10% | 50% | Increase |
| U.S. macro hedge program | | | | | | |
| Equity options | 286 |
| Option model | Equity volatility | 24% | 43% | Increase |
| International hedging program | | | | | | |
| Equity options | 44 |
| Option model | Equity volatility | 22% | 33% | Increase |
| Long interest rate | (119 | ) | Option model | Interest rate volatility | —% | 1% | Increase |
|
| | | | | | | | |
| | Fair Value | Predominant Valuation Technique | Significant Unobservable Input | Minimum | Maximum | Impact of Increase in Input on Fair Value [1] |
| As of December 31, 2016 |
| Interest rate derivatives | | | | | | |
| Interest rate swaps | $ | (29 | ) | Discounted cash flows | Swap curve
beyond 30 years | 3% | 3% | Decrease |
| GMWB hedging instruments | | | | | | |
| Equity variance swaps | (36 | ) | Option model | Equity volatility | 20% | 23% | Increase |
| Equity options | 17 |
| Option model | Equity volatility | 27% | 30% | Increase |
| Customized swaps | 100 |
| Discounted cash flows | Equity volatility | 12% | 30% | Increase |
| Macro hedge program | | | | | | |
| Equity options [2] | 188 |
| Option model | Equity volatility | 17% | 28% | Increase |
|
| | | | | | | |
| As of December 31, 2015 |
| Interest rate derivatives | | | | | | |
| Interest rate swaps | (30 | ) | Discounted cash flows | Swap curve
beyond 30 years | 3% | 3% | Decrease |
| GMWB hedging instruments | | | | | | |
| Equity variance swaps | (31 | ) | Option model | Equity volatility | 19% | 21% | Increase |
| Equity options | 35 |
| Option model | Equity volatility | 27% | 29% | Increase |
| Customized swaps | 131 |
| Discounted cash flows | Equity volatility | 10% | 40% | Increase |
| Macro hedge program | | | | | | |
| Equity options | 179 |
| Option model | Equity volatility | 14% | 28% | Increase |
| |
| [1] | Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table. Changes are based on long positions, unless otherwise noted. Changes in fair value will be inversely impacted for short positions. |
| |
| [2] | Level 3 international program hedging instruments excludes thoseExcludes derivatives for which the Company bases fair value on broker quotations. |
SecuritiesThe tables above exclude the portion of ABS, CRE CDOs, index options and derivativescertain corporate securities for which the Company bases fair valuevalues are predominately based on independent broker quotations predominately include ABS, CDOs, corporate, fixed maturities, FVO and certain credit derivatives. Due to the lack of transparency in the process brokers use to develop prices for these investments,quotes. While the Company does not have access to the significant unobservable inputs brokers use to price these securities and derivatives. The Company believes however, the types of inputsthat independent brokers may use wouldin their pricing process, the Company believes brokers likely beuse inputs similar to those used to price securities and derivatives for which inputs are available toby the Company and therefore may include, but not be limitedthird-party pricing services to price similar instruments. As such, in their pricing models, brokers likely use estimated loss severity rates, constant prepayment rates, constant default rates and credit spreads. Therefore, similar to non brokernon-broker priced securities, and derivatives, generally, increases in these inputs would generally cause fair values to decrease. For the year ended December 31, 2013, 2016, no significant adjustments were made by the Company to broker prices received.
AsTransfers between Levels
Transfers of securities among the levels occur at the beginning of the reporting period. The amount of transfers from Level 1 to Level 2 was $563 and $711, for the years ended December 31, 20132016 and 2015, respectively, which represented previously on-the-run U.S. Treasury securities that are now off-the-run. For the years ended December 31, 2012, excluded2016 and 2015, there were no transfers from Level 2 to Level 1. See the fair value roll-forward tables above are limited partnershipsfor the years ended December 31, 2016 and other alternative investments which total $542015, for the transfers into and $150, respectively,out of Level 3 assets measured at fair value. The predominant valuation method uses a NAV calculated on a monthly basis and represents funds where the Company does not have the ability to redeem the investment in the near-term at that NAV, including an assessment of the investee's liquidity.3.
Product Derivatives
The Company formerly offered and subsequently reinsured certain variable annuity products with GMWB riders in the U.S. The Company has also assumed, through reinsurance from HLIKK, GMIB, GMWB and GMAB riders. The Company has subsequently ceded certain GMWB rider liabilities and the assumed reinsurance from HLIKK to an affiliated captive reinsurer. The GMWB provides the policyholder with a guaranteed remaining balance (“GRB”) which is generally equal to premiums less withdrawals. If the policyholder’s account value is reduced a specified level through a combination of market declines and withdrawals but the GRB still has value, the Company is obligated to continue to make annuity payments to the policyholder until the GRB is exhausted. Certain contract provisions can increase the GRB at contract holder election or after the passage of time. 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 Company’s GMWB liability is carried at fair value and reported in other policyholder funds. The notional value of the embedded derivative is the GRB.
Table of ContentsHARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3.2. Fair Value Measurements (continued)
GMWB Embedded, Customized and Reinsurance Derivatives |
| |
| GMWB Embedded Derivatives | The Company formerly offered certain variable annuity products with GMWB riders that provide the policyholder with a GRB which is generally equal to premiums less withdrawals. If the policyholder’s account value is reduced to a specified level through a combination of market declines and withdrawals but the GRB still has value, the Company is obligated to continue to make annuity payments to the policyholder until the GRB is exhausted. When payments of the GRB are not life-contingent, the GMWB represents an embedded derivative carried at fair value reported in other policyholder funds and benefits payable in the Consolidated Balance Sheets with changes in fair value reported in net realized capital gains and losses. |
| Free-standing Customized Derivatives | The Company holds free-standing customized derivative contracts to provide protection from certain capital markets risks for the remaining term of specified blocks of non-reinsured GMWB riders. These customized derivatives are based on policyholder behavior assumptions specified at the inception of the derivative contracts. The Company retains the risk for differences between assumed and actual policyholder behavior and between the performance of the actively managed funds underlying the separate accounts and their respective indices. These derivatives are reported in the Consolidated Balance Sheets within other investments or other liabilities, as appropriate, after considering the impact of master netting agreements. |
| GMWB Reinsurance Derivative | The Company has reinsurance arrangements in place to transfer a portion of its risk of loss due to GMWB. These arrangements are recognized as derivatives carried at fair value and reported in reinsurance recoverables in the Consolidated Balance Sheets. Changes in the fair value of the reinsurance agreements are reported in net realized capital gains and losses. |
Valuation Techniques
Fair values for GMWB embedded derivatives, free-standing customized derivatives and reinsurance derivatives are classified as Level 3 in the fair value hierarchy and are calculated using internally developed models that utilize significant unobservable inputs because active, observable markets do not exist for these items. In valuing the GMWB embedded derivative, the Company attributes to the derivative a portion of the expected fees to be collected over the expected life of the contract 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.claims. The excess of fees collected from the contract holder in the current period over the Attributed Feesportion of fees attributed to the embedded derivative in the current period are associated with the host variable annuity contract and reported in fee income.
The reinsurance assumed on the HLIKK GMIB, GMWB, and GMAB and ceded to an affiliated captive reinsurer meets 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.
Living Benefits Required to be Fair Valued (in Other Policyholder Funds and Benefits Payable)
Living benefits required to be fair valued include U.S guaranteed withdrawal benefits, international guaranteed withdrawal benefits and international other guaranteed living benefits. Fair values for GMWB and GMAB contracts are calculated using the income approach based upon internally developed models because active, observable markets do not exist for those items. The fair value of the Company’s guaranteed benefit liabilities, classified as embedded derivatives, and the related reinsurance and customized freestanding derivatives are 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 Company’s 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 described below is unobservable in the marketplace and requires subjectivity by the Company in determining their value.Valuation Controls
Oversight of the Company’sCompany's valuation policies and processes for productGMWB embedded, reinsurance, and U.S. GMWB reinsurancecustomized derivatives is performed by a multidisciplinary group comprised of finance, actuarial and risk management professionals. This multidisciplinary group reviews and approves changes and enhancements to the Company’sCompany's valuation model as well as associated controls.
Valuation Inputs
The fair value for each of the non-life contingent GMWBs, the free-standing customized derivatives and the GMWB reinsurance derivative is calculated as an aggregation of the following components: Best Estimate Claims CostsClaim Payments; Credit Standing Adjustment; and Margins. The Company believes the aggregation of these components results in an amount that a market participant in an active liquid market would require, if such a market existed, to assume the risks associated with the guaranteed minimum benefits and the related reinsurance and customized derivatives. Each component described in the following discussion is unobservable in the marketplace and requires subjectivity by the Company in determining its value.
Best Estimate Claim Payments
The Best Estimate Claims Costs isClaim Payments are calculated based on actuarial and capital market assumptions related to projected cash flows, including the present value of benefits and related contract charges, over the lives of the contracts, incorporating unobservable inputs including expectations concerning policyholder behavior such as lapses, fund selection, resets and withdrawal utilization (for the customized derivatives, policyholder behavior is prescribed in the derivative contract). Because of the dynamic and complex nature of these cash flows, best estimatebehavior. These assumptions andare input into a Monte Carlo stochastic process involving the generation of thousands of scenarios that assume risk neutral returns consistent with swap ratesscenario process that is used to determine the valuation and a blend of observable implied index volatility levels were used. Estimating these cash flows involves numerous estimates and subjective judgments including those regarding expected markets ratesa number of return, market volatility, correlations of market index returns to funds, fund performance, discount rates and various actuarial assumptions for policyholder behavior which emerge over time.variables.
At each valuation date, the Company assumes expected returns based on:
risk-free rates as represented by the Eurodollar futures, LIBOR deposits and swap rates to derive forward curve rates;
market implied volatility assumptions for each underlying index based primarily on a blend of observed market “implied volatility” data;
correlations of historical returns across underlying well known market indices based on actual observed returns over the ten years preceding the valuation date; and
three years of history for fund regression.
As many guaranteed benefit obligations are relatively new in the marketplace, actual policyholder behavior experience is limited. As a result, estimates of future policyholder behavior are subjective and based on analogous internal and external data. As markets change, mature and evolve and actual policyholder behavior emerges, management continually evaluates the appropriateness of its assumptions for this component of the fair value model.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
On a daily basis, the Company updates capital market assumptions used in the GMWB liability model such as interest rates, equity indices and the blend of implied equity index volatilities. The Company monitors various aspects of policyholder behavior and may modify certain of its assumptions, including living benefit lapses and withdrawal rates, if credible emerging data indicates that changes are warranted. In addition, the Company will continue to evaluate policyholder behavior assumptions should we implement initiatives to reduce the size of the variable annuity business. At a minimum, all policyholder behavior assumptions are reviewed and updated at least annually as appropriate, in conjunction with the completionpart of the Company’s annual fourth-quarter comprehensive study to refine its estimate of future gross profits duringprofits. In addition, the third quarterCompany recognized non-market-based updates driven by the relative outperformance (underperformance) of each year.the underlying actively managed funds as compared to their respective indices.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Fair Value Measurements (continued)
Credit Standing Adjustment
This assumption makesThe credit standing adjustment is an adjustmentestimate of the additional amount that market participants would make,require in determining fair value to reflect the risk that guaranteedGMWB benefit obligations or the GMWB reinsurance recoverables will not be fulfilled (“nonperformance risk”).fulfilled. The Company incorporates a blend of observable Company and reinsurer credit default spreads from capital markets, adjusted for market recoverability. For the years ended December 31, 2013, 2012 and 2011, the credit standing adjustment assumption, net of reinsurance and exclusive of the impact of the credit standing adjustment on other market sensitivities, resulted in pre-tax realized gains (losses) of $492, $499 and $(156), respectively.
Margins
The behavior risk margin adds a margin that market participants would require, in determining fair value, for the risk that the Company’s assumptions about policyholder behavior could differ from actual experience. The behavior risk margin is calculated by taking the difference between adverse policyholder behavior assumptions and best estimate assumptions.
Assumption updates, including policyholder behavior assumptions, affected best estimatesValuation Inputs Used in Levels 2 and margins3 Measurements for total pre-tax realized gains of $28, $76GMWB Embedded, Customized and Reinsurance Derivatives$13 for the years ended December 31, 2013, 2012 and 2011. As of December 31, 2013 and 2012 the behavior risk margin was $32 and $77, respectively.In addition to the non-market-based updates described above, the Company recognized non-market-based updates driven by the relative outperformance (underperformance) of the underlying actively managed funds as compared to their respective indices resulting in before-tax realized gains/(losses) of approximately $11, $29 and $(18) for the years ended December 31, 2013, 2012 and 2011, respectively. |
| | |
| Level 2
Primary Observable Inputs | Level 3
Primary Unobservable Inputs |
| • Risk-free rates as represented by the Eurodollar futures, LIBOR deposits and swap rates to derive forward curve rates • Correlations of 10 years of observed historical returns across underlying well-known market indices • Correlations of historical index returns compared to separate account fund returns • Equity index levels | • Market implied equity volatility assumptions
Assumptions about policyholder behavior, including:
• Withdrawal utilization • Withdrawal rates
• Lapse rates • Reset elections |
Significant unobservable inputs used in the fair value measurement of living benefits required to be fair valuedUnobservable Inputs for Level 3 GMWB Embedded Customized and the U.S. GMWB reinsurance derivative are withdrawal utilization and withdrawal rates, lapse rates, reset elections and equity volatility. The following table provides quantitative information about the significant unobservable inputs and is applicable to all of the Living Benefits Required to be Fair Valued and the reinsurance recoverable for U.S. GMWB and Japan GMWB, GMIB and GMAB. Significant increases in any of the significant unobservable inputs, in isolation, will generally have an increase or decrease correlation with the fair value measurement, as shown in the table.Reinsurance Derivatives
|
| | | |
| | Unobservable Inputs |
| Significant Unobservable Input | Minimum | Maximum | Impact of Increase in Input on Fair Value Measurement [1] |
| Withdrawal Utilization[2] | 20% | 100% | Increase |
| Withdrawal Rates [2] | 0% | 8% | Increase |
| Annuitization utilization [3] | 0% | 100% | Increase |
| Lapse Rates [4] | 0% | 75% | Decrease |
| Reset Elections [5] | 20% | 75% | Increase |
| Equity Volatility [6] | 10% | 50% | Increase |
|
| | | |
| | Unobservable Inputs (Minimum) | Unobservable Inputs (Maximum) | Impact of Increase in Input
on Fair Value Measurement [1] |
| December 31, 2016 |
| Withdrawal Utilization [2] | 15% | 100% | Increase |
| Withdrawal Rates [3] | —% | 8% | Increase |
| Lapse Rates [4] | —% | 40% | Decrease |
| Reset Elections [5] | 20% | 75% | Increase |
| Equity Volatility [6] | 12% | 30% | Increase |
| December 31, 2015 |
| Withdrawal Utilization [2] | 20% | 100% | Increase |
| Withdrawal Rates [3] | —% | 8% | Increase |
| Lapse Rates [4] | —% | 75% | Decrease |
| Reset Elections [5] | 20% | 75% | Increase |
| Equity Volatility [6] | 10% | 40% | Increase |
| |
| [1] | Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table. |
| |
| [2] | Ranges representRange represents assumed cumulative percentages of policyholders taking withdrawals and the annual amounts withdrawn.withdrawals. |
| |
| [3] | For reinsurance associated with Japan GMIB, rangeRange represents assumed cumulative percentages of policyholders annuitizing variable annuity contracts.annual amount withdrawn by policyholders. |
| |
| [4] | Range represents assumed annual percentages of full surrender of the underlying variable annuity contracts across all policy durations for in force business. |
| |
| [5] | Range represents assumed cumulative percentages of policyholders that would elect to reset their guaranteed benefit base. |
| |
| [6] | Range represents implied market volatilities for equity indices based on multiple pricing sources. |
Generally a change in withdrawal utilization assumptions would be accompanied by a directionally opposite change in lapse rate assumptions, as the behavior of policyholders that utilize GMWB or GMAB riders is typically different from policyholders that do not utilize these riders.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
Separate Account Assets
Separate account assets are primarily invested in mutual funds. Other separate account assets include fixed maturities, limited partnerships, equity securities, short-term investments and derivatives that are valued in the same manner, and using the same pricing sources and inputs, as those investments held by the Company. Separate account assets classified as Level 3 primarily includeFor limited partnerships in which fair value represents the separate account’s share of the fair valueNAV, 39% and 30% were subject to significant liquidation restrictions due to lock-up or gating provisions as of the equity in the investment (“net asset value”)December 31, 2016 and areDecember 31, 2015, respectively. Total limited partnerships that do not allow any form of redemption were 11% and 2%, as of December 31, 2016 and December 31, 2015, respectively. Separate account assets classified in levelas Level 3 based on the Company’s ability to redeem its investment.primarily include long-dated bank loans, subprime RMBS, and commercial mortgage loans.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Fair Value Measurements (continued)
Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The tables below provide aCompany uses 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 roll forwardhierarchy level as the associated asset or liability. Therefore, the realized and unrealized gains and losses on derivatives reported in the Level 3 roll-forward may be offset by realized and unrealized gains and losses of the associated assets and liabilities in other line items of the financial statements.
Fair Value Roll-forwards for Financial Instruments Classified as Level 3 for the years endedYear Ended December 31, 2013 and 2012, for the financial instruments classified as Level 3.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed Maturities, AFS | Fixed Maturities, FVO |
| Assets | ABS | CDOs | CMBS | Corporate | Foreign govt./govt. agencies | Municipal | RMBS | Total Fixed Maturities, AFS |
| Fair value as of January 1, 2013 | $ | 238 |
| $ | 723 |
| $ | 532 |
| $ | 1,340 |
| $ | 34 |
| $ | 169 |
| $ | 1,133 |
| $ | 4,169 |
| $ | 199 |
|
| Total realized/unrealized gains (losses) | | | | | | | | | |
| Included in net income [1], [2] | (12 | ) | 18 |
| (14 | ) | 6 |
| (1 | ) | — |
| 39 |
| 36 |
| 61 |
|
| Included in OCI [3] | 32 |
| 110 |
| 53 |
| (4 | ) | (3 | ) | (10 | ) | 42 |
| 220 |
| — |
|
| Purchases | 25 |
| 37 |
| 37 |
| 75 |
| 27 |
| — |
| 74 |
| 275 |
| 14 |
|
| Settlements | (6 | ) | (113 | ) | (89 | ) | (112 | ) | (4 | ) | — |
| (134 | ) | (458 | ) | (2 | ) |
| Sales | (127 | ) | (341 | ) | (152 | ) | (333 | ) | (13 | ) | (110 | ) | (355 | ) | (1,431 | ) | (94 | ) |
| Transfers into Level 3 [4] | 3 |
| 23 |
| 36 |
| 99 |
| — |
| — |
| — |
| 161 |
| 3 |
|
| Transfers out of Level 3 [4] | (45 | ) | (29 | ) | (43 | ) | (281 | ) | (2 | ) | — |
| (1 | ) | (401 | ) | (3 | ) |
| Fair value as of December 31, 2013 | $ | 108 |
| $ | 428 |
| $ | 360 |
| $ | 790 |
| $ | 38 |
| $ | 49 |
| $ | 798 |
| $ | 2,571 |
| $ | 178 |
|
| Changes in unrealized gains (losses) included in net income related to financial instruments still held at December 31, 2013 [2] [7] | $ | (7 | ) | $ | — |
| $ | (2 | ) | $ | (7 | ) | $ | — |
| $ | — |
| $ | (1 | ) | $ | (17 | ) | $ | 44 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Freestanding Derivatives [5] | |
| Assets (Liabilities) | Equity Securities, AFS | Credit | Equity | Interest Rate | U.S. GMWB Hedging | U.S. Macro Hedge Program | Intl. Program Hedging | Other Contract Derivatives | Total Free- Standing Derivatives [5] |
| Fair value as of January 1, 2013 | $ | 55 |
| $ | 4 |
| $ | 45 |
| $ | (57 | ) | $ | 519 |
| $ | 286 |
| $ | (75 | ) | $ | — |
| $ | 722 |
|
| Total realized/unrealized gains (losses) | | | | | | | | | |
| Included in net income [1], [2] | (10 | ) | (1 | ) | (26 | ) | 7 |
| (372 | ) | (191 | ) | 24 |
| — |
| (559 | ) |
| Included in OCI [3] | 6 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Purchases | 7 |
| — |
| 1 |
| — |
| — |
| 44 |
| (25 | ) | — |
| 20 |
|
| Settlements | — |
| (1 | ) | (7 | ) | — |
| (4 | ) | — |
| (9 | ) | — |
| (21 | ) |
| Sales | (2 | ) | — |
| — |
| — |
| — |
| — |
| — |
|
| — |
|
| Transfers into Level 3 [4] | — |
| — |
| — |
| — |
| — |
| — |
| (8 | ) | (20 | ) | (28 | ) |
| Transfers out of Level 3 [4] | (5 | ) | — |
| (11 | ) | 26 |
| 3 |
| — |
| 32 |
| 20 |
| 70 |
|
| Fair value as of December 31, 2013 | $ | 51 |
| $ | 2 |
| $ | 2 |
| $ | (24 | ) | $ | 146 |
| $ | 139 |
| $ | (61 | ) | $ | — |
| $ | 204 |
|
| Changes in unrealized gains (losses) included in net income related to financial instruments still held at December 31, 2013 [2] [7] | $ | (9 | ) | $ | (1 | ) | $ | (15 | ) | $ | 2 |
| $ | (390 | ) | $ | (187 | ) | $ | (170 | ) | $ | — |
| $ | (761 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Total realized/unrealized gains (losses) | | | | | | |
| | | Fair value as of January 1, 2016 | Included in net income [1] [2] [6] | Included in OCI [3] | Purchases | Settlements | Sales | Transfers into Level 3 [4] | Transfers out of Level 3 [4] | Fair value as of December 31, 2016 |
| Assets | | | | | | | | | |
| Fixed Maturities, AFS | | | | | | | | | |
| | ABS | $ | 5 |
| $ | — |
| $ | — |
| $ | 35 |
| $ | (2 | ) | $ | (2 | ) | $ | 5 |
| $ | (4 | ) | $ | 37 |
|
| | CDOs | 330 |
| (1 | ) | (14 | ) | 62 |
| (117 | ) | — |
| — |
| — |
| 260 |
|
| | CMBS | 62 |
| — |
| (2 | ) | 43 |
| (13 | ) | (2 | ) | — |
| (67 | ) | 21 |
|
| | Corporate | 534 |
| (6 | ) | 10 |
| 87 |
| (63 | ) | (126 | ) | 368 |
| (238 | ) | 566 |
|
| | Foreign Govt./Govt. Agencies | 17 |
| — |
| 1 |
| 8 |
| (4 | ) | (5 | ) | — |
| — |
| 17 |
|
| | Municipal | 49 |
| — |
| — |
| 16 |
| (1 | ) | — |
| 8 |
| — |
| 72 |
|
| | RMBS | 628 |
| (1 | ) | 4 |
| 268 |
| (154 | ) | (26 | ) | 2 |
| (10 | ) | 711 |
|
| Total Fixed Maturities, AFS | 1,625 |
| (8 | ) | (1 | ) | 519 |
| (354 | ) | (161 | ) | 383 |
| (319 | ) | 1,684 |
|
| Fixed Maturities, FVO | 2 |
| — |
| — |
| 1 |
| — |
| (1 | ) | — |
| (2 | ) | — |
|
| Equity Securities, AFS | 38 |
| (1 | ) | 6 |
| 4 |
| — |
| (3 | ) | — |
| — |
| 44 |
|
| Freestanding Derivatives | | | | | | | | | |
| | Equity | — |
| (8 | ) | — |
| 8 |
| — |
| — |
| — |
| — |
| — |
|
| | Interest rate | (29 | ) | (1 | ) | — |
| — |
| — |
| — |
| — |
| — |
| (30 | ) |
| | GMWB hedging instruments | 135 |
| (60 | ) | — |
| — |
| — |
| — |
| — |
| 6 |
| 81 |
|
| | Macro hedge program | 147 |
| (38 | ) | — |
| 63 |
| (6 | ) | — |
| — |
| 1 |
| 167 |
|
| Total Freestanding Derivatives [5] | 253 |
| (107 | ) | — |
| 71 |
| (6 | ) | — |
| — |
| 7 |
| 218 |
|
| Reinsurance Recoverable for GMWB | 83 |
| (24 | ) | — |
| — |
| 14 |
| — |
| — |
| — |
| 73 |
|
| Separate Accounts | 139 |
| (1 | ) | (3 | ) | 320 |
| (15 | ) | (78 | ) | 17 |
| (178 | ) | 201 |
|
| Total Assets | $ | 2,140 |
| $ | (141 | ) | $ | 2 |
| $ | 915 |
| $ | (361 | ) | $ | (243 | ) | $ | 400 |
| $ | (492 | ) | $ | 2,220 |
|
| (Liabilities) | | | | | | | | | |
| Other Policyholder Funds and Benefits Payable | | | | | | | | | |
| | Guaranteed Withdrawal Benefits | (262 | ) | 88 |
| — |
| — |
| (67 | ) | — |
| — |
| — |
| (241 | ) |
| | Equity Linked Notes | (26 | ) | (7 | ) | — |
| — |
| — |
| — |
| — |
| — |
| (33 | ) |
| Total Other Policyholder Funds and Benefits Payable | (288 | ) | 81 |
| — |
| — |
| (67 | ) | — |
| — |
| — |
| (274 | ) |
| Total Liabilities | $ | (288 | ) | $ | 81 |
| $ | — |
| $ | — |
| $ | (67 | ) | $ | — |
| $ | — |
| $ | — |
| $ | (274 | ) |
Table of ContentsHARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3.2. Fair Value Measurements (continued)
|
| | | | | | | | | |
| Assets | Limited Partnerships and Other Alternative Investments | Reinsurance Recoverable for U.S. GMWB and Japan GMWB, GMIB, and GMAB [6] | Separate Accounts |
| Fair value as of January 1, 2013 | $ | 150 |
| $ | 1,081 |
| $ | 583 |
|
| Total realized/unrealized gains (losses) | | | |
| Included in net income [1], [2] | (5 | ) | (1,856 | ) | 23 |
|
| Included in OCI [3] | — |
| — |
| — |
|
| Purchases | 64 |
| — |
| 250 |
|
| Settlements | — |
| 310 |
| (2 | ) |
| Sales | (9 | ) | — |
| (88 | ) |
| Transfers into Level 3 [4] | — |
| — |
| 45 |
|
| Transfers out of Level 3 [4] | (146 | ) | — |
| (74 | ) |
| Fair value as of December 31, 2013 | $ | 54 |
| $ | (465 | ) | $ | 737 |
|
| Changes in unrealized gains (losses) included in net income related to financial instruments still held at December 31, 2013 [2] [7] | $ | (5 | ) | $ | (1,856 | ) | $ | 21 |
|
Fair Value Roll-forwards for Financial Instruments Classified as Level 3 for the Year Ended December 31, 2015
|
| | | | | | | | | | | | |
| | Other Policyholder Funds and Benefits Payable | |
| Liabilities | Guaranteed Living Benefits [7] | Equity Linked Notes | Total Other Policyholder Funds and Benefits Payable | Consumer Notes |
| Fair value as of January 1, 2013 | $ | (3,119 | ) | $ | (8 | ) | $ | (3,127 | ) | $ | (2 | ) |
| Total realized/unrealized gains (losses) | | | | |
| Included in net income [1], [2] | 2,653 |
| (10 | ) | 2,643 |
| — |
|
| Included in OCI [3] | — |
| — |
| — |
| — |
|
| Settlements [8] | (110 | ) | — |
| (110 | ) | — |
|
| Fair value as of December 31, 2013 | $ | (576 | ) | $ | (18 | ) | $ | (594 | ) | $ | (2 | ) |
| Changes in unrealized gains (losses) included in net income related to financial instruments still held at December 31, 2013 [2] [7] | $ | 2,653 |
| $ | (10 | ) | $ | 2,643 |
| $ | — |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
The tables below provide a fair value roll forward for the year ended December 31, 2012 for the financial instruments classified as Level 3.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fixed Maturities, AFS | |
| Assets | ABS | CDOs | CMBS | Corporate | Foreign govt./govt. agencies | Municipal | RMBS | Total Fixed Maturities, AFS | Fixed Maturities, FVO |
| Fair value as of January 1, 2012 | $ | 317 |
| $ | 328 |
| $ | 348 |
| $ | 1,497 |
| $ | 37 |
| $ | 382 |
| $ | 933 |
| $ | 3,842 |
| $ | 484 |
|
| Total realized/unrealized gains (losses) | | | | | | | | | |
| Included in net income [1], [2] | (2 | ) | (19 | ) | (41 | ) | 2 |
| — |
| (5 | ) | (68 | ) | (133 | ) | 106 |
|
| Included in OCI [3] | 45 |
| 134 |
| 89 |
| (38 | ) | 1 |
| 34 |
| 298 |
| 563 |
| — |
|
| Purchases | 18 |
| — |
| 18 |
| 169 |
| 9 |
| 174 |
| 289 |
| 677 |
| 1 |
|
| Settlements | (58 | ) | (36 | ) | (111 | ) | (98 | ) | (4 | ) | — |
| (125 | ) | (432 | ) | (1 | ) |
| Sales | (34 | ) | (1 | ) | (109 | ) | (74 | ) | (11 | ) | (91 | ) | (173 | ) | (493 | ) | (391 | ) |
| Transfers into Level 3 [4] | 12 |
| 317 |
| 422 |
| 538 |
| 2 |
| — |
| 2 |
| 1,293 |
| — |
|
| Transfers out of Level 3 [4] | (60 | ) | — |
| (84 | ) | (656 | ) | — |
| (325 | ) | (23 | ) | (1,148 | ) | — |
|
| Fair value as of December 31, 2012 | $ | 238 |
| $ | 723 |
| $ | 532 |
| $ | 1,340 |
| $ | 34 |
| $ | 169 |
| $ | 1,133 |
| $ | 4,169 |
| $ | 199 |
|
| Changes in unrealized gains (losses) included in net income related to financial instruments still held at December 31, 2012 [2] [7] | $ | (1 | ) | $ | (11 | ) | $ | (17 | ) | $ | (7 | ) | $ | — |
| $ | (5 | ) | $ | (11 | ) | $ | (52 | ) | $ | (7 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Freestanding Derivatives [5] |
| Assets (Liabilities) | Equity Securities, AFS | Credit | Equity | Interest Rate | U.S. GMWB Hedging | U.S. Macro Hedge Program | Intl. Program Hedging | Total Free- Standing Derivatives [5] |
| Fair value as of January 1, 2012 | $ | 56 |
| $ | (489 | ) | $ | 36 |
| $ | (91 | ) | $ | 883 |
| $ | 357 |
| $ | (35 | ) | $ | 661 |
|
| Total realized/unrealized gains (losses) | | | | | | | | |
| Included in net income [1], [2] | 3 |
| 155 |
| (32 | ) | 2 |
| (431 | ) | (323 | ) | (83 | ) | (712 | ) |
| Included in OCI [3] | (3 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Purchases | 11 |
| — |
| 57 |
| 1 |
| 56 |
| 252 |
| (60 | ) | 306 |
|
| Settlements | — |
| 338 |
| (16 | ) | — |
| (12 | ) | — |
| 95 |
| 405 |
|
| Sales | (12 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Transfers out of Level 3 [4] | — |
| — |
| — |
| 31 |
| 23 |
| — |
| 8 |
| 62 |
|
| Fair value as of December 31, 2012 | $ | 55 |
| $ | 4 |
| $ | 45 |
| $ | (57 | ) | $ | 519 |
| $ | 286 |
| $ | (75 | ) | $ | 722 |
|
| Changes in unrealized gains (losses) included in net income related to financial instruments still held at December 31, 2012 [2] [7] | $ | 2 |
| $ | 126 |
| $ | (8 | ) | $ | (1 | ) | $ | (425 | ) | $ | (322 | ) | $ | (85 | ) | $ | (715 | ) |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Fair Value Measurements (continued)
|
| | | | | | | | | |
| Assets | Limited Partnerships and Other Alternative Investments | Reinsurance Recoverable for U.S. GMWB and Japan GMWB, GMIB, and GMAB [6][9] | Separate Accounts |
| Fair value as of January 1, 2012 | $ | — |
| $ | 3,073 |
| $ | 1,031 |
|
| Total realized/unrealized gains (losses) | | | |
| Included in net income [1], [2] | (11 | ) | (2,373 | ) | 37 |
|
| Included in OCI [3] | — |
| — |
| — |
|
| Purchases | 26 |
| — |
| 252 |
|
| Settlements | — |
| 381 |
| (1 | ) |
| Sales | — |
| — |
| (476 | ) |
| Transfers into Level 3 [4] | 135 |
| — |
| 443 |
|
| Transfers out of Level 3 [4] | — |
| — |
| (703 | ) |
| Fair value as of December 31, 2012 | $ | 150 |
| $ | 1,081 |
| $ | 583 |
|
| Changes in unrealized gains (losses) included in net income related to financial instruments still held at December 31, 2012 [2] [7] | $ | (11 | ) | $ | (2,373 | ) | $ | 28 |
|
|
| | | | | | | | | | | | | | | |
| | Other Policyholder Funds and Benefits Payable [1] | | |
| Liabilities | Guaranteed Living Benefits [7][9] | Equity Linked Notes | Total Other Policyholder Funds and Benefits Payable | Other Liabilities | Consumer Notes |
| Fair value as of January 1, 2012 | $ | (5,776 | ) | $ | (9 | ) | $ | (5,785 | ) | $ | (9 | ) | $ | (4 | ) |
| Total realized/unrealized gains (losses) | | | | | |
| Included in net income [1], [2] | 2,920 |
| 1 |
| 2,921 |
| (34 | ) | 2 |
|
| Included in OCI [3] | — |
| — |
| — |
| — |
| — |
|
| Settlements [8] | (263 | ) | — |
| (263 | ) | 43 |
| — |
|
| Fair value as of December 31, 2012 | $ | (3,119 | ) | $ | (8 | ) | $ | (3,127 | ) | $ | — |
| $ | (2 | ) |
| Changes in unrealized gains (losses) included in net income related to financial instruments still held at December 31, 2012 [2] [7] | $ | 2,920 |
| $ | 1 |
| $ | 2,921 |
| $ | — |
| $ | 2 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Total realized/unrealized gains (losses) | | | | | | |
| | | Fair value as of January 1, 2015 | Included in net income [1] [2] [6] | Included in OCI [3] | Purchases | Settlements | Sales | Transfers into Level 3 [4] | Transfers out of Level 3 [4] | Fair value as of December 31, 2015 |
| Assets | | | | | | | | | |
| Fixed Maturities, AFS | | | | | | | | | |
| | ABS | $ | 82 |
| $ | — |
| $ | (2 | ) | $ | 22 |
| $ | — |
| $ | (6 | ) | $ | 1 |
| $ | (92 | ) | $ | 5 |
|
| | CDOs | 360 |
| (1 | ) | 3 |
| — |
| (26 | ) | — |
| — |
| (6 | ) | 330 |
|
| | CMBS | 119 |
| — |
| (5 | ) | 18 |
| (36 | ) | (3 | ) | 4 |
| (35 | ) | 62 |
|
| | Corporate | 646 |
| (18 | ) | (38 | ) | 45 |
| (21 | ) | (43 | ) | 99 |
| (136 | ) | 534 |
|
| | Foreign Govt./Govt. Agencies | 30 |
| — |
| (3 | ) | 5 |
| (3 | ) | (15 | ) | 3 |
| — |
| 17 |
|
| | Municipal | 54 |
| — |
| (5 | ) | — |
| — |
| — |
| — |
| — |
| 49 |
|
| | RMBS | 734 |
| (2 | ) | (2 | ) | 154 |
| (126 | ) | (127 | ) | 16 |
| (19 | ) | 628 |
|
| Total Fixed Maturities, AFS | 2,025 |
| (21 | ) | (52 | ) | 244 |
| (212 | ) | (194 | ) | 123 |
| (288 | ) | 1,625 |
|
| Fixed Maturities, FVO | 84 |
| (5 | ) | 1 |
| 6 |
| (23 | ) | (50 | ) | — |
| (11 | ) | 2 |
|
| Equity Securities, AFS | 48 |
| (5 | ) | 1 |
| 11 |
| (1 | ) | (13 | ) | — |
| (3 | ) | 38 |
|
| Freestanding Derivatives | | | | | | | | | |
| | Credit | (3 | ) | 1 |
| — |
| (8 | ) | — |
| — |
| — |
| 10 |
| — |
|
| | Commodity | — |
| (3 | ) | — |
| — |
| (3 | ) | — |
| 6 |
| — |
| — |
|
| | Equity | 5 |
| 5 |
| — |
| — |
| (10 | ) | — |
| — |
| — |
| — |
|
| | Interest rate | (27 | ) | (1 | ) | — |
| — |
| (1 | ) | — |
| — |
| — |
| (29 | ) |
| | GMWB hedging instruments | 170 |
| (16 | ) | — |
| — |
| (19 | ) | — |
| — |
| — |
| 135 |
|
| | Macro hedge program | 141 |
| (41 | ) | — |
| 47 |
| — |
| — |
| — |
| — |
| 147 |
|
| | Other contracts | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Total Freestanding Derivatives [5] | 286 |
| (55 | ) | — |
| 39 |
| (33 | ) | — |
| 6 |
| 10 |
| 253 |
|
| Reinsurance Recoverable for GMWB | 56 |
| 9 |
| — |
| — |
| 18 |
| — |
| — |
| — |
| 83 |
|
| Separate Accounts | 112 |
| 28 |
| (5 | ) | 375 |
| (20 | ) | (238 | ) | 12 |
| (125 | ) | 139 |
|
| Total Assets | $ | 2,611 |
| $ | (49 | ) | $ | (55 | ) | $ | 675 |
| $ | (271 | ) | $ | (495 | ) | $ | 141 |
| $ | (417 | ) | $ | 2,140 |
|
| (Liabilities) | | | | | | | | | |
| Other Policyholder Funds and Benefits Payable | | | | | | | | | |
| | Guaranteed Withdrawal Benefits | (139 | ) | (59 | ) | — |
| — |
| (64 | ) | — |
| — |
| — |
| (262 | ) |
| | Equity Linked Notes | (26 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (26 | ) |
| Total Other Policyholder Funds and Benefits Payable | (165 | ) | (59 | ) | — |
| — |
| (64 | ) | — |
| — |
| — |
| (288 | ) |
| Consumer Notes | (3 | ) | 3 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Total Liabilities | $ | (168 | ) | $ | (56 | ) | $ | — |
| $ | — |
| $ | (64 | ) | $ | — |
| $ | — |
| $ | — |
| $ | (288 | ) |
| |
| [1] | The Company classifies realized and unrealized gains and losses(losses) on GMWB reinsurance derivatives and Guaranteed Living BenefitGMWB 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 amountsAmounts in these rows are generally reported in net realized capital gains (losses). 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. 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 primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs. |
| |
| [5] | Derivative instruments are reported in this table on a net basis for asset/asset (liability) positions and reported in the Consolidated Balance SheetSheets in other investments and other liabilities. |
| |
| [6] | Includes fair value of reinsurance recoverables of approximately $495 and $900 as of December 31, 2013 and 2012, respectively, related to a transaction entered into with an affiliated captive reinsurer. See Note 13 - Transactions with Affiliates of Notes to Consolidated Financial Statements for more information.
