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CRC SELECT
MODIFIED GUARANTEED ANNUITY CONTRACT
HARTFORD LIFE INSURANCE COMPANY
P.O. BOX 5085
HARTFORD, CONNECTICUT 06102-5085 [The
TELEPHONE: 1-800-862-6668 (CONTRACT OWNERS) Hartford
1-800-862-7155 (REGISTERED REPRESENTATIVES) LOGO]
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This prospectus describes information you should know before you purchase CRC
Select. Please read it carefully.
CRC Select is a contract between you and Hartford Life Insurance Company where
you agree to make one Purchase Payment to us and we agree to pay you interest
for a Guarantee Period you select and we agree to make a series of Annuity
Payouts at a later date. This annuity is a single premium, tax-deferred,
modified guaranteed annuity offered to both individuals and groups. It is:
x Single premium, because you make a one-time Purchase Payment.
x Tax-deferred, which means you don't pay taxes until you take money out or
until we start to make Annuity Payouts.
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It is a "modified guaranteed" annuity because Hartford guarantees to pay you
your Purchase Payment and the interest earned on that Purchase Payment unless
you cancel during the right to examine period, fully or partially Surrender your
Contract, transfer to a different Guarantee Period or request Annuity Payouts
before the end of your Guarantee Period.
Although we file this prospectus with the Securities and Exchange Commission
("SEC"), the SEC doesn't approve or disapprove of these securities or determine
if this prospectus is truthful or complete. Anyone who represents that the SEC
does these things may be guilty of a criminal offense.
This prospectus can also be obtained from the Securities and Exchange
Commission's website: (www.sec.gov).
This annuity IS NOT:
- A bank deposit or obligation
- Federally insured
- Endorsed by any bank or governmental agency
This annuity may not be available for sale in all states.
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PROSPECTUS DATED: MAY 1, 2003
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2 HARTFORD LIFE INSURANCE COMPANY
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AVAILABLE INFORMATION
We are required by the Securities Exchange Act of 1934 to file reports and other
information with the SEC. You may read or copy these reports at the SEC's public
reference facilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C., or
at the SEC's Regional Offices located at 75 Park Place, New York, New York and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois. You may also obtain copies, at prescribed rates, of our reports from
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may also obtain reports, proxy and information statements and
other information about us at the SEC's website at: www.sec.gov.
One of the reports we file with the SEC is our Annual Report on Form 10-K for
the fiscal year ended December 31, 2002. The substance of the information
contained in the Annual Report appears in this prospectus. The entire Annual
Report is incorporated by reference into this prospectus. You may obtain a copy
of the Annual Report free of charge by calling the toll-free number or writing
to us at the address on the cover of this prospectus.
We filed a registration statement ("Registration Statement") relating to the
Contracts offered by this prospectus with the SEC under the Securities Act of
1933. This Prospectus has been filed as a part of the Registration Statement and
does not contain all of the information contained in the Registration Statement.
For more information about the Contracts and us, you may obtain a copy of the
Registration Statement in the manner set forth in the preceding paragraph.
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HARTFORD LIFE INSURANCE COMPANY 3
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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DEFINITIONS 4
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HIGHLIGHTS 5
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THE CONTRACT 6
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Annuity Payouts 12
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Miscellaneous Provisions 14
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Investments by Hartford 14
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Amendment of Contracts 15
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Assignment of Contracts 15
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Distribution of Contracts 15
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FEDERAL TAX CONSIDERATIONS 15
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THE COMPANY 22
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LEGAL OPINION 46
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EXPERTS 46
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APPENDIX A -- MODIFIED GUARANTEED ANNUITY FOR QUALIFIED
PLANS 47
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APPENDIX B -- MARKET VALUE ADJUSTMENT 48
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FINANCIAL STATEMENTS F-1
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</Table>
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4 HARTFORD LIFE INSURANCE COMPANY
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DEFINITIONS
These terms are capitalized when used throughout this prospectus. Please refer
to these defined terms if you have any questions as you read your prospectus.
ADMINISTRATIVE OFFICE OF THE COMPANY -- Our location and overnight mailing
address is: 200 Hopmeadow Street, Simsbury, Connecticut 06089. Our standard
mailing address is: Investment Product Services, P.O. Box 5085, Hartford, CT
06102-5085
ANNUITANT -- The person on whose life this Contract is based. The Annuitant may
not be changed.
ANNUITY COMMENCEMENT DATE -- The date we start to make Annuity Payouts.
CODE -- The Internal Revenue Code of 1986, as amended.
CONTINGENT ANNUITANT -- The person you designate to become the Annuitant if the
Annuitant dies prior to the Annuity Commencement Date.
CONTRACT -- The individual Annuity Contract and any endorsements or riders.
Group participants and some individuals will receive a certificate rather than a
Contract.
CONTRACT OWNER OR YOU -- The owner or holder of this Contract.
CONTRACT VALUE -- The sum of your Purchase Payment and all interest earned minus
any Surrenders and any applicable Premium Taxes.
CONTRACT YEAR -- The 12 months following the date you purchased your annuity and
then each subsequent year.
HARTFORD, WE, US OR OUR -- Hartford Life Insurance Company. Only Hartford is a
capitalized term in the prospectus.
JOINT ANNUITANT -- The person on whose life Annuity Payouts are based if the
Annuitant dies after the Annuity Calculation Date. You may name a Joint
Annuitant only if your Annuity Payout Option provides for a survivor. The Joint
Annuitant may not be changed.
MARKET VALUE ADJUSTMENT -- An adjustment that either increases or decreases the
amount we pay you under certain circumstances.
POWER OF ATTORNEY -- You may authorize another person to act on your behalf by
submitting a completed Power of Attorney form. Once we have the completed form
on file, we will accept instructions from your designated third party until we
receive instructions terminating the power of attorney in writing from you. You
may not be able to make changes to your Contract if you have authorized someone
else to act under a power of attorney.
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HARTFORD LIFE INSURANCE COMPANY 5
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HIGHLIGHTS
HOW DO I PURCHASE THIS ANNUITY?
You must complete our application or order request and submit it to us for
approval with your Purchase Payment. Your Purchase Payment must be at least
$5,000, unless this Contract is purchased as part of certain retirement plans.
- For a limited time, usually within ten days after you receive your annuity,
you may cancel it without paying a Surrender Charge. Your Purchase Payment
will be subject to a Market Value Adjustment.
WHAT IS A GUARANTEE PERIOD?
A Guarantee Period is the length of time you select for which Hartford
guarantees to pay you interest. The interest rate we credit depends on the
Guarantee Period you select. We currently offer Guarantee Periods of five years,
six years, seven years, eight years, nine years and ten years.
WHAT HAPPENS AT THE END OF EACH GUARANTEE PERIOD?
We will notify you of your options before the end of your Guarantee Period.
These options currently include:
- - Fully Surrendering your Contract,
- - Having your Contract Value rollover to a Subsequent Guarantee Period of the
same length of time,
- - Transferring to a Guarantee Period of a different duration,
- - Asking us to begin making Annuity Payouts,
- - Purchasing a variable annuity issued by Hartford, or
- - Any other option that may become available.
UNLESS WE RECEIVE WRITTEN INSTRUCTIONS FROM YOU SELECTING A DIFFERENT OPTION,
HARTFORD WILL ROLL YOUR CONTRACT VALUE INTO A SUBSEQUENT GUARANTEE PERIOD FOR
THE SAME LENGTH OF TIME. YOUR CONTRACT WILL RECEIVE THE INTEREST RATE WE HAVE
ESTABLISHED FOR THAT NEW GUARANTEE PERIOD.
CAN I TAKE OUT ANY OF MY MONEY?
You may Surrender all or part of your Contract Value or transfer to a different
Guarantee Period at any time before we start making Annuity Payouts. You may not
Surrender any of your Contract Value after we begin making Annuity Payouts.
- You may have to pay a Surrender Charge.
We may charge you a Surrender Charge when you partially or fully Surrender your
annuity. The percentage of the Surrender Charge assessed will depend on the
length of time that has lapsed from the beginning of the Guarantee Period in
effect at the time you request your Surrender to the date we receive your
request for Surrender. You may take out all or some of the interest we have
credited to your Contract Value in the 12 months prior to your request without a
Surrender Charge.
- You may have a Market Value Adjustment.
If you request a Surrender, cancel during the right to examine period, transfer
to a new Guarantee Period, or begin to take Annuity Payouts before the end of
your Guarantee Period, the amount you receive will be modified to include a
Market Value Adjustment. A Market Value Adjustment, which is described later,
may decrease or increase the amount you receive, depending on whether interest
rates have risen or fallen since the beginning of your Guarantee Period. You may
take out all or some of the interest we have credited to your Contract Value in
the 12 months prior to your request without a Market Value Adjustment.
- You may have to pay income tax on any money you take out and, if you
Surrender before you are age 59 1/2, you may have to pay an income tax
penalty.
WILL HARTFORD PAY A DEATH BENEFIT?
There is a Death Benefit if the Contract Owner, joint contract owner or
Annuitant die before we begin to make Annuity Payouts. This Death Benefit is
equal to the Contract Value on the date we receive a certified death certificate
or other proof of death acceptable to us.
Depending on the Annuity Payout Option you select, we may pay a Death Benefit
after we begin to make Annuity Payouts.
WHAT ANNUITY PAYOUT OPTIONS ARE AVAILABLE?
You may choose one of the following Annuity Payout Options: Life Annuity, Life
Annuity with a Cash Refund, Life Annuity with Payments for a Period Certain,
Joint and Last Survivor Life Annuity, Joint and Last Survivor Life Annuity with
Payments for a Period Certain, and Payments for a Period Certain. We may make
other Annuity Payout Options available at any time.
You must begin to take Annuity Payouts by end of the Guarantee Period
immediately following the Annuitant's 90th birthday or the end of the 10th
Contract Year, whichever is later, unless you elect a later date to begin
receiving payments subject to the laws and regulations then in effect and our
approval.
If the end of your Guarantee Period occurs after the Annuity Commencement Date,
we begin Annuity Payouts on the Annuity Commencement Date, unless you change
that date to coincide with the end of the Guarantee Period. If we begin to make
Annuity Payouts before the end of your Guarantee Period, a Market Value
Adjustment will be made to your Contract Value.
If you do not tell us what Annuity Payout Option you want before the Annuity
Commencement Date, we will make payments under the Life Annuity with a 10-year
Period Certain Annuity Payout Option.
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6 HARTFORD LIFE INSURANCE COMPANY
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THE CONTRACT
WHAT TYPES OF CONTRACTS ARE AVAILABLE?
The Contract is an individual tax-deferred modified guaranteed annuity contract.
It is designed for retirement planning purposes and may be purchased by any
individual, group, or trust, including:
- - IRAs adopted according to Section 408 of the Code;
- - Annuity purchase plans adopted by public school systems and certain tax-exempt
organizations according to Section 403(b) of the Code;
The examples above represent Qualified Contracts, as defined by the Code. In
addition, individuals and trusts can also purchase Contracts that are not part
of a tax qualified retirement plan. These are known as Non-Qualified Contracts.
If you are purchasing the Contract for use in an IRA or qualified retirement
plan, you should consider other features of the Contract besides tax deferral,
since any investment vehicle used within an IRA or qualified plan receives tax
deferred treatment under the Code.
This Contract is not available in Puerto Rico or Maryland.
HOW DO I PURCHASE A CONTRACT?
You may purchase a Contract by completing and submitting an application or an
order request along with your Purchase Payment. For most Contracts, the minimum
Purchase Payment is $5,000, unless the Contract is purchased as part of certain
retirement plans. Prior approval is required for a Purchase Payment of
$1,000,000 or more.
You may not make additional Purchase Payments to this Contract, but you may
purchase a new contract. The new contracts may have different Guarantee Periods
and will earn interest at the rate set for those new contracts.
Neither you nor your Annuitant must have had your 86th birthday on the date that
your Contract is issued. You must be of legal age in the state where the
Contract is being purchased or a guardian must act on your behalf.
HOW IS THE PURCHASE PAYMENT APPLIED TO MY CONTRACT?
Your Contract will be issued after we receive your Purchase Payment. Your
Purchase Payment becomes part of a non-unitized separate account established by
Hartford. You have no priority claim on assets in this separate account. All
assets of Hartford, including those in this separate account, are available to
meet Hartford's guarantees under the Contract and are available to meet the
general obligations of Hartford.
If the request or other information accompanying the Purchase Payment is
incomplete when we receive it, we will hold the money in a non-interest bearing
account for up to three weeks while we try to obtain complete information. For
Contracts issued in New York, we will hold the money in a non-interest bearing
account for up to ten days. If we cannot obtain the information within that
time, we will either return the Purchase Payment and explain why the Purchase
Payment could not be processed or keep the Purchase Payment if you authorize us
to keep it until you provide the necessary information.
We will send you a confirmation after we apply your Purchase Payment.
CAN I CANCEL MY CONTRACT AFTER I PURCHASE IT?
We want you to be satisfied with the Contract you have purchased. We urge you to
closely examine its provisions. If for any reason you are not satisfied with
your Contract, simply return it within ten days after you receive it with a
written request for cancellation that indicates your tax-withholding
instructions. In some states, you may be allowed more time to cancel your
Contract. We will not deduct any Surrender Charge during this time, however a
Market Value Adjustment, which is described later, may apply. We may require
additional information, including a signature guarantee, before we can cancel
your Contract.
The amount we pay you upon cancellation depends on the requirements of the state
where you purchased your Contract, the method of purchase, the type of Contract
you purchased and your age.
WHAT IS A GUARANTEE PERIOD?
A Guarantee Period is the length of time you select for which Hartford
guarantees to pay you interest. The interest rate we credit depends on the
Guarantee Period you select. We currently offer Guarantee Periods of five years,
six years, seven years, eight years, nine years and ten years. We reserve the
right to establish new Guarantee Periods, modify these Guarantee Periods or
eliminate some or all of these Guarantee Periods in the future. You choose the
length of your Guarantee Period when you purchase your Contract. This is your
Initial Guarantee Period. Your Initial Guarantee Period will determine your
Initial Guarantee Rate or the rate of interest credited to your Purchase
Payment. The Initial Guarantee Rate will never be less than 3% on an annual
basis.
If you transfer to a new Guarantee Period or reach the end of the Initial
Guarantee Period and allow this Contract to "rollover" to another Guarantee
Period of the same length of time, this is a Subsequent Guarantee Period.
Basically, any Guarantee Period that is not an Initial Guarantee Period is a
Subsequent Guarantee Period. During a Subsequent Guarantee Period, your Contract
earns interest at the Subsequent Guarantee Rate, which will never be less than
3% on an annual basis.
Hartford, in its sole discretion, determines the interest rates credited to each
Guarantee Period. These interest rates generally reflect prevailing interest
rates of other investments that are similar in nature and duration. In computing
our interest rates, we may also consider the impact of regulations, taxes, sales
commissions, administrative expenses, general economic trends and competitive
factors. Contracts with Purchase Payments of $1,000,000 or more may earn
interest at a different rate than
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HARTFORD LIFE INSURANCE COMPANY 7
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other Contracts with the same Guarantee Period. Hartford or its agents cannot
predict nor guarantee our future interest rates.
CAN I TRANSFER INTO A DIFFERENT GUARANTEE PERIOD?
Once each Contract Year, beginning after the first Contract Year, you may
transfer from your Guarantee Period into a Guarantee Period of a different
duration, provided the new Guarantee Period you select is at least five years or
longer. There is no Surrender Charge for such a transfer. While we currently do
not impose a transfer charge, we reserve the right to charge a fee of up to $50
for each transfer. A Market Value Adjustment, which is described later, will be
applied to your Contract Value at the time of transfer, unless the transfer
occurs at the end of the Guarantee Period. The amount transferred into the new
Guarantee Period is equal to the Contract Value of the old Guarantee Period on
the date of the transfer minus or plus the Market Value Adjustment.
While you may transfer to a different Guarantee Period with a duration of 5
years or more, you cannot transfer into a Guarantee Period with a duration that
will take you past your Annuity Commencement Date. That means that if you
elected to begin Annuity Payouts on your Annuitant's 90th birthday and your
Annuitant is 87 years old, you would not be able to transfer into a new
Guarantee Period unless you extended your Annuity Commencement Date.
WHAT HAPPENS AT THE END OF EACH GUARANTEE PERIOD?
We will notify you of your options before the end of your Guarantee Period.
These options currently include:
- - Fully Surrendering your Contract,
- - Having your Contract Value rollover to a Subsequent Guarantee Period of the
same length of time,
- - Transferring to a Guarantee Period of a different duration,
- - Asking us to begin making Annuity Payouts,
- - Purchase a variable annuity from Hartford, or
- - Any other option that may become available.
Unless we receive written instructions from you selecting a different option,
Hartford will roll your Contract Value into a Subsequent Guarantee Period of the
same length of time. Your Contract will receive the interest rate we have
established for that new Guarantee Period. If we roll your Contract Value into a
Subsequent Guarantee Period because we have not received any other instructions
from you, Hartford will, for some period of time after the end of your Guarantee
Period, allow you to exercise a different option. Currently, we will allow 21
days after the end of a Guarantee Period to request a different option. However,
Hartford reserves the right to change or terminate this administrative
processing period. A request for a different option received during this time
will be treated as if it was received prior to the end of the current Guarantee
Period. However, a request to transfer to another Guarantee Period of a
different duration is processed as of the date we receive the request and
receives the interest rate credited to that Guarantee Period as of that date.
If you rollover into a Subsequent Guarantee Period or transfer to a Guarantee
Period of a different duration, you cannot rollover or transfer into a Guarantee
Period with a duration that will take you past your Annuity Commencement Date.
That means that if you elected to begin Annuity Payouts on your Annuitant's 90th
birthday and your Annuitant is 87 years old, you would not be able to rollover
or transfer into a new Guarantee Period with a duration longer than three years
unless you extended your Annuity Commencement Date.
FOR CONTRACTS PURCHASED IN NEW YORK -- We will notify you of your options at
least 15 days, but no more than 45 days, before the end of your Guarantee
Period. If you fully or partially Surrender your Contract within the 30 day
period prior to the end of your Guarantee Period, no Surrender Charge is
deducted or Market Value Adjustment made.
HOW IS THE VALUE OF MY CONTRACT CALCULATED BEFORE THE ANNUITY COMMENCEMENT DATE?
We calculate your Contract Value by deducting any applicable Premium Tax from
your Purchase Payment, or your rollover value, if you are in a Subsequent
Guarantee Period. We then credit your Contract Value on a daily basis with an
amount that is equivalent to your Guarantee Period's interest rate on an annual
basis and deduct any partial Surrenders.
The following example shows how interest would be credited to your Contract
Value. The example assumes you purchased a Contract with a five-year Guarantee
Period crediting a hypothetical Initial Guarantee Rate of 5% on an annual basis.
The example assumes no money is taken from the Contract during the Guarantee
Period. We are using a hypothetical interest rate of 5%. This interest rate is
for illustration only and is no indication of future interest rates. Actual
interest rates may be more or less than those shown.
<Table>
Year one $10,000 Purchase Payment or rollover value
$ 500 total year's interest payments
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$10,500 end of year Contract Value
Year two $10,500 beginning Contract Value
$ 525 total year's interest payments
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$11,025 end of year Contract Value
</Table>
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8 HARTFORD LIFE INSURANCE COMPANY
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<Table>
Year three $11,025 beginning Contract Value
$ 551 total year's interest payments
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$11,576 end of year Contract Value
Year four $11,576 beginning Contract Value
$ 579 total year's interest payments
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$12,155 end of year Contract Value
Year five $12,155 beginning Contract Value
$ 608 total year's interest payments
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$12,763 end of year Contract Value
</Table>
Once each Contract Year, we will send you a statement which shows
- your Contract Value as of the end of the preceding Contract Year,
- any money you take out of your Contract during the Contract Year,
- your Contract Value at the end of the current Contract Year, and
- the annual rate of interest being credited to your Contract.
FEES AND CHARGES
WHAT HAPPENS IF I REQUEST A SURRENDER BEFORE THE END OF THE GUARANTEE PERIOD?
We don't charge you a sales charge when you purchase this Contract or assess any
annual fees. However, if you want to take money out of the Contract before the
end of your Guarantee Period, there are two charges we may assess, plus a Market
Value Adjustment that may, at times, result in a deduction. The two charges are
Premium Tax and a Surrender Charge.
x PREMIUM TAXES
We deduct Premium Taxes, if required, by a state or other government agency.
Some states collect the taxes when Purchase Payments are made; others collect at
annuitization. Since we pay Premium Taxes when they are required by applicable
law, we may deduct them from your Contract when we pay the taxes, upon
Surrender, or on the Annuity Commencement Date. The Premium Tax rate varies by
state or municipality. Currently, the maximum rate charged by any state is 5.0%.
x SURRENDER CHARGE -- The Surrender Charge covers some of the expenses relating
to the sale and distribution of the Contract, including commissions paid to
registered representatives and the cost of preparing sales literature and
other promotional activities.
We assess a Surrender Charge when you request a full or partial Surrender,
unless your Surrender occurs at the end of a Guarantee Period. The percentage we
assess for the Surrender Charge varies according to the length of time between
the beginning of the Guarantee Period in effect at the time of your Surrender
and the date of your request for Surrender. When you request a Surrender, we
deduct the dollar amount you request from your Contract Value. Then we subtract
any interest we have credited to your Contract in the 12 months prior to the
request for Surrender that has not already been withdrawn from the amount
requested for Surrender. This difference is then the amount subject to a
Surrender Charge. We then determine the appropriate percentage of Surrender
Charge, if any, to be deducted by calculating the length of time the money has
been part of your present Guarantee Period. We deduct the percentage of the
amount Surrendered from the amount you requested, and, provided there is no
Market Value Adjustment, pay you that amount.
If you are in your Initial Guarantee Period, the percentage we deduct is equal
to:
<Table>
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<Caption>
NUMBER OF YEARS FROM THE
BEGINNING OF THE INITIAL
GUARANTEE PERIOD SURRENDER CHARGE
1 6%
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2 6%
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3 5%
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4 4%
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5 3%
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6 2%
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7 2%
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8+ 2%
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</Table>
If you are in a Subsequent Guarantee Period, the percentage we deduct is equal
to:
<Table>
<Caption>
NUMBER OF YEARS FROM THE
BEGINNING OF ANY
SUBSEQUENT GUARANTEE PERIOD SURRENDER CHARGE
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1 4%
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2 3%
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3 2%
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4 2%
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5 2%
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6 2%
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7 2%
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8+ 2%
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</Table>
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HARTFORD LIFE INSURANCE COMPANY 9
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If you purchase your Contract in New York, and you are in your Initial Guarantee
Period, the percentage we deduct is equal to:
<Table>
<Caption>
NUMBER OF YEARS FROM THE
BEGINNING OF THE
INITIAL GUARANTEE PERIOD SURRENDER CHARGE
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1 or less 7%
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2 6%
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3 5%
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4 4%
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5 3%
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6 2%
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7 1%
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8 0%
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9 0%
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10 0%
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</Table>
If you purchase your Contract in New York and you are in a Subsequent Guarantee
Period of five (5) years or more, the percentage we deduct is equal to:
<Table>
<Caption>
NUMBER OF YEARS FROM THE
BEGINNING OF A
SUBSEQUENT GUARANTEE PERIOD SURRENDER CHARGE
- ---------------------------------------------
1 or less 5%
- ---------------------------------------------
2 4%
- ---------------------------------------------
3 3%
- ---------------------------------------------
4 2%
- ---------------------------------------------
5 1%
- ---------------------------------------------
6 0%
- ---------------------------------------------
7 0%
- ---------------------------------------------
8 0%
- ---------------------------------------------
9 0%
- ---------------------------------------------
10 0%
- ---------------------------------------------
</Table>
If you purchase your Contract in New York and you are in a Subsequent Guarantee
Period of four (4) years or less, the percentage we deduct is equal to:
<Table>
<Caption>
NUMBER OF YEARS FROM THE
BEGINNING OF A
SUBSEQUENT GUARANTEE PERIOD SURRENDER CHARGE
- ------------------------------------------------------
1% multiplied by the
number of years in the
1 or less Guarantee Period
- ------------------------------------------------------
The percentage used for
2 Year 1 or less minus 1%
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The percentage used for
3 Year 2 minus 1%
- ------------------------------------------------------
The percentage used for
4 Year 3 minus 1%
- ------------------------------------------------------
</Table>
THE FOLLOWING SITUATIONS ARE NOT SUBJECT TO A SURRENDER CHARGE:
- - Surrenders made at the end of a Guarantee Period.
- - Surrender of interest that has been credited to the Contract Value during the
12 months prior to the Surrender that has not previously been withdrawn.
- - Upon death of the Annuitant, joint owner or Contract Owner.
- - Upon Annuitization.
- - Upon cancellation during the right to examine period.
- - Required Minimum Distributions from IRAs or 403(b) plans.
SURRENDERS MADE UNDER THE NURSING HOME WAIVER RIDER. We will waive any Surrender
Charge applicable to a partial or full Surrender if you, the joint owner or the
Annuitant, is confined for at least 180 calendar days to a: (a) hospital
recognized as a general hospital by the proper authority of the state in which
it is located; or (b) hospital recognized as a general hospital by the Joint
Commission on the Accreditation of Hospitals; or (c) facility certified by
Medicare as a hospital or long-term care facility; or (d) nursing home licensed
by the state in which it is located and offers the services of a registered
nurse 24 hours a day. If you, the joint owner or the Annuitant is confined when
you purchase the Contract, this waiver is not available. For the waiver to
apply, you must: (a) have owned the Contract continuously since it was issued,
(b) provide written proof of confinement satisfactory to us, and (c) request the
Surrender within 91 calendar days of the last day of confinement. Your
confinement must be at the recommendation of a physician for medically necessary
reasons. This waiver may not be available in all states. Please contact your
registered representative or us to determine if it is available for you.
MARKET VALUE ADJUSTMENT
If you request to Surrender, cancel during the right to examine period, transfer
to a new Guarantee Period or ask that we begin to make Annuity Payouts at any
time other than at the end of your Guarantee Period, we may apply a Market Value
Adjustment. That means that the amount we pay you for a Surrender or the
Contract Value we transfer to a new Guarantee Period or use to determine your
Annuity Payouts will be adjusted up or down.
The Market Value Adjustment reflects both the amount of time left in your
Guarantee Period, and, the difference between the Guarantee Rate credited to
your current Guarantee Period and the interest rate we are crediting to a new
Guarantee Period with a duration equal to the amount of time left in your
Guarantee Period. If your Guarantee Period's interest rate is lower than the
interest rate we are currently crediting the new Guarantee Period, then the
application of the Market Value Adjustment will reduce the amount you receive.
Conversely, if your Guarantee Period's interest rate is higher than the interest
rate we are crediting for the new Guarantee Period, then the application of the
Market Value Adjustment will increase the amount you receive.
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10 HARTFORD LIFE INSURANCE COMPANY
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For example, assume you purchase a Contract with an Initial Guarantee Period of
ten years crediting interest at an Initial Guarantee Rate of 8% on an annual
basis. You request a partial Surrender at the end of the seventh Contract Year.
At that time you request a Surrender, Hartford's interest rate was 6% on an
annual basis for Subsequent Guarantee Periods with a three-year duration, the
amount of time left in your Initial Guarantee Period. Then the amount payable
upon partial Surrender will increase after the application of the Market Value
Adjustment. On the other hand, if Hartford was crediting an interest rate higher
than your 8% Initial Guarantee Rate, then the application of the Market Value
Adjustment will decrease the amount payable to you upon partial Surrender.
The Market Value Adjustment will apply to any request to Surrender, cancel
during the right to examine period, transfer to a new Guarantee Period prior to
the end of a Guarantee Period, or if you ask us to begin Annuity Payouts prior
to the end of a Guarantee Period except:
- - Previous 12 months' interest payments that you ask us to send to you that you
have not previously Surrendered.
- - Distributions made due to death.
- - Payments we make to you as part of your Annuity Payout.
The actual formula for calculating the Market Value Adjustment is set forth in
the Appendix B that also contains an additional illustrations of the application
of the Market Value Adjustment.
Since the interest rates Hartford credits may reflect, in part, the investment
yields available to Hartford (see "Investments by Hartford"); the Market Value
Adjustment may also reflect, in part, the levels of such yields. It is possible,
therefore, that should such yields increase significantly from the time you
purchased your Contract, coupled with the application of the Surrender Charges,
the amount you would receive upon a full Surrender of your Contract could be
less than your original Purchase Payment.
WE MAY OFFER, IN OUR DISCRETION, REDUCED FEES AND CHARGES FOR CERTAIN CONTRACTS
THAT MAY RESULT IN DECREASED COSTS AND EXPENSES. REDUCTIONS IN THESE FEES AND
CHARGES WILL NOT BE UNFAIRLY DISCRIMINATORY AGAINST ANY CONTRACT OWNER.
SURRENDERS
ARE THERE ANY RESTRICTIONS ON PARTIAL SURRENDERS?
If you request a partial Surrender before we begin to make Annuity Payouts,
there are two restrictions:
- - The amount you want to Surrender must be at least equal to $1,000, our current
minimum for partial Surrenders, and
- - The Contract must have a minimum Contract Value of $5,000 after the Surrender.
The above restrictions do not apply if you Surrender interest that has been
credited to the Contract Value during the 12 months prior to Surrender.
We reserve the right to terminate your Contract and pay you the Contract Value
minus any applicable charges or adjustments if your Contract Value is under the
minimum after the Surrender.
HOW DO I REQUEST A SURRENDER?
Requests for Surrenders must be in writing. To request a full or partial
Surrender, complete a Surrender Form or send us a letter, signed by you,
stating:
- - the dollar amount that you want to receive, either before or after we withhold
taxes and deduct for any applicable charges,
- - your tax withholding amount or percentage, if any, and
- - your mailing address.
If there are joint Contract Owners, both must authorize all Surrenders.
We may defer payment of any partial or full Surrender for a period not exceeding
six months from the date of our receipt of your notice of Surrender or the
period permitted by state insurance law, if less. We may defer a Surrender
payment more than 10 days and, if we do, we will pay interest of at least 3% per
annum on the amount deferred.
WHAT SHOULD BE CONSIDERED ABOUT TAXES?
There are certain tax consequences associated with Surrenders:
PRIOR TO AGE 59 1/2 -- If you make a Surrender prior to age 59 1/2, there may be
adverse tax consequences including a 10% federal income tax penalty on the
taxable portion of the Surrender payment. Surrendering before age 59 1/2 may
also affect the continuing tax-qualified status of some Contracts.
WE DO NOT MONITOR SURRENDER REQUESTS. TO DETERMINE WHETHER A SURRENDER IS
PERMISSIBLE, WITH OR WITHOUT FEDERAL INCOME TAX PENALTY, PLEASE CONSULT YOUR
PERSONAL TAX ADVISER.
MORE THAN ONE CONTRACT ISSUED IN THE SAME CALENDAR YEAR -- If you own more than
one Contract issued by us or our affiliates in the same calendar year, then
these Contracts may be treated as one Contract for the purpose of determining
the taxation of distributions prior to the Annuity Commencement Date. Please
consult your tax adviser for additional information.
INTERNAL REVENUE CODE SECTION 403(b) ANNUITIES -- As of December 31, 1988, all
section 403(b) annuities have limits on full and partial Surrenders.
Contributions to your Contract made after December 31, 1988 and any increases in
cash value after December 31, 1988 may not be distributed unless you are:
(a) age 59 1/2, (b) no longer employed, (c) deceased, (d) disabled, or
(e) experiencing a financial hardship (cash value increases may not be
distributed for hardships prior to age 59 1/2). Distributions prior to age
59 1/2 due to financial hardship; unemployment or retirement may still be
subject to a penalty tax of 10%.
WE ENCOURAGE YOU TO CONSULT WITH YOUR TAX ADVISER BEFORE MAKING ANY SURRENDERS.
PLEASE SEE THE "FEDERAL TAX CONSIDERATIONS" SECTION FOR MORE INFORMATION.
<Page>
HARTFORD LIFE INSURANCE COMPANY 11
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DEATH BENEFIT
WHAT IS THE DEATH BENEFIT AND HOW IS IT CALCULATED?
Before we begin to make Annuity Payouts, we will pay a Death Benefit upon the
death of the Contract Owner, joint owner, or the Annuitant, if there is no
surviving Contingent Annuitant. The Death Benefit is calculated when we receive
a certified death certificate or other legal document acceptable to us. The
Death Benefit we pay is equal to the Contract Value on the date we receive the
certified death certificate or other legal document.
HOW IS THE DEATH BENEFIT PAID?
The Death Benefit may be taken in one lump sum or under any of the Annuity
Payout Options then being offered by us. On the date we receive complete
instructions from the Beneficiary, we will compute the Death Benefit amount to
be paid out or applied to a selected Annuity Payout Option. When there is more
than one Beneficiary, we will calculate the Death Benefit amount for each
Beneficiary's portion of the proceeds and then pay it out or apply it to a
selected Annuity Payout Option according to each Beneficiary's instructions
acceptable to us.
If the Contract Owner dies before we begin to make Annuity Payouts, the
Beneficiary may elect to leave proceeds from the Death Benefit with us for up to
five years from the date of the Contract Owner's death under the Annuity
Proceeds Settlement Option "Death Benefit Remaining with the Company". The
proceeds will remain in the same Guarantee Period in effect at the time of death
and receive the same interest rate credited to that Contract. If the Guarantee
Period has more than five years remaining, then Hartford will, before the
completion of the 5th Contract Year after the death of the Contract Owner,
terminate the Contract and waiving all Surrender Charges, pay the Contract Value
to the Beneficiary. A Market Value Adjustment will be applicable.
The Beneficiary of a non-qualified Contract or IRA may also elect the "Single
Life Expectancy Only" option. This option allows the Beneficiary to take the
Death Benefit in a series of payments spread over a period equal to the
Beneficiary's remaining life expectancy. Distributions are calculated based on
IRS life expectancy tables. This option is subject to different limitations and
conditions depending on whether the Contract is non-qualified or an IRA.
REQUIRED DISTRIBUTIONS -- If the Contract Owner dies before the Annuity
Commencement Date, the Death Benefit must be distributed within five years after
death. The Beneficiary can choose any Annuity Payout Option that results in
complete Annuity Payout within five years.
