<Page>
As filed with the Securities and Exchange Commission on April 5, 2004.
File No. 333-85520
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Post-Effective Amendment No. 2 to
FORM S-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
HARTFORD LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
CONNECTICUT
(State or other jurisdiction of incorporation or organization)
6355
(Primary Standard Industrial Classification Code Number)
06-094148
(I.R.S. Employer Identification Number)
P.O. BOX 2999
HARTFORD, CONNECTICUT 06104-2999
(Address of Principal Executive Office)
MARIANNE O'DOHERTY
HARTFORD LIFE INSURANCE COMPANY
P.O. BOX 2999
HARTFORD, CONNECTICUT 06104-2999
(860) 843-6733
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11 (a)(1)
of this form, check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dated as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a) may determine.
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PART I
<Page>
THE GENERAL ACCOUNT OPTION
UNDER GROUP VARIABLE ANNUITY CONTRACTS [LOGO]
ISSUED BY HARTFORD LIFE INSURANCE COMPANY
This Prospectus describes the General Account Option available under
certain group variable annuity contracts (the "Contract" or "Contracts").
Hartford Life Insurance Company issues the Contracts with respect to its
Separate Accounts known as Hartford Life Insurance Company DC Variable
Account-I and Hartford Life Insurance Company Separate Account Two. This
Prospectus must be accompanied by, and should be read together with, the
prospectus for the Contract and the applicable Separate Accounts.
We issue the Contracts in connection with Deferred Compensation Plans of
tax-exempt and governmental employers. The Contract Owner can allocate
Contributions, in whole or in part, to the General Account Option or to the
Separate Accounts during the period before annuity payments start.
Contributions allocated to the General Account Option become part of our
company assets in our General Account. During the period before annuity
payments start, we credit interest on Contract values allocated to the General
Account Option at a rate of interest that is at least equal to the Guaranteed
Interest Rate stated in the Contract. We can declare rates of interest from
time to time that are greater than the Guaranteed Interest Rate.
The Mortality, Expense Risk and Administrative charge applicable to
Contract values in the Separate Accounts does not apply to the General Account
Option. However, all other charges as described in the prospectus for the
Contract and the Separate Accounts accompanying this Prospectus, including the
Annual Maintenance Fee, Contingent Deferred Sales Charges, Transfer Fee and
Charges for Premium Taxes, apply equally to Contract values held in the
General Account Option.
We generally process distributions and transfers from the General Account
Option within a reasonable period of time after we receive a Participant
request at our Administrative Office. We deduct applicable charges from
distributions and transfers. Under certain conditions, transfers from the
General Account Option may be limited or deferred. Distributions may be
deferred or subject to a market value adjustment that could result in your
receipt of less than the total of your Contributions.
If you decide to become a Contract Owner or a Participant, you should keep
this Prospectus for your records.
This Prospectus is filed with the Securities and Exchange Commission. The
Securities and Exchange Commission doesn't approve or disapprove these
securities or determine if the information in this prospectus is truthful or
complete. Anyone who represents that the Securities and Exchange Commission
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 group variable annuity contract IS NOT:
- A bank deposit or obligation
- Federally insured
- Endorsed by any bank or governmental agency
------------------------------------------------------------------------------
Prospectus Dated: May 3, 2004
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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 Room at 450 Fifth Street, N.W., Washington, D.C.,
20549. You may call the SEC at 1-800-SEC-0330 for further information on the
public reference room. You may also obtain reports, proxy and information
statements and other information about us at the SEC's website at:
www.sec.gov.
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.
In addition, the SEC allows Hartford to "incorporate by reference"
information that Hartford files with the SEC into this prospectus, which means
that incorporated documents are considered part of this prospectus. Hartford
can disclose important information to you by referring you to those documents.
Information that Hartford files with the SEC will automatically update and
supercede the information in this prospectus.
The Annual Report on Form 10-K for the fiscal year ended December 31,
2003, previously filed by Hartford with the Commission under the 1934 Act will
be delivered with this Prospectus and is incorporated herein by reference.
Hartford will provide without charge to each person to whom a copy of this
Prospectus has been delivered, upon the written or oral request of such
person, a copy of the document referred to above which has been incorporated
by reference in this Prospectus, other than exhibits to such document.
Requests for such copies should be directed to Hartford Life Insurance
Company, P.O. Box 5085, Hartford, Connecticut 06102-5085, telephone:
1-800-862-6668.
2
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TABLE OF CONTENTS
<Table>
<Caption>
SECTION PAGE
------- ----
SUMMARY................................................................. 4
GLOSSARY OF SPECIAL TERMS............................................... 5
INTRODUCTION............................................................ 6
THE GENERAL ACCOUNT OPTION.............................................. 6
A. The Accumulation Period........................................... 6
1. Contributions.................................................... 6
2. Guaranteed Interest Rates and Declared Interest Rates............ 6
3. Participant Account Values....................................... 7
4. Transfers from the General Account Option........................ 7
5. Transfers to the General Account Option.......................... 8
6. Surrenders....................................................... 8
(a) General...................................................... 8
(b) Payment of Full or Partial Surrenders......................... 8
(c) Contract Termination......................................... 9
7. Experience Rating of the Contracts............................... 9
B. Annuity Period.................................................... 10
INVESTMENTS BY HARTFORD................................................. 10
DISTRIBUTION OF THE CONTRACTS........................................... 10
FEDERAL TAX CONSIDERATIONS.............................................. 11
A. Taxation of Hartford.............................................. 11
B. Information Regarding Deferred Compensation Plans for State and
Local Governments.................................................... 11
HARTFORD LIFE INSURANCE COMPANY......................................... 11
A. Business of Hartford Life Insurance Company....................... 11
Management's Discussion and Analysis of Financial Condition and
Results of Operation................................................. 19
LEGAL OPINIONS.......................................................... 56
EXPERTS................................................................. 56
APPENDIX A -- MARKET VALUE LUMP SUM OPTION.............................. 57
APPENDIX B -- FINANCIAL STATEMENTS...................................... F-1
</Table>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALES PERSON, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED ON.
3
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SUMMARY
This Prospectus describes the General Account Option under Contracts issued
in connection with Deferred Compensation Plans of tax-exempt and governmental
employers. We issue the Contracts with respect to our Separate Accounts known as
Hartford Life Insurance Company DC Variable Account-I ("DC-I") and a series of
Hartford Life Insurance Company Separate Account Two ("DC-II"). Contributions to
the General Account Option become a part of our company assets in our General
Account. Contributions to the Contracts can also be allocated to one or more
variable Sub-Accounts of the Separate Accounts. "Sub-Accounts" are divisions of
a Separate Account. The Contracts and the Separate Accounts are described in a
separate prospectus accompanying this Prospectus. All such prospectuses should
be read carefully and retained for future reference.
We credit interest on Contributions to the General Account Option during the
Accumulation Period. We establish specified Guaranteed Interest Rates for the
first five calendar years (a "Five Year Guarantee Period") for Contributions
received during the calendar year in which the Contract is issued (the "First
Calendar Year"). Before the start of each calendar year following the First
Calendar Year, we establish Guaranteed Interest Rates for a Five Year Guarantee
Period for Contributions received in such following year. We establish
Guaranteed Interest Rates annually after each Five Year Guarantee Period.
We can establish Declared Interest Rates in excess of any Guaranteed
Interest Rates from time to time. Declared Interest Rates can apply to some or
all of the values under the General Account Option for periods of time that we
determine. The rates of interest credited will affect Participant Account values
(see "The General Account Option -- Participant Account Values") and are used to
determine amounts payable upon termination of the Contracts. (See
"Surrenders -- Contract Termination").
Generally, we intend to invest the General Account assets attributable to
the Contracts in investment grade securities. We have no specific formula for
determining the rates of interest that we will establish as Declared Interest
Rates or Guaranteed Interest Rates in the future. However, our determination
generally will be affected by interest rates available on the types of debt
instruments in which we intend to invest the proceeds attributable to the
General Account Option. In addition, we can also consider various other factors
in determining Declared and Guaranteed Interest Rates for a given period,
including, regulatory and tax requirements; sales commission and administrative
expenses borne by us; general economic trends; and competitive factors. (See
"Investments by Hartford").
During the Accumulation Period, the Contract Owner may allocate all or a
portion of a Participant's Account value held under the General Account Option
to one or more of the variable Sub-Accounts of the Separate Account. We do not
deduct Contingent Deferred Sales Charges on such transfers. However, there are
restrictions which may limit the amount that may be so allocated and transfers
may be deferred in certain cases. (See, "Transfers from the General Account
Option"). Distributions from the General Account Option are generally made
within a reasonable period of time after a request is received and reflect the
full value of Participant's Account values less applicable charges described in
the Contract prospectus. However, under certain conditions, distributions may be
deferred or subject to a market value adjustment. (See "Surrenders").
4
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GLOSSARY OF SPECIAL TERMS
ACCUMULATION PERIOD: The period before the start of Annuity payments.
ACTIVE LIFE FUND: The sum of all Participant Account values under a Contract
during the Accumulation Period.
ADMINISTRATIVE OFFICE: Located at 200 Hopmeadow Street, Simsbury, CT 06089. The
mailing address for correspondence concerning this Contract is P.O. Box 1583,
Hartford, CT 06144-1583, except for overnight or express mail packages, which
should be sent to: Attention: IPD/Retirement Plan Service Center, 200 Hopmeadow
Street, Simsbury, CT 06089.
ANNUITANT: The person on whose life Annuity payments are based.
ANNUITY: A series of payments for life or another designated period.
ANNUITY COMMENCEMENT DATE: The date we start to make Annuity payments to you.
ANNUITY PERIOD: The period during which we make Annuity payments to you.
CODE: The Internal Revenue Code of 1986, as amended.
COMMISSION: Securities and Exchange Commission.
CONTRACT OWNER: The Employer or entity owning the Contract.
CONTRACT YEAR: A period of 12 months beginning with the effective date of the
Contract or with any anniversary of the effective date.
CONTRIBUTION(S): The amount(s) paid or transferred to us by the Contract Owner
on behalf of Participants pursuant to the terms of the Contracts.
DATE OF COVERAGE: The date on which we receive the application on behalf of a
Participant.
DECLARED INTEREST RATE(S): One or more rates of interest that we declare which
will never be less than the Guaranteed Interest Rates and may apply to some or
all of the Participant Account values allocated to the General Account Option
for period(s) of time determined by us.
DEFERRED COMPENSATION PLAN: A plan established and maintained in accordance with
the provisions of section 457 of the Code and the regulations issued thereunder.
EMPLOYER: A governmental or tax-exempt employer maintaining a Deferred
Compensation Plan for its employees or other eligible persons.
GENERAL ACCOUNT: Our General Account that consists of all of our company assets.
GUARANTEED INTEREST RATE(S): The minimum rate(s) of interest to be credited on
the General Account portion of the Active Life Fund, as set forth in the
Contract.
HARTFORD (ALSO, "WE", "US" OR "OUR"): Hartford Life Insurance Company.
MARKET VALUE LUMP SUM OPTION: At Contract termination, a lump sum payment that
is adjusted for the market value of the underlying assets as described under the
formula under "The General Account Option -- The Accumulation Period --
Surrenders."
PARTICIPANT: A term used to describe, for record keeping purposes, any employee
or other eligible person electing to participate in the Deferred Compensation
Plan of the Employer/Contract Owner.
PARTICIPANT ACCOUNT: An account to which the General Account values and the
Separate Account values held by the Contract Owner on behalf of Participant
under the Contract are allocated.
PARTICIPANT'S CONTRACT YEAR: A period of twelve (12) months beginning with the
Date of Coverage of a Participant and each successive 12-month period.
PLAN: The Deferred Compensation Plan of an Employer.
PREMIUM TAX: A tax charged by a state or municipality on premiums, purchase
payments or Contract values.