|
| |
[7] | Includes both market and non-market impacts in deriving realized and unrealized gains (losses). |
| |
[8] | Settlements of other liabilities reflect the removal of liabilities carried at fair value upon the deconsolidation of a variable interest entity. See Note 4 - Investments and Derivative Instruments of Notes to Consolidated Financial Statements for additional information.
|
| |
[9] | In 2012, ($231) and $264 were inappropriately presented as Included in OCI within the Reinsurance Recoverable for U.S. GMWB and Japan GMWB, GMIB and GMAB and Guaranteed Living Benefits, respectively. Amounts have been rescheduled to Included in Net Income. This change in presentation of this disclosure had no impact on the Company's net income or OCI.
|
Table of ContentsHARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3.2. Fair Value Measurements (continued)
Changes in Unrealized Gains (Losses) included in Net Income for Financial Instruments Classified as Level 3 Still Held at Year End
|
| | | | | | | |
| | | December 31, 2016 [1] [2] | December 31, 2015 [1] [2] |
| Assets | | |
| Fixed Maturities, AFS | | |
| | CDOs | $ | — |
| $ | (1 | ) |
| | CMBS | (1 | ) | (1 | ) |
| | Corporate | (13 | ) | (17 | ) |
| | RMBS | — |
| (3 | ) |
| Total Fixed Maturities, AFS | (14 | ) | (22 | ) |
| Fixed Maturities, FVO | — |
| (3 | ) |
| Equity Securities, AFS | (1 | ) | (5 | ) |
| Freestanding Derivatives | | |
| | GMWB hedging instruments | (52 | ) | (5 | ) |
| | Macro hedge program | (33 | ) | (34 | ) |
| Total Freestanding Derivatives | (85 | ) | (39 | ) |
| Reinsurance Recoverable for GMWB | (24 | ) | 9 |
|
| Separate Accounts | — |
| 27 |
|
| Total Assets | $ | (124 | ) | $ | (33 | ) |
| (Liabilities) | | |
| Other Policyholder Funds and Benefits Payable | | |
| | Guaranteed Withdrawal Benefits | 88 |
| (59 | ) |
| | Equity Linked Notes | (7 | ) | — |
|
| Total Other Policyholder Funds and Benefits Payable | 81 |
| (59 | ) |
| Consumer Notes | — |
| 3 |
|
| Total Liabilities | $ | 81 |
| $ | (56 | ) |
| |
| [1] | All amounts in these rows are reported in net realized capital gains (losses). 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. All amounts are before income taxes and amortization of DAC. |
| |
| [2] | Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein. |
Fair Value Option
The Company holdshas elected the fair value option investmentsfor certain securities that contain an embedded credit derivativederivatives with underlying credit risk, primarily related to commercialresidential real estate. Also included are foreign government securities for which the FVO was elected in order to align with the accounting for yen-based fixed annuity liabilities, which are adjusted for changes in spot rates through realized gainsestate, and losses. Similar to other fixed maturities, income earned from these securities is recorded in net investment income. Changes in the fair value of these securities are recorded in net realized capital gains and losses.
included within Fixed Maturities, FVO on the Consolidated Balance Sheets. The Company also electedclassifies the fair value option forunderlying fixed maturities held in certain consolidated VIE investment funds.funds within Fixed Maturities, FVO. The Company electedreports the fair value option in order to report investmentsunderlying fixed maturities of these consolidated investment companies at fair value with changes in the fair value of these securities recognized in net realized capital gains and losses, which is consistent with accounting requirementrequirements for investment companies. The consolidated investment funds primarily hold fixed income securities in multiple sectors and the Company has management and control of the funds as well as a significant ownership interest.
The following table presents the changes in fair value of those assets and liabilities accounted for usingCompany also elected the fair value option reportedfor certain equity securities in order to align the accounting with total return swap contracts that hedge the risk associated with the investments. The swaps do not qualify for hedge accounting and the change in value of both the equity securities and the total return swaps are recorded in net realized capital gains and losseslosses. These equity securities are classified within equity securities, AFS on the Consolidated Balance Sheets. As of December 31, 2016, the Company no longer holds these investments. Income earned from FVO securities is recorded in the Company’s Consolidated Statements of Operations.
|
| | | | | | |
| | Year Ended December 31, |
| | 2013 | 2012 |
| Assets | | |
| Fixed maturities, FVO | | |
| Corporate | $ | (12 | ) | $ | 9 |
|
| CRE CDOs | 14 |
| 64 |
|
| CMBS | — |
| (2 | ) |
| Foreign government | (112 | ) | (88 | ) |
| RMBS | — |
| 5 |
|
| Other liabilities | | |
| Credit-linked notes | — |
| (34 | ) |
| Total realized capital gains (losses) | $ | (110 | ) | $ | (46 | ) |
The following table presents thenet investment income and changes in fair value of assetsare recorded in net realized capital gains and liabilities accounted for using the fair value option included in the Company's Consolidated Balance Sheets.losses.
|
| | | | | | |
| | December 31, 2013 | December 31, 2012 |
| Assets | | |
| Fixed maturities, FVO | | |
| ABS | $ | 3 |
| $ | — |
|
| Corporate | 84 |
| 108 |
|
| CRE CDOs | 167 |
| 193 |
|
| CMBS | 8 |
| 4 |
|
| Foreign government | 494 |
| 699 |
|
| Municipals | 1 |
| 1 |
|
| RMBS | 9 |
| 3 |
|
| U.S. government | 25 |
| 2 |
|
| Total fixed maturities, FVO | $ | 791 |
| $ | 1,010 |
|
Table of ContentsHARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3.2. Fair Value Measurements (continued)
Changes in Fair Value of Assets using Fair Value Option
|
| | | | | | | | | |
| | For the year ended December 31, |
| | 2016 | 2015 | 2014 |
| Assets | | | |
| Fixed maturities, FVO | | | |
| CDOs | $ | — |
| $ | 1 |
| $ | 21 |
|
| Corporate | — |
| (3 | ) | (3 | ) |
| Foreign government | — |
| 2 |
| 16 |
|
| RMBS | 3 |
| — |
| — |
|
| Total fixed maturities, FVO | $ | 3 |
| $ | — |
| $ | 34 |
|
| Equity, FVO | (34 | ) | (12 | ) | (2 | ) |
| Total realized capital gains (losses) | $ | (31 | ) | $ | (12 | ) | $ | 32 |
|
Fair Value of Assets and Liabilities using the Fair Value Option |
| | | | | | |
| | As of December 31, |
| | 2016 | 2015 |
| Assets | | |
| Fixed maturities, FVO | | |
| ABS | $ | — |
| $ | 4 |
|
| CDOs | — |
| 1 |
|
| CMBS | — |
| 6 |
|
| Corporate | — |
| 31 |
|
| Foreign government | — |
| 1 |
|
| RMBS | 82 |
| 119 |
|
| U.S. Government | — |
| 3 |
|
| Total fixed maturities, FVO | $ | 82 |
| $ | 165 |
|
| Equity, FVO [1] | $ | — |
| $ | 281 |
|
| |
| [1] | Included in equity securities, AFS on the Consolidated Balance Sheets. The Company did not hold any equity securities, FVO as of December 31, 2016. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Fair Value Measurements (continued)
Financial Instruments Not Carried at Fair Value
The following presents carrying amountsFinancial Assets and fair values of the Company's financial instruments not carriedLiabilities Not Carried at fair value, and not included in the above fair value discussion as of December 31, 2013 and December 31, 2012 were as follows:Fair Value
| | | | December 31, 2013 | December 31, 2012 | | December 31, 2016 | December 31, 2015 |
| | Fair Value Hierarchy Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Fair Value Hierarchy Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value |
| Assets | | | | |
| Policy loans | Level 3 | 1,416 |
| 1,476 |
| 1,951 |
| 2,112 |
| Level 3 | $ | 1,442 |
| $ | 1,442 |
| $ | 1,446 |
| $ | 1,446 |
|
| Mortgage loans | Level 3 | 3,470 |
| 3,519 |
| 4,935 |
| 5,109 |
| Level 3 | 2,811 |
| 2,843 |
| 2,918 |
| 2,995 |
|
| Liabilities | | | | |
Other policyholder funds and benefits payable [1]
| Level 3 | 8,955 |
| 9,153 |
| 9,318 |
| 9,668 |
| Level 3 | 6,436 |
| 6,626 |
| 6,611 |
| 6,802 |
|
Consumer notes [2]
| Level 3 | 82 |
| 82 |
| 159 |
| 159 |
| |
| Consumer notes [2] [3] | | Level 3 | 20 |
| 20 |
| 38 |
| 38 |
|
| Assumed investment contracts [3] | | Level 3 | 487 |
| 526 |
| 619 |
| 682 |
|
| |
| [1] | Excludes group accident and health and universal life insurance contracts, including corporate owned life insurance. |
| |
| [2] | Excludes amounts carried at fair value and included in disclosures above.preceding disclosures. |
| |
| [3] | Included in other liabilities in the Consolidated Balance Sheets. |
The Company has not made any changes in its valuation methodologies for the following assets and liabilities during the years ended December 31, 2013 or December 31, 2012.
Fair valuevalues for policy loans and consumer notes were estimated using discounted cash flow calculationsdetermined using current interestloan coupon rates,adjusted for estimated loan duration.
which reflect the current rates available under the contracts. As a result, the fair value approximates the carrying value of the policy loans.Fair values for mortgage loans were estimated using discounted cash flow calculations based on current lending rates for similar type loans. Current lending rates reflect changes in credit spreads and the remaining terms of the loans.
OtherFair values for other policyholder funds and benefits payable and assumed investment contracts, not carried at fair value, is determinedare estimated based on the cash surrender values of the underlying policies or by estimating future cash flows discounted at the current market rate.interest rates adjusted for credit risk.
Fair values for consumer notes were estimated using discounted cash flow calculations using current interest rates adjusted for estimated loan durations.
4.HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Investments and Derivative Instruments
Net Investment Income (Loss)
| | | | For the years ended December 31, | For the years ended December 31, |
| (Before-tax) | 2013 | | 2012 | 2011 | 2016 | 2015 | 2014 |
| Fixed maturities [1] | $ | 1,253 |
| | $ | 1,953 |
| $ | 1,927 |
| $ | 1,049 |
| $ | 1,095 |
| $ | 1,113 |
|
| Equity securities, AFS | 8 |
| | 11 |
| 10 |
| |
| Equity securities | | 8 |
| 7 |
| 14 |
|
| Mortgage loans | 172 |
| | 248 |
| 206 |
| 135 |
| 152 |
| 156 |
|
| Policy loans | 82 |
| | 116 |
| 128 |
| 83 |
| 82 |
| 80 |
|
| Limited partnerships and other alternative investments | 119 |
| | 85 |
| 143 |
| 86 |
| 97 |
| 141 |
|
| Other investments [2] | 123 |
| | 199 |
| 231 |
| 64 |
| 82 |
| 111 |
|
| Investment expenses | (76 | ) | | (77 | ) | (73 | ) | (52 | ) | (59 | ) | (72 | ) |
| Total securities AFS and other | 1,681 |
| | 2,535 |
| 2,572 |
| |
| Equity securities, trading | 2 |
| | 1 |
| — |
| |
| Total net investment income | $ | 1,683 |
| | $ | 2,536 |
| $ | 2,572 |
| $ | 1,373 |
| $ | 1,456 |
| $ | 1,543 |
|
| |
| [1] | Includes net investment income on short-term investments. |
| |
| [2] | Includes income from derivatives that hedge fixed maturities and qualify for hedge accounting. |
The net unrealized gain on equity securities, trading, included in net investment income during the years ended December 31, 2013, 2012 and 2011, was $1, $0 and $1, respectively. These amounts were not included in net unrealized gains (losses) in the accompanying Consolidated Balance Sheets.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivatives (continued)
Net Realized Capital Gains (Losses)
|
| | | | | | | | | |
| | For the years ended December 31, |
| (Before-tax) | 2013 | 2012 | 2011 |
| Gross gains on sales [1] | $ | 2,196 |
| $ | 478 |
| $ | 400 |
|
| Gross losses on sales | (700 | ) | (278 | ) | (200 | ) |
| Net OTTI losses recognized in earnings [2] | (45 | ) | (255 | ) | (125 | ) |
| Valuation allowances on mortgage loans | (1 | ) | 4 |
| 25 |
|
| Japanese fixed annuity contract hedges, net [3] | 6 |
| (36 | ) | 3 |
|
| Periodic net coupon settlements on credit derivatives/Japan | (3 | ) | (8 | ) | — |
|
| Results of variable annuity hedge program | | |
|
| U.S. GMWB derivatives, net | 262 |
| 519 |
| (397 | ) |
| U.S. macro hedge program | (234 | ) | (340 | ) | (216 | ) |
| Total U.S. program | 28 |
| 179 |
| (613 | ) |
| International Program [4] | (963 | ) | (1,145 | ) | 639 |
|
| Total results of variable annuity hedge program | (935 | ) | (966 | ) | 26 |
|
| GMIB/GMAB/GMWB reinsurance | 1,107 |
| 1,233 |
| (326 | ) |
| Coinsurance and modified coinsurance reinsurance contracts | (1,405 | ) | (1,901 | ) | 375 |
|
| Other, net [5] | 106 |
| 248 |
| (255 | ) |
| Net realized capital gains (losses), before-tax | $ | 326 |
| $ | (1,481 | ) | $ | (77 | ) |
|
| | | | | | | | | |
| | For the years ended December 31, |
| (Before-tax) | 2016 | 2015 | 2014 |
| Gross gains on sales | $ | 211 |
| $ | 239 |
| $ | 264 |
|
| Gross losses on sales | (93 | ) | (211 | ) | (235 | ) |
| Net OTTI losses recognized in earnings | (28 | ) | (61 | ) | (29 | ) |
| Valuation allowances on mortgage loans | — |
| (4 | ) | (4 | ) |
| Japanese fixed annuity contract hedges, net | — |
| — |
| (14 | ) |
| Results of variable annuity hedge program | | |
|
| GMWB derivatives, net | (38 | ) | (87 | ) | 5 |
|
| Macro hedge program | (163 | ) | (46 | ) | (11 | ) |
| Total U.S. program | (201 | ) | (133 | ) | (6 | ) |
| International Program | — |
| — |
| (126 | ) |
| Total results of variable annuity hedge program | (201 | ) | (133 | ) | (132 | ) |
| GMAB/GMWB reinsurance | — |
| — |
| 579 |
|
| Modified coinsurance reinsurance contracts | (12 | ) | 46 |
| 395 |
|
| Transactional foreign currency revaluation | (70 | ) | (4 | ) | — |
|
| Non-qualifying foreign currency derivatives | 57 |
| (16 | ) | (122 | ) |
| Other, net [1] | (27 | ) | (2 | ) | (125 | ) |
| Net realized capital losses | $ | (163 | ) | $ | (146 | ) | $ | 577 |
|
| |
| [1] | Includes $1.5 billion of gross gains relating to the sales of the Retirement Plansnon-qualifying derivatives, excluding variable annuity hedge program and Individual Life businesses in the year ended December 31, 2013. |
| |
[2] | Includes $173 of intent-to-sell impairments relating to the Retirement Plans and Individual Life businesses sold for the year ended December 31, 2012.
|
| |
[3] | Includes for the years ended December 31, 2013, 2012 and 2011, transactional foreign currency re-valuation related to the Japan fixed annuity productderivatives, of $324$(12), $245,$46, and $(129) ,$972, respectively as well as the change in value related to the derivative hedging instrumentsfor 2016, 2015 and the Japan government FVO securities of $(318), $(281), and $132, respectively.
|
| |
[4] | Includes $(55), $(66), and $0 of transactional foreign currency re-valuation for the years ended December 31, 2013, 2012 and 2011, respectively.
|
| |
[5] | For the years ended December 31, 2013, 2012 and 2011, other, net gains and losses includes $295, $205 and $(119), respectively, of transactional foreign currency re-valuation primarily associated with the internal reinsurance of the Japan variable annuity business, of which a portion is offset within realized gains and losses by the change in value of the associated hedging derivatives. Also includes $71 and $110 of gains relating to Retirement Plans and Individual Life businesses sold for the years ended December 31, 2013 and 2012, respectively, as well as changes in value of non-qualifying derivatives.
2014. |
Net realized capital gains and losses from investment sales are reported as a component of revenues and are determined on a specific identification basis. GrossBefore tax, net gains and losses on sales and impairments previously reported as unrealized gains or losses in AOCI were $1.4 billion, $(55)$89, $(27) and $75$1 for the years ended December 31, 2013, 20122016, 2015 and 2011,2014, respectively.
Sales of Available-for-Sale Securities
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| | 2013 | | 2012 | | 2011 |
| Fixed maturities, AFS |
| |
| |
|
| Sale proceeds | $ | 19,190 |
| | $ | 23,555 |
| | $ | 19,861 |
|
| Gross gains [1] | 1,867 |
| | 521 |
| | 354 |
|
| Gross losses | (421 | ) | | (270 | ) | | (205 | ) |
| Equity securities, AFS | | |
| |
|
| Sale proceeds | $ | 81 |
| | $ | 133 |
| | $ | 147 |
|
| Gross gains | 254 |
| | 15 |
| | 50 |
|
| Gross losses | (263 | ) | | (5 | ) | | — |
|
[1] Includes $1.5 billion of gross gains relating to the sales of the Retirement Plans and Individual Life businesses for the year ended December 31, 2013.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Investments (continued)
4. Investments and Derivatives (continued)Sales of AFS Securities |
| | | | | | | | | |
| | For the years ended December 31, |
| | 2016 | 2015 | 2014 |
| Fixed maturities, AFS | | | |
| Sale proceeds | $ | 7,409 |
| $ | 9,454 |
| $ | 9,084 |
|
| Gross gains | 206 |
| 195 |
| 210 |
|
| Gross losses | (85 | ) | (161 | ) | (183 | ) |
| Equity securities, AFS | |
| |
| Sale proceeds | $ | 321 |
| $ | 586 |
| $ | 107 |
|
| Gross gains | 4 |
| 26 |
| 9 |
|
| Gross losses | (8 | ) | (26 | ) | (6 | ) |
Sales of AFS securities in 20132016 were primarily a result of duration and liquidity management, as well as tactical changes to the portfolio as a result of managementchanging market conditions.
Recognition and Presentation of durationOther-Than-Temporary Impairments
The Company will record an other-than-temporary impairment (“OTTI”) for fixed maturities and liquidity as well as progress towards sector allocation objectives.
Other-Than-Temporary Impairment Losses
The following table presentscertain equity securities with debt-like characteristics (collectively “debt securities”) 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 roll-forwardrecovery in value. A corresponding charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the Company’s cumulative credit impairments onsecurity.
The Company will also record an OTTI for those debt securities heldfor which the Company does not expect to recover the entire amortized cost basis. For these securities, the excess of the amortized cost basis over its fair value is separated into the portion representing a credit OTTI, which is recorded in net realized capital losses, and the remaining non-credit amount, which is recorded in OCI. The credit OTTI amount is the excess of its amortized cost basis over the Company’s best estimate of discounted expected future cash flows. The non-credit amount is the excess of the best estimate of the discounted expected future cash flows over the fair value. The Company’s best estimate of discounted expected future cash flows becomes the new cost basis and accretes prospectively into net investment income over the estimated remaining life of the security.
The Company’s best estimate of expected future cash flows is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions regarding the future performance. The Company considers, but is not limited to (a) changes in the financial condition of the issuer and the underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) credit ratings, (d) payment structure of the security and (e) the extent to which the fair value has been less than the amortized cost of the security.
For non-structured securities, assumptions include, but are not limited to, economic and industry-specific trends and fundamentals, security-specific developments, industry earnings multiples and the issuer’s ability to restructure and execute asset sales.
For structured securities, assumptions include, but are not limited to, various performance indicators such as historical and projected default and recovery rates, credit ratings, current and projected delinquency rates, loan-to-value ("LTV") ratios, average cumulative collateral loss rates that vary by vintage year, prepayment speeds, and property value declines. These assumptions require the use of December 31, 2013, 2012significant management judgment and 2011.include the probability of issuer default and estimates regarding timing and amount of expected recoveries which may include estimating the underlying collateral value.
The Company will also record an OTTI for equity securities where the decline in the fair value is deemed to be other-than-temporary. A corresponding 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 new cost basis. The Company’s evaluation and assumptions used to determine an equity OTTI include, but is 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 preferred stock dividends and (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery. For the remaining equity securities which are determined to be temporarily impaired, the Company asserts its intent and ability to retain those equity securities until the price recovers.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Investments (continued)
Impairments in Earnings by Type
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| (Before-tax) | 2013 | | 2012 | | 2011 |
| Balance, beginning of period | $ | (813 | ) | | $ | (1,319 | ) | | $ | (1,598 | ) |
| Additions for credit impairments recognized on [1]: | | | | | |
| Securities not previously impaired | (14 | ) | | (27 | ) | | (41 | ) |
| Securities previously impaired | (4 | ) | | (15 | ) | | (47 | ) |
| Reductions for credit impairments previously recognized on: | | | | | |
| Securities that matured or were sold during the period | 403 |
| | 543 |
| | 358 |
|
| Securities due to an increase in expected cash flows | 17 |
| | 5 |
| | 9 |
|
| Securities the Company made the decision to sell or more likely than not will be required to sell | 1 |
| | — |
| | $ | — |
|
| Balance, end of period | $ | (410 | ) | | $ | (813 | ) | | $ | (1,319 | ) |
|
| | | | | | | | | |
| | For the years ended December 31, |
| | 2016 | 2015 | 2014 |
| Intent-to-sell impairments | $ | 4 |
| $ | 24 |
| $ | 11 |
|
| Credit impairments | 22 |
| 23 |
| 16 |
|
| Impairments on equity securities | 2 |
| 14 |
| 1 |
|
| Other impairments | — |
| — |
| 1 |
|
| Total impairments | $ | 28 |
| $ | 61 |
| $ | 29 |
|
Cumulative Credit Impairments
|
| | | | | | | | | |
| | For the years ended December 31, |
| (Before-tax) | 2016 | 2015 | 2014 |
| Balance as of beginning of period | $ | (211 | ) | $ | (296 | ) | $ | (410 | ) |
| Additions for credit impairments recognized on [1]: | | | |
| Securities not previously impaired | (9 | ) | (11 | ) | (7 | ) |
| Securities previously impaired | (13 | ) | (12 | ) | (9 | ) |
| Reductions for credit impairments previously recognized on: | | | |
| Securities that matured or were sold during the period | 44 |
| 58 |
| 111 |
|
| Securities the Company made the decision to sell or more likely than not will be required to sell | — |
| 1 |
| — |
|
| Securities due to an increase in expected cash flows | 19 |
| 49 |
| $ | 19 |
|
| Balance as of end of period | $ | (170 | ) | $ | (211 | ) | $ | (296 | ) |
| |
| [1] | These additions are included in the net OTTI losses recognized in earnings in the Consolidated Statements of Operations. |
Available-for-Sale Securities
The following table presents the Company’s AFS securitiesSecurities by type.