If the Contract Owner dies on or after the Annuity Commencement Date under an
Annuity Payout Option with a Payout upon Death Benefit, any remaining value must
be distributed at least as rapidly as under the Annuity Payout Option being used
as of the Contract Owner's death.
If the Contract Owner is not an individual (e.g. a trust), then the original
Annuitant will be treated as the Contract Owner in the situations described
above and any change in the original Annuitant will be treated as the death of
the Contract Owner.
WHAT SHOULD THE BENEFICIARY CONSIDER?
ALTERNATIVES TO THE REQUIRED DISTRIBUTIONS -- The selection of an Annuity Payout
Option and the timing of the selection will have an impact on the tax treatment
of the Death Benefit. To receive favorable tax treatment, the Annuity Payout
Option selected: (a) cannot extend beyond the Beneficiary's life or life
expectancy, and (b) must begin within one year of the date of death.
If these conditions are NOT met, the Death Benefit will be treated as a lump sum
payment for tax purposes. This sum will be taxable in the year in which it is
considered received.
SPOUSAL CONTRACT CONTINUATION -- If the Contract Owner dies, the Contract
Owner's spouse, if named as a Beneficiary, may elect to continue the Contract as
the new Contract Owner. This spousal continuation is available only once for
each Contract. The spouse may, in the alternative, elect to receive the Death
Benefit in one lump sum payment or have the Death Benefit paid under one of the
Annuity Payout Options.
WHO WILL RECEIVE THE DEATH BENEFIT?
The distribution of the Death Benefit is based on whether death is before, on or
after the Annuity Commencement Date.
<Page>
12 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
IF DEATH OCCURS BEFORE THE ANNUITY COMMENCEMENT DATE:
<Table>
<Caption>
IF THE DECEASED IS THE . . . AND . . . AND . . . THEN THE . . .
Contract Owner There is a surviving joint The Annuitant is living or Joint Contract Owner
Contract Owner deceased receives the Death
Benefit.
Contract Owner There is no surviving The Annuitant is living or Designated Beneficiary
joint Contract Owner deceased receives the Death
Benefit.
Contract Owner There is no surviving The Annuitant is living or Contract Owner's estate
joint Contract Owner or deceased receives the Death
surviving Beneficiary Benefit.
Annuitant The Annuitant is also the There is no named Designated Beneficiary
Contract Owner Contingent Annuitant receives the Death
Benefit.
Annuitant The Contract Owner is a There is no named The Contract Owner
trust or other non-natural Contingent Annuitant receives the Death
person Benefit.
Annuitant The Contract Owner is There is no named The Contract Owner is
living Contingent Annuitant presumed to be the
Contingent Annuitant and
the Contract continues.
The Contract Owner may
waive this presumption and
receive the Death Benefit.
Annuitant The Contract Owner is The Contingent Annuitant Contingent Annuitant
living is living becomes the Annuitant, and
the Contract continues.
</Table>
IF DEATH OCCURS ON OR AFTER THE ANNUITY COMMENCEMENT DATE:
<Table>
<Caption>
IF THE DECEASED IS THE . . . AND . . . THEN THE . . .
Contract Owner The Annuitant is living Designated Beneficiary becomes the
Contract Owner
Annuitant The Contract Owner is living Contract Owner receives the Death
Benefit.
Annuitant The Annuitant is also the Contract Owner Designated Beneficiary receives the
Death Benefit.
</Table>
THESE ARE THE MOST COMMON DEATH BENEFIT SCENARIOS, HOWEVER, THERE ARE OTHERS.
SOME OF THE ANNUITY PAYOUT OPTIONS MAY NOT RESULT IN THE PAYMENT OF A DEATH
BENEFIT. IF YOU HAVE QUESTIONS ABOUT THESE AND ANY OTHER SCENARIOS, PLEASE
CONTACT YOUR REGISTERED REPRESENTATIVE OR US.
ANNUITY PAYOUTS
This section describes what happens when we begin to make regular Annuity
Payouts from your Contract. You, as the Contract Owner, should answer four
questions:
1. When do you want Annuity Payouts to begin?
2. What Annuity Payout Option do you want to use?
3. How often do you want the Payee to receive Annuity Payouts?
4. How are Annuity Payouts calculated?
Please check with your financial adviser to select the Annuity Payout Option
that best meets your income needs.
1. WHEN DO YOU WANT ANNUITY PAYOUTS TO BEGIN?
You select an Annuity Commencement Date when you purchase your Contract or at
any time before we begin making Annuity Payouts. You may change the Annuity
Commencement Date by notifying us before we begin to make Annuity Payouts.
The Annuity Commencement Date cannot be deferred beyond the end of the Guarantee
Period immediately following the Annuitant's 90th birthday or the end of the
Guarantee Period immediately following the end of the 10th Contract Year,
whichever is later, unless you elect a later date to begin receiving payments,
subject to the laws and regulations then in effect and our approval. Unless you
elect an Annuity Payout Option before the Annuity Commencement Date, we will
begin to make Annuity Payouts under the Life Annuity with a 10-Year Period
Certain Annuity Payout Option.
<Page>
HARTFORD LIFE INSURANCE COMPANY 13
- --------------------------------------------------------------------------------
If the Annuity Commencement Date does not coincide with the end of a Guarantee
Period, a Market Value Adjustment will apply. In that case, Hartford will
determine the amount available for Annuity Payouts by taking your Contract
Value, deducting any applicable Premium Taxes and then multiplying that amount
by the Market Value Adjustment. No Market Value Adjustment will apply if the
Annuity Commencement Date coincides with the end of your Guarantee Period.
If you rollover into a Subsequent Guarantee Period or transfer to a Guarantee
Period of a different duration, you cannot rollover or transfer into a Guarantee
Period with a duration that will take you past your Annuity Commencement Date.
That means that if you elected to begin Annuity Payouts on your Annuitant's 90th
birthday and your Annuitant is 87 years old, you would not be able to rollover
or transfer into a new Guarantee Period with a duration longer than three years
unless you extended your Annuity Commencement Date.
All Annuity Payouts, regardless of frequency, will occur on the same day of the
month as the Annuity Commencement Date.
Once you pass the Annuitant's 90th birthday or the end of your 10th Contract
Year, some Guarantee Period durations, may not be available.
In New York, you must give Hartford 30 days advance written notice of your
intent to change your Annuity Commencement Date, and cannot defer that date past
the Annuitant's 90th birthday.
2. WHICH ANNUITY PAYOUT OPTION DO YOU WANT TO USE?
Your Contract contains the Annuity Payout Options described below. We may at
times offer other Annuity Payout Options. Once Annuity Payouts begin, you cannot
change the Annuity Payout Option.
LIFE ANNUITY -- We make Annuity Payouts as long as the Annuitant is living. When
the Annuitant dies, we stop making Annuity Payouts. A Payee would receive only
one Annuity Payout if the Annuitant dies after the first Payout, two Annuity
Payouts if the Annuitant dies after the second Payout, and so forth.
LIFE ANNUITY WITH A CASH REFUND -- We make Annuity Payouts as long as the
Annuitant is living. When the Annuitant dies, we stop making Annuity Payouts. At
the death of the Annuitant, if the Contract Value on the Annuity Commencement
Date minus any Premium Tax is greater than the sum of all Annuity Payouts
already made, any difference will be paid to the Beneficiary.
LIFE ANNUITY WITH PAYMENTS FOR A PERIOD CERTAIN -- We make Annuity Payouts
during the lifetime of the Annuitant but Annuity Payouts are at least guaranteed
for a period of time you select between 5 years and 100 years minus the age of
the Annuitant. If, at the death of the Annuitant, Annuity Payouts have been made
for less than the minimum elected number of years, then the Beneficiary may
elect to (a) continue Annuity Payouts for the remainder of the minimum elected
number of years or (b) receive the commuted value in one sum.
JOINT AND LAST SURVIVOR LIFE ANNUITY -- We will make Annuity Payouts as long as
either the Annuitant or Joint Annuitant are living. When one Annuitant dies, we
continue to make Annuity Payouts to the other Annuitant until that second
Annuitant dies. When choosing this option, you must decide what will happen to
the Annuity Payouts after the first Annuitant dies. You must select Annuity
Payouts that:
- - Remain the same at 100%, or
- - Decrease to 66.67%, or
- - Decrease to 50%.
The percentages represent actual dollar amounts. The percentage will also impact
the Annuity Payout amount we pay while both Annuitants are living. If you pick a
lower percentage, your original Annuity Payouts will be higher while both
Annuitants are alive.
JOINT AND LAST SURVIVOR LIFE ANNUITY WITH PAYMENTS FOR A PERIOD CERTAIN -- We
will make Annuity Payouts as long as either the Annuitant or Joint Annuitant are
living, but Annuity Payouts are at least guaranteed for a period of time you
select between 5 years and 100 years minus the age of the Annuitant. If, at the
death of the last Annuitant, Annuity Payouts have been made for less than the
minimum elected number of years, then the Beneficiary may elect to (a) continue
Annuity Payouts for the remainder of the minimum elected number of years or (b)
receive the commuted value in one sum. When one Annuitant dies, we continue to
make Annuity Payouts to the other Annuitant until that second Annuitant dies.
When choosing this option, you must decide what will happen to the Annuity
Payouts after the first Annuitant dies and the Period Certain has ended. You
must select Annuity Payouts that:
- - Remain the same at 100%, or
- - Decrease to 66.67%, or
- - Decrease to 50%.
The percentages represent actual dollar amounts. The percentage will also impact
the Annuity Payout amount we pay while both Annuitants are living. If you pick a
lower percentage, your original Annuity Payouts will be higher while both
Annuitants are alive.
PAYMENTS FOR A PERIOD CERTAIN -- We will make Annuity Payouts for the number of
years that you select. During the first Contract Year, you can select any period
of time between 10 years and 100 years minus the Annuitant's age. After the
first Contract Year, you can select any period of time between 5 and 100 years
minus the Annuitant's age. If, at the death of the Annuitant, Annuity Payouts
have been made for less than the period certain, then the Beneficiary may elect
to (a) continue Annuity Payouts for the remainder of the minimum elected number
of years or (b) receive the commuted value in one sum.
IMPORTANT INFORMATION:
- - YOU CANNOT SURRENDER YOUR CONTRACT ONCE ANNUITY PAYOUTS BEGIN.
<Page>
14 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
- - For Qualified Contracts, if you elect an Annuity Payout Option with a Period
Certain, the guaranteed number of years must be less than the life expectancy
of the Annuitant at the time the Annuity Payouts begin. We compute life
expectancy using the IRS mortality tables.
- - AUTOMATIC ANNUITY PAYMENTS -- If you do not elect an Annuity Payout Option,
Annuity Payouts will automatically begin on the Annuity Commencement Date
under the Life Annuity with Payments for a Period Certain Annuity Payout
Option with a ten-year period certain.
3. HOW OFTEN DO YOU WANT THE PAYEE TO RECEIVE ANNUITY PAYOUTS?
In addition to selecting an Annuity Commencement Date and an Annuity Payout
Option, you must also decide how often you want the Payee to receive Annuity
Payouts. You may choose to receive Annuity Payouts:
- - monthly,
- - quarterly,
- - semi-annually, or
- - annually.
Once you select a frequency, it cannot be changed after the Annuity Commencement
Date. If you do not make a selection, the Payee will receive monthly Annuity
Payouts. The first payment must be at least equal to the minimum payment amount
according to our rules then in effect. If at any time, payments become less than
the minimum payment amount, we have the right to change the payment frequency to
meet the minimum payment requirements. If any payment amount is less than the
minimum annual payment amount, we may make an alternative arrangement with you.
4. HOW ARE ANNUITY PAYOUTS CALCULATED?
The Tables in the Contract provide for guaranteed dollar amounts of monthly
payments for each $1,000 applied under the Annuity Payout Options. Under the
Life Annuity, Life Annuity with Cash Refund and Life Annuity with Payments for a
Period Certain, the amount of each Annuity Payout will depend upon the age and
gender of the Annuitant at the time the first Annuity Payout is due. Under the
Joint and Last Survivor Life Annuity and Joint and Last Survivor Life Annuity
with Payments for a Period Certain, the amount of the first Annuity Payout will
depend upon the gender of both Annuitants and their ages at the time the Annuity
Payout is due.
Gender will not be used to determine the amount of the Annuity Payouts if the
Contract is issued to qualify under certain sections of the Code. If gender is
used to determine the amount of Annuity Payouts, the Annuity tables in the
Contract will provide rates of payment for male Annuitants and female
Annuitants.
The fixed payment Annuity tables for the Annuity Payout Options, except for
Payments for a Period Certain Annuity Payout Option are based on the 1983a
Individual Annuity Mortality Table projected to the year 2000 using Projection
Scale G and an interest rate of 2.5%. The table for the Payments for a Period
Certain Annuity Payout Option is based on an interest rate of 2.5% per annum.
The Annuity tables for the Annuity Payout Options, except for Payments for a
Period Certain Annuity Payout Option are age dependent. For Annuity payments
beginning after 2000, the amount of the first payment will be based on an age a
specified number of years younger than the Annuitant's then attained age. The
age setback is as follows:
<Table>
<Caption>
DATE OF FIRST PAYMENT AGE SETBACK
- ------------------------------------
Prior to 2005 1 year
- ------------------------------------
2005 - 2014 2 years
- ------------------------------------
2015 - 2019 3 years
- ------------------------------------
2020 - 2029 4 years
- ------------------------------------
2030 - 2039 5 years
- ------------------------------------
2040 or later 6 years
- ------------------------------------
</Table>
MISCELLANEOUS PROVISIONS
INVESTMENTS BY HARTFORD
Assets of Hartford must be invested in accordance with the requirements
established by applicable state laws regarding the nature and quality of
investments that may be made by life insurance companies and the percentage of
their assets that may be committed to any particular type of investment. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages, real estate and
certain other investments.
Contract reserves will be accounted for in a non-unitized separate account.
Contract Owners have no priority claims on assets accounted for in this separate
account. All assets of Hartford, including those accounted for in this separate
account, are available to meet the guarantees under the Contracts and are
available to meet the general obligations of Hartford.
Nonetheless, in establishing Guarantee Rates and Current Rates, Hartford intends
to take into account the yields available on the instruments in which it intends
to invest the proceeds from the Contracts. (See "Guarantee Rates"). Hartford's
investment strategy with respect to the proceeds attributable to the Contracts
will generally be to invest in investment-grade debt instruments having
durations tending to match the applicable Guarantee Periods.
Investment-grade debt instruments in which Hartford intends to invest the
proceeds from the Contracts include:
Securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the United
States Government.
Debt securities which have an investment grade, at the time of purchase, within
the four highest grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A
or Baa), Standard & Poor's
<Page>
HARTFORD LIFE INSURANCE COMPANY 15
- --------------------------------------------------------------------------------
Corporation (AAA, AA, A or BBB) or any other nationally recognized rating
service.
Other debt instruments, including, but not limited to, issues of or guaranteed
by banks or bank holding companies and corporations, which obligations, although
not rated by Moody's Investors Services, Inc. or Standard & Poor's Corporation
are deemed by Hartford's management to have an investment quality comparable to
securities which may be purchased as stated above.
While the foregoing generally describes our investment strategy with respect to
the proceeds attributable to the Contracts, we are not obligated to invest the
proceeds attributable to the Contract according to any particular strategy,
except as may be required by Connecticut and other state insurance laws.
AMENDMENT OF CONTRACTS
We may modify the Contract, but no modification will affect the amount or term
of any Contract unless a modification is required to conform the Contract to
applicable Federal or State law. No modification will affect the method by which
Contract Values are determined. We will notify you in writing of any
modifications.
ASSIGNMENT OF CONTRACTS
Ownership of this Contract is generally assignable. However, if the Contract is
issued to a tax qualified retirement plan, it is possible that the ownership of
the Contract may not be transferred or assigned. An assignment of a
Non-Qualified Contract may subject the Contract Values or Surrender Value to
income taxes and certain penalty taxes.
DISTRIBUTION OF CONTRACTS
Hartford Securities Distribution Company, Inc. ("HSD") serves as principal
underwriter for the Contracts. HSD is a wholly owned subsidiary of Hartford. The
principal business address of HSD is the same as Hartford. HSD is registered
with the Commission under the 1934 Act as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc.
The Contracts are sold by certain independent broker-dealers registered under
the 1934 Act to persons who have established an account with the broker-dealer.
In addition, the Contracts may be offered to members of certain other eligible
groups or certain individuals. Hartford will pay a maximum commission of 5% for
the sale of a Contract. From time to time, customers of certain broker-dealers
may be offered special initial Guarantee Rates and negotiated commissions.
Broker-dealers or financial institutions are compensated according to a schedule
set forth by HSD and any applicable rules or regulations for insurance
compensation. Compensation is generally based on premium payments made by
policyholders or contract owners.
In addition, a broker-dealer or financial institution may also receive
additional compensation for, among other things, training, marketing or other
services provided. HSD, its affiliates or Hartford may also make compensation
arrangements with certain broker-dealers or financial institutions based on
total sales by the broker-dealer or financial institution of insurance products.
These payments, which may be different for different broker-dealers or financial
institutions, will be made by HSD, its affiliates or Hartford out of their own
assets and will not effect the amounts paid by the policyholders or contract
owners to purchase, hold or Surrender insurance products.
The Contract may be sold directly to certain individuals under certain
circumstances that do not involve payment of any sales compensation to a
registered representative. In such case, Hartford will credit the Contract with
an additional 2.0% of Premium Payment. This additional percentage of Premium
Payment in no way affects present or future charges, rights, benefits or current
values of other Contract Owners. The following class of individuals are eligible
for this feature: (1) current or retired officers, directors, trustees and
employees (and their families) of the ultimate parent and affiliates of
Hartford; and (2) employees and registered representatives (and their families)
of registered broker-dealers (or their financial institutions) that have a sales
agreement with Hartford and its principal underwriter to sell the Contracts.
FEDERAL TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
What are some of the federal tax consequences which affect these Contracts?
A. GENERAL
Since federal tax law is complex, the tax consequences of purchasing this
contract will vary depending on your situation. You may need tax or legal advice
to help you determine whether purchasing this contract is right for you.
Our general discussion of the tax treatment of this contract is based on our
understanding of federal income tax laws as they are currently interpreted. A
detailed description of all federal income tax consequences regarding the
purchase of this contract cannot be made in the prospectus. We also do not
discuss state, municipal or other tax laws that may apply to this contract. For
detailed information, you should consult with a qualified tax adviser familiar
with your situation.
B. TAXATION OF HARTFORD
Hartford is taxed as a life insurance company under Subchapter L of Chapter 1 of
the Internal Revenue Code of 1986, as amended (the "Code"). The assets
underlying the Contracts will be owned by Hartford. The income earned on such
assets will be Hartford's income.
<Page>
16 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
C. TAXATION OF ANNUITIES -- GENERAL PROVISIONS AFFECTING PURCHASERS OTHER THAN
QUALIFIED RETIREMENT PLANS
Section 72 of the Code governs the taxation of annuities in general.
1. NON-NATURAL PERSONS, CORPORATIONS, ETC.
Code Section 72 contains provisions for contract owners which are not natural
persons. Non-natural persons include corporations, trusts, limited liability
companies, partnerships and other types of legal entities. The tax rules for
contracts owned by non-natural persons are different from the rules for
contracts owned by individuals. For example, the annual net increase in the
value of the contract is currently includable in the gross income of a
non-natural person, unless the non-natural person holds the contract as an agent
for a natural person. There are additional exceptions from current inclusion
for:
- - certain annuities held by structured settlement companies,
- - certain annuities held by an employer with respect to a terminated qualified
retirement plan and
- - certain immediate annuities.
A non-natural person which is a tax-exempt entity for federal tax purposes will
not be subject to income tax as a result of this provision.
If the contract owner is a non-natural person, the primary annuitant is treated
as the contract owner in applying mandatory distribution rules. These rules
require that certain distributions be made upon the death of the contract owner.
A change in the primary annuitant is also treated as the death of the contract
owner.
2. OTHER CONTRACT OWNERS (NATURAL PERSONS).
A Contract Owner is not taxed on increases in the value of the Contract until an
amount is received or deemed received, e.g., in the form of a lump sum payment
(full or partial value of a Contract) or as Annuity payments under the
settlement option elected.
The provisions of Section 72 of the Code concerning distributions are summarized
briefly below. Also summarized are special rules affecting distributions from
Contracts obtained in a tax-free exchange for other annuity contracts or life
insurance contracts which were purchased prior to August 14, 1982.
a. DISTRIBUTIONS PRIOR TO THE ANNUITY COMMENCEMENT DATE.
i. Total premium payments less amounts received which were not includable in
gross income equal the "investment in the contract" under Section 72 of the
Code.
ii. To the extent that the value of the Contract (ignoring any surrender
charges except on a full surrender) exceeds the "investment in the
contract," such excess constitutes the "income on the contract." It is
unclear what value should be used in determining the "income on the
contract." We believe that the current Contract value (determined without
regard to surrender charges) is an appropriate measure. However, the IRS
could take the position that the value should be the current Contract value
(determined without regard to surrender charges) increased by some measure
of the value of certain future benefits.
iii. Any amount received or deemed received prior to the Annuity Commencement
Date (e.g., upon a partial surrender) is deemed to come first from any
such "income on the contract" and then from "investment in the contract,"
and for these purposes such "income on the contract" shall be computed by
reference to any aggregation rule in subparagraph 2.c. below. As a result,
any such amount received or deemed received (1) shall be includable in
gross income to the extent that such amount does not exceed any such
"income on the contract," and (2) shall not be includable in gross income
to the extent that such amount does exceed any such "income on the
contract." If at the time that any amount is received or deemed received
there is no "income on the contract" (e.g., because the gross value of the
Contract does not exceed the "investment in the contract" and no
aggregation rule applies), then such amount received or deemed received
will not be includable in gross income, and will simply reduce the
"investment in the contract."
iv. The receipt of any amount as a loan under the Contract or the assignment or
pledge of any portion of the value of the Contract shall be treated as an
amount received for purposes of this subparagraph a. and the next
subparagraph b.
v. In general, the transfer of the Contract, without full and adequate
consideration, will be treated as an amount received for purposes of this
subparagraph a. and the next subparagraph b. This transfer rule does not
apply, however, to certain transfers of property between spouses or incident
to divorce.
b. DISTRIBUTIONS AFTER ANNUITY COMMENCEMENT DATE.
Annuity payments made periodically after the Annuity Commencement Date are
includable in gross income to the extent the payments exceed the amount
determined by the application of the ratio of the "investment in the contract"
to the total amount of the payments to be made after the Annuity Commencement
Date (the "exclusion ratio").
i. When the total of amounts excluded from income by application of the
exclusion ratio is equal to the investment in the contract as of the
Annuity Commencement Date, any additional payments (including surrenders)
will be entirely includable in gross income.
ii. If the annuity payments cease by reason of the death of the Annuitant and,
as of the date of death, the amount of annuity payments excluded from gross
income by the exclusion ratio does not exceed the investment in the
contract as of the Annuity Commencement Date, then the remaining portion of
unrecovered investment shall be allowed as a deduction for the last taxable
year of the Annuitant.
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iii. Generally, nonperiodic amounts received or deemed received after the
Annuity Commencement Date are not entitled to any exclusion ratio and
shall be fully includable in gross income. However, upon a full surrender
after such date, only the excess of the amount received (after any
surrender charge) over the remaining "investment in the contract" shall be
includable in gross income (except to the extent that the aggregation rule
referred to in the next subparagraph c. may apply).
c. AGGREGATION OF TWO OR MORE ANNUITY CONTRACTS.
Contracts issued after October 21, 1988 by the same insurer (or affiliated
insurer) to the same Contract Owner within the same calendar year (other than
certain contracts held in connection with a tax-qualified retirement
arrangement) will be treated as one annuity Contract for the purpose of
determining the taxation of distributions prior to the Annuity Commencement
Date. An annuity contract received in a tax-free exchange for another annuity
contract or life insurance contract may be treated as a new Contract for this
purpose. We believe that for any annuity subject to such aggregation, the values
under the Contracts and the investment in the contracts will be added together
to determine the taxation under subparagraph 2.a., above, of amounts received or
deemed received prior to the Annuity Commencement Date. Withdrawals will first
be treated as withdrawals of income until all of the income from all such
Contracts is withdrawn. As of the date of this prospectus, there are no
regulations interpreting this provision.
d. 10% PENALTY TAX -- APPLICABLE TO CERTAIN WITHDRAWALS AND ANNUITY
PAYMENTS.
i. If any amount is received or deemed received on the Contract (before or
after the Annuity Commencement Date), the Code applies a penalty tax equal
to ten percent of the portion of the amount includable in gross income,
unless an exception applies.
ii. The 10% penalty tax will not apply to the following distributions:
1. Distributions made on or after the date the recipient has attained the
age of 59 1/2.
2. Distributions made on or after the death of the holder or where the
holder is not an individual, the death of the primary annuitant.
3. Distributions attributable to a recipient's becoming disabled.
4. A distribution that is part of a scheduled series of substantially equal
periodic payments (not less frequently than annually) for the life (or
life expectancy) of the recipient (or the joint lives or life
expectancies of the recipient and the recipient's designated
Beneficiary). In determining whether a payment stream designed to
satisfy this exception qualifies, it is possible that the IRS could take
the position that the entire interest in the Contract should include not
only the current Contract value, but also some measure of the value of
certain future benefits.
5. Distributions made under certain annuities issued in connection with
structured settlement agreements.
6. Distributions of amounts which are allocable to the "investment in the
contract" prior to August 14, 1982 (see next subparagraph e.).
e. SPECIAL PROVISIONS AFFECTING CONTRACTS OBTAINED THROUGH A TAX-FREE
EXCHANGE OF OTHER ANNUITY OR LIFE INSURANCE CONTRACTS PURCHASED PRIOR TO
AUGUST 14, 1982.
If the Contract was obtained by a tax-free exchange of a life insurance or
annuity Contract purchased prior to August 14, 1982, then any amount received or
deemed received prior to the Annuity Commencement Date shall be deemed to come
(1) first from the amount of the "investment in the contract" prior to
August 14, 1982 ("pre-8/14/82 investment") carried over from the prior Contract,
(2) then from the portion of the "income on the contract" (carried over to, as
well as accumulating in, the successor Contract) that is attributable to such
pre-8/14/82 investment, (3) then from the remaining "income on the contract" and
(4) last from the remaining "investment in the contract." As a result, to the
extent that such amount received or deemed received does not exceed such
pre-8/14/82 investment, such amount is not includable in gross income. In
addition, to the extent that such amount received or deemed received does not
exceed the sum of (a) such pre-8/14/82 investment and (b) the "income on the
contract" attributable thereto, such amount is not subject to the 10% penalty
tax. In all other respects, amounts received or deemed received from such post-
exchange Contracts are generally subject to the rules described in this
subparagraph e.
f. REQUIRED DISTRIBUTIONS.
i. Death of Contract Owner or Primary Annuitant
Subject to the alternative election or spouse beneficiary provisions in ii
or iii below:
1. If any Contract Owner dies on or after the Annuity Commencement Date and
before the entire interest in the Contract has been distributed, the
remaining portion of such interest shall be distributed at least as
rapidly as under the method of distribution being used as of the date of
such death;
2. If any Contract Owner dies before the Annuity Commencement Date, the
entire interest in the Contract will be distributed within 5 years after
such death; and
3. If the Contract Owner is not an individual, then for purposes of 1. or
2. above, the primary annuitant under the Contract shall be treated as
the Contract Owner, and any change in the primary annuitant shall be
treated as the death of the Contract Owner. The primary annuitant is the
individual, the events in the life
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of whom are of primary importance in affecting the timing or amount of
the payout under the Contract.
ii. Alternative Election to Satisfy Distribution Requirements
If any portion of the interest of a Contract Owner described in i. above is
payable to or for the benefit of a designated beneficiary, such beneficiary
may elect to have the portion distributed over a period that does not extend
beyond the life or life expectancy of the beneficiary. Distributions must
begin within a year of the Contract Owner's death.
iii. Spouse Beneficiary
If any portion of the interest of a Contract Owner is payable to or for the
benefit of his or her spouse, and the Annuitant or Contingent Annuitant is
living, such spouse shall be treated as the Contract Owner of such portion
for purposes of section i. above. This spousal contract continuation shall
apply only once for this contract.
g. ADDITION OF RIDERS.
The addition of a rider to the Contract could cause it to be considered newly
issued or entered into, for tax purposes, and thus could result in the loss of
certain grandfathering with respect to the Contract. Please contact your tax
adviser for more information.
D. FEDERAL INCOME TAX WITHHOLDING
Any portion of a distribution that is current taxable income to the Contract
Owner will generally be subject to federal income tax withholding and reporting
under the Code. Generally, however, a Contract Owner may elect not to have
income taxes withheld or to have income taxes withheld at a different rate by
filing a completed election form with us. Election forms will be provided at the
time distributions are requested.
E. GENERAL PROVISIONS AFFECTING QUALIFIED RETIREMENT PLANS
The Contract may be used for a number of qualified retirement plans. If the
Contract is being purchased with respect to some form of qualified retirement
plan, please see "Information Regarding Tax-Qualified Retirement Plans" below
for information relative to the types of plans for which it may be used and the
general explanation of the tax features of such plans.
F. ANNUITY PURCHASES BY NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
The discussion above provides general information regarding U.S. federal income
tax consequences to annuity purchasers that are U.S. citizens or residents.
Purchasers that are not U.S. citizens or residents will generally be subject to
U.S. federal income tax and withholding on taxable annuity distributions at a
30% rate, unless a lower treaty rate applies and any required tax forms are
submitted to us. In addition, purchasers may be subject to state premium tax,
other state and/or municipal taxes, and taxes that may be imposed by the
purchaser's country of citizenship or residence. Prospective purchasers are
advised to consult with a qualified tax adviser regarding U.S., state, and
foreign taxation with respect to an annuity purchase.
G. GENERATION SKIPPING TRANSFER TAX
Under certain circumstances, the Code may impose a "generation skipping transfer
tax" when all or part of an annuity contract is transferred to, or a death
benefit is paid to, an individual two or more generations younger than the
owner. Regulations issued under the Code may require us to deduct the tax from
your Contract, or from any applicable payment, and pay it directly to the IRS.
H. ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA")
repealed the Federal estate tax and replaced it with a carryover basis income
tax regime effective for estates of decedents dying after December 31, 2009.
EGTRRA also repealed the generation skipping transfer tax, but not the gift tax,
for transfers made after December 31, 2009. EGTRRA contains a sunset provision,
which essentially returns the Federal estate, gift and generation skipping
transfer taxes to their pre-EGTRRA form, beginning in 2011. Congress may or may
not enact permanent repeal between now and then.
During the period prior to 2010, EGTRRA provides for periodic decreases in the
maximum estate tax rate coupled with periodic increases in the unified credit
exemption amount. For 2003, the maximum estate tax rate is 49% and the unified
credit exemption amount is $1,000,000.
The complexity of the new tax law, along with uncertainty as to how it might be
modified in coming years, underscores the importance of seeking guidance from a
qualified advisor to help ensure that your estate plan adequately addresses your
needs and that of your beneficiaries under all possible scenarios.
INFORMATION REGARDING TAX-QUALIFIED RETIREMENT PLANS
This summary does not attempt to provide more than general information about the
federal income tax rules associated with use of a Contract by a tax-qualified
retirement plan. State income tax rules applicable to tax-qualified retirement
plans often differ from federal income tax rules, and this summary does not
describe any of these differences. Because of the complexity of the tax rules,
owners, participants and beneficiaries are encouraged to consult their own tax
advisors as to specific tax consequences.
The Contracts may offer death benefits that may exceed the greater of the
amounts paid for the Contract or the Contract's cash value. Owners who intend to
use the Contract in connection with tax-qualified retirement plans should
consider the income tax effects that such a death benefit may have on the plan.
The federal tax rules applicable to owners of Contracts under tax-qualified
retirement plans vary according to the type of plan as well as the terms and
conditions of the plan itself. Contract owners, plan participants and
beneficiaries are cautioned that the rights and benefits of any person may be
controlled by the terms and conditions of the tax-qualified retirement plan
itself, regardless of the terms and conditions of a Contract. We are not bound
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by the terms and conditions of such plans to the extent such terms conflict with
a Contract, unless we specifically consent to be bound.
Some tax-qualified retirement plans are subject to distribution and other
requirements that are not incorporated into our administrative procedures.
Contract owners, participants and beneficiaries are responsible for determining
that contributions, distributions and other transactions comply with applicable
law. Tax penalties may apply to transactions with respect to tax-qualified
retirement plans if applicable federal income tax rules and restrictions are not
carefully observed.
We do not currently offer the Contracts in connection with all of the types of
tax-qualified retirement plans discussed below and may not offer the Contracts
for all types of tax-qualified retirement plans in the future.
1. TAX-QUALIFIED PENSION OR PROFIT-SHARING PLANS -- Eligible employers can
establish certain tax-qualified pension and profit-sharing plans under
section 401 of the Code. Rules under section 401(k) of the Code govern certain
"cash or deferred arrangements" under such plans. Rules under
section 408(k) govern "simplified employee pensions." Tax-qualified pension and
profit-sharing plans are subject to limitations on the amount that may be
contributed, the persons who may be eligible to participate, the time when
distributions must commence, and the form in which distributions must be paid.
Employers intending to use the Contracts in connection with tax-qualified
pension or profit-sharing plans should seek competent tax and other legal
advice. If the death benefit under the Contract can exceed the greater of the
amount paid for the Contract and the Contract's cash value, it is possible that
the IRS would characterize such death benefit as an "incidental death benefit."
There are limitations on the amount of incidental benefits that may be provided
under pension and profit sharing plans. In addition, the provision of such
benefits may result in currently taxable income to the participants.
2. TAX SHELTERED ANNUITIES UNDER SECTION 403(B) -- Public schools and certain
types of charitable, educational and scientific organizations, as specified in
section 501(c)(3) of the Code, can purchase tax-sheltered annuity contracts for
their employees. Tax-deferred contributions can be made to tax-sheltered annuity
contracts under section 403(b) of the Code, subject to certain limitations. In
general, total contributions may not exceed the lesser of (1) 100% of the
participant's compensation, and (2) $40,000 (adjusted for increases in
cost-of-living). The maximum elective deferral amount is equal to $12,000 for
2003, $13,000 for 2004, $14,000 for 2005, and $15,000 for 2006 and thereafter,
indexed. The limitation on elective deferrals may be increased to allow certain
"catch-up" contributions for individuals who have attained age 50.