SEPARATE ACCOUNTS: Our separate accounts called Hartford Life Insurance Company
DC Variable Account-I ("DC-I") and Hartford Life Insurance Company Separate
Account Two ("DC-II").
SURRENDER: Any partial or complete withdrawal of Contract values.
5
<Page>
INTRODUCTION
This Prospectus sets forth information you should know before you purchase
or become a Participant in the General Account Option under Contracts. This
Prospectus describes only the parts of the Contracts relating to the General
Account Option. The Contracts also contain certain variable Separate Accounts.
The Contracts and the Separate Accounts are described in a separate prospectus
that accompanies this Prospectus. Please read them together and retain them for
your records.
THE GENERAL ACCOUNT OPTION
The General Account Option is available under Contracts issued in connection
with a Deferred Compensation Plan of an Employer. The Contracts provide for both
an Accumulation Period and an Annuity Period. During the Accumulation Period,
the Employer can make Contributions to the General Account Option. Those
Contributions, and the interest credited thereon, become part of our General
Account. During the Annuity Period, Fixed or Variable Annuities can be purchased
with Participant Account values. The operation of the Contract during the
Annuity Period is described in the Contract prospectus accompanying this
Prospectus.
A. THE ACCUMULATION PERIOD
1. CONTRIBUTIONS
Contract Owners and Participants may allocate Contributions and Contract
values to the General Account Option.
2. GUARANTEED INTEREST RATES AND DECLARED INTEREST RATES
We credit interest on Contributions to the General Account Option during the
Accumulation Period. We establish specified Guaranteed Interest Rates for the
first five calendar years (a "Five Year Guarantee Period") for Contributions
received during the calendar year in which the Contract is issued (the "First
Calendar Year"). Before the start of each calendar year following the First
Calendar Year, we establish Guaranteed Interest Rates for a Five Year Guarantee
Period for Contributions received in such following year. The Guaranteed
Interest Rates for a Five Year Guarantee Period may not be the same in each
year.
After each Five Year Guarantee Period, we establish Guaranteed Interest
Rates annually (a "One Year Guarantee Period"). These one-year Guaranteed
Interest Rates commence automatically at the end of a Five Year Guarantee Period
and at the end of each subsequent One Year Guarantee Period. All Guaranteed
Interest Rates and Declared Interest Rates are effective annual rates after
taking into account daily compounding of interest.
The following example is for illustrative purposes only. It contains
hypothetical rates of interest. Actual Guaranteed Interest Rates for any given
time may be more or less than those illustrated.
- Example: A Contract is issued on July 1, in Year 1. At issue, we set the
Guaranteed Interest Rates for calendar Years 1 through 5 as follows:
<Table>
<Caption>
HYPOTHETICAL
RATES OF
CALENDAR YEAR INTEREST
- ------------- --------------------
Year 1..... 5.00%
Year 2..... 4.75%
Year 3..... 4.50%
Year 4..... 4.25%
Year 5..... 4.00%
</Table>
Assume that we receive Contributions of $1,000 during Year 1 and that we
receive Contributions of $1,500 during Year 2. We will credit the Year 1
Contributions of $1,000 with interest at a rate of at least 5.00% (i.e., the
Guaranteed Interest Rate for Year 1) for Year 1. During Year 2, we will credit
the Year 1 Contributions, along with the interest credited from Year 1, with
interest at a rate of at least 4.75% per year. Similarly, for calendar Years 3,
4 and 5, we will credit the Year 1 Contributions, along with the interest
credited from prior years, with interest at
6
<Page>
a rate of at least 4.50%, 4.25% and 4.00% per year respectively. At the end of
Year 5, we will set a one-year Guaranteed Interest Rate for Year 6. We will
follow this procedure for setting a one-year Guaranteed Interest Rate for each
subsequent year.
At the end of Year 1, we will set the Guaranteed Interest Rates for calendar
Years 2 through 6 for the Contributions of $1,500 received in Year 2. At the end
of Year 6 and annually thereafter, we will set one-year Guaranteed Interest
Rates for the Year 2 Contributions of $1,500 along with the interest that was
credited on the $1,500 in prior years.
We will follow the same procedure for contributions received in Year 3 and
later. At the end of each calendar year, we will set Guaranteed Interest Rates
for each of the next five calendar years for the following year's Contributions.
At the end of each Five Year Guarantee Period for a particular year's
contributions, we will establish one-year Guaranteed Interest Rates annually.
We can establish Declared Interest Rates in excess of any Guaranteed
Interest Rates from time to time. Declared Interest Rates can apply to some or
all of the values under the General Account Option for periods of time that we
determine. For example, we could determine to declare an interest rate in excess
of the otherwise applicable Guaranteed Interest Rate(s) for a nine month period,
and applicable only to Participant Account values attributable to Contributions
received in a particular time period. The rates of interest credited will affect
Participant Account values (See "Participants Account Values") and are used to
determine amounts payable upon termination of the Contracts (See "Surrenders --
Contract Termination"). We will provide the Contract Owner with written
notification of the Declared Interest Rate and the values to which the Declared
Interest Rate will apply.
We have no specific formula for determining the rates of interest that we
will establish as Declared Interest Rates or Guaranteed Interest Rates in the
future. However, our determination generally will be affected by interest rates
available on the types of debt instruments in which we intend to invest the
proceeds attributable to the General Account Option. In addition, we can also
consider various other factors in determining Declared and Guaranteed Interest
Rates for a given period, including, regulatory and tax requirements; sales
commission and administrative expenses borne by us; general economic trends; and
competitive factors. (See, "Investments by Hartford"). WE WILL MAKE THE FINAL
DETERMINATION AS TO ANY DECLARED INTEREST RATES AND ANY GUARANTEED INTEREST
RATES IN EXCESS OF THE CONTRACTUALLY GUARANTEED RATE. WE CANNOT PREDICT NOR CAN
WE GUARANTEE THE RATES OF ANY FUTURE DECLARED INTEREST OR GUARANTEED INTEREST
RATES IN EXCESS OF THE CONTRACTUALLY GUARANTEED RATE.
3. PARTICIPANT ACCOUNT VALUES
We credit interest on Participant Account values held under the General
Account Option at rates at least equal to the applicable Guaranteed Interest
Rates. We allocate Contributions to Participant Accounts, and begin crediting
interest as of the date we receive the Contribution at our Administrative
Office. We credit interest to Participant Account values daily.
4. TRANSFERS FROM THE GENERAL ACCOUNT OPTION
The Contract Owner may transfer Participant Account values held in the
General Account Option to one or more of the Sub-Accounts of the Separate
Accounts under the Contract. The charges for transfers are described in the
prospectus for the Contracts which accompanies this Prospectus. We do not deduct
Contingent Deferred Sales Charges when a transfer is made to the Separate
Accounts.
All transfers are made on a last in, first out basis. This means the portion
of a Participant Account attributable to older Contributions or transfers will
be transferred only after the portion attributable to the most recent
Contribution or transfer has been transferred.
The right to transfer Contract values is subject to our right to limit any
such transfer in any calendar year, to one-sixth ( 1/6) of the Participant
Account value under the General Account Option under the Contract as of the end
of the preceding calendar year. (See "Surrenders").
Transfers of assets presently held in the General Account Option, or that
were held in the General Account Option at any time during the preceding three
month period to the Hartford Money Market HLS Sub-Account are prohibited.
Similarly, transfers of assets presently held in the Hartford Money Market HLS
Sub-Account or which were held in such Sub-Account or the General Account Option
during the preceding three months, to the General Account Option are prohibited.
7
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5. TRANSFERS TO THE GENERAL ACCOUNT OPTION
You can transfer Participant Account values from a Separate Account to the
General Account Option at any time. The charges for transfers are described in
the Contract prospectus that accompanies this Prospectus. We do not deduct
Contingent Deferred Sales Charges when a transfer is made. We will treat such
transfers like Contributions to the General Account Option on the date of such
transfer.
6. SURRENDERS
(A) GENERAL
Subject to the termination provisions described below, the Contract
Owner can request a full or partial Surrender of Participant Account values,
less any Contingent Deferred Sales Charge, at any time. However, if the sum
of all Surrenders and transfers from the General Account Option in a
calendar year, including the currently requested Surrender, exceeds
one-sixth ( 1/6) of the aggregate values held in the General Account Option
under the Contract at the end of the preceding calendar year, we reserve the
right to defer Surrenders in excess of the limit to the next calendar year.
At such time, unless we are directed in writing otherwise, deferred
Surrenders will be made in the order originally received up to the limit, if
applicable. We will use this method until all Surrenders have been
satisfied.
(B) PAYMENT OF FULL OR PARTIAL SURRENDERS (PARTICIPANT ACCOUNT ONLY)
In the event of a partial Surrender of a Participant's Account, we will
pay the requested value less any applicable Contingent Deferred Sales
Charge. We will make all partial Surrenders of a Participant Account on a
last in, first out basis. This means the portion of your Participant Account
attributable to your most recent Contribution (or transfer) will be
Surrendered first. In the event of a full Surrender of a Participant
Account, we will pay the account value less any applicable Premium Tax not
previously deducted, the Annual Maintenance Fee and applicable Contingent
Deferred Sales Charges.
CONTINGENT DEFERRED SALES CHARGES: We deduct a Contingent Deferred Sales
Charge ("Sales Charge") from Surrenders of or from the Contract. THE AMOUNT OF
THE SALES CHARGE DEPENDS ON THE SALES CHARGE SCHEDULE IN THE CONTRACT. THERE ARE
FOUR SEPARATE GROUP VARIABLE ANNUITY CONTRACTS WITH DIFFERENT SALES CHARGE
SCHEDULES, AS SHOWN BELOW. THE SALES CHARGE UNDER EACH DEPENDS ON the number of
Participant's Contract Years completed with respect to a Participant's Account
before the Surrender. The Sales Charge is a percentage of the amount
Surrendered.
<Table>
<Caption>
PARTICIPANT'S CONTRACT YEARS SALES CHARGE
- ---------------------------- ------------
During the First through the Eighth Year.................... 5%
During the Ninth through Fifteenth Year..................... 3%
During the Sixteenth Year and thereafter.................... 0%
</Table>
<Table>
<Caption>
PARTICIPANT'S CONTRACT YEARS SALES CHARGE
- ---------------------------- ------------
During the First through the Sixth Year..................... 7%
During the Seventh through Twelfth Year..................... 5%
During the Thirteenth Year and thereafter................... 0%
</Table>
<Table>
<Caption>
PARTICIPANT'S CONTRACT YEARS SALES CHARGE
- ---------------------------- ------------
During the First through the Sixth Year..................... 5%
During the Seventh through Eight Year....................... 4%
During the Ninth through Tenth Year......................... 3%
During the Eleventh through Twelfth Year.................... 2%
During the Thirteenth Year and thereafter................... 0%
</Table>
<Table>
<Caption>
PARTICIPANT'S CONTRACT YEARS SALES CHARGE
- ---------------------------- ------------
During the First through the Second Year.................... 5%
During the Third through Fourth Year........................ 4%
During the Fifth Year....................................... 3%
During the Sixth Year....................................... 2%
During the Seventh Year..................................... 1%
During the Eighth Year and thereafter....................... 0%
</Table>
We may reduce the amount or term of the Sales Charge (see "Experience Rating
under the Contracts"). Please consult the prospectus for the related group
variable annuity contract and the Separate Account for applicable Sales Charges.
8
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(C) CONTRACT TERMINATION (CONTRACT OWNERS ONLY)
If the Contract Owner requests a full Surrender of the Contract or of
all Contract values held in the General Account Option, the Contract Owner
may select one of the two optional methods of payment, as described below.
The terms utilized have the following meanings:
<Table>
i = the rate of interest (expressed as a percent, e.g. .05 = 5%)
to be credited, subject to a minimum rate of 0% and a
maximum rate of B%.