Type
| | | | December 31, 2013 | | December 31, 2012 | December 31, 2016 | December 31, 2015 |
| | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Non-Credit OTTI [1] | | Cost or Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Non-Credit OTTI [1] | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Non-Credit OTTI [1] | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Non-Credit OTTI [1] |
| ABS | $ | 1,172 |
| | $ | 13 |
| | $ | (56 | ) | | $ | 1,129 |
| | $ | (2 | ) | | $ | 1,807 |
| | $ | 38 |
| | $ | (172 | ) | | $ | 1,673 |
| | $ | (4 | ) | $ | 1,011 |
| $ | 9 |
| $ | (27 | ) | $ | 993 |
| $ | — |
| $ | 864 |
| $ | 16 |
| $ | (34 | ) | $ | 846 |
| $ | — |
|
| CDOs [2] | 1,392 |
| | 98 |
| | (41 | ) | | 1,448 |
| | — |
| | 2,236 |
| | 61 |
| | (117 | ) | | 2,160 |
| | (4 | ) | 893 |
| 49 |
| (2 | ) | 940 |
| — |
| 1,354 |
| 67 |
| (11 | ) | 1,408 |
| — |
|
| CMBS | 2,275 |
| | 106 |
| | (34 | ) | | 2,347 |
| | (3 | ) | | 3,757 |
| | 262 |
| | (107 | ) | | 3,912 |
| | (7 | ) | 2,135 |
| 45 |
| (34 | ) | 2,146 |
| (1 | ) | 1,936 |
| 52 |
| (24 | ) | 1,964 |
| (3 | ) |
| Corporate | 15,913 |
| | 1,196 |
| | (192 | ) | | 16,917 |
| | (6 | ) | | 27,774 |
| | 3,426 |
| | (221 | ) | | 30,979 |
| | (19 | ) | 13,677 |
| 1,111 |
| (95 | ) | 14,693 |
| — |
| 14,425 |
| 975 |
| (225 | ) | 15,175 |
| (3 | ) |
| Foreign govt./govt. agencies | 1,267 |
| | 27 |
| | (117 | ) | | 1,177 |
| | — |
| | 1,369 |
| | 120 |
| | (29 | ) | | 1,460 |
| | — |
| 337 |
| 18 |
| (10 | ) | 345 |
| — |
| 328 |
| 14 |
| (11 | ) | 331 |
| — |
|
| Municipal | 988 |
| | 26 |
| | (49 | ) | | 965 |
| | — |
| | 1,808 |
| | 204 |
| | (14 | ) | | 1,998 |
| | — |
| 1,098 |
| 97 |
| (6 | ) | 1,189 |
| — |
| 1,057 |
| 80 |
| (5 | ) | 1,132 |
| — |
|
| RMBS | 2,419 |
| | 60 |
| | (48 | ) | | 2,431 |
| | (3 | ) | | 4,590 |
| | 196 |
| | (115 | ) | | 4,671 |
| | (28 | ) | 1,742 |
| 34 |
| (16 | ) | 1,760 |
| — |
| 1,468 |
| 43 |
| (8 | ) | 1,503 |
| — |
|
| U.S. Treasuries | 1,762 |
| | 1 |
| | (14 | ) | | 1,749 |
| | — |
| | 2,412 |
| | 151 |
| | (12 | ) | | 2,551 |
| | — |
| 1,614 |
| 153 |
| (14 | ) | 1,753 |
| — |
| 2,127 |
| 184 |
| (13 | ) | 2,298 |
| — |
|
| Total fixed maturities, AFS | 27,188 |
| | 1,527 |
| | (551 | ) | | 28,163 |
| | (14 | ) | | 45,753 |
| | 4,458 |
| | (787 | ) | | 49,404 |
| | (62 | ) | 22,507 |
| 1,516 |
| (204 | ) | 23,819 |
| (1 | ) | 23,559 |
| 1,431 |
| (331 | ) | 24,657 |
| (6 | ) |
| Equity securities, AFS | 362 |
| | 35 |
| | (25 | ) | | 372 |
| | — |
| | 408 |
| | 28 |
| | (36 | ) | | 400 |
| | — |
| |
| Total AFS securities [3] | $ | 27,550 |
| | $ | 1,562 |
| | $ | (576 | ) | | $ | 28,535 |
| | $ | (14 | ) | | $ | 46,161 |
| | $ | 4,486 |
| | $ | (823 | ) | | $ | 49,804 |
| | $ | (62 | ) | |
| Equity securities, AFS [3] | | 142 |
| 12 |
| (2 | ) | 152 |
| — |
| 178 |
| 11 |
| (11 | ) | 178 |
| — |
|
| Total AFS securities | | $ | 22,649 |
| $ | 1,528 |
| $ | (206 | ) | $ | 23,971 |
| $ | (1 | ) | $ | 23,737 |
| $ | 1,442 |
| $ | (342 | ) | $ | 24,835 |
| $ | (6 | ) |
| |
| [1] | Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses as of December 31, 20132016 and 2012. 2015. |
| |
| [2] | Gross unrealized gains (losses) exclude the fair value of bifurcated embedded derivative features ofderivatives within certain securities. Subsequent changes in value will beare recorded in net realized capital gains (losses). |
| |
| [3] | AsExcludes equity securities, FVO, with a cost and fair value of $293 and $281, respectively, as of December 31, 2012 Includes fixed maturities, AFS and2015. The Company held no equity securities, AFS relating to the salesFVO as of the Retirement Plans and Individual Life businesses; see Note 2 - Business Dispositions of Notes to Consolidated Financial Statements for further discussion of these transactions.
December 31, 2016. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Investments (continued)
4. Investments and Derivatives (continued)
The following table presents the Company’s fixedFixed maturities, AFS, by contractual maturity year.
Contractual Maturity Year
| | | December 31, 2013 | December 31, 2016 | | December 31, 2015 |
| Contractual Maturity | Amortized Cost | | Fair Value | Amortized Cost | Fair Value | | Amortized Cost | Fair Value |
| One year or less | $ | 1,615 |
| | $ | 1,639 |
| $ | 722 |
| $ | 727 |
| | $ | 953 |
| $ | 974 |
|
| Over one year through five years | 5,328 |
| | 5,535 |
| 4,184 |
| 4,301 |
| | 4,973 |
| 5,075 |
|
| Over five years through ten years | 4,319 |
| | 4,481 |
| 3,562 |
| 3,649 |
| | 3,650 |
| 3,714 |
|
| Over ten years | 8,668 |
| | 9,153 |
| 8,258 |
| 9,303 |
| | 8,361 |
| 9,173 |
|
| Subtotal | 19,930 |
| | 20,808 |
| 16,726 |
| 17,980 |
| | 17,937 |
| 18,936 |
|
| Mortgage-backed and asset-backed securities | 7,258 |
| | 7,355 |
| 5,781 |
| 5,839 |
| | 5,622 |
| 5,721 |
|
| Total fixed maturities, AFS | $ | 27,188 |
| | $ | 28,163 |
| $ | 22,507 |
| $ | 23,819 |
| | $ | 23,559 |
| $ | 24,657 |
|
Estimated maturities may differ from contractual maturities due to security call or prepayment provisions. Due to the potential for variability in payment spreadsspeeds (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.
The Company's onlyCompany had no investment exposure to any credit concentration risk of a single issuer greater than 10% of the Company’s stockholders’Company's stockholder's equity, other than the U.S. government and certain U.S. government agencies, was the Government of Japan which represents $853 or 10% of stockholders' equity, and 2% of total invested assetssecurities as of December 31, 2013.2016 or December 31, 2015. As of December 31, 2012, the Company was not exposed to any concentration of credit risk of a single issuer greater than 10% of the Company’s stockholders’ equity other than U.S. government and certain U.S. government agencies. As of December 31, 2013,2016, other than U.S. government and certain U.S. government agencies, the Company’s three largest exposures by issuer were the Government of Japan, JPMorgan Chase & Co.National Grid plc, HSBC Holdings plc, and Goldman Sachs Group Inc.Oracle Corp., which each comprised less than 3%1% of total invested assets. As of December 31, 2012,2015, other than U.S. government and certain U.S. government agencies, the Company’s three largest exposures by issuer were the GovernmentMorgan Stanley, Verizon Communications Inc., and Bank of Japan, National Grid PLC and Berkshire Hathaway Inc.America Corp., which each comprised less than 2%1% of total invested assets.
The Company’s three largest exposures by sector as of December 31, 20132016, were utilities, financial services, utilities, and commercial real estateconsumer non-cyclical which comprised approximately 9%10%, 8%9% and 7%, respectively, of total invested assets. The Company’s three largest exposures by sector as of December 31, 20122015 were utilities, financial services, utilities, and consumer non-cyclical which comprised approximately 10%11%, 8% and 8%7%, respectively, of total invested assets.
Security Unrealized Losses on AFS Securities
Unrealized Loss Aging
The following tables present the Company’s unrealized loss aging for AFS securities by typeType and lengthLength of time the security was in a continuous unrealized loss position.Time
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Less Than 12 Months | | 12 Months or More | | Total |
| | Amortized Cost | Fair Value | Unrealized Losses | | Amortized Cost | Fair Value | Unrealized Losses | | Amortized Cost | Fair Value | Unrealized Losses |
| ABS | $ | 249 |
| $ | 248 |
| $ | (1 | ) | | $ | 265 |
| $ | 239 |
| $ | (26 | ) | | $ | 514 |
| $ | 487 |
| $ | (27 | ) |
| CDOs [1] | 325 |
| 325 |
| — |
| | 210 |
| 208 |
| (2 | ) | | 535 |
| 533 |
| (2 | ) |
| CMBS | 1,058 |
| 1,030 |
| (28 | ) | | 139 |
| 133 |
| (6 | ) | | 1,197 |
| 1,163 |
| (34 | ) |
| Corporate | 2,535 |
| 2,464 |
| (71 | ) | | 402 |
| 378 |
| (24 | ) | | 2,937 |
| 2,842 |
| (95 | ) |
| Foreign govt./govt. agencies | 164 |
| 155 |
| (9 | ) | | 6 |
| 5 |
| (1 | ) | | 170 |
| 160 |
| (10 | ) |
| Municipal | 166 |
| 160 |
| (6 | ) | | — |
| — |
| — |
| | 166 |
| 160 |
| (6 | ) |
| RMBS | 548 |
| 535 |
| (13 | ) | | 198 |
| 195 |
| (3 | ) | | 746 |
| 730 |
| (16 | ) |
| U.S. Treasuries | 385 |
| 371 |
| (14 | ) | | — |
| — |
| — |
| | 385 |
| 371 |
| (14 | ) |
| Total fixed maturities, AFS | 5,430 |
| 5,288 |
| (142 | ) | | 1,220 |
| 1,158 |
| (62 | ) | | 6,650 |
| 6,446 |
| (204 | ) |
| Equity securities, AFS [2] | 59 |
| 57 |
| (2 | ) | | 5 |
| 5 |
| — |
| | 64 |
| 62 |
| (2 | ) |
| Total securities in an unrealized loss position | $ | 5,489 |
| $ | 5,345 |
| $ | (144 | ) | | $ | 1,225 |
| $ | 1,163 |
| $ | (62 | ) | | $ | 6,714 |
| $ | 6,508 |
| $ | (206 | ) |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Investments (continued)
4. Investments and Derivatives (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 |
| | Less Than 12 Months | | 12 Months or More | | Total |
| | Amortized Cost | | Fair Value | | Unrealized Losses | | Amortized Cost | | Fair Value | | Unrealized Losses | | Amortized Cost | | Fair Value | | Unrealized Losses |
| ABS | $ | 288 |
| | $ | 286 |
| | $ | (2 | ) | | $ | 418 |
| | $ | 364 |
| | $ | (54 | ) | | $ | 706 |
| | $ | 650 |
| | $ | (56 | ) |
| CDOs [1] | 64 |
| | 63 |
| | (1 | ) | | 1,185 |
| | 1,144 |
| | (40 | ) | | 1,249 |
| | 1,207 |
| | (41 | ) |
| CMBS | 437 |
| | 423 |
| | (14 | ) | | 392 |
| | 372 |
| | (20 | ) | | 829 |
| | 795 |
| | (34 | ) |
| Corporate | 2,449 |
| | 2,360 |
| | (89 | ) | | 799 |
| | 696 |
| | (103 | ) | | 3,248 |
| | 3,056 |
| | (192 | ) |
| Foreign govt./govt. agencies | 542 |
| | 501 |
| | (41 | ) | | 303 |
| | 227 |
| | (76 | ) | | 845 |
| | 728 |
| | (117 | ) |
| Municipal | 508 |
| | 475 |
| | (33 | ) | | 99 |
| | 83 |
| | (16 | ) | | 607 |
| | 558 |
| | (49 | ) |
| RMBS | 922 |
| | 909 |
| | (13 | ) | | 475 |
| | 440 |
| | (35 | ) | | 1,397 |
| | 1,349 |
| | (48 | ) |
| U.S. Treasuries | 1,456 |
| | 1,442 |
| | (14 | ) | | — |
| | — |
| | — |
| | 1,456 |
| | 1,442 |
| | (14 | ) |
| Total fixed maturities, AFS | 6,666 |
| | 6,459 |
| | (207 | ) | | 3,671 |
| | 3,326 |
| | (344 | ) | | 10,337 |
| | 9,785 |
| | (551 | ) |
| Equity securities, AFS | 77 |
| | 73 |
| | (4 | ) | | 135 |
| | 114 |
| | (21 | ) | | 212 |
| | 187 |
| | (25 | ) |
| Total securities in an unrealized loss position | $ | 6,743 |
| | $ | 6,532 |
| | $ | (211 | ) | | $ | 3,806 |
| | $ | 3,440 |
| | $ | (365 | ) | | $ | 10,549 |
| | $ | 9,972 |
| | $ | (576 | ) |
| | | | December 31, 2012 | December 31, 2015 |
| | Less Than 12 Months | | 12 Months or More | | Total | Less Than 12 Months | | 12 Months or More | | Total |
| | Amortized Cost | | Fair Value | | Unrealized Losses | | Amortized Cost | | Fair Value | | Unrealized Losses | | Amortized Cost | | Fair Value | | Unrealized Losses | Amortized Cost | Fair Value | Unrealized Losses | | Amortized Cost | Fair Value | Unrealized Losses | | Amortized Cost | Fair Value | Unrealized Losses |
| ABS | $ | 77 |
| | $ | 76 |
| | $ | (1 | ) | | $ | 787 |
| | $ | 616 |
| | $ | (171 | ) | | $ | 864 |
| | $ | 692 |
| | $ | (172 | ) | $ | 387 |
| $ | 385 |
| $ | (2 | ) | | $ | 271 |
| $ | 239 |
| $ | (32 | ) | | $ | 658 |
| $ | 624 |
| $ | (34 | ) |
| CDOs [1] | 5 |
| | 5 |
| | — |
| | 1,640 |
| | 1,515 |
| | (117 | ) | | 1,645 |
| | 1,520 |
| | (117 | ) | 608 |
| 602 |
| (6 | ) | | 500 |
| 493 |
| (5 | ) | | 1,108 |
| 1,095 |
| (11 | ) |
| CMBS | 192 |
| | 179 |
| | (13 | ) | | 795 |
| | 701 |
| | (94 | ) | | 987 |
| | 880 |
| | (107 | ) | 655 |
| 636 |
| (19 | ) | | 99 |
| 94 |
| (5 | ) | | 754 |
| 730 |
| (24 | ) |
| Corporate [1] | 614 |
| | 578 |
| | (36 | ) | | 1,339 |
| | 1,154 |
| | (185 | ) | | 1,953 |
| | 1,732 |
| | (221 | ) | |
| Corporate | | 4,880 |
| 4,696 |
| (184 | ) | | 363 |
| 322 |
| (41 | ) | | 5,243 |
| 5,018 |
| (225 | ) |
| Foreign govt./govt. agencies | 318 |
| | 290 |
| | (28 | ) | | 7 |
| | 6 |
| | (1 | ) | | 325 |
| | 296 |
| | (29 | ) | 144 |
| 136 |
| (8 | ) | | 30 |
| 27 |
| (3 | ) | | 174 |
| 163 |
| (11 | ) |
| Municipal | 65 |
| | 62 |
| | (3 | ) | | 98 |
| | 87 |
| | (11 | ) | | 163 |
| | 149 |
| | (14 | ) | 179 |
| 174 |
| (5 | ) | | — |
| — |
| — |
| | 179 |
| 174 |
| (5 | ) |
| RMBS | 322 |
| | 321 |
| | (1 | ) | | 750 |
| | 636 |
| | (114 | ) | | 1,072 |
| | 957 |
| | (115 | ) | 280 |
| 279 |
| (1 | ) | | 230 |
| 223 |
| (7 | ) | | 510 |
| 502 |
| (8 | ) |
| U.S. Treasuries | 384 |
| | 372 |
| | (12 | ) | | — |
| | — |
| | — |
| | 384 |
| | 372 |
| | (12 | ) | 963 |
| 950 |
| (13 | ) | | 8 |
| 8 |
| — |
| | 971 |
| 958 |
| (13 | ) |
| Total fixed maturities, AFS | 1,977 |
| | 1,883 |
| | (94 | ) | | 5,416 |
| | 4,715 |
| | (693 | ) | | 7,393 |
| | 6,598 |
| | (787 | ) | 8,096 |
| 7,858 |
| (238 | ) | | 1,501 |
| 1,406 |
| (93 | ) | | 9,597 |
| 9,264 |
| (331 | ) |
| Equity securities, AFS | 9 |
| | 9 |
| | — |
| | 172 |
| | 136 |
| | (36 | ) | | 181 |
| | 145 |
| | (36 | ) | |
| Equity securities, AFS [2] | | 83 |
| 79 |
| (4 | ) | | 44 |
| 37 |
| (7 | ) | | 127 |
| 116 |
| (11 | ) |
| Total securities in an unrealized loss position | $ | 1,986 |
| | $ | 1,892 |
| | $ | (94 | ) | | $ | 5,588 |
| | $ | 4,851 |
| | $ | (729 | ) | | $ | 7,574 |
| | $ | 6,743 |
| | $ | (823 | ) | $ | 8,179 |
| $ | 7,937 |
| $ | (242 | ) | | $ | 1,545 |
| $ | 1,443 |
| $ | (100 | ) | | $ | 9,724 |
| $ | 9,380 |
| $ | (342 | ) |
| |
| [1] | Unrealized losses exclude the change in fair value of bifurcated embedded derivative features ofderivatives within certain securities. Subsequentsecurities for which changes in fair value will beare recorded in net realized capital gains (losses). |
| |
| [2] | As of December 31, 2016 and 2015, excludes equity securities, FVO which are included in equity securities, AFS on the Consolidated Balance Sheets. |
As of December 31, 2013,2016, AFS securities in an unrealized loss position comprisedconsisted of 1,0071,897 securities, primarily related toin the corporate securities and foreign government and government agencies,sector, which arewere depressed primarily due to an increase in interest rates and/or widening of credit spreads since the securities were purchased and/or declines in the value of the currency in which the assets are denominated.purchased. As of December 31, 2013, 89%2016, 95% of these securities were depressed less than 20% of cost or amortized cost. The decrease in unrealized losses during 20132016 was primarily attributable to realized capital losses as a result of portfolio management activity,tighter credit spreads, partially offset by an increase inhigher interest rates.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Investments (continued)
4. Investments and Derivatives (continued)
Most of the securities depressed for twelve months or more primarily relate to certain floating ratestudent loan ABS and corporate securities with greater than 10 years to maturity concentrated in the financial services sector, foreign government and government agencies, as well as structuredenergy sectors. Corporate financial services securities with exposure to commercial and residential real estate. Althoughstudent loan ABS were primarily depressed because the securities have floating-rate coupons and have long-dated maturities, and current credit spreads have tightened during 2013, current market spreads continue to beare wider than spreads atwhen these securities were purchased. Corporate securities within the securities' respective purchase dates for structured securities with exposure to commercial and residential real estate largelyenergy sector are primarily depressed due to the economic and market uncertainties regarding future performancea lower level of certain commercial and residential real estate backed securities. In addition, the majority of securities have a floating-rate coupon referenced to a market index where rates have declined substantially.oil prices. The Company neither has an intention to sell nor does it expect to be required to sell the securities outlined above.in the preceding discussion.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 | | December 31, 2012 |
| | Amortized Cost [1] | | Valuation Allowance | | Carrying Value | | Amortized Cost [1] | | Valuation Allowance | | Carrying Value |
| Total commercial mortgage loans [2] | $ | 3,482 |
| | $ | (12 | ) | | $ | 3,470 |
| | $ | 4,949 |
| | $ | (14 | ) | | $ | 4,935 |
|
| |
[1] | Amortized cost represents carrying value prior to valuation allowances, if any. |
| |
[2] | Commercial 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. The Company reviews mortgage loans on a quarterly basis to identify potential credit losses. Among other factors, management reviews current and projected macroeconomic trends, such as unemployment rates, and property-specific factors such as rental rates, occupancy levels, LTV ratios and debt service coverage ratios (“DSCR”). In addition, the Company considers historical, current and projected delinquency rates and property values. Estimates of collectibility require the use of significant management judgment and include the probability and timing of borrower default and loss severity estimates. In addition, cash flow projections may change based upon new information about the borrower's ability to pay and/or the value of underlying collateral such as changes in projected property value estimates. For mortgage loans that are deemed impaired, a valuation allowance is established for the difference between the carrying amount and estimated value. The mortgage loan's estimated value is most frequently the Company's share of the fair value of the collateral but may also be the Company’s share of either (a) the present value of the expected future cash flows discounted at the loan’s effective interest rate or (b) the loan’s observable market price. A valuation allowance may be recorded for an individual loan or for a group of loans that have an LTV ratio of 90% or greater, a low DSCR or have other lower credit quality characteristics. Changes in valuation allowances are recorded in net realized capital gains and losses. Interest income on impaired loans is accrued to the extent it is deemed collectible and the borrowers continue to make payments under the original or restructured loan terms. The Company stops accruing interest income on loans when it is probable that the Company will not receive interest and principal payments according to the contractual terms of the loan agreement. The company resumes accruing interest income when it determines that sufficient collateral exists to satisfy the full amount of the loan principal and interest payments and when it is probable cash will be received in the foreseeable future. Interest income on defaulted loans is recognized when received. As of December 31, 2012 includes commercial mortgage loans relating to the sales of the Retirement Plans and Individual Life businesses; see Note 2 - Business Dispositions of Notes to Consolidated Financial Statements for further discussion of these transactions.
|
As of December 31, 20132016, commercial mortgage loans had an amortized cost of $2.8 billion, with a valuation allowance of $19 and 2012,a carrying value of $2.8 billion. As of December 31, 2015, commercial mortgage loans had an amortized cost of $2.9 billion, with a valuation allowance of $19 and a carrying value of $2.9 billion. Amortized cost represents carrying value prior to valuation allowances, if any.
As of December 31, 2016 and 2015, the carrying value of mortgage loans associated with thethat had a valuation allowance was $86$31 and $189,$39, respectively. Included in the table above areThere were no mortgage loans held-for-sale with a carrying value and valuation allowance of $53 and $3, respectively, as of December 31, 2013 and $47 and $3, respectively, as of 2016 or December 31, 2012. The carrying value of these loans is included in mortgage loans in the Company’s Consolidated Balance Sheets.2015. As of December 31, 2013,2016, the Company had an immaterial amount of mortgage loans within the Company’s mortgage loan portfolio that have had extensions or restructurings other than what is allowable under the original terms of the contract are immaterial.contract.
The following table presents the activity within the Company’s valuation allowance for mortgage loans. These loans have been evaluated both individually and collectively for impairment. Loans evaluated collectively for impairment are immaterial.Valuation Allowance Activity
| | | | For the years ended December 31, | For the years ended December 31, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| Balance as of January 1 | $ | (14 | ) | | $ | (23 | ) | | $ | (62 | ) | $ | (19 | ) | | $ | (15 | ) | | $ | (12 | ) |
| (Additions)/Reversals | (2 | ) | | 4 |
| | 25 |
| — |
| | (4 | ) | | (4 | ) |
| Deductions | 4 |
| | 5 |
| | 14 |
| — |
| | — |
| | 1 |
|
| Balance as of December 31 | $ | (12 | ) | | $ | (14 | ) | | $ | (23 | ) | $ | (19 | ) | | $ | (19 | ) | | $ | (15 | ) |
The weighted-average LTV ratio of the Company’s commercial mortgage loan portfolio was 57%51% as of December 31, 2013,2016, while the weighted-average LTV ratio at origination of these loans was 63%. LTV ratios compare the loan amount to the value of the underlying property collateralizing the loan. The loan collateral values are updated no less than annually through property level reviews of the portfolio.underlying properties. Factors considered in theestimating property valuationvalues include, but are not limited to,among other things, actual and expected property cash flows, geographic market data and capitalization rates. DSCRs comparethe ratio of the property's net operating income to its value. DSCR compares a property’s net operating income to the borrower’s principal and interest payments. The weighted average DSCR of the Company’s commercial mortgage loan portfolio was 2.23x2.55x as of December 31, 2013.2016. As of December 31, 2013,2016 and December 31, 2015, the Company heldno delinquent commercial mortgage loans past due by 90 days or more. The Company held only one delinquent commercial mortgage loan past due by 90 days or more as of December 31, 2012.more. The loan had a total carrying value and valuation allowance of this loan totaled $32$15 and $0,$16, respectively, and was not accruing income.
The following table presents the carrying value of the Company’s commercial mortgage loans by LTV and DSCR.
|
| | | | | | | | | | | |
| Commercial Mortgage Loans Credit Quality |
| | December 31, 2013 | | December 31, 2012 |
| Loan-to-value | Carrying Value | | Avg. Debt-Service Coverage Ratio | | Carrying Value | | Avg. Debt-Service Coverage Ratio |
| Greater than 80% | $ | 35 |
| | 1.15x | | $ | 137 |
| | 0.89x |
| 65% - 80% | 777 |
| | 1.94x | | 1,717 |
| | 2.27x |
| Less than 65% | 2,658 |
| | 2.34x | | 3,081 |
| | 2.44x |
| Total commercial mortgage loans | $ | 3,470 |
| | 2.23x | | $ | 4,935 |
| | 2.34x |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Investments (continued)
4. Investments and Derivatives (continued)
The following tables present the carrying value of the Company’s mortgage loans by region and property type.Commercial Mortgage Loans Credit Quality
|
| | | | | | | | | | | |
| Mortgage Loans by Region |
| | December 31, 2013 | | December 31, 2012 |
| | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total |
| East North Central | $ | 79 |
| | 2.3% | | $ | 97 |
| | 2.0% |
| Middle Atlantic | 255 |
| | 7.3% | | 370 |
| | 7.5% |
| Mountain | 40 |
| | 1.2% | | 62 |
| | 1.3% |
| New England | 163 |
| | 4.7% | | 231 |
| | 4.7% |
| Pacific | 1,019 |
| | 29.4% | | 1,504 |
| | 30.5% |
| South Atlantic | 548 |
| | 15.8% | | 1,012 |
| | 20.5% |
| West North Central | 17 |
| | 0.5% | | 16 |
| | 0.3% |
| West South Central | 144 |
| | 4.1% | | 234 |
| | 4.7% |
| Other [1] | 1,205 |
| | 34.7% | | 1,409 |
| | 28.5% |
| Total mortgage loans | $ | 3,470 |
| | 100% | | $ | 4,935 |
| | 100% |
|
| | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| Loan-to-value | Carrying Value | Avg. Debt-Service Coverage Ratio | | Carrying Value | Avg. Debt-Service Coverage Ratio |
| Greater than 80% | $ | 20 |
| 0.59x | | $ | 15 |
| 0.91x |
| 65% - 80% | 182 |
| 2.17x | | 280 |
| 1.78x |
| Less than 65% | 2,609 |
| 2.61x | | 2,623 |
| 2.54x |
| Total commercial mortgage loans | $ | 2,811 |
| 2.55x | | $ | 2,918 |
| 2.45x |
Mortgage Loans by Region
|
| | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Carrying Value | Percent of Total | | Carrying Value | Percent of Total |
| East North Central | $ | 54 |
| 1.9 | % | | $ | 66 |
| 2.3 | % |
| East South Central | 14 |
| 0.5 | % | | 14 |
| 0.5 | % |
| Middle Atlantic | 237 |
| 8.4 | % | | 210 |
| 7.2 | % |
| New England | 93 |
| 3.3 | % | | 163 |
| 5.6 | % |
| Pacific | 814 |
| 29.0 | % | | 933 |
| 32.0 | % |
| South Atlantic | 613 |
| 21.8 | % | | 579 |
| 19.8 | % |
| West South Central | 128 |
| 4.6 | % | | 125 |
| 4.3 | % |
| Other [1] | 858 |
| 30.5 | % | | 828 |
| 28.3 | % |
| Total mortgage loans | $ | 2,811 |
| 100 | % | | $ | 2,918 |
| 100 | % |
| |
| [1] | Primarily represents loans collateralized by multiple properties in various regions. |
Mortgage Loans by Property Type
| | | Mortgage Loans by Property Type | |
| | December 31, 2013 | | December 31, 2012 | December 31, 2016 | | December 31, 2015 |
| | Carrying Value | | Percent of Total | | Carrying Value | | Percent of Total | Carrying Value | Percent of Total | | Carrying Value | Percent of Total |
| Commercial | | | | | | | | | | | | |
| Agricultural | $ | 93 |
| | 2.7 | % | | $ | 109 |
| | 2.2 | % | $ | 16 |
| 0.6 | % | | $ | 16 |
| 0.5 | % |
| Industrial | 1,182 |
| | 34.1 | % | | 1,519 |
| | 30.8 | % | 793 |
| 28.2 | % | | 829 |
| 28.4 | % |
| Lodging | 27 |
| | 0.8 | % | | 81 |
| | 1.6 | % | 25 |
| 0.9 | % | | 26 |
| 0.9 | % |
| Multifamily | 576 |
| | 16.6 | % | | 869 |
| | 17.6 | % | 535 |
| 19.0 | % | | 557 |
| 19.1 | % |
| Office | 723 |
| | 20.8 | % | | 1,120 |
| | 22.7 | % | 605 |
| 21.5 | % | | 729 |
| 25.0 | % |
| Retail | 745 |
| | 21.5 | % | | 1,047 |
| | 21.2 | % | 611 |
| 21.8 | % | | 650 |
| 22.3 | % |
| Other | 124 |
| | 3.5 | % | | 190 |
| | 3.9 | % | 226 |
| 8.0 | % | | 111 |
| 3.8 | % |
| Total mortgage loans | $ | 3,470 |
| | 100 | % | | $ | 4,935 |
| | 100 | % | $ | 2,811 |
| 100 | % | | $ | 2,918 |
| 100 | % |
Variable Interest Entities
The Company is involvedengaged with various special purpose entities and other entities that are deemed to be VIEs primarily as a collateral or investment manager and as an investor through normal investment activities but also as wellan investment manager and as a means of accessing capital through a contingent capital facility. For further information on facility ("the facility, see Note 10 - Debt of Notes to Consolidated Financial Statements.facility").
A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest, such as simple majority kick-out rights, or lacks sufficient funds to finance its own activities without financial support provided by other entities.
The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in the VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. Based on the Company’s assessment, if it determines it is the primary beneficiary, the Company consolidates the VIE in the Company’s Consolidated Financial Statements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Investments (continued)
4. Investments and Derivatives (continued)
Consolidated VIEs
The following table presents the carrying value of assets and liabilities, and the maximum exposure to loss relating to the VIEs for which the Company is the primary beneficiary. Creditors have no recourse against the Company in the event of default by these VIEs nor does the Company have any implied or unfunded commitments to these VIEs. The Company’s financial or other support provided to these VIEs is limited to its collateral or investment management services and original investment. Since December 31, 2015, the Company has disposed of the VIEs for which it was the primary beneficiary.
Consolidated VIEs
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 | | December 31, 2012 |
| | Total Assets | | Total Liabilities [1] | | Maximum Exposure to Loss [2] | | Total Assets | | Total Liabilities [1] | | Maximum Exposure to Loss [2] |
| CDOs [3] | $ | 12 |
| | $ | 13 |
| | $ | — |
| | $ | 89 |
| | $ | 88 |
| | $ | 7 |
|
| Investment funds [4] | 134 |
| | 20 |
| | 119 |
| | 132 |
| | 20 |
| | 110 |
|
| Limited partnerships | 4 |
| | 2 |
| | 2 |
| | 6 |
| | 3 |
| | 3 |
|
| Total | $ | 150 |
| | $ | 35 |
| | $ | 121 |
| | $ | 227 |
| | $ | 111 |
| | $ | 120 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Total Assets | Total Liabilities [1] | Maximum Exposure to Loss [2] | | Total Assets | Total Liabilities [1] | Maximum Exposure to Loss [2] |
| Investment funds [3] | $ | — |
| $ | — |
| $ | — |
| | $ | 52 |
| $ | 11 |
| $ | 42 |
|
Limited partnerships and other alternative investments [4]
| — |
| — |
| — |
| | 2 |
| 1 |
| 1 |
|
| Total | $ | — |
| $ | — |
| $ | — |
| | $ | 54 |
| $ | 12 |
| $ | 43 |
|
| |
| [1] | Included in other liabilities inon the Company’s 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 cost basis of the Company’s investment. |
| |
| [3] | Total assets included in fixed maturities, FVO, short-term investments, and equity, AFS inon the Company’sCompany's Consolidated Balance Sheets. |
| |
| [4] | Total assets included in fixed maturities, FVO, short-termlimited partnerships and other alternative investments and equity, AFS inon the Company's Consolidated Balance Sheets. |
Non-Consolidated VIEs
CDOs represent structuredThe Company, through normal investment vehicles for whichactivities, makes passive investments in limited partnerships and other alternative investments. Upon the adoption of the new consolidation guidance discussed above, these investments are now considered VIEs. For these non-consolidated VIEs, the Company has a controlling financial interest asdetermined it provides collateral management services, earns a fee for those services and also holds investments in the securities issued by these vehicles. Investment funds represents wholly-owned fixed income funds for which the Company has exclusive management and control including management of investment securities which is the activity that most significantly impacts its economic performance. Limited partnerships represent one hedge fund for which the Company holds a majority interest in the fund as an investment.
Non-Consolidated VIEs
The Company does not hold any investments issued by VIEs for which the Company is not the primary beneficiary as it has no ability to direct activities that could significantly affect the economic performance of the investments. The Company’s maximum exposure to loss as of December 31, 20132016 and 2012. December 31, 2015 is limited to the total carrying value of $859 and $729, respectively, which are included in limited partnerships and other alternative investments in the Company's Consolidated Balance Sheets. As of December 31, 2016 and December 31, 2015, the Company has outstanding commitments totaling $497 and $299, respectively, whereby the Company is committed to fund these investments and may be called by the partnership during the commitment period to fund the purchase of new investments and partnership expenses. These investments are generally of a passive nature in that the Company does not take an active role in management.