Tax-sheltered annuity programs under section 403(b) are subject to a PROHIBITION
AGAINST DISTRIBUTIONS FROM THE CONTRACT ATTRIBUTABLE TO CONTRIBUTIONS MADE
PURSUANT TO A SALARY REDUCTION AGREEMENT, unless such distribution is made:
- - after the participating employee attains age 59 1/2;
- - upon severance from employment;
- - upon death or disability; or
- - in the case of hardship (and in the case of hardship, any income attributable
to such contributions may not be distributed).
Generally, the above restrictions do not apply to distributions attributable to
cash values or other amounts held under a section 403(b) contract as of
December 31, 1988.
If the death benefit under the Contract can exceed the greater of the amount
paid for the Contract and the Contract's cash value, it is possible that the IRS
would characterize such death benefit as an "incidental death benefit." If the
death benefit were so characterized, this could result in currently taxable
income to purchasers. In addition, there are limitations on the amount of
incidental death benefits that may be provided under a section
403(b) arrangement.
3. DEFERRED COMPENSATION PLANS UNDER SECTION 457 -- Certain governmental
employers or tax-exempt employers other than a governmental unit can establish a
Deferred Compensation Plan under section 457 of the Code. For these purposes, a
"governmental employer" is a State, a political subdivision of a State, or an
agency or an instrumentality of a State or political subdivision of a State.
Employees and independent contractors performing services for a governmental or
tax-exempt employer can elect to have contributions made to a Deferred
Compensation Plan of their employer in accordance with the employer's plan and
section 457 of the Code.
Deferred Compensation Plans that meet the requirements of section 457(b) of the
Code are called "eligible" Deferred Compensation Plans. Section 457(b) limits
the amount of contributions that can be made to an eligible Deferred
Compensation Plan on behalf of a participant. Generally, the limitation on
contributions is the lesser of (1) 100% of a participant's includible
compensation or (2) the applicable dollar amount, equal to $12,000 for 2003,
$13,000 for 2004, $14,000 for 2005, and $15,000 for 2006 and thereafter,
indexed. The plan may provide for additional "catch-up" contributions during the
three taxable years ending before the year in which the participant attains
normal retirement age. In addition, the contribution limitation may be increased
to allow certain "catch-up" contributions for individuals who have attained age
50.
All of the assets and income of an eligible Deferred Compensation Plan for a
governmental employer must be held in trust for the exclusive benefit of
participants and their beneficiaries. For this purpose, certain custodial
accounts and annuity contracts are treated as trusts. The requirement of a trust
does not apply to amounts under an eligible Deferred Compensation Plan of a
tax-exempt (non-governmental) employer. In addition, the requirement of a trust
does not apply to amounts under a Deferred Compensation Plan of a governmental
employer if the Deferred Compensation Plan is not an eligible plan within the
meaning of section 457(b) of the Code. In the absence of such a trust,
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amounts under the plan will be subject to the claims of the employer's general
creditors.
In general, distributions from an eligible Deferred Compensation Plan to a
participant or beneficiary are prohibited under section 457 of the Code unless
made after the participating employee:
- - attains age 70 1/2
- - has a severance from employment as defined in the Code (including death of the
participating employee), or
- - suffers an unforeseeable financial emergency as defined in the Code.
4. INDIVIDUAL RETIREMENT ANNUITIES ("IRAS") UNDER SECTION 408
TRADITIONAL IRAs -- Eligible individuals can establish individual retirement
programs under section 408 of the Code through the purchase of an IRA.
Section 408 imposes limits with respect to IRAs, including limits on the amount
that may be contributed to an IRA, the amount of such contributions that may be
deducted from taxable income, the persons who may be eligible to contribute to
an IRA, and the time when distributions commence from an IRA. See Section 6
below for a discussion of rollovers involving IRAs.
SIMPLE IRAs -- Eligible employees may establish SIMPLE IRAs in connection with a
SIMPLE IRA plan of an employer under section 408(p) of the Code. Special
rollover rules apply to SIMPLE IRAs. Amounts can be rolled over from one SIMPLE
IRA to another SIMPLE IRA. However, amounts can be rolled over from a SIMPLE IRA
to a Traditional IRA only after two years have expired since the employee first
commenced participation in the employer's SIMPLE IRA plan. Amounts cannot be
rolled over to a SIMPLE IRA from a qualified plan or a Traditional IRA. Hartford
is a non-designated financial institution for purposes of the SIMPLE IRA rules.
ROTH IRAs -- Eligible individuals may establish Roth IRAs under section 408A of
the Code. Contributions to a Roth IRA are not deductible. Subject to special
limitations, a Traditional IRA, SIMPLE IRA or Simplified Employee Pension under
Section 408(k) of the Code may be converted into a Roth IRA or a distribution
from such an arrangement may be rolled over to a Roth IRA. However, a conversion
or a rollover to a Roth IRA is not excludable from gross income. If certain
conditions are met, qualified distributions from a Roth IRA are tax-free.
5. FEDERAL TAX PENALTIES AND WITHHOLDING -- Distributions from tax-qualified
retirement plans are generally taxed as ordinary income under section 72 of the
Code. Under these rules, a portion of each distribution may be excludable from
income. The excludable amount is the portion of the distribution that bears the
same ratio as the after-tax contributions bear to the expected return.
(a) PENALTY TAX ON EARLY DISTRIBUTIONS Section 72(t) of the Code imposes an
additional penalty tax equal to 10% of the taxable portion of a distribution
from certain tax-qualified retirement plans. However, the 10% penalty tax
does not apply to a distribution that is:
- - Made on or after the date on which the employee reaches age 59 1/2;
- - Made to a beneficiary (or to the estate of the employee) on or after the death
of the employee;
- - Attributable to the employee's becoming disabled (as defined in the Code);
- - Part of a series of substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the employee or the
joint lives (or joint life expectancies) of the employee and his or her
designated beneficiary. In determining whether a payment stream designed to
satisfy this exception qualifies, it is possible that the IRS could take the
position that the entire interest in the Contract should include not only the
current Contract value, but also some measure of the value of certain future
benefits;
- - Except in the case of an IRA, made to an employee after separation from
service after reaching age 55; or
- - Not greater than the amount allowable as a deduction to the employee for
eligible medical expenses during the taxable year.
IN ADDITION, THE 10% PENALTY TAX DOES NOT APPLY TO A DISTRIBUTION FROM AN IRA
THAT IS:
- - Made after separation from employment to an unemployed IRA owner for health
insurance premiums, if certain conditions are met;
- - Not in excess of the amount of certain qualifying higher education expenses,
as defined by section 72(t)(7) of the Code; or
- - A qualified first-time homebuyer distribution meeting the requirements
specified at section 72(t)(8) of the Code.
If you are a participant in a SIMPLE IRA plan, you should be aware that the 10%
penalty tax is increased to 25% with respect to non-exempt early distributions
made from your SIMPLE IRA during the first two years following the date you
first commenced participation in any SIMPLE IRA plan of your employer.
(b) MINIMUM DISTRIBUTION PENALTY TAX If the amount distributed is less than the
minimum required distribution for the year, the Participant is subject to a
50% penalty tax on the amount that was not properly distributed.
An individual's interest in a tax-qualified retirement plan generally must be
distributed, or begin to be distributed, not later than the Required Beginning
Date. Generally, the Required Beginning Date is April 1 of the calendar year
following the later of:
- - the calendar year in which the individual attains age 70 1/2; or
- - the calendar year in which the individual retires from service with the
employer sponsoring the plan.
The Required Beginning Date for an individual who is a five (5) percent owner
(as defined in the Code), or who is the
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owner of an IRA, is April 1 of the calendar year following the calendar year in
which the individual attains age 70 1/2.
The entire interest of the Participant must be distributed beginning no later
than the Required Beginning Date over:
- - the life of the Participant or the lives of the Participant and the
Participant's designated beneficiary (as defined in the Code), or
- - over a period not extending beyond the life expectancy of the Participant or
the joint life expectancy of the Participant and the Participant's designated
beneficiary.
Each annual distribution must equal or exceed a "minimum distribution amount"
which is determined generally by dividing the account balance by the applicable
life expectancy. This account balance is generally based upon the account value
as of the close of business on the last day of the previous calendar year. In
addition, minimum distribution incidental benefit rules may require a larger
annual distribution. Required minimum distributions also can be made in the form
of annuity payments. The death benefit under the contract may affect the amount
of the minimum required distribution that must be taken.
If an individual dies before reaching his or her Required Beginning Date, the
individual's entire interest must generally be distributed within five years of
the individual's death. However, this rule will be deemed satisfied, if
distributions begin before the close of the calendar year following the
individual's death to a designated beneficiary and distribution is over the life
of such designated beneficiary (or over a period not extending beyond the life
expectancy of the beneficiary). If the beneficiary is the individual's surviving
spouse, distributions may be delayed until the individual would have attained
age 70 1/2.
If an individual dies after reaching his or her Required Beginning Date or after
distributions have commenced, the individual's interest must generally be
distributed at least as rapidly as under the method of distribution in effect at
the time of the individual's death.
The minimum distribution requirements apply to Roth IRAs after the Contract
owner dies, but not while the Contract owner is alive. In addition, if the owner
of a Traditional or Roth IRA dies and the Contract owner's spouse is the sole
designated beneficiary, the surviving spouse may elect to treat the Traditional
or Roth IRA as his or her own.
In 2002, the Internal Revenue Service issued final and temporary regulations in
the Federal Register relating to minimum required distributions. Please consult
with your tax or legal adviser with any questions regarding the new regulations.
(c) WITHHOLDING We are generally required to withhold federal income tax from
the taxable portion of each distribution made under a Contract. The federal
income tax withholding requirements, including the rate at which withholding
applies, depend on whether a distribution is or is not an eligible rollover
distribution.
Federal income tax withholding from the taxable portion of distributions that
are not eligible rollover distributions is required unless the payee is eligible
to, and does in fact, elect not to have income tax withheld by filing an
election with us. Where the payee does not elect out of withholding, the rate of
income tax to be withheld depends on whether the distribution is nonperiodic or
periodic. Regardless of whether an election is made not to have federal income
taxes withheld, the recipient is still liable for payment of federal income tax
on the taxable portion of the distribution.
For periodic payments, federal income tax will be withheld from the taxable
portion of the distribution by treating the payment as wages under IRS wage
withholding tables, using the marital status and number of withholding
allowances elected by the payee on an IRS Form W-4P, or acceptable substitute,
filed us. Where the payee has not filed a Form W-4P, or acceptable substitute,
with us, the payee will be treated as married claiming three withholding
allowances. Special rules apply where the payee has not provided us with a
proper taxpayer identification number or where the payments are sent outside the
United States or U.S. possessions.
For nonperiodic distributions, where a payee has not elected out of withholding,
income tax will be withheld at a rate of 10 percent from the taxable portion of
the distribution.
Federal income tax withholding is required at a rate of 20 percent from the
taxable portion of any distribution that is an eligible rollover distribution to
the extent it is not directly rolled over to an eligible recipient plan. Payees
cannot elect out of income tax withholding with respect to such distributions.
Also, special withholding rules apply with respect to distributions from
non-governmental section 457(b) plans, and to distributions made to individuals
who are neither citizens or resident aliens of the United States.
6. ROLLOVER DISTRIBUTIONS -- Under present federal tax law, "eligible rollover
distributions" from qualified retirement plans under section 401(a) of the Code,
qualified annuities under section 403(a) of the Code,
section 403(b) arrangements, and governmental 457(b) plans generally can be
rolled over tax-free within 60 days to any of such plans or arrangements that
accept such rollovers. Similarly, distributions from an IRA generally are
permitted to be rolled over tax-free within 60 days to a qualified plan,
qualified annuity, section 403(b) arrangement, or governmental 457(b) plan.
After tax contributions may be rolled over from a qualified plan, qualified
annuity or governmental 457 plan into another qualified plan or an IRA. In the
case of such a rollover of after tax contributions, the rollover is permitted to
be accomplished only through a direct rollover. In addition, a qualified plan is
not permitted to accept rollovers of after tax contributions unless the plan
provides separate accounting for such contributions (and earnings thereon).
Similar rules apply for purposes of rolling over after tax contributions from a
section 403(b) arrangement. After tax contributions (including nondeductible
contributions to an IRA) are not permitted to be rolled over from an IRA into a
qualified plan, qualified annuity, section 403(b) arrangement, or governmental
457(b) plan.
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For this purpose, an eligible rollover distribution is generally a distribution
to an employee of all or any portion of the balance to the credit of the
employee in a qualified trust under section 401(a) of the Code, qualified
annuity under section 403(a) of the Code, a 403(b) arrangement or a governmental
457(b) plan. However, an eligible rollover distribution does not include: any
distribution which is one of a series of substantially equal periodic payments
(not less frequently than annually) made (1) for the life (or life expectancy)
of the employee or the joint lives (or joint life expectancies) of the employee
and the employee's designated beneficiary, or (2) for a specified period of 10
years or more; any distribution to the extent it is a required minimum
distribution amount (discussed above); or any distribution which is made upon
hardship of the employee.
Separate accounting is required on amounts rolled from plans described under
Code sections 401, 403(b) or 408(IRA), when those amounts are rolled into plans
described under section 457(b) sponsored by governmental employers. These
amounts, when distributed from the governmental 457(b) plan, will be subject to
the 10% early withdrawal tax applicable to distributions from plans described
under sections 401, 403(b) or 408(IRA), respectively.
THE COMPANY
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BUSINESS OF HARTFORD LIFE INSURANCE COMPANY
(Dollar amounts in millions, unless otherwise stated)
Hartford Life Insurance Company and its subsidiaries ("Hartford Life Insurance
Company" or the "Company"), is a direct subsidiary of Hartford Life and Accident
Insurance Company ("HLA"), a wholly owned subsidiary of Hartford Life, Inc.
("Hartford Life"). Hartford Life is an indirect subsidiary of The Hartford
Financial Services Group, Inc. ("The Hartford"). The Company, together with HLA,
provides (i) investment products, including variable annuities, fixed market
value adjusted ("MVA") annuities, mutual funds and retirement plan services for
the savings and retirement needs of over 1.5 million customers, (ii) life
insurance for wealth protection, accumulation and transfer needs for
approximately 740,000 customers, (iii) group benefits products such as group
life and group disability insurance for the benefit of millions of individuals
and (iv) corporate owned life insurance, which includes life insurance policies
purchased by a company on the lives of its employees. The Company is one of the
largest sellers of individual variable annuities, variable life insurance and
group disability insurance in the United States. The Company's strong position
in each of its core businesses provides an opportunity to increase the sale of
the Company's products and services as individuals increasingly save and plan
for retirement, protect themselves and their families against disability or
death and engage in estate planning. In an effort to advance the Company's
strategy of growing its life and asset accumulation businesses, The Hartford
acquired the individual life insurance, annuity and mutual fund businesses of
Fortis on April 2, 2001. (For additional information, see the Capital Resources
and Liquidity section of the MD&A and Note 15 of Notes to Consolidated Financial
Statements).
In the past year, the Company's total assets, decreased 2% to $142.1 billion at
December 31, 2002 from $145.4 billion at December 31, 2001. The Company
generated revenues of $3.4 billion, $3.7 billion and $3.4 billion in 2002, 2001
and 2000, respectively. Additionally, Hartford Life Insurance Company generated
net income of $426, $646 and $487 in 2002, 2001 and 2000, respectively.
CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE
The Company maintains advantageous economies of scale and operating efficiencies
due to its growth, attention to expense and claims management and commitment to
customer service and technology. These advantages allow the Company to
competitively price its products for its distribution network and policyholders.
The Company continues to achieve operating efficiencies in its Investment
Products segment. Operating expenses associated with the Company's individual
annuity products as a percentage of total individual annuity account values have
been reduced since 1992, declining from 43 basis points to 25 basis points in
2002. In addition, the Company utilizes computer technology to enhance
communications within the Company and throughout its distribution network in
order to improve the Company's efficiency in marketing, selling and servicing
its products and, as a result, provides high-quality customer service. In
recognition of excellence in customer service for variable annuities, Hartford
Life Insurance Company was awarded the 2002 Annuity Service Award by DALBAR
Inc., a recognized independent financial services research organization, for the
seventh consecutive year. Hartford Life Insurance Company is the only company to
receive this prestigious award in every year of the award's existence.
Additionally, the Company's Individual Life Division won its second consecutive
DALBAR award for service of life insurance customers and its first DALBAR
Intermediary Service Award in 2002.
RISK MANAGEMENT
The Company's product designs, prudent underwriting standards and risk
management techniques are structured to protect it against disintermediation
risk and greater than expected mortality and morbidity experience. As of
December 31, 2002, the Company had limited exposure to disintermediation risk on
approximately 96% of its domestic life insurance and annuity liabilities through
the use of non-guaranteed separate accounts, MVA features, policy loans,
surrender charges and non-surrenderability provisions. The Company effectively
utilizes prudent underwriting to select and price insurance risks and regularly
monitors mortality and morbidity assumptions to determine if experience remains
consistent with these assumptions and to
<Page>
HARTFORD LIFE INSURANCE COMPANY 23
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ensure that its product pricing remains appropriate. The Company also enforces
disciplined claims management to protect itself against greater than expected
morbidity experience.
REPORTING SEGMENTS
Hartford Life Insurance Company is organized into three reportable operating
segments: Investment Products, Individual Life and Corporate Owned Life
Insurance ("COLI"). The Company includes in "Other" corporate items not directly
allocable to any of its reportable operating segments as well as certain group
benefits, including group life and group disability insurance that is directly
written by the Company and is substantially ceded to its parent, HLA, realized
capital gains and losses and intersegment eliminations. The following is a
description of each segment, including a discussion of principal products,
methods of distribution and competitive environments. Additional information on
Hartford Life Insurance Company's segments may be found in the MD&A and Note 14
of Notes to Consolidated Financial Statements.
INVESTMENT PRODUCTS
The Investment Products segment focuses, through the sale of individual variable
and fixed annuities, retirement plan services and other investment products, on
the savings and retirement needs of the growing number of individuals who are
preparing for retirement or who have already retired. Investment Products
generated revenues of $2.2 billion in 2002 and $2.1 billion in 2001 and 2000, of
which individual annuities accounted for $1.4 billion in 2002, 2001 and 2000.
Net income in the Investment Products segment was $343, $375 and $354 in 2002,
2001 and 2000, respectively.
The Company sells both variable and fixed individual annuity products through a
wide distribution network of national and regional broker-dealer organizations,
banks and other financial institutions and independent financial advisors. The
Company is a market leader in the annuity industry with sales of $11.6 billion,
$10.0 billion and $10.7 billion in 2002, 2001 and 2000, respectively. The
Company was the largest seller of individual retail variable annuities in the
United States with sales of $10.3 billion in 2002 and $9.0 billion in 2001 and
2000. In addition, the Company continues to be the largest seller of individual
retail variable annuities through banks in the United States.
The Company's total account value related to individual annuity products was
$74.9 billion as of December 31, 2002. Of this total account value, $64.3
billion, or 86%, related to individual variable annuity products and $10.6
billion, or 14%, related primarily to fixed MVA annuity products. In 2001, the
Company's total account value related to individual annuity products was $84.2
billion. Of this total account value, $74.6 billion, or 89%, related to
individual variable annuity products and $9.6 billion, or 11%, related primarily
to fixed MVA annuity products.
In addition to its leading position in individual annuities, Hartford Life
Insurance Company continues to emerge as a significant participant in the mutual
fund business and is among the top providers of retirement products and
services, including asset management and plan administration sold to small and
medium size corporations pursuant to Section 401(k) of the Internal Revenue Code
of 1986, as amended (referred to as "401(k)") and to municipalities pursuant to
Section 457 and 403(b) of the Internal Revenue Code of 1986, as amended
(referred to as "Section 457" and "403(b)", respectively). The Company also
provides structured settlement contracts, terminal funding products and other
investment products such as guaranteed investment contracts ("GICs").
As previously mentioned, The Hartford acquired the individual annuity and mutual
fund businesses of Fortis, Inc. in 2001. This acquisition helped solidify the
Company's strong position in variable annuities and strengthened the Company's
401(k) sales.
PRINCIPAL PRODUCTS
INDIVIDUAL VARIABLE ANNUITIES -- Hartford Life Insurance Company earns fees,
based on policyholders' account values, for managing variable annuity assets and
maintaining policyholder accounts. The Company uses specified portions of the
periodic deposits paid by a customer to purchase units in one or more mutual
funds as directed by the customer, who then assumes the investment performance
risks and rewards. As a result, variable annuities permit policyholders to
choose aggressive or conservative investment strategies, as they deem
appropriate, without affecting the composition and quality of assets in the
Company's general account. These products offer the policyholder a variety of
equity and fixed income options, as well as the ability to earn a guaranteed
rate of interest in the general account of the Company. The Company offers an
enhanced guaranteed rate of interest for a specified period of time (no longer
than twelve months) if the policyholder elects to dollar-cost average funds from
the Company's general account into one or more non-guaranteed separate accounts.
Due to this enhanced rate and the volatility experienced in the overall equity
markets, this option continues to be popular with policyholders. Additionally,
the Investment Products segment sells variable annuity contracts that offer
various guaranteed death benefits. For certain guaranteed death benefits, the
Company pays the greater of (1) the account value at death; (2) the sum of all
premium payments less prior withdrawals; or (3) the maximum anniversary value of
the contract, plus any premium payments since the contract anniversary, minus
any withdrawals following the contract anniversary.
Policyholders may make deposits of varying amounts at regular or irregular
intervals and the value of these assets fluctuates in accordance with the
investment performance of the funds selected by the policyholder. To encourage
persistency, many of the Company's individual variable annuities are subject to
withdrawal restrictions and surrender charges. Surrender charges range up to 8%
of the contract's initial deposit less withdrawals, and reduce to zero on a
sliding scale, usually within seven policy years. Volatility experienced by the
equity markets over the past few years did not cause a significant increase in
variable annuity surrenders, demonstrating that policyholders are generally
aware of the long-term nature of these products. Individual variable annuity
account values of $64.3 billion as of December 31, 2002, have grown
significantly from $13.1 billion as of
<Page>
24 HARTFORD LIFE INSURANCE COMPANY
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December 31, 1994, due to strong net cash flow, resulting from high levels of
sales, low levels of surrenders and equity market appreciation. Approximately
88% and 94% of the individual variable annuity account values were held in
non-guaranteed separate accounts as of December 31, 2002 and 2001, respectively.
In August 2002, The Company introduced Principal First, a new guaranteed
withdrawal benefit rider which is sold in conjunction with the Company's
variable annuity contracts. The Principal First rider provides a guaranteed
withdrawal benefit that gives the policyholder the right to make periodic
surrenders that total an amount equal to the policyholder's premium payments.
This guarantee will remain in effect if periodic surrenders do not exceed an
amount equal to 7% of premium payments each contract year. If the policyholder
chooses to surrender an amount more than 7% in a contract year, then the
guarantee may be reduced to an amount less than premium payments.
The assets underlying the Company's variable annuities are managed both
internally and by outside money managers, while the Company provides all policy
administration services. The Company utilizes a select group of money managers,
such as Wellington Management Company, LLP ("Wellington"); Hartford Investment
Management Company ("HIMCO"), a wholly-owned subsidiary of The Hartford; Putnam
Financial Services, Inc. ("Putnam"); American Funds; MFS Investment Management
("MFS"); Franklin Templeton Group; and AIM Investments ("AIM"). All have an
interest in the continued growth in sales of the Company's products and greatly
enhance the marketability of the Company's annuities and the strength of its
product offerings. The Director variable annuity, which is managed in part by
Wellington, continues to be the industry leader in terms of retail sales. In
addition, Hartford Leaders, which is a multi-manager variable annuity that
combines the product manufacturing, wholesaling and service capabilities of the
Company with the investment management expertise of four of the nation's most
successful investment management organizations: American Funds, Franklin
Templeton Group, AIM and MFS, has quickly emerged as a strong selling product
for the Company and ranks in the top 5 in the industry.
FIXED MVA ANNUITIES -- Fixed MVA annuities are fixed rate annuity contracts
which guarantee a specific sum of money to be paid in the future, either as a
lump sum or as monthly income. In the event that a policyholder surrenders a
policy prior to the end of the guarantee period, the MVA feature increases or
decreases the cash surrender value of the annuity in respect of any interest
rate decreases or increases, respectively, thereby protecting the Company from
losses due to higher interest rates at the time of surrender. The amount of
payment will not fluctuate due to adverse changes in the Company's investment
return, mortality experience or expenses. The Company's primary fixed MVA
annuities have terms varying from one to ten years with an average term of
approximately eight years. Account values of fixed MVA annuities and other
variable products were $10.6 billion and $9.6 billion as of December 31, 2002
and 2001, respectively.
GOVERNMENTAL -- The Company sells retirement plan products and services to
municipalities under Section 457 plans. The Company offers a number of different
investment products, including variable annuities and fixed products, to the
employees in Section 457 plans. Generally, with the variable products, the
Company manages the fixed income funds and certain other outside money managers
act as advisors to the equity funds offered in Section 457 plans administered by
the Company. As of December 31, 2002, the Company administered over 3,000 plans
under Sections 457 and 403(b).
CORPORATE -- The Company sells retirement plan products and services to
corporations under Section 401(k) targeting the small and medium case markets.
The Company believes these markets are under-penetrated in comparison to the
large case market. As of December 31, 2002, the Company administered over 4,100
Section 401(k) plans.
INSTITUTIONAL INVESTMENT PRODUCTS -- The Company sells structured settlement
contracts which provide for periodic payments to an injured person or survivor
for a generally determinable number of years, typically in settlement of a claim
under a liability policy in lieu of a lump sum settlement. The Company's
structured settlements are sold through The Hartford's Property & Casualty
insurance operations as well as specialty brokers. The Company also markets
other annuity contracts for special purposes such as the funding of terminated
defined benefit pension plans. In addition, the Company offers GICs and
short-term funding agreements.
MARKETING AND DISTRIBUTION
The Investment Products distribution network is based on management's strategy
of utilizing multiple and competing distribution channels to achieve the
broadest distribution to reach target customers. The success of the Company's
marketing and distribution system depends on its product offerings, fund
performance, successful utilization of wholesaling organizations, quality of
customer service, and relationships with national and regional broker-dealer
firms, banks and other financial institutions, and independent financial
advisors (through which the sale of the Company's retail investment products to
customers is consummated).
Hartford Life Insurance Company maintains a distribution network of
approximately 1,500 broker-dealers and approximately 500 banks. As of
September 30, 2002, the Company was selling products through 24 of the 25
largest retail banks in the United States, including proprietary relationships
with 12 of the top 25. The Company periodically negotiates provisions and terms
of its relationships with unaffiliated parties, and there can be no assurance
that such terms will remain acceptable to the Company or such third parties. The
Company's primary wholesaler of its individual annuities is PLANCO Financial
Services, Inc. and its affiliate, PLANCO, Incorporated (collectively "PLANCO") a
wholly owned subsidiary of HLA. PLANCO is one of the nation's largest
wholesalers of individual annuities and has played a significant role in The
Hartford's growth over the past decade. As a
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HARTFORD LIFE INSURANCE COMPANY 25
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wholesaler, PLANCO distributes the Company's fixed and variable annuities,
mutual funds and 401(k) plans by providing sales support to registered
representatives, financial planners and broker-dealers at brokerage firms and
banks across the United States. PLANCO secures an important distribution channel
for the Company and gives the Company a wholesale distribution platform which it
can expand in terms of both the number of individuals wholesaling its products
and the portfolio of products which they wholesale. In addition, the Company
uses internal personnel with extensive experience in the Section 457 market, as
well as access to the Section 401(k) market, to sell its products and services
in the retirement plan and institutional markets.
COMPETITION
The Investment Products segment competes with numerous other insurance companies
as well as certain banks, securities brokerage firms, independent financial
advisors and other financial intermediaries marketing annuities, mutual funds
and other retirement-oriented products. Product sales are affected by
competitive factors such as investment performance ratings, product design,
visibility in the marketplace, financial strength ratings, distribution
capabilities, levels of charges and credited rates, reputation and customer
service.
INDIVIDUAL LIFE
The Individual Life segment provides life insurance solutions to a wide array of
partners to solve the wealth protection, accumulation and transfer needs of
their affluent, emerging affluent and business insurance clients. The individual
life business acquired from Fortis in 2001 added significant scale to the
Company's Individual Life segment, contributing to the significant increase in
life insurance in force. Revenues were $858, $774 and $545 in 2002, 2001 and
2000, respectively. Net income in the Individual Life segment was $116, $106 and
$70 in 2002, 2001 and 2000, respectively.
PRINCIPAL PRODUCTS
Hartford Life Insurance Company holds a significant market share in the variable
life product market. In 2002, the Company's new sales of individual life
insurance were 82% variable life, 13% universal life and other, and 5% term life
insurance.
VARIABLE LIFE -- Variable life insurance provides a return linked to an
underlying investment portfolio and the Company allows policyholders to
determine their desired asset mix among a variety of underlying mutual funds. As
the return on the investment portfolio increases or decreases, the surrender
value of the variable life policy will increase or decrease, and, under certain
policyholder options or market conditions, the death benefit may also increase
or decrease. The Company's single premium variable life product provides a death
benefit to the policy beneficiary based on a single premium deposit. The
Company's second-to-die products are distinguished from other products in that
two lives are insured rather than one, and the policy proceeds are paid upon the
death of both insureds. Second-to-die policies are frequently used in estate
planning for a married couple.
UNIVERSAL LIFE AND INTEREST SENSITIVE WHOLE LIFE -- Universal life and interest
sensitive whole life insurance coverages provide life insurance with adjustable
rates of return based on current interest rates. The Company offers both
flexible and fixed premium policies and provides policyholders with flexibility
in the available coverage, the timing and amount of premium payments and the
amount of the death benefit, provided there are sufficient policy funds to cover
all policy charges for the coming period. The Company also sells universal life
insurance policies with a second-to-die feature similar to that of the variable
life insurance product offered.
MARKETING AND DISTRIBUTION
Consistent with the Company's strategy to access multiple distribution outlets,
the Individual Life distribution organization has been developed to penetrate a
multitude of retail sales channels. These include independent life insurance
sales professionals; agents of other companies; national, regional and
independent broker-dealers; banks, financial planners, certified public
accountants and property and casualty insurance organizations. The primary
organization used to wholesale Hartford Life's products to these outlets is a
group of highly qualified life insurance professionals with specialized training
in sophisticated life insurance sales. These individuals are generally employees
of the Company who are managed through a regional sales office system.
COMPETITION
The Individual Life segment competes with approximately 1,800 life insurance
companies in the United States, as well as other financial intermediaries
marketing insurance products. Competitive factors related to this segment are
primarily the breadth and quality of life insurance products offered, pricing,
relationships with third-party distributors, effectiveness of wholesaling
support, pricing and availability of reinsurance and the quality of underwriting
and customer service.
CORPORATE OWNED LIFE INSURANCE ("COLI")
Hartford Life Insurance Company is a leader in the COLI market, which includes
life insurance policies purchased by a company on the lives of its employees,
with the company or a trust sponsored by the company named as the beneficiary
under the policy. Until the passage of Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), the Company sold two principal types of
COLI, leveraged and variable products. Leveraged COLI is a fixed premium life
insurance policy owned by a company or a trust sponsored by a company. HIPAA
phased out the deductibility of interest on policy loans under leveraged COLI at
the end of 1998, virtually eliminating all future sales of leveraged COLI.
Variable COLI continues to be a product used by employers to fund non-qualified
benefits or other postemployment benefit liabilities.
Variable COLI account values were $19.7 billion and $18.0 billion as of
December 31, 2002 and 2001, respectively. Leveraged
<Page>
26 HARTFORD LIFE INSURANCE COMPANY
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COLI account values decreased to $3.3 billion as of December 31, 2002 from $4.3
billion as of December 31, 2001, primarily due to the continuing effects of
HIPAA. COLI generated revenues of $592, $717 and $765 in 2002, 2001 and 2000,
respectively and net income of $31, $36 and $35 in 2002, 2001 and 2000,
respectively.
OTHER MATTERS
RESERVES
In accordance with applicable insurance regulations under which the Company
operates, life insurance subsidiaries of Hartford Life establish and carry as
liabilities actuarially determined reserves which are calculated to meet the
Company's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States, which are modified to
reflect the Company's actual experience when appropriate. These reserves are
computed at amounts that, with additions from estimated premiums to be received
and with interest on such reserves compounded annually at certain assumed rates,
are expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's disability or death. Reserves also
include unearned premiums, premium deposits, claims incurred but not reported
and claims reported but not yet paid. Reserves for assumed reinsurance are
computed in a manner that is comparable to direct insurance reserves. Additional
information on Hartford Life reserves may be found in the Critical Accounting
Estimates section of the MD&A under "Reserves".
CEDED REINSURANCE
In accordance with normal industry practice, Hartford Life Insurance Company is
involved in both the cession and assumption of insurance with other insurance
and reinsurance companies including HLA. The Company cedes both group life and
group accident and health risk to HLA. As of December 31, 2002, the largest
amount of life insurance retained on any one life by any one of the Company's
operations was approximately $2.5. In addition, the Company reinsures the
majority of the minimum death benefit guarantee and the guaranteed withdrawal
benefits offered in connection with its variable annuity contracts. Such
transfer does not relieve Hartford Life Insurance Company of its primary
liability and, as such, failure of reinsurers to honor their obligations could
result in losses to Hartford Life Insurance Company. The Company also assumes
reinsurance from other insurers. The Company evaluates the financial condition
of its reinsurers and monitors concentrations of credit risk. For the years
ended December 31, 2002, 2001 and 2000, the Company did not make any significant
changes in the terms under which reinsurance is ceded to other insurers.
INVESTMENT OPERATIONS
An important element of the financial results of Hartford Life Insurance Company
is return on invested assets. The Company's investment operations are managed by
Hartford Investment Management Company ("HIMCO"), a wholly owned subsidiary of
The Hartford. The Company's investments have been separated into specific
portfolios, which support specific classes of product liabilities. HIMCO works
closely with the product lines to develop investment guidelines, including
duration targets, asset allocation and convexity constraints, asset/liability
mismatch tolerances and return objectives, to ensure that the product line's
individual risk and return objectives are met.