A = The weighted average interest rate (expressed as a decimal,
e.g. 1% = .01) being credited under the General Account
Option as of the date of termination.
B = The average yield (expressed as decimal, e.g. 1% = .01) for
the month prior to the date of termination of the higher of
the Salomon Brothers weekly index of new Long Term Public
Utilities rated Aa by Moody's Investors Services, Inc. and
the Salomon Brothers weekly Index of Current Coupon 30 year
Federal National Mortgage Association Securities, or their
equivalents.
</Table>
(i) BOOK VALUE SPREAD OPTION (PERIODIC PAYMENT NOT TO EXCEED FIVE YEARS):
Under this option, we will pay an amount equal to the Contract values held
in the General Account Option less applicable Premium Taxes, any Annual
Maintenance Fee and applicable Sales Charges. We reserve the right to make such
payment in level annual installments over a period not to exceed five years from
the date of the request, in which event interest will be credited on the unpaid
balance at a rate per annum produced by the following formula:
i = (A - 2(B - A)) - .005
- Example: If A = 6% and B = 7%, then interest on the unpaid balance would be
paid at a rate of (.06 - 2(.07 - .06)) - .005 or 3.5%
This formula may result in an interest rate that is less than the weighted
average interest rate being credited under the General Account Option as of the
date of termination.
(ii) MARKET VALUE LUMP SUM OPTION:
Under this option, we will pay a lump sum amount equal to the Contract
values held in the General Account Option, less any applicable Sales Charges,
Annual Maintenance Fee, and Premium Taxes multiplied by the appropriate market
value factor. The amount payable on Surrender may be adjusted down by
application of the market value adjustment. This market value factor is
determined as follows:
(a) if B is greater than A, the market value factor equals 1 - (6(B - A))
or,
(b) if A is greater than B, the market value factors equals 1.00
- Example: If A = 7% and B = 9%, then the market value factor would be
1 - (6(.09 - .07)) = .88.
Under this option, it is possible that the amount payable on surrender would
be more or less than your contribution(s).
Additional examples of both optional methods of payment are contained in
Appendix A.
7. EXPERIENCE RATING UNDER THE CONTRACTS:
We may apply experience credits under a Contract based on investment,
administrative, mortality or other factors, including, but not limited to
(1) the total number of Participants, (2) the sum of all Participants' Account
values, (3) the allocation of Contract values between the General Account and
the Separate Accounts under the Contract, (4) present or anticipated levels of
Contributions, distributions, transfers, administrative expenses or commissions,
and (5) whether we are the exclusive annuity contract provider. Experience
credits can take the form of a reduction in the deduction for mortality, expense
risk and administrative undertakings, a reduction in the term or amount of any
applicable Sales Charges, an increase in the rate of interest credited under the
Contract, a payment to be allocated as directed by the Contract Owner, or any
combination of the foregoing. We may apply experience credits either
prospectively or retrospectively. We may apply and allocate experience credits
in such manner as we deem appropriate. Any such credit will not be unfairly
discriminatory against any person, including the affected Contract Owners or
Participants. Experience credits have been given in certain cases. Participants
in Contracts receiving experience credits will receive notification regarding
such credits. Experience credits may be discontinued at our sole discretion in
the event of a change in applicable factors.
9
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B. ANNUITY PERIOD
We will normally make payments within 15 business days after we have
received a claim for settlement or any other later specified date. We will make
subsequent annuity payments on the anniversaries of the first payment.
The prospectus for the Contract and the Separate Account(s) accompanying
this Prospectus more fully describes the Annuity Period and the Annuity Payment
Options under the Contracts.
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 Guaranteed Rates and Declared 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 "Guaranteed Interest
Rates and Declared Interest 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 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.
DISTRIBUTION OF THE CONTRACTS
Hartford Securities Distribution Company, Inc. ("HSD") serves as Principal
Underwriter for the securities issued with respect to the General Account
Option. HSD is an affiliate of Hartford. The Hartford Financial Services
Group, Inc. ultimately controls both HSD and Hartford. The principal business
address of HSD is the same as that of Hartford.
The securities will be sold by salespersons of HSD who represent Hartford as
insurance and variable annuity agents and who are registered representatives or
Broker-Dealers who have entered into distribution agreements with HSD.
HSD is registered with the Commission under the Securities Exchange Act of
1934 as a Broker-Dealer and is a member of the National Association of
Securities Dealers, Inc.
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Broker-dealers or financial institutions are compensated according to a
schedule set forth by HSD and any applicable rules or regulations for variable
insurance compensation. Compensation is generally based on premium payments made
by policyholders or contract owners. This compensation is usually paid from the
sales charges described in this Prospectus.
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 affect the amounts paid by the policyholders or contract
owners to purchase, hold or surrender variable insurance products.
FEDERAL TAX CONSIDERATIONS
A. 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 assets underlying the
General Account Option under the Contracts will be owned by Hartford. The income
earned on such assets will be Hartford's income.
B. INFORMATION REGARDING DEFERRED COMPENSATION PLANS FOR STATE AND LOCAL
GOVERNMENTS
The tax treatment of Contributions and distributions is briefly described in
the accompanying prospectus for the Contract.
HARTFORD LIFE INSURANCE COMPANY
A. BUSINESS OF HARTFORD LIFE INSURANCE COMPANY
(DOLLAR AMOUNTS IN MILLIONS, UNLESS OTHERWISE STATED)
GENERAL
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 735,000 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 universal 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 the financial uncertainties associated with 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, increased 21% to $171.9
billion at December 31, 2003 from $142.1 billion at December 31, 2002. The
Company generated revenues of $4.9 billion, $3.9 billion and $4.5 billion in
2003, 2002 and 2001, respectively. Additionally, Hartford Life Insurance Company
generated net income of $626, $426 and $646 in 2003, 2002, and 2001,
respectively.
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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. 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 2003 Annuity Service Award by DALBAR
Inc., a recognized independent financial services research organization, for the
eighth consecutive year. Hartford Life Insurance Company is the only company to
receive this prestigious award in every year of the award's existence. Also, in
2003 the Company earned its first DALBAR Award for Retirement Plan Service which
recognizes Hartford Life Insurance Company as the No. 1 service provider of
retirement plans in the industry. Additionally, the Company's Individual Life
segment won its third consecutive DALBAR award for service of life insurance
customers and its second DALBAR Intermediary Service Award in 2003.
RISK MANAGEMENT
The Company's product designs, prudent underwriting standards and risk
management techniques are structured to protect it against disintermediation
risk, greater than expected mortality and morbidity experience and, for certain
product features, specifically the guaranteed minimum death benefit ("GMDB") and
guaranteed minimum withdrawal benefit ("GMWB") offered with variable annuity
products, equity market volatility. As of December 31, 2003, 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 ensure that its product pricing remains
appropriate. The Company also enforces disciplined claims management to protect
itself against greater than expected morbidity experience. The Company uses
reinsurance structures and has modified benefit features to mitigate the
mortality exposure associated with guaranteed minimum death benefits. The
Company also uses reinsurance to minimize the volatility associated with the
GMWB liability.
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 $3.4 billion in 2003, $2.7 billion in
2002 and $2.9 billion in 2001, of which individual annuities accounted for $1.7
billion, $1.5 billion and $1.4 billion in 2003, 2002 and 2001, respectively. Net
income in the Investment Products segment was $414, $343 and $375 in 2003, 2002
and 2001, 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
$16.5 billion, $11.6 billion, and $10.0 billion in 2003, 2002 and 2001,
respectively. The Company was the largest
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seller of individual retail variable annuities in the United States with sales
of $15.7 billion in 2003, $10.3 billion in 2002 and $9.0 billion in 2001. 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
$97.7 billion as of December 31, 2003. Of this total account value, $86.5
billion, or 89%, related to individual variable annuity products and $11.2
billion, or 11%, related primarily to fixed MVA annuity products. In 2002, the
Company's total account value related to individual annuity products was $74.9
billion. 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 addition to its leading position in individual annuities, Hartford Life
Insurance Company 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").
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.
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 deposit less withdrawals, and reduce to zero on a sliding
scale, usually within seven years from the deposit date. Individual variable
annuity account values of $86.5 billion as of December 31, 2003, have grown from
$64.3 billion as of December 31, 2002, due to strong net cash flow, resulting
from high levels of sales, low levels of surrenders and equity market
appreciation. Approximately 90% and 88% of the individual variable annuity
account values were held in non-guaranteed separate accounts as of December 31,
2003 and 2002, 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 the policyholder
with a guaranteed remaining balance ("GRB") if the account value is reduced to
zero through a combination of market declines and withdrawals. The GRB is
generally equal to premiums less withdrawals. However, annual withdrawals that
exceed 7% of the premiums paid may reduce the GRB by an amount greater than the
withdrawals and may also impact the guaranteed annual withdrawal amount that
subsequently applies after the excess annual withdrawals occur. The policyholder
also has the option, after a specified time period, to reset the GRB to the
then-current account value, if greater.
The assets underlying the Company's variable annuities are managed both
internally and by independent 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 ("Hartford Investment Management"), a wholly-owned
subsidiary of The Hartford; Putnam Financial Services, Inc. ("Putnam"); American
Funds; MFS Investment Management
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("MFS"); Franklin Templeton Group; and AIM Investments ("AIM"). All have an
interest in the continued growth in sales of the Company's products and enhance
the marketability of the Company's annuities and the strength of its product
offerings. 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 emerged as the industry leader in terms of
retail sales. In addition, the Director variable annuity, which is managed in
part by Wellington, ranks second in the industry in terms of retail sales.
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 four years. Account values of fixed MVA annuities were $11.2
billion and $10.6 billion as of December 31, 2003 and 2002, 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, 2003, 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) plans 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, 2003, the Company administered over
4,100 Section 401(k) plans.
INSTITUTIONAL INVESTMENT PRODUCTS -- The Company sells the following
institutional investment products; structured settlements, GICs and other short
term funding agreements, institutional mutual funds and other annuity contracts
for special purposes such as funding of terminated defined benefit pension
plans. Structured settlement contracts 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.
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 December
31, 2003, the Company was selling products through the 25 largest retail banks
in the United States. 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 wholesaler, PLANCO distributes the
Company's fixed and variable annuities, 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. Owning 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
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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.
REGULATORY DEVELOPMENTS
Recently, there has been a significant increase in federal and state
regulatory activity relating to financial services companies, particularly
mutual funds companies. These regulatory inquiries have focused on a number of
mutual fund issues. The Company, like many others in the financial services
industry, has received requests for information from the Securities and Exchange
Commission and a subpoena from the New York Attorney General's Office, in each
case requesting documentation and other information regarding various mutual
fund regulatory issues. The Company continues to cooperate fully with these
regulatory agencies in responding to these requests. In addition,
representatives from the SEC's Office of Compliance Inspections and Examinations
recently concluded an on-site compliance examination of the Company's variable
annuity and mutual fund operations.
Hartford Life's mutual funds are available for purchase by the separate
accounts of different variable life insurance policies, variable annuity
products, and funding agreements, and they are offered directly to certain
qualified retirement plans. Although existing products contain transfer
restrictions between subaccounts, some products, particularly older variable
annuity products, do not contain restrictions on the frequency of transfers. In
addition, as a result of the settlement of litigation against the Company with
respect to certain owners of older variable annuity products, the Company's
ability to restrict transfers by these owners is limited.
A number of companies recently have announced settlements of enforcement
actions with various regulatory agencies, primarily the Securities and Exchange
Commission and the New York Attorney General's Office. No such action has been
initiated against the Company. It is possible that one or more regulatory
agencies may pursue action against the Company in the future.
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 a significant increase in
life insurance in force in that year. Revenues were $893, $858, and $774 for the
years ended December 31, 2003, 2002 and 2001, respectively. Net income in the
Individual Life segment was $134, $116, and $106 for the years ended
December 31, 2003, 2002 and 2001, respectively.