In addition, the Company through normal investment activities,also makes passive investments in structured securities issued by VIEs for which the Company is not the manager whichand, therefore does not consolidate. These investments are included in ABS, CDOs, CMBS and RMBS in the Available-for-Sale Securities table and fixed maturities, FVO, in the Company’s Consolidated Balance Sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the relative size of the Company’s investment in comparison to the principal amount of the structured securities issued by the VIEs, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits and the Company’s inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of the Company’s investment.
Securities Lending, Repurchase and Dollar Roll Agreements and Other Collateral Transactions
The Company enters into securities financing transactions as a way to earn income on securities loaned (securities lending) or on securities sold and repurchased (repurchase agreements). Under a securities lending program, the Company lends certain fixed maturities within the corporate, foreign government/government agencies, and municipal sectors as well as equity securities to qualifying third-party borrowers in return for collateral in the form of cash or securities. For domestic and non-domestic loaned securities, respectively, borrowers provide collateral of 102% and 105% of the fair value of the securities lent at the time of the loan. Borrowers will return the securities to the Company for cash or securities collateral at maturity dates generally of 90 days or less. Security collateral on deposit from counterparties in connection with securities lending transactions may not be sold or re-pledged, except in the event of default by the counterparty, and is not reflected on the Company’s consolidated balance sheets. Additional collateral is obtained if the fair value of the collateral falls below 100% of the fair value of the loaned securities. The agreements provide the counterparty the right to sell or re-pledge the securities loaned. If cash, rather than securities, is received as collateral, the cash is typically invested in short-term investments or fixed maturities and is reported as an asset on the consolidated balance sheets. Income associated with securities lending transactions is reported as a component of net investment income on the Company’s consolidated statements of operations. As of December 31, 2016, the fair value of securities on loan and the associated liability for cash collateral received was $435 and $420,
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Investments (continued)
respectively. The Company also received securities collateral of $26 which was not included in the Company's Consolidated Balance Sheets. As of December 31, 2015, the fair value of securities on loan and the associated liability for cash collateral received was $15 and $15, respectively.
From time to time, the Company enters into repurchase agreements and dollar roll transactions to manage liquidity or to earn incremental spread income. A repurchase agreement is a transaction in which one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous agreement to repurchase the same securities at a specified price at a later date. A dollar roll is a type of repurchase agreement where a mortgage backed security is sold with an agreement to repurchase substantially the same security at a specified timedate in the future. These transactions are generally short-term in nature, and therefore, the carrying amountshave a contractual maturity of these instruments approximate fair value.ninety days or less.
As part ofUnder repurchase agreements, and dollar roll transactions, the Company transfers collateral of U.S. government and government agency securities and receives cash. For the repurchase agreements, the Company obtains cash in an amount equal to at least 95% of the fair value of the securities transferred. The agreements contain contractual provisions that require additional collateral to be transferred when necessary and provide the counterparty the right to sell or re-pledge the securities transferred. The cash received from the repurchase program is typically invested in short-term investments or fixed maturities.maturities and is reported as an asset on the Company's consolidated balance sheets. Repurchase agreements include master netting provisions that provide theboth counterparties the right to set offoffset claims and apply securities held by them inwith respect ofto their obligations in the event of a default. Although the Company has the contractual right to offset claims, fixed maturities do not meet the specific conditions for net presentation under U.S. GAAP. The Company accounts for the repurchase agreements and dollar roll transactions as collateralized borrowings. The securities transferred under repurchase agreements and dollar roll transactions are included in fixed maturities, AFS with the obligation to repurchase those securities recorded in other liabilities on the Company's Consolidated Balance Sheets.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivatives (continued)
As of December 31, 2013, the Company has no outstanding repurchase agreements or dollar roll transactions. As of December 31, 2012,2016, the Company reported in fixed maturities, AFS on the Consolidated Balance Sheets financial collateral pledged relating to repurchase agreements of $923$112 in fixed maturities, AFS on the Consolidated Balance sheets.and $9 in cash. The Company reported a corresponding obligation to repurchase thesethe pledged securities of $923$118 in other liabilities on the Consolidated Balance sheets. With respect to dollar roll transactions,Sheets. As of December 31, 2015, the Company reported in financial collateral pledged with a fair valuerelating to repurchase agreements of $692 in fixed maturities, AFS with$249. The Company reported a corresponding obligation to repurchase $692 reportedthe pledged securities of $249 in other liabilities on the Consolidated Balance Sheets. The Company had no outstanding dollar roll transactions as of December 31, 2012.2016 or December 31, 2015.
The Company is required by law to deposit securities with government agencies in certain states wherein which it conducts business. As of December 31, 20132016 and 20122015 the fair value of securities on deposit was approximately $13$21 and $14,$14, respectively.
Refer to Derivative Collateral Arrangements section of this note forFor disclosure of collateral in support of derivative transactions.transactions, refer to the Derivative Collateral Arrangements section of Note 4 - Derivative Instruments.
Equity Method Investments
The majority of the Company's investments in limited partnerships and other alternative investments, including hedge funds, mortgage and real estate funds, mezzanine debt funds, and private equity and other funds (collectively, “limited partnerships”), are accounted for under the equity method of accounting. The Company’s maximum exposure to loss as of December 31, 20132016 is limited to the total carrying value of $0.9 billion.$930. In addition, the Company has outstanding commitments totaling approximately $223,$497, to fund limited partnership and other alternative investments as of December 31, 2013.2016. The Company’s investments in limited partnerships are generally of a passive nature in that the Company does not take an active role in the management of the limited partnerships. In 2013,2016, aggregate investment income (losses) from limited partnerships and other alternative investments exceeded 10% of the Company’s pre-tax consolidated net income. Accordingly, the Company is disclosing aggregated summarized financial data for the Company’s limited partnership investments. This aggregated summarized financial data does not represent the Company’s proportionate share of limited partnership assets or earnings. Aggregate total assets of the limited partnerships in which the Company invested totaled $77.2$100.6 billion and $75.3$82.2 billion as of December 31, 20132016 and 2012,2015, respectively. Aggregate total liabilities of the limited partnerships in which the Company invested totaled $10.7$17.6 billion and $9.6$14.0 billion as of December 31, 20132016 and 2012,2015, respectively. Aggregate net investment income (loss) of the limited partnerships in which the Company invested totaled $1.8$0.9 billion,, $0.9 $0.8 billion and $1.2$3.5 billion for the periods ended December 31, 2013, 20122016, 2015 and 2011,2014, respectively. Aggregate net income (loss) of the limited partnerships in which the Company invested totaled $7.1$7.4 billion,, $6.5 $5.2 billion,, and $8.1$8.7 billion for the periods ended December 31, 2013, 20122016, 2015 and 2011,2014, respectively. As of, and for the period ended, December 31, 2013,2016, the aggregated summarized financial data reflects the latest available financial information.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Derivatives
Derivative Instruments
The Company utilizes a variety of OTC, OTC-cleared 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, commodity 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 beare permissible investments under the Company’s investment policies. The Company also purchasesmay enter into and has previously issued 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 beas embedded derivative instruments, such as thecertain GMWB riderriders included with certain variable annuity products.
Strategies that qualifyQualify for hedge accountingHedge Accounting
CertainSome of the Company's derivatives the Company enters into satisfy the hedge accounting requirements as outlined in Note 1 of these financial statements. Typically, these hedge relationshipshedging instruments include interest rate swaps and, to a lesser extent, foreign currency swaps where the terms or expected cash flows of the securitieshedged item closely match the terms of the swap. The interest rate swaps are typically used to manage interest rate duration of certain fixed maturity securities or liability contracts, or convert securities, or liabilities, denominated in a foreign currency to US dollars.contracts. The hedge strategies by hedge accounting designation include:
Cash flow hedgesFlow Hedges
Interest rate swaps are predominantly used to manage portfolio duration and better match cash receipts from assets with cash disbursements required to fund liabilities. These derivatives primarily convert interest receipts on floating-rate fixed maturity securities or interest payments on floating-rate guaranteed investment contracts to fixed rates. The Company also enters into forward starting swap agreements to hedge the interest rate exposure related to the future purchase of fixed-rate securities, primarily to hedge interest rate risk inherent in the assumptions used to price certain product liabilities.
Foreign currency swaps are used to convert foreign currency-denominated cash flows related to certain investment receipts and liability payments to U.S. dollars in order to reduce cash flow fluctuations due to changes in currency rates.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivatives (continued)
Fair value hedgesValue Hedges
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 currencyThese swaps are typically used to hedge the changes in fair value of certain foreign currency-denominated fixedmanage interest rate liabilities due to changes in foreign currency rates by swapping the fixed foreign payments to floating rate U.S. dollar denominated payments.duration.
Non-qualifying strategiesStrategies
Derivative relationships that do not qualify for hedge accounting or “non-qualifying(“non-qualifying strategies”) primarily include the hedge programsprogram for our U.S. and internationalthe Company's variable annuity products as well as the hedging and replication strategies through the use ofthat utilize credit default swaps. In addition, hedges of interest rate, and foreign currency and equity risk of certain fixed maturities, equities and liabilities do not qualify for hedge accounting. These
The non-qualifying strategies include:
Interest rate swaps, swaptions, caps, floors,Rate Swaps, Swaptions, and futuresFutures
The Company may useuses interest rate swaps, swaptions, caps, floors and futures to manage interest rate 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, 20132016 and 20122015, the notional amount of interest rate swaps in offsetting relationships was $4.5$2.7 billion and $5.1$4.6 billion, respectively.
Foreign Currency Swaps and Forwards
Foreign currency swapsforwards are used to hedge non-U.S. dollar denominated cash and forwards
equity securities. The Company also enters into foreign currency swaps and forwards to convert the foreign currency exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars.
Japan 3Win foreign currency swapsFixed Payout Annuity Hedge
The Company formerly offeredhas obligations for certain variable annuity products with a guaranteed minimum income benefit ("GMIB") rider through a wholly-owned Japanese subsidiary.yen denominated fixed payout annuities under an assumed reinsurance contract. The GMIB rider is reinsured to a wholly-owned U.S. subsidiary whichCompany invests in U.S. dollar denominated assets to support the assumed reinsurance liability. The U.S. subsidiary entered intoCompany has in place pay U.S. dollar, receive yen swap contracts to hedge the currency and yen interest rate exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments.
Japanese fixed annuity hedging instruments
The Company formerly offered a yen denominated fixed annuity product through a wholly-owned Japanese subsidiary and reinsured to a wholly-owned U.S. subsidiary. The U.S. subsidiary invests in U.S. dollar denominated securities to support the yen denominated fixed liability payments and entered into currency rate swaps to hedge the foreign currency exchange rate and yen interest rate exposures that exist as a result of U.S. dollar assets backing the yen denominated liability.
Credit contractsContracts
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 the value onof fixed maturity securities. Credit default swaps are also used to assume credit risk related to an individual entity or referenced index or asset pool, as a part of replication transactions. These contracts require the Company to pay or receive a periodic fee in exchange for compensation from the counterparty should the referenced security issuers experience a credit
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Derivatives (continued)
event, as defined in the contract. The Company is also exposed to credit risk related to certain structured fixed maturity securities that have embedded credit derivatives, embedded within certain fixed maturity securities. These securities are primarily comprised of structured securities that contain credit derivatives thatwhich reference a standard index of corporate securities. In addition, 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 swapsIndex Swaps and optionsOptions
The Company enters into equity index options to hedge the impact of a decline in the equity markets on the investment portfolio. During 2015, the Company entered into a total return swap to hedge equity risk of specific common stock investments which were accounted for using fair value option in order to align the accounting treatment within net realized capital gains (losses). The swap matured in January 2016 and the specific common stock investments were sold at that time. In addition, the Company formerly offered certain equity indexed products that remain in force, a portion of which may contain an embedded derivativederivatives that requires bifurcation.require changes in value to be bifurcated from the host contract. The Company has entered intouses equity index swaps and options to economically hedge the equity volatility risk associated with these embedded derivatives. the equity indexed products.
Commodity Contracts
The Company also enters into equity indexhas used put option contracts on oil futures to partially offset potential losses related to certain fixed maturity securities that could be impacted by changes in oil prices. These options and futures withwere terminated at the purposeend of hedging the impact of an adverse equity market environment on the investment portfolio.2015.
U.S GMWB derivatives,Derivatives, net
The Company formerly offered certain variable annuity products with GMWB riders in the U.S.riders. The GMWB product is a bifurcated embedded derivative (“U.S. GMWB product derivatives”) that has a notional value equal to the guaranteed remaining balance ("GRB").GRB. The Company uses reinsurance contracts to transfer a portion of its risk of loss due to U.S GMWB. The reinsurance contracts covering U.S. GMWB (“U.S. GMWB reinsurance contracts”) are accounted for as free-standing derivatives with a notional amount equal to the GRB amount.reinsured.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivatives (continued)
The Company utilizes derivatives (“ U.S. GMWB hedging derivatives”instruments”) as part of an actively manageda dynamic hedging program designed to hedge a portion of the capital market risk exposures of the un-reinsurednon-reinsured GMWB due toriders. The GMWB hedging instruments hedge changes in interest rates, equity market levels, and equity volatility. These derivatives 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. The Company retains the risk for differences between assumed and actual policyholder behavior and between the performance of the actively managed funds underlying the separate accounts and their respective indices. The following table representspresents notional and fair value for U.S. GMWB hedging instruments.
| | | | Notional Amount | | Fair Value | Notional Amount | | Fair Value |
| | December 31, 2013 | | December 31, 2012 | | December 31, 2013 | | December 31, 2012 | December 31, 2016 | December 31, 2015 | | December 31, 2016 | December 31, 2015 |
| Customized swaps | $ | 7,839 |
| | $ | 7,787 |
| | $ | 74 |
| | $ | 238 |
| $ | 5,191 |
| $ | 5,877 |
| | $ | 100 |
| $ | 131 |
|
| Equity swaps, options, and futures | 4,237 |
| | 5,130 |
| | 44 |
| | 267 |
| 1,362 |
| 1,362 |
| | (27 | ) | 2 |
|
| Interest rate swaps and futures | 6,615 |
| | 5,705 |
| | (77 | ) | | 67 |
| 3,703 |
| 3,740 |
| | 21 |
| 25 |
|
| Total | $ | 18,691 |
| | $ | 18,622 |
| | $ | 41 |
| | $ | 572 |
| $ | 10,256 |
| $ | 10,979 |
| | $ | 94 |
| $ | 158 |
|
U.S. macro hedge programMacro Hedge Program
The Company utilizes equity swaps, options, futures, and forwards to partially hedgeprovide partial protection against a decline in the equity marketsstatutory tail scenario risk arising from GMWB and the resultingGMDB liabilities on the Company's statutory surplus and capital impact primarily arising from GMDB and GMWB obligations. The following table represents notional and fair value for the U.S. macro hedge program.
|
| | | | | | | | | | | | | | | |
| | Notional Amount | | Fair Value |
| | December 31, 2013 | | December 31, 2012 | | December 31, 2013 | | December 31, 2012 |
| Equity options and swaps | 9,934 |
| | 7,442 |
| | 139 |
| | 286 |
|
| Total | $ | 9,934 |
| | $ | 7,442 |
| | $ | 139 |
| | $ | 286 |
|
International program
The Hartford formerly offered certain variable annuity products in Japan with GMWB or GMAB riders, which are bifurcated embeddedsurplus. These derivatives (“International program product derivatives”). The GMWB provides the policyholder with a guaranteed remaining balance (“GRB”) which is generally equal to premiums less withdrawals. If the policyholder’s account value is reduced to a specified level through a combination of market declines and withdrawals but the GRB still has value, the Company is obligated to continue to make annuity payments to the policyholder until the GRB is exhausted. Certain contract provisions can increase the GRB at contractholder election or after the passage of time. The GMAB provides the policyholder with their initial deposit in a lump sum after a specified waiting period. The notional amountcover some of the International program product derivatives are the foreign currency denominated GRBs converted to U.S. dollars at the current foreign spot exchange rate as of the reporting period date.
The Company has reinsured certain of these GMWB and GMAB riders from an affiliate. See Note 13 - Transactions with Affiliates for further discussion.
The Company enters into derivative contracts (“International program hedging instruments”) to hedge a portion of the capital market risk exposures associated with the guaranteed benefits associated with the international variable annuity contracts. During 2013, the Company expanded its hedging program to substantially reduce equity and foreign currency exchange risk. The program is primarily focused on theresidual risks that have been reinsured to the Company’s U.S. legal entities although certain hedges, predominantly options, are also held directly in HLIKK . The hedging derivatives collectively held in these entities are comprised of equity futures, options, swaps and currency forwards and options to hedge against a decline in the debt and equity markets or changes in foreign currency exchange rates and the resulting statutory surplus and capital impact primarily arising from GMDB, GMIB and GMWB obligations issued in Japan.
The Company also enters into foreign currency denominated interest rate swaps and swaptions to hedge the interest rate exposure related to the potential annuitization of certain benefit obligations.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivatives (continued)
The following table represents notional and fair value for the international program hedging instruments.
|
| | | | | | | | | | | | | | | |
| | Notional Amount | | Fair Value |
| | December 31, 2013 | | December 31, 2012 | | December 31, 2013 | | December 31, 2012 |
| Credit derivatives | 350 |
| | 350 |
| | 5 |
| | 28 |
|
| Currency forwards [1] | 8,778 |
| | 9,327 |
| | 24 |
| | (87 | ) |
| Currency options | 8,408 |
| | 9,710 |
| | (58 | ) | | (49 | ) |
| Equity futures | 999 |
| | 1,206 |
| | — |
| | — |
|
| Equity options | 1,022 |
| | 2,621 |
| | (63 | ) | | (105 | ) |
| Equity swaps | 3,830 |
| | 2,683 |
| | (95 | ) | | (12 | ) |
| Customized swaps | — |
| | 899 |
| | — |
| | (11 | ) |
| Interest rate futures | 566 |
| | 634 |
| | — |
| | — |
|
| Interest rate swaps and swaptions | 33,072 |
| | 21,018 |
| | 160 |
| | 131 |
|
| Total | $ | 57,025 |
| | $ | 48,448 |
| | $ | (27 | ) | | $ | (105 | ) |
| |
[1] | As of December 31, 2013 and 2012 net notional amounts are $(1.6) billion and $0.1 billion, respectively, which include $3.6 billion and $4.7 billion, respectively, related to long positions and $5.2 billion and $4.6 billion, respectively, related to short positions.
|
GMAB, GMWB and GMIB reinsurance contracts
As a reinsurer, the Company assumes the GMAB, GMWB, and GMIB embedded derivatives for host variable annuity contracts written by HLIKK. 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. For further information on this transaction, refer to Note 13 - Transactions with Affiliates of Notes to Consolidated Financial Statements.
Coinsurance and modified coinsurance reinsurance contracts
During 2010, 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 reinsurednot otherwise covered by the Company that have been assumed from HLIKK and is accounted for as a free-standing derivative. For further information on this transaction, refer to Note 13 - Transactions with Affiliates of Notes to Consolidated Financial Statements.dynamic hedging program.
Modified Coinsurance Reinsurance Contracts
As of December 31, 20132016 and 2015, the Company had approximately $1.3 billion$875 and $895, respectively, of invested assets supporting other policyholder funds and benefits payable reinsured under a modified coinsurance arrangement in connection with the sale of the Individual Life business, which was structured as a reinsurance transaction. The assets are primarily held in a trust established by the Company. The Company pays or receives cash quarterly to settle the operating results of the reinsured business, including the investment results. As a result of this modified coinsurance arrangement, the Company has an embedded derivative that transfers to the reinsurer certain unrealized changes in fair value dueof investments subject to interest rate and credit risks of these assets.risk. The notional amountsamount of the embedded derivative reinsurance contracts are the invested assets supporting the reinsured reserves andwhich are carried at fair value.value and support the reinsured reserves.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Derivatives (continued)
Derivative Balance Sheet ClassificationFair Value Hedges
The following table summarizesInterest rate swaps are used to hedge the balance sheet classification of the Company’s derivative relatedchanges in fair value amountsof fixed maturity securities due to fluctuations in interest rates. These swaps are typically used to manage interest rate duration.
Non-qualifying Strategies
Derivative relationships that do not qualify for hedge accounting (“non-qualifying strategies”) primarily include the hedge program for the Company's variable annuity products as well as the gross assethedging and liability fair value amounts. For reporting purposes,replication strategies that utilize credit default swaps. In addition, hedges of interest rate, foreign currency and equity risk of certain fixed maturities, equities and liabilities do not qualify for hedge accounting.
The non-qualifying strategies include:
Interest Rate Swaps, Swaptions, and Futures
The Company uses interest rate swaps, swaptions, and futures to manage interest rate duration between assets and liabilities in certain investment portfolios. In addition, the Company has electedenters into interest rate swaps to offsetterminate existing swaps, thereby offsetting the fairchanges in value amounts, income accruals,of the original swap. As of December 31, 2016 and related2015, the notional amount of interest rate swaps in offsetting relationships was $2.7 billion and $4.6 billion, respectively.
Foreign Currency Swaps and Forwards
Foreign currency forwards are used to hedge non-U.S. dollar denominated cash collateral receivables and payablesequity securities. The Company also enters into foreign currency swaps and forwards to convert the foreign currency exposures of OTC derivative instruments executed in a legal entity and with the same counterparty or under a master netting agreement, which provides the Company with the legal right of offset. certain foreign currency-denominated fixed maturity investments to U.S. dollars.
Fixed Payout Annuity Hedge
The Company has also electedobligations for certain yen denominated fixed payout annuities under an assumed reinsurance contract. The Company invests in U.S. dollar denominated assets to offsetsupport the fair value amounts, income accrualsassumed reinsurance liability. The Company has in place pay U.S. dollar, receive yen swap contracts to hedge the currency and related cash collateral receivablesyen interest rate exposure between the U.S. dollar denominated assets and payables of OTC-cleared derivative instruments basedthe yen denominated fixed liability reinsurance payments.
Credit Contracts
Credit default swaps are used to purchase credit protection on clearing house agreements. The fair value amounts presented below do not include income accrualsan individual entity or related cash collateral receivablesreferenced index to economically hedge against default risk and payables, which are netted with derivative fair value amounts to determine balance sheet presentation. Derivativescredit-related changes in the Company’s separate accountsvalue of fixed maturity securities. Credit default swaps are not included becausealso used to assume credit risk related to an individual entity or referenced index as a part of replication transactions. These contracts require the associated gains and losses accrue directlyCompany to policyholders. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the following table. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presenteda periodic fee in exchange for compensation from the table to quantifycounterparty should the volume of the Company’s derivative activity. Notional amounts are not necessarily reflective ofreferenced security issuers experience a credit risk. In addition, the tables below exclude investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 3 - Fair Value Measurements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivatives (continued)
event, as defined in the contract. The Company is also exposed to credit risk related to certain structured fixed maturity securities that have embedded credit derivatives, which reference a standard index of corporate securities. In addition, 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 and Options
The Company enters into equity index options to hedge the impact of a decline in the equity markets on the investment portfolio. During 2015, the Company entered into a total return swap to hedge equity risk of specific common stock investments which were accounted for using fair value option in order to align the accounting treatment within net realized capital gains (losses). The swap matured in January 2016 and the specific common stock investments were sold at that time. In addition, the Company formerly offered certain equity indexed products that remain in force, a portion of which contain embedded derivatives that require changes in value to be bifurcated from the host contract. The Company uses equity index swaps to economically hedge the equity volatility risk associated with the equity indexed products.
Commodity Contracts
The Company has used put option contracts on oil futures to partially offset potential losses related to certain fixed maturity securities that could be impacted by changes in oil prices. These options were terminated at the end of 2015.
GMWB Derivatives, net
The Company formerly offered certain variable annuity products with GMWB riders. The GMWB product is a bifurcated embedded derivative (“GMWB product derivatives”) that has a notional value equal to the GRB. The Company uses reinsurance contracts to transfer a portion of its risk of loss due to GMWB. The reinsurance contracts covering GMWB (“GMWB reinsurance contracts”) are accounted for as free-standing derivatives with a notional amount equal to the GRB reinsured.
The Company utilizes derivatives (“GMWB hedging instruments”) as part of a dynamic hedging program designed to hedge a portion of the capital market risk exposures of the non-reinsured GMWB riders. The GMWB hedging instruments hedge changes in interest rates, equity market levels, and equity volatility. These derivatives 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. The Company retains the risk for differences between assumed and actual policyholder behavior and between the performance of the actively managed funds underlying the separate accounts and their respective indices. The following table presents notional and fair value for GMWB hedging instruments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Derivatives | | Asset Derivatives | | Liability Derivatives |
| | Notional Amount | | Fair Value | | Fair Value | | Fair Value |
| Hedge Designation/ Derivative Type | Dec 31, 2013 | | Dec 31, 2012 | | Dec 31, 2013 | | Dec 31, 2012 | | Dec 31, 2013 | | Dec 31, 2012 | | Dec 31, 2013 | | Dec 31, 2012 |
| Cash flow hedges | | | | | | | | | | | | | | | |
| Interest rate swaps | $ | 3,215 |
| | $ | 3,863 |
| | $ | 16 |
| | $ | 167 |
| | $ | 49 |
| | $ | 167 |
| | $ | (33 | ) | | $ | — |
|
| Foreign currency swaps | 143 |
| | 163 |
| | (5 | ) | | (17 | ) | | 2 |
| | 3 |
| | (7 | ) | | (20 | ) |
| Total cash flow hedges | 3,358 |
| | 4,026 |
| | 11 |
| | 150 |
| | 51 |
| | 170 |
| | (40 | ) | | (20 | ) |
| Fair value hedges | | | | | | | | | | | | | | | |
| Interest rate swaps | 1,261 |
| | 753 |
| | (24 | ) | | (55 | ) | | 2 |
| | — |
| | (26 | ) | | (55 | ) |
| Foreign currency swaps | — |
| | 40 |
| | — |
| | 16 |
| | — |
| | 16 |
| | — |
| | — |
|
| Total fair value hedges | 1,261 |
| | 793 |
| | (24 | ) | | (39 | ) | | 2 |
| | 16 |
| | (26 | ) | | (55 | ) |
| Non-qualifying strategies | | | | | | | | | | | | | | | |
| Interest rate contracts | | | | | | | | | | | | | | | |
| Interest rate swaps, swaptions, caps, floors, and futures | 4,633 |
| | 13,432 |
| | (368 | ) | | (363 | ) | | 123 |
| | 436 |
| | (491 | ) | | (799 | ) |
| Foreign exchange contracts | | | | | | | | | | | | | | | |
| Foreign currency swaps and forwards | 118 |
| | 182 |
| | (4 | ) | | (9 | ) | | 6 |
| | 5 |
| | (10 | ) | | (14 | ) |
| Japan 3Win foreign currency swaps | 1,571 |
| | 1,816 |
| | (354 | ) | | (127 | ) | | — |
| | — |
| | (354 | ) | | (127 | ) |
| Japanese fixed annuity hedging instruments | 1,436 |
| | 1,652 |
| | (6 | ) | | 224 |
| | 88 |
| | 228 |
| | (94 | ) | | (4 | ) |
| Credit contracts | | | | | | | | | | | | | | | |
| Credit derivatives that purchase credit protection | 243 |
| | 1,539 |
| | (4 | ) | | (5 | ) | | — |
| | 3 |
| | (4 | ) | | (8 | ) |
| Credit derivatives that assume credit risk [1] | 1,507 |
| | 1,981 |
| | 27 |
| | (8 | ) | | 28 |
| | 17 |
| | (1 | ) | | (25 | ) |
| Credit derivatives in offsetting positions | 3,501 |
| | 5,341 |
| | (3 | ) | | (22 | ) | | 35 |
| | 56 |
| | (38 | ) | | (78 | ) |
| Equity contracts | | | | | | | | | | | | | | | |
| Equity index swaps and options | 131 |
| | 791 |
| | (2 | ) | | 35 |
| | 18 |
| | 45 |
| | (20 | ) | | (10 | ) |
| Variable annuity hedge program | | | | | | | | | | | | | | | |
| U.S. GMWB product derivative [2] | 21,512 |
| | 28,868 |
| | (36 | ) | | (1,249 | ) | | — |
| | — |
| | (36 | ) | | (1,249 | ) |
| U.S. GMWB reinsurance contracts | 4,508 |
| | 5,773 |
| | 29 |
| | 191 |
| | 29 |
| | 191 |
| | — |
| | — |
|
| U.S. GMWB hedging instruments | 18,691 |
| | 18,622 |
| | 41 |
| | 572 |
| | 333 |
| | 743 |
| | (292 | ) | | (171 | ) |
| U.S. macro hedge program | 9,934 |
| | 7,442 |
| | 139 |
| | 286 |
| | 178 |
| | 356 |
| | (39 | ) | | (70 | ) |
| International program product derivatives [2] | — |
| | 1,876 |
| | — |
| | (42 | ) | | — |
| | — |
| | — |
| | (42 | ) |
| International program hedging instruments | 57,025 |
| | 48,448 |
| | (27 | ) | | (105 | ) | | 649 |
| | 657 |
| | (676 | ) | | (762 | ) |
| Other | | | | | | | | | | | | | | | |
| GMAB, GMWB, and GMIB reinsurance contracts | 11,999 |
| | 18,287 |
| | (540 | ) | | (1,827 | ) | | — |
| | — |
| | (540 | ) | | (1,827 | ) |
| Coinsurance and modified coinsurance reinsurance contracts | 29,423 |
| | 44,985 |
| | (427 | ) | | 890 |
| | 383 |
| | 1,566 |
| | (810 | ) | | (676 | ) |
| Total non-qualifying strategies | 166,232 |
| | 201,035 |
| | (1,535 | ) | | (1,559 | ) | | 1,870 |
| | 4,303 |
| | (3,405 | ) | | (5,862 | ) |
| Total cash flow hedges, fair value hedges, and non-qualifying strategies | $ | 170,851 |
| | $ | 205,854 |
| | $ | (1,548 | ) | | $ | (1,448 | ) | | $ | 1,923 |
| | $ | 4,489 |
| | $ | (3,471 | ) | | $ | (5,937 | ) |
| Balance Sheet Location | | | | | | | | | | | | | | | |
| Fixed maturities, available-for-sale | $ | 196 |
| | $ | 416 |
| | $ | (1 | ) | | $ | (20 | ) | | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | (20 | ) |
| Other investments | 40,564 |
| | 37,809 |
| | 272 |
| | 581 |
| | 721 |
| | 1,049 |
| | (449 | ) | | (468 | ) |
| Other liabilities | 62,590 |
| | 67,765 |
| | (825 | ) | | 38 |
| | 789 |
| | 1,683 |
| | (1,614 | ) | | (1,645 | ) |
| Consumer notes | 9 |
| | 26 |
| | (2 | ) | | (2 | ) | | — |
| | — |
| | (2 | ) | | (2 | ) |
| Reinsurance recoverable | 33,931 |
| | 47,430 |
| | (398 | ) | | 1,081 |
| | 413 |
| | 1,757 |
| | (811 | ) | | (676 | ) |
| Other policyholder funds and benefits payable | 33,561 |
| | 52,408 |
| | (594 | ) | | (3,126 | ) | | — |
| | — |
| | (594 | ) | | (3,126 | ) |
| Total derivatives | $ | 170,851 |
| | $ | 205,854 |
| | $ | (1,548 | ) | | $ | (1,448 | ) | | $ | 1,923 |
| | $ | 4,489 |
| | $ | (3,471 | ) | | $ | (5,937 | ) |
|
| | | | | | | | | | | | | |
| | Notional Amount | | Fair Value |
| | December 31, 2016 | December 31, 2015 | | December 31, 2016 | December 31, 2015 |
| Customized swaps | $ | 5,191 |
| $ | 5,877 |
| | $ | 100 |
| $ | 131 |
|
| Equity swaps, options, and futures | 1,362 |
| 1,362 |
| | (27 | ) | 2 |
|
| Interest rate swaps and futures | 3,703 |
| 3,740 |
| | 21 |
| 25 |
|
| Total | $ | 10,256 |
| $ | 10,979 |
| | $ | 94 |
| $ | 158 |
|
| |
[1] | The derivative instruments related to this strategy are held for other investment purposes. |
| |
[2] | These derivatives are embedded within liabilities and are not held for risk management purposes. |
Macro Hedge Program
The Company utilizes equity swaps, options, futures, and forwards to provide partial protection against the statutory tail scenario risk arising from GMWB and the GMDB liabilities on the Company's statutory surplus. These derivatives cover some of the residual risks not otherwise covered by the dynamic hedging program.