The Company's primary objective for its general account and guaranteed separate
accounts is to maximize after-tax returns consistent with acceptable risk
parameters, including the management of the interest rate sensitivity of
invested assets and the generation of sufficient liquidity, relative to that of
corporate and policyholder obligations.
For a further discussion of the Company's approach to managing risks, including
derivative utilization, see the Capital Markets Risk Management section of the
MD&A, as well as Notes 2(g), 2(h) and 5 of Notes to Consolidated Financial
Statements.
REGULATION AND PREMIUM RATES
Although there has been some deregulation with respect to large commercial
insurers in recent years, insurance companies, for the most part, are still
subject to comprehensive and detailed regulation and supervision throughout the
United States. The extent of such regulation varies, but generally has its
source in statutes which delegate regulatory, supervisory and administrative
powers to state insurance departments. Such powers relate to, among other
things, the standards of solvency that must be met and maintained; the licensing
of insurers and their agents; the nature of and limitations on investments;
establishing premium rates; claim handling and trade practices; restrictions on
the size of risks which may be insured under a single policy; deposits of
securities for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of companies; annual and other reports required to
be filed on the financial condition of companies or for other purposes; fixing
maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values; and the adequacy of reserves and other
necessary provisions for unearned premiums, unpaid claims and claim adjustment
expenses and other liabilities, both reported and unreported.
Most states have enacted legislation that regulates insurance holding company
systems such as Hartford Life. This legislation provides that each insurance
company in the system is required to register with the insurance department of
its state of domicile and furnish information concerning the operations of
companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the system.
All transactions within a holding company system affecting insurers must be fair
and equitable. Notice to the insurance departments is required prior to the
consummation of transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any entity in its
holding company system. In addition, certain of such transactions cannot be
consummated without the applicable insurance department's prior approval.
<Page>
HARTFORD LIFE INSURANCE COMPANY 27
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EMPLOYEES
Hartford Life Insurance Company had approximately 4,000 employees at December
31, 2002.
PROPERTIES
Hartford Life Insurance Company's principal executive offices are located in
Simsbury, Connecticut. The Company's home office complex consists of
approximately 655 thousand square feet, and is leased from a third party by
Hartford Fire Insurance Company ("Hartford Fire"), a direct subsidiary of The
Hartford. This lease expires in the year 2009. Expenses associated with these
offices are allocated on a direct basis to Hartford Life Insurance Company by
Hartford Fire. The Company believes its properties and facilities are suitable
and adequate for current operations.
LEGAL PROCEEDINGS
Hartford Life Insurance Company is involved or may become involved in various
legal actions, in the normal course of its business, in which claims for alleged
economic and punitive damages have been or may be asserted some for substantial
amounts. Some of the pending litigation has been filed as purported class
actions and some actions have been filed in certain jurisdictions that permit
punitive damage awards that are disproportionate to the actual damages incurred.
Although there can be no assurances, at the present time, the Company does not
anticipate that the ultimate liability arising from potential, pending or
threatened legal actions, after consideration of provisions made for estimated
losses and costs of defense, will have a material adverse effect on the
financial condition or operating results of the Company.
On March 15, 2002, a jury in the U.S. District Court for the Eastern District of
Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life
Insurance Company, et al. in favor of Bancorp in the amount of $118 million. The
case involved claims of patent infringement, misappropriation of trade secrets,
and breach of contract against Hartford Life Insurance Company and its affiliate
International Corporate Marketing Group, Inc. ("ICMG"). The judge dismissed the
patent infringement claim on summary judgment. The jury's award was based on the
last two claims. On August 28, 2002, the Court entered an order awarding Bancorp
prejudgment interest on the breach of contract claim in the amount of $16
million.
Hartford Life Insurance Company and ICMG have appealed the judgment on the trade
secret and breach of contract claims. Bancorp has cross-appealed the pretrial
dismissal of its patent infringement claim. The Company's management, based on
the advice of its legal counsel, believes that there is a substantial likelihood
that the judgment will not survive at its current amount. Based on the advice of
legal counsel regarding the potential outcomes of this litigation, the Company
recorded an $11 million after-tax charge in the first quarter of 2002 to
increase litigation reserves associated with this matter. Should Hartford Life
Insurance Company and ICMG not succeed in eliminating or reducing the judgment,
a significant additional expense would be recorded in the future related to this
matter.
On March 16, 2003, a final decision and award was issued in an arbitration
between Hartford Life and one of its primary reinsurers relating to policies
with death benefit guarantees written from 1994 to 1999. The arbitration
involved alleged breaches under the reinsurance treaties. Although Hartford Life
believed that its position in this arbitration was strong, an adverse outcome
could have resulted in a decrease to Hartford Life's statutory surplus and
capital and could have potentially increased the death benefit costs incurred by
Hartford Life in the future. Under the terms of the final decision and award,
the reinsurer's reinsurance obligations to Hartford Life were not limited or
reduced in any manner and, as a result, are left unchanged.
MARKET FOR HARTFORD LIFE INSURANCE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
All of the Company's outstanding shares are ultimately owned by Hartford Life
and Accident Insurance Company, which is ultimately a subsidiary of The
Hartford. As of February 28, 2003, the Company had issued and outstanding 1,000
shares of Common Stock, $5,690 par value per share.
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28 HARTFORD LIFE INSURANCE COMPANY
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SELECTED FINANCIAL DATA
The following selected financial data for Hartford Life, its subsidiaries and
affiliated companies should be read in conjunction with the consolidated
financial statements and notes thereto included in this Prospectus.
STATEMENT OF INCOME
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
2002 2001 2000 1999 1998
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REVENUES
Premiums and other considerations $2,145 $2,251 $2,206 $2,045 $2,218
Net investment income 1,583 1,495 1,326 1,359 1,759
Net realized (losses) gains (288) (91) (85) (4) (2)
------ ------ ------ ------ ------
Total Revenues 3,440 3,655 3,447 3,400 3,975
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 1,766 1,703 1,495 1,574 1,911
Amortization of deferred policy acquisition costs 531 566 604 539 431
Dividends to policyholders 65 68 67 104 329
Other insurance expenses 650 622 600 631 766
------ ------ ------ ------ ------
Total Benefits, Claims and Expenses 3,012 2,959 2,766 2,848 3,437
Income before income tax expense 428 696 681 552 538
Income tax expense 2 44 194 191 188
------ ------ ------ ------ ------
NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGES 426 652 487 361 350
Cumulative effect of accounting changes, net of
tax -- (6) -- -- --
NET INCOME $ 426 $ 646 $ 487 $ 361 $ 350
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</Table>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollar amounts in millions, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of Hartford Life Insurance
Company and its subsidiaries ("Hartford Life Insurance Company" or the
"Company") as of December 31, 2002, compared with December 31, 2001, and its
results of operations for the three years ended December 31, 2002, 2001 and
2000. This discussion should be read in conjunction with the Consolidated
Financial Statements and related Notes beginning on page F-1.
Certain of the statements contained herein (other than statements of historical
fact) are forward-looking statements. These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic,
competitive and legislative developments. These forward-looking statements are
subject to change and uncertainty which are, in many instances, beyond the
Company's control and have been made based upon management's expectations and
beliefs concerning future developments and their potential effect upon the
Company. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on Hartford Life Insurance Company will be those anticipated by
management. Actual results could differ materially from those expected by the
Company, depending on the outcome of various factors. These factors include: the
effect of changes in interest rates, the stock markets or other financial
markets; stronger than anticipated competitive activity; unfavorable
legislative, regulatory or judicial developments; the Company's ability to
distribute its products through distribution channels both current and future;
the uncertain impact of the Bush Administration's budget proposal relating to
the distribution of nontaxable dividends to shareholders and the creation of new
tax-favored individual savings accounts, if adopted, on the Company; the
availability of reinsurance to protect the Company against losses and the impact
of increasing and uncertain reinsurance rates; the possibility of higher loss
costs than anticipated; the possibility of general economic and business
conditions that are less favorable than anticipated; the effect of assessments
and other surcharges for guaranty funds; a downgrade in the Company's
claims-paying, financial strength or credit ratings; the ability of the
Company's subsidiaries to pay dividends to the Company; and other factors
described in such forward-looking statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
CONSOLIDATED RESULTS OF OPERATIONS
Hartford Life Insurance Company provides investment and retirement products such
as variable and fixed annuities and retirement plan services; individual and
corporate owned life insurance; and, group benefit products, such as group life
and
<Page>
HARTFORD LIFE INSURANCE COMPANY 29
- --------------------------------------------------------------------------------
group disability insurance that is directly written by the Company and is
substantially ceded to its parent, Hartford Life and Accident Insurance Company
(HLA).
The Company derives its revenues principally from: (a) fee income, including
asset management fees on separate account and mortality and expense fees, as
well as cost of insurance charges; (b) fully insured premiums; (c) certain other
fees; and (d) net investment income on general account assets. Asset management
fees and mortality and expense fees are primarily generated from separate
account assets, which are deposited with the Company through the sale of
variable annuity and variable life products. Cost of insurance charges are
assessed on the net amount at risk for investment-oriented life insurance
products. Premium revenues are derived primarily from the sale of group life and
group disability insurance products.
The Company's expenses essentially consist of interest credited to policyholders
on general account liabilities, insurance benefits provided, dividends to
policyholders, costs of selling and servicing the various products offered by
the Company, and other general business expenses.
The Company's profitability depends largely on the amount of assets under
management, the level of fully insured premiums, the adequacy of product pricing
and underwriting discipline, claims management and operating efficiencies, and
its ability to earn target spreads between earned investment rates on general
account assets and credited rates to customers. The level of assets under
management is generally impacted by equity market performance, persistency of
the in-force block of business, sales and other deposits, as well as any
acquired blocks of business.
OPERATING SUMMARY
<Table>
<Caption>
2002 2001 2000
- ---------------------------------------------------------------
Revenues $3,440 $3,655 $3,447
- ---------------------------------------------------------------
Expenses 3,014 3,003 2,960
- ---------------------------------------------------------------
Cumulative effect of
accounting changes, net of
tax (1) -- (6) --
- ---------------------------------------------------------------
Net income 426 646 487
- ---------------------------------------------------------------
Less: Cumulative effect of
accounting changes, net of
tax (1) -- (6) --
- ---------------------------------------------------------------
Net realized capital
losses, after-tax (185) (59) (55)
- ---------------------------------------------------------------
Operating income (2) $ 611 $ 711 $ 542
- ---------------------------------------------------------------
</Table>
(1) For the year ended December 31, 2001, represents the cumulative impact of
the Company's adoption of SFAS No. 133 of $(3) and EITF Issue 99-20 of $(3).
(2) For the year ended December 31, 2002, includes $76 tax benefit related to
separate account investment activity and an $3 after-tax benefit related to
September 11. Additionally, for the year ended December 31, 2002, includes
$11 after-tax expense related to the Bancorp litigation. For the year ended
December 31, 2001, includes $144 tax benefit related to separate account
investment activity and $9 of after-tax losses related to September 11. For
the year ended December 31, 2000, includes $32 tax benefit related to
favorable tax items.
Hartford Life Insurance Company defines "operating income" as after-tax
operational results excluding, as applicable, net realized capital gains and
losses, restructuring charges, losses from early retirement of debt, the
cumulative effect of accounting changes and certain other items. Operating
income is a performance measure used by the Company in the management of its
operations. Management believes that this performance measure delineates the
results of operations of the Company's ongoing businesses in a manner that
allows for a better understanding of the underlying trends in the Company's
current business. However, operating income should only be analyzed in
conjunction with, and not in lieu of, net income and may not be comparable to
other performance measures used by the Company's competitors.
Hartford Life Insurance Company consists of the following reportable operating
segments: Investment Products, Individual Life, and Corporate Owned Life
Insurance ("COLI"). In addition, the Company includes in an Other category
certain group benefits, including group life and group disability insurance that
is directly written by the Company and is substantially ceded to its parent and
corporate items not directly allocable to any of its reportable operating
segments.
On April 2, 2001, The Hartford acquired the United States individual life
insurance, annuity and mutual fund businesses of Fortis. This transaction was
accounted for as a purchase and, as such, the revenues and expenses generated by
this business from April 2, 2001 forward are included in Life's consolidated
results of operations. (For further disclosure, see Note 15 of Notes to
Consolidated Financial Statements).
2002 COMPARED TO 2001 -- Revenues decreased $215, or 6%, primarily driven by
realized capital losses of $288 in 2002 as compared to $91 in 2001. (See the
Investments section for further discussion of investment results and related
realized capital losses.) Additionally, COLI experienced a decline in revenues
of $125, or 17%, as a result of the decrease in leveraged COLI account values as
compared to a year ago as well as lower sales volume, which was partially offset
by revenue growth across the Company's other operating segments. Revenues
related to the Investment Products segment increased $71, or 3%, as a result of
continued growth related to its institutional investment product business, which
more than offset the decline of $28, or 2%, in revenues within the individual
annuity operation. Lower assets under management due to the decline in the
equity markets are the principal driver of declining revenues for the individual
annuity operation. Additionally, Individual Life revenues increased by $84, or
11%, as a result of the Fortis acquisition and increased life insurance in
force.
Expenses increased $11, due to a lower benefit recorded related to favorable
resolution of dividends-received deduction
<Page>
30 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
("DRD")-related tax items (see also the discussion of DRD tax issues at Note
13(c) of Notes to Consolidated Financial Statements), an increase in benefits
and claims of $63, or 4%, due primarily to higher death benefits in the
Investment Products segment, as a result of the lower equity markets and
additional expense related to the Fortis acquisition. These increases were
partially offset by a decrease in income tax expense, due to lower pre-tax
income as compared to a year ago. Expenses increased $103, or 6%, in the
Investment Products segment, principally related to the growth in the
institutional investment product business and an increase in benefits and
claims. In addition, 2002 expenses include $11, after-tax, of accrued expenses
recorded within the COLI segment related to the Bancorp litigation. (For a
discussion of the Bancorp litigation, see Note 13(a) of Notes to Consolidated
Financial Statements.) Also included in expenses was an after-tax benefit of $3,
recorded within "Other", associated with favorable development related to the
Company's estimated September 11 exposure.
Net income and operating income decreased $220, or 34%, and $100, or 14%,
respectively, due to the decline in revenues and increase in expenses described
above. In 2002 the Company recognized a $3 after-tax benefit due to favorable
development related to September 11. In 2001, the Company recorded a $9
after-tax loss related to September 11. Excluding the impact of September 11,
net income decreased $232, or 35%, and operating income decreased $112, or 16%.
Net income for the Investment Products segment was down $32, or 9%, as growth in
the other investment products businesses, particularly institutional investment
products, was more than offset by the decline in revenues in the individual
annuity operation, which was negatively impacted by the lower equity markets.
COLI net income decreased $5, or 14%. Excluding the impact of September 11,
COLI's net income decreased $7, or 18%, primarily the result of the charge
associated with the Bancorp litigation. The declines in net income for those
segments were partially offset by the increase in net income for the Individual
Life segment. Individual Life net income increased $10, or 9%. Excluding the
impact of September 11, Individual Life's net income increased $7, or 6%, as the
result of the Fortis acquisition. Other net income decreased $193 and operating
income decreased $73, or 38%. The decline in net income of the Other segment is
principally due to higher realized capital losses and a lower DRD tax benefit
recorded in 2002 compared to 2001 as discussed above.
2001 COMPARED TO 2000 -- Revenues increased $208, or 6%, primarily related to
the growth across one of the Company's primary operating segments. Individual
Life segment revenues increased $229, or 42%. The revenue growth in the
Individual Life segment was primarily due to higher earned fee income and net
investment income resulting from the business acquired from Fortis. Revenues
related to the Company's Individual Annuity business were down $55 or 4%,
primarily due to lower fee income as a result of the lower equity markets in
2001. Additionally, COLI revenues were below prior year due to a decrease in
variable COLI sales and the declining block of leveraged COLI business.
Total expenses increased $43, or 1%, primarily associated with the growth in
revenues discussed above. Net income increased $159, or 33%, led by the
Individual Life where net income increased $36, or 51%, primarily as the result
of the business acquired from Fortis. In addition, the 2001 results include a
$130 federal income tax benefit primarily related to separate account investment
activity and a $9 after-tax loss associated with the impact of the September 11
terrorist attack. Additionally, 2000 results include a benefit of $32 also
related to favorable tax items. Excluding these tax items and the impact of the
September 11 terrorist attack, net income increased $70, or 15%, for the year
ended December 31, 2001, as each of the Company's operating segments experienced
growth from a year ago.
SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
<Table>
<Caption>
2002 2001 2000
- -------------------------------------------------------------------
Investment Products $343 $375 $354
- -------------------------------------------------------------------
Individual Life 116 106 70
- -------------------------------------------------------------------
Corporate Owned Life Insurance 31 36 35
- -------------------------------------------------------------------
Other (64) 129 28
- -------------------------------------------------------------------
Net income $426 $646 $487
- -------------------------------------------------------------------
</Table>
A description of each segment as well as an analysis of the operating results
summarized above is included on the following pages. Deferred Acquisition Costs,
Reserves and Investments are discussed in separate sections.
INVESTMENT PRODUCTS
OPERATING SUMMARY
<Table>
<Caption>
2002 2001 2000
- ---------------------------------------------------------------
Total revenues $2,185 $2,114 $2,068
- ---------------------------------------------------------------
Total expenses 1,842 1,739 1,714
- ---------------------------------------------------------------
Net income $ 343 $ 375 $ 354
- ---------------------------------------------------------------
</Table>
The Investment Products segment focuses on the savings and retirement needs of
the growing number of individuals who are preparing for retirement or have
already retired through the sale of individual variable and fixed annuities,
retirement plan services and other investment products. The Company is both a
leading writer of individual variable annuities and a top seller of individual
variable annuities through banks in the United States.
2002 COMPARED TO 2001 -- Revenues in the Investment Products segment increased
$71 or 3%. The increase in revenues was primarily driven by growth in the
institutional investment product business. This revenue increase was partially
offset by lower fee income related to the individual annuity operation as
average account values decreased compared to prior year, primarily due to the
lower equity markets.
Expenses increased $103, or 6%, driven primarily by increases of $131, or 16%,
in benefits and claims expenses due to the lower equity markets. Partially
offsetting these increases was a $34, or 8%, decrease in amortization of policy
acquisition costs
<Page>
HARTFORD LIFE INSURANCE COMPANY 31
- --------------------------------------------------------------------------------
related to the individual annuity business, which declined as a result of lower
gross profits, driven by the decrease in fee income and the increase in death
benefit costs.
Net income decreased $32, or 9%, driven by the continued lower equity markets
resulting in the decline in revenues in the individual annuity operation and
increases in the death benefit costs incurred by the individual annuity
operation. The decrease in individual annuity revenues was significantly offset
by growth in revenues related to other investment products, particularly the
institutional investment product business. (For discussion of the potential
future financial statement impact of continued declines in the equity market on
the Investment Products segment, see the Capital Markets Risk Management section
under "Market Risk".)
2001 COMPARED TO 2000 -- Revenues in the Investment Products segment increased
$46, or 2%, driven primarily by other investment products. Revenues from other
investment products increased $101, or 16%, principally due to growth in net
investment income. Net investment income in other investment products increased
$110, or 20%, due mostly to growth in the institutional business, where account
values were $9.1 billion at December 31, 2001, an increase of $1.4 billion, or
18%, from a year ago. The increase in revenues from other investment products
was partially offset by individual annuity revenues, which decreased $55 or 4%.
Fee income and net investment income from the individual annuity business
acquired from Fortis helped to partially offset lower revenues in the individual
annuity operation, which was primarily associated with decreased account values
resulting from the lower equity markets as compared to the prior year.
Total expenses increased $25, or 1%, driven by higher interest credited and
insurance operating expenses related to other investment products consistent
with the revenue growth described above. Interest credited related to other
investment products increased $78, or 18%. Also, individual annuity benefits and
claims expenses increased $37, or 15%, principally due to the business acquired
from Fortis and higher death benefits resulting from the lower equity markets in
2001. Individual annuity's insurance operating costs increased $13, or 5% also
due to the business acquired from Fortis. Partially offsetting the increase in
benefits, claims, and insurance operating costs was a decrease in amortization
of deferred policy acquisition costs of $64, or 13% resulting from the lower
gross profits associated with the individual annuity business. In addition,
income tax expense for the twelve months ended December 31, 2001 was $111, a $39
or 26% decrease due to lower pretax operating income and the ongoing tax impact
related to separate account investment activity.
Net income increased $21, or 6%. These increases were driven by the growth in
revenues in other investment products described above, the favorable impact of
Fortis and the lower effective tax rate related to the individual annuity
business.
OUTLOOK
Management believes the market for retirement products continues to expand as
individuals increasingly save and plan for retirement. Demographic trends
suggest that as the "baby boom" generation matures, a significant portion of the
United States population will allocate a greater percentage of their disposable
incomes to saving for their retirement years due to uncertainty surrounding the
Social Security system and increases in average life expectancy. As this market
grows, particularly for variable annuities, new companies are continually
entering the market, aggressively seeking distribution channels and pursuing
market share. One factor which could impact the Investment Products segment is
the President's 2004 budget proposal. See the Legislative Initiatives section of
the Capital Resources and Liquidity section for further discussion of this
proposed legislation.
The individual annuity segment continues to be impacted by the lower equity
markets in terms of lower assets under management. However, the Company
experienced strong sales of annuities, which were $11.6 billion in 2002 as
compared to $10.0 billion in 2001. Partially contributing to the growth in sales
is Hartford Life's introduction of Principal First, a guaranteed withdrawal
benefit rider, which was developed in response to our customers' needs. Based on
VARDS, the Company had 9.4% market share as of December 31, 2002 as compared to
8.7% at December 31, 2001. (For discussion of the potential future financial
statement impact of continued declines in the equity market on the Investment
Products segment, see the Capital Markets Risk Management section under "Equity
Risk".)
INDIVIDUAL LIFE
OPERATING SUMMARY
<Table>
<Caption>
2002 2001 2000
- --------------------------------------------------------------------
Total revenues $858 $774 $545
- --------------------------------------------------------------------
Total expenses 742 668 475
- --------------------------------------------------------------------
Net income $116 $106 $ 70
- --------------------------------------------------------------------
</Table>
The Individual Life segment provides life insurance solutions to a wide array of
partners to solve the wealth protection, accumulation and transfer needs of
their affluent, emerging affluent and business insurance clients. Additionally,
the Fortis transaction, through the addition of a retail broker dealer, which
has been renamed Woodbury Financial Services, has allowed the Individual Life
segment to increase its reach in the emerging affluent market.
2002 COMPARED TO 2001 -- Revenues in the Individual Life segment increased $84,
or 11%, primarily driven by business growth including the impact of the Fortis
transaction. However, new business sales have decreased in 2002 as compared to
prior year.
Expenses increased $74, or 11%, principally driven by the growth in the business
resulting from the Fortis acquisition. In addition, mortality experience
(expressed as death claims as a
<Page>
32 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
percentage of net amount at risk) for 2002 increased as compared to the prior
year, but was in line with management's expectations.
Net income increased $10, or 9%. Individual Life incurred an after-tax loss of
$3 related to September 11 in the third quarter of 2001. Excluding this loss,
Individual Life's earnings increased $7, or 6%, for the year ended December 31,
2002, due to the contribution to earnings from the Fortis transaction.
2001 COMPARED TO 2000 -- Revenues in the Individual Life segment increased $229,
or 42%, primarily due to the business acquired from Fortis. Fee income,
including cost of insurance charges, increased $161, or 41%, driven principally
by growth in the variable life business. In addition, net investment income on
general account business (universal life, interest sensitive whole life and term
life) increased $62, or 44%, consistent with the growth in related account
values.
Benefits, claims and expenses increased $177, or 41%, due principally to the
growth in revenues described above. Although death benefits were higher in 2001
than the prior year as a result of the increase in life insurance in force,
year-to-date mortality experience (expressed as death claims as a percentage of
net amount at risk) for 2001 was within pricing assumptions.
Net income increased $36, or 51% primarily due to the revenue growth described
above. Individual Life incurred an after-tax loss of $3 related to the
September 11 terrorist attack. Excluding this loss, operating income increased
$39, or 56%, primarily due to the growth factors described above.
OUTLOOK
Individual Life sales continue to be impacted by the lower equity markets,
uncertainty surrounding estate tax legislation, and aggressive competition from
universal life providers. However, The Hartford's acquisition of the United
States individual life insurance business of Fortis has increased its scale
while broadening its distribution capabilities as described above. Additionally,
the Company continues to introduce new and enhanced products, which are expected
to increase universal life sales.
CORPORATE OWNED LIFE INSURANCE (COLI)
OPERATING SUMMARY
<Table>
<Caption>
2002 2001 2000
- --------------------------------------------------------------------
Total revenues $592 $717 $765
- --------------------------------------------------------------------
Total expenses 561 681 730
- --------------------------------------------------------------------
Net income $ 31 $ 36 $ 35
- --------------------------------------------------------------------
</Table>
Hartford Life Insurance Company is a leader in the COLI market, which includes
life insurance policies purchased by a company on the lives of its employees,
with the company or a trust sponsored by the company named as beneficiary under
the policy. Until the Health Insurance Portability and Accountability Act of
1996 ("HIPAA"), the Company sold two principal types of COLI business: leveraged
and variable products. Leveraged COLI is a fixed premium life insurance policy
owned by a company or a trust sponsored by a company. HIPAA phased out the
deductibility of interest on policy loans under leveraged COLI through the end
of 1998, virtually eliminating all future sales of this product. Variable COLI
continues to be a product used by employers to fund non-qualified benefits or
other postemployment benefit liabilities.
2002 COMPARED TO 2001 -- COLI revenues decreased $125, or 17%, primarily related
to lower net investment and fee income due to the declining block of leveraged
COLI, where related account values declined in 2002 compared to prior year. Net
investment income decreased $75, or 21%, while fee income decreased $49, or 14%.
Expenses decreased $120, or 18%, which is relatively consistent with the
decrease in revenues described above. However, the decrease was partially offset
by $11, after-tax, in accrued litigation expenses related to the Bancorp
dispute. (For a discussion of the Bancorp litigation, see Note 13a of Notes to
Consolidated Financial Statements.)
Net income decreased $5, or 14%, compared to prior year. COLI incurred an
after-tax loss of $2 related to September 11 in the third quarter of 2001.
Excluding the impact of September 11, COLI's net income decreased $7, or 18%,
principally due to the $11 after-tax expense accrued in connection with the
Bancorp litigation.
2001 COMPARED TO 2000 -- COLI revenues decreased $48, or 6%, mostly due to lower
fee income and net investment income. Fee income and other decreased $34, or 8%,
due to a decline in variable COLI sales and deposits which were approximately
$1.5 billion in 2001 as compared to $2.9 billion in 2000. In addition, net
investment income decreased $14, or 4% due primarily to lower interest rates,
and the decline in leveraged COLI account values.
Benefits, claims and expenses decreased $47, or 7%, directly related to the
decrease in revenue discussed above.
Net income increased $1 or 3% primarily due to the overall growth in variable
COLI business and earnings associated with the leveraged COLI business
recaptured in 1998. COLI incurred an after-tax charge of $2 related to the
September 11 terrorist attack; excluding this charge, net income increased $3,
or 9%.
OUTLOOK
The focus of this segment is variable COLI, which continues to be a product
generally used by employers to fund non-qualified benefits or other
postemployment benefit liabilities. The leveraged COLI product has been an
important contributor to The Hartford's profitability in recent years and will
continue to contribute to the profitability of the Company in the future,
although the level of profit has declined in 2002, compared to 2001. COLI
continues to be subject to a changing legislative and regulatory environment
that could have a material adverse effect on its business.
INVESTMENTS
Hartford Life Insurance Company's general account and guaranteed separate
account investment portfolios are managed based
<Page>
HARTFORD LIFE INSURANCE COMPANY 33
- --------------------------------------------------------------------------------
on the underlying characteristics and nature of each operation's liabilities and
within established risk parameters. (For a further discussion on The Hartford's
approach to managing risks, see the Capital Markets Risk Management section.)
The investment portfolios of Hartford Life Insurance Company are managed by
Hartford Investment Management Company ("HIMCO"), a wholly-owned subsidiary of
The Hartford. HIMCO is responsible for monitoring and managing the asset/
liability profile, establishing investment objectives and guidelines and
determining, within specified risk tolerances and investment guidelines, the
appropriate asset allocation, duration, convexity and other characteristics of
the portfolios. Security selection and monitoring are performed by asset class
specialists working within dedicated portfolio management teams.
Fluctuations in interest rates affect the Company's return on, and the fair
value of, fixed maturity investments, which comprised approximately 86% and 81%
of the fair value of its invested assets as of December 31, 2002 and 2001,
respectively. Other events beyond the Company's control could also adversely
impact the fair value of these investments. Specifically, a downgrade of an
issuer's credit rating or default of payment by an issuer could reduce the
Company's investment return.
The Company also invests in unaffiliated limited partnership arrangements in
order to further diversify its investment portfolio. These limited partnerships
represent approximately 2% and 3% of the fair value of its invested assets as of
December 31, 2002 and 2001, respectively. Limited partnerships are typically
less liquid than direct investments in fixed income or equity investments.
Market volatility and other factors beyond the Company's control can adversely
affect the value of these investments. Because the Company is a limited partner,
its ability to control the timing or the realization of the related investment
income is restricted.
A decrease in the fair value of any investment that is deemed other than
temporary would result in the Company's recognition of a realized capital loss
in its financial results prior to the actual sale of the investment. See
Company's discussion of evaluation of other than temporary impairment in
Critical Accounting Estimates under " Valuation of Investments and Derivative
Instruments".
The weighted average duration of the fixed maturity portfolio was 4.5 and 4.6 as
of December 31, 2002 and 2001, respectively. Duration is defined as the
approximate percentage change in market price of the portfolio for a 100 basis
point change in interest rates. For example, if interest rates increased by 100
basis points, the fair value of the portfolio would be expected to decrease by
approximately 4.5% and 4.6% as of December 31, 2002 and 2001, respectively. The
following table identifies the invested assets by type held in the general
account as of December 31, 2002 and 2001.
COMPOSITION OF INVESTED ASSETS
<Table>
<Caption>
2002 2001
----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------------------------------------------------------------------------
Fixed maturities, at fair value $24,786 86.3% $19,142 81.0%
Equity securities, at fair value 120 0.4% 64 0.3%
Policy loans, at outstanding balance 2,895 10.1% 3,278 13.8%
Limited partnerships, at fair value 486 1.7% 721 3.1%
Other investments 432 1.5% 415 1.8%
------- ----- ------- -----
TOTAL INVESTMENTS $28,719 100.0% $23,620 100.0%
- ---------------------------------------------------------------------------------------------
</Table>
During 2002, fixed maturity investments increased 30% primarily due to increased
operating cash flows, transfers into the general account from the variable
annuity separate account, and an increase in fair value due to a lower interest
rate environment. Limited partnerships decreased $235, or 33%, due to
redemptions and a tactical decision to reallocate funds to other asset classes.
<Page>
34 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
The following table sets forth by type the fixed maturity securities held in the
Company's general account as of December 31, 2002 and 2001.
<Table>
<Caption>
2002 2001
------------------- -------------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- -------------------------------------------------------------------------------------------------
Corporate $13,560 54.7% $10,443 54.5%
Asset-backed securities 3,674 14.8% 3,131 16.4%
Commercial mortgage backed securities 3,632 14.7% 2,534 13.2%
Collateralized mortgage obligations 571 2.3% 591 3.1%
Mortgage backed securities -- agency 1,648 6.6% 800 4.2%
Government/Government agencies -- Foreign 464 1.9% 327 1.7%
Government/Government agencies -- U.S. 264 1.1% 260 1.4%
Municipal -- taxable 31 0.1% 47 0.2%
Municipal -- exempt 1 -- -- --
Short-term 941 3.8% 1,008 5.3%
Redeemable preferred stock -- -- 1 --
------- ------- ------- -------
TOTAL FIXED MATURITIES $24,786 100.0% $19,142 100.0%
- -------------------------------------------------------------------------------------------------
</Table>
There were no material changes in asset allocation during 2002 and 2001.
As of December 31, 2002 and 2001, 19% and 22%, respectively, of the Company's
fixed maturities were invested in private placement securities (including 11%
and 13% of Rule 144A offerings as of December 31, 2002 and 2001, respectively).
Private placement securities are generally less liquid than public securities.
However, private placements generally have covenants designed to compensate for
liquidity risk. Most of the private placement securities in the operation's
portfolio are rated by nationally recognized rating agencies. (For further
discussion of the Company's investment credit policies, see the Capital Markets
Risk Management section under "Credit Risk".)
INVESTMENT RESULTS
The table below summarizes Hartford Life Insurance Company's investment results.
<Table>
<Caption>
(BEFORE-TAX) 2002 2001 2000
- ---------------------------------------------------------------
Net investment income --
excluding policy loan
income $1,332 $1,191 $1,021
- ---------------------------------------------------------------
Policy loan income 251 304 305
- ---------------------------------------------------------------
Net investment income --
total $1,583 $1,495 $1,326
- ---------------------------------------------------------------
Yield on average invested
assets (1) 6.3% 7.1% 7.1%
- ---------------------------------------------------------------
Net realized capital
losses $ (288) $ (91) $ (85)
- ---------------------------------------------------------------
</Table>
(1) Represents net investment income (excluding net realized capital losses)
divided by average invested assets at cost (fixed maturities at amortized
cost).
2002 COMPARED TO 2001 -- Net investment income, excluding policy loan income,
increased $141, or 12%. The increase was primarily due to income earned on the
previously discussed higher invested asset base partially offset by $30 lower
income on limited partnerships and the impact of lower interest rates. Yields on
average invested assets decreased as a result of lower rates on new investment
purchases, decreased policy loan income, and decreased income on limited
partnerships.
Net realized capital losses increased $197 compared to 2001. Included in 2002
net realized capital losses were write-downs for other than temporary
impairments on primarily corporate and asset-backed fixed maturities of $340.
Write-downs on corporate fixed maturities totaled $175 and included impairments
in the communications and technology sector of $137 (including a $74 loss
related to securities issued by WorldCom Corporation), and the utilities sector
of $28. Write-downs on asset-backed securities totaled $154 and included
impairments of securities backed by aircraft lease receivables of $66, corporate
debt of $29, manufactured housing receivables of $16, mutual fund fee
receivables of $16, and on various other asset-backed securities totaling $27.