PRINCIPAL PRODUCTS
Hartford Life Insurance Company holds a significant market share in the
variable universal life product market. In 2003, the Company's new sales of
individual life insurance were 54% variable universal life, 41% universal life
and other, and 5% term life insurance.
VARIABLE UNIVERSAL LIFE -- Variable universal 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 universal 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 second-to-die
products are distinguished from other products in that two lives are insured
rather than one, and the policy
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proceeds are paid upon the death of both insureds. Second-to-die policies are
frequently used in estate planning for a married couple. Variable universal life
account values were $4.7 billion and $3.6 billion as of December 31, 2003 and
2002, respectively.
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 universal 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.
Additional distribution is provided through Woodbury Financial Services, a
subsidiary retail broker dealer and other marketing relationships.
COMPETITION
The Individual Life segment competes with approximately 1,200 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 post-employment benefit liabilities.
Variable COLI account values were $21.0 billion and $19.7 billion as of
December 31, 2003 and 2002, respectively. Leveraged COLI account values
decreased to $2.5 billion as of December 31, 2003 from $3.3 billion as of
December 31, 2002, primarily due to surrender activity. COLI generated revenues
of $482, $592 and $717 for the years ended December 31, 2003, 2002 and 2001,
respectively and net income of $46, $31 and $36 in 2003, 2002 and 2001,
respectively.
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
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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 Insurance Company reserves may be found in the Critical
Accounting Estimates section of the MD&A under "Reserves".
CEDED REINSURANCE
In accordance with normal industry practice, the Company is involved in both
the cession and assumption of insurance with other insurance and reinsurance
companies. As of December 31, 2003, 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 has reinsured the majority of the minimum death
benefit guarantees and the guaranteed minimum withdrawal benefits offered in
connection with its variable annuity contracts. The majority of variable annuity
contracts issued since August 2002 include a guaranteed minimum withdrawal
benefit ("GMWB") rider. The GMWB represents an embedded derivative in the
variable annuity contract that is required to be reported separately from the
host variable annuity contract. For all contracts in effect through July 6,
2003, the Company entered into a third party reinsurance arrangement to offset
its exposure to the GMWB for the remaining lives of those contracts. As of
July 6, 2003, the Company exhausted all but a small portion of the reinsurance
capacity for new business under this current arrangement and will be ceding only
a very small number of new contracts subsequent to July 6, 2003. Substantially
all new contracts with the GMWB are covered by a reinsurance arrangement with a
related party. See Note 13 "Transactions with Affiliates" for information on
this arrangement. Ceded reinsurance does not relieve the Company of its primary
liability and, as such, failure of reinsurers to honor their obligations could
result in losses to the 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, 2003,
2002 and 2001, the Company did not make any significant changes in the terms
under which reinsurance is ceded to other insurers except for the Company's
recapture of a block of business previously reinsured with an unaffiliated
reinsurer. For further discussion see Note 10 in "Notes to Consolidated
Financial Statements".
INVESTMENT OPERATIONS
An important element of the financial results of Hartford Life Insurance
Company is return on invested assets. The investment portfolios are managed
based on the underlying characteristics and nature of each operation's
respective liabilities and within established risk parameters.
The investment portfolios of the Company are managed by Hartford Investment
Management, a wholly-owned subsidiary of The Hartford. Hartford Investment
Management 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.
The primary investment objective of the Company's 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 policyholder and corporate obligations.
For a further discussion of Hartford Life Insurance Company's approach to
managing risks, including derivative utilization, see the Investments and
Capital Markets Risk Management sections, of the MD&A, as well as Note 2 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
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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 the Company. 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.
EMPLOYEES
Hartford Life Insurance Company had approximately 3,800 employees at
December 31, 2003.
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
The Company is or may become involved in various kinds of legal actions,
some of which assert claims for substantial amounts. These actions may include,
among others, putative state and federal class actions seeking certification of
a state or national class. The Company also is involved in individual actions in
which punitive damages are sought, such as claims alleging bad faith in the
handling of insurance claims. Management expects that the ultimate liability, if
any, with respect to such lawsuits, after consideration of provisions made for
potential losses and costs of defense, will not be material to the consolidated
financial condition of the Company. Nonetheless, given the large or
indeterminate amounts sought in certain of these actions, and the inherent
unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's consolidated results of operations or cash flows in particular
quarterly or annual periods.
BANCORP SERVICES, LLC -- In the third quarter of 2003, Hartford Life
Insurance Company ("HLIC") and its affiliate International Corporate Marketing
Group, LLC ("ICMG") settled their intellectual property dispute with Bancorp
Services, LLC ("Bancorp"). The dispute concerned, among other things, Bancorp's
claims for alleged patent infringement, breach of a confidentiality agreement,
and misappropriation of trade secrets related to certain stable value
corporate-owned life insurance products. The dispute was the subject of
litigation in the United States District Court for the Eastern District of
Missouri, in which Bancorp obtained in 2002 a judgment exceeding $134 against
HLIC and ICMG after a jury trial on the trade secret and breach of contract
claims, and HLIC and ICMG obtained summary judgment on the patent infringement
claim. Based on the advice of legal counsel following entry of the judgment, the
Company recorded an $11 after-tax charge in the first quarter of 2002 to
increase litigation reserves. Both components of the judgment were appealed.
Under the terms of the settlement, HLIC and ICMG will pay a minimum of $70
and a maximum of $80, depending on the outcome of the patent appeal, to resolve
all disputes between the parties. The appeal from the trade secret and breach of
contract judgment will be dismissed. The settlement resulted in the recording of
a $9 after-tax benefit in the third quarter of 2003, to reflect the Company's
portion of the settlement.
REINSURANCE ARBITRATION -- On March 16, 2003, a final decision and award was
issued in the previously disclosed reinsurance arbitration between subsidiaries
of The Hartford and one of their primary reinsurers relating to policies with
guaranteed death benefits written from 1994 to 1999. The arbitration involved
alleged
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breaches under the reinsurance treaties. Under the terms of the final decision
and award, the reinsurer's reinsurance obligations to The Hartford's
subsidiaries were unchanged and not limited or reduced in any manner. The award
was confirmed by the Connecticut Superior Court on May 5, 2003.
MARKET FOR HARTFORD LIFE INSURANCE COMPANY'S COMMON EQUITY 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 20, 2004, the Company had issued and outstanding 1,000
shares of Common Stock, $5,690 par value per share. There is no established
public trading market for the Company's Common Stock.
For a discussion regarding the Company's payment of dividends, and the
restrictions related thereto, see the Capital Resources and Liquidity section of
the MD&A under "Dividends".
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, 2003, compared with December 31, 2002, and its
results of operations for the three years ended December 31, 2003, 2002 and
2001. 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 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 the 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
uncertain effect on the Company of the Jobs and Growth Tax Relief Reconciliation
Act of 2003, in particular the reduction in tax rates on long-term capital gains
and most dividend distributions; the response of reinsurance companies under
reinsurance contracts, the impact of increasing reinsurance rates and the
availability and adequacy of reinsurance to protect the Company against losses;
the inability to effectively mitigate the impact of equity market volatility on
the Company's financial position and results of operations arising from
obligations under annuity product guarantees; the possibility of more
unfavorable loss experience than anticipated; the possibility of general
economic and business conditions that are less favorable than anticipated; 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 effects of emerging claim and coverage issues; 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.
CRITICAL ACCOUNTING 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 Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability: deferred policy acquisition costs and present
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value of future profits, valuation of investments; valuation of derivative
instruments; reserves and contingencies. In developing these estimates
management makes subjective and complex judgments that are inherently uncertain
and subject to material change as facts and circumstances develop. Although
variability is inherent in these estimates, management believes the amounts
provided are appropriate based upon the facts available upon compilation of the
financial statements.
DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
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. These deferred costs, together with the present value of future profits
of acquired business, are recorded as an asset commonly referred to as deferred
policy acquisition costs and present value of future profits ("DAC"). At
December 31, 2003 and 2002, the carrying value of the Company's DAC was $6.1
billion and $5.5 billion, respectively. For statutory accounting purposes, such
costs are expensed as incurred.
DAC related to traditional policies are amortized over the premium-paying
period in proportion to the present value of annual expected premium income. 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 the estimated gross profits ("EGPs") arising principally from projected
investment, mortality and expense margins and surrender charges. The
attributable portion of the DAC amortization is allocated to realized gains and
losses on investments. The DAC balance is also adjusted through other
comprehensive income by an amount that represents the amortization of deferred
policy acquisition costs that would have been required as a charge or credit to
operations had unrealized gains and losses on investments 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 EGPs to determine if actual experience
or other evidence suggests that earlier estimates should be revised. In the
event that the Company were to revise its EGPs, the cumulative DAC amortization
would be adjusted to reflect such revised EGPs in the period the revision was
determined to be necessary. Several 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 to a lesser extent, variable
universal life insurance businesses. The average annual long-term rate of
assumed separate account fund performance (before mortality and expense charges)
used in estimating gross profits for the variable annuity and variable universal
life business was 9% for the years ended December 31, 2003 and 2002. For other
products, including fixed annuities and other universal life-type contracts, the
average assumed investment yield ranged from 5% to 8.5% for both years ended
December 31, 2003 and 2002.
The Company has developed sophisticated modeling capabilities to evaluate
its DAC asset, which allowed it to run a large number of stochastically
determined scenarios of separate account fund performance. These scenarios were
then utilized to calculate a statistically significant range of reasonable
estimates of EGPs. This range was then compared to the present value of EGPs
currently utilized in the DAC amortization model. As of December 31, 2003, the
present value of the EGPs utilized in the DAC amortization model fall within a
reasonable range of statistically calculated present value of EGPs. As a result,
the Company does not believe there is sufficient evidence to suggest that a
revision to the EGPs (and therefore, a revision to the DAC) as of December 31,
2003 is necessary; however, if in the future the EGPs utilized in the DAC
amortization model were to exceed the margin of the reasonable range of
statistically calculated EGPs, a revision could be necessary. Furthermore, the
Company has estimated that the present value of the EGPs is likely to remain
within a reasonable range if overall separate account returns decline by 15% or
less for 2004, and if certain other assumptions that are implicit in the
computations of the EGPs are achieved.
Additionally, the Company continues to perform analyses with respect to the
potential impact of a revision to future EGPs. If such a revision to EGPs were
deemed necessary, the Company would adjust, as appropriate, all of its
assumptions for products accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments", and reproject its future EGPs based on
current account values at the end of the quarter in which a revision is deemed
to be necessary. To illustrate the effects of this process, assume the Company
had concluded that a revision of the Company's
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EGPs was required at December 31, 2003. If the Company assumed a 9% average
long-term rate of growth from December 31, 2003 forward along with other
appropriate assumption changes in determining the revised EGPs, the Company
estimates the cumulative increase to amortization would be approximately
$60-$70, after-tax. If instead the Company were to assume a long-term growth
rate of 8% in determining the revised EGPs, the adjustment would be
approximately $75-$90, after-tax. Assuming that such an adjustment were to have
been required, the Company anticipates that there would have been immaterial
impacts on its DAC amortization for the 2004 and 2005 years exclusive of the
adjustment, and that there would have been positive earnings effects in later
years. Any such adjustment would not affect statutory income or surplus, due to
the prescribed accounting for such amounts that is discussed above.
Aside from absolute levels and timing of market performance assumptions,
additional factors that will influence this determination include the degree of
volatility in separate account fund performance 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 (which closed at 1,112 on December 31, 2003), although no assurance
can be provided that this correlation will continue in the future.
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 the present value of 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' funds in the separate accounts is invested in the
equity market. As of December 31, 2003, the Company believed variable annuity
separate account assets could fall by at least 40% before portions of its DAC
asset would be unrecoverable.