Modified Coinsurance Reinsurance Contracts
As of December 31, 2016 and 2015, the Company had approximately $875 and $895, respectively, of invested assets supporting other policyholder funds and benefits payable reinsured under a modified coinsurance arrangement in connection with the sale of the Individual Life business, which was structured as a reinsurance transaction. The assets are primarily held in a trust established by the Company. The Company pays or receives cash quarterly to settle the operating results of the reinsured business, including the investment results. As a result of this modified coinsurance arrangement, the Company has an embedded derivative that transfers to the reinsurer certain unrealized changes in fair value of investments subject to interest rate and credit risk. The notional amount of the embedded derivative reinsurance contracts are the invested assets which are carried at fair value and support the reinsured reserves.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivatives (continued)
Change in Notional Amount
The net decrease in notional amount of derivatives since December 31, 2012 was primarily due to the following:
The decrease in notional amount of non-qualifying interest rate contracts primarily resulted from the termination of interest rate swaptions purchased during the third quarter of 2012 designed to hedge the interest rate risk of the securities being transferred related to the sale of the Retirement Plan business segment.
The decrease in notional amount related to the U.S. GMWB product derivatives was primarily driven by product lapses and partial withdrawals.
The decrease in notional amount related to the international program product derivatives was due to the GWMB embedded derivative disposed of as part of the sale of HLIL. For additional information on the sale agreement, refer to Note 2 - Business Dispositions of Notes to Consolidated Financial Statements.
The decrease in notional amount of coinsurance and modified coinsurance reinsurance contracts primarily resulted from policyholder surrender activity and the termination of embedded derivatives as part of Individual Life and Retirement Plans business dispositions. For additional information on the sale agreement, refer to Note 2 - Business Dispositions of Notes to Consolidated Financial Statements.
The decrease in notional amount of GMAB, GMWB, and GMIB reinsurance contracts was primarily driven by policyholder surrender activity.
The increase in notional amount related to the international program hedging instruments resulted from the Company expanding its hedging program related to international product program guarantees from the business reinsured from HLIKK in the first quarter of 2013.
Change in Fair Value
The net decrease in the total fair value of derivative instruments since December 31, 2012 was primarily related to the following:
The fair value related to the Japanese fixed annuity hedging instruments and Japan 3Win foreign currency swaps decreased primarily due to a depreciation of the Japanese yen in relation to the U.S. dollar.
The fair value related to the cash flow hedging interest rate swaps decreased primarily due to an increase in U.S. interest rates.
GMAB, GMWB and GMIB reinsurance contracts represent the guarantees that are internally reinsured from HLIKK. The fair value of these liabilities has improved as a result of a sustained recovery in the equity markets, exchange rates, interest rates, and volatility. For a discussion related to the reinsurance agreement refer to Note 13 - Transactions with Affiliates of Notes to Consolidated Financial Statements for more information on this transaction.
The Coinsurance and modified coinsurance reinsurance contracts represents U.S. and International guarantees that are ceded to an affiliate. The primary driver of the decline in the fair value of these derivatives is a result of changes in the unrealized gains/losses of the underlying portfolios associated with these contracts as well as policyholder surrender activity. For a discussion related to the reinsurance agreement refer to Note 13 - Transactions with Affiliates of Notes to Consolidated Financial Statements for more information on this transaction.
The fair value associated with the international program hedging instruments decreased primarily due to an improvement in global equity markets and depreciation of the Japanese yen in relation to the euro and the U.S. dollar.
The increase in fair value related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily driven by revaluing the liability for living benefits resulting from favorable policyholder behavior largely related to increased full surrenders and liability assumption updates for partial lapses and withdrawal rates.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivatives (continued)
Offsetting of Derivative Assets/Liabilities
The following tables present the gross fair value amounts, the amounts offset, and net position of derivative instruments eligible for offset in the Company's Consolidated Balance Sheets. Amounts offset include fair value amounts, income accruals and related cash collateral receivables and payables associated with derivative instruments that are traded under a common master netting agreement, as described above. Also included in the tables are financial collateral receivables and payables, which is contractually permitted to be offset upon an event of default, although is disallowed for offsetting under U.S. GAAP.
As of December 31, 2013
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | (i) | | (ii) | | (iii) = (i) - (ii) | (iv) | | (v) = (iii) - (iv) |
| | | | | | Net Amounts Presented in the Statement of Financial Position | | Collateral Disallowed for Offset in the Statement of Financial Position | | |
| | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Statement of Financial Position | | Derivative Assets [1] | | Accrued Interest and Cash Collateral Received [2] | | Financial Collateral Received [4] | | Net Amount |
| Description | | | | | | | | | | | |
| Other investments | $ | 1,510 |
| | $ | 1,290 |
| | $ | 272 |
| | $ | (52 | ) | | $ | 121 |
| | $ | 99 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Statement of Financial Position | | Derivative Liabilities [3] | | Accrued Interest and Cash Collateral Pledged [3] | | Financial Collateral Pledged [4] | | Net Amount |
| Description | | | | | | | | | | | |
| Other liabilities | $ | (2,063 | ) | | $ | (1,308 | ) | | $ | (825 | ) | | $ | 70 |
| | $ | (826 | ) | | $ | 71 |
|
As of December 31, 2012
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | (i) | | (ii) | | (iii) = (i) - (ii) | (iv) | | (v) = (iii) - (iv) |
| | | | | | Net Amounts Presented in the Statement of Financial Position | | Collateral Disallowed for Offset in the Statement of Financial Position | | |
| | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Statement of Financial Position | | Derivative Assets [1] | | Accrued Interest and Cash Collateral Received [2] | | Financial Collateral Received [4] | | Net Amount |
| Description | | | | | | | | | | | |
| Other investments | $ | 2,732 |
| | $ | 2,238 |
| | $ | 581 |
| | $ | (87 | ) | | $ | 490 |
| | $ | 4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Statement of Financial Position | | Derivative Liabilities [3] | | Accrued Interest and Cash Collateral Pledged [3] | | Financial Collateral Pledged [4] | | Net Amount |
| Description | | | | | | | | | | | |
| Other liabilities | $ | (2,113 | ) | | $ | (1,759 | ) | | $ | 38 |
| | $ | (392 | ) | | $ | (300 | ) | | $ | (54 | ) |
| |
[1]
| Included in other investments in the Company's Consolidated Balance Sheets. |
| |
[2]
| Included in other assets in the Company's Consolidated Balance Sheets and is limited to the net derivative receivable associated with each counterparty. |
| |
[3]
| Included in other liabilities in the Company's Consolidated Balance Sheets and is limited to the net derivative payable associated with each counterparty. |
| |
[4]
| Excludes collateral associated with exchange-traded derivatives instruments. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivatives (continued)
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings. All components of each derivative’s 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 on Derivative (Effective Portion) | | Net Realized Capital Gains (Losses) Recognized in Income on Derivative (Ineffective Portion) |
| | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
| Interest rate swaps | $ | (158 | ) | | $ | 26 |
| | $ | 245 |
| | $ | (2 | ) | | $ | — |
| | $ | (2 | ) |
| Foreign currency swaps | 12 |
| | (18 | ) | | (5 | ) | | — |
| | — |
| | — |
|
| Total | $ | (146 | ) | | $ | 8 |
| | $ | 240 |
| | $ | (2 | ) | | $ | — |
| | $ | (2 | ) |
|
| | | | | | | | | | | | |
| Derivatives in Cash Flow Hedging Relationships |
| | | Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
| | | 2013 | | 2012 | | 2011 |
| Interest rate swaps | Net realized capital gains (losses) | $ | 70 |
| | $ | 85 |
| | $ | 6 |
|
| Interest rate swaps | Net investment income (loss) | 57 |
| | 97 |
| | 77 |
|
| Foreign currency swaps | Net realized capital gains (losses) | 4 |
| | (4 | ) | | (1 | ) |
| Total | | $ | 131 |
| | $ | 178 |
| | $ | 82 |
|
As of December 31, 2013, 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 $46. 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.
During the year ended December 31, 2013, 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. For the year ended December 31, 2012, the before-tax deferred net gains on derivative instruments reclassified from AOCI to earnings totaled $91 which primarily resulted from the discontinuance of cash flow hedges due to forecasted transactions no longer probable of occurring associated with variable rate bonds sold as part of the Individual Life and Retirement Plans business dispositions. For further information on the business dispositions, see Note 2. For the year ended December 31, 2011, the Company had no net reclassifications, respectively, from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring.
Fair Value Hedges
Interest rate swaps are used to hedge the changes in fair value of fixed maturity securities due to fluctuations in interest rates. These swaps are typically used to manage interest rate duration.
Non-qualifying Strategies
Derivative relationships that do not qualify for hedge accounting (“non-qualifying strategies”) primarily include the hedge program for the Company's variable annuity products as well as the hedging and replication strategies that utilize credit default swaps. In addition, hedges of interest rate, foreign currency and equity risk of certain fixed maturities, equities and liabilities do not qualify for hedge accounting.
The non-qualifying strategies include:
Interest Rate Swaps, Swaptions, and Futures
The Company uses interest rate swaps, swaptions, and futures to manage interest rate 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, 2016 and 2015, the notional amount of interest rate swaps in offsetting relationships was $2.7 billion and $4.6 billion, respectively.
Foreign Currency Swaps and Forwards
Foreign currency forwards are used to hedge non-U.S. dollar denominated cash and equity securities. The Company also enters into foreign currency swaps and forwards to convert the foreign currency exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars.
Fixed Payout Annuity Hedge
The Company has obligations for certain yen denominated fixed payout annuities under an assumed reinsurance contract. The Company invests in U.S. dollar denominated assets to support the assumed reinsurance liability. The Company has in place pay U.S. dollar, receive yen swap contracts to hedge the currency and yen interest rate exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments.
Credit Contracts
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 the value of fixed maturity securities. Credit default swaps are also used to assume credit risk related to an individual entity or referenced index as a part of replication transactions. These contracts require the Company to pay or receive a periodic fee in exchange for compensation from the counterparty should the referenced security issuers experience a credit
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Derivatives (continued)
event, as defined in the contract. The Company is also exposed to credit risk related to certain structured fixed maturity securities that have embedded credit derivatives, which reference a standard index of corporate securities. In addition, 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 and Options
The Company enters into equity index options to hedge the impact of a decline in the equity markets on the investment portfolio. During 2015, the Company entered into a total return swap to hedge equity risk of specific common stock investments which were accounted for using fair value option in order to align the accounting treatment within net realized capital gains (losses). The swap matured in January 2016 and the specific common stock investments were sold at that time. In addition, the Company formerly offered certain equity indexed products that remain in force, a portion of which contain embedded derivatives that require changes in value to be bifurcated from the host contract. The Company uses equity index swaps to economically hedge the equity volatility risk associated with the equity indexed products.
Commodity Contracts
The Company has used put option contracts on oil futures to partially offset potential losses related to certain fixed maturity securities that could be impacted by changes in oil prices. These options were terminated at the end of 2015.
GMWB Derivatives, net
The Company formerly offered certain variable annuity products with GMWB riders. The GMWB product is a bifurcated embedded derivative (“GMWB product derivatives”) that has a notional value equal to the GRB. The Company uses reinsurance contracts to transfer a portion of its risk of loss due to GMWB. The reinsurance contracts covering GMWB (“GMWB reinsurance contracts”) are accounted for as free-standing derivatives with a notional amount equal to the GRB reinsured.
The Company utilizes derivatives (“GMWB hedging instruments”) as part of a dynamic hedging program designed to hedge a portion of the capital market risk exposures of the non-reinsured GMWB riders. The GMWB hedging instruments hedge changes in interest rates, equity market levels, and equity volatility. These derivatives 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. The Company retains the risk for differences between assumed and actual policyholder behavior and between the performance of the actively managed funds underlying the separate accounts and their respective indices. The following table presents notional and fair value for GMWB hedging instruments.
|
| | | | | | | | | | | | | |
| | Notional Amount | | Fair Value |
| | December 31, 2016 | December 31, 2015 | | December 31, 2016 | December 31, 2015 |
| Customized swaps | $ | 5,191 |
| $ | 5,877 |
| | $ | 100 |
| $ | 131 |
|
| Equity swaps, options, and futures | 1,362 |
| 1,362 |
| | (27 | ) | 2 |
|
| Interest rate swaps and futures | 3,703 |
| 3,740 |
| | 21 |
| 25 |
|
| Total | $ | 10,256 |
| $ | 10,979 |
| | $ | 94 |
| $ | 158 |
|
Macro Hedge Program
The Company utilizes equity swaps, options, futures, and forwards to provide partial protection against the statutory tail scenario risk arising from GMWB and the GMDB liabilities on the Company's statutory surplus. These derivatives cover some of the residual risks not otherwise covered by the dynamic hedging program.
Modified Coinsurance Reinsurance Contracts
As of December 31, 2016 and 2015, the Company had approximately $875 and $895, respectively, of invested assets supporting other policyholder funds and benefits payable reinsured under a modified coinsurance arrangement in connection with the sale of the Individual Life business, which was structured as a reinsurance transaction. The assets are primarily held in a trust established by the Company. The Company pays or receives cash quarterly to settle the operating results of the reinsured business, including the investment results. As a result of this modified coinsurance arrangement, the Company has an embedded derivative that transfers to the reinsurer certain unrealized changes in fair value of investments subject to interest rate and credit risk. The notional amount of the embedded derivative reinsurance contracts are the invested assets which are carried at fair value and support the reinsured reserves.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Derivatives (continued)
Derivative Balance Sheet Classification
For reporting purposes, the Company has elected to offset within assets or liabilities based upon the net of the fair value amounts, income accruals, and related cash collateral receivables and payables of OTC 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. The Company has also elected to offset within assets or liabilities based upon the net of the fair value amounts, income accruals and related cash collateral receivables and payables of OTC-cleared derivative instruments based on clearing house agreements. The following fair value amounts do not include income accruals or related cash collateral receivables and payables, which are netted with derivative fair value amounts to determine balance sheet presentation. Derivatives in the Company’s separate accounts, where the associated gains and losses accrue directly to policyholders are not included in the table below. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the following table. 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 Company’s derivative activity. Notional amounts are not necessarily reflective of credit risk. The following tables exclude investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 2 - Fair Value Measurements of Notes to the Consolidated Financial Statements.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Derivatives (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Derivatives | | Asset Derivatives | | Liability Derivatives |
| | Notional Amount | | Fair Value | | Fair Value | | Fair Value |
| Hedge Designation/ Derivative Type | Dec 31, 2016 | Dec 31, 2015 | | Dec 31, 2016 | | Dec 31, 2015 | | Dec 31, 2016 | Dec 31, 2015 | | Dec 31, 2016 | Dec 31, 2015 |
| Cash flow hedges | | | | | | | | | | | | |
| Interest rate swaps | $ | 1,794 |
| $ | 1,766 |
| | $ | 7 |
| | $ | 38 |
| | $ | 9 |
| $ | 38 |
| | $ | (2 | ) | $ | — |
|
| Foreign currency swaps | 164 |
| 143 |
| | (16 | ) | | (19 | ) | | 10 |
| 7 |
| | (26 | ) | (26 | ) |
| Total cash flow hedges | 1,958 |
| 1,909 |
| | (9 | ) | | 19 |
| | 19 |
| 45 |
| | (28 | ) | (26 | ) |
| Fair value hedges | | | | | | | | | | | | |
| Interest rate swaps | — |
| 23 |
| | — |
| | — |
| | — |
| — |
| | — |
| — |
|
| Total fair value hedges | — |
| 23 |
| | — |
| | — |
| | — |
| — |
| | — |
| — |
|
| Non-qualifying strategies | | | | | | | | | | | | |
| Interest rate contracts | | | | | | | | | | | | |
| Interest rate swaps and futures | 2,774 |
| 4,710 |
| | (411 | ) | | (415 | ) | | 249 |
| 285 |
| | (660 | ) | (700 | ) |
| Foreign exchange contracts | | | | | | | | | | | | |
| Foreign currency swaps and forwards | 382 |
| 386 |
| | 36 |
| | 4 |
| | 36 |
| 4 |
| | — |
| — |
|
| Fixed payout annuity hedge | 804 |
| 1,063 |
| | (263 | ) | | (357 | ) | | — |
| — |
| | (263 | ) | (357 | ) |
| Credit contracts | | | | | | | | | | | | |
| Credit derivatives that purchase credit protection | 131 |
| 249 |
| | (3 | ) | | 10 |
| | — |
| 12 |
| | (3 | ) | (2 | ) |
| Credit derivatives that assume credit risk [1] | 458 |
| 1,435 |
| | 4 |
| | (10 | ) | | 5 |
| 5 |
| | (1 | ) | (15 | ) |
| Credit derivatives in offsetting positions | 1,006 |
| 1,435 |
| | (1 | ) | | (1 | ) | | 16 |
| 17 |
| | (17 | ) | (18 | ) |
| Equity contracts | | | | | | | | | | | | |
| Equity index swaps and options | 100 |
| 404 |
| | — |
| | 15 |
| | 33 |
| 41 |
| | (33 | ) | (26 | ) |
| Variable annuity hedge program | | | | | | | | | | | | |
| GMWB product derivatives [2] | 13,114 |
| 15,099 |
| | (241 | ) | | (262 | ) | | — |
| — |
| | (241 | ) | (262 | ) |
| GMWB reinsurance contracts | 2,709 |
| 3,106 |
| | 73 |
| | 83 |
| | 73 |
| 83 |
| | — |
| — |
|
| GMWB hedging instruments | 10,256 |
| 10,979 |
| | 94 |
| | 158 |
| | 190 |
| 264 |
| | (96 | ) | (106 | ) |
| Macro hedge program | 6,532 |
| 4,548 |
| | 178 |
| | 147 |
| | 201 |
| 179 |
| | (23 | ) | (32 | ) |
| Other | | | | | | | | | | | | |
| Modified coinsurance reinsurance contracts | 875 |
| 895 |
| | 68 |
| | 79 |
| | 68 |
| 79 |
| | — |
| — |
|
| Total non-qualifying strategies | 39,141 |
| 44,309 |
| | (466 | ) | | (549 | ) | | 871 |
| 969 |
| | (1,337 | ) | (1,518 | ) |
| Total cash flow hedges, fair value hedges, and non-qualifying strategies | $ | 41,099 |
| $ | 46,241 |
| | $ | (475 | ) | | $ | (530 | ) | | $ | 890 |
| $ | 1,014 |
| | $ | (1,365 | ) | $ | (1,544 | ) |
| Balance Sheet Location | | | | | | | | | | | | |
| Fixed maturities, available-for-sale | $ | 121 |
| $ | 184 |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| $ | — |
| | $ | — |
| $ | (1 | ) |
| Other investments | 12,732 |
| 11,837 |
| | 235 |
| | 250 |
| | 325 |
| 360 |
| | (90 | ) | (110 | ) |
| Other liabilities | 11,498 |
| 15,071 |
| | (577 | ) | | (653 | ) | | 424 |
| 492 |
| | (1,001 | ) | (1,145 | ) |
| Reinsurance recoverables | 3,584 |
| 4,000 |
| | 141 |
| | 162 |
| | 141 |
| 162 |
| | — |
| — |
|
| Other policyholder funds and benefits payable | 13,164 |
| 15,149 |
| | (274 | ) | | (288 | ) | | — |
| — |
| | (274 | ) | (288 | ) |
| Total derivatives | $ | 41,099 |
| $ | 46,241 |
| | $ | (475 | ) | | $ | (530 | ) | | $ | 890 |
| $ | 1,014 |
| | $ | (1,365 | ) | $ | (1,544 | ) |
| |
| [1] | The derivative instruments related to this strategy are held for other investment purposes. |
| |
| [2] | These derivatives are embedded within liabilities and are not held for risk management purposes. |
Offsetting of Derivative Assets/Liabilities
The following tables present the gross fair value amounts, the amounts offset, and net position of derivative instruments eligible for offset in the Company's Consolidated Balance Sheets. Amounts offset include fair value amounts, income accruals and related cash collateral receivables and payables associated with derivative instruments that are traded under a common master netting agreement, as described in the preceding discussion. Also included in the tables are financial collateral receivables and payables, which are contractually permitted to be offset upon an event of default, although are disallowed for offsetting under U.S. GAAP.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Derivatives (continued)
|
| | | | | | | | | | | | | | | | | | |
| | (i) | (ii) | (iii) = (i) - (ii) | | (v) = (iii) - (iv) |
| | | | Net Amounts Presented in the Statement of Financial Position | Collateral Disallowed for Offset in the Statement of Financial Position | |
| | Gross Amounts of Recognized Assets (Liabilities) | Gross Amounts Offset in the Statement of Financial Position | Derivative Assets [1] (Liabilities) [2] | Accrued Interest and Cash Collateral (Received) [3] Pledged [2] | Financial Collateral (Received) Pledged [4] | Net Amount |
| As of December 31, 2016 | | | | | | |
| Other investments | $ | 749 |
| $ | 588 |
| $ | 235 |
| $ | (74 | ) | $ | 101 |
| $ | 60 |
|
| Other liabilities | (1,091 | ) | (396 | ) | (577 | ) | (118 | ) | (655 | ) | (40 | ) |
| As of December 31, 2015 | | | | | | |
| Other investments | $ | 852 |
| $ | 692 |
| $ | 250 |
| $ | (90 | ) | $ | 99 |
| $ | 61 |
|
| Other liabilities | (1,255 | ) | (499 | ) | (653 | ) | (103 | ) | (753 | ) | (3 | ) |
| |
[1] | Included in other investments in the Company's Consolidated Balance Sheets. |
| |
[2] | Included in other liabilities in the Company's Consolidated Balance Sheets and is limited to the net derivative receivable associated with each counterparty. |
| |
[3] | Included in other investments in the Company's Consolidated Balance Sheets and is limited to the net derivative payable associated with each counterparty. |
| |
[4] | Excludes collateral associated with exchange-traded derivative instruments. |
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 period earnings. All components of each derivative’s 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 on Derivative (Effective Portion) | | Net Realized Capital Gains (Losses) Recognized in Income on Derivative (Ineffective Portion) |
| | 2016 | 2015 | 2014 | | 2016 | 2015 | 2014 |
| Interest rate swaps | $ | (16 | ) | $ | 3 |
| $ | 34 |
| | $ | — |
| $ | — |
| $ | 2 |
|
| Foreign currency swaps | 2 |
| — |
| (10 | ) | | — |
| — |
| — |
|
| Total | $ | (14 | ) | $ | 3 |
| $ | 24 |
| | $ | — |
| $ | — |
| $ | 2 |
|
|
| | | | | | | | | | |
| Derivatives in Cash Flow Hedging Relationships |
| | | Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
| | | 2016 | 2015 | 2014 |
| Interest rate swaps | Net realized capital gains (losses) | $ | 1 |
| $ | (1 | ) | $ | (1 | ) |
| Interest rate swaps | Net investment income (loss) | 25 |
| 33 |
| 50 |
|
| Foreign currency swaps | Net realized capital gains (losses) | (2 | ) | (9 | ) | (13 | ) |
| Total | | $ | 24 |
| $ | 23 |
| $ | 36 |
|
As of December 31, 2016, 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 $13. 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 net investment 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 approximately less than one year.
During the years ended December 31, 2016, 2015, and 2014, 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.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Derivatives (continued)
Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge,hedges, the gain or loss on the derivativederivatives as well as the offsetting loss or gain on the hedged itemitems 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 derivative’s gain or loss were included in the assessment of hedge effectiveness.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. InvestmentsFor the years ended December 31, 2016, 2015, and Derivatives (continued)
The2014, the Company recognized in income immaterial gains and (losses) representingfor the ineffective portion of fair value hedges as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives in Fair Value Hedging Relationships |
| | Gain (Loss) Recognized in Income [1] |
| | 2013 | | 2012 | | 2011 |
| | Derivative | | Hedged Item | | Derivative | | Hedged Item | | Derivative | | Hedged Item |
| Interest rate swaps | | | | | | | | | | | |
| Net realized capital gains (losses) | $ | 27 |
| | $ | (24 | ) | | $ | (3 | ) | | $ | (3 | ) | | $ | (58 | ) | | $ | 54 |
|
| Foreign currency swaps | | | | | | | | | | | |
| Net realized capital gains (losses) | 1 |
| | (1 | ) | | (7 | ) | | 7 |
| | (1 | ) | | 1 |
|
| Benefits, losses and loss adjustment expenses | (2 | ) | | 2 |
| | (6 | ) | | 6 |
| | (22 | ) | | 22 |
|
| Total | $ | 26 |
| | $ | (23 | ) | | $ | (16 | ) | | $ | 10 |
| | $ | (81 | ) | | $ | 77 |
|
| |
[1] | The amounts presented do not include the periodic net coupon settlements of the derivative or the coupon income (expense) related to the derivative instrument and 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 (losses). The following table presents the gain or loss recognized in income on non-qualifying strategies:
|
| | | | | | | | | | | |
Non-qualifying Strategies Gain (Loss) Recognized within Net Realized Capital Gains (Losses) |
| | December 31, |
| | 2013 | | 2012 | | 2011 |
| Interest rate contracts | | | | | |
| Interest rate swaps, caps, floors, and forwards | $ | (5 | ) | | $ | 26 |
| | $ | 20 |
|
| Foreign exchange contracts | | | | | |
| Foreign currency swaps and forwards | 4 |
| | 10 |
| | 1 |
|
| Japan 3Win foreign currency swaps [1] | (268 | ) | | (300 | ) | | 31 |
|
| Japanese fixed annuity hedging instruments [2] | (207 | ) | | (178 | ) | | 109 |
|
| Credit contracts | | | | | |
| Credit derivatives that purchase credit protection | (20 | ) | | (19 | ) | | (8 | ) |
| Credit derivatives that assume credit risk | 46 |
| | 204 |
| | (141 | ) |
| Equity contracts | | | | | |
| Equity index swaps and options | (22 | ) | | (31 | ) | | (67 | ) |
| Variable annuity hedge program | | | | | |
| U.S. GMWB product derivatives | 1,306 |
| | 1,430 |
| | (780 | ) |
| U.S. GMWB reinsurance contracts | (192 | ) | | (280 | ) | | 131 |
|
| U.S. GMWB hedging instruments | (852 | ) | | (631 | ) | | 252 |
|
| U.S. macro hedge program | (234 | ) | | (340 | ) | | (216 | ) |
| International program hedging instruments | (963 | ) | | (1,145 | ) | | 639 |
|
| Other | | | | | |
| GMAB, GMWB, and GMIB reinsurance contracts | 1,107 |
| | 1,233 |
| | (326 | ) |
| Coinsurance and modified coinsurance reinsurance contracts | (1,405 | ) | | (1,901 | ) | | 375 |
|
| Total [3] | $ | (1,705 | ) | | $ | (1,922 | ) | | $ | 20 |
|
| |
[1] | The associated liability is adjusted for changes in spot rates through realized capital gains and was $250, $189 and $(100) for the years ended December 31, 2013, 2012 and 2011, respectively.
|
| |
[2] | The associated liability is adjusted for changes in spot rates through realized capital gains and losses and was $324, $245 and $(129) for the years ended December 31, 2013, 2012, and 2011, respectively.
|
| |
[3] | Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 3 - Fair Value Measurements. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES |
| | | | | | | | | |
Non-qualifying Strategies Gain (Loss) Recognized within Net Realized Capital Gains (Losses) |
| | December 31, |
| | 2016 | 2015 | 2014 |
| Variable annuity hedge program | | | |
| GMWB product derivatives | $ | 88 |
| $ | (59 | ) | $ | (2 | ) |
| GMWB reinsurance contracts | (14 | ) | 17 |
| 4 |
|
| GMWB hedging instruments | (112 | ) | (45 | ) | 3 |
|
| Macro hedge program | (163 | ) | (46 | ) | (11 | ) |
| International program hedging instruments | — |
| — |
| (126 | ) |
| Total variable annuity hedge program | (201 | ) | (133 | ) | (132 | ) |
| Foreign exchange contracts | | | |
| Foreign currency swaps and forwards | 32 |
| 5 |
| 4 |
|
| Fixed payout annuity hedge | 25 |
| (21 | ) | (148 | ) |
| Japanese fixed annuity hedging instruments | — |
| — |
| 22 |
|
| Total foreign exchange contracts | 57 |
| (16 | ) | (122 | ) |
| Other non-qualifying derivatives | | | |
| Interest rate contracts | | | |
| Interest rate swaps, swaptions, and futures | (18 | ) | (7 | ) | (6 | ) |
| Credit contracts | | | |
| Credit derivatives that purchase credit protection | (9 | ) | 3 |
| (6 | ) |
| Credit derivatives that assume credit risk | 15 |
| (4 | ) | 10 |
|
| Equity contracts | | | |
| Equity index swaps and options | 30 |
| 19 |
| 7 |
|
| Commodity contracts | | | |
| Commodity options | — |
| (5 | ) | — |
|
| Other | | | |
| GMAB and GMWB reinsurance contracts | — |
| — |
| 579 |
|
| Modified coinsurance reinsurance contracts | (12 | ) | 46 |
| 395 |
|
| Derivative instruments formerly associated with HLIKK [1] | — |
| — |
| (2 | ) |
| Total other non-qualifying derivatives | (12 | ) | 46 |
| 972 |
|
| Total [2] | $ | (138 | ) | $ | (97 | ) | $ | 723 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivatives (continued)
For[1] These amounts relate to the year ended December 31, 2013 the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprisedtermination of the following:
The net losshedging program associated with the international program hedging instruments was primarily driven by an improvement in global equity markets and depreciation of the Japanese yen in relation to the euro and the U.S. dollar.
The net gain related to the combined GMWB hedging program, which includes the GMWBJapan variable annuity product reinsurance, and hedging derivatives, was primarily driven by revaluing the liability for living benefits resulting from favorable policyholder behavior largely related to increased full surrenders and liability assumption updates for partial lapses and withdrawal rates.
The net gain associated with GMAB, GMWB, and GMIB reinsurance contracts, which are reinsured to an affiliated captive reinsurer, was primarily due to the depreciationsale of HLIKK.
[2] Excludes investments that contain an embedded credit derivative for which the Japanese yen and an improvementCompany has elected the fair value option. For further discussion, see the Fair Value Option section in equity markets.
The net loss on the coinsurance and modified coinsurance reinsurance agreement, which is accounted for as a derivative instrument primarily offsets the net loss on GMAB, GMWB, and GMIB reinsurance contracts. For a discussion related to the reinsurance agreement refer to Note 132 - Transactions with Affiliates of Notes to Consolidated Financial Statements for more information on this transaction.Fair Value Measurements.
The net loss related to the Japanese fixed annuity hedging instruments and the Japan 3Win foreign currency swaps was primarily due to a depreciation of the Japanese yen in relation to the U.S. dollar.
The net loss on the U.S. macro hedge program was primarily due to an improvement in domestic equity markets, an increase in interest rates and a decline in equity volatility.
For the year ended December 31, 2012 the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:
The net loss associated with the international program hedging instruments was primarily driven by an improvement in global equity markets and depreciation of the Japanese yen in relation to the euro and the U.S. dollar.
The net gain related to the combined GMWB hedging program, which includes the GMWB product, reinsurance, and hedging derivatives, was primarily driven by liability model assumption updates, outperformance of underlying actively managed funds compared to their respective indices, and lower equity volatility.
The net loss on the U.S. macro hedge program was primarily due to the passage of time, an improvement in domestic equity markets, and a decrease in equity volatility.
The net gain associated with GMAB, GMWB, and GMIB reinsurance contracts, which are reinsured to an affiliated captive reinsurer, was primarily due to the depreciation of the Japanese yen and an improvement in equity markets.
The net loss on the coinsurance and modified coinsurance reinsurance agreement, which is accounted for as a derivative instrument primarily offsets the net loss on GMAB, GMWB, and GMIB reinsurance contracts. For a discussion related to the reinsurance agreement refer to Note 13 - Transactions with Affiliates of Notes to Consolidated Financial Statements for more information on this transaction.
The net loss related to the Japan 3Win foreign currency swaps and Japanese fixed annuity hedging instruments was primarily due to the depreciation of the Japanese yen in relation to the U.S. dollar, the strengthening of the currency basis swap spread between the U.S. dollar and the Japanese yen, and a decline in U.S. interest rates.
The gain on credit derivatives that assume credit risk as a part of replication transactions resulted from credit spread tightening.