These losses were partially offset by gains from the sale of fixed maturity
securities.
2001 COMPARED TO 2000 -- Net investment income, excluding policy loan income,
increased $170, or 17%. The increase was primarily due to income earned on the
previously discussed increase in fixed maturity investments, partially offset by
lower yields on fixed maturities in the third and fourth quarters of 2001.
Yields on overall average invested assets were flat.
Net realized capital losses increased $6 compared to 2000. Included in 2001 net
realized capital losses were write-downs for other than temporary impairments on
primarily corporate and asset backed fixed maturities of $93. Write-downs on
corporate securities totaled $58 and included impairments in the utilities
sector of $37 and the communications and technology sector of $17. Write-downs
on corporate fixed maturities in the utilities sector were on securities issued
by Enron Corporation. Write-downs on asset-backed securities totaled $25 and
included impairments of securities backed by corporate debt of $10 and on
various other asset-backed securities totaling $15. Also included in net
realized capital losses is a $10 loss recognized on the sale of the Company's
interest in an Argentine insurance joint venture, in addition to losses
associated with the credit deterioration of certain investments in which the
Company has an indirect
<Page>
HARTFORD LIFE INSURANCE COMPANY 35
- --------------------------------------------------------------------------------
economic interest. These losses were partially offset by gains from the sale of
fixed maturities.
SEPARATE ACCOUNT PRODUCTS
Separate account products are those for which a separate investment and
liability account is maintained on behalf of the policyholder. Separate accounts
reflect two categories of risk assumption: non-guaranteed separate accounts
totaling $93.8 billion and $104.2 billion as of December 31, 2002 and 2001,
respectively, wherein the policyholder assumes substantially all the investment
risk and reward, and guaranteed separate accounts totaling $11.5 billion and
$10.1 billion as of December 31, 2002 and 2001, respectively, wherein Hartford
Life Insurance Company contractually guarantees either a minimum return or
account value to the policyholder. Guaranteed separate account products
primarily consist of modified guaranteed individual annuities and modified
guaranteed life insurance and generally include market value adjustment features
and surrender charges to mitigate the risk of disintermediation. The primary
investment objective of guaranteed separate accounts is to maximize after-tax
returns consistent with acceptable risk parameters, including the management of
the interest rate sensitivity of invested assets relative to that of
policyholder obligations, as discussed in the Capital Markets Risk Management
section under "Market Risk -- Interest Rate Risk."
Investment objectives for non-guaranteed separate accounts vary by fund account
type, as outlined in the applicable fund prospectus or separate account plan of
operations. Non-guaranteed separate account products include variable annuities,
variable life insurance contracts and variable COLI.
CAPITAL MARKETS RISK MANAGEMENT
Hartford Life Insurance Company has a disciplined approach to managing risks
associated with its capital markets and asset/ liability management activities.
Investment portfolio management is organized to focus investment management
expertise on specific classes of investments, while asset/liability management
is the responsibility of dedicated risk management units supporting the Company,
including guaranteed separate accounts. Derivative instruments are utilized in
compliance with established Company policy and regulatory requirements and are
monitored internally and reviewed by senior management.
The Company is exposed to two primary sources of investment and asset/liability
management risk: credit risk, relating to the uncertainty associated with the
ability of an obligor or counterparty to make timely payments of principal
and/or interest, and market risk, relating to the market price and/or cash flow
variability associated with changes in interest rates, securities prices, market
indices, yield curves or currency exchange rates. The Company does not hold any
financial instruments purchased for trading purposes.
CREDIT RISK
Hartford Life Insurance Company has established investment credit policies that
focus on the credit quality of obligors and counterparties, limit credit
concentrations, encourage diversification and require frequent creditworthiness
reviews. Investment activity, including setting of policy and defining
acceptable risk levels, is subject to regular review and approval by senior
management and reported to the Finance Committee of the Board of Directors of
The Hartford.
The Company invests primarily in securities which are rated investment grade and
has established exposure limits, diversification standards and review procedures
for all credit risks including borrower, issuer and counterparty.
Creditworthiness of specific obligors is determined by an internal credit
evaluation supplemented by consideration of external determinants of
creditworthiness, typically ratings assigned by nationally recognized ratings
agencies. Obligor, asset sector and industry concentrations are subject to
established limits and monitored on a regular basis.
Hartford Life Insurance Company is not exposed to any credit concentration risk
of a single issuer greater than 10% of the Company's stockholder's equity.
DERIVATIVE INSTRUMENTS
The Company's derivatives counterparty exposure policy establishes market-based
credit limits, favors long-term financial stability and creditworthiness, and
typically requires credit enhancement/credit risk reducing agreements. Credit
risk is measured as the amount owed to the Company based on current market
conditions and potential payment obligations between the Company and its
counterparties. Credit exposures are generally quantified weekly and netted, and
collateral is pledged to and held by, or on behalf of, the Company to the extent
the current value of derivatives exceeds exposure policy thresholds.
The Company periodically enters into swap agreements in which the Company
assumes credit exposure from a single entity, referenced index or asset pool.
Total return swaps involve the periodic exchange of payments with other parties,
at specified intervals, calculated using the agreed upon index and notional
principal amounts. Generally, no cash or principal payments are exchanged at the
inception of the contract. Typically, at the time a swap is entered into, the
cash flow streams exchanged by the counterparties are equal in value.
Credit default swaps involve a transfer of credit risk from one party to another
in exchange for periodic payments. One party to the contract will make a payment
based on an agreed upon rate and a notional amount. The second party will only
make a payment when there is a credit event, and such payment will be equal to
the notional value of the swap contract, and in return, the second party will
receive the debt obligation of the first party.
As of December 31, 2002 and 2001, the notional value of total return and credit
default swaps totaled $437 and $230, respectively, and their swap fair value
totaled $(41) and $(51), respectively.
The following tables identify fixed maturity securities for Hartford Life
Insurance Company including guaranteed separate
<Page>
36 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
accounts, by credit quality. The ratings referenced in the tables are based on
the ratings of a nationally recognized rating organization or, if not rated,
assigned based on the Company's internal analysis of such securities. In
addition, an aging of the gross unrealized loss position is presented for fixed
maturity and equity securities.
As of December 31, 2002 and 2001, over 94% and 96%, respectively, of the fixed
maturity portfolio was invested in securities rated investment grade (BBB and
above).
<Table>
<Caption>
2002 2001
--------------------------------------- ---------------------------------------
AMORITZED PERCENT OF AMORITZED PERCENT OF
FIXED MATURITIES BY CREDIT QUALITY COST FAIR VALUE TOTAL FAIR VALUE COST FAIR VALUE TOTAL FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
United States Government/ Government agencies $ 3,213 $ 3,341 9.3% $ 2,137 $ 2,197 7.6%
AAA 5,077 5,399 15.1% 3,708 3,818 13.2%
AA 3,334 3,507 9.8% 2,821 2,884 9.9%
A 11,019 11,687 32.5% 10,614 10,794 37.2%
BBB 8,662 9,081 25.3% 7,002 7,027 24.2%
BB & below 1,928 1,862 5.2% 1,091 1,031 3.6%
Short-term 993 994 2.8% 1,233 1,233 4.3%
------- ------- ----- ------- ------- -----
TOTAL FIXED MATURITIES $34,226 $35,871 100.0% $28,606 $28,984 100.0%
------- ------- ----- ------- ------- -----
Total general account fixed maturities $23,675 $24,786 69.1% $18,933 $19,142 66.0%
------- ------- ----- ------- ------- -----
Total guaranteed separate account fixed
maturities $10,551 $11,085 30.9% $ 9,673 $ 9,842 34.0%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
The Company's total and below investment grade ("BIG") fixed maturity and equity
securities held as of December 31, 2002 and 2001 that were in an unrealized loss
position are presented in the tables below by length of time the security was in
an unrealized loss position.
<Table>
<Caption>
TOTAL SECURITIES BIG AND EQUITY SECURITIES
------------------------------- --------------------------------
AMORITZED FAIR UNREALIZED AMORITZED FAIR UNREALIZED
UNREALIZED LOSS AGING AT DECEMBER 31, 2002 COST VALUE LOSS COST VALUE LOSS
- --------------------------------------------------------------------------------------------------------------------------
Three months or less $1,382 $1,316 $ (66) $ 131 $104 $ (27)
Greater than three months to six months 1,211 1,158 (53) 188 165 (23)
Greater than six months to nine months 519 465 (54) 160 134 (26)
Greater than nine months to twelve months 1,247 1,181 (66) 299 264 (35)
Greater than twelve months 1,873 1,693 (180) 354 299 (55)
------ ------ ----- ------ ---- -----
TOTAL $6,232 $5,813 $(419) $1,132 $966 $(166)
- --------------------------------------------------------------------------------------------------------------------------
</Table>
The total securities that were in an unrealized loss position for longer than
six months as of December 31, 2002 primarily consisted of corporate and
asset-backed securities. The significant corporate security industry sectors of
banking and financial services, utilities, technology and communications and
airlines comprised of 20%, 13%, 14% and 3%, respectively, of the greater than
six months unrealized loss amount. Asset-backed securities comprised 34% of the
greater than six month unrealized loss amount and included securities backed by
corporate debt, aircraft lease receivables and credit card receivables. At
December 31, 2002, the Company held no securities of a single issuer that were
at an unrealized loss in excess of 4% of total unrealized losses. The total
unrealized loss position of $(419) consisted of $(297) in general account losses
and $(122) in guaranteed separate account losses.
The BIG and equity securities that were in an unrealized loss position for
longer than six months as of December 31, 2002 primarily consisted of corporate
securities in the technology and communications and utilities sectors as well as
asset-backed securities backed by corporate debt, equipment loans and credit
card receivables. The technology and communications and utilities sectors along
with diversified equity mutual funds and asset-backed securities comprised 29%,
23%, 18% and 14%, respectively, of the BIG and equity securities that were in an
unrealized loss position for greater than six months at December 31, 2002. The
total unrealized loss position of BIG and equity securities of $(166) consisted
of $(131) in general account losses and $(35) in guaranteed separate account
losses.
<Page>
HARTFORD LIFE INSURANCE COMPANY 37
- --------------------------------------------------------------------------------
<Table>
<Caption>
TOTAL SECURITIES BIG AND EQUITY SECURITIES
------------------------------- --------------------------------
AMORITZED FAIR UNREALIZED AMORITZED FAIR UNREALIZED
UNREALIZED LOSS AGING AT DECEMBER 31, 2001 COST VALUE LOSS COST VALUE LOSS
- --------------------------------------------------------------------------------------------------------------------------
Three months or less $4,064 $3,945 $(119) $ 154 $133 $ (21)
Greater than three months to six months 685 622 (63) 67 49 (18)
Greater than six months to nine months 437 417 (20) 42 38 (4)
Greater than nine months to twelve months 1,943 1,871 (72) 209 184 (25)
Greater than twelve months 1,923 1,778 (145) 286 247 (39)
------ ------ ----- ------ ---- -----
TOTAL $9,052 $8,633 $(419) $ 758 $651 $(107)
- --------------------------------------------------------------------------------------------------------------------------
</Table>
The total securities that were in an unrealized loss position for longer than
six months as of December 31, 2001 primarily consisted of corporate and
asset-backed securities. The significant corporate security industry sectors
that were in an unrealized loss position for greater than six months included
banking and financial services of 21%. The communications and technology,
utilities and petroleum sectors comprised 14%, 13%, and 5%, respectively of the
total securities that were in an unrealized loss position at December 31, 2001
for greater than six months. Asset-backed securities comprised 20% of the
greater than six month unrealized loss amount, and included securities backed by
corporate debt, franchise loans, aircraft lease receivables, credit card
receivables, and manufactured housing receivables. At December 31, 2001, the
Company held no securities of a single issuer that were at an unrealized loss in
excess of 3% of total unrealized losses. The total unrealized loss position of
$(419) consisted of $(313) in general account losses and $(106) in guaranteed
separate account losses.
The BIG and equity securities that were in an unrealized loss position for
longer than six months as of December 31, 2001 primarily consisted of corporate
securities in the utilities and technology and communications sectors as well as
asset backed securities backed by primarily manufactured housing receivables,
corporate debt and equipment lease receivables. Diversified equity mutual funds,
asset-backed securities, technology and communications sector securities and
utilities sector securities comprised 10%, 22%, 19% and 15%, respectively, of
the BIG securities in a unrealized loss position at December 31, 2001 for
greater than six months. The total unrealized loss position of BIG and equity
securities of $(107) consisted of $(69) in general account losses and $(38) in
guaranteed separate account losses.
As part of our ongoing monitoring process by a committee of investment and
accounting professionals, the Company has reviewed these securities and
concluded that there were no additional other than temporary impairments as of
December 31, 2002 and 2001. Due to the issuers' continued satisfaction of the
securities' obligations in accordance with their contractual terms and their
continued expectation to do so, as well as our evaluation of the fundamentals of
the issuers' financial condition, the Company believes that the prices of the
securities in the sectors identified above, were temporarily depressed primarily
as a result of a market dislocation and generally poor cyclical economic
conditions and sentiment. See the Critical Accounting Estimates section in the
MD&A for the factors considered in evaluating other than temporary impairments.
The evaluation for other than temporary impairments is a quantitative and
qualitative process which is subject to risks and uncertainties in the
determination of whether declines in the fair value of investments are other
than temporary. The risks and uncertainties include changes in general economic
conditions, the issuer's financial condition or near term recovery prospects and
the effects of changes in interest rates. In addition, for securitized financial
assets with contractual cash flows (e.g. asset-backed securities), projections
of expected future cash flows may change based upon new information regarding
the performance of the underlying collateral.
MARKET RISK
Hartford Life Insurance Company has material exposure to both interest rate and
equity market risk. The Company analyzes interest rate risk using various models
including multi-scenario cash flow projection models that forecast cash flows of
the liabilities and their supporting investments, including derivative
instruments.
Hartford Life Insurance Company has several objectives in managing market risk.
The Company is responsible for maximizing after-tax returns within acceptable
risk parameters, including the management of the interest rate sensitivity of
invested assets and the generation of sufficient liquidity to that of corporate
and policyholder obligations. The Company's fixed maturity portfolios have
material market exposure to interest rate risk. The Company continually monitors
these exposures and makes portfolio adjustments to manage these risks within
established limits.
Downward movement in market interest rates during 2002 resulted in a significant
increase in the unrealized appreciation of the fixed maturity security portfolio
from 2001. However, The Company's asset allocation and its exposure to market
risk as of December 31, 2002 have not changed materially from its position at
December 31, 2001.
DERIVATIVE INSTRUMENTS
Hartford Life Insurance Company utilizes a variety of derivative instruments,
including swaps, caps, floors, forwards and exchange traded futures and options,
in compliance with Company policy and regulatory requirements in order to
achieve one of four Company approved objectives: to hedge risk arising from
interest rate, price or currency exchange rate volatility; to manage liquidity;
to control transaction costs; or to enter into income enhancement and
replication transactions.
<Page>
38 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
Interest rate swaps involve the periodic exchange of payments with other
parties, at specified intervals, calculated using the agreed upon rates and
notional principal amounts. Generally, no cash is exchanged at the inception of
the contract and no principal payments are exchanged. Typically, at the time a
swap is entered into, the cash flow streams exchanged by the counterparties are
equal in value.
Foreign currency swaps exchange an initial principal amount in two currencies,
agreeing to re-exchange the currencies at a future date, at an agreed exchange
rate. There is also periodic exchange of payments at specified intervals
calculated using the agreed upon rates and exchanged principal amounts.
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 rate or falls below the floor strike 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 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.
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, 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.
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to the The Hartford's Finance
Committee of the Board of Directors. The notional amounts of derivative
contracts represent the basis upon which pay or receive amounts are calculated
and are not reflective of credit risk. Notional amounts pertaining to derivative
instruments for both general and guaranteed separate accounts at December 31,
2002 and 2001 totaled $9.6 billion and $8.1 billion, respectively.
The following discussions focus on the key market risk exposures within Hartford
Life Insurance Company.
INTEREST RATE RISK
Hartford Life Insurance Company's general account and guaranteed separate
account exposure to interest rate risk relates to the market price and/or cash
flow variability associated with changes in market interest rates. Changes in
interest rates can potentially impact the Company's profitability. In certain
scenarios where interest rates are volatile, the Company could be exposed to
disintermediation risk and reduction in net interest rate spread or profit
margins.
The Company's general account and guaranteed separate account investment
portfolios primarily consist of investment grade, fixed maturity securities,
including corporate bonds, asset-backed securities, commercial mortgage-backed
securities, tax-exempt municipal securities and collateralized mortgage
obligations. The fair value of these and the Company's other invested assets
fluctuates depending on the interest rate environment and other general economic
conditions. During periods of declining interest rates, paydowns on mortgage-
backed securities and collateralized mortgage obligations increase as the
underlying mortgages are prepaid. During such periods, the Company generally
will not be able to reinvest the proceeds of any such prepayments at comparable
yields. Conversely, during periods of rising interest rates, the rate of
prepayments generally declines, exposing the Company to the possibility of
asset/liability cash flow and yield mismatch. (For further discussion of the
Company's risk management techniques to manage this market risk, see the "Asset
and Liability Management Strategies Used to Manage Market Risk" discussed
below.)
As described above, Hartford Life Insurance Company holds a significant fixed
maturity portfolio that includes both fixed and variable rate securities. The
following table reflects the principal amounts of the Company's general and
guaranteed separate accounts fixed and variable rate fixed maturity portfolios,
along with the respective weighted average coupons by estimated maturity year at
December 31, 2002. Comparative totals are included as of December 31, 2001.
Expected maturities differ from contractual maturities due to call or prepayment
provisions. The weighted average coupon ("WAC") on variable rate securities is
based on spot rates as of December 31, 2002 and 2001, and is primarily based on
London Interbank Offered Rate ("LIBOR"). Callable bonds and notes are
distributed to either call dates or maturity, depending on which date produces
the most conservative yield. Asset-backed securities, collateralized mortgage
obligations and mortgage-backed securities are distributed based on estimates of
the rate of future prepayments of principal over the remaining life of the
securities. These estimates are developed using prepayment speeds provided in
broker consensus data. Such estimates are derived from prepayment speeds
previously experienced at the interest rate levels projected for the underlying
collateral. Actual prepayment experience may vary from these estimates.
Financial instruments with certain leverage features have been included in each
of the fixed maturity categories. These instruments have not been separately
displayed because they were immaterial to the Company's investment portfolio.
<Page>
HARTFORD LIFE INSURANCE COMPANY 39
- --------------------------------------------------------------------------------
<Table>
<Caption>
2002 2001
2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
BONDS AND NOTES -- CALLABLE
FIXED RATE
Par value $ 10 $ 25 $ 123 $ 17 $ 19 $1,652 $ 1,846 $ 1,584
Weighted average coupon 6.6% 7.2% 4.6% 7.3% 8.3% 2.8% 3.1% 2.9%
Fair value $ 1,436 $ 1,113
VARIABLE RATE
Par value $ -- $ 6 $ 25 $ 8 $ 6 $ 735 $ 780 $ 953
Weighted average coupon -- 2.4% 3.0% 3.3% 4.1% 2.9% 2.9% 3.4%
Fair value $ 711 $ 873
BONDS AND NOTES -- OTHER
FIXED RATE
Par value $2,531 $1,332 $1,819 $1,879 $1,635 $9,833 $19,029 $16,434
Weighted average coupon 5.8% 6.0% 7.2% 6.4% 6.4% 6.5% 6.4% 6.3%
Fair value $19,441 $15,769
VARIABLE RATE
Par value $ 219 $ 90 $ 258 $ 113 $ 13 $ 389 $ 1,082 $ 1,117
Weighted average coupon 3.0% 2.7% 4.1% 2.1% 7.2% 3.7% 3.4% 4.9%
Fair value $ 960 $ 1,023
ASSET BACKED SECURITIES
FIXED RATE
Par value $ 344 $ 427 $ 514 $ 230 $ 130 $ 668 $ 2,313 $ 2,075
Weighted average coupon 6.8% 6.3% 5.7% 6.1% 6.2% 7.1% 6.4% 6.9%
Fair value $ 2,305 $ 2,068
VARIABLE RATE
Par value $ 155 $ 293 $ 351 $ 357 $ 327 $1,457 $ 2,940 $ 2,264
Weighted average coupon 2.1% 2.2% 2.3% 2.3% 2.4% 2.4% 2.3% 2.8%
Fair value 2,756 $ 2,201
COLLATERALIZED MORTGAGE OBLIGATIONS
FIXED RATE
Par value $ 85 $ 74 $ 61 $ 56 $ 49 $ 339 $ 664 $ 788
Weighted average coupon 6.4% 6.2% 6.2% 6.2% 6.2% 6.3% 6.3% 6.4%
Fair value $ 693 $ 784
VARIABLE RATE
Par value $ 10 $ 12 $ 10 $ 7 $ 5 $ 47 $ 91 $ 15
Weighted average coupon 2.4% 2.5% 2.7% 3.0% 3.1% 2.3% 2.5% 6.9%
Fair value $ 90 $ 16
COMMERCIAL MORTGAGE BACKED SECURITIES
FIXED RATE
Par value $ 63 $ 106 $ 104 $ 185 $ 391 $2,794 $ 3,643 $ 2,691
Weighted average coupon 6.1% 6.6% 6.4% 6.8% 6.8% 6.7% 6.7% 7.0%
Fair value $ 4,044 $ 2,789
VARIABLE RATE
Par value $ 165 $ 140 $ 104 $ 72 $ 90 $ 705 $ 1,276 $ 1,449
Weighted average coupon 3.4% 3.4% 4.1% 6.8% 4.7% 7.1% 5.8% 5.8%
Fair value $ 1,342 $ 1,338
MORTGAGE BACKED SECURITIES
FIXED RATE
Par value $ 260 $ 314 $ 255 $ 175 $ 126 $ 829 $ 1,959 $ 990
Weighted average coupon 6.7% 6.7% 6.6% 6.6% 6.6% 6.6% 6.6% 6.8%
Fair value $ 2,057 $ 1,008
VARIABLE RATE
Par value $ 3 $ 5 $ 6 $ 5 $ 4 $ 13 $ 36 $ 2
Weighted average coupon 2.5% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 5.3%
Fair value $ 36 $ 2
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
ASSET/LIABILITY MANAGEMENT STRATEGIES USED TO MANAGE MARKET RISK
The Company employs several risk management tools to quantify and manage market
risk arising from their investments and interest sensitive liabilities. For
certain portfolios, management monitors the changes in present value between
assets and liabilities resulting from various interest rate scenarios using
integrated asset/liability measurement systems and a proprietary system that
simulates the impacts of parallel and non-parallel yield curve shifts. Based on
this current and prospective information, management implements risk reduction
techniques to improve the match between assets and liabilities.
Derivatives play an important role in facilitating the management of interest
rate risk, creating opportunities to efficiently fund obligations, hedge against
risks that affect the value of certain liabilities and adjust broad investment
risk characteristics as a result of any significant changes in market risks. The
Companys uses a variety of derivatives, including swaps, caps, floors, forwards
and exchange-traded financial futures and options, in order to hedge exposure
primarily to interest rate risk on anticipated investment purchases or existing
assets and liabilities. At December 31, 2002, notional amounts pertaining to
derivatives totaled $8.3 billion ($6.8 billion related to insurance investments
and $1.5 billion related to life insurance liabilities).
<Page>
40 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
Notional amounts pertaining to derivatives totaled $7.7 billion at December 31,
2001 ($6.2 billion related to insurance investments and $1.5 billion related to
life insurance liabilities).
The economic objectives and strategies for which the Company utilized
derivatives have not changed as a result of SFAS 133 and are categorized as
follows:
ANTICIPATORY HEDGING -- For certain liabilities, the Company commits to the
price of the product prior to receipt of the associated premium or deposit.
Anticipatory hedges are executed to offset the impact of changes in asset prices
arising from interest rate changes pending the receipt of premium or deposit and
the subsequent purchase of an asset. These hedges involve taking a long position
(purchase) in interest rate futures or entering into an interest rate swap with
duration characteristics equivalent to the associated liabilities or anticipated
investments. The notional amounts of anticipatory hedges as of December 31, 2002
and 2001, were $0 and $78, respectively.
LIABILITY HEDGING -- Several products obligate the Company to credit a return to
the contract holder which is indexed to a market rate. To hedge risks associated
with these products, the Company enters into various derivative contracts.
Interest rate swaps are used to convert the contract rate into a rate that
trades in a more liquid and efficient market. This hedging strategy enables the
Company to customize contract terms and conditions to customer objectives and
satisfies the operation's asset/ liability matching policy. In addition,
interest rate swaps are used to convert certain variable contract rates to
different variable rates, thereby allowing them to be appropriately matched
against variable rate assets. Finally, interest rate caps and option contracts
are used to hedge against the risk of contract holder disintermediation in a
rising interest rate environment. The notional amounts of derivatives used for
liability hedging as of December 31, 2002 and 2001, were $1.5 billion.
ASSET HEDGING -- To meet the various policyholder obligations and to provide
cost-effective prudent investment risk diversification, the Company may combine
two or more financial instruments to achieve the investment characteristics of a
fixed maturity security or that match an associated liability. The use of
derivative instruments in this regard effectively transfers unwanted investment
risks or attributes to others. The selection of the appropriate derivative
instruments depends on the investment risk, the liquidity and efficiency of the
market, and the asset and liability characteristics. The notional amounts of
asset hedges as of December 31, 2002 and 2001, were $6.6 billion and $5.7
billion, respectively.
PORTFOLIO HEDGING -- The Company periodically compares the duration and
convexity of its portfolios of assets to its corresponding liabilities and
enters into portfolio hedges to reduce any difference to desired levels.
Portfolio hedges reduce the duration and convexity mismatch between assets and
liabilities and offset the potential impact to cash flows caused by changes in
interest rates. The notional amounts of portfolio hedges as of December 31, 2002
and 2001, were $151 and $353, respectively.
The following tables provide information as of December 31, 2002 with
comparative totals for December 31, 2001 on derivative instruments used in
accordance with the aforementioned hedging strategies. For interest rate swaps,
caps and floors, the tables present notional amounts with weighted average pay
and receive rates for swaps and weighted average strike rates for caps and
floors by maturity year. For interest rate futures, the table presents contract
amount and weighted average settlement price by expected maturity year. For
option contracts, the table presents contract amount by expected maturity year.
<Table>
<Caption>
2002 2001
2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SWAPS (1)
PAY FIXED/RECEIVE VARIABLE
Notional value $ 295 $ 85 $ 23 $ 36 $ 90 $ 139 $ 668 $ 508
Weighted average pay rate 4.2% 3.5% 6.6% 6.7% 4.3% 5.9% 4.7% 5.8%
Weighted average receive rate 1.5% 1.4% 1.8% 1.8% 1.4% 1.5% 1.5% 2.2%
Fair value $ (37) $ (20)
PAY VARIABLE/RECEIVE FIXED
Notional value $ 423 $1,369 $ 942 $ 739 $ 614 $1,041 $ 5,128 $ 4,323
Weighted average pay rate 1.5% 1.6% 1.5% 1.5% 1.5% 1.4% 1.5% 2.1%
Weighted average receive rate 5.5% 5.5% 5.7% 5.5% 5.0% 5.1% 5.4% 5.8%
Fair value $ 426 $ 177
PAY VARIABLE/RECEIVE DIFFERENT
VARIABLE
Notional value $ 2 $ 11 $ 5 $ -- $ -- $ -- $ 18 $ 23
Weighted average pay rate 1.7% (0.5)% 5.5% -- -- -- 1.5% 3.1%
Weighted average receive rate 1.4% 0.8% 2.1% -- -- -- 1.2% 4.8%
Fair value $ (1) $ (1)
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Swap agreements in which the Company assumes credit exposure from a single
entity, referenced index or asset pool are not included above, rather they
are included in the Credit Risk discussion. At December 31, 2002 and 2001,
these swaps had a notional value of $437 and $230, respectively, and a fair
value of $(41) and $(51), respectively. Also, swap agreements that reduce
foreign currency exposure in certain fixed maturity investments are not
included above, rather they are included in the foreign currency risk
discussion. At December 31, 2002 and 2001, these swaps had a notional value
of $791 and $433, respectively, and a fair value of $(68) and $6,
respectively.
(2) Negative weighted average pay rate in 2004 results when payments are
received on both sides of an index swap.
<Page>
HARTFORD LIFE INSURANCE COMPANY 41
- --------------------------------------------------------------------------------
<Table>
<Caption>
2002 2001
2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE CAPS -- LIBOR BASED
PURCHASED
Notional value $ 43 $ -- $ 77 $ -- $ 15 $ -- $ 135 $ 145
Weighted average strike rate (8.0 --
9.9%) 8.5% -- 8.4% -- 8.3% -- 8.4% 8.5%
Fair value $ -- $ 1
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 19
Weighted average strike rate (10.1%) -- -- -- -- -- -- -- 10.1%
Fair value $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
2002 2001
2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE CAPS -- CMT BASED (1)
PURCHASED
Notional value $ 250 $ -- 250 $ -- $ -- $ -- $ 500 $ 500
Weighted average strike rate (8.7%) 8.7% -- 8.7% -- -- -- 8.7% 8.7%
Fair value $ -- $ 3
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) CMT represents the Constant Maturity Treasury Rate.
<Table>
<Caption>
2002 2001
2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE FLOORS -- LIBOR BASED
PURCHASED
Notional value $ -- $ 27 $ -- $ -- $ -- $ -- $ 27 $ 27
Weighted average strike rate (7.9%) -- 7.9% -- -- -- -- 7.9% 7.9%
Fair value $ 3 $ 3
ISSUED
Notional value $ 43 $ 20 $ 77 $ -- $ -- $ -- $ 140 $ 168
Weighted average strike rate (4.0 --
5.9%) 5.5% 5.3% 5.3% -- -- -- 5.3% 5.3%
Fair value $ (8) $ (7)
Notional value $ -- $ 27 $ -- $ -- $ -- $ -- $ 27 $ 27
Weighted average strike rate (7.8%) -- 7.8% -- -- -- -- 7.8% 7.8%
Fair value $ (3) $ (3)
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
2002 2001
2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE FLOORS -- CMT BASED (1)
PURCHASED
Notional value $ 150 $ -- $ -- $ -- $ -- $ -- $ 150 $ 150
Weighted average strike rate (5.5%) 5.5% $ -- $ -- $ -- $ -- $ -- 5.5% 5.5%
Fair value $ 1 $ 5
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) CMT represents the Constant Maturity Treasury Rate.
<Table>
<Caption>
2002 2001
2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE FUTURES
LONG
Contract amount/notional $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 266
Weighted average settlement price $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 105
SHORT
Contract amount/notional $ 11 $ -- $ -- $ -- $ -- $ -- $ 11 $ 25
Weighted average settlement price $ 114 $ -- $ -- $ -- $ -- $ -- $ 114 $ 105
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
2002 2001
2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
OPTION CONTRACTS
LONG
Contract amount/notional $ 83 $ 88 $ -- $ 280 $ 29 $ 16 $ 496 $ 526
Fair Value $ 9 $ 16
SHORT
Contract amount/notional $ 172 $ 457 $ 145 $ 205 $ 25 $ 30 $ 1,034 $ 991
Fair Value $ (32) $ (52)
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
CURRENCY EXCHANGE RISK -- Currency exchange risk exists with respect to
investments in non-US dollar denominated securities. The fair value of these
fixed maturity securities at December 31, 2002 and 2001 were $1.2 billion and
$455, respectively. Derivative contracts were utilized to manage the currency
exposures. The Company enters into foreign currency swaps to hedge the
variability in cash flow associated with certain foreign denominated securities.
This hedging strategy enters into foreign currency swap agreements that are
structured to match all the foreign currency cash flows of the hedged foreign
denominated securities. At December 31, 2002 and 2001, the foreign currency
swaps had a notional value of $791 and $433, respectively
<Page>
42 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
and fair value of $(68) and $6, respectively. In the fourth quarter of 2002, the
Company entered into a costless collar strategy to temporarily mitigate a
portion of its residual currency risk in foreign dominated securities.
Accordingly, the Company purchased foreign put options and wrote foreign call
options expiring in January 2003. At December 31, 2002 the foreign put and call
options had a notional value of $469, and fair value of $(3). The Company had no
foreign put or call options at December 31, 2001.
LIFE INSURANCE LIABILITY CHARACTERISTICS -- Hartford Life Insurance Company's
insurance liabilities, other than non-guaranteed separate accounts, are
primarily related to accumulation vehicles such as fixed or variable annuities
and investment contracts and other insurance products such as long-term
disability and term life insurance.
ASSET ACCUMULATION VEHICLES -- While interest rate risk associated with these
insurance products has been reduced through the use of market value adjustment
features and surrender charges, the primary risk associated with asset
accumulation products is that the spread between investment return and credited
rate may not be sufficient to earn targeted returns.
FIXED RATE -- Products in this category require the Company to pay a fixed rate
for a certain period of time. The cash flows are not interest sensitive because
the products are written with a market value adjustment feature and the
liabilities have protection against the early withdrawal of funds through
surrender charges. Product examples include fixed rate annuities with a market
value adjustment and fixed rate guaranteed investment contracts. Contract
duration is dependent on the policyholder's choice of guarantee period.
INDEXED -- Products in this category are similar to the fixed rate asset
accumulation vehicles but require the Company to pay a rate that is determined
by an external index. The amount and/ or timing of cash flows will therefore
vary based on the level of the particular index. The primary risks inherent in
these products are similar to the fixed rate asset accumulation vehicles, with
the additional risk that changes in the index may adversely affect
profitability. Product examples include indexed guaranteed investment contracts
with an estimated duration of up to two years.
INTEREST CREDITED -- Products in this category credit interest to policyholders,
subject to market conditions and minimum guarantees. Policyholders may surrender
at book value but are subject to surrender charges for an initial period.
Product examples include universal life contracts and the general account
portion of the Company's variable annuity products. Liability duration is short
to intermediate term.
OTHER INSURANCE PRODUCTS
LONG-TERM PAY OUT LIABILITIES -- Products in this category are long term in
nature and may contain significant actuarial (including mortality and morbidity)
pricing and cash flow risks. The cash flows associated with these policy
liabilities are not interest rate sensitive but do vary based on the timing and
amount of benefit payments. The primary risks associated with these products are
that the benefits will exceed expected actuarial pricing and/or that the actual
timing of the cash flows will differ from those anticipated resulting in an
investment return lower than that assumed in pricing. Product examples include
structured settlement contracts, on-benefit annuities (i.e., the annuitant is
currently receiving benefits thereon) and long-term disability contracts.
