Transactions with Affiliates

6 Months Ended

Jun. 30, 2011

Transactions with Affiliates [Abstract]

Transactions with Affiliates

10. Transactions with Affiliates

Transactions of the Company with Hartford Fire Insurance Company, Hartford Holdings and its affiliates relate principally to tax settlements, reinsurance, insurance coverage, rental and service fees, payment of dividends and capital contributions. In addition, an affiliated entity purchased non-contingent and contingent life group annuity contracts from the Company to fund structured settlement periodic payment obligations assumed by the affiliated entity as part of claims settlements with property casualty insurance companies and self-insured entities. As of June 30, 2011 and December 31, 2010 the Company had $53 of reserves for claim annuities purchased by affiliated entities. The Company recorded intercompany claim annuity earned premiums of $1 and $12 for the three months ended June 30, 2011 and June 30, 2010, and $4 and $35 for the six months ended June 30, 2011 and June 30, 2010, respectively. In the fourth quarter of 2008, The Company issued a payout annuity to an affiliate for $2.2 billion of consideration. The Company will pay the benefits associated with this payout annuity over 12 years.

Substantially all general insurance expenses related to the Company, including rent and employee benefit plan expenses are initially paid by The Hartford. Direct expenses are allocated to the Company using specific identification, and indirect expenses are allocated using other applicable methods. Indirect expenses include those for corporate areas which, depending on type, are allocated based on either a percentage of direct expenses or on utilization.

The Company has issued a guarantee to retirees and vested terminated employees (“Retirees”) of The Hartford Retirement Plan for U.S. Employees (“the Plan”) who retired or terminated prior to January 1, 2004. The Plan is sponsored by The Hartford. The guarantee is an irrevocable commitment to pay all accrued benefits which the Retiree or the 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.

Reinsurance Assumed from Affiliates

Prior to June 1, 2009, Hartford Life sold fixed market value adjusted (“MVA”) annuity products to customers in Japan. The yen based MVA product was written by the HLIKK, a wholly owned Japanese subsidiary of Hartford Life and subsequently reinsured to the Company. As of June 30, 2011 and December 31, 2010, $2.6 billion and $2.7 billion, respectively, of the account value had been assumed by the Company.

A subsidiary of the Company, Hartford Life and Annuity Insurance Company (“HLAI”), entered into a reinsurance agreement with HLIKK. Through this agreement, HLIKK agreed to cede and HLAI agreed to reinsure 100% of the risks associated with the in-force and prospective GMIB riders and the GMDB riders on covered contracts that have an associated GMIB rider issued by HLIKK on its variable annuity business. The reinsurance agreement applies to all contracts, GMIB riders and GMDB riders in-force and issued as of July 31, 2006 and prospectively, except for policies and GMIB riders issued prior to April 1, 2005. This agreement contains a tiered reinsurance premium structure. While the form of the agreement between HLAI and HLIKK for GMIB business is reinsurance, in substance and for accounting purposes the agreement is a free standing derivative. As such, the reinsurance agreement for GMIB business is recorded at fair value on the Company’s balance sheet, with prospective changes in fair value recorded in net realized capital gains (losses) in net income. The fair value of GMIB liability at June 30, 2011 and December 31, 2010 is $2.3 billion and $2.6 billion, respectively.

In addition to this agreement, HLAI has two additional reinsurance agreements with HLIKK, one to assume 100% of the GMAB, GMIB and GMDB riders issued by HLIKK on certain of its variable annuity business. The second agreement is for HLAI to assume 100% of the in-force and prospective GMWB riders issued by HLIKK on certain variable annuity business. The GMAB, GMIB and GMWB reinsurance is accounted for as freestanding derivatives at fair value. The fair value of the GMWB and GMAB was a liability of $17 and $0 at June 30, 2011 and $21 and $1 at December 31, 2010, respectively. The Reinsurance Agreement for GMDB business is accounted for as a Death Benefit and Other Insurance Benefit Reserves which is not reported at fair value. The liability for the assumed GMDB reinsurance and net amount at risk for the assumed GMDB reinsurance was $48 and $4.0 billion at June 30, 2011 and $54 and $4.1 billion at December 31, 2010, respectively.

Effective November 1, 2010, HLAI entered into a reinsurance agreement with Hartford Life Limited Ireland, (“HLL”), a wholly-owned subsidiary of HLAI. Through this agreement, HLL agreed to cede and HLAI agreed to reinsure 100% of the risks associated with the in-force GMWB and GMDB riders issued by HLL on its variable annuity business. While the form of the agreement between HLAI and HLL for GMWB business is reinsurance, in substance and for accounting purposes the agreement is a free standing derivative. As such, the reinsurance agreement for GMWB business is recorded at fair value on the Company’s balance sheet, with prospective changes in fair value recorded in net realized capital gains (losses) in net income. The fair value of GMWB liability at June 30, 2011 is $22 and $21 at December 31, 2010.

Reinsurance Ceded to Affiliates

Effective October 1, 2009, and amended on November 1, 2010, HLAI entered into a modified coinsurance (“modco”) and coinsurance with funds withheld reinsurance agreement with an affiliated captive reinsurer, White River Life Reinsurance (“WRR”). The agreement provides that HLAI will cede, and WRR will reinsure 100% of the in-force and prospective variable annuities and riders written or reinsured by HLAI summarized below:

• Direct written variable annuities and the associated GMDB and GMWB riders.

• Variable annuity contract rider benefits written by HLIKK, which are reinsured to HLAI.

• Annuity contracts and riders written by Union Security Insurance Company, which are reinsured to HLAI.

• Variable annuity contract rider benefits written by HLL, which are reinsured to HLAI as of November 1, 2010

• Annuitizations of, and certain other settlement options offered under, deferred annuity contracts.

Under modco, the assets and the liabilities 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. These modco adjustments are recorded as an adjustment to operating expenses.

For the six months ending June 30, 2011 the impact of this transaction was a decrease to earnings of $84 after-tax. Included in this amount are net realized capital losses of $492, which represents the change in valuation of the derivative, associated with this transaction. In addition, the balance sheet of the Company reflects a modco reinsurance (payable)/recoverable, a deposit liability as well as a net reinsurance recoverable that is comprised of an embedded derivative. The balance of the modco reinsurance (payable)/recoverable, deposit liability and net reinsurance recoverable were $229, $549, $1.5 billion and $(864), $78, and $1.7 billion at June 30, 2011 and December 31, 2010, respectively.

The following table illustrates the transaction’s impact on the Company’s Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and June 30, 2010, respectively.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Earned premiums	$	(16	)	$	(13	)	$	(32	)	$	(25	)
Net realized (losses) gains		69			1,310			(492	)		930
Total revenues		53			1,297			(524	)		905
Benefits, losses and loss adjustment expenses		(11	)		(8	)		(24	)		(17	)
Insurance operating costs and other expenses		91			1,033			(376	)		834
Total expenses		(80	)		1,025			(400	)		817
(Loss) income before income taxes		(27	)		272			(124	)		88
Income tax (benefit) expense		(7	)		95			(40	)		31
Net (loss) gain	$	(20	)	$	177		$	(84	)	$	57

Effective November 1, 2007, HLAI, a subsidiary insurance company (“Ceding Company”), entered into a modco agreement with funds withheld with an affiliate captive reinsurer, Champlain Life Reinsurance Company (“Reinsurer”) to provide statutory surplus relief for certain life insurance policies. The Agreement is accounted for as a financing transaction for U.S. GAAP. A standby unaffiliated third party Letter of Credit supports a portion of the statutory reserves that have been ceded to the Reinsurer.