For the year ended December 31, 2011 the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily due to the following:
The net gain associated with the international program hedging instruments was primarily driven by strengthening of the Japanese yen, a decline in global equity markets, and a decrease in interest rates.
The loss related to the combined GMWB hedging program, which includes the GMWB product, reinsurance, and hedging derivatives, was primarily a result of a decrease in long-term interest rates and higher interest rate volatility.
The net loss associated with GMAB, GMWB, and GMIB reinsurance contracts, which are reinsured to an affiliated captive reinsurer, was primarily due to the strengthening of the Japanese yen and a decrease in equity markets.
The net gain on the coinsurance and modified coinsurance reinsurance agreement, which is accounted for as a derivative instrument primarily offsets the net loss on GMAB, GMWB, and GMIB reinsurance contracts. For a discussion related to the reinsurance agreement refer to Note 13 - Transactions with Affiliates of Notes to Consolidated Financial Statements for more information on this transaction.
The net loss on the U.S. macro hedge program was primarily driven by time decay and a decrease in equity market volatility since the purchase date of certain options during the fourth quarter.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivatives (continued)
Refer to Note 12 - Commitments and Contingencies of Notes to Consolidated Financial Statements for additional disclosures regarding contingent credit related features in derivative agreements.
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk of a single entity or referenced index or asset pool in order to synthetically replicate investment transactions.transactions that would be permissible under the Company's investment policies. 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 issuer’s debt obligation after the occurrence of the credit event. A credit event is generally defined as a default on contractually obligated interest or
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Derivatives (continued)
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 standard and customized diversified portfolios of corporate and CMBS issuers. The diversified portfolios of corporate issuers are established within sector concentration limits and may be divided into tranches that possess different credit ratings.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivatives (continued)
The following tables present the notional amount, fair value, weighted average years to maturity, underlying referenced credit obligation type and average credit ratings, and offsetting notional amounts and fair value for credit derivatives in which the Company is assuming credit risk asAs of December 31, 2013 and 2012.2016
|
| | | | | | | | | | | | | | | | | |
| | | | | | Underlying Referenced Credit Obligation(s) [1] | | | |
| Credit Derivative type by derivative risk exposure | Notional Amount [2] | Fair Value | Weighted Average Years to Maturity | | Type | Average Credit Rating | | Offsetting Notional Amount [3] | Offsetting Fair Value [3] |
| Single name credit default swaps | | | | | | | | | |
| Investment grade risk exposure | $ | 88 |
| $ | — |
| 3 years | | Corporate Credit/ Foreign Gov. | A | | $ | 45 |
| $ | — |
|
| Below investment grade risk exposure | 43 |
| — |
| 1 year | | Corporate Credit | B- | | 43 |
| — |
|
| Basket credit default swaps [4] | | | | | | | | | |
| Investment grade risk exposure | 493 |
| 5 |
| 3 years | | Corporate Credit | BBB+ | | 225 |
| (1 | ) |
| Below investment grade risk exposure | 22 |
| 2 |
| 4 years | | Corporate Credit
| B | | 22 |
| (2 | ) |
| Investment grade risk exposure | 158 |
| (2 | ) | 2 years | | CMBS Credit | AA+ | | 111 |
| 1 |
|
| Below investment grade risk exposure | 57 |
| (13 | ) | 1 year | | CMBS Credit | CCC | | 57 |
| 13 |
|
| Embedded credit derivatives | | | | | | | | | |
| Investment grade risk exposure | 100 |
| 100 |
| Less than 1 year | | Corporate Credit | A+ | | — |
| — |
|
| Total [5] | $ | 961 |
| $ | 92 |
| | | | | | $ | 503 |
| $ | 11 |
|
20132015
|
| | | | | | | | | | | | | | | | | |
| | | | | | Underlying Referenced Credit Obligation(s) [1] | | | |
| Credit Derivative type by derivative risk exposure | Notional Amount [2] | Fair Value | Weighted Average Years to Maturity | | Type | Average Credit Rating | | Offsetting Notional Amount [3] | Offsetting Fair Value [3] |
| Single name credit default swaps | | | | | | | | | |
| Investment grade risk exposure | $ | 118 |
| $ | — |
| 1 year | | Corporate Credit/ Foreign Gov. | BBB+ | | $ | 115 |
| $ | (1 | ) |
| Below investment grade risk exposure | 43 |
| (2 | ) | 2 years | | Corporate Credit | CCC+ | | 43 |
| 1 |
|
| Basket credit default swaps [4] | | | | | | | | | |
| Investment grade risk exposure | 1,265 |
| 7 |
| 4 years | | Corporate Credit | BBB+ | | 345 |
| (2 | ) |
| Investment grade risk exposure | 503 |
| (14 | ) | 6 years | | CMBS Credit | AAA- | | 141 |
| 1 |
|
| Below investment grade risk exposure | 74 |
| (13 | ) | 1 year | | CMBS Credit | CCC | | 74 |
| 13 |
|
| Embedded credit derivatives | | | | | | | | | |
| Investment grade risk exposure | 150 |
| 148 |
| 1 year | | Corporate Credit | A+ | | — |
| — |
|
| Total [5] | $ | 2,153 |
| $ | 126 |
| | | | | | $ | 718 |
| $ | 12 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Underlying Referenced Credit Obligation(s) [1] | | | | |
Credit Derivative type by derivative risk exposure | | Notional Amount [2] | | Fair Value | | Weighted Average Years to Maturity | | Type | | Average Credit Rating | | Offsetting Notional Amount [3] | | Offsetting Fair Value [3] |
| Single name credit default swaps | | | | | | | | | | | | | | |
| Investment grade risk exposure | | $ | 735 |
| | $ | 6 |
| | 2 years | | Corporate Credit/
Foreign Gov. | | A | | $ | 592 |
| | $ | (4 | ) |
| Below investment grade risk exposure | | 24 |
| | — |
| | 1 year | | Corporate Credit | | CCC | | 25 |
| | — |
|
| Basket credit default swaps [4] | | | | | | | | | | | | | | |
| Investment grade risk exposure | | 1,912 |
| | 25 |
| | 3 years | | Corporate Credit | | BBB+ | | 784 |
| | (10 | ) |
| Below investment grade risk exposure | | 87 |
| | 8 |
| | 5 years | | Corporate Credit | | BB- | | — |
| | — |
|
| Investment grade risk exposure | | 235 |
| | (5 | ) | | 3 years | | CMBS Credit | | A | | 235 |
| | 5 |
|
| Below investment grade risk exposure | | 115 |
| | (18 | ) | | 3 years | | CMBS Credit | | B- | | 115 |
| | 18 |
|
| Embedded credit derivatives | | | | | | | | | | | | | | |
| Investment grade risk exposure | | 150 |
| | 145 |
| | 3 years | | Corporate Credit | | BBB+ | | — |
| | — |
|
| Total [5] | | $ | 3,258 |
| | $ | 161 |
| | | | | | | | $ | 1,751 |
| | $ | 9 |
|
As of December 31, 2012
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Underlying Referenced Credit Obligation(s) [1] |
| Credit Derivative type by derivative risk exposure | | Notional Amount [2] | | Fair Value | | Weighted Average Years to Maturity | | Type | | Average Credit Rating | | Offsetting Notional Amount [3] | | Offsetting Fair Value [3] |
| Single name credit default swaps | | | | | | | | | | | | | | |
| Investment grade risk exposure | | $ | 1,787 |
| | $ | 8 |
| | 3 years | | Corporate Credit/ Foreign Gov. | | A | | $ | 878 |
| | $ | (19 | ) |
| Below investment grade risk exposure | | 114 |
| | (1 | ) | | 1 year | | Corporate Credit | | B+ | | 114 |
| | (3 | ) |
| Basket credit default swaps [4] | | | | | | | | | | | | | | |
| Investment grade risk exposure | | 2,074 |
| | 11 |
| | 2 years | | Corporate Credit | | BBB+ | | 1,326 |
| | (6 | ) |
| Investment grade risk exposure | | 237 |
| | (12 | ) | | 4 years | | CMBS Credit | | A | | 238 |
| | 12 |
|
| Below investment grade risk exposure | | 115 |
| | (27 | ) | | 4 years | | CMBS Credit | | B+ | | 115 |
| | 27 |
|
| Embedded credit derivatives | | | | | | | | | | | | | | |
| Investment grade risk exposure | | 325 |
| | 296 |
| | 4 years | | Corporate Credit | | BBB- | | — |
| | — |
|
| Total [5] | | $ | 4,652 |
| | $ | 275 |
| | | | | | | | $ | 2,671 |
| | $ | 11 |
|
| |
[1] | The average credit ratings are based on availability and are generally the midpoint of the applicableavailable ratings among Moody’s, S&P, Fitch and Fitch.Morningstar. 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. These derivatives are governed by agreements, and clearing house rules and applicable law which include collateral posting requirements. There is no additional specific collateral related to these contracts or recourse provisions included in the contracts to offset losses going forward.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 $2.3$1.8 billion and $2.4 billion as of December 31, 20132016 and 2012, respectively,2015, of notional amount on swaps of standard market indices of diversified portfolios of corporate and CMBS issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index. |
| |
| [5] | Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 32 - Fair Value Measurements. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Investments and Derivatives (continued)
Derivative Collateral Arrangements
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, 20132016 and 2012,2015, the Company pledged cash collateral associated with derivative instruments with a fair value of $134 and $173, respectively, for which the collateral receivable has been primarily included within other investments on the Company's Consolidated Balance Sheets. As of December 31, 2016 and 2015, the Company also pledged securities collateral associated with derivative instruments with a fair value of $865$830 and $370,$873, respectively, which have been included in fixed maturities on the Consolidated Balance Sheets. The counterparties have the right to sell or re-pledge these securities. The Company also pledged cash collateral associated with derivative instruments with a fair value of $290 and $179, respectively, as
As of December 31, 20132016 and 2012 which have been included in short-term investments on the Consolidated Balance Sheets.
As of December 31, 2013 and 2012,2015, the Company accepted cash collateral associated with derivative instruments with a fair value of $171$333 and $607,$341, respectively, which was invested and recorded in the Consolidated Balance Sheets in fixed maturities and short-term investments with corresponding amounts recorded in other liabilities.investments or other liabilities as determined by the Company's election to offset on the balance sheet. The Company also accepted securities collateral as of December 31, 20132016 and 20122015 with a fair value of $121$107 and $490,$100, respectively, of which the Company has the ability to sell or repledge $117$81 and $348,$100, respectively. As of December 31, 20132016 and 2012,2015, the fair value ofCompany had no repledged securities totaled $39 and $0, respectively, and the Company did not sell any securities. In addition, as of December 31, 20132016 and 2012, noncash2015, non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Consolidated Balance Sheets.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Reinsurance
5. Reinsurance
The Company cedes insurance to affiliated and unaffiliated insurers to enable the Company to manage capital and risk exposure. Such arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company's procedures include careful initial selection of its reinsurers, structuring agreements to provide collateral funds where necessary, and regularly monitoring the financial condition and ratings of its reinsurers.
Reinsurance Recoverables
Reinsurance recoverables include balances due from reinsurance companies and are presented net of an allowance for uncollectible reinsurance. Reinsurance recoverables include an estimate of the amount of gross losses and loss adjustment expense reserves that may be ceded under the terms of the reinsurance agreements, including incurred but not reported unpaid losses. The Company’s estimate of losses and loss adjustment expense reserves ceded to reinsurers is based on assumptions that are consistent with those used in establishing the gross reserves for business ceded to the reinsurance contracts. The Company entered into twocalculates its ceded reinsurance transactionsprojection based on the terms of any applicable reinsurance agreements, including an estimate of how incurred but not reported losses will ultimately be ceded under reinsurance agreements. Accordingly, the Company’s estimate of reinsurance recoverables is subject to similar risks and uncertainties as the estimate of the gross reserve for future policy benefits.
The Company's reinsurance recoverables are summarized as follows: |
| | | | | | |
| | As of December 31, |
| Reinsurance Recoverables | 2016 | 2015 |
| Reserve for future policy benefits and other policyholder funds and benefits payable | | |
| Sold businesses (MassMutual and Prudential) | $ | 19,363 |
| $ | 18,993 |
|
| Other reinsurers | 1,362 |
| 1,506 |
|
| Gross reinsurance recoverables | $ | 20,725 |
| $ | 20,499 |
|
As of December 31, 2016, the Company has reinsurance recoverables from MassMutual and Prudential of $8.6 billion and $10.8 billion, respectively. As of December 31, 2015, the Company has reinsurance recoverables from MassMutual and Prudential of $8.6 billion and $10.4 billion, respectively. The Company's obligations to its direct policyholders that have been reinsured to MassMutual and Prudential are secured by invested assets held in connectiontrust. Net of invested assets held in trust, as of December 31, 2016, the Company has $1.2 billion of reinsurance recoverables from Prudential representing approximately 15% of the Company's consolidated stockholder's equity. As of December 31, 2016, the Company has no other reinsurance-related concentrations of credit risk greater than 10% of the Company’s Consolidated Stockholder's Equity.
No allowance for uncollectible reinsurance is required as of December 31, 2016 and December 31, 2015. The allowance for uncollectible reinsurance reflects management’s best estimate of reinsurance cessions that may be uncollectible in the future due to reinsurers’ unwillingness or inability to pay. The Company analyzes recent developments in commutation activity between reinsurers and cedants, recent trends in arbitration and litigation outcomes in disputes between reinsurers and cedants and the overall credit quality of the Company’s reinsurers. Based on this analysis, the Company may adjust the allowance for uncollectible reinsurance or charge off reinsurer balances that are determined to be uncollectible. Where its contracts permit, the Company secures future claim obligations with the salesvarious forms of its Retirement Planscollateral, including irrevocable letters of credit, secured trusts, funds held accounts and Individual Life businesses in January 2013. For further discussion of these transactions, see Note 2 - Business Dispositions of Notesgroup-wide offsets.
Due to the Consolidated Financial Statements.inherent uncertainties as to collection and the length of time before reinsurance recoverables become due, it is possible that future adjustments to the Company’s reinsurance recoverables, net of the allowance, could be required, which could have a material adverse effect on the Company’s consolidated results of operations or cash flows in a particular quarter or annual period.
Insurance Revenues
The effect of reinsurance on earned premiums, fee income and other is as follows: |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | 2015 | 2014 |
| Gross earned premiums, fee income and other | $ | 2,659 |
| $ | 2,877 |
| $ | 3,228 |
|
| Reinsurance assumed | 129 |
| 113 |
| 74 |
|
| Reinsurance ceded | (1,616 | ) | (1,801 | ) | (2,060 | ) |
| Net earned premiums, fee income and other | $ | 1,172 |
| $ | 1,189 |
| $ | 1,242 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Reinsurance (continued)
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 agreements, which reduce death and other benefits, were $915, $302,$1,131, $1,094, and $252$845 for the years ended December 31, 2013, 2012,2016, 2015, and 2011,2014, respectively. In addition, the Company has reinsured a portion of the risk associated with U.S. variable annuities and the associated GMDB and GMWB riders.
The Company also maintains a reinsurance agreementsagreement with HLA, whereby the Company cedes both group life and group accident and health risk. Under these treaties,this treaty, the Company ceded group life premium of $71, $94,$40, $64, and $106 in$85 for the years ended December 31, 2013, 2012,2016, 2015, and 2011,2014, respectively. The Company ceded accident and health premiums to HLA of $152, $177,$86, $129, and $191, respectively.
A subsidiary of$365 for the Company, Hartford Life and Annuity Insurance Company (“HLAI”) has a modified coinsurance ("modco") and coinsurance with funds withheld reinsurance agreement with an affiliated captive reinsurer, White River Life Reinsurance (“WRR”). Under this transaction, the Company ceded $31, $58, and $61 inyears ended December 31, 2013, 2012,2016, 2015, and 2011. For further information regarding the WRR reinsurance agreement, see Note 13- Transactions with Affiliates of Notes to Consolidated Financial Statements.
Prior to June 1, 2009, yen and U.S. dollar based fixed market value adjusted (“MVA”) annuity products, written by HLIKK, were sold to customers in Japan. HLIKK, a wholly owned Japanese subsidiary of Hartford Life, Inc., reinsured to the Company in-force and prospective MVA annuities sold from September 1, 2004 to June 1, 2009. As of December 31, 2013 and 2012, $1.5 billion and $2.1 billion, respectively, of the account value had been assumed by the Company.
Reinsurance Recoverables
Life insurance product reinsurance recoverables represent loss and loss adjustment expense recoverable from a number of reinsurers. The Company's reinsurance recoverables are summarized as follows:
|
| | | | | | |
| | December, 31 |
| Reinsurance Recoverables | 2013 | 2012 |
| Future policy benefits and unpaid loss and loss adjustment expenses: | | |
| Sold businesses (MassMutual and Prudential) | $ | 18,969 |
| $ | — |
|
| Other reinsurers | 825 |
| 2,893 |
|
| Net reinsurance recoverables | $ | 19,794 |
| $ | 2,893 |
|
As of December 31, 2013, the Company has reinsurance recoverables of $9.5 billion each from MassMutual and Prudential. These reinsurance recoverables are secured by invested assets held in trust for the benefit of the Company in the event of a default by the reinsurers. As of December 31, 2013, the fair value of assets held in trust securing the reinsurance recoverables from MassMutual and Prudential were $9.5 billion and $7.1 billion,2014, respectively. As of December 31, 2013, the net reinsurance recoverables from Prudential represents approximately 29% of the Company's consolidated stockholders' equity. As of December 31, 2013, the Company has no other reinsurance-related concentrations of credit risk greater than 10% of the Company’s consolidated stockholder's equity.
Insurance Revenues
Net fee income, earned premiums and other were comprised of the following: |
| | | | | | | | | |
| | For the years Ended December 31, |
| | 2013 | 2012 | 2011 |
| Gross fee income, earned premiums and other | $ | 3,502 |
| $ | 3,739 |
| $ | 4,147 |
|
| Reinsurance assumed | 13 |
| 8 |
| 13 |
|
| Reinsurance ceded | (1,869 | ) | (698 | ) | (733 | ) |
| Net fee income, earned premiums and other | $ | 1,646 |
| $ | 3,049 |
| $ | 3,427 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Deferred Policy Acquisition Costs and Present Value of Future Profits
Changes in the DAC balance are as follows:
| | | | For the years ended December 31, | For the years ended December 31, |
| | 2013 | 2012 | 2011 | 2016 | 2015 | 2014 |
| Balance, beginning of period | $ | 3,072 |
| $ | 3,448 |
| $ | 3,694 |
| $ | 542 |
| $ | 521 |
| $ | 689 |
|
| Deferred costs | 16 |
| 329 |
| 381 |
| 7 |
| 7 |
| 14 |
|
| Amortization — DAC | (124 | ) | (280 | ) | (290 | ) | (40 | ) | (82 | ) | (110 | ) |
| Amortization — Unlock benefit (charge), pre-tax | (104 | ) | (44 | ) | (137 | ) | (74 | ) | 13 |
| (96 | ) |
| Amortization — DAC from discontinued operations | — |
| (35 | ) | (47 | ) | |
| Amortization — DAC related to business dispositions [1] [2] | (2,229 | ) | — |
| — |
| |
| Adjustments to unrealized gains and losses on securities available-for-sale and other [3] | 58 |
| (346 | ) | (154 | ) | |
| Effect of currency translation | — |
| — |
| 1 |
| |
| Adjustments to unrealized gains and losses on securities AFS and other | | 28 |
| 83 |
| 24 |
|
| Balance, end of period | $ | 689 |
| $ | 3,072 |
| $ | 3,448 |
| $ | 463 |
| $ | 542 |
| $ | 521 |
|
| |
[1]
| Includes accelerated amortization of $352 and $2,374 recognized upon the sale of the Retirement Plans and Individual Life businesses, respectively, in the first quarter of 2013. For further information, see Note 2 - Business Dispositions of Notes to Consolidated Financial Statements.
|
| |
[2]
| Includes previously unrealized gains on securities AFS of $148 and $349 recognized upon the sale of the Retirement Plans and Individual Life businesses, respectively, in the first quarter of 2013. |
| |
[3] | Other includes a $16 reduction of the DAC asset as a result of the sale of assets used to administer the Company's PPLI business in 2012. The reduction is directly attributable to this transaction as it results in lower future estimated gross profits than originally estimated on these products.
|
As of December 31, 2013, estimated future net amortization expense of present value of future profits for the succeeding five years is $5, $4, $4, $3 and $3 in 2014, 2015, 2016, 2017 and 2018 respectively.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
7. Goodwill
The reporting units of the Company for which goodwill was allocated include Mutual Funds, Retirement Plans and Individual Life.
Year Ended December 31, 2013
During the first quarter of 2013, the Company completed the sale of its Retirement Plans business to Mass Mutual and its Individual Life business to Prudential. Accordingly, the carrying value of each reporting unit's goodwill of $87 and $163, respectively, was reduced and is included in reinsurance loss on disposition in the Company's Consolidated Statement of Operations. For further information on the disposition of the Retirement Plans and Individual Life businesses, see Note 2 - Business Dispositions of Notes to Consolidated Financial Statements.
Year Ended December 31, 2012
During the fourth quarter of 2012, the Company wrote off $159 of goodwill associated with the Mutual Funds reporting unit including goodwill of $10 due to the sale of Woodbury Financial Services and $149 of remaining goodwill as a result of the Mutual Funds reorganization. For further discussion of the reorganization of the Mutual Funds business, see Note 1 - Basis of Presentation and Significant Accounting Policies and Note 17 - Discontinued Operations of Notes to Consolidated Financial Statements.
During the first quarter of 2012, the Company determined that a triggering event requiring an interim impairment assessment had occurred as a result of its decision to pursue sales or other strategic alternatives for the Retirement Plans and Individual Life reporting units.
The Company completed interim impairment tests during each of the first three quarters of 2012 for the Retirement Plans reporting unit which resulted in no impairment of goodwill. The annual goodwill assessment for Retirement Plans was completed as of October 31, 2012 and an additional impairment test was completed as of December 31, 2012 as a result of the anticipated sale of this business unit. No write-down of goodwill resulted for the year ended December 31, 2012. Retirement Plans passed step one of the goodwill impairment tests with a margin of less than 10% between fair value and book value of the reporting unit as of both dates. The fair value of the Retirement Plans reporting unit as of October 31, 2012 and December 31, 2012 was based on a negotiated transaction price. The carrying amount of goodwill allocated to the Retirement Plans reporting unit was $87 as of December 31, 2012.
The Company completed interim impairment tests during each of the first three quarters of 2012 for the Individual Life reporting unit which resulted in no impairment of goodwill as the Company anticipated a gain on the sale of the Individual Life reporting unit. Upon closing the fourth quarter of 2012, the Company uncovered an error in its calculation of the transaction gain that resulted in the transaction generating a modest loss. This loss would have resulted in a goodwill impairment in the third quarter; however, this loss was recognized in the fourth quarter as it was immaterial to the respective quarter's financial statements taken as a whole. Accordingly, an impairment loss of $61 was recognized in the fourth quarter of 2012. An additional impairment test was completed for the Individual Life reporting unit as of December 31, 2012 as a result of the anticipated sale of this business unit. No additional write-down of goodwill resulted for the year ended December 31, 2012 as fair value approximated the remaining book value of the reporting unit as of December 31, 2012. The fair value of the Individual Life reporting unit as of October 31, 2012 and December 31, 2012 was based on a negotiated transaction price. The carrying amount of goodwill allocated to the Individual Life reporting unit was $163 as of December 31, 2012.
Year Ended December 31, 2011
The Company completed its annual goodwill assessment for the individual reporting units on January 1, 2011 and October 31, 2011, which resulted in no impairment of goodwill. All reporting units passed the first step of both impairment tests with a significant margin.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Separate Accounts, Death Benefits and Other Insurance Benefit Features
Changes in the gross GMDB and UL secondary guarantee benefits are as follows:
|
| | | | | | |
| | GMDB | UL Secondary Guarantees |
| Liability balance as of January 1, 2013 | $ | 944 |
| $ | 363 |
|
| Incurred | 183 |
| 294 |
|
| Paid | (135 | ) | — |
|
| Unlock | (116 | ) | 2 |
|
| Impact of reinsurance transaction | — |
| 1,143 |
|
| Currency translation adjustment | (27 | ) | — |
|
| Liability balance as of December 31, 2013 | $ | 849 |
| $ | 1,802 |
|
| Reinsurance recoverable asset, as of January 1, 2013 | $ | 608 |
| $ | 21 |
|
| Incurred | 104 |
| 296 |
|
| Paid | (98 | ) | — |
|
| Unlock | (81 | ) | — |
|
| Impact of reinsurance transaction | — |
| 1,485 |
|
| Reinsurance recoverable asset, as of December 31, 2013 | $ | 533 |
| $ | 1,802 |
|
|
| | | | | | |
| | GMDB | UL Secondary Guarantees |
| Liability balance as of January 1, 2012 | $ | 1,158 |
| $ | 228 |
|
| Incurred | 228 |
| 113 |
|
| Paid | (258 | ) | — |
|
| Unlock | (181 | ) | 22 |
|
| Currency translation adjustment | (3 | ) | — |
|
| Liability balance as of December 31, 2012 | $ | 944 |
| $ | 363 |
|
| Reinsurance recoverable asset, as of January 1, 2012 | $ | 724 |
| $ | 22 |
|
| Incurred | 121 |
| (1 | ) |
| Paid | (121 | ) | — |
|
| Unlock | (116 | ) | — |
|
| Reinsurance recoverable asset, as of December 31, 2012 | $ | 608 |
| $ | 21 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Separate Accounts, Death7. Reserves for Future Policy Benefits and Other Insurance Benefit Features (continued)Separate Account Liabilities
The following table presents details concerning GMDB and GMIB exposureChanges in Reserves for future policy benefits are as of follows:December 31, 2013: |
| | | | | | | | | | | | |
| | Universal Life-Type Contracts | | |
| | GMDB/GMWB [1] | Life Secondary Guarantees | Traditional Annuity and Other Contracts [2] | Total |
| Liability balance as of January 1, 2016 | $ | 863 |
| $ | 2,313 |
| $ | 10,674 |
| $ | 13,850 |
|
| Less Shadow Reserve | — |
| — |
| (211 | ) | (211 | ) |
| Liability balance as of January 1, 2016, excluding shadow reserve | 863 |
| 2,313 |
| 10,463 |
| 13,639 |
|
| Incurred [3] | 37 |
| 314 |
| 671 |
| 1,022 |
|
| Paid | (114 | ) | — |
| (785 | ) | (899 | ) |
| Liability balance as of December 31, 2016, excluding shadow reserve | 786 |
| 2,627 |
| 10,349 |
| 13,762 |
|
| Add Shadow Reserve | — |
| — |
| 238 |
| 238 |
|
| Liability balance as of December 31, 2016 | $ | 786 |
| $ | 2,627 |
| $ | 10,587 |
| $ | 14,000 |
|
| Reinsurance recoverable asset, as of January 1, 2016 | $ | 523 |
| $ | 2,313 |
| $ | 1,823 |
| $ | 4,659 |
|
| Incurred [3] | — |
| 314 |
| (56 | ) | 258 |
|
| Paid | (91 | ) | — |
| (70 | ) | (161 | ) |
| Reinsurance recoverable asset, as of December 31, 2016 | $ | 432 |
| $ | 2,627 |
| $ | 1,697 |
| $ | 4,756 |
|
|
| | | | | | | | | | |
| Individual Variable and Group Annuity Account Value by GMDB/GMIB Type |
| Maximum anniversary value (“MAV”) [1] | Account Value (“AV”) [8] | Net amount at Risk (“NAR”) [9] | Retained Net Amount at Risk (“RNAR”) [9] | Weighted Average Attained Age of Annuitant |
| MAV only | $ | 19,638 |
| $ | 2,914 |
| $ | 178 |
| 69 |
| With 5% rollup [2] | 1,610 |
| 232 |
| 16 |
| 69 |
| With Earnings Protection Benefit Rider (“EPB”) [3] | 4,862 |
| 629 |
| 19 |
| 67 |
| With 5% rollup & EPB | 588 |
| 119 |
| 5 |
| 70 |
| Total MAV | 26,698 |
| 3,894 |
| 218 |
| |
| Asset Protection Benefit (APB) [4] | 18,579 |
| 277 |
| 55 |
| 68 |
| Lifetime Income Benefit (LIB) – Death Benefit [5] | 773 |
| 9 |
| 2 |
| 66 |
| Reset [6] (5-7 years) | 3,286 |
| 74 |
| 34 |
| 69 |
| Return of Premium [7] /Other | 12,476 |
| 71 |
| 17 |
| 67 |
| Subtotal U.S. GMDB | $ | 61,812 |
| $ | 4,325 |
| $ | 326 |
| 68 |
| Less: General Account Value with U.S. GMBD | 4,349 |
| | | |
| Subtotal Separate Account Liabilities with GMDB | 57,463 |
| | | |
| Separate Account Liabilities without U.S. GMDB | 83,411 |
| | | |
| Total Separate Account Liabilities | $ | 140,874 |
| | | |
| Japan GMDB [10], [11] | $ | 12,659 |
| $ | 167 |
| $ | — |
| 69 |
| Japan GMIB [10], [11] | $ | 12,456 |
| $ | 102 |
| $ | — |
| 69 |
|
| | | | | | | | | | | | |
| | Universal Life-Type Contracts | | |
| | GMDB/GMWB [1] | Life Secondary Guarantees | Traditional Annuity and Other Contracts [2] | Total Future Policy Benefits |
| Liability balance as of January 1, 2015 | $ | 812 |
| $ | 2,041 |
| $ | 10,771 |
| $ | 13,624 |
|
| Less Shadow Reserve | — |
| — |
| (265 | ) | (265 | ) |
| Liability balance as of January 1, 2015, excluding shadow reserve | 812 |
| 2,041 |
| 10,506 |
| 13,359 |
|
| Incurred [3] | 163 |
| 272 |
| 741 |
| 1,176 |
|
| Paid | (112 | ) | — |
| (784 | ) | (896 | ) |
| Liability balance as of December 31, 2015, excluding shadow reserve | 863 |
| 2,313 |
| 10,463 |
| 13,639 |
|
| Add Shadow Reserve | — |
| — |
| 211 |
| 211 |
|
| Liability balance as of December 31, 2015 | $ | 863 |
| $ | 2,313 |
| $ | 10,674 |
| $ | 13,850 |
|
| Reinsurance recoverable asset, as of January 1, 2015 | $ | 480 |
| $ | 2,041 |
| $ | 1,795 |
| $ | 4,316 |
|
| Incurred [3] | 132 |
| 272 |
| 107 |
| 511 |
|
| Paid | (89 | ) | — |
| (79 | ) | (168 | ) |
| Reinsurance recoverable asset, as of December 31, 2015 | $ | 523 |
| $ | 2,313 |
| $ | 1,823 |
| $ | 4,659 |
|
| |
| [1] | These liability balances include all GMDB benefits, plus the life-contingent portion of GMWB benefits in excess of the return of the GRB. GMWB benefits that make up a shortfall between the account value and the GRB are embedded derivatives held at fair value and are excluded from these balances. |
| |
| [2] | Represents life-contingent reserves for which the company is subject to insurance and investment risk. |
| |
| [3] | Includes the portion of assessments established as additions to reserves as well as changes in estimates affecting the reserves. |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Reserves for Future Policy Benefits and Separate Account Liabilities (continued)
The following table provides details concerning GMDB/GMWB exposure as of December 31, 2016: |
| | | | | | | | | | |
| Account Value by GMDB/GMWB Type |
| Maximum anniversary value (“MAV”) [1] | Account Value (“AV”) [8] | Net amount at Risk (“NAR”) [9] | Retained Net Amount at Risk (“RNAR”) [9] | Weighted Average Attained Age of Annuitant |
| MAV only | $ | 13,565 |
| $ | 2,285 |
| $ | 350 |
| 71 |
| With 5% rollup [2] | 1,156 |
| 187 |
| 60 |
| 71 |
| With Earnings Protection Benefit Rider (“EPB”) [3] | 3,436 |
| 464 |
| 75 |
| 70 |
| With 5% rollup & EPB | 467 |
| 102 |
| 22 |
| 73 |
| Total MAV | 18,624 |
| 3,038 |
| 507 |
| |
| Asset Protection Benefit ("APB") [4] | 10,438 |
| 172 |
| 114 |
| 69 |
| Lifetime Income Benefit ("LIB") – Death Benefit [5] | 464 |
| 6 |
| 6 |
| 70 |
| Reset [6] (5-7 years) | 2,406 |
| 13 |
| 12 |
| 70 |
| Return of Premium ("ROP") [7] /Other | 8,766 |
| 69 |
| 65 |
| 69 |
| Subtotal Variable Annuity with GMDB/GMWB [10] | $ | 40,698 |
| $ | 3,298 |
| $ | 704 |
| 70 |
| Less: General Account Value with GMDB/GMWB | 3,773 |
| | | |
| Subtotal Separate Account Liabilities with GMDB | 36,925 |
| | | |
| Separate Account Liabilities without GMDB | 78,740 |
| | | |
| Total Separate Account Liabilities | $ | 115,665 |
| | | |
| |
| [1] | MAV GMDB is the greatest of current AV, net premiums paid and the highest AV on any anniversary before age 80 years (adjusted for withdrawals). |
| |
| [2] | Rollup 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 years or 100% of adjusted premiums. |
| |
| [3] | EPB GMDB is the greatest of the MAV, current AV, or contract value plus a percentage of the contract’s growth. The contract’s growth is AV less premiums net of withdrawals, subject to a cap of 200% of premiums net 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,AV; net premiums paid,paid; or for certain contracts, a benefit amount that ratchets over time, generally based on market performance.performance that ratchets over time. |
| |
| [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 years (adjusted for withdrawals). |
| |
| [7] | ROP GMDB is the greater of current AV and net premiums paid. |
| |
| [8] | AV includes the contract holder’s investment in the separate account and the general account. |
| |
| [9] | NAR is defined as the guaranteed benefit in excess of the current AV. RNAR isrepresents NAR reduced for reinsurance. NAR and RNAR are highly sensitive to equity market movements and increase when equity markets decline. |
| |
| [10] | AssumedSome variable annuity contracts with 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 GRB related to the Japan GMIB was $11.7 billion as of December 31, 2013. The GRB related to the Japan GMAB and GMWB was $304 as of December 31, 2013. 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, 2013, 100% of NAR is reinsured to an affiliate. See Note 13 - Transactions with Affiliates of Notes to Consolidated Financial Statements.
|
| |
[11] | Policies with a guaranteed living benefit (a GMWB in the US or a GMIB in Japan) also have a guaranteed death benefit. Thelife-contingent GMWB that may provide for benefits in excess of the return of the GRB. Such contracts included in this amount have $6.4 billion of total account value and weighted average attained age of 72 years. There is no NAR for each benefit is shown, however these benefits are not additive. When a policy terminates due to death, anyor retained NAR related to GMWB or GMIB is released. Similarly, when a policy goes into benefit status on a GMWB or GMIB, its GMDB NAR is released.these contracts. |
For a description of the Company’s guaranteed living benefits that are accounted for at fair value, see Note 3 - Fair Value Measurements of Notes to Consolidated Financial Statements.