Contract duration is generally five to ten years.
SHORT-TERM PAY OUT LIABILITIES -- These liabilities are short term in nature
with a duration of less than one year. The primary risks associated with these
products are determined by the non-investment contingencies such as mortality or
morbidity and the variability in the timing of the expected cash flows.
Liquidity is of greater concern than for the long-term pay out liabilities.
Products include individual and group term life insurance contracts and
short-term disability contracts.
Management of the duration of investments with respective policyholder
obligations is an explicit objective of the Company's management strategy. The
estimated cash flows of insurance policy liabilities based upon internal
actuarial assumptions as of December 31, 2002 are reflected in the table below
by expected maturity year. Comparative totals are included for December 31,
2001.
(DOLLARS IN BILLIONS)
<Table>
<Caption>
2002 2001
DESCRIPTION (1) 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed rate asset accumulation vehicles $1.7 $3.0 $2.6 $2.0 $1.9 $2.4 $13.6 $15.7
Weighted average credited rate 6.0% 6.0% 5.9% 5.6% 5.5% 5.7% 5.8% 5.9%
Indexed asset accumulation vehicles $0.6 $0.1 $ -- $ -- $ -- $ -- $ 0.7 $ 0.7
Weighted average credited rate 3.0% 3.0% -- -- -- -- 3.0% 6.5%
Interest credited asset accumulation
vehicles $3.3 $3.2 $3.2 $0.5 $0.4 $6.8 $17.4 $ 7.5
Weighted average credited rate 3.9% 3.9% 3.8% 4.8% 4.8% 4.7% 4.2% 5.8%
Long-term pay out liabilities $0.5 $0.4 $0.3 $0.3 $0.3 $3.8 $ 5.6 $ 5.9
Short-term pay out liabilities $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 0.3
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) As of December 31, 2002 and 2001, the fair value of the Company's investment
contracts including guaranteed separate accounts was $27.8 billion and $25.7
billion, respectively.
<Page>
HARTFORD LIFE INSURANCE COMPANY 43
- --------------------------------------------------------------------------------
SENSITIVITY TO CHANGES IN INTEREST RATES -- For liabilities whose cash flows are
not substantially affected by changes in interest rates ("fixed liabilities")
and where investment experience is substantially absorbed by the Company, the
sensitivity of the net economic value (discounted present value of asset cash
flows less the discounted present value of liability cash flows) of those
portfolios to 100 basis point shifts in interest rates are shown in the
following table.
<Table>
<Caption>
CHANGE IN NET ECONOMIC VALUE
------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------
Basis point shift -100 + 100 -100 + 100
Amount $ 12 $ (34) $ 6 $ (22)
Percent of liability value 0.05% (0.15)% 0.03% (0.11)%
- --------------------------------------------------------------------------------------------------------
</Table>
These fixed liabilities represented about 65% of the Company's general and
guaranteed separate account liabilities at December 31, 2002 and 2001. The
remaining liabilities generally allow the Company significant flexibility to
adjust credited rates to reflect actual investment experience and thereby pass
through a substantial portion of actual investment experience to the
policyholder. The fixed liability portfolios are managed and monitored relative
to defined objectives and are analyzed regularly by management for internal risk
management purposes using scenario simulation techniques, and are evaluated on
an annual basis, in compliance with regulatory requirements.
EQUITY RISK -- Hartford Life Insurance Company's operations are significantly
influenced by changes in the equity markets. The Company's profitability depends
largely on the amount of assets under management, which is primarily driven by
the level of sales, equity market appreciation and depreciation and the
persistency of the in-force block of business. A prolonged and precipitous
decline in the equity markets, as has been experienced of late, can have a
significant impact on the Company's operations, as sales of variable products
may decline and surrender activity may increase, as customer sentiment towards
the equity market turns negative. The lower assets under management will have a
negative impact on the Company's financial results, primarily due to lower fee
income related to the Investment Products and Individual Life segments, where a
heavy concentration of equity linked products are administered and sold.
Furthermore, the Company may experience a reduction in profit margins if a
significant portion of the assets held in the variable annuity separate accounts
move to the general account and the Company is unable to earn an acceptable
investment spread, particularly in light of the low interest rate environment
and the presence of contractually guaranteed minimum interest credited rates,
which for the most part are at a 3% rate.
In addition, prolonged declines in the equity market may also decrease the
Company's expectations of future gross profits, which are utilized to determine
the amount of DAC to be amortized in a given financial statement period. A
significant decrease in the Company's estimated gross profits would require the
Company to accelerate the amount of DAC amortization in a given period,
potentially causing a material adverse deviation in that period's net income.
Although an acceleration of DAC amortization would have a negative impact on the
Company's earnings, it would not affect the Company's cash flow or liquidity
position.
Additionally, the Investment Products segment sells variable annuity contracts
that offer various guaranteed death benefits. For certain guaranteed death
benefits, Hartford Life pays the greater of (1) the account value at death; (2)
the sum of all premium payments less prior withdrawals; or (3) the maximum
anniversary value of the contract, plus any premium payments since the contract
anniversary, minus any withdrawals following the contract anniversary. The
Company currently reinsures a significant portion of these death benefit
guarantees associated with its in-force block of business. The Company currently
records the death benefit costs, net of reinsurance, as they are incurred.
Declines in the equity market may increase the Company's net exposure to death
benefits under these contracts.
The Company's total gross exposure (i.e. before reinsurance) to these guaranteed
death benefits as of December 31, 2002 is $22.4 billion. Due to the fact that
82% of this amount is reinsured, the Company's net exposure is $4.1 billion.
This amount is often referred to as the net amount at risk. However, the Company
will only incur these guaranteed death benefit payments in the future if the
policyholder has an in-the-money guaranteed death benefit at their time of
death. In order to analyze the total costs that the Company may incur in the
future related to these guaranteed death benefits, the Company performed an
actuarial present value analysis. This analysis included developing a model
utilizing 250 stochastically generated investment performance scenarios and best
estimate assumptions related to mortality and lapse rates. A range of projected
costs was developed and discounted back to the statement date utilizing the
Company's cost of capital, which for this purpose was assumed to be 9.25%. Based
on this analysis, the Company estimated that the present value of the retained
death benefit costs to be incurred in the future fell within a range of $86 to
$349. This range was calculated utilizing a 95% confidence interval. The median
of the 250 stochastically generated scenarios was $159.
Furthermore, the Company is involved in arbitration with one of its primary
reinsurers relating to policies with such death benefit guarantees written from
1994 to 1999. The arbitration involves alleged breaches under the reinsurance
treaties. Although the Company believes that its position in this pending
arbitration is strong, an adverse outcome could result in a decrease to the
Company's statutory surplus and capital and potentially increase the death
benefit costs incurred by the Company in the future. The arbitration hearing was
held during the fourth quarter of 2002, but no decision has been rendered.
<Page>
44 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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. The Company maintained cash and short-term
investments totalling $1.0 billion and $1.1 billion as of December 31, 2002 and
2001.
CASH FLOW
<Table>
<Caption>
2002 2001 2000
- ------------------------------------------------------------------------
Cash provided by operating
activities $ 671 $ 1,105 $ 1,333
- ------------------------------------------------------------------------
Cash used for investing activities (4,435) (3,658) (44)
- ------------------------------------------------------------------------
Cash provided by (used for)
financing activities 3,754 2,586 (1,288)
- ------------------------------------------------------------------------
Cash -- end of year 79 87 56
- ------------------------------------------------------------------------
</Table>
2002 COMPARED TO 2001 -- The decrease in cash provided by operating activities
was primarily the result of the timing of the settlement of receivables,
payables and other related liabilities. The increase in cash provided by
financing activities primarily relates to the increase in receipts from
investment and universal life-type contracts charged against policyholder
accounts. Operating cash flows in the periods presented have been more than
adequate to meet liquidity requirements.
2001 COMPARED TO 2000 -- The decrease in cash provided by operating activities
was primarily the result of the timing of the settlement of receivables,
payables and other related liabilities. The increase in cash used for investing
activities and the decrease in cash used for financing activities primarily
relates to the purchase of Fortis Financial Group. Operating cash flows in the
periods presented have been more than adequate to meet liquidity requirements.
RATINGS -- Ratings are an important factor in establishing the competitive
position in the insurance and financial services marketplace. There can be no
assurance that the 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 level of revenues or the persistency of the Company's business
may be adversely impacted.
The following table summarizes Hartford Life Insurance Company's significant
United States member companies' financial ratings from the major independent
rating organizations as of February 28, 2003:
<Table>
<Caption>
A.M. STANDARD
BEST FITCH MOODY'S & POOR'S
- ------------------------------------------------------------------------
INSURANCE RATINGS
Hartford Life Insurance
Company A+ AA Aa3 AA-
Hartford Life and Annuity A+ AA Aa3 AA-
-- -- --- ---
OTHER RATINGS
Hartford Life Insurance
Company:
Short Term Rating -- -- P-1 A-1+
</Table>
On November 26, 2002, Standard & Poor's removed from CreditWatch its
counterparty credit rating on The Hartford Financial Services Group, Inc. and
related entities and lowered it to 'A-' from 'A' reflecting concerns about
trends in the retirement and savings sector, the consolidated capitalization of
The Hartford's insurance operations, and the increasingly competitive
environment for spread-based and equity-linked retirement and savings products.
At the same time, Standard & Poor's lowered to AA- from AA the insurance
financial strength ratings of Hartford Fire Intercompany Pool and the life
insurance subsidiaries of Hartford Life.
On January 28, 2003, Fitch Ratings placed its fixed income ratings for The
Hartford Financial Services Group, Inc. (HFSG) and its insurer financial
strength ratings for the Hartford Fire Intercompany Pool on Rating Watch
Negative. Ratings for HFSG's life insurance subsidiaries and fixed income
ratings at Hartford Life, Inc., were not impacted by Fitch's rating actions and
remain on stable outlook. Fitch's rating action followed The Hartford's
announcement that it has initiated a comprehensive review of its current
asbestos liabilities. Fitch anticipates responding to the Rating Watch status
upon completion of the asbestos review or potentially sooner if certain
uncertainties are resolved earlier.
On September 19, 2002, Fitch Ratings lowered the ratings of Hartford Life as
part of a comprehensive industry review of all North American life insurance
company ratings. For Hartford Life, Fitch stated the rating action was driven
primarily by Fitch's opinion that most of the very strong, publicly owned
insurance organizations are more appropriately rated in the 'AA' rating
category. Fitch also changed its view on the variable annuity business and
stated that it believes that the associated risks, mainly variable earnings, are
greater than previously considered.
On January 28, 2003, following The Hartford's announcement that it is commencing
a comprehensive study of its asbestos loss reserves, A.M. Best Co. placed under
review with negative implications the commercial paper and debt ratings of The
Hartford Financial Services Group, Inc. and Hartford Life, Inc. Currently, the
financial strength ratings of The Hartford's various life and property/casualty
subsidiaries remain unaffected. On December 16, 2002, all of The Hartford's
financial strength and debt ratings were affirmed.
On September 4, 2002, Moody's revised its outlook on The Hartford's debt ratings
to Stable from Negative citing The Hartford's commitment to maintaining its
capital strength in the event of a significant unforeseen loss or adverse
development that would weaken its capital position.
On January 28, 2003, Moody's Investors Service confirmed the ratings of The
Hartford Financial Services Group, Inc. and its subsidiaries, including the
ratings of Hartford Life, Inc. following The Hartford's announcement of its
intention to conduct a ground up analysis of its asbestos exposures, expected to
be completed during the second quarter 2003. In the same action, Moody's changed
the outlook on the debt ratings for both the parent company and Hartford Life to
negative from stable, and also placed a negative outlook on the insurance
financial strength
<Page>
HARTFORD LIFE INSURANCE COMPANY 45
- --------------------------------------------------------------------------------
ratings of members of The Hartford's property and casualty intercompany pool.
The negative outlook reflects the significant uncertainty surrounding the
group's asbestos liabilities. The outlook for the insurance financial strength
ratings (Aa3) for the life insurance companies remains stable.
EQUITY MARKETS -- For a discussion of equity markets impact to capital and
liquidity, see the Capital Markets Risk Management section under "Market Risk".
RISK-BASED CAPITAL -- The National Association of Insurance Commissioners
("NAIC") has regulations establishing minimum capitalization requirements based
on risk-based capital ("RBC") formulas for both life and property and casualty
companies. The requirements consist of formulas, which identify companies that
are undercapitalized and require specific regulatory actions. The RBC formula
for life companies establishes capital requirements relating to insurance,
business, asset and interest rate risks. As of December 31, 2002, Hartford Life
Insurance Company had more than sufficient capital to meet the NAIC's RBC
requirements.
CONTINGENCIES
LEGAL PROCEEDINGS -- Hartford Life is or may become involved in various legal
actions, in the normal course of its business, in which claims for alleged
economic and punitive damages have been or may be asserted, some for substantial
amounts. Some of the pending litigation has been filed as purported class
actions and some actions have been filed in certain jurisdictions that permit
punitive damage awards that are disproportionate to the actual damages incurred.
Although there can be no assurances, at the present time, the Company does not
anticipate that the ultimate liability arising from potential, pending or
threatened legal actions, after consideration of provisions made for estimated
losses and costs of defense, will have a material adverse effect on the
financial condition or operating results of the Company.
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS -- Hartford Life Insurance
Company distributes its annuity and life insurance products through a variety of
distribution channels, including broker-dealers, banks, wholesalers, its own
internal sales force and other third party organizations. The Company
periodically negotiates provisions and renewals of these relationships and there
can be no assurance that such terms will remain acceptable to the Company or
such third parties. An interruption in the Company's continuing relationship
with certain of these third parties could materially affect the Company's
ability to market its products.
LEGISLATIVE INITIATIVES -- Federal measures which have been previously
considered or enacted by Congress and which, if revisited, could affect the
insurance business include tax law changes pertaining to the tax treatment of
insurance companies and life insurance products, as well as changes in
individual income tax rates and the estate tax. These changes could have an
impact on the relative desirability of various personal investment vehicles.
Legislation to restructure the Social Security system, expand private pension
plans, and create new retirement savings incentives also may be considered.
The Bush Administration's fiscal year 2004 budget contains several proposals
that could materially affect the Company's business. In particular, there are
proposals that would more fully integrate corporate and individual taxes by
permitting the distribution of nontaxable dividends to shareholders under
certain circumstances. These proposals could have a material effect on sales of
the Company's variable annuities and other retirement savings products, as well
as implications for The Hartford's shareholders, both with respect to the amount
of taxable dividends received, as well as the price of and tax basis in their
holdings of The Hartford's common stock. The dividend exclusion proposal also
would reduce the federal tax benefits currently received by the Company stemming
from the dividends received deduction.
There also are proposals in the 2004 budget that would create new investment
vehicles with larger annual contribution limits for individuals to use for
savings purposes. Some of these proposed vehicles would have significant tax
advantages, and could have material effects on the Company's product portfolio.
There have also been proposals regarding certain deferred compensation
arrangements that could have negative impacts on the Company's product sales. It
is too early in the legislative process to determine the future disposition of
any of these proposals. Therefore, any potential impact to the Company's
financial condition or results of operations cannot be reasonably estimated at
this time.
On November 26, 2002, President Bush signed the Terrorism Risk Insurance Act of
2002 (the "Act") into law. The Act established a program that will run through
2005 that provides a backstop for insurance-related losses resulting from any
"act of terrorism" certified by the Secretary of the Treasury, in concurrence
with the Secretary of State and Attorney General.
The Act created a program under which the federal government will pay 90% of
covered losses after an insurer's losses exceed a deductible determined by a
statutorily prescribed formula, up to a combined annual aggregate limit for the
federal government and all insurers of $100 billion. If an act of terrorism or
acts of terrorism result in covered losses exceeding the $100 billion annual
limit, insurers with losses exceeding their deductible will not be responsible
for additional losses.
The statutory formula for determining a company's deductible for each year is
based on the company's direct commercial earned premium for the prior calendar
year multiplied by a specified percentage. The specified percentages are 7% for
2003, 10% for 2004 and 15% for 2005.
The Act does not currently apply to group life insurance contracts but permits
the Secretary of the Treasury to extend the backstop protection to them.
GUARANTY FUND -- Under insurance guaranty fund laws in each state, the District
of Columbia and Puerto Rico, insurers
<Page>
46 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
licensed to do business can be assessed by state insurance guaranty associations
for certain obligations of insolvent insurance companies to policyholders and
claimants. Part of the assessments paid by the Company's insurance subsidiaries
pursuant to these laws may be used as credits for a portion of the Company's
insurance subsidiaries' premium taxes. There was $2 in guaranty fund assessment
refunds in 2002. There were no guaranty fund assessment payments (net of
refunds) in 2001 and 2000.
NAIC CODIFICATION -- The NAIC adopted the Codification of Statutory Accounting
Principles ("Codification") in March 1998. The effective date for the statutory
accounting guidance was January 1, 2001. Each of Hartford Life's domiciliary
states has adopted Codification, and the Company has made the necessary changes
in its statutory accounting and reporting required for implementation. The
overall impact of applying the new guidance resulted in a benefit of $38 in
statutory surplus.
EFFECT OF INFLATION -- The rate of inflation as measured by the change in the
average consumer price index has not had a material effect on the revenues or
operating results of Hartford Life Insurance Company during the three most
recent fiscal years.
ACCOUNTING STANDARDS -- For a discussion of accounting standards, see Note 2 of
Notes to Consolidated Financial Statements.
There were no changes in, or disagreements with, accountants on accounting and
financial disclosure in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002.
LEGAL OPINION
- --------------------------------------------------------------------------------
The validity of the interests in the Contracts described in this Prospectus will
be passed upon for Hartford by Christine Hayer Repasy, Senior Vice President,
General Counsel and Corporate Secretary of Hartford.
EXPERTS
- --------------------------------------------------------------------------------
The financial statements included in this registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the registration statement, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing. The principal business address of
Deloitte & Touche LLP is City Place, 185 Asylum Street, Hartford, Connecticut
06103-3402.
<Page>
HARTFORD LIFE INSURANCE COMPANY 47
- --------------------------------------------------------------------------------
APPENDIX A -- MODIFIED GUARANTEED ANNUITY FOR QUALIFIED PLANS
The CRC-Registered Trademark- (Compound Rate Contract) Select Annuity for
Qualified Plans is a group deferred annuity Contract under which one or more
purchase payments may be made. Plans eligible to purchase the Contract are
pension and profit-sharing plans qualified under Section401(a) of the Internal
Revenue Code (the "Code"), Keogh Plans and eligible state deferred compensation
plans under Section457 of the Code ("Qualified Plans").
To apply for a Group Annuity Contract, the trustee or other applicant need only
complete an application for the Group Annuity Contract and make its initial
purchase payment. A Group Annuity Contract will then be issued to the applicant
and subsequent Purchase Payments may be made, subject to the same $2,000 minimum
applicable to qualified purchasers of Certificates. While no Certificates are
issued, each purchase payment, and the Account established thereby, are
confirmed to the Contract Owner. The initial and subsequent purchase payments
operate to establish Accounts under the Group Annuity Contract in the same
manner as non-qualified purchases. Each Account will have its own Initial and
Subsequent Guarantee Periods and Guaranteed Rates. Surrenders under the Group
Annuity Contract may be made, at the election of the Contract Owner, from one or
more of the Accounts established under the Contract. Account surrenders are
subject to the same limitations, adjustments and charges as surrenders made
under a certificate (see "Surrenders"). Net Surrender Values may be surrendered
or applied to purchase annuities for the Contract Owners' Qualified Plan
Participants.
Because there are no individual participant accounts, the Qualified Group
Annuity Contract issued in connection with a Qualified Plan does not provide for
death benefits. Annuities purchased for Qualified Plan Participants may provide
for a payment upon the death of the Annuitant, depending on the option chosen
(see "Annuity Options"). Additionally, since there are no Annuitants prior to
the actual purchase of an Annuity by the Contract Owner, the provisions
regarding the Annuity Commencement Date are not applicable.
If you are purchasing the Contract for use in an IRA or other qualified
retirement plan, you should consider other features of the Contract besides tax
deferral, since any investment vehicle used within an IRA or other qualified
plan receives tax deferred treatment under the Code.
<Page>
48 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
APPENDIX B -- MARKET VALUE ADJUSTMENT
The formula that will be used to determine the Market Value Adjustment is: [(1 +
i)/(1 + j)](n/12), where
<Table>
i = The Guarantee Rate in effect for the Current Guarantee
Period (expressed as a decimal, e.g., 1% = .01).
j = The Current Rate (expressed as a decimal, e.g., 1% = .01) in
effect for durations equal to the number of years remaining
in the current Guarantee Period (years are rounded to the
nearest whole number of years).
n = The number of complete months from the surrender date to the
end of the current Guarantee Period.
</Table>
EXAMPLE OF MARKET VALUE ADJUSTMENT (MVA)
<Table>
Beginning Account Value: $50,000
Guarantee Period: 5 years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of contract year 3
Last 12 months interest: $2,980
</Table>
EXAMPLE 1 (FEATURING A CURRENT RATE THAT IS HIGHER THAN THE GUARANTEE RATE):
<Table>
Gross surrender value at middle of Contract Year = $50,000 (1.055) to the power of 2.5 = $57,161.18
3:
Net surrender value at middle of Contract Year 3: = ($57,161.18 - $2980 - (.05)($57,161.18 -- $2980))
X MVA + $2980
= $51,472.12 X MVA + $2980
</Table>
<Table>
Market Value Adjustment Calculation:
i = .055
j = .061
n = 30
MVA = [(1.055)/(1.061)] to the power of 30/12
= .985922299
Net Surrender Value at middle of Contract Year 3: = $51,472.12 X MVA + $2980
= $51,472.12 X .985922299 + $2980
= $53,727.51
</Table>
EXAMPLE 2: (FEATURING A CURRENT RATE THAT IS LOWER THAN THE GUARANTEE RATE):
<Table>
Gross surrender value at middle of Contract Year = $50,000 (1.055) to the power of 2.5 = $57,161.18
3:
Net surrender value at middle of Contract Year 3: = ($57,161.18 - $2980 - (.05)($57,161.18 - $2980))
X MVA + $2980
= $51,472.12 X MVA + $2980
</Table>
<Table>
Market Value Adjustment Calculation:
i = .055
j = .050
n = 30
MVA = [(1.055)/(1.050)] to the power of 30/12
= 1.011947313
Net Surrender Value at middle of Contract Year 3: = $51,472.12 X MVA + $2980
= $51,472.12 X 1.011947313 + $2980
= $55,067.07
</Table>
Note: These examples do not include any applicable taxes
<Page>
INDEPENDENT AUDITORS' REPORT
------------------------------------
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 its subsidiaries (collectively, "the Company") as of
December 31, 2002 and 2001, and the related consolidated statements of income,
changes in stockholder's equity, comprehensive income and cash flows for each of
the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hartford Life Insurance Company and
its subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 2 (d) of the consolidated financial statements, the Company
changed its method of accounting for goodwill and indefinite-lived intangible
assets in 2002. In addition, the Company changed its method of accounting for
derivative instruments and hedging activities and its method of accounting for
the recognition of interest income and impairment on purchased retained
beneficial interests in securitized financial assets in 2001.
Deloitte & Touche LLP
Hartford, Connecticut
February 19, 2003
F-1
<Page>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------------------
(In millions)
REVENUES
Fee income $2,079 $2,157 $2,109
Earned premiums and other 66 94 97
Net investment income 1,583 1,495 1,326
Net realized capital losses (288) (91) (85)
-----------------------------------------------------------------------------
TOTAL REVENUES 3,440 3,655 3,447
-----------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 1,766 1,703 1,495
Insurance expenses and other 650 622 600
Amortization of deferred policy acquisition
costs and present value of future profits 531 566 604
Dividends to policyholders 65 68 67
-----------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 3,012 2,959 2,766
-----------------------------------------------------------------------------
Income before income tax expense and cumulative
effect of
accounting changes 428 696 681
Income tax expense 2 44 194
Income before cumulative effect of accounting
changes 426 652 487
Cumulative effect of accounting changes, net of
tax -- (6) --
-----------------------------------------------------------------------------
NET INCOME $ 426 $ 646 $ 487
-----------------------------------------------------------------------------
</Table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<Page>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
AS OF DECEMBER 31,
------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------
(In millions,
except for share
data)
ASSETS
Investments
Fixed maturities, available for sale, at fair
value (amortized cost of $23,675 and $18,933) $ 24,786 $ 19,142
Equity securities, available for sale, at fair
value (cost of $137 and $71) 120 64
Policy loans, at outstanding balance 2,895 3,278
Other investments 918 1,136
------------------------------------------------------------------------
TOTAL INVESTMENTS 28,719 23,620
------------------------------------------------------------------------
Cash 79 87
Premiums receivable and agents' balances 15 10
Reinsurance recoverables 1,477 1,215
Deferred policy acquisition costs and present
value of future profits 5,479 5,338
Deferred income taxes (243) (11)
Goodwill 186 186
Other assets 1,073 724
Separate account assets 105,316 114,261
------------------------------------------------------------------------
TOTAL ASSETS $142,101 $145,430
------------------------------------------------------------------------
LIABILITIES
Reserve for future policy benefits $ 6,658 $ 6,050
Other policyholder funds 22,103 18,412
Other liabilities 2,207 1,949
Separate account liabilities 105,316 114,261
------------------------------------------------------------------------
TOTAL LIABILITIES 136,284 140,672
------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES, NOTE 13
STOCKHOLDER'S EQUITY
Common stock -- 1,000 shares authorized, issued
and outstanding, par value $5,690 6 6
Capital surplus 2,041 1,806
Accumulated other comprehensive income
Net unrealized capital gains on securities,
net of tax 574 177
Foreign currency translation adjustments (1) (2)
------------------------------------------------------------------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME 573 175
------------------------------------------------------------------------
Retained earnings 3,197 2,771
------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 5,817 4,758
------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $142,101 $145,430
------------------------------------------------------------------------
</Table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<Page>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<Table>
<Caption>
Accumulated Other
Comprehensive Income (Loss)
--------------------------------------
Net
Unrealized Net Gain on
Capital Gains Cash Flow Foreign
(Losses) on Hedging Currency Total
Common Capital Securities, Instruments, Translation Retained Stockholder's
Stock Surplus Net of Tax Net of Tax Adjustments Earnings Equity
----------------------------------------------------------------------------
(In millions)
2002
Balance, December 31, 2001 $6 $1,806 $ 114 $ 63 $ (2) $2,771 $4,758
Comprehensive income
Net income 426 426
Other comprehensive income, net of
tax (1)
Net change in unrealized capital gains
(losses) on securities (3) 349 349
Net gain on cash flow hedging
instruments 48 48
Cumulative translation adjustments 1 1
Total other comprehensive income 398
Total comprehensive income 824
Capital contribution from parent 235 235
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $6 $2,041 $ 463 $111 $ (1) $3,197 $5,817
----------------------------------------------------------------------------
2001
Balance, December 31, 2000 $6 $1,045 $ 16 $ -- $ -- $2,125 $3,192
Comprehensive income
Net income 646 646
Other comprehensive income, net of
tax (1)
Cumulative effect of accounting
change (2) (18) 21 3
Net change in unrealized capital gains
(losses) on securities (3) 116 116
Net gain on cash flow hedging
instruments 42 42
Cumulative translation adjustments (2) (2)
Total other comprehensive income 159
Total comprehensive income 805
Capital contribution from parent 761 761
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $6 $1,806 $ 114 $ 63 $ (2) $2,771 $4,758
----------------------------------------------------------------------------
2000
Balance, December 31, 1999 $6 $1,045 $(255) $ -- $ -- $1,823 $2,619
Comprehensive income (loss)
Net income 487 487
Other comprehensive income, net of
tax (1)
Net change in unrealized capital gains
(losses) on securities (3) 271 271
Total other comprehensive income 271
Total comprehensive income (loss) 758
Dividends declared (185) (185)
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $6 $1,045 $ 16 $ -- $ -- $2,125 $3,192
----------------------------------------------------------------------------
</Table>
(1) Net change in unrealized capital gain (losses) on securities is reflected
net of tax and other items of $509, $62 and $147 for the years ended
December 31, 2002, 2001 and 2000, respectively. Cumulative effect of
accounting change is net of tax benefit of $2 for the year ended
December 31, 2001. Net gain on cash flow hedging instruments is net of tax
provision of $26 and $23 for the years ended December 31, 2002 and 2001,
respectively. There is no tax effect on cumulative translation adjustments.
(2) Net change in unrealized capital gain (losses), net of tax, includes
cumulative effect of accounting change of $(3) to net income and $21 to net
gain on cash flow hedging instruments.
(3) There were reclassification adjustments for after-tax losses realized in net
income of $(178), $(43), and $(55) for the years ended December 31, 2002,
2001 and 2000, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<Page>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2002 2001 2000
--------------------------
(In millions)
OPERATING ACTIVITIES
Net income $ 426 $ 646 $ 487
Adjustments to reconcile net income to
net cash provided by operating
activities
Net realized capital losses 288 91 85
Cumulative effect of adoption of
SFAS 133 -- 3 --
Cumulative effect of adoption of
EITF 99-20 -- 3 --
Amortization of deferred policy
acquisition costs and present value
of future profits 531 566 604
Additions to deferred policy
acquisition costs and present value
of future profits (987) (975) (916)
Depreciation and amortization 19 (18) (28)
Decrease (increase) in premiums
receivable and agents' balances (5) 5 14
Increase (decrease) in other
liabilities (61) (84) 375
Change in receivables, payables, and
accruals 2 (72) 53
Increase in accrued tax 76 115 34
Decrease in deferred income tax 23 7 73
Increase in future policy benefits 608 871 496
Decrease (increase) in reinsurance
recoverables (127) 21 32
Other, net (122) (74) 24
--------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 671 1,105 1,333
--------------------------
INVESTING ACTIVITIES
Purchases of investments (12,470) (9,766) (5,800)
Sales of investments 5,769 4,564 4,230
Maturity and principal paydowns of
fixed maturity investments 2,266 2,227 1,521
Acquisition of Fortis Financial Group -- (683) --
Other -- -- 5
--------------------------
NET CASH USED FOR INVESTING ACTIVITIES (4,435) (3,658) (44)
--------------------------
FINANCING ACTIVITIES
Capital contributions 235 761 --
Dividends paid -- -- (185)
Net receipts from (disbursements for)
investment and universal life-type
contracts charged against
policyholder accounts 3,519 1,825 (1,103)
--------------------------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 3,754 2,586 (1,288)
--------------------------
Net increase (decrease) in cash (10) 33 1
Impact of foreign exchange 2 (2) --
Cash -- beginning of year 87 56 55
--------------------------
Cash -- end of year $ 79 $ 87 $ 56
--------------------------
Supplemental Disclosure of Cash Flow
Information:
Net Cash Paid During the Year for:
Income taxes $ (2) $ (69) $ 173
</Table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<Page>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS, UNLESS OTHERWISE STATED)
-----------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
These Consolidated Financial Statements include Hartford Life Insurance Company
and its wholly-owned subsidiaries ("Hartford Life Insurance Company" or the
"Company"), Hartford Life and Annuity Insurance Company ("HLAI"), Hartford
International Life Reassurance Corporation ("HLRe") and Servus Life Insurance
Company, formerly Royal Life Insurance Company of America. The Company is a
wholly-owned subsidiary of Hartford Life and Accident Insurance Company ("HLA"),
a wholly-owned subsidiary of Hartford Life, Inc. ("Hartford Life"). Hartford
Life is a direct subsidiary of Hartford Holdings, Inc., a direct subsidiary of
The Hartford Financial Services Group, Inc. ("The Hartford"), the Company's
ultimate parent company. In November 1998, Hartford Life Insurance Company
transferred in the form of a dividend, Hartford Financial Services, LLC and its
subsidiaries to HLA.
Pursuant to an initial public offering (the "IPO") on May 22, 1997, Hartford
Life sold to the public 26 million shares of Class A Common Stock at $28.25 per
share and received proceeds, net of offering expenses, of $687. The 26 million
shares sold in the IPO represented approximately 18.6% of the equity ownership
in Hartford Life. On June 27, 2000, The Hartford acquired all of the outstanding
common shares of Hartford Life not already owned by The Hartford (The Hartford
Acquisition). As a result of The Hartford Acquisition, Hartford Life became a
direct subsidiary of Hartford Fire. During the third quarter of 2002, Hartford
Life became a direct subsidiary of Hartford Holdings, Inc., a direct wholly
owned subsidiary of The Hartford.
Along with its parent, HLA, the Company is a leading financial services and
insurance group which provides (a) investment products, such as individual
variable annuities and fixed market value adjusted annuities and retirement plan
services for savings and retirement needs; (b) individual life insurance for
income protection and estate planning; (c) group benefits products such as group
life and group disability insurance that is directly written by the Company and
is substantially ceded to its parent, HLA, and (d) corporate owned life
insurance.
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States, which differ
materially from the accounting prescribed by various insurance regulatory
authorities. All material intercompany transactions and balances between
Hartford Life Insurance Company and its subsidiaries and affiliates have been
eliminated.
(b) USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining reserves,
deferred policy acquisition costs, valuation of investments and derivative
instruments and contingencies.
(c) RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial information to
conform to the current year classifications.
(d) ADOPTION OF NEW ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". Under historical guidance, all gains and losses
resulting from the extinguishment of debt were required to be aggregated and, if
material, classified as an extraordinary item, net of related income tax effect.
SFAS No. 145 rescinds that guidance and requires that gains and losses from
extinguishments of debt be classified as extraordinary items only if they are
both unusual and infrequent in occurrence. SFAS No. 145 also amends SFAS
No. 13, "Accounting for Leases" for the required accounting treatment of certain
lease modifications that have economic effects similar to sale-leaseback
transactions. SFAS No. 145 requires that those lease modifications be accounted
for in the same manner as sale-leaseback transactions. The provisions of SFAS
No. 145 related to SFAS No. 13 are effective for transactions occurring after
May 15, 2002. Adoption of the provisions of SFAS No. 145 related to SFAS No. 13
did not have a material impact on the Company's consolidated financial condition
or results of operations.