VALUATION OF INVESTMENTS AND DERIVATIVE INSTRUMENTS
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" as defined in Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". 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 of the immediate
participation guaranteed contracts and certain life and annuity deferred policy
acquisition costs, reflected in stockholders' equity as a component of
accumulated other comprehensive income ("AOCI"). Policy loans are carried at
outstanding balance, which approximates fair value. Other investments primarily
consist of limited partnership interests, derivatives and mortgage loans. The
limited partnerships are accounted for under the equity method and accordingly
the partnership earnings are included in net investment income. Derivatives are
carried at fair value and mortgage loans on real estate are recorded at the
outstanding principal balance adjusted for amortization of premiums or discounts
and net of valuation allowances, if any.
VALUATION OF FIXED MATURITIES
The fair value for fixed maturity securities is largely determined by one of
three primary pricing methods: independent third party pricing services,
independent broker quotations or pricing matrices which use data provided by
external sources. With the exception of short-term securities for which
amortized cost is predominantly used to approximate fair value, security pricing
is applied using a hierarchy or "waterfall" approach whereby prices are first
sought from independent pricing services with the remaining unpriced securities
submitted to brokers for prices or lastly priced via a pricing matrix.
Prices from independent pricing services are often unavailable for
securities that are rarely traded or are traded only in privately negotiated
transactions. As a result, a significant percentage of the Company's asset-
backed and commercial mortgage-backed securities are priced via broker
quotations. A pricing matrix is used to price securities for which the Company
is unable to obtain either a price from a third party service or an independent
broker quotation. The pricing matrix begins with current treasury rates and uses
credit spreads and issuer-specific yield adjustments received from an
independent third party source to determine the market price for the security.
The credit spreads incorporate the issuer's credit rating as assigned by a
nationally recognized rating agency and a risk premium, if warranted, due to the
issuer's industry and
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security's time to maturity. The issuer-specific yield adjustments, which can be
positive or negative, are updated twice annually, as of June 30 and
December 31, by an independent third-party source and are intended to adjust
security prices for issuer-specific factors. The matrix-priced securities at
December 31, 2003 and 2002, primarily consisted of non-144A private placements
and have an average duration of 4.3 and 4.4, respectively.
The following table identifies the fair value of fixed maturity securities
by pricing source as of December 31, 2003 and 2002:
<Table>
<Caption>
2003 2002
------------------------------------- -------------------------------------
GENERAL AND GENERAL AND
GUARANTEED SEPARATE PERCENTAGE GUARANTEED SEPARATE PERCENTAGE
ACCOUNT FIXED OF TOTAL ACCOUNT FIXED OF TOTAL
MATURITIES AT FAIR VALUE FAIR VALUE MATURITIES AT FAIR VALUE FAIR VALUE
------------------------ ---------- ------------------------ ----------
Priced via independent market
quotations...................... $33,985 81.2% $27,437 76.5%
Priced via broker quotations...... 3,060 7.3% 4,641 12.9%
Priced via matrices............... 3,086 7.4% 2,685 7.5%
Priced via other methods.......... 280 0.7% 239 0.7%
Short-term investments (1)........ 1,409 3.4% 869 2.4%
------- ----- ------- -----
TOTAL........................... $41,820 100.0% $35,871 100.0%
------- ----- ------- -----
TOTAL GENERAL ACCOUNTS.......... $30,085 71.9% $24,786 69.1%
TOTAL GUARANTEED SEPARATE
ACCOUNTS....................... $11,735 28.1% $11,085 30.9%
------- ----- ------- -----
</Table>
(1) SHORT-TERM INVESTMENTS ARE VALUED AT AMORTIZED COST, WHICH APPROXIMATES FAIR
VALUE.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. As such, the estimated fair value of
a financial instrument may differ significantly from the amount that could be
realized if the security was sold immediately.
OTHER-THAN-TEMPORARY IMPAIRMENTS
One of the significant estimations inherent in the valuation of investments
is the evaluation of other-than-temporary impairments. The evaluation of
impairments is a quantitative and qualitative process, which is subject to risks
and uncertainties and is intended to determine whether declines in the fair
value of investments should be recognized in current period earnings. 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. 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
other-than-temporarily impaired, 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 other-than-temporarily impaired
investment becomes its new cost basis. The Company has a security monitoring
process overseen by a committee of investment and accounting professionals that
identifies securities that, due to certain characteristics, as described below,
are subjected to an enhanced analysis on a quarterly basis.
Securities not subject to Emerging Issues Task Force ("EITF") Issue No.
99-20, "Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets" ("non-EITF Issue No. 99-20
securities"), that are depressed by twenty percent or more for six months are
presumed to be other-than-temporarily impaired unless the depression is the
result of rising interest rates or significant objective verifiable evidence
supports that the security price is temporarily depressed and is expected to
recover within a reasonable period of time. Non-EITF Issue No. 99-20 securities
depressed less than twenty percent or depressed twenty percent or more but for
less than six months are also reviewed to determine if an other-than-temporary
impairment is present. The primary factors considered in evaluating whether a
decline in value for non-EITF Issue No. 99-20 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 condition, credit
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rating 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 recovery.
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 the fair value of a 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.
Projections of expected future cash flows may change based upon new information
regarding the performance of the underlying collateral.
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 continues to review the
other-than-temporarily impaired securities for additional other-than-temporary
impairments.
VALUATION OF DERIVATIVE INSTRUMENTS
Derivative instruments are reported at fair value based upon either
independent market quotations for exchange traded derivative contracts,
independent third party pricing sources or pricing valuation models which
utilize independent third party data as inputs. Valuation of derivatives
underlying the GMWB investment product is discussed below.
VALUATION OF GUARANTEED MINIMUM WITHDRAWAL BENEFIT EMBEDDED DERIVATIVES
An embedded derivative instrument is 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.
The Company has calculated the fair value of the guaranteed minimum withdrawal
benefit ("GMWB") embedded derivative liability based on actuarial assumptions
related to the projected cash flows, including benefits and related contract
charges, over the lives of the contracts, incorporating expectations concerning
policyholder behavior. Because of the dynamic and complex nature of these cash
flows, stochastic techniques under a variety of market return scenarios and
other best estimate assumptions are used. Estimating these cash flows involves
numerous estimates and subjective judgments including those regarding expected
market rates of return, market volatility, correlations of market returns and
discount rates. At each valuation date, the Company assumes expected returns
based on risk-free rates as represented by the current LIBOR forward curve
rates; market volatility assumptions for each underlying index is based on a
blend of observed market "implied volatility" data and annualized standard
deviations of monthly returns using the most recent 20 years of observed market
performance; correlations of market returns across underlying indices is based
on actual observed market returns and relationships over the ten years preceding
the valuation date; and current risk-free spot rates as represented by the
current LIBOR spot curve is used to determine the present value of expected
future cash flows produced in the stochastic projection process.
RESERVES
The Company and its insurance subsidiaries establish and carry as
liabilities actuarially determined reserves which are calculated to meet
Hartford Life Insurance 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
death. Changes in or deviations from the assumptions used for mortality,
morbidity, expected future premiums and interest can significantly affect the
Company's reserve levels and related future operations. Reserves also include
unearned premiums, premium deposits, claims incurred but not reported ("IBNR")
and claims reported but not yet paid. Reserves for assumed reinsurance are
computed in a manner that is comparable to direct insurance reserves.
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The liability for policy benefits for universal life-type contracts and
interest-sensitive whole life policies 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.
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. Certain investment contracts include provisions whereby a
guaranteed minimum death benefit is provided in the event that the
contractholder's account value at death is below the guaranteed value. Although
the Company reinsures the majority of the death benefit guarantees associated
with its in-force block of business, declines in the equity market may increase
the Company's net exposure to death benefits under these contracts. In addition,
these contracts contain various provisions for determining the amount of the
death benefit guaranteed following the withdrawal of a portion of the account
value by the policyholder. Partial withdrawals under certain of these contracts
may not result in a reduction in the guaranteed minimum death benefit in
proportion to the portion surrendered. The Company records the death benefit
costs, net of reinsurance, as they are incurred. See Impact of New Accounting
Standards section for a discussion of the Company's adoption of Statement of
Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" (the "SOP") in
2004 and the recording of a liability for GMDB in accordance with the provisions
of the SOP.
For the Company's group disability policies, the level of reserves is based
on a variety of factors including particular diagnoses, termination rates and
benefit levels.
ACCOUNTING FOR CONTINGENCIES
Management follows the requirements of SFAS No. 5 "Accounting for
Contingencies". This statement requires management to evaluate each contingent
matter separately. The evaluation is a two-step process, including: determining
a likelihood of loss, and, if a loss is likely, developing a potential range of
loss. Management establishes reserves for these contingencies at its "best
estimate", or, if no one number within the range of possible losses is more
likely than any other, the Company records an estimated reserve at the low end
of the range of losses. The majority of contingencies currently being evaluated
by the Company relate to litigation and tax matters, which are inherently
difficult to evaluate and subject to significant changes.
CONSOLIDATED RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
Hartford Life Insurance Company provides investment and retirement products
such as variable and fixed annuities, and retirement plan services and other
institutional products; individual and corporate owned life insurance; and,
group benefit products, such as group life and 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 universal 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 in its variable annuity business and to a lesser
extent, variable universal life depends largely on the amount of its assets
under management on which it earns fees and the level of fees charged. Changes
in assets under management are comprised of two main factors: net flows, which
measure the success of the Company's asset gathering and retention efforts
(sales and other deposits less surrenders) and the market return of the funds,
which is heavily influenced by the return on the equity markets. The
profitability of the Company's fixed annuities depends largely on its ability to
earn target spreads between earned investment rates on its general account
assets and interest credited to policyholders. Profitability is
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also influenced by operating expense management including the benefits of
economies of scale in its variable annuity businesses in particular. In
addition, the size and persistency of gross profits from these businesses is an
important driver of earnings as it affects the amortization of the deferred
policy acquisition costs.
The Company's profitability in its individual life insurance business
depends largely on the size of its in force block, the adequacy of product
pricing and underwriting discipline, and the efficiency of its claims and
expense management.
OPERATING SUMMARY
<Table>
<Caption>
2003 VS. 2002 VS.
2002 2001
2003 2002 2001 CHANGE CHANGE
-------- -------- -------- ----------- -----------
Fee income................................... $2,169 $2,079 $2,157 4% (4)%
Earned premiums.............................. 806 453 799 78% (43)%
Net investment income........................ 1,764 1,572 1,491 12% 5%
Other revenues............................... 128 121 128 6% (5)%
Net realized capital gains (losses).......... 1 (276) (87) NM NM
------ ------ ------ ---- ----
TOTAL REVENUES............................. 4,868 3,949 4,488 23% (12)%
------ ------ ------ ---- ----
Benefits, claims and claim adjustment
expenses................................... 2,726 2,275 2,536 20% (10)%
Amortization of deferred policy acquisition
costs and present value of future
profits.................................... 660 531 566 24% (6)%
Insurance operating costs and expenses....... 636 625 610 2% 2%
Other expenses............................... 52 90 80 (42)% 13%
------ ------ ------ ---- ----
TOTAL BENEFITS, CLAIMS AND EXPENSES........ 4,074 3,521 3,792 16% (7)%
------ ------ ------ ---- ----
INCOME BEFORE INCOME TAXES................. 794 428 696 86% (39)%
Income Tax expense........................... 168 2 44 NM (95)%
------ ------ ------ ---- ----
Cumulative effect of accounting changes, net
of tax (1)................................. -- -- (6) -- 100%
------ ------ ------ ---- ----
NET INCOME................................. $ 626 $ 426 $ 646 47% (34)%
====== ====== ====== ==== ====
</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).
Hartford Life Insurance Company is organized into the following reportable
operating segments: Investment Products, Individual Life and Corporate Owned
Life Insurance ("COLI"). The Company also includes in "Other" realized capital
gains and losses, corporate items not directly allocated to any of its
reportable operating segments, as well as certain group benefits operations,
including group life and 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 defines the following as "NM" or not
meaningful: increases or decreases greater than 200%, or changes from a net gain
to a net loss position, or vice versa.