AccountThe account balances of contracts with guarantees were invested in variable separate accounts as follows:
| | | Asset type | December 31, 2013 | December 31, 2012 | December 31, 2016 | December 31, 2015 |
| Equity securities (including mutual funds) | $ | 52,858 |
| $ | 58,208 |
| $ | 33,880 |
| $ | 36,970 |
|
| Cash and cash equivalents | 4,605 |
| 6,940 |
| 3,045 |
| 3,453 |
|
| Total | $ | 57,463 |
| $ | 65,148 |
| $ | 36,925 |
| $ | 40,423 |
|
As of December 31, 20132016 and December 31, 20122015, approximately 17%16% and 16%, respectively,17% of the equity securities above(including mutual funds), in the preceding table were funds invested in fixed income securities through these funds and approximately 83%84% and 84%, respectively,83% were funds invested in equity securities through these funds.
9. Sales Inducements
The Company offered 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. Amortization expense associated with expenses previously deferred is recorded over the remaining life of the contract. Consistent with the Unlock, the Company unlocked the amortization of the sales inducement asset. See Note 6 - Deferred Policy Acquisition Costs and Present Value of Future Profits of Notes to Consolidated Financial Statements for more information concerning the Unlock.securities.
Changes in sales inducement activity are as follows:
|
| | | | | | | | | |
| | For the years ended December 31, |
| | 2013 | 2012 | 2011 |
| Balance, beginning of period | $ | 118 |
| $ | 186 |
| $ | 197 |
|
| Sales inducements deferred | — |
| 4 |
| 6 |
|
| Amortization—Unlock | (3 | ) | (59 | ) | (4 | ) |
| Amortization charged to income | (8 | ) | (13 | ) | (13 | ) |
| Amortization related to business dispositions [1] | (71 | ) | — |
| — |
|
| Balance, end of period | $ | 36 |
| $ | 118 |
| $ | 186 |
|
[1] Includes $22 and $49, related to sale of the Company's Retirement Plans and Individual Life businesses, respectively, in the first quarter of 2013. For further information on guaranteed living benefits that are accounted for at fair value, such as GMWB, see Note 2 - Business DispositionsFair Value Measurements of Notes to Consolidated Financial Statements.
10.HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Debt
Collateralized Advances
The Company becameis a member of the Federal Home Loan Bank of Boston (“FHLBB”) in May 2011.. Membership allows the Company access to collateralized advances, which may be used to support various spread-based business and enhance liquidity management. The Connecticut DepartmentFHLBB membership requires the company to own member stock and advances require the purchase of Insurance (“CTDOI”) will permit the Company to pledge up to $1.25 billion in qualifying assets to secure FHLBB advances for 2014.activity stock. The amount of advances that can be taken are dependent on the asset types pledged to secure the advances. The CTDOI will permit the Company to pledge up to $1.1 billion in qualifying assets to secure FHLBB advances for 2017. The pledge limit is recalculated annually based on statutory admitted assets and capital and surplus. The Company would need to seek the prior approval of the CTDOI if there were a desirein order to exceed these limits. As of December 31, 2013 and 2012,2016, the Company had no advances outstanding under the FHLBB facility.
Consumer Notes
The Company issued consumer notes through its Retail Investor Notes Program prior to 2009. 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 Company’s 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 Company’s exposure to market risks in accordance with Company policy.
As of December 31, 2013, these consumer notes have interest rates ranging from 4% to 6% for fixed notes and, for variable notes, based on December 31, 2013 rates, either consumer price index plus 102 to 247 basis points, or indexed to the S&P 500, Dow Jones Industrials, or the Nikkei 225. The aggregate maturities of Consumer Notes are as follows: $14 in 2014, $32 in 2015, $18 in 2016, $12 in 2017 and $8 thereafter. For 2013, 2012 and 2011, interest credited to holders of consumer notes was $6, $10 and $15, respectively.
11. Income Tax
Income (loss) from continuing operations before income taxes for the years ended December 31, 2013, 2012 and 2011 included income (loss) from domestic operations of $561, $531 and $(137) , respectively. There was no income (loss) from foreign operations for the years ended December 31, 2013, 2012 and 2011.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Income tax expenseTaxes
The provision (benefit) is as follows:for income taxes consists of the following:
|
| | | | | | | | | |
| | For the years ended December 31, |
| | 2013 | 2012 | 2011 |
| Income tax expense (benefit) | | | |
| Current - U.S. Federal | $ | (208 | ) | $ | 139 |
| $ | (206 | ) |
| Deferred - U.S. Federal Excluding NOL Carryforward | 405 |
| (94 | ) | 46 |
|
| U.S. Net Operating Loss Carryforward | (148 | ) | (9 | ) | (163 | ) |
| Total Deferred | 257 |
| (103 | ) | (117 | ) |
| Income tax expense (benefit) | $ | 49 |
| $ | 36 |
| $ | (323 | ) |
|
| | | | | | | | | |
| | For the years ended December 31, |
| | 2016 | 2015 | 2014 |
| Income Tax Expense (Benefit) | | | |
| Current - U.S. Federal | $ | 2 |
| $ | 36 |
| $ | (339 | ) |
| Deferred - U.S. Federal | 72 |
| (6 | ) | 523 |
|
| Total income tax expense | $ | 74 |
| $ | 30 |
| $ | 184 |
|
Deferred tax assets and liabilities on the consolidated balance sheets represent the tax consequences of differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets (liabilities) include the following as of December 31:following:
| | | | As of December 31, | As of December 31, |
| Deferred Tax Assets | 2013 | 2012 | 2016 | 2015 |
| Tax basis deferred policy acquisition costs | $ | 163 |
| $ | 424 |
| $ | 101 |
| $ | 119 |
|
| Unearned premium reserve and other underwriting related reserves | | 6 |
| 4 |
|
| Financial statement deferred policy acquisition costs and reserves | | 32 |
| — |
|
| Investment-related items | 1,516 |
| 1,244 |
| 135 |
| 524 |
|
| Insurance product derivatives | 742 |
| 1,092 |
| 79 |
| 90 |
|
| NOL Carryover | 377 |
| 225 |
| |
| Minimum tax credit | 327 |
| 355 |
| |
| Net operating loss carryover | | 1,155 |
| 1,166 |
|
| Alternative minimum tax credit | | 232 |
| 232 |
|
| Foreign tax credit carryover | 44 |
| 33 |
| 40 |
| 122 |
|
| Capital loss carryover | — |
| 5 |
| |
| Other | 71 |
| 65 |
| 191 |
| 16 |
|
| Total Deferred Tax Assets | 3,240 |
| 3,443 |
| 1,971 |
| 2,273 |
|
| Valuation Allowance | — |
| (53 | ) | |
| Net Deferred Tax Assets | 3,240 |
| 3,390 |
| 1,971 |
| 2,273 |
|
| Deferred Tax Liabilities | | |
| Financial statement deferred policy acquisition costs and reserves | (650 | ) | (356 | ) | — |
| (220 | ) |
| Net unrealized gain on investments | (403 | ) | (1,432 | ) | (480 | ) | (432 | ) |
| Employee benefits | (52 | ) | (45 | ) | (54 | ) | (40 | ) |
| Depreciable and amortizable assets | (25 | ) | — |
| |
| Total Deferred Tax Liabilities | (1,130 | ) | (1,833 | ) | (534 | ) | (692 | ) |
| Total Deferred Tax Asset | $ | 2,110 |
| $ | 1,557 |
| |
| Net Deferred Tax Assets | | $ | 1,437 |
| $ | 1,581 |
|
As of December 31, 2013 and 2012, the deferred tax asset included the expected tax benefit attributable to foreign net operating losses of $0 and $221, which have no expiration. The Company hadhas a current income tax recoverablereceivable of $80$64 and $276 as of December 31, 20132016 and 2015, respectively.
Under a current income tax payable of $192as of December 31, 2012.
If the Company were to follow a “separate entity”separate entity approach, theno current tax benefit related to any of the Company’s tax attributes realized by virtue of its inclusion in The Hartford’s consolidated tax returnbenefits would have been required to be recorded directly to surplus rather than income. These benefits were $0, $18 and $0 for the years ended December 31, 2013, 2012 and 2011, respectively.equity in 2016, 2015, or 2014.
The Company recorded a deferred tax asset valuation allowance thatbelieves it is adequate to reduce the total deferred tax asset to an amount that will more likely than not be realized. Thethat all deferred tax asset valuation allowance was $0 relating mostly to U.S. net operating losses, as of December 31, 2013 and $53, relating mostly to foreign net operating losses, as of December 31, 2012.assets will be fully realized. In assessing the need for a valuation allowance, management considered future taxable temporary difference reversals, future taxable income exclusive of reversing temporary differences and carryforwards,carryovers, taxable income in open carrybackcarry back years as well asand other tax planning strategies. TheseFrom time to time, tax planning strategies could include holding a portion of debt securities with market value losses until recovery, selling appreciatedaltering the level of tax exempt securities to offset capital losses,held, making investments which have specific tax characteristics, and business considerations such as asset-liability matching,matching.
Net deferred income taxes include the future tax benefits associated with the net operating loss carryover, alternative minimum tax credit carryover and foreign tax credit carryover as follows:
Net Operating Loss Carryover
As of December 31, 2016 and 2015, the sales of certain corporate assets. Management views such tax planning strategies as prudent and feasible and will implement them, if necessary, to realize thenet deferred tax asset. Based onasset included the availabilityexpected tax benefit attributable to net operating losses of additional tax planning strategies identified in 2011, the Company released $56, or 100%$3,301 and $3,333, respectively. If unutilized, $3,299 of the valuation allowance associated with investment realized capital losses. Future economic conditions and debt market volatility, including increases in interest rates, can adversely impactlosses expire from 2023-2029. Utilization of these loss carryovers is dependent upon the Company’s tax planning strategies and in particular the Company’s ability to utilize tax benefits on previously recognized realized capital losses.generation of sufficient future taxable income.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Income Taxes (continued)
11. IncomeMost of the net operating loss carryover originated from the Company's U.S. annuity business, including from the hedging program. Given the continued runoff of the U.S. fixed and variable annuity business, the exposure to taxable losses is significantly lessened. Accordingly, given the expected future ultimate parent's consolidated group earnings, the Company believes sufficient taxable income will be generated in the future to utilize its net operating loss carryover. Although the Company believes there will be sufficient future taxable income to fully recover the remainder of the loss carryover, the Company's estimate of the likely realization may change over time.
Alternative Minimum Tax (continued)Credit and Foreign Tax Credit Carryover
As of December 31, 2016 and 2015, the net deferred tax asset included the expected tax benefit attributable to alternative minimum tax credit carryover of $232 and $232 and foreign tax credit carryover of $40 and $122 respectively. The alternative minimum tax credits have no expiration date and the foreign tax credit carryover expire from 2020 to 2024. These credits are available to offset regular federal income taxes from future taxable income and although the Company believes there will be sufficient future regular federal taxable income, there can be no certainty that future events will not affect the ability to utilize the credits. Additionally, the use of the foreign tax credits generally depends on the generation of sufficient taxable income to first utilize all of the U.S. net operating loss carryover. However, the Company has identified and purchased certain investments which allow for utilization of the foreign tax credits without first using the net operating loss carryover. Consequently, the Company believes it is more likely than not the foreign tax credit carryover will be fully realized. Accordingly, no valuation allowance has been provided on either the alternative minimum tax carryover or foreign tax credit carryover.
The Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal state and local, or non-U.S. income tax examinations for years prior to 2007. The audit of the years 2007-2011 are2012 and 2013 began in March 2015 and is expected to concludebe completed in 2015, with no material impact on the consolidated financial condition or results of operations. In addition, in 2011, the Company recorded a tax benefit of $52 as a result of a resolution of a tax matter with the IRS for the computation of the dividends-received deduction (DRD) for years 1998, 2000 and 2001.2017. Management believes that adequate provision has been made in the financial statements for any potential assessments that may result from tax examinations and other tax-related matters for all open tax years.
The Company’s unrecognized tax benefits are settled with the parent consistent with the terms of a tax sharing agreement. The Company’s effective tax rate for the year ended December 31, 2015 reflects a $36 net reduction in the provision for income taxes from intercompany tax settlements.
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, |
| | 2013 | 2012 | 2011 |
| Tax provision (benefit) at the U.S. federal statutory rate | $ | 196 |
| $ | 186 |
| $ | (48 | ) |
| Dividends-received deduction | (135 | ) | (140 | ) | (201 | ) |
| Foreign related investments | (7 | ) | (9 | ) | (15 | ) |
| Valuation Allowance | — |
| — |
| (56 | ) |
| Other | (5 | ) | (1 | ) | (3 | ) |
| Income tax expense (benefit) | $ | 49 |
| $ | 36 |
| $ | (323 | ) |
|
| | | | | | | | | |
| | For the years ended December 31, |
| | 2016 | 2015 | 2014 |
| Tax provision at the U.S. federal statutory rate | $ | 125 |
| $ | 186 |
| $ | 301 |
|
| Dividends received deduction ("DRD") | (76 | ) | (152 | ) | (109 | ) |
| Foreign related investments | (7 | ) | (3 | ) | (8 | ) |
| IRS audit adjustments | 31 |
| — |
| — |
|
| Other | 1 |
| (1 | ) | — |
|
| Provision for income taxes | $ | 74 |
| $ | 30 |
| $ | 184 |
|
The separate account DRD is estimated for the current year using information from the most recent return, adjusted for current year equity market performance and other appropriate factors, including estimated levels of corporate dividend payments and level of policy owner equity account balances. The actual current year DRD can vary from estimates based on, but not limited to, changes in eligible dividends received in the mutual funds, amounts of distributions from these mutual funds, amounts of short-term capital gains at the mutual fund level and the Company’s taxable income before the DRD. The Company evaluates its DRD computations on a quarterly basis.
12.HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Commitments and Contingencies
Contingencies Relating to Corporate Litigation and Regulatory Matters
Management evaluates each contingent matter separately. A loss is recorded if probable and reasonably estimable. Management establishes reserves for these contingencies at its “best estimate,” or, if no one number within the range of possible losses is more probable than any other, the Company records an estimated liability at 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 insuredswith respect to life, disability and as an insurer defending coverage claims brought against it.accidental death and dismemberment insurance policies and with respect to annuity contracts. The Company accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves.reserves for future policy benefits. 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 and in addition to the matter described below, putative state and federal class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, bad faith in the handling of insurance claims and improper sales practices in connection with the sale of certain life insurance products and improper claim practices with respect to certain group benefits claims. The Companyinvestment products. Some of these actions also is involved in individual actions in whichseek punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims.damages. 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, theit is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows in particular quarterly or annual periods.
Lease Commitments
The rent paid to Hartford Fire Insurance Company ("Hartford Fire") for operating leases was $2, $179 and $197 for the years ended December 31, 20132016, 20122015 and 20112014, respectively. Future minimum lease commitments as of December 31, 20132016 are immaterial.
Unfunded Commitments
As of December 31, 20132016, the Company has outstanding commitments totaling $253645, of which $223497 is committed to fund limited partnership and other alternative investments, which may be called by the partnership during the commitment period to fund the purchase of new investments and partnership expenses. Additionally, $27106 is largely related to commercial whole loans expected to fund inof the first half of 2013. The remaining outstanding commitments are relatedrelate to various funding obligations associated with private placement securities. The remaining outstanding commitments of $42 relate to mortgage loans the Company is expecting to fund in the first half of 2017.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Commitments and Contingencies (continued)
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 state’s 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 Accounting Standards Codification 405-30, “Accounting by Insurance and Other Enterprises for Insurance-Related Assessments”. Liabilities for guaranty funds 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, 20132016 and 2012,2015 the liability balance was $21$8 and $42,$15, respectively. As of December 31, 20132016 and 2012, $272015 was $15 and $27,$27, respectively, related to premium tax offsets werewas included in other assets. In 2011, the Company recognized $22 for expected assessments related to the Executive Life Company
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Commitments and Contingencies (continued)
Derivative Commitments
Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings, as set by nationally recognized statistical agencies, of the individual legal entity that entered into the derivative agreement as set by nationally recognized statistical rating agencies.agreement. If the legal entity’s 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 enable the counterparties to terminate the agreements and 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 legal entity’s ability to conduct hedging activities by increasing the associated costs and decreasing the willingness of counterparties to transact with the legal 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, 2013,2016, was $844.$794. Of this $844$794 the legal entities have posted collateral of $945$939 in the normal course of business. In addition, the Company has posted collateral of $44$31 associated with a customized GMWB derivative. Based on derivative market values as of December 31, 2013,2016, a downgrade of one level below the current financial strength ratings by either Moody’s or S&P could require approximately an additional $5 to be posted as collateral. Based on derivative market values as of December 31, 2013, a downgrade of two levels below the current financial strength ratings by either Moody’s or S&P would not require additional assets 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 would post, ifwhen required, would beis primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13.11. Transactions with Affiliates
Parent Company Transactions
Transactions of the Company with Hartford Fire Insurance Company ("Hartford Fire"), Hartford Holdings Inc. ("HHI") and its affiliates relate principally to tax settlements, reinsurance, insurance coverage, rental and service fees, payment of dividends and capital contributions.contributions, and employee costs. In addition, an affiliated entity purchased group annuity contracts from the Company has issued structured settlement contracts to fund structured settlement periodic payment obligations assumed by the affiliated entity as part of claims settlements withof property casualty insurance companies and self-insuredself -insured entities. In many cases, the structured settlement contracts are to fund claim settlements of the Company's affiliated property and casualty companies whereby these property and casualty companies transferred funds to another affiliate of the Company to purchase the contracts. As of December 31, 20132016 and 2012,2015, the Company had $54$53 and $53$53, respectively, of reserves for claim annuities purchased by affiliated entities. For the years ended December 31, 2013, 2012,2016, 2015 and 2011,2014, the Company recorded earned premiums of $8, $28,$4, $3, and $12$3 for these intercompany claim annuities. In 2008,Under some of the structured settlement agreements, the claimants have released The Hartford's property and casualty subsidiaries of their primary claim obligation. Reserves for annuities issued by the Company issued a payout annuity to an affiliate for $2.2 billionfund structured settlement payments where the claimant has not released The Hartford's property and casualty subsidiaries of consideration. The Company will pay the benefits associated with this payout annuity over 12 years.their primary obligation totaled $711 and $746 as of December 31, 2016 and 2015, respectively.
Substantially all general insurance expenses related to the Company, including rent and employee benefit plan expenses are initially paid by The Hartford. Direct expensesExpenses are allocated to the Company using specific identification and indirect expenses are allocated usingif available, or other applicable methods. Indirect expensesmethods that would include those for corporate areas which, depending on type, are allocated based on either a percentageblend of direct expenses or on utilization.
Investment advisory agreements between the Company's Mutual Funds subsidiariesrevenue, expense and HL Investment Advisors, LLC, an indirect subsidiary of the Company, were terminated effective December 31, 2012 in connection with HLA's reorganization of its Mutual Funds business. The Company no longer has any significant continuing involvement in HLI's Mutual Funds business.capital.
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 Retiree’s designated beneficiary is entitled to receive under the Plan in the event the Plan assets are insufficient to fund those benefits and The Hartford is unable to provide sufficient assets to fund those benefits. The Company believes that the likelihood that payments will be required under this guarantee is remote.
In 1990, Hartford Fire guaranteed the obligations of the Company with respect to life, accident and health insurance and annuity contracts issued after January 1, 1990. The guarantee was issued to provide an increased level of security to potential purchasers of HLIC’sthe Company's products. Although the guarantee was terminated in 1997, it still covers policies that were issued from 1990 to 1997. As of December 31, 20132016 and 2012, 2015, no recoverables have been recorded for this guarantee, as the Company was able to meet these policyholder obligations.
Reinsurance Assumed from Affiliates
Prior to June 1, 2009, yenThe Company and U.S. dollar basedHLAI formerly reinsured certain fixed market value adjusted (“MVA”) annuity products writtenand variable annuity product GMDB, GMIB, GMWB and GMAB riders from HLIKK, a former Japanese affiliate that was sold on June 30, 2014 to ORIX Life Insurance Corporation. Concurrent with the sale, HLIKK recaptured certain risks that had been reinsured to the Company and HLAI by terminating or modifying intercompany agreements. As a result, the Company recognized a loss on this recapture of $213 in 2014. Upon closing, HLIKK were soldis responsible for all liabilities of the recaptured business.
HLAI continues to customers in Japan. HLIKK,provide reinsurance for yen denominated fixed payout annuities approximating $487 and $619 as of December 31, 2016 and 2015, respectively.
Reinsurance Ceded to Affiliates
Effective August 1, 2016, the Company recaptured a reinsurance agreement with HLA, a wholly owned Japanesesubsidiary of Hartford Life, Inc. whereby the Company had ceded a single group annuity contract to HLA under a 100% quota share agreement. As a result of this recapture, the Company received a return of premium of $90 and increased reserves by $63 resulting in a recognized pre-tax gain of approximately $27.
The Company also maintains a reinsurance agreement with Hartford Life and Accident Insurance Company ("HLA"), a wholly-owned subsidiary of Hartford Life, Inc., reinsured towhereby the Company in-forcecedes both group life and prospective MVA annuities sold from September 1, 2004 to June 1, 2009. Asgroup accident and health risk. Under this treaty, the Company ceded group life premium of $40, $64, and $85 for the years ended December 31, 20132016, 2015, and 2012, $1.5 billion2014, respectively. The Company ceded accident and $2.1 billion, respectively,health premiums to HLA of $86, $129, and $365 for the account value had been assumed by the Company.years ended December 31, 2016, 2015, and 2014, respectively.
HLAI assumed from HLIKK GMDB on covered contracts that have an associated GMIB rider in force on or after July 31, 2006 and GMIB riders issued on or afterEffective April 1, 2005.2014, HLAI, assumed certain in-forceterminated its modco and prospective GMAB, GMIB and GMDB riders issued on or after February 5, 2007 by HLIKK. HLAI assumed certain in-force and prospective GMIB and GMDB riders issued on or after February 1, 2008 by HLIKK. HLAI assumed certain in-force and prospective GMDB riders issued on or after April 1, 2005 by HLIKK.
The GMDB reinsurance is accounted for as a Death Benefit and Other Insurance Benefit Reserve which is not reported at fair value. The liability for the assumed GMDB reinsurance was $0 and $22 and the net amount at risk for the assumed GMDB reinsurance was $0.2 billion and $2.7 billion at December 31, 2013 and 2012, respectively.
While the form of the agreement between HLAI and HLIKK for the GMIB business is reinsurance, in substance and for accounting purposes the agreement is a free standing derivative. As such, the reinsurance agreement for the GMIB business is recorded at fair value on the Company’s balance sheet,coinsurance with prospective changes in fair value recorded in net realized capital gains (losses) in net income (loss). The fair value of the GMIB liability was $0.5 billion and $1.8 billion at December 31, 2013 and 2012, respectively.
As of December 31, 2012, HLAI had afunds withheld reinsurance agreement with Hartford Life Limited, ("HLL"),WRR, following receipt of approval from the CTDOI and Vermont Department of Financial Regulation. As a wholly owned UK subsidiaryresult, the Company recognized a gain of HLAI, that assumed 100%$213 in the year ended December 31, 2014 resulting from the termination of the risksderivatives associated with GMDB and GMWB written by and in-force with HLL as of November 1, 2010. The liability for the assumed GMDB reinsurance was $4 and the net amount at risk for the assumed GMDB reinsurance was $42, as of December 31, 2012. On December 12, 2013, the Company completed the sale of HLIL in a cash transaction to Columbia Insurance Company, a Berkshire Hathaway company. For further information concerning this transaction, see Note 2 - Business Dispositions of Notes to Consolidated Financial Statements.transaction.
Table of ContentsHARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13.11. Transactions with Affiliates (continued)
While the formThe impact of the agreements between HLAI and HLIKK for the GMAB/GMWB business is reinsurance, in substance and for accounting purposes these agreements are free standing derivatives. As such, the reinsurance agreements for the GMAB/GMWB business are recorded at fair value on the Company’s Consolidated Balance Sheets, with prospective changes in fair value recorded in net realized capital gains (losses) in net income (loss). The fair value of the GMAB/GMWB liability was $4 and $0 at December 31, 2013 and 2012, respectively.
Reinsurance Ceded to Affiliates
HLAI has a modified coinsurance (“modco”)modco and coinsurance with funds withheld reinsurance agreement with WRR. HLAI cedes to WRR variable annuity contracts, associated riders, and payout annuities written by HLAI; annuity contracts and associated riders assumed by HLAI under unaffiliated reinsurance agreements; GMAB, GMIB riders and GMDB risks assumed by HLAI from HLIKK; and, up until the sale of HLL on December 12, 2013, GMDB and GMWB riders assumed by HLAI from HLL.
Under modco, the assets and the liabilities, and under coinsurance with funds withheld, the assets, associated with the reinsured business will remain on the consolidated balance sheet of HLIC in segregated portfolios, and WRR will receive the economic risks and rewards related to the reinsured business through modco and funds withheld adjustments. These adjustments are recorded as an adjustment to operating expenses.
The impact of this transaction on the Company’s Consolidated Statements of Operations isprior to termination in 2014 was as follows: | | | | For the years ended December 31, | For the Year Ended December 31, |
| | 2013 | 2012 | 2011 | 2014 |
| Earned premiums | $ | (31 | ) | $ | (58 | ) | $ | (61 | ) | $ | (5 | ) |
| Net realized gains (losses) [1] | (1,665 | ) | (2,130 | ) | 483 |
| |
| Net realized losses [1] | | (103 | ) |
| Total revenues | (1,696 | ) | (2,188 | ) | 422 |
| (108 | ) |
| Benefits, losses and loss adjustment expenses | (8 | ) | (55 | ) | (50 | ) | (1 | ) |
| Insurance operating costs and other expenses | (1,158 | ) | (1,442 | ) | 836 |
| (4 | ) |
| Total expenses | (1,166 | ) | (1,497 | ) | 786 |
| (5 | ) |
| Loss before income taxes | (530 | ) | (691 | ) | (364 | ) | (103 | ) |
| Income tax benefit | (185 | ) | (242 | ) | (127 | ) | (36 | ) |
| Net loss | $ | (345 | ) | $ | (449 | ) | $ | (237 | ) | $ | (67 | ) |
| |
| [1] | Amounts represent the change in valuation of the derivative associated with this transaction. |
[1] Amounts represent the change in valuationF- 59
The Company's Consolidated Balance Sheets include a modco reinsurance recoverable and a deposit liability, as well as a net reinsurance recoverable that is comprised of an embedded derivative. The balance of the modco reinsurance recoverable, deposit liability and net reinsurance recoverable were $129, $638, $495, respectively, at December 31, 2013 and $1.3 billion, $527, $900, respectively, at December 31, 2012.HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Champlain Life Reinsurance CompanyNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Effective November 1, 2007, HLAI entered into a modco and coinsurance with funds withheld agreement with Champlain Life Reinsurance Company ("Champlain Life"), an affiliate captive insurance company, to provide statutory surplus relief for certain life insurance policies. The agreement was accounted for as a financing transaction in accordance with U.S. GAAP. Simultaneous with the sale of the Individual Life business to Prudential, HLAI recaptured the business assumed by Champlain Life. As a result, on January 2, 2013, HLAI was relieved of its funds withheld obligation to Champlain Life of $691; HLAI paid a recapture fee of $347 to Champlain Life; and, HLAI recognized a pre-tax gain of $344 ($224 after-tax). HLAI simultaneously ceded the recaptured reserves to Prudential and recognized the gain on recapture as part of the reinsurance loss on disposition.
14.12. 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 arefor life benefit reserves, generally carriedcarry bonds at amortized cost and present reinsurance assets and liabilities are presented net of reinsurance.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES For reporting purposes, statutory capital and surplus is referred to collectively as "statutory capital".
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Statutory Results (continued)
The statutory net income (loss) and surplus wasstatutory capital are as follows: |
| | | | | | | | | |
| | For the years ended December 31, |
| | 2013 | 2012 | 2011 |
| Combined statutory net income (loss) | $ | 1,290 |
| $ | 927 |
| $ | (669 | ) |
| Statutory capital and surplus | $ | 5,005 |
| $ | 5,016 |
| $ | 5,920 |
|
|
| | | | | | | | | |
| | For the years ended December 31, |
| | 2016 | 2015 | 2014 |
| Combined statutory net income | $ | 349 |
| $ | 371 |
| $ | 132 |
|
| Statutory capital | $ | 4,398 |
| $ | 4,939 |
| $ | 5,564 |
|
Statutory accounting practices do not consolidate the net income (loss) of subsidiaries as performedthat report under U.S. GAAP. Therefore, theThe combined statutory net income (loss) above presentsrepresents the total statutory net income of the Company, and its other insurance subsidiaries to present a comparable statutory net income (loss).subsidiaries.
Regulatory Capital Requirements
The Company's and its U.S. insurance companies' states of domicile impose risk-based capital (“RBC”) requirements. The requirements provide a means of measuring the minimum amount of statutory capital and surplus, referred to collectively as capital appropriate for an insurance company to support its overall business operations based on its size and risk profile. Regulatory compliance is determined by a ratio of a company's total adjusted capital (“TAC”) to its authorized control level RBC (“ACL RBC”). Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The minimum level of TAC before corrective action commences (“Company Action Level”) is two times the ACL RBC (“Company Action Level”).RBC. The adequacy of a company's capital is determined by the ratio of a company's TAC to its Company Action Level, (knownknown as the RBC ratio)"RBC ratio". The Company and all of its operating insurance subsidiaries had RBC ratios in excess of the minimum levels required by the applicable insurance regulations. In aggregate,The RBC ratios for the Company and its domesticprincipal life insurance operating subsidiaries maintain an RBC ratio for the groupwere all in excess of 400% of their Company Action LevelLevels as of December 31, 20132016 and 2012.2015. The reporting of RBC ratios is not intended for the purpose of ranking any company, or for use in connection with any marketing, advertising of promotional activities.