Effective September 2001, the Company adopted Emerging Issues Task Force
("EITF") Issue No. 01-10, "Accounting for the Impact of the Terrorist Attacks of
September 11, 2001". Under the consensus, costs related to the terrorist act
should be reported as part of income from continuing operations and not as an
extraordinary item. The Company has recognized and classified all direct and
indirect costs associated with the attack of September 11 in accordance with the
consensus. (For discussion of the impact of the September 11 terrorist attack
("September 11"), see Note 3.)
F-6
<Page>
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 establishes an accounting model for
long-lived assets to be disposed of by sale that applies to all long-lived
assets, including discontinued operations. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. Adoption
of SFAS No. 144 did not have a material impact on the Company's consolidated
financial condition or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS
No. 141 eliminates the pooling-of-interests method of accounting for business
combinations, requiring all business combinations to be accounted for under the
purchase method. Accordingly, net assets acquired are recorded at fair value
with any excess of cost over net assets assigned to goodwill. SFAS No. 141 also
requires that certain intangible assets acquired in a business combination be
recognized apart from goodwill. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001. Adoption of SFAS No. 141
did not have a material impact on the Company's consolidated financial condition
or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". Under SFAS No. 142, amortization of goodwill is precluded, however, its
recoverability must be periodically (at least annually) reviewed and tested for
impairment. Goodwill must be tested at the reporting unit level for impairment
in the year of adoption, including an initial test performed within six months
of adoption. If the initial test indicates a potential impairment, then a more
detailed analysis to determine the extent of impairment must be completed within
twelve months of adoption.
During the second quarter of 2002, the Company completed the review and analysis
of its goodwill asset in accordance with the provisions of SFAS No. 142. The
result of the analysis indicated that each reporting unit's fair value exceeded
its carrying amount, including goodwill. As a result, goodwill for each
reporting unit was not considered impaired. Adoption of all other provisions of
SFAS No. 142 did not have a material impact on the Company's consolidated
financial condition or results of operations. SFAS No. 142 also requires that
useful lives for intangibles other than goodwill be reassessed and remaining
amortization periods be adjusted accordingly. (For further discussion of the
impact of SFAS No. 142, see Note 7.)
Effective April 1, 2001, the Company adopted EITF Issue No. 99-20, "Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets". Under the consensus, investors in certain
securities with contractual cash flows, primarily asset-backed securities, are
required to periodically update their best estimate of cash flows over the life
of the security. If the fair value of the securitized financial asset is less
than its carrying amount and there has been a decrease in the present value of
the estimated cash flows since the last revised estimate, considering both
timing and amount, an other than temporary impairment charge is recognized. The
estimated cash flows are also used to evaluate whether there have been any
changes in the securitized asset's estimated yield. All yield adjustments are
accounted for on a prospective basis. Upon adoption of EITF Issue No. 99-20, the
Company recorded a $3 charge as the net of tax cumulative effect of the
accounting change.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and
138. The standard requires, among other things, that all derivatives be carried
on the balance sheet at fair value. The standard also specifies hedge accounting
criteria under which a derivative can qualify for special accounting. In order
to receive special accounting, the derivative instrument must qualify as a hedge
of either the fair value or the variability of the cash flow of a qualified
asset or liability, or forecasted transaction. Special accounting for qualifying
hedges provides for matching the timing of gain or loss recognition on the
hedging instrument with the recognition of the corresponding changes in value of
the hedged item. The Company's policy prior to adopting SFAS No. 133 was to
carry its derivative instruments on the balance sheet in a manner similar to the
hedged item(s).
Upon adoption of SFAS No. 133, the Company recorded a $3 charge as the net of
tax cumulative effect of the accounting change. This transition adjustment was
primarily comprised of gains and losses on derivatives that had been previously
deferred and not adjusted to the carrying amount of the hedged item. Also
included in the transition adjustment were gains and losses related to
recognizing at fair value all derivatives that are designated as fair-value
hedging instruments offset by the difference between the book values and fair
values of related hedged items attributable to the hedged risks. The entire
transition amount was previously recorded in Accumulated Other Comprehensive
Income ("AOCI") -- Unrealized Gain/Loss on Securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
Gains and losses on derivatives that were previously deferred as adjustments to
the carrying amount of hedged items were not affected by the implementation of
SFAS No. 133. Upon adoption, the Company also reclassified $21, net of tax, to
AOCI -- Gain on Cash-Flow Hedging Instruments from AOCI -- Unrealized Gain/Loss
on Securities. This reclassification reflects the January 1, 2001 net unrealized
gain for all derivatives that were designated as cash-flow hedging instruments.
(For further discussion of the Company's derivative-related accounting policies,
see Note 2(h).)
F-7
<Page>
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125". SFAS No. 140 revises the accounting for
securitizations, other financial asset transfers and collateral arrangements.
SFAS No. 140 was effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. For recognition
and disclosure of collateral and for additional disclosures related to
securitization transactions, SFAS No. 140 was effective for the Company's
December 31, 2000 financial statements. Adoption of SFAS No. 140 did not have a
material impact on the Company's financial condition or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation -- an Interpretation of Accounting
Principles Board ("APB") Opinion No. 25" ("FIN 44"). FIN 44 clarifies the
application of APB Opinion No. 25, "Accounting for Stock Issued to Employee",
regarding the definition of employee, the criteria for determining a
non-compensatory plan, the accounting for changes to the terms of a previously
fixed stock option or award, the accounting for an exchange of stock
compensation awards in a business combination and other stock compensation
related issues. FIN 44 became effective July 1, 2000, with respect to new
awards, modifications to outstanding awards and changes in grantee status that
occur on or after that date. The adoption of FIN 44 did not have a material
impact on the Company's consolidated financial condition or results of
operations.
Effective January 1, 2000, The Hartford adopted Statement of Position ("SOP")
No. 98-7, "Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk". This SOP provides guidance on the method of accounting
for insurance and reinsurance contracts that do not transfer insurance risk,
defined in the SOP as the deposit method. Adoption of this SOP did not have a
material impact on the Company's consolidated financial condition or results of
operations.
(e) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" ("FIN 46"), which requires an enterprise to assess if
consolidation of an entity is appropriate based upon its variable economic
interests in a variable interest entity (VIE). The initial determination of
whether an entity is a VIE shall be made on the date at which an enterprise
becomes involved with the entity. A VIE is an entity in which the equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. An
enterprise shall consolidate a VIE if it has a variable interest that will
absorb a majority of the VIE's expected losses if they occur, receive a majority
of the entity's expected residual returns if they occur or both. A direct or
indirect ability to make decisions that significantly affect the results of the
activities of a VIE is a strong indication that an enterprise has one or both of
the characteristics that would require consolidation of the VIE.
FIN 46 is effective for new VIEs established subsequent to January 31, 2003 and
for existing VIEs as of July 1, 2003. The Hartford invests in a variety of
investment structures that require analysis under this Interpretation, including
asset-backed securities, partnerships and certain trust securities and is
currently assessing the impact of adopting FIN 46. Based upon a preliminary
review, the adoption of FIN 46 is not expected to have a material impact on the
Company's financial condition or results of operations as there were no material
VIEs identified which would require consolidation. FIN 46 further requires the
disclosure of certain information related to VIEs in which the Company holds a
significant variable interest. The Company does not believe that it owns any
such interests that require disclosure at this time.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires certain guarantees to be
recorded at fair value and also requires a guarantor to make new disclosures,
even when the likelihood of making payments under the guarantee is remote. In
general, the Interpretation applies to contracts or indemnification agreements
that contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or an
equity security of the guaranteed party. The recognition provisions of FIN 45
are effective on a prospective basis for guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 15, 2002. See
disclosures in Note 2(h), "Other Investment and Risk Management Activities --
Specific Strategies". Adoption of this statement is not expected to have a
material impact on the Company's consolidated financial condition or results of
operations.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others -- an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34".
FIN 45 sets forth requirements for disclosures made by a guarantor and valuation
of the guarantee for its interim and annual financial statements about its
obligations under certain guarantees that it has issued.
On April 1, 1997 Hartford Life Insurance Company entered into a guarantee with
Hartford-Comprehensive Employee Benefit Service Company ("CEBSCO"), an affiliate
of the Company regarding the financial obligations associated with structured
settlement contracts. CEBSCO enters into assignment agreements with unaffiliated
companies where structured settlement liabilities are assigned to CEBSCO. CEBSCO
purchases an annuity from Hartford
F-8
<Page>
Life Insurance Company to fund the liability and the Company establishes a
liability on its balance sheet. The total amount of the Company's exposure under
the guarantee is equal to the initial liability established for the annuity
contract.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Action (including Certain Costs Incurred in
a Restructuring)" ("Issue 94-3"). The principal difference between SFAS No. 146
and Issue 94-3 is that SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred, rather than at the date of an entity's commitment to an exit plan.
SFAS No. 146 is effective for exit or disposal activities after December 31,
2002. Adoption of SFAS No. 146 will result in a change in the timing of when a
liability is recognized if the Company has restructuring activities after
December 31, 2002.
(f) EXPENSING STOCK OPTIONS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure and Amendment to FASB No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of that Statement. Under the prospective method, stock-based
compensation expense is recognized for awards granted after the beginning of the
fiscal year in which the change is made. The modified prospective method
recognizes stock-based compensation expense related to new and unvested awards
in the year of change equal to that which would have been recognized had SFAS
No. 123 been adopted as of its effective date, fiscal years beginning after
December 15, 1994. The retrospective restatement method recognizes stock
compensation costs for the year of change and restates financial statements for
all prior periods presented as though the fair value recognition provisions of
SFAS No. 123 had been adopted as of its effective date.
Beginning in January 2003, The Hartford adopted the fair value recognition
provisions of accounting for employee stock compensation on a prospective basis.
Prior to January 2003, the Hartford applied the intrinsic value-based provisions
set forth in APB Opinion No. 25. Under the intrinsic value method, compensation
expense is determined on the measurement date, that is the first date on which
both the number of shares the employee is entitled to receive, and the exercise
price are known. Compensation expense, if any, is measured based on the award's
intrinsic value, which is the excess of the market price of the stock over the
exercise price on the measurement date. For the years ended December 31, 2002,
2001 and 2000, compensation expense related to The Hartford's stock based
compensation plans, including non-option plans, was $6, $8 and $23 after-tax,
respectively. The expense related to stock-based employee compensation included
in the determination of net income for 2002 is less than that which would have
been recognized if the fair value method had been applied to all awards since
the effective date of SFAS No. 123.
(g) INVESTMENTS
The Company's investments in both fixed maturities, which include bonds,
redeemable preferred stock and commercial paper, and equity securities, which
include common and non-redeemable preferred stocks, are classified as "available
for sale" in accordance with SFAS No. 115. Accordingly, these securities are
carried at fair value with the after-tax difference from amortized cost, as
adjusted for the effect of deducting the life and pension policyholders' share
related to the Company's immediate participation guaranteed contracts and the
related change in amortization of deferred policy acquisition costs, reflected
in stockholders' equity as a component of accumulated other comprehensive
income. Policy loans are carried at outstanding balance which approximates fair
value. Other investments consist primarily of limited partnership investments
which are accounted for by the equity method. The Company's net income from
partnerships is included in net investment income. Other investments also
include mortgage loans carried at amortized cost and derivatives at fair value.
The fair value of securities is based upon quoted market prices when available
or broker quotations. Where market prices or broker quotations are not
available, management typically estimates the fair value based upon discounted
cash flows, applying current interest rates for similar financial instruments
with comparable terms and credit quality. The estimated fair value of a
financial instrument may differ significantly from the amount that could be
realized if the security were sold immediately. Derivative instruments are
reported at fair value based upon internally established valuations that are
consistent with external valuation models, quotations furnished by dealers in
such instrument or market quotations.
Net realized capital gains and losses on security transactions associated with
the Company's immediate participation guaranteed contracts are recorded and
offset by amounts owed to policyholders and were $(1), $(1) and $(9) for the
years ended December 31, 2002, 2001 and 2000, respectively. Under the terms of
the contracts, the net realized capital gains and losses will be credited to
policyholders in future years as they are entitled to receive them. Net realized
capital gains and losses, after deducting the life and pension policyholders'
share and related amortization of deferred policy acquisition costs for certain
products, are reported as a component of revenues and are determined on a
specific identification basis.
The Company's accounting policy requires that a decline in the value of a
security below its amortized cost basis be assessed to determine if the decline
is other than temporary. If so, the security is deemed to be impaired
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and, a charge is recorded in net realized capital losses equal to the difference
between the fair value and amortized cost basis of the security. The fair value
of the impaired investment becomes its new cost basis. The Company has a
security monitoring process comprised of a committee of investment and
accounting professionals that identifies securities that, due to certain
characteristics are subjected to an enhanced analysis on a quarterly basis. Such
characteristics include but are not limited to a deterioration of the financial
condition of the issuer, the magnitude and duration of unrealized losses, credit
rating and industry category.
The primary factors considered in evaluating whether a decline in value for
fixed income and equity securities is other than temporary include: (a) the
length of time and the extent to which the fair value has been less than cost,
(b) the financial conditions and near-term prospects of the issuer, (c) whether
the debtor is current on contractually obligated interest and principal
payments, and (d) the intent and ability of the Company to retain the investment
for a period of time sufficient to allow for any anticipated recovery.
Additionally, for certain securitized financial assets with contractual cash
flows (including asset-backed securities), EITF Issue No. 99-20 requires the
Company to periodically update its best estimate of cash flows over the life of
the security. If management determines that the fair value of its securitized
financial asset is less than its carrying amount and there has been a decrease
in the present value of the estimated cash flows since the last revised
estimate, considering both timing and amount, then an other than temporary
impairment charge is recognized. Furthermore, for securities expected to be
sold, an other than temporary impairment charge is recognized if the Company
does not expect the fair value of a security to recover to amortized cost prior
to the expected date of sale. Once an impairment charge has been recorded, the
Company then continues to review the other than temporarily impaired securities
for appropriate valuation on an ongoing basis.
(h) DERIVATIVE INSTRUMENTS
OVERVIEW
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded futures and options to manage risk through
one of four Company-approved objectives: to hedge risk arising from interest
rate, price or currency exchange rate volatility; to manage liquidity; to
control transaction costs; or to enter into income enhancement and replication
transactions.
The Company also periodically enters into swap agreements in which the Company
assumes credit exposure from a single entity, referenced index or asset pool.
All of the Company's derivative transactions are permitted uses of derivatives
under the derivatives use plan filed and/ or approved, as applicable, by the
State of Connecticut and State of New York Insurance Departments. The Company
does not make a market or trade in these instruments for the express purpose of
earning short-term trading profits.
ACCOUNTING AND FINANCIAL STATEMENT PRESENTATION OF
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, and in accordance with SFAS No. 133, all derivatives
are recognized on the balance sheet at their fair value. 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 a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability
("cash-flow" hedge), (3) a foreign-currency, fair-value or cash-flow hedge
("foreign-currency" hedge), (4) a hedge of a net investment in a foreign
operation or (5) held for other investment and risk management activities, which
primarily involve managing asset or liability related risks which do not qualify
for hedge accounting under SFAS No. 133. Changes in the fair value of a
derivative that is designated and qualifies as a fair-value hedge, along with
the gain or loss on the hedged asset or liability that is attributable to the
hedged risk, are recorded in current period earnings as realized capital gains
or losses. Changes in the fair value of a derivative that is designated and
qualifies as a cash-flow hedge are recorded in AOCI and are reclassified into
earnings when earnings are impacted by the variability of the cash flow of the
hedged item. Changes in the fair value of derivatives that are designated and
qualify as foreign-currency hedges, are recorded in either current period
earnings or AOCI, depending on whether the hedge transaction is a fair-value
hedge or a cash-flow hedge. If, however, a derivative is used as a hedge of a
net investment in a foreign operation, its changes in fair value, to the extent
effective as a hedge, are recorded in the cumulative translation adjustments
account within stockholder's equity. Changes in the fair value of derivative
instruments held for other investment and risk management purposes are reported
in current period earnings as realized capital gains and losses. As of
December 31, 2002, the Company carried $179 of derivative assets in other
investments and $78 of derivative liabilities in other liabilities. As of
December 31, 2001, the Company carried $113 of derivative assets in other
investments and $72 of derivative liabilities in other liabilities.
HEDGE DOCUMENTATION AND EFFECTIVENESS TESTING
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. In connection with the
implementation of SFAS No. 133, the Company designated anew all existing hedge
relationships. The documentation process includes linking all derivatives that
are designated as fair-value, cash flow or foreign-currency hedges to specific
assets and liabilities on the balance sheet or to specific forecasted
transactions. The Company also formally assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in
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offsetting changes in fair values or cash flows of hedged items. At inception,
and on a quarterly basis, the change in value of the hedging instrument and the
change in value of the hedged item are measured to assess the validity of
maintaining special hedge accounting. Hedging relationships are considered
highly effective if the changes in the fair value or discounted cash flows of
the hedging instrument are within a ratio of 80-125% of the inverse changes in
the fair value or discounted cash flows of the hedged item. Hedge effectiveness
is evaluated primarily based on regression analysis or the cumulative change in
cash flow or fair value, as appropriate. If it is determined that a derivative
is no longer highly effective as a hedge, the Company discontinues hedge
accounting in the period in which effectiveness was lost and prospectively, as
discussed below under discontinuance of hedge accounting.
CREDIT RISK
The Company's derivatives counterparty exposure policy establishes market-based
credit limits, favors long-term financial stability and creditworthiness, and
typically requires credit enhancement/credit risk reducing agreements. By using
derivative instruments, the Company is exposed to credit risk which is measured
as the amount owed to the Company based on current market conditions and
potential payment obligations between the Company and its counterparties. When
the fair value of a derivative contract is positive, this indicates that the
counterparty owes the Company, and, therefore, exposes the Company to credit
risk. Credit exposures are generally quantified weekly and netted, and
collateral is pledged to and held by, or on behalf of, the Company to the extent
the current value of derivatives exceeds exposure policy thresholds. The Company
also minimizes the credit risk in derivative instruments by entering into
transactions with high quality counterparties that are reviewed periodically by
the Company's internal compliance unit, reviewed frequently by senior management
and reported to The Finance Committee of The Hartford's Board of Directors. The
Company also maintains a policy of requiring that all derivative contracts be
governed by an International Swaps and Derivatives Association Master Agreement
which is structured by legal entity and by counterparty and permits right of
offset.
EMBEDDED DERIVATIVES
The Company occasionally purchases or issues financial instruments that contain
a derivative instrument that is embedded in the financial instrument. 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, is carried at fair value with changes in fair value reported in
realized gains and losses.
DISCONTINUANCE OF HEDGE ACCOUNTING
The Company discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item, (2) the derivative is
dedesignated as a hedge instrument, because it is unlikely that a forecasted
transaction will occur, or (3) the derivative expires or is sold, terminated, or
exercised. When hedge accounting is discontinued because it is determined that
the derivative no longer qualifies as an effective fair-value hedge, the
derivative continues to be carried at fair value on the balance sheet with
changes in its fair value recognized in current period earnings. The changes in
the fair value of the hedged asset or liability are no longer recorded in
earnings. When hedge accounting is discontinued because the Company becomes
aware that it is probable that a forecasted transaction will not 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 all 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 amortized into earnings when
earnings are impacted by the variability of the cash flow of the hedged item.
SFAS NO. 133 CATEGORIZATION OF THE COMPANY'S
HEDGING ACTIVITIES
CASH-FLOW HEDGES
General
For the year ended December 31, 2002 and 2001, the Company's gross gains and
losses representing the total ineffectiveness of all cash-flow hedges were
immaterial, with the net impact reported as net realized capital gains and
losses.
Gains and losses on derivative contracts that are reclassified from AOCI to
current period earnings are included in the line item in the statement of income
in which the hedged item is recorded. As of December 31, 2002 and 2001, the
after-tax deferred net gains on derivative instruments accumulated in AOCI that
are expected to be reclassified to earnings during the next twelve months are $7
and $2, respectively. This expectation is based on the anticipated interest
payments on hedged investments in fixed maturity securities that will occur over
the next twelve months, at which time the Company will recognize the deferred
net gains/losses as an adjustment to interest income over the term of the
investment cash flows. The maximum term over which the Company is hedging its
exposure to the variability of future cash flows (for all forecasted
transactions, excluding interest payments on variable-rate debt) is twelve
months. As of December 31, 2002 and 2001, the Company held derivative notional
value related to strategies categorized as cash-flow hedges of $2.9 billion and
$2.2 billion, respectively. For the years ended December 31, 2002 and 2001, the
net reclassifications from AOCI to earnings resulting from the discontinuance of
cash-flow hedges were immaterial.
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Specific Strategies
The Company's primary use of cash flow hedging is to use interest-rate swaps as
an "asset hedging" strategy, in order to convert interest receipts on
floating-rate fixed maturity investments to fixed rates. When multiple assets
are designated in a hedging relationship under SFAS No. 133, a homogeneity test
is performed to ensure that the assets react similarly to changes in market
conditions. To satisfy this requirement, at inception of the hedge, fixed
maturity investments with identical variable rates are grouped together (for
example: 1-month LIBOR or 3-month LIBOR, not both).
The Company enters into "receive fixed/pay variable" interest rate swaps to
hedge the variability in the first LIBOR-based interest payments received on
each pool of eligible variable rate fixed maturity investments. Ineffectiveness
is measured by comparing the present value of the variable rate pay side of the
swaps to the present value of the first anticipated variable rate interest
receipts on the hedged fixed maturity investments. At December 31, 2002 and
2001, the Company held $2.5 billion and $1.9 billion, respectively, in
derivative notional value related to this strategy.
The Company enters into foreign currency swaps to hedge the variability in cash
flow associated with certain foreign dominated fixed maturity investments. The
foreign currency swap agreements are structured to match the foreign currency
cash flows of the foreign dominated fixed maturity investments (i.e.
par/notional value, currency, initial cost, maturity date, and payment dates).
If hedge ineffectiveness exists, it is recorded as net realized capital gain or
loss. Notional value of foreign currency swaps at December 31, 2002 and 2001
totaled $386 and $144, respectively.
FAIR-VALUE HEDGES
General
For the year ended December 31, 2002 and 2001, the Company's gross gains and
losses representing the total ineffectiveness of all fair-value hedges were
immaterial, with the net impact reported as realized capital gains/ losses. All
components of each derivative's gain or loss are included in the assessment of
hedge effectiveness. As of December 31, 2002 and 2001, the Company held $159 and
$215, respectively, in derivative notional value related to strategies
categorized as fair-value hedges.
Specific Strategies
The Company purchases interest rate caps and sells interest rate floor contracts
in an "asset hedging" strategy utilized to offset corresponding interest rate
caps and floors that exist in certain of its variable-rate fixed maturity
investments. The standalone interest rate cap and floor contracts are structured
to offset those embedded in the hedged investment. The calculation of
ineffectiveness involves a comparison of the present value of the cumulative
change in the expected future cash flows on the interest rate cap/floor and the
present value of the cumulative change in the expected future interest cash
flows that are hedged on the fixed maturity investment. If hedge ineffectiveness
exists, it is recorded as net realized capital gain or loss. All hedges
involving variable rate bonds with embedded interest rate caps and floors are
perfectly matched with respect to notional values, payment dates, maturity,
index, and the hedge relationship does not contain any other basis differences.
No component of the hedging instrument's fair value is excluded from the
determination of effectiveness. At December 31, 2002 and 2001 the Company held
$129 and $149, respectively, in derivative notional value related to this
strategy.
OTHER INVESTMENT AND RISK MANAGEMENT ACTIVITIES
General
The Company's other investment and risk management activities primarily relate
to strategies used to reduce economic risk or enhance income, and do not receive
hedge accounting treatment. Swap agreements, interest rate cap and floor
agreements and option contracts are used to reduce economic risk. Income
enhancement and replication transactions include the use of written covered call
options, which offset embedded equity call options, total return swaps and
synthetic replication of cash market instruments. The change in the value of all
derivatives held for other investment and risk management purposes is reported
in current period earnings as realized capital gains or losses. For the year
ended December 31, 2002 and 2001, the Company recognized after-tax net losses of
$7 and $14, respectively (reported as net realized capital gains and losses in
the statement of income), which represented the total change in value for other
derivative-based strategies which do not qualify for hedge accounting under SFAS
No. 133. As of December 31, 2002 and 2001, the Company held $3.4 billion and
$2.7 billion, respectively in derivative notional value related to strategies
categorized as Other Investment and Risk Management Activities.
Specific Strategies
The Company issues liability contracts in which policyholders have the option to
surrender their policies at book value and that guarantee a minimum credited
rate of interest. Typical products with these features include Whole Life,
Universal Life and Repetitive Premium Variable Annuities. The Company uses
interest rate cap and swaption contracts as an economic hedge, classified for
internal purposes as a "liability hedge", thereby mitigating the Company's loss
in a rising interest rate environment. The Company is exposed to the situation
where interest rates rise and the Company is not able to raise its credited
rates to competitive yields. The policyholder can then surrender at book value
while the underlying bond portfolio may experience a loss. The increase in yield
in a rising interest rate environment due to the interest rate cap and swaption
contracts may be used to raise credited rates, increasing the Company's
competitiveness and reducing the policyholder's incentive to surrender. In
accordance with Company policy, the amount of notional value will not exceed the
book value of the liabilities being hedged and the term of the derivative
contract will not
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exceed the average maturity of the liabilities. As of December 31, 2002 and
2001, the Company held $516 in derivative notional value related to this
strategy.
When terminating certain hedging relationships, the Company will enter a
derivative contract with terms and conditions that directly offset the original
contract, thereby offsetting its changes in value from that date forward. The
Company dedesignates the original contract and records the changes in value of
both the original contract and the new offsetting contract through realized
capital gains and losses. At December 31, 2002 and 2001, the Company held
$1.4 billion and $1.0 billion in derivative notional value related to this
strategy.
Periodically, the Company enters into swap agreements in which the Company
assumes credit exposure from a single entity, referenced index or asset pool.
The Company assumes credit exposure to individual entities through credit
default swaps. In assuming this obligation, the Company receives a periodic fee.
These contracts obligate the Company to compensate the derivative counterparty
in the event of bankruptcy, failure to pay or restructuring, and in return, the
company will receive a debt obligation of the referenced entity. The maximum
potential future exposure to the Company is the notional value of the swap
contracts, which was $49 after tax as of December 31, 2002. The market value of
these swaps was immaterial at December 31, 2002. The Company did not transact in
credit default swaps in 2001. The term of the credit default swaps range from
3-5 years. The Company also assumes exposure to an asset pool through total
return swaps. As of December 31, 2002 and 2001, the maximum potential future
exposure to the Company $68 and $10 after tax, respectively. The market value of
these swaps at December 31, 2002 and 2001 was a loss of $42 and $51,
respectively, which was reported on the balance sheet in Other Liabilities. The
term of the total return swaps range from 6 months to 10 years. These
arrangements are entered into to modify portfolio duration or to increase
diversification while controlling transaction costs. At December 31, 2002 and
2001, the Company held $307 and $230, respectively, in derivative notional value
related to this strategy.
The Company issues an option in an "asset hedging" strategy utilized to monetize
the option embedded in certain of its fixed maturity investments. The Company
receives a premium for issuing the freestanding option. The written option
grants the holder the ability to call the bond at a predetermined strike value.
The maximum potential future economic exposure is represented by the then fair
value of the bond in excess of the strike value which is expected to be entirely
offset by the appreciation in the value of the embedded long option. The
structure is designed such that the fixed maturity investment and freestanding
option have identical expected lives, typically 2-5 years. At December 31, 2002
and 2001, the Company held $371 and $402, respectively, in derivative notional
value related to the written option and held $371 and $402, respectively, of
derivative notional value related to the embedded option.
Periodically, in order to mitigate its foreign currency risk, the Company enters
into a costless collar strategy. Accordingly, the Company purchases foreign put
options and writes foreign call options to hedge the foreign currency exposures
in certain of its foreign fixed maturity investments. At December 31, 2002, the
maximum potential exposure to the Company was $1 after tax. At December 31, 2002
and 2001, the Company held $275 and $0, respectively, in derivative notional
value related to this strategy. The term of the options is up to 4 months.
(i) SEPARATE ACCOUNTS
Hartford Life Insurance Company maintains separate account assets and
liabilities, which are reported at fair value. Separate account assets are
segregated from other investments and investment income and gains and losses
accrue directly to the policyholder. Separate accounts reflect two categories of
risk assumption: non-guaranteed separate accounts, wherein the policyholder
assumes the investment risk, and guaranteed separate accounts, wherein Hartford
Life Insurance Company contractually guarantees either a minimum return or
account value to the policyholder. The fees earned for administrative and
contractholder maintenance services performed for these separate accounts are
included in fee income.
(j) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, which include commissions and certain other expenses
that vary with and are primarily associated with acquiring business, are
deferred and amortized over the estimated lives of the contracts, usually 20
years. The deferred costs are recorded as an asset commonly referred to as
deferred policy acquisition costs ("DAC"). At December 31, 2002 and 2001, the
carrying value of the Company's DAC was $5.0 billion and $4.8 billion,
respectively.
DAC related to traditional policies are amortized over the premium-paying period
in proportion to the present value of annual expected premium income.
Adjustments are made each year to recognize actual experience as compared to
assumed experience for the current period.
DAC related to investment contracts and universal life-type contracts are
deferred and amortized using the retrospective deposit method. Under the
retrospective deposit method, acquisition costs are amortized in proportion to
the present value of estimated gross profits ("EGPs") from projected investment,
mortality and expense margins and surrender charges. A portion of the DAC
amortization is allocated to realized gains and losses. The DAC balance is also
adjusted by an amount that represents the change in amortization of deferred
policy acquisition costs that would have been required as a charge or credit to
operations had unrealized amounts been realized. Actual gross profits can vary
from management's estimates, resulting in increases or decreases in the rate of
amortization.
The Company regularly evaluates its estimated gross profits to determine if
actual experience or other evidence suggests that earlier estimates should be
revised. Several
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assumptions considered to be significant in the development of EGPs include
separate account fund performance, surrender and lapse rates, estimated interest
spread and estimated mortality. The separate account fund performance assumption
is critical to the development of the EGPs related to the Company's variable
annuity and variable life insurance businesses. The average long-term rate of
assumed separate account fund performance used in estimating gross profits for
the variable annuity and variable life business was 9% at December 31, 2002 and
2001. For all other products including fixed annuities and other universal life
type contracts the average assumed investment yield ranged from 5% to 8.5% for
the years ended December 31, 2002 and 2001.
Due to the increased volatility and precipitous decline experienced by the U.S.
equity markets in 2002, the Company enhanced its DAC evaluation process during
the course of the year. The Company developed sophisticated modeling
capabilities, which allowed it to run 250 stochastically determined scenarios of
separate account fund performance. These scenarios were then utilized to
calculate a reasonable range of estimates for the present value of future gross
profits. This range is then compared to the present value of future gross
profits currently utilized in the DAC amortization model. As of December 31,
2002, the current estimate falls within the reasonable range, and therefore, the
Company does not believe there is evidence to suggest a revision to the EGPs is
necessary.
Additionally, the Company has performed various sensitivity analyses with
respect to separate account fund performance to provide an indication of future
separate account fund performance levels, which could result in the need to
revise future EGPs. The Company has estimated that a revision to the future EGPs
is unlikely in 2003 in the event that the separate account fund performance
meets or exceeds the Company's long-term assumption of 9% and that a revision is
likely if the overall separate account fund performance is negative for the
year. In the event that separate account fund performance falls between 0% and
9% during 2003, the Company will need to evaluate the actual gross profits
versus the mean EGPs generated by the stochastic DAC analysis and determine
whether or not to make a revision to the future EGPs. Factors that will
influence this determination include the degree of volatility in separate
account fund performance, when during the year performance becomes negative and
shifts in asset allocation within the separate account made by policyholders.
The overall return generated by the separate account is dependent on several
factors, including the relative mix of the underlying sub-accounts among bond
funds and equity funds as well as equity sector weightings. The Company's
overall separate account fund performance has been reasonably correlated to the
overall performance of the S&P 500 Index, although no assurance can be provided
that this correlation will continue in the future.
Should the Company change its assumptions utilized to develop EGPs (commonly
referred to as "unlocking") the Company would record a charge (or credit) to
bring its DAC balance to the level it would have been had EGPs been calculated
using the new assumptions from the date of each policy. The Company evaluates
all critical assumptions utilized to develop EGPs (e.g. lapse, mortality) and
will make a revision to future EGPs to the extent that actual experience is
significantly different than expected.
The overall recoverability of the DAC asset is dependent on the future
profitability of the business. The Company tests the aggregate recoverability of
the DAC asset by comparing the amounts deferred to total EGPs. In addition, the
Company routinely stress tests its DAC asset for recoverability against severe
declines in its separate account assets, which could occur if the equity markets
experienced another significant sell-off, as the majority of policyholders'
money held in the separate accounts is invested in the equity market.
(k) RESERVE FOR FUTURE POLICY BENEFITS
Hartford Life establishes and carries as liabilities actuarially determined
reserves which are calculated to meet the Company's future obligations. Reserves
for life insurance and disability contracts are based on actuarially recognized
methods using prescribed morbidity and mortality tables in general use in the
United States, which are modified to reflect the Company's actual experience
when appropriate. These reserves are computed at amounts that, with additions
from estimated premiums to be received and with interest on such reserves
compounded annually at certain assumed rates, are expected to be sufficient to
meet the Company's policy obligations at their maturities or in the event of an
insured's disability or death. Reserves also include unearned premiums, premium
deposits, claims incurred but not reported and claims reported but not yet paid.
Reserves for assumed reinsurance are computed in a manner that is comparable to
direct insurance reserves.
Liabilities for future policy benefits are computed by the net level premium
method using interest assumptions ranging from 3% to 11% and withdrawal and
mortality assumptions appropriate at the time the policies were issued. Claim
reserves, which are the result of sales of group long-term and short-term
disability, stop loss, and Medicare supplement, are state at amounts determined
by estimates on individual cases and estimates of unreported claims based on
past experience.
(l) OTHER POLICYHOLDER FUNDS
Other policyholder funds and benefits payable include reserves for investment
contracts without life contingencies, corporate owned life insurance and
universal life insurance contracts. Of the amounts included in this item,
$20.6 billion and $14.9 billion, as of December 31, 2002 and 2001, respectively,
represent net policyholder obligations. The liability for policy benefits for
universal life-type contracts is equal to the balance that accrues to the
benefit of policyholders, including credited interest, amounts that have been
assessed to compensate the Company for services to be performed over future
periods, and any amounts previously assessed against policyholders that are
refundable on termination of the contract.