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 the Company's
consolidated results of operations. (For further disclosure, see Note 15 of
Notes to Consolidated Financial Statements).
2003 COMPARED TO 2002 -- Revenues increased as a result of realized gains in
2003 as compared to realized losses in 2002. (See the Investments section for
further discussion of investment results and related realized capital losses.)
Also contributing to the increased revenues were higher earned premiums and net
investment income in the Investment Products segment as compared to the prior
year.
25
<Page>
The increase in earned premiums in Investment Products is attributed to
higher sales in the institutional investment products business, specifically, in
the terminal funding and structured settlement businesses. Additionally, net
investment income increased due to higher general account assets in the
individual annuity business and growth in assets in the institutional
investments business. Fee income in the Investment Products segment was higher
in 2003 compared to a year ago, as a result of higher average account values,
specifically in the individual annuities business, due primarily to stronger
variable annuity sales compared to the prior year. The Individual Life segment
reported an increase in revenues in 2003 compared to a year ago driven by
increases in fees and cost of insurance as life insurance inforce grew and aged,
and variable universal life account values increased 30% due primarily to the
growth in the equity markets. Partially offsetting these increases were lower
fee income and net investment income in the COLI segment. The decrease in COLI
net investment income for 2003 was primarily due to lower average leveraged COLI
account values as a result of surrender activity. In addition, COLI had lower
fee income due in part to lower sales in 2003, as compared to the prior year.
Benefits, claims and expenses increased primarily due to increases in the
Investment Products segment associated with the growth in the individual annuity
and institutional investments businesses discussed above. Partially offsetting
this increase was a decrease in interest credited expenses in COLI related to
the decline in leverage COLI account values. For the year ended December 31,
2003, COLI other expenses decreased due to a $9 after-tax benefit, associated
with the settlement for the Bancorp Services, LLC ("Bancorp") litigation. (For
further discussion of the Bancorp litigation, see Note 12 of Notes to
Consolidated Financial Statements.)
Net income increased for the year ended December 31, 2003 due primarily to
the growth in the Investment Products segment and a decrease in net realized
capital losses compared to a year ago. Additionally, Individual Life experienced
earnings growth in 2003 due to increases in fee income, favorable mortality and
growth in the in force business. COLI net income increased $15 primarily due to
the benefit for the Bancorp litigation recorded in 2003 discussed above.
Partially offsetting the increase was the $3 after-tax impact recorded in the
first quarter of 2002 related to favorable development on the Company's
estimated September 11 exposure.
The effective tax rate increased in 2003 when compared with 2002 as a result
of higher earnings and lower DRD tax items. The tax provision recorded during
2003, reflects a benefit of $23, consisting primarily of a change in estimate of
the DRD tax benefit reported during 2002. The change in estimate was the result
of actual 2002 investment performance on the related separate accounts being
unexpectedly out of pattern with past performance, which had been the basis for
the estimate. The total DRD benefit related to the 2003 tax year for the year
ended December 31, 2003 was $87 as compared to $63 for the year ended
December 31, 2002.
2002 COMPARED TO 2001 -- Revenues decreased, primarily driven by an increase
in realized capital losses in 2002 as compared to the prior year. (See the
Investments section for further discussion of investment results and related
realized capital losses.) Additionally, COLI experienced a decline in revenues,
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 other operating segments. Revenues related to the Investment
Products segment decreased, as a result of lower earned premiums in the
institutional investment product business and a decline 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. Partially offsetting these decreases was an
increase in Individual Life revenues, primarily due to the Fortis acquisition
and increased life insurance in force.
Total benefits, claims and expenses decreased, due primarily to the revenue
changes described above. Expenses decreased in the Investment Products segment,
principally due to a lower change in reserve as a result of the lower earned
premiums discussed above. 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 12 of Notes to
Consolidated Financial Statements.) Also included in 2002 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 decreased due primarily to lower income in Other as a result of
higher realized capital losses and lower income in the Investment Products
segment as a result of the lower equity markets. These declines were partially
offset by an increase in Individual Life primarily due to the Fortis
acquisition. In addition, the
26
<Page>
Company recorded, in 2002, an $11 after-tax expense associated with the Bancorp
Litigation and recognized an after-tax benefit of $3 due to favorable
development related to September 11. In 2001, the Company recorded a $9
after-tax loss related to September 11.
SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
<Table>
<Caption>
2003 2002 2001
-------- -------- --------
Investment Products......................................... $414 $343 $375
Individual Life............................................. 134 116 106
Corporate Owned Life Insurance.............................. 46 31 36
Other....................................................... 32 (64) 129
---- ---- ----
NET INCOME................................................ $626 $426 $646
</Table>
A description of each segment as well as an analysis of the operating
results summarized above is included on the following pages.
INVESTMENT PRODUCTS
OPERATING SUMMARY
<Table>
<Caption>
2003 VS. 2002 VS.
2002 2001
2003 2002 2001 CHANGE CHANGE
--------- -------- --------- ----------- -----------
Fee income and other.................... $ 1,337 $ 1,241 $ 1,351 8% (8)%
Earned premiums......................... 756 395 729 91% (46)%
Net investment income................... 1,254 1,049 865 20% 21%
Net realized capital gains.............. 27 9 2 NM NM
-------- ------- -------- ---- ----
TOTAL REVENUES........................ 3,374 2,694 2,947 25% (9)%
Benefits, claims and claim adjustment
expenses.............................. 1,976 1,441 1,634 37% (12)%
Insurance operating costs and other
expenses.............................. 425 438 414 (3)% 6%
Amortization of deferred policy
acquisition costs..................... 494 385 413 28% (7)%
-------- ------- -------- ---- ----
TOTAL BENEFITS, CLAIMS AND EXPENSES... 2,895 2,264 2,461 28% (8)%
-------- ------- -------- ---- ----
INCOME BEFORE INCOME TAXES............ 479 430 486 11% (12)%
Income tax expense...................... 65 87 111 (25)% (22)%
-------- ------- -------- ---- ----
NET INCOME............................ $ 414 $ 343 $ 375 21% (9)%
======== ======= ======== ==== ====
Individual variable annuity account
values................................ $ 86,501 $64,343 $ 74,581 34% (14)%
Other individual annuity account
values................................ 11,215 10,565 9,572 6% 10%
Other investment products account
values................................ 25,951 19,615 18,912 32% 4%
-------- ------- -------- ---- ----
TOTAL ACCOUNT VALUES.................. $123,667 $94,523 $103,065 31% (8)%
======== ======= ======== ==== ====
</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.
27
<Page>
2003 COMPARED TO 2002 -- Revenues in the Investment Products segment
increased primarily driven by higher earned premiums and higher net investment
income. The increase in earned premiums is due to higher sales of terminal
funding and structured settlement products in the institutional investment
products business. Net investment income increased due to higher general account
assets. General account assets for the individual annuity business were $9.4
billion as of December 31, 2003, an increase of approximately $800 million or 9%
from 2002, due primarily to an increase in individual annuity sales, with a
majority of those new sales electing to use the dollar cost averaging ("DCA")
feature. The DCA feature allows policyholders to earn a credited interest rate
in the general account for a defined period of time as their invested assets are
systematically invested into the separate account funds. Additionally, net
investment income related to other investment products increased as a result of
the growth in average assets over the last twelve months in the institutional
investment business, where related general account assets under management
increased $2.5 billion, since December 31, 2002, to $9.5 billion as of
December 31, 2003. Assets under management is an internal performance measure
used by the Company since a significant portion of the Company's revenue is
based upon asset values. These revenues increase or decrease with a rise or
fall, respectively, in the level of average assets under management. Fee income
in the Investment Products segment was higher in 2003 compared to a year ago, as
a result of higher average account values, specifically in individual annuities,
due primarily to stronger variable annuity sales and the higher equity market
values compared to the prior year.
Total benefits, claims and expenses increased primarily due to higher
terminal funding and structured settlement sales in the institutional investment
business causing an increase in reserve levels and increased interest credited
in the individual annuity operation as a result of higher general account asset
levels. Additionally, amortization of deferred policy acquisition costs related
to the individual annuity business increased due to higher gross profits.
Net income was higher driven by an increase in revenues in the individual
annuity and other investment product operations as a result of the strong net
flows and growth in the equity markets during 2003 and strong expense
management. In addition, net income increased in 2003 compared to 2002 due to
the favorable impact of $21, resulting from the Company's previously discussed
change in estimate of the DRD tax benefit reported during 2002. The change in
estimate was the result of 2002 actual investment performance on the related
separate accounts being unexpectedly out of pattern with past performance, which
had been the basis for the estimate. The total DRD benefit related to the 2003
tax year for the year ended December 31, 2003 was $81 as compared to $59 for the
year ended December 31, 2002.
2002 COMPARED TO 2001 -- Revenues in the Investment Products segment
decreased, primarily due to lower earned premiums in the institutional
investment products business and 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. Partially offsetting these declines
was an increase in net investment income, primarily driven by growth in the
institutional investment product business.
Total benefits, claims and expenses decreased, due primarily to a lower
change in reserve as a result of the lower earned premiums discussed above.
Additionally, there was a decrease in amortization of policy acquisition costs
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. Partially offsetting these decreases were increases in interest
credited on general account assets, commissions and wholesaling expenses and
individual annuity death benefit costs due to the lower equity markets.
Net income decreased, 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.
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. In addition,
the Company believes that it has developed and implemented strategies to
maintain and enhance its position as a market leader in the financial services
industry. This was demonstrated by record individual annuity sales in 2003 of
$16.5 billion (a 42% increase) compared to $11.6 billion and $10.0 billion in
2002 and 2001, respectively. Significantly contributing to the growth in sales
was the introduction of Principal First, a guaranteed minimum withdrawal benefit
rider, which was
28
<Page>
developed in response to our customers' needs. However, the competition is
increasing in this market and as a result, the Company may not be able to
sustain the level of sales attained in 2003. Based on VARDS, the Company had
12.6% market share as of December 31, 2003 as compared to 9.4% at December 31,
2002.
The growth and profitability of the individual annuity business is dependent
to a large degree on the performance of the equity markets. In periods of
favorable equity market performance, the Company may experience stronger sales
and higher net cash flows, which will increase assets under management and thus
increase fee income earned on those assets. In addition, higher equity market
levels will generally reduce certain costs to the Company of individual
annuities, such as GMDB and GMWB benefits. Conversely though, weak equity
markets may dampen sales activity and increase surrender activity causing
declines in assets under management and lower fee income. Such declines in the
equity markets will also increase the cost to the Company of GMDB and GMWB
benefits associated with individual annuities. The Company attempts to mitigate
some of the volatility associated with the GMDB and GMWB benefits using
reinsurance or other risk management strategies. Future net income for the
Company will be affected by the effectiveness of the risk management strategies
the Company has implemented to mitigate the net income volatility associated
with the GMDB and GMWB benefits of variable annuity contracts. For spread based
products sold in the Investment Products segment, the future growth will depend
on the ability to earn targeted returns on new business, given competition and
the future interest rate environment.
INDIVIDUAL LIFE
OPERATING SUMMARY
<Table>
<Caption>
2003 VS. 2002 VS.
2002 2001
2003 2002 2001 CHANGE CHANGE
-------- -------- -------- ----------- -----------
Fee income and other......................... $ 671 $ 635 $ 570 6% 11%
Net investment income........................ 222 224 205 (1)% 9%
Net realized capital losses.................. -- (1) (1) 100% --
------ ------ ------ --- ----
TOTAL REVENUES............................. 893 858 774 4% 11%
Benefits, claims and claim adjustment
expenses................................... 380 393 330 (3)% 19%
Insurance operating costs and other
expenses................................... 150 144 131 4% 10%
Amortization of deferred policy acquisition
costs...................................... 165 146 153 13% (5)%
TOTAL BENEFITS, CLAIMS AND EXPENSES........ 695 683 614 2% 11%
------ ------ ------ --- ----
INCOME BEFORE INCOME TAXES................. 198 175 160 13% 9%
Income tax expense........................... 64 59 54 8% 9%
------ ------ ------ --- ----
NET INCOME................................. $ 134 $ 116 $ 106 16% 9%
====== ====== ====== === ====
Variable universal life account values....... $4,725 $3,648 $3,993 30% (9)%
------ ------ ------ --- ----
Total account values......................... $8,200 $7,019 $7,329 17% (4)%
------ ------ ------ --- ----
</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.
2003 COMPARED TO 2002 -- Revenues in the Individual Life segment increased
primarily driven by increases in fees and cost of insurance charges as life
insurance in force grew and aged, and variable universal life account values
increased 30%, driven by the growth in the equity markets in 2003. These
increases were partially offset by lower earned premiums and net investment
income in 2003. The decrease in net investment income was due primarily to lower
investment yields. Earned premiums, which include premiums for ceded reinsurance
decreased primarily due to increased use of reinsurance.
Total benefits, claims and expenses increased, principally driven by an
increase in amortization of deferred policy acquisition costs. These increases
were partially offset by a decrease in benefit costs in 2003 as compared to 2002
due to favorable mortality rates compared to the prior year.
29
<Page>
Net income increased due to increases in fee income and unusually favorable
mortality. Additionally, net income for the year ended December 31, 2003
includes the favorable impact of $2 DRD benefit resulting from the Company's
previously discussed change in estimate of the DRD tax benefit reported during
2002. The total DRD benefit related to the 2003 tax year for the year ended
December 31, 2003 was $4 as compared to $3 for the year ended December 31, 2002.
2002 COMPARED TO 2001 -- Revenues in the Individual Life segment increased,
primarily driven by business growth including the impact of the Fortis
transaction. Total benefit, claims and expenses increased, principally driven by
the growth in the business including the impact of the Fortis acquisition. In
addition, mortality experience (expressed as death claims as a percentage of net
amount at risk) for 2002 increased as compared to the prior year, but were in
line with management's expectations. Individual Life earnings increased for the
year ended December 31, 2002 , principally due to the contribution to earnings
from the Fortis transaction. The increase in net income was also impacted by an
after-tax loss of $3 related to September 11 in the third quarter of 2001.
OUTLOOK
The individual life segment benefited from unusually favorable mortality
during the fourth quarter. It is not anticipated that similar experience would
be likely to continue. Individual life sales grew to $196 in 2003 from $173 in
2002 with the successful introduction of new universal life and whole life
products. Improved equity markets should help increase variable universal life
sales. The Company also continues to introduce new and enhanced products, which
are expected to increase sales. However, the Company continues to face
uncertainty surrounding estate tax legislation and aggressive competition from
life insurance providers. The Company is actively pursuing broader distribution
opportunities to fuel growth, including our Pinnacle Partners marketing
initiative, and anticipates growth at Woodbury Financial Services.
CORPORATE OWNED LIFE INSURANCE (COLI)
OPERATING SUMMARY
<Table>
<Caption>
2003 VS. 2002 VS.
2002 2001
2003 2002 2001 CHANGE CHANGE
-------- -------- -------- ----------- -----------
Fee income and other...................... $ 266 $ 315 $ 365 (16)% (14)%
Net investment income..................... 215 276 352 (22)% (22)%
Net realized capital gains................ 1 1 -- -- NM
------- ------- ------- ---- ----
TOTAL REVENUES.......................... 482 592 717 (19)% (17)%
Benefits, claims and claim adjustment
expenses................................ 324 401 514 (19)% (22)%
Insurance operating costs and expenses.... 30 84 84 (64)% --
Dividends to policyholders................ 60 62 66 (3)% (6)%
------- ------- ------- ---- ----
TOTAL BENEFITS, CLAIMS AND EXPENSES..... 414 547 664 (24)% (18)%
------- ------- ------- ---- ----
INCOME BEFORE INCOME TAXES.............. 68 45 53 51% (15)%
Income tax expense........................ 22 14 17 57% (18)%
------- ------- ------- ---- ----
NET INCOME.............................. $ 46 $ 31 $ 36 48% (14)%
======= ======= ======= ==== ====
Variable COLI account values.............. $20,993 $19,674 $18,019 7% 9%
Leveraged COLI account values............. 2,524 3,321 4,315 (24)% (23)%
------- ------- ------- ---- ----
Total account values...................... $23,517 $22,995 $22,334 2% 3%
======= ======= ======= ==== ====
</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.
30
<Page>
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.
2003 COMPARED TO 2002 -- COLI revenues decreased, primarily driven by lower
net investment and fee income. Net investment income and fee income decreased
due to the decline in leveraged COLI account values as a result of surrender
activity. Fee income was also reduced as the result of lower sales volume in
2003 as compared to prior year.
Total benefits, claims and expenses decreased in 2003, primarily as a result
of a decline in interest credited. This was due to the decline in general
account assets as compared to 2002. This is related to the surrender activity
noted above. Additionally, total benefits, claims and expenses decreased in 2003
as a result of a $9 after-tax benefit recorded in insurance operating costs and
expenses related to the Bancorp litigation. (For further discussion of the
Bancorp litigation, see Note 12 of Notes to Consolidated financial Statements.)
In addition, total benefits, claims and expenses for the year ended
December 31, 2002 included an $11 after-tax expense related to the Bancorp
litigation accrued in the first quarter of 2002.
Net income increased in 2003 compared to 2002 principally as a result of the
Bancorp litigation benefit of $9, after-tax, recorded in the third quarter of
2003. Excluding the benefit (expense) associated with the Bancorp litigation
discussed above, net income decreased $5 or 12%, primarily due to the decline in
leveraged COLI account values discussed above.
2002 COMPARED TO 2001 -- COLI revenues decreased, primarily related to lower
net investment and fee income due to the declining block of leveraged COLI
compared to a year ago. Total benefits, claims and expenses decreased, 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. COLI's net income decreased principally
due to the $11 after-tax expense accrued in connection with the Bancorp
litigation. The decrease in net income was also impacted by an after-tax loss of
$2 related to September 11 recorded in the third quarter of 2001.
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 COLI'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 2003, compared to 2002. COLI continues to be
subject to a changing legislative and regulatory environment that could have a
material adverse effect on its business.
INVESTMENTS
GENERAL
The investment portfolios are managed based on the underlying
characteristics and nature of each operation's respective liabilities and within
established risk parameters. (For a further discussion of Hartford Life
Insurance Company's approach to managing risks, see the Investment Credit Risk
and Capital Markets Risk Management sections.)
The investment portfolios are managed by Hartford Investment Management
Company ("Hartford Investment Management"), a wholly-owned subsidiary of The
Hartford. Hartford Investment Management 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.
The primary investment objective of Hartford Life Insurance Company's
general account 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
policyholder and corporate obligations, as discussed in the Capital Markets Risk
Management section under "Market Risk -Key Market Risk Exposures".
31
<Page>
Return on general account invested assets is an important element of
Hartford Life Insurance Company's financial results. Significant fluctuations in
the fixed income or equity markets could weaken the Company's financial
condition or its results of operations. Additionally, changes in market interest
rates may impact the period of time over which certain investments, such as
mortgage-backed securities, are repaid and whether certain investments are
called by the issuers. Such changes may, in turn, impact the yield on these
investments and also may result in reinvestment of funds received from calls and
prepayments at rates below the average portfolio yield. Net investment income
and net realized capital gains and losses accounted for approximately 36%, 33%
and 32% of the Company's consolidated revenues for the years ended December 31,
2003, 2002 and 2001, respectively.
Fluctuations in interest rates affect the Company's return on, and the fair
value of, general account fixed maturity investments, which comprised
approximately 90% and 86% of the fair value of its invested assets as of
December 31, 2003 and 2002, 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 invests in private placement securities, mortgage loans and
limited partnership arrangements in order to further diversify its investment
portfolio. These investment types comprised approximately 19% of the fair value
of its invested assets as of December 31, 2003 and 2002. These security types
are typically less liquid than direct investments in publicly traded fixed
income or equity investments. However, generally these securities have higher
yields to compensate for the liquidity risk.
A decrease in the fair value of any investment that is deemed
other-than-temporary would result in the Company's recognition of a net realized
capital loss in its financial results prior to the actual sale of the
investment. (For a further discussion, see the Company's discussion of the
evaluation of other-than-temporary impairments in Critical Accounting Estimates
under "Investments".)
The following table identifies the invested assets by type held in the
general account as of December 31, 2003 and 2002.
COMPOSITION OF INVESTED ASSETS
<Table>
<Caption>
2003 2002
---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- -------
Fixed maturities, at fair value........................ $30,085 90.4% $24,786 86.3%
Equity securities, at fair value....................... 85 0.3% 120 0.4%
Policy loans, at outstanding balance................... 2,470 7.4% 2,895 10.1%
Mortgage loans, at cost................................ 354 1.1% 243 0.8%
Limited partnerships, at fair value.................... 169 0.5% 486 1.7%
Other investments...................................... 116 0.3% 189 0.7%
------- ----- ------- -----
TOTAL INVESTMENTS...................................... $33,279 100.0% $28,719 100.0%
======= ===== ======= =====
</Table>
During 2003, fixed maturity investments increased 21%, primarily the result
of investment and universal life contract sales, operating cash flows and
redeployment of invested assets from limited partnerships. In March 2003, the
Company decided to liquidate its hedge fund limited partnership investments and
reinvest the proceeds in fixed maturity investments. Hedge fund liquidations
totaled $372 during the year and as of December 31, 2003 were fully liquidated.
32
<Page>
INVESTMENT RESULTS
The following table summarizes the Company's investment results.
<Table>
<Caption>
(BEFORE-TAX) 2003 2002 2001
- ------------ -------- -------- --------
Net investment income -- excluding policy loan
income (1)................................................ $1,557 $1,321 $1,187
Policy loan income.......................................... 207 251 304
------ ------ ------
Net investment income -- total (1).......................... $1,764 $1,572 $1,491
Yield on average invested assets (2)........................ 6.1% 6.2% 7.1%
------ ------ ------
Gross gains on sale......................................... 215 138 83
Gross losses on sale........................................ (95) (80) (59)
Impairments................................................. (139) (340) (93)
Periodic net coupon settlements on non-qualifying
derivatives (1)........................................... 29 13 4
Other, net (3).............................................. (9) (7) (22)
------ ------ ------
Net realized capital gains (losses), before-tax (1)......... $ 1 $ (276) $ (87)
====== ====== ======
</Table>
(1) PRIOR PERIODS REFLECT THE RECLASSIFICATION OF PERIODIC NET COUPON
SETTLEMENTS ON NON-QUALIFYING DERIVATIVES FROM NET INVESTMENT INCOME TO NET
REALIZED CAPITAL GAINS (LOSSES).
(2) REPRESENTS NET INVESTMENT INCOME (EXCLUDING NET REALIZED CAPITAL GAINS
(LOSSES)) DIVIDED BY AVERAGE INVESTED ASSETS AT COST OR AMORTIZED COST, AS
APPLICABLE. AVERAGE INVESTED ASSETS ARE CALCULATED BY DIVIDING THE SUM OF
THE BEGINNING AND ENDING PERIOD AMOUNTS BY TWO, EXCLUDING THE COLLATERAL
OBTAINED FROM THE SECURITIES LENDING PROGRAM.
(3) PRIMARILY CONSISTS OF CHANGES IN FAIR VALUE AND HEDGE INEFFECTIVENESS ON
DERIVATIVE INSTRUMENTS AS WELL AS THE AMORTIZATION OF DEFERRED ACQUISITION
COSTS.
2003 COMPARED TO 2002 -- Net investment income, excluding policy loan
income, increased $236, or 18%, compared to the prior year. The increase was
primarily due to income earned on a higher invested asset base partially offset
by lower investment yields. Policy loan income decreased primarily due to the
decline in leveraged COLI policies, as a result of surrender activity and lower
sales. Yield on average invested assets decreased as a result of lower rates on
new investment purchases and decreased policy loan income.
Net realized capital gains (losses) for 2003 improved by $277 compared to
the prior year, primarily as a result of net gains on sales of fixed maturities
and a decrease in other-than-temporary impairments on fixed maturities. (For a
further discussion of other-than-temporary impairments, see the
Other-Than-Temporary Impairments commentary in this section of the MD&A.)
2002 COMPARED TO 2001 -- Net investment income, excluding policy loan
income, increased $134, or 11%. The increase was primarily due to income earned
on a higher invested asset base partially offset by lower income on limited
partnerships and the impact of lower interest rates on new investment purchases.
Policy loan income decreased primarily due to the decline in leveraged COLI
policies, as a result of surrender activity and lower sales. Yield 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 for 2002 increased $189, or 217%, compared to
the prior year as a result of higher other-than-temporary impairments. (For a
further discussion of other-than-temporary impairments, see the
Other-Than-Temporary Impairments commentary in this section of the MD&A.)
SEPARATE ACCOUNT PRODUCTS -- Separate account products are those for which a
separate investment and liability account is maintained on behalf of the
policyholder. The Company's separate accounts reflect two categories of risk
assumption: non-guaranteed separate accounts totaling $118.1 billion and $93.5
billion as of December 31, 2003 and 2002, respectively, wherein the policyholder
assumes substantially all the risk and reward; and guaranteed separate accounts
totaling $12.1 billion and $11.8 billion as of December 31, 2003 and 2002,
respectively, wherein the Company contractually guarantees either a minimum
return or the 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
33
<Page>
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 -- Key Market Risk Exposures". Effective January 1, 2004, these
investments will be included with general account assets pursuant to Statement
of Position ("SOP") 03-01, "Accounting and Reporting by Insurance Enterprises
for Certain Nontraditional Long-Duration Contracts and for Separate Accounts".
Investment objectives for non-guaranteed separate accounts, which consist of
the participants' account balances, 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
universal life insurance contracts and variable COLI.
OTHER-THAN-TEMPORARY IMPAIRMENTS -- The following table identifies the
Company's other-than-temporary impairments by type.
OTHER-THAN-TEMPORARY IMPAIRMENTS BY TYPE
<Table>
<Caption>
(BEFORE-TAX) 2003 2002 2001
- ------------ -------- -------- --------
Asset-backed securities ("ABS")
Aircraft lease receivables................................ $ 29 $ 65 $ 2
Corporate debt obligations ("CDO")........................ 15 29 9
Credit card receivables................................... 12 9 --
Interest only securities.................................. 5 3 10
Manufacturing housing ("MH") receivables.................. 9 14 --
Mutual fund fee receivables............................... 3 16 --
Other ABS................................................. 2 13 3
---- ---- ---
Total ABS............................................... 75 149 24
Commercial mortgage-backed securities ("CMBS").............. 5 4 --
Corporate
Basic industry............................................ 2 -- 4
Consumer non-cyclical..................................... 7 -- --
Financial services........................................ 2 6 --
Food and beverage......................................... 25 -- --
Technology and communications............................. 2 137 17
Transportation............................................ 7 1 --
Utilities................................................. -- 22 37
Other Corporate........................................... -- 10 --
---- ---- ---
Total Corporate......................................... 45 176 58
Equity...................................................... 8 -- --
Foreign government.......................................... -- 11 11
Mortgage-backed securities ("MBS") -- interest only
securities................................................ 6 -- --
---- ---- ---
TOTAL OTHER-THAN-TEMPORARY IMPAIRMENTS...................... $139 $340 $93
==== ==== ===
</Table>
ABS -- During 2003, other-than-temporary impairments were recorded for
various ABS security types as a result of a continued deterioration of cash
flows derived from the underlying collateral. A significant number of these
impairments were recorded on the Company's investments in lower tranches of ABS
supported by aircraft lease and enhanced equipment trust certificates (together,
"aircraft lease receivables") due to continued lower aircraft lease rates and
the prolonged decline in airline travel. CDO impairments were primarily the
result of increasing default rates and lower recovery rates on the collateral.
Impairments on ABS backed by
34
<Page>
credit card receivables were a result of issuers extending credit to sub-prime
borrowers and the higher default rates on these loans, while impairments on
securities supported by MH receivables were primarily the result of repossessed
units liquidated at depressed levels. Interest only security impairments
recorded during 2003, 2002 and 2001 were due to the flattening of the forward
yield curve.
Impairments of ABS during 2002 and 2001 were driven by deterioration of
collateral cash flows. Numerous bankruptcies, collateral defaults, weak economic
conditions and reduced airline travel were all factors contributing to lower
collateral cash flows and broker quoted market prices of ABS.
CORPORATE -- The decline in corporate bankruptcies and improvement in
general economic conditions have contributed to lower corporate impairment
levels in 2003 compared to 2002.
A significant portion of corporate impairments during 2003 resulted from
issuers who experienced fraud or accounting irregularities. The most significant
of these was the Italian dairy concern, Parmalat SpA, and one consumer
non-cyclical issuer in the healthcare industry which resulted in a $25 and $6,
before-tax loss, respectively. A loss of $3 was recorded relating to one
communications sector issuer in the cable television industry due to
deteriorating earnings forecasts, debt restructuring issues and accounting
irregularities. Additional impairments were incurred as a result of the
deterioration in the transportation sector during the first half of the year,
specifically issuers of airline debt, as a result of a continued decline in
airline travel.
During 2002, impairments of corporate securities were concentrated in the
technology and communications sector and included a $74, before-tax, loss
related to securities issued by WorldCom.
During 2001, impairments of corporate securities were concentrated in the
technology and communications and the utilities sectors, which included a $37,
before-tax, loss related to securities issued by Enron Corporation.
OTHER -- Other-than-temporary impairments were also recorded in 2003 on
various diversified mutual funds and preferred stock investments. In 2002 and
2001 other-than-temporary impairments were recognized on various common stock
investments, primarily in the technology and communications sector, which had
experienced declines in fair value for an extended period of time.
In addition to the impairments described above, fixed maturity and equity
securities were sold during 2003, 2002 and 2001 at total gross losses of $74,
$63 and $61, respectively. No single security was sold at a loss in excess of
$8, $13 and $6 during 2003, 2002 and 2001, respectively.
Based upon the general improvement in corporate credit quality, favorable
overall market conditions and the apparent stabilization in certain ABS types,
the Company expects other-than-temporary impairments to trend lower in 2004 from
the 2003 and 2002 amounts.
INVESTMENT 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 by the Company's Finance Committee of the Board of Directors.
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
35
<Page>
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 which are reviewed periodically by the Company's internal
compliance unit, reviewed frequently by senior management and reported to the
Company's Finance Committee of the 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.
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,
who assumes credit exposure 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. A credit event is generally defined as default on contractually
obligated interest or principal payment or restructure.
As of December 31, 2003 and 2002, the notional value of total return and
credit default swaps totaled $450 and $437, respectively, and the swap fair
value totaled $(17) and $(41), respectively.
36
<Page>
The following table identifies fixed maturity securities by type, including
guaranteed separate accounts, as of December 31, 2003 and December 31, 2002.
<Table>
<Caption>
2003
------------------------------------------------------
PERCENT
AMORTIZED UNREALIZED UNREALIZED FAIR OF TOTAL
FIXED MATURITIES BY TYPE COST GAINS LOSSES VALUE FAIR VALUE
- ------------------------ --------- ---------- ---------- ------- ----------
ABS.................................................... $ 5,118 $ 109 $ (96) $ 5,131 12.3%
CMBS................................................... 7,010 384 (21) 7,373 17.6%
Collateralized mortgage obligations ("CMO")............ 681 12 (2) 691 1.7%
Corporate
Basic industry....................................... 2,680 208 (8) 2,880 6.9%
Capital goods........................................ 1,222 98 (5) 1,315 3.1%
Consumer cyclical.................................... 2,113 153 (5) 2,261 5.4%
Consumer non-cyclical................................ 2,576 190 (8) 2,758 6.6%
Energy............................................... 1,389 116 (5) 1,500 3.6%
Financial services................................... 4,995 385 (24) 5,356 12.9%
Technology and communications........................ 3,315 357 (10) 3,662 8.8%
Transportation....................................... 568 41 (3) 606 1.4%
Utilities............................................ 1,820 174 (11) 1,983 4.7%
Other................................................ 507 23 (1) 529 1.3%
Government/Government agencies
Foreign.............................................. 810 77 (1) 886 2.1%
United States........................................ 981 30 (4) 1,007 2.4%
MBS -- agency.......................................... 1,916 30 (2) 1,944 4.6%
Municipal
Taxable.............................................. 374 14 (7) 381 0.9%
Redeemable preferred stock............................. 1 -- -- 1 --
Short-term............................................. 1,555 1 -- 1,556 3.7%
------- ------ ----- ------- ------
TOTAL FIXED MATURITIES................................. $39,631 $2,402 $(213) $41,820 100.0%
======= ====== ===== ======= ======
TOTAL GENERAL ACCOUNT FIXED MATURITIES................. $28,511 $1,715 $(141) $30,085 71.9%
TOTAL GUARANTEED SEPARATE ACCOUNT FIXED MATURITIES..... $11,120 $ 687 $ (72) $11,735 28.1%
======= ====== ===== ======= ======
</Table>
37
<Page>
<Table>
<Caption>
2002
------------------------------------------------------
PERCENT
AMORTIZED UNREALIZED UNREALIZED FAIR OF TOTAL
FIXED MATURITIES BY TYPE COST GAINS LOSSES VALUE FAIR VALUE
- ------------------------ --------- ---------- ---------- ------- ----------
ABS.................................................... $ 5,115 $ 109 $(143) $ 5,081 14.2%
CMBS................................................... 4,979 416 (9) 5,386 15.0%
Collateralized mortgage obligations ("CMO")............ 752 33 (2) 783 2.2%
Corporate
Basic industry....................................... 2,000 129 (7) 2,122 5.9%
Capital goods........................................ 1,048 68 (7) 1,109 3.1%
Consumer cyclical.................................... 1,425 88 (3) 1,510 4.2%
Consumer non-cyclical................................ 2,462 176 (16) 2,622 7.3%
Energy............................................... 1,446 110 (8) 1,548 4.3%
Financial services................................... 4,956 307 (81) 5,182 14.4%
Technology and communications........................ 2,911 247 (68) 3,090 8.6%
Transportation....................................... 571 45 (11) 605 1.7%
Utilities............................................ 1,757 114 (41) 1,830 5.1%
Other................................................ 404 18 -- 422 1.2%
Government/Government agencies
Foreign.............................................. 720 68 (5) 783 2.2%
United States........................................ 553 44 -- 597 1.7%
MBS -- agency.......................................... 2,035 58 -- 2,093 5.8%
Municipal
Taxable.............................................. 98 16 (1) 113 0.3%
Redeemable preferred stock............................. 1 -- -- 1 --
Short-term............................................. 993 1 -- 994 2.8%
------- ------ ----- ------- ------
TOTAL FIXED MATURITIES................................. $34,226 $2,047 $(402) $35,871 100.0%
======= ====== ===== ======= ======
TOTAL GENERAL ACCOUNT FIXED MATURITIES................. $23,675 $1,389 $(278) $24,786 69.1%
TOTAL GUARANTEED SEPARATE ACCOUNT FIXED MATURITIES..... $10,551 $ 658 $(124) $11,085 30.9%
======= ====== ===== ======= ======
</Table>
The Company's fixed maturity gross unrealized gains and losses have improved
by $355 and $189, respectively from December 31, 2