Dividend RestrictionsDividends and Capital Contributions
Dividends to the Company from its insurance subsidiaries are restricted, as is the ability of the Company to pay dividends to its parent company. Future dividend decisions will be based on, and affected by, a number of factors, including the operating results and financial requirements of the Company on a stand-alone basis and the impact of regulatory restrictions.
The payment of dividends by Connecticut-domiciled insurers is limited under the insurance holding company laws of Connecticut. These laws require notice to and approval by the state insurance commissioner for the declaration or payment of any dividend, which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer’s policyholder surplus as of December 31 of the preceding year or (ii) net income (or net gain from operations, if such company is a life insurance company)operations) for the twelve-month period ending on the thirty-first day of December last preceding, in each case determined under statutory insurance accounting principles. In addition, if any dividend of a Connecticut-domiciled insurer exceeds the insurer’s earned surplus, it requires the prior approval of the Connecticut Insurance Commissioner. The insurance holding company lawsCTDOI.
In 2016, HLAI paid dividends of $750 to the other jurisdictionsCompany which were subsequently paid to the Company's parent.
In 2017, the Company is permitted to pay up to a maximum of $1 billion in whichdividends and the Company’s insurance subsidiaries are incorporated (or deemed commercially domiciled) generally contain similar (although in certain instances somewhat more restrictive) limitations on the payment of dividends.
The Company’sCompany 's subsidiaries are permitted to pay up to a maximum of approximately $1 billion$345 in dividends in 2014 without prior approval from the applicable insurance commissioner. With respectHowever, to meet the liquidity needed to pay dividends up to the HFSG Holding Company, the Company may require receiving regulatory approval for extraordinary dividends from HLAI. On January 30, 2017, HLAI paid a dividend of $300 to the Company which was subsequently paid as a dividend to the Company's parent.
The Company anticipates paying an additional $300 dividends to its parent the Company’s dividend limitation under the holding company laws of Connecticut is $919 in 2014. However, because the Company’s earned surplus is negative as ofduring 2017.
Year Ended December 31, 2013,2015
In 2015 the Company will not be permitted to pay anypaid dividends of approximately $1.0 billion to its parent, in 2014 without priorbased on the approval from the Connecticut Insurance Commissioner until such time as earned surplus becomes positive. On February 5, 2013 the Company received approval from the State of Connecticut Insurance Department to receive a $1.1 billion extraordinary dividend from its Connecticut domiciled life insurance subsidiaries, and to pay a $1.2 billion extraordinary dividend to its parent company. These dividends were received and paid on February 22, 2013.
15. Pension Plans, Postretirement, Health Care and Life Insurance Benefit and Savings Plans
Pension Plans
Hartford Life's employees are included in The Hartford's non-contributory defined benefit pension and postretirement health care and life insurance benefit plans. Effective December 31, 2012, The Hartford amended the defined benefit pension to freeze participation and benefit accruals. Also, The Hartford amended its postretirement health care and life insurance benefit plans for all current employees to no longer provide subsidized coverage for current employees who retire on or after January 1, 2014.
Defined benefit pension expense/(income), postretirement health care and life insurance benefits expense/(income) allocated by The Hartford to the Company, was $(1), $(3) and $45 for the years ended December 31, 2013, 2012 and 2011, respectively.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Investment and Savings Plan
Substantially all U.S. employees of the Company are eligible to participate in The Hartford Investment and Savings Plan under which designated contributions may be invested in common stock of The Hartford or certain other investments. The Hartford's contributions include a non-elective contribution of 2% of eligible compensation and a dollar-for-dollar matching contribution of up to 6.0% of eligible compensation contributed by the employee each pay period. The Hartford also maintains a non-qualified savings plan, The Hartford Excess Savings Plan, with the same level of contributions, with respect to employee compensation in excess of the limit that can be recognized under the tax-qualified Investment and Savings Plan. Eligible compensation includes overtime and bonuses but is limited to a total, for the Investment and Savings Plan and Excess Savings Plan combined, of $1 annually.
Prior to January 1, 2013, the contributions were matched, up to 3.0% of base salary. In 2012, employees who had earnings of less than $110 thousand also received a contribution of 1.5% of base salary and employees whose prior year earnings were more than $110 thousand received a contribution of 0.5% of base salary. The cost to Hartford Life for this plan was approximately $7, $10 and $9 for the years ended December 31, 2013, 2012 and 2011, respectively.
16. Stock Compensation Plans
The Hartford has three primary stock-based compensation plans. The Company is included in these plans and has been allocated compensation expense of $11, $32 and $14 for the years ended December 31, 2013, 2012 and 2011, respectively. The Company’s income tax benefit recognized for stock-based compensation plans was $4, $11 and $5 for the years ended December 31, 2013, 2012 and 2011, respectively. The Company did not capitalize the cost of stock-based compensation.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Discontinued Operations
On December 12, 2013, the Company completed the sale of HLIL, an indirect wholly-owned subsidiary of the Company. For further information regarding the sale of HLIL, see Note 2 - Business Dispositions of Notes to Consolidated Financial Statements.
On December 10, 2012, HLA received regulatory approval to reorganize its Mutual Funds business for the purpose of streamlining the business by consolidating the entities that provide services to the Mutual Funds business under a subsidiary of HLI, thereby separating its Mutual Funds business from its insurance business. Following the reorganization, the Company will no longer have any significant continuing involvement in HLI's Mutual Funds business. For further discussion of the reorganization of the Mutual Funds business, see Note 1 - Basis of Presentation and Significant Accounting Policies and Note 7 - Goodwill of Notes to Consolidated Financial Statements.
The Company does not expect these transactions to have a material impact on the Company’s future earnings. The results of operations reflected as discontinued operations in the Consolidated Statements of Operations, consisting of amounts related to HLIL and the Company's Mutual Funds business, are as follows: |
| | | | | | | | | |
| | For the years ended December 31, |
| | 2013 | 2012 | 2011 |
| Revenues | | | |
| Earned Premiums | $ | (23 | ) | $ | — |
| $ | — |
|
| Fee income and other | 14 |
| 563 |
| 609 |
|
| Net investment income (loss) | | | |
| Securities available-for-sale and other | (3 | ) | 10 |
| 8 |
|
| Equity securities, trading | 139 |
| 201 |
| (14 | ) |
| Total net investment income (loss) | 136 |
| 211 |
| (6 | ) |
| Net realized capital gains (losses) | (14 | ) | 68 |
| 78 |
|
| Total revenues | 113 |
| 842 |
| 681 |
|
| Benefits, losses and expenses | | | |
| Benefits, losses and loss adjustment expenses | 2 |
| — |
| (1 | ) |
| Benefits, losses and loss adjustment expenses - returns credited on international variable annuity | 139 |
| 201 |
| (14 | ) |
| Amortization of DAC | — |
| 35 |
| 47 |
|
| Insurance operating costs and other expenses | (33 | ) | 410 |
| 541 |
|
| Goodwill impairment | — |
| 149 |
| — |
|
| Total benefits, losses and expenses | 108 |
| 795 |
| 573 |
|
| Income (loss) before income taxes | 5 |
| 47 |
| 108 |
|
| Income tax expense (benefit) | (5 | ) | (14 | ) | 50 |
|
| Income (loss) from operations of discontinued operations, net of tax | 10 |
| 61 |
| 58 |
|
| Net realized capital losses on disposal, net of tax | (51 | ) | — |
| — |
|
| Income (loss) from discontinued operations, net of tax | $ | (41 | ) | $ | 61 |
| $ | 58 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Restructuring and Other Costs
As a result of a strategic business realignment announced in 2012, The Hartford is currently focusing on its Property & Casualty, Group Benefits and Mutual Funds businesses. In addition, the Company implemented restructuring activities in 2011 across several areas aimed at reducing overall expense levels. The Company intends to substantially complete the related restructuring activities over the next 24 months. For further discussion of the Company's strategic business realignment and related business disposition transactions, see Note 2 - Business Dispositions of Notes to Consolidated Financial Statements.
Termination benefits related to workforce reductions and lease and other contract terminations have been accrued through December 31, 2013. Additional costs, mainly severance benefits and other related costs and professional fees, expected to be incurred subsequent to December 31, 2013, and asset impairment charges, if any, will be expensed as appropriate.
In 2013, The Hartford initiated a plan to consolidate its real estate operations in Connecticut, including the intention to exit certain facilities and relocate employees. The consolidation of real estate in Connecticut is consistent with The Hartford's strategic business realignment and follows the completion of sales of the Retirement Plans and Individual Life businesses. Asset related charges will be incurred over the remaining estimated useful life of facilities, and relocation and other maintenance charges will be recognized as incurred.
Restructuring and other costs are expected to approximate $147, pre-tax. As the Company executes on its operational and strategic initiatives, the Company's estimate of and actual costs incurred for restructuring activities may differ from these estimates.
Restructuring and other costs, pre-tax incurred by the Company in connection with these activities are as follows:
|
| | | | | | |
| | For the years ended December 31, |
| | 2013 | 2012 |
| Severance benefits and related costs | $ | 7 |
| $ | 93 |
|
| Professional fees | 15 |
| 23 |
|
| Asset impairment charges | 5 |
| 4 |
|
| Total restructuring and other costs | $ | 27 |
| $ | 120 |
|
There were no restructuring and other costs incurred by the Company in 2011.
Changes in the accrued restructuring liability balance included in other liabilities in the Company's Consolidated Balance Sheets are as follows:
|
| | | | | | | | | | | | |
| For the year ended December 31, 2013 |
| Severance Benefits and Related Costs | Professional Fees | Asset Impairment Charges | Total Restructuring and Other Costs |
| Balance, beginning of period | $ | 31 |
| $ | — |
| $ | — |
| $ | 31 |
|
| Accruals/provisions | 7 |
| 15 |
| 5 |
| 27 |
|
| Payments/write-offs | (37 | ) | (15 | ) | (5 | ) | (57 | ) |
| Balance, end of period | $ | 1 |
| $ | — |
| $ | — |
| $ | 1 |
|
|
| | | | | | | | | | | | |
| | For the year ended December 31, 2012 |
| | Severance Benefits and Related Costs | Professional Fees | Asset Impairment Charges | Total Restructuring and Other Costs |
| Balance, beginning of period | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Accruals/provisions | 93 |
| 23 |
| 4 |
| 120 |
|
| Payments/write-offs | (62 | ) | (23 | ) | (4 | ) | (89 | ) |
| Balance, end of period | $ | 31 |
| $ | — |
| $ | — |
| $ | 31 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Changes in and Reclassifications From Accumulated Other Comprehensive Income
Changes in AOCI, net of tax and DAC, by component consist of the following:
For the year ended December 31, 2013 |
| | | | | | | | | | | | |
| | Net Unrealized Gain on Securities | Net Gain (Loss) on Cash-Flow Hedging Instruments | Foreign Currency Translation Adjustments | Total AOCI |
| Beginning balance | $ | 1,752 |
| $ | 258 |
| $ | (23 | ) | $ | 1,987 |
|
| OCI before reclassifications | (352 | ) | (94 | ) | 23 |
| (423 | ) |
| Amounts reclassified from AOCI | (905 | ) | (85 | ) | — |
| (990 | ) |
| Net OCI | (1,257 | ) | (179 | ) | 23 |
| (1,413 | ) |
| Ending balance | $ | 495 |
| $ | 79 |
| $ | — |
| $ | 574 |
|
For the year ended December 31, 2012
|
| | | | | | | | | | | | |
| | Net Unrealized Gain on Securities | Net Gain (Loss) on Cash-Flow Hedging Instruments | Foreign Currency Translation Adjustments | Total AOCI |
| Beginning balance | $ | 632 |
| $ | 368 |
| $ | (47 | ) | 953 |
|
| OCI before reclassifications | 1,084 |
| 6 |
| 24 |
| 1,114 |
|
| Amounts reclassified from AOCI | 36 |
| (116 | ) | — |
| (80 | ) |
| Net OCI | 1,120 |
| (110 | ) | 24 |
| 1,034 |
|
| Ending balance | $ | 1,752 |
| $ | 258 |
| $ | (23 | ) | $ | 1,987 |
|
For the year ended December 31, 2011
|
| | | | | | | | | | | | |
| | Net Unrealized Gain on Securities | Net Gain (Loss) on Cash-Flow Hedging Instruments | Foreign Currency Translation Adjustments | Total AOCI |
| Beginning balance | $ | (542 | ) | $ | 265 |
| $ | (45 | ) | (322 | ) |
| OCI before reclassifications | 1,223 |
| 156 |
| (2 | ) | 1,377 |
|
| Amounts reclassified from AOCI | (49 | ) | (53 | ) | — |
| (102 | ) |
| Net OCI | 1,174 |
| 103 |
| (2 | ) | 1,275 |
|
| Ending balance | $ | 632 |
| $ | 368 |
| $ | (47 | ) | $ | 953 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Statutory Results (continued)
19.The Company’s subsidiaries were permitted to pay up to a maximum of approximately $415 in dividends without prior approval from the applicable insurance commissioner. On January 29, 2016, Hartford Life and Annuity paid an extraordinary dividend of $500 to the Company which was subsequently paid as an extraordinary dividend to HLI.
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Changes in and Reclassifications From Accumulated Other Comprehensive Income
Changes in AOCI, net of tax, by component consist of the following:
For the year ended December 31, 2016 |
| | | | | | | | | | | | |
| | Changes in |
| | Net Unrealized Gain on Securities | Net Gain on Cash Flow Hedging Instruments | Foreign Currency Translation Adjustments | AOCI, net of tax |
| Beginning balance | $ | 539 |
| $ | 57 |
| $ | (3 | ) | $ | 593 |
|
| OCI before reclassifications | 212 |
| (9 | ) | — |
| 203 |
|
| Amounts reclassified from AOCI | (58 | ) | (16 | ) | — |
| (74 | ) |
| OCI, net of tax | 154 |
| (25 | ) | — |
| 129 |
|
| Ending balance | $ | 693 |
| $ | 32 |
| $ | (3 | ) | $ | 722 |
|
For the year ended December 31, 2015 |
| | | | | | | | | | | | |
| | Changes in |
| | Net Unrealized Gain on Securities | Net Gain on Cash Flow Hedging Instruments | Foreign Currency Translation Adjustments | AOCI, net of tax |
| Beginning balance | $ | 1,154 |
| $ | 70 |
| $ | (3 | ) | $ | 1,221 |
|
| OCI before reclassifications | (633 | ) | 2 |
| — |
| (631 | ) |
| Amounts reclassified from AOCI | 18 |
| (15 | ) | — |
| 3 |
|
| OCI, net of tax | (615 | ) | (13 | ) | — |
| (628 | ) |
| Ending balance | $ | 539 |
| $ | 57 |
| $ | (3 | ) | $ | 593 |
|
For the year ended December 31, 2014 |
| | | | | | | | | | | | |
| | Changes in |
| | Net Unrealized Gain on Securities | Net Gain on Cash Flow Hedging Instruments | Foreign Currency Translation Adjustments | AOCI, net of tax |
| Beginning balance | $ | 495 |
| $ | 79 |
| $ | — |
| $ | 574 |
|
| OCI before reclassifications | 660 |
| 14 |
| (3 | ) | 671 |
|
| Amounts reclassified from AOCI | (1 | ) | (23 | ) | — |
| (24 | ) |
| OCI, net of tax | 659 |
| (9 | ) | (3 | ) | 647 |
|
| Ending balance | $ | 1,154 |
| $ | 70 |
| $ | (3 | ) | $ | 1,221 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Changes In and Reclassifications From Accumulated Other Comprehensive Income (continued)
Reclassifications from AOCI consist of the following:
| | | | Amount Reclassified from AOCI | | | Amount Reclassified from AOCI | |
| AOCI | For the year ended December 31, 2013 | For the year ended December 31, 2012 | For the year ended December 31, 2011 | Affected Line Item in the Consolidated Statement of Operations | For the Year Ended December 31, 2016 | For the Year Ended December 31, 2015 | For the Year Ended December 31, 2014 | Affected Line Item in the Consolidated Statement of Operations |
| Net Unrealized Gain on Securities | | | | |
| Available-for-sale securities [1] | $ | 1,392 |
| $ | (55 | ) | $ | 75 |
| Net realized capital gains (losses) | |
| Available-for-sale securities | | $ | 89 |
| $ | (27 | ) | $ | 1 |
| Net realized capital gains (losses) |
| | 1,392 |
| (55 | ) | 75 |
| Total before tax | 89 |
| (27 | ) | 1 |
| Total before tax |
| | 487 |
| (19 | ) | 26 |
| Income tax expense | 31 |
| (9 | ) | — |
| Income tax expense |
| | $ | 905 |
| $ | (36 | ) | $ | 49 |
| Net income | $ | 58 |
| $ | (18 | ) | $ | 1 |
| Net income |
| Net Gains on Cash-Flow Hedging Instruments | | | | |
| Interest rate swaps [2] | $ | 70 |
| $ | 85 |
| $ | 6 |
| Net realized capital gains (losses) | |
| Interest rate swaps | | $ | 1 |
| $ | (1 | ) | $ | (1 | ) | Net realized capital gains (losses) |
| Interest rate swaps | 57 |
| 97 |
| 77 |
| Net investment income | 25 |
| 33 |
| 50 |
| Net investment income |
| Foreign currency swaps | 4 |
| (4 | ) | (1 | ) | Net realized capital gains (losses) | (2 | ) | (9 | ) | (13 | ) | Net realized capital gains (losses) |
| | 131 |
| 178 |
| 82 |
| Total before tax | 24 |
| 23 |
| 36 |
| Total before tax |
| | 46 |
| 62 |
| 29 |
| Income tax expense | 8 |
| 8 |
| 13 |
| Income tax expense |
| | $ | 85 |
| $ | 116 |
| $ | 53 |
| Net income | $ | 16 |
| $ | 15 |
| $ | 23 |
| Net income |
| Total amounts reclassified from AOCI | $ | 990 |
| $ | 80 |
| $ | 102 |
| Net income | $ | 74 |
| $ | (3 | ) | $ | 24 |
| Net income |
[1] Includes $1.5 billion of net unrealized gains on securities relating to the sales of the Retirement Plans and Individual Life businesses.[2] Includes $71 of net gains on cash flow hedging instruments relating to the sales of the Retirement Plans and Individual Life businesses.
20. Subsequent Event
During 2013, The Hartford initiated a plan to make HLA the single nationwide underwriting company for its Group Benefits business by capitalizing it to support the Group Benefits business and separating it from the legal entities that support its Talcott Resolution operating segment. On January 30, 2014, The Hartford received approval from the State of Connecticut Insurance Department ("CTDOI") to dividend approximately $800 of cash and invested assets from HLAI and the Company to HLA and then distribute those subsidiaries From HLA to HLI.
21.14. Quarterly Results (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended |
| | March 31, | June 30, | September 30, | December 31, |
| | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 |
| Total revenues | $ | 2,267 |
| $ | 198 |
| $ | 229 |
| $ | 2,110 |
| $ | 804 |
| $ | 1,170 |
| $ | 335 |
| $ | 626 |
|
| Total benefits, losses and expenses | 1,754 |
| (60 | ) | 271 |
| 2,014 |
| 550 |
| 948 |
| 519 |
| 671 |
|
| Income (loss) from continuing operations, net of tax | 367 |
| 202 |
| 11 |
| 93 |
| 202 |
| 173 |
| (68 | ) | 27 |
|
| Income (loss) from discontinued operations, net of tax | 19 |
| 86 |
| (46 | ) | (6 | ) | (1 | ) | 30 |
| (13 | ) | (49 | ) |
| Net income (loss) | 386 |
| 288 |
| (35 | ) | 87 |
| 201 |
| 203 |
| (81 | ) | (22 | ) |
| Less: Net income (loss) attributable to the noncontrolling interest | 6 |
| (1 | ) | — |
| — |
| — |
| — |
| — |
| 3 |
|
| Net income (loss) attributable to Hartford Life Insurance Company | $ | 380 |
| $ | 289 |
| $ | (35 | ) | $ | 87 |
| $ | 201 |
| $ | 203 |
| $ | (81 | ) | $ | (25 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended |
| | March 31, | June 30, | September 30, | December 31, |
| | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 |
| Total revenues | $ | 487 |
| $ | 668 |
| $ | 622 |
| $ | 702 |
| $ | 702 |
| $ | 630 |
| $ | 571 |
| $ | 499 |
|
| Total benefits, losses and expenses | 478 |
| 483 |
| 474 |
| 461 |
| 610 |
| 500 |
| 464 |
| 525 |
|
| Net income | 28 |
| 145 |
| 118 |
| 230 |
| 79 |
| 118 |
| 57 |
| 7 |
|
| Less: Net income (loss) attributable to the noncontrolling interest | — |
| — |
| — |
| — |
| — |
| 1 |
| — |
| (1 | ) |
| Net income attributable to Hartford Life Insurance Company | $ | 28 |
| $ | 145 |
| $ | 118 |
| $ | 230 |
| $ | 79 |
| $ | 117 |
| $ | 57 |
| $ | 8 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS IN AFFILIATES
($ in millions)
| | | | As of December 31, 2013 | As of December 31, 2016 |
| Type of Investment | Cost | Fair Value | Amount at which shown on Balance Sheet | Cost | Fair Value | Amount at which shown on Balance Sheet |
| Fixed maturities | | |
| Fixed Maturities | | |
| Bonds and notes | | |
| U.S. government and government agencies and authorities (guaranteed and sponsored) | $ | 3,714 |
| $ | 3,728 |
| $ | 3,728 |
| $ | 3,125 |
| $ | 3,275 |
| $ | 3,275 |
|
| States, municipalities and political subdivisions | 988 |
| 965 |
| 965 |
| 1,098 |
| 1,189 |
| 1,189 |
|
| Foreign governments | 1,267 |
| 1,177 |
| 1,177 |
| 337 |
| 345 |
| 345 |
|
| Public utilities | 3,368 |
| 3,579 |
| 3,579 |
| 2,665 |
| 2,873 |
| 2,873 |
|
| All other corporate bonds | 12,545 |
| 13,338 |
| 13,338 |
| 11,012 |
| 11,820 |
| 11,820 |
|
| All other mortgage-backed and asset-backed securities | 5,306 |
| 5,376 |
| 5,376 |
| 4,270 |
| 4,317 |
| 4,317 |
|
| Total fixed maturities, available-for-sale | 27,188 |
| 28,163 |
| 28,163 |
| 22,507 |
| 23,819 |
| 23,819 |
|
| Fixed maturities, at fair value using fair value option | 901 |
| 791 |
| 791 |
| 80 |
| 82 |
| 82 |
|
| Total fixed maturities | 28,089 |
| 28,954 |
| 28,954 |
| 22,587 |
| 23,901 |
| 23,901 |
|
| Equity securities | | |
| Equity Securities | | |
| Common stocks | | |
| Industrial, miscellaneous and all other | 241 |
| 254 |
| 254 |
| 61 |
| 71 |
| 71 |
|
| Non-redeemable preferred stocks | 121 |
| 118 |
| 118 |
| 81 |
| 81 |
| 81 |
|
| Total equity securities, available-for-sale | 362 |
| 372 |
| 372 |
| 142 |
| 152 |
| 152 |
|
| Equity securities, trading | 10 |
| 12 |
| 12 |
| 10 |
| 11 |
| 11 |
|
| Total equity securities | 372 |
| 384 |
| 384 |
| 152 |
| 163 |
| 163 |
|
| Mortgage loans | 3,470 |
| 3,519 |
| 3,470 |
| 2,811 |
| 2,843 |
| 2,811 |
|
| Policy loans | 1,416 |
| 1,476 |
| 1,416 |
| 1,442 |
| 1,442 |
| 1,442 |
|
| Investments in partnerships and trusts | 1,329 |
| 1,329 |
| 1,329 |
| |
| Futures, options and miscellaneous | 927 |
| 270 |
| 270 |
| 493 |
| 282 |
| 282 |
|
| Short-term investments | 1,960 |
| 1,952 |
| 1,952 |
| 1,349 |
| 1,349 |
| 1,349 |
|
| Investments in partnerships and trusts | | 930 |
| | 930 |
|
| Total investments | $ | 37,563 |
| $ | 37,884 |
| $ | 37,775 |
| $ | 29,764 |
|
|
| $ | 30,878 |
|
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
(In millions)
| | | | Gross Amount | Ceded to Other Companies | Assumed From Other Companies | Net Amount | Percentage of Amount Assumed to Net | Gross Amount | Ceded to Other Companies | Assumed From Other Companies | Net Amount | Percentage of Amount Assumed to Net |
| For the year ended December 31, 2013 | | | |
| For the year ended December 31, 2016 | | | |
| Life insurance in force | $ | 318,652 |
| $ | 241,684 |
| $ | 815 |
| $ | 77,783 |
| 1 | % | $ | 284,779 |
| $ | 213,221 |
| $ | 558 |
| $ | 72,116 |
| 1 | % |
| Insurance revenues | | | | |
| Life insurance and annuities | $ | 3,238 |
| $ | 1,714 |
| $ | 13 |
| $ | 1,537 |
| 1 | % | $ | 2,524 |
| $ | 1,527 |
| $ | 129 |
| $ | 1,126 |
| 11 | % |
| Accident and health insurance | 264 |
| 155 |
| — |
| 109 |
| — | % | 135 |
| 89 |
| — |
| 46 |
| — | % |
| Total insurance revenues | $ | 3,502 |
| $ | 1,869 |
| $ | 13 |
| $ | 1,646 |
| 1 | % | $ | 2,659 |
| $ | 1,616 |
| $ | 129 |
| $ | 1,172 |
| 11 | % |
| For the year ended December 31, 2012 | | | |
| For the year ended December 31, 2015 | | | |
| Life insurance in force | $ | 355,164 |
| $ | 151,982 |
| $ | 781 |
| $ | 203,963 |
| — | % | $ | 306,472 |
| $ | 234,306 |
| $ | 713 |
| $ | 72,879 |
| 1 | % |
| Insurance revenues | | | | |
| Life insurance and annuities | $ | 3,441 |
| $ | 517 |
| $ | 8 |
| $ | 2,932 |
| — | % | $ | 2,687 |
| $ | 1,673 |
| $ | 113 |
| $ | 1,127 |
| 10 | % |
| Accident and health insurance | 298 |
| 181 |
| — |
| 117 |
| — | % | 190 |
| 128 |
| — |
| 62 |
| — | % |
| Total insurance revenues | $ | 3,739 |
| $ | 698 |
| $ | 8 |
| $ | 3,049 |
| — | % | $ | 2,877 |
| $ | 1,801 |
| $ | 113 |
| $ | 1,189 |
| 10 | % |
| For the year ended December 31, 2011 | | | |
| For the year ended December 31, 2014 | | | |
| Life insurance in force | $ | 316,817 |
| $ | 130,029 |
| $ | 1,941 |
| $ | 188,729 |
| 1 | % | $ | 327,772 |
| $ | 255,185 |
| $ | 797 |
| $ | 73,384 |
| 1 | % |
| Insurance revenues | | | | |
| Life insurance and annuities | $ | 3,842 |
| $ | 531 |
| $ | 13 |
| $ | 3,324 |
| — | % | $ | 2,979 |
| $ | 1,691 |
| $ | 74 |
| $ | 1,362 |
| 5 | % |
| Accident and health insurance | 305 |
| 202 |
| — |
| 103 |
| — | % | 249 |
| 369 |
| — |
| (120 | ) | — | % |
| Total insurance revenues | $ | 4,147 |
| $ | 733 |
| $ | 13 |
| $ | 3,427 |
| — | % | $ | 3,228 |
| $ | 2,060 |
| $ | 74 |
| $ | 1,242 |
| 6 | % |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
(In millions)
|
| | | | | | | | | | | | | | | |
| | Balance January 1, | Charged to Costs and Expenses | Translation Adjustment | Write-offs/ Payments/ Other | Balance December 31, |
| 2013 | | | | | |
| Valuation allowance on deferred tax asset | $ | 53 |
| $ | — |
| $ | — |
| $ | (53 | ) | $ | — |
|
| Valuation allowance on mortgage loans | 14 |
| 2 |
| — |
| (4 | ) | 12 |
|
| 2012 | | | | | |
| Valuation allowance on deferred tax asset | 78 |
| (25 | ) | — |
| — |
| 53 |
|
| Valuation allowance on mortgage loans | 23 |
| (4 | ) | — |
| (5 | ) | 14 |
|
| 2011 | | | | | |
| Valuation allowance on deferred tax asset | 131 |
| (53 | ) | — |
| — |
| 78 |
|
| Valuation allowance on mortgage loans | 62 |
| (25 | ) | — |
| (14 | ) | 23 |
|
|
| | | | | | | | | | | | |
| | Balance January 1, | Charged to Costs and Expenses | Write-offs/Payments/Other | Balance December 31, |
| 2016 | | | | |
| Valuation allowance on mortgage loans | $ | 19 |
| $ | — |
| $ | — |
| $ | 19 |
|
| 2015 | | | | |
| Valuation allowance on mortgage loans | $ | 15 |
| $ | 4 |
| $ | — |
| $ | 19 |
|
| 2014 | | | | |
| Valuation allowance on mortgage loans | $ | 12 |
| $ | 4 |
| $ | (1 | ) | $ | 15 |
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
|
| |
| HARTFORD LIFE INSURANCE COMPANY |
| |
| /s/ Peter F. Sannizzaro |
| | Peter F. Sannizzaro |
| | Senior Vice President, Chief Financial Officer and Principal Accounting Officer |
Date: February 28, 2014
24, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | |
/s/ Beth A. BombaraBrion S. Johnson | | President and Director | | February 28, 201424, 2017 |
Beth A. BombaraBrion S. Johnson | | | | |
| | | |
| /s/ Peter F. Sannizzaro | | Senior Vice President, Chief Financial Officer and Principal Accounting Officer | | February 28, 201424, 2017 |
| Peter F. Sannizzaro | | | | |
| | | |
| | |
/s/ Mark NilandRobert Paiano | | Senior Vice President and Director | | February 28, 201424, 2017 |
Mark NilandRobert Paiano | | | | |
| | | | |
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20132016
FORM 10-K
EXHIBITS INDEX
The exhibits attached to this Form 10-K are those that are required by Item 601 of Regulation S-K.
|
| | |
| Exhibit No. | | Description |
| 3.01 | | Restated Certificate of Incorporation of Hartford Life Insurance Company (the “Company”), effective April 2, 1982, as amended by Amendment No. 1, effective August 3, 1984, as amended by Amendment No. 2 effective December 31, 1996, as amended by Amendment No. 3, effective July 25, 2000 (incorporated herein by reference to Exhibit 3.01 to the Company’s Form 10-K for the fiscal year ended December 31, 2004). |
| | |
| 3.02 | | Amended and Restated By-Laws of Hartford Life Insurance Company, effective July 31, 2007,March 15, 2013, (incorporated herein by reference to Exhibit 3.023.01 to the Company’s Form 10-K10-Q for the yearquarterly period ended DecemberMarch 31, 2004)2013). |
| | |
| 4.01 | | Restated Certificate of Incorporation and Amended and Restated By-Laws of Hartford Life Insurance Company (incorporated by reference as indicated in Exhibits 3.01 and 3.02 hereto, respectively). |
| | |
| 10.01 | | Intercompany Liquidity Agreement between The Hartford Financial Services Group, Inc., Hartford Life and Accident Insurance Company and certain affiliates, including Hartford Life Insurance Company, effective December 31, 2010 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed on January 5, 2011). |
| | |
| 12.01 | | Computation of Ratio of Earnings to Fixed Charges* |
| | |
| 23.01 | | Consent of Deloitte & Touche LLP* |
| | |
| 31.01 | | Certification of Beth A. Bombara,Brion S. Johnson, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| | |
| 31.02 | | Certification of Peter F. Sannizzaro, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| | |
| 32.01 | | Certification of Beth A. Bombara,Brion S. Johnson, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| | |
| 32.02 | | Certification of Peter F. Sannizzaro, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| | |
| 101.INS | | XBRL Instance Document |
| | |
| 101.SCH | | XBRL Taxonomy Extension Schema |
| | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
| | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
| | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase |
| | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
|
| |
| * | Filed with the Securities and Exchange Commission as an exhibit to this report. |
|
| |
† | Confidential treatment has been requested for the redacted portions of this agreement. A complete copy of this agreement, including the redacted portions, has been filed separately with the Securities and Exchange Commission. |