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For investment contracts, policyholder liabilities are equal to the accumulated
policy account values, which consist of an accumulation of deposit payments plus
credited interest, less withdrawals and amounts assessed through the end of the
period.
(m) 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 investment and 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. Traditional life and the majority of
the Company's accident and health products are long duration contracts, and
premiums are recognized as revenue when due from policyholders. Retrospective
and contingent commissions and other related expenses are incurred and recorded
in the same period that the retrospective premiums are recorded or other
contract provisions are met.
(n) FOREIGN CURRENCY TRANSLATION
Foreign currency translation gains and losses are reflected in stockholder's
equity as a component of accumulated other comprehensive income. 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. Gains and losses on
foreign currency transactions are reflected in earnings. The national currencies
of the international operations are their functional currencies.
(o) DIVIDENDS TO POLICYHOLDERS
Policyholder dividends are accrued using an estimate of the amount to be paid
based on underlying contractual obligations under policies and applicable state
laws.
Participating life insurance in force accounted for 6%, 8% and 17% as of
December 31, 2002, 2001 and 2000, respectively, of total life insurance in
force. Dividends to policyholders were $65, $68 and $67 for the years ended
December 31, 2002, 2001 and 2000, 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 the stockholder, the policyholders' share of net income on those
contracts that cannot be distributed is excluded from stockholder's equity by a
charge to operations and a credit to a liability.
(p) REINSURANCE
Written premiums, earned premiums and incurred insurance losses and loss
adjustment expense all reflect the net effects of assumed and ceded reinsurance
transactions. Assumed reinsurance refers to our acceptance of certain insurance
risks that other insurance companies have underwritten. Ceded reinsurance means
other insurance companies have agreed to share certain risks the Company has
underwritten. Reinsurance accounting is followed for assumed and ceded
transactions when the risk transfer provisions of SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," have
been met.
(q) INCOME TAXES
The Company recognizes taxes payable or refundable for the current year and
deferred taxes for the future tax consequences of differences between the
financial reporting and tax basis of assets and liabilities. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years the temporary differences are expected to reverse.
3. SEPTEMBER 11, 2001
As a result of September 11, the Company recorded an estimated loss amounting to
$9, net of taxes and reinsurance, in the third quarter of 2001. The Company
based the loss estimate upon a review of insured exposures using a variety of
assumptions and actuarial techniques, including estimated amounts for unknown
and unreported policyholder losses and costs incurred in settling claims. Also
included was an estimate of amounts recoverable under the Company's ceded
reinsurance programs. In the first quarter of 2002, the Company recognized a $3
after-tax benefit related to favorable development of reserves related to
September 11. As a result of the uncertainties involved in the estimation
process, final claims settlement may vary from present estimates.
4. SALE OF SUDAMERICANA
HOLDING S.A.
On September 7, 2001, Hartford Life Insurance Company completed the sale of its
ownership interest in an Argentine subsidiary, Sudamericana Holding S.A. The
Company recognized an after-tax net realized capital loss of $11 related to the
sale.
F-15
<Page>
5. INVESTMENTS AND DERIVATIVE INSTRUMENTS
(a) COMPONENTS OF NET INVESTMENT INCOME
<Table>
<Caption>
For the years ended
December 31,
----------------------
2002 2001 2000
----------------------
Interest income from fixed maturities $1,235 $1,105 $ 959
Interest income from policy loans 251 304 305
Income from other investments 114 99 75
----------------------
Gross investment income 1,600 1,508 1,339
Less: Investment expenses 17 13 13
----------------------
NET INVESTMENT INCOME $1,583 $1,495 $1,326
----------------------
</Table>
(b) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
<Table>
<Caption>
For the years ended
December 31,
---------------------
2002 2001 2000
---------------------
Fixed maturities $(285) $(52) $(106)
Equity securities (4) (17) 3
Real estate and other -- (23) 9
Change in liability to policyholders for net realized
capital gains 1 1 9
---------------------
NET REALIZED CAPITAL GAINS (LOSSES) $(288) $(91) $ (85)
---------------------
</Table>
(c) NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON EQUITY SECURITIES
<Table>
<Caption>
For the years ended
December 31,
--------------------
2002 2001 2000
--------------------
Gross unrealized capital gains $ 2 $ 1 $ 2
Gross unrealized capital losses (19) (8) (5)
--------------------
Net unrealized capital gains (losses) (17) (7) (3)
Deferred income taxes and other items (6) (1) (1)
--------------------
Net unrealized capital gains (losses), net of tax (11) (6) (2)
Balance -- beginning of year (6) (2) 5
--------------------
NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON EQUITY
SECURITIES $ (5) $(4) $(7)
--------------------
</Table>
(d) NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES
<Table>
<Caption>
For the years ended
December 31,
---------------------
2002 2001 2000
---------------------
Gross unrealized capital gains $1,389 $ 514 $ 269
Gross unrealized capital losses (278) (305) (231)
Unrealized capital (gains) losses credited to policyholders (58) (24) (10)
---------------------
Net unrealized capital gains (losses) 1,053 185 28
Deferred income taxes and other items 579 65 10
---------------------
Net unrealized capital gains (losses), net of tax 474 120 18
Balance -- beginning of year 120 18 (260)
---------------------
NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED
MATURITIES $ 354 $ 102 $ 278
---------------------
</Table>
F-16
<Page>
(e) FIXED MATURITY INVESTMENTS
<Table>
<Caption>
As of December 31, 2002
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) $ 255 $ 9 $ -- $ 264
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) -- asset backed 2,063 64 (2) 2,125
States, municipalities and political subdivisions 27 4 (1) 30
International governments 422 43 (1) 464
Public utilities 1,160 70 (29) 1,201
All other corporate, including international 11,094 822 (128) 11,788
All other corporate -- asset backed 7,152 348 (100) 7,400
Short-term investments 940 1 -- 941
Certificates of deposit 561 28 (17) 572
Redeemable preferred stock 1 -- -- 1
------------------------------------------
TOTAL FIXED MATURITIES $23,675 $1,389 $(278) $24,786
------------------------------------------
</Table>
<Table>
<Caption>
As of December 31, 2001
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) $ 247 $ 15 $ (2) $ 260
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) -- asset backed 1,179 26 (3) 1,202
States, municipalities and political subdivisions 44 4 (1) 47
International governments 312 18 (3) 327
Public utilities 994 14 (26) 982
All other corporate, including international 8,829 283 (146) 8,966
All other corporate -- asset backed 5,816 142 (104) 5,854
Short-term investments 1,008 -- -- 1,008
Certificates of deposit 503 12 (20) 495
Redeemable preferred stock 1 -- -- 1
--------------------------------------------
TOTAL FIXED MATURITIES $18,933 $514 $(305) $19,142
--------------------------------------------
</Table>
The amortized cost and fair value of fixed maturity investments as of
December 31, 2002 by contractual maturity year are shown below. Estimated
maturities differ from contractual maturities due to call or prepayment
provisions. Asset backed securities, including mortgage backed securities and
collateralized mortgage obligations, are distributed to maturity year based on
the Company's estimates of the rate of future prepayments of principal over the
remaining lives of the securities. These estimates are developed using
prepayment speeds provided in broker consensus data. Such estimates are derived
from prepayment speeds experienced at the interest rate levels projected for the
applicable underlying collateral and can be expected to vary from actual
experience.
<Table>
<Caption>
Amortized Fair
Cost Value
--------------------
MATURITY
One year or less $ 3,032 $ 3,051
Over one year through five years 9,166 9,479
Over five years through ten years 6,325 6,708
Over ten years 5,152 5,548
--------------------
TOTAL $23,675 $24,786
--------------------
</Table>
F-17
<Page>
(f) SALES OF FIXED MATURITY AND EQUITY SECURITY INVESTMENTS
Sales of fixed maturities, excluding short-term fixed maturities, for the years
ended December 31, 2002, 2001 and 2000 resulted in proceeds of $5.6 billion,
$4.6 billion and $3.0 billion, gross realized capital gains of $117, $82 and
$29, and gross realized capital losses of $60, $44 and $109, respectively. Sales
of equity security investments for the years ended December 31, 2002, 2001 and
2000 resulted in proceeds of $11, $42 and $15, respectively. There were no
realized gains on sales of equity securities for the years ended December 31,
2002 and 2001. Sales of equity security investments for the year ended
December 31, 2000 resulted in gross realized capital gains of $5. Sales of
equity security investments for the years ended December 31, 2002, 2001 and 2000
resulted in gross realized capital losses of $3, $17 and $2, respectively.
(g) CONCENTRATION OF CREDIT RISK
The Company is not exposed to any concentration of credit risk in fixed
maturities of a single issuer greater than 10% of stockholder's equity.
(h) DERIVATIVE INSTRUMENTS
The notional amounts of derivative contracts represent the basis upon which pay
or receive amounts are calculated and are not reflective of credit risk.
Notional amounts pertaining to derivative instruments (excluding guaranteed
separate accounts) totaled $6.5 billion at December 31, 2002 and $5.1 billion at
December 31, 2001.
The Company uses derivative instruments in its management of market risk
consistent with four risk management strategies: hedging anticipated
transactions, hedging liability instruments, hedging invested assets and hedging
portfolios of assets and/or liabilities.
A reconciliation between notional amounts as of December 31, 2002 and 2001 by
derivative type and strategy is as follows:
<Table>
<Caption>
BY DERIVATIVE TYPE
--------------------------------------------------------------------
December 31, 2001 Maturities/ December 31, 2002
Notional Amount Additions Terminations (1) Notional Amount
--------------------------------------------------------------------
Caps $ 577 $ -- $ 20 $ 557
Floors 295 -- 20 275
Swaps/Forwards 3,302 1,694 462 4,534
Futures 77 110 187 --
Options 894 438 229 1,103
--------------------------------------------------------------------
TOTAL $5,145 $2,242 $918 $6,469
--------------------------------------------------------------------
BY STRATEGY
--------------------------------------------------------------------
Liability $ 677 $ -- $ -- $ 677
Anticipatory 77 110 187 --
Asset 4,251 2,132 731 5,652
Portfolio 140 -- -- 140
--------------------------------------------------------------------
TOTAL $5,145 $2,242 $918 $6,469
--------------------------------------------------------------------
</Table>
(1) During 2002, the Company had no significant gain or loss on terminations
of hedge positions using derivative financial instruments.
(i) COLLATERAL ARRANGEMENTS
Hartford Life Insurance Company entered into various collateral arrangements
which require both the pledging and accepting of collateral in connection with
its derivative instruments and repurchase agreements. As of December 31, 2002
and 2001, collateral pledged has not been separately reported in the
Consolidated Balance Sheet. The classification and carrying amounts of
collateral pledged at December 31, 2002 and 2001 were as follows:
<Table>
<Caption>
2002 2001
--------------------------------
ASSETS
U.S. Gov't and Gov't agencies and authorities (guaranteed
and sponsored) $ -- $ 1
U.S. Gov't and Gov't agencies and authorities (guaranteed
and sponsored -- asset backed 8 --
--------------------------------
$ 8 $ 1
--------------------------------
</Table>
At December 31, 2002 and 2001, Hartford Life Insurance Company had accepted
collateral consisting of cash, U.S. Government, and U.S. Government agency
securities with a fair value of $407 and $148, respectively. At December 31,
2002 and 2001, only cash collateral of $173 and $89, respectively, was invested
and recorded on the balance sheet in fixed maturities and other liabilities. The
Company is only permitted by contract to sell or repledge the noncash collateral
in the event of a default by the counterparty and none of the collateral has
been sold or repledged at December 31, 2002 and 2001. As of December 31, 2002
and 2001 all collateral accepted was held in separate custodial accounts.
F-18
<Page>
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosure about Fair Value of Financial Instruments", requires
disclosure of fair value information of financial instruments. For certain
financial instruments where quoted market prices are not available, other
independent valuation techniques and assumptions are used. Because considerable
judgment is used, these estimates are not necessarily indicative of amounts that
could be realized in a current market exchange. SFAS No. 107 excludes certain
financial instruments from disclosure, including insurance contracts other than
financial guarantees and investment contracts. Hartford Life Insurance Company
uses the following methods and assumptions in estimating the fair value of each
class of financial instrument.
Fair value for fixed maturities and marketable equity securities approximates
those quotations published by applicable stock exchanges or received from other
reliable sources.
For policy loans, carrying amounts approximate fair value.
Fair value of other investments, which primarily consist of partnership
investments, is based on external market valuations from partnership management.
Other investments also include mortgage loans, whereby the carrying value
approximates fair value.
Derivative instruments are reported at fair value based upon internally
established valuations that are consistent with external valuation models,
quotations furnished by dealers in such instrument or market quotations. Other
policyholder funds and benefits payable fair value information is determined by
estimating future cash flows, discounted at the current market rate.
The carrying amount and fair values of Hartford Life Insurance Company's
financial instruments as of December 31, 2001 and 2000 were as follows:
<Table>
<Caption>
2002 2001
------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------
ASSETS
Fixed maturities $24,786 $24,786 $19,142 $19,142
Equity securities 120 120 64 64
Policy loans 2,895 2,895 3,278 3,278
Other investments 918 918 1,136 1,136
LIABILITIES
Other policyholder funds (1) 16,266 16,566 15,648 15,514
------------------------------------
</Table>
(1) Excludes universal life insurance contracts, including corporate owned
life insurance.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142 and accordingly
ceased all amortization of goodwill.
The following tables show net income for the years ended December 31, 2002, 2001
and 2000, with the 2001 and 2000 periods adjusted for goodwill amortization
recorded.
<Table>
<Caption>
2002 2001 2000
----------------
NET INCOME
Income before cumulative effect of accounting changes $426 $652 $487
Goodwill amortization, net of tax -- 4 --
----------------
Adjusted income before cumulative effect of accounting
changes 426 656 487
Cumulative effect of accounting changes, net of tax -- (6) --
----------------
ADJUSTED NET INCOME $426 $650 $487
----------------
</Table>
The following table shows the Company's acquired intangible assets that continue
to be subject to amortization and aggregate amortization expense. Except for
goodwill, the Company has no intangible assets with indefinite useful lives.
<Table>
<Caption>
2002 2001
----------------------------------------------
Accumulated Accumulated
Carrying Net Carrying Net
Amount Amortization Amount Amortization
----------------------------------------------
AMORTIZED INTANGIBLE ASSETS
PRESENT VALUE OF FUTURE PROFITS $525 $80 $568 $37
----------------------------------------------
</Table>
Net amortization expense for the years ended December 31, 2002, 2001 and 2000
was $43, $37 and $0, respectively.
F-19
<Page>
Estimated future net amortization expense for the succeeding five years is as
follows.
<Table>
<Caption>
For the year ended December 31,
- --------------------------------------------------------------------
2003 $42
2004 $39
2005 $36
2006 $34
2007 $31
- --------------------------------------------------------------------
</Table>
8. SEPARATE ACCOUNTS
Hartford Life Insurance Company maintained separate account assets and
liabilities totaling $105.3 billion and $114.3 billion at December 31, 2002 and
2001, respectively, which are reported at fair value. Separate account assets,
which are segregated from other investments, reflect two categories of risk
assumption: non-guaranteed separate accounts totaling $93.8 billion and
$104.2 billion at December 31, 2002 and 2001, respectively, wherein the
policyholder assumes substantially all the investment risks and rewards, and
guaranteed separate accounts totaling $11.5 and $10.1 billion at December 31,
2002 and 2001, respectively, wherein Hartford Life Insurance Company
contractually guarantees either a minimum return or account value to the
policyholder. Included in non-guaranteed separate account assets were policy
loans totaling $384 and $575 at December 31, 2002 and 2001, respectively. Net
investment income (including net realized capital gains and losses) and interest
credited to policyholders on separate account assets are not reflected in the
Consolidated Statements of Income.
Separate account management fees and other revenues were $1.1 billion,
$1.2 billion and $1.3 billion in 2002, 2001 and 2000, respectively. The
guaranteed separate accounts include fixed market value adjusted (MVA)
individual annuities and modified guaranteed life insurance. The average
credited interest rate on these contracts was 6.3% and 6.4% as of December 31,
2002 and 2001, respectively. The assets that support these liabilities were
comprised of $11.1 billion and $9.8 billion in fixed maturities at December 31,
2002 and 2001, respectively, and $385 and $234 of other invested assets at
December 31, 2002 and 2001, respectively. The portfolios are segregated from
other investments and are managed to minimize liquidity and interest rate risk.
In order to minimize the risk of disintermediation associated with early
withdrawals, fixed MVA annuity and modified guaranteed life insurance contracts
carry a graded surrender charge as well as a market value adjustment. Additional
investment risk is hedged using a variety of derivatives which totaled $135 and
$37 in carrying value and $3.6 billion and $3.2 billion in notional amounts as
of December 31, 2002 and 2001, respectively.
9. STATUTORY RESULTS
<Table>
<Caption>
For the years ended December 31,
----------------------------------
2002 2001 2000
----------------------------------
Statutory net income (loss) $ (305) $ (485) $ 283
----------------------------------
Statutory capital and surplus $2,354 $2,412 $1,972
----------------------------------
</Table>
A significant percentage of the consolidated statutory surplus is permanently
reinvested or is subject to various state regulatory restrictions which limit
the payment of dividends without prior approval. The total amount of statutory
dividends which may be paid by the insurance subsidiaries of the Company in
2003, without prior regulatory approval, is estimated to be $235.
Hartford Life Insurance Company and its domestic insurance subsidiaries prepare
their statutory financial statements in accordance with accounting practices
prescribed by the applicable state of domicile. 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 NAIC adopted the Codification of Statutory Accounting Principles
("Codification") in March 1998. The effective date for the statutory accounting
guidance was January 1, 2001. Each of Hartford Life Insurance Company's
domiciliary states has adopted Codification and the Company has made the
necessary changes in its statutory reporting required for implementation. The
overall impact of applying the new guidance resulted in a one-time statutory
cumulative transition benefit of approximately $38 in statutory surplus in 2001.
10. POSTRETIREMENT BENEFIT AND SAVINGS PLANS
(a) PENSION PLANS
The Company's employees are included in The Hartford's non-contributory defined
benefit pension and postretirement health care and life insurance benefit plans.
Defined benefit pension expense, allocated by The Hartford to Hartford Life
Insurance Company, was $10, $11 and $5 in 2002, 2001 and 2000, respectively.
Postretirement health care and life insurance benefits expense, allocated by The
Hartford, was not material to the results of operations for 2002, 2001 and 2000.
(b) INVESTMENT AND SAVINGS PLAN
Substantially all the Company's U.S. employees are eligible to participate in
The Hartford's Investment and Savings Plan. The cost to Hartford Life Insurance
Company for this plan was approximately $5, $6 and $5 in 2002, 2001 and 2000,
respectively.
11. REINSURANCE
Hartford Life Insurance Company cedes insurance to other insurers in order to
limit its maximum losses and to
F-20
<Page>
diversify its exposures. Such transfer does not relieve Hartford Life Insurance
Company of its primary liability and, as such, failure of reinsurers to honor
their obligations could result in losses to Hartford Life Insurance Company. The
Company also assumes reinsurance from other insurers and is a member of and
participates in several reinsurance pools and associations. Hartford Life
Insurance Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk. As of December 31, 2002, Hartford Life
had no reinsurance recoverables and related concentrations of credit risk
greater than 10% of the Company's stockholders' equity.
In accordance with normal industry practice, Hartford Life Insurance Company is
involved in both the cession and assumption of insurance with other insurance
and reinsurance companies. As of December 31, 2002, the largest amount of life
insurance retained on any one life by any one of the life operations was
approximately $2.5. In addition, the Company reinsures the majority of the
minimum death benefit guarantees and the guaranteed withdrawal benefits offered
in connection with its variable annuity contracts.
Insurance net retained premiums were comprised of the following:
<Table>
<Caption>
For the years ended December 31,
----------------------------------
2002 2001 2000
----------------------------------
Gross premiums $2,815 $3,152 $2,885
Reinsurance assumed 45 79 44
Reinsurance ceded (715) (980) (723)
----------------------------------
NET RETAINED PREMIUMS $2,145 $2,251 $2,206
----------------------------------
</Table>
Hartford Life Insurance Company reinsures certain of its risks to other
reinsurers under yearly renewable term, coinsurance, and modified coinsurance
arrangements. Yearly renewable term and coinsurance arrangements result in
passing a portion of the risk to the reinsurer. Generally, the reinsurer
receives a proportionate amount of the premiums less an allowance for
commissions and expenses and is liable for a corresponding proportionate amount
of all benefit payments. Modified coinsurance is similar to coinsurance except
that the cash and investments that support the liabilities for contract benefits
are not transferred to the assuming company, and settlements are made on a net
basis between the companies.
The Company is currently in arbitration with one of its reinsurers related to
this reinsurance (see further discussion in Note 13(a)).
The cost of reinsurance related to long-duration contracts is accounted for over
the life of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies. Insurance recoveries on ceded
reinsurance contracts, which reduce death and other benefits were $670, $693 and
$578 for the years ended December 31, 2002, 2001 and 2000, respectively.
Hartford Life Insurance Company also assumes reinsurance from other insurers.
Hartford Life Insurance Company records a receivable for reinsured benefits paid
and the portion of insurance liabilities that are reinsured, net of a valuation
allowance, if necessary. The amounts recoverable from reinsurers are estimated
based on assumptions that are consistent with those used in establishing the
reserves related to the underlying reinsured contracts. Management believes the
recoverables are appropriately established; however, in the event that future
circumstances and information require Hartford Life Insurance Company to change
its estimates of needed loss reserves, the amount of reinsurance recoverables
may also require adjustments.
Hartford Life Insurance Company maintains certain reinsurance agreements with
HLA, whereby the Company cedes both group life and group accident and health
risk. Under these treaties, the Company ceded group life premium of $96, $178
and $101 in 2002, 2001 and 2000, respectively, and accident and health premium
of $373, $418 and $429, respectively, to HLA.
12. INCOME TAX
Hartford Life Insurance 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, generally will be determined as though the Company were filing a
separate Federal income tax return with current credit for net losses to the
extent the losses provide a benefit in the consolidated return.
The Company is included in The Hartford's consolidated Federal income tax
return. The Company's effective tax rate was 1%, 6% and 28% in 2002, 2001 and
2000, respectively.
F-21
<Page>
Income tax expense (benefit) is as follows:
<Table>
<Caption>
For the years ended December 31,
----------------------------------
2002 2001 2000
----------------------------------
Current $ 4 $(202) $121
Deferred (2) 246 73
----------------------------------
INCOME TAX EXPENSE $ 2 $ 44 $194
----------------------------------
</Table>
A reconciliation of the tax provision at the U.S. Federal statutory rate to the
provision (benefit) for income taxes is as follows:
<Table>
<Caption>
For the years ended December 31,
----------------------------------
2002 2001 2000
----------------------------------
Tax provision at the U.S. federal statutory rate $150 $244 $238
Tax preferred investments (63) (60) (24)
IRS audit settlement (See Note 13(c)) (76) -- (24)
Tax adjustment (See Note 13(c)) -- (144) --
Foreign related investments (6) -- --
Other (3) 4 4
----------------------------------
TOTAL $ 2 $ 44 $194
----------------------------------
</Table>
Deferred tax assets (liabilities) include the following as of December 31:
<Table>
<Caption>
2001 2000
------------------------
Tax basis deferred policy acquisition costs $ 699 $ 737
Financial statement deferred policy acquisition costs and
reserves (724) (494)
Employee benefits 7 12
Net unrealized capital losses (gains) on securities (422) (95)
Net operating loss carryforward/Minimum tax credits 249 64
Investments and other (52) (235)
------------------------
TOTAL $(243) $ (11)
------------------------
</Table>
Hartford Life Insurance Company had a current tax receivable of $89 and $144 as
of December 31, 2002 and 2001, respectively.
Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax Act
of 1959 permitted the deferral from taxation of a portion of statutory income
under certain circumstances. In these situations, the deferred income was
accumulated in a "Policyholders' Surplus Account" and, based on current tax law,
will be taxable in the future only under conditions which management considers
to be remote; therefore, no Federal income taxes have been provided on the
balance in this account, which for tax return purposes was $104 as of
December 31, 2002.
13. COMMITMENTS AND CONTINGENT LIABILITIES
(a) LITIGATION
Hartford Life Insurance Company is or may become involved in various legal
actions, in the normal course of its business, in which claims for alleged
economic and punitive damages have been or may be asserted, some for substantial
amounts. Some of the pending litigation has been filed as purported class
actions and some actions have been filed in certain jurisdictions that permit
punitive damage awards that are disproportionate to the actual damages incurred.
Although there can be no assurances, at the present time, the Company does not
anticipate that the ultimate liability arising from potential, pending or
threatened legal actions, after consideration of provisions made for estimated
losses and costs of defense, will have a material adverse effect on the
financial condition or operating results of the Company.
On March 15, 2002, a jury in the U.S. District Court for the Eastern District of
Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life
Insurance Company, et al. in favor of Bancorp in the amount of $118. The case
involved claims of patent infringement, misappropriation of trade secrets, and
breach of contract against the Company and its affiliate International Corporate
Marketing Group, Inc. ("ICMG"). The judge dismissed the patent infringement
claim on summary judgment. The jury's award was based on the last two claims. On
August 28, 2002, the Court entered an order awarding Bancorp prejudgment
interest on the breach of contract claim in the amount of $16.
The Company and ICMG have appealed the judgment on the trade secret and breach
of contract claims. Bancorp has cross-appealed the pretrial dismissal of its
patent infringement claim. The Company's management, based on the advice of its
legal counsel, believes that there is a substantial likelihood that the judgment
will not survive at its current amount. Based on the advice of legal counsel
regarding the potential outcomes of this litigation, the Company recorded an $11
after-tax charge in the first
F-22
<Page>
quarter of 2002 to increase litigation reserves associated with this matter.
Should Hartford Life Insurance Company and ICMG not succeed in eliminating or
reducing the judgment, a significant additional expense would be recorded in the
future related to this matter.
The Company is involved in arbitration with one of its primary reinsurers
relating to policies with death benefit guarantees written from 1994 to 1999.
The arbitration involves alleged breaches under the reinsurance treaties.
Although the Company believes that its position in this pending arbitration is
strong, an adverse outcome could result in a decrease to the Company's statutory
surplus and capital and potentially increase the death benefit costs incurred by
the Company in the future. The arbitration hearing was held during the fourth
quarter of 2002, but no decision has been rendered.
(b) LEASES
The rent paid to Hartford Fire for space occupied by the Company was $15, $15
and $15 in 2002, 2001 and 2000, respectively. Future minimum rental commitments
are as follows:
<Table>
2003 $16
2004 16
2005 16
2006 16
2007 16
Thereafter 32
---
TOTAL $112
---
</Table>
The principal executive offices of Hartford Life Insurance Company, together
with its parent, are located in Simsbury, Connecticut. Rental expense is
recognized on a level basis for the facility located in Simsbury, Connecticut,
which expires on December 31, 2009, and amounted to approximately $10, $11 and
$11 in 2002, 2001 and 2000, respectively.
(c) TAX MATTERS
The Company's Federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). Throughout the audit of the 1996-1997 years, the
Company and the IRS have been engaged in an ongoing dispute regarding what
portion of the separate account dividends-received deduction ("DRD") is
deductible by the Company. During 2001 the Company continued its discussions
with the IRS. As part of the Company's due diligence with respect to this issue,
the Company closely monitored the activities of the IRS with respect to other
taxpayers on this issue and consulted with outside tax counsel and advisors on
the merits of the Company's separate account DRD. The due diligence was
completed during the third quarter of 2001 and the Company concluded that it was
probable that a greater portion of the separate account DRD claimed on its filed
returns would be realized. Based on the Company's assessment of the probable
outcome, the Company concluded an additional $144 tax benefit was appropriate to
record in the third quarter of 2001, relating to the tax years 1996-2000.
Additionally, the Company increased its estimate of the separate account DRD
recognized with respect to tax year 2001 from $44 to $60. Furthermore, for tax
year 2002, this amount was $63. During 2000, the Company had recorded a $24 tax
benefit as a result of a final settlement with the IRS on different aspects of
the Company's share of the dividends-received deduction for the 1993-1995 tax
years.
Earlier in 2002, the Company and its IRS agent requested advice from the
National Office of the IRS with respect to certain aspects of the computation of
the separate account DRD that had been claimed by the Company for the 1996-1997
audit period. During September 2002 the IRS National Office issued a ruling that
confirmed that the Company had properly computed the items in question in the
separate account DRD claimed on its 1996-1997 tax returns. Additionally, during
the third quarter, the Company reached agreement with the IRS on all other
issues with respect to the 1996-1997 tax years. The Company recorded a benefit
of $76 during the third quarter of 2002, primarily relating to the tax treatment
of such issues for the 1996-1997 tax years, as well as appropriate carryover
adjustments to the 1998-2002 years. The Company will continue to monitor further
developments surrounding the computation of the separate account DRD, as well as
other items, and will adjust its estimate of the probable outcome of these
issues as developments warrant. 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.
(d) UNFUNDED COMMITMENTS
At December 31, 2002, Hartford Life Insurance Company has outstanding
commitments to fund limited partnership investments totaling $205. These capital
commitments can be called by the partnerships during the commitment period (on
average, 3-6 years) to fund working capital needs or the purchase of new
investments. If the commitment period expires and has not been fully funded,
Hartford Life Insurance Company is not required to fund the remaining unfunded
commitment, but may elect to do so.
14. SEGMENT INFORMATION
Hartford Life Insurance Company is organized into three reportable operating
segments which include Investment Products, Individual Life and Corporate Owned
Life Insurance (COLI). Investment Products offers individual fixed and variable
annuities, retirement plan services and other investment products. Individual
Life sells a variety of life insurance products, including variable life,
universal life, interest sensitive whole life and term life insurance. COLI
primarily offers variable products used by employers to fund non-qualified
benefits or other post-employment benefit obligations as well as leveraged COLI.
The Company includes in "Other" corporate items not directly allocable to any of
its reportable operating segments, as well as certain group benefit products
including group life and group disability insurance that is directly written by
the Company and is substantially ceded to its parent, HLA.
F-23
<Page>
The accounting policies of the reportable operating segments are the same as
those described in the summary of significant accounting policies in Note 2.
Hartford Life Insurance Company evaluates performance of its segments based on
revenues, net income and the segment's return on allocated capital. The Company
charges direct operating expenses to the appropriate segment and allocates the
majority of indirect expenses to the segments based on an intercompany expense
arrangement. Intersegment revenues are not significant and primarily occur
between corporate and the operating segments. These amounts include interest
income on allocated surplus and the allocation of net realized capital gains and
losses through net investment income utilizing the duration of the segment's
investment portfolios. The Company's revenues are primarily derived from
customers within the United States. The Company's long-lived assets primarily
consist of deferred policy acquisition costs and deferred tax assets from within
the United States. The following tables present summarized financial information
concerning the Company's segments as well as the Company's revenues by product.
F-24
<Page>
<Table>
<Caption>
For the years ended December 31,
----------------------------------
2002 2001 2000
----------------------------------
TOTAL REVENUES
Investment Products $ 2,185 $ 2,114 $ 2,068
Individual Life 858 774 545
COLI 592 717 765
Other (195) 50 69
----------------------------------
TOTAL REVENUES $ 3,440 $ 3,655 $ 3,447
----------------------------------
NET INVESTMENT INCOME
Investment Products $ 1,057 $ 867 $ 724
Individual Life 223 204 142
COLI 277 352 366
Other 26 72 94
----------------------------------
TOTAL NET INVESTMENT INCOME $ 1,583 $ 1,495 $ 1,326
----------------------------------
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS AND PVP
Investment Products $ 385 $ 413 $ 477
Individual Life 146 153 127
COLI -- -- --
Other -- -- --
----------------------------------
TOTAL AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS AND
PRESENT VALUE OF FUTURE PROFITS $ 531 $ 566 $ 604
----------------------------------
INCOME TAX EXPENSE (BENEFIT)
Investment Products $ 87 $ 111 $ 150
Individual Life 59 54 38
COLI 14 17 19
Other (158) (138) (13)
----------------------------------
TOTAL INCOME TAX EXPENSE $ 2 $ 44 $ 194
----------------------------------
NET INCOME (LOSS)
Investment Products $ 343 $ 375 $ 354
Individual Life 116 106 70
COLI 31 36 35
Other (64) 129 28
----------------------------------
TOTAL NET INCOME $ 426 $ 646 $ 487
----------------------------------
ASSETS
Investment Products $ 96,865 $106,497 $106,553
Individual Life 8,173 9,248 6,558
COLI 30,326 26,835 23,384
Other 6,737 2,853 2,340
----------------------------------
TOTAL ASSETS $142,101 $145,433 $138,835
----------------------------------
REVENUES BY PRODUCT
Investment Products
Individual Annuities $ 1,364 $ 1,392 $ 1,447
Other 821 722 621
----------------------------------
TOTAL INVESTMENT PRODUCTS 2,185 2,114 2,068
----------------------------------
Individual Life 858 774 545
COLI 592 717 765
----------------------------------
</Table>
F-25
<Page>
15. ACQUISITIONS
On April 2, 2001, Hartford Life acquired the individual life insurance, annuity
and mutual fund businesses of Fortis, Inc. ("Fortis Financial Group" or
"Fortis") for $1.12 billion in cash. The Company effected the acquisition
through several reinsurance agreements with subsidiaries of Fortis and the
purchase of 100% of the stock of Fortis Advisers, Inc. and Fortis
Investors, Inc., wholly-owned subsidiaries of Fortis, Inc. The acquisition was
accounted for as a purchase transaction and, as such, the revenues and expenses
generated by this business from April 2, 2001 forward are included in the
Company's Consolidated Statements of Income.
16. QUARTERLY RESULTS FOR 2002 AND 2001 (UNAUDITED)
<Table>
<Caption>
Three Months Ended
September December
March 31, June 30, 30, 31,
-----------------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
-----------------------------------------------------
Revenues $913 $879 $814 $931 $826 $917 $887 $928
Benefits, claims and expenses 736 685 756 746 747 759 773 769
Net income 132 135 57 129 146 265 91 117
-----------------------------------------------------
</Table>
F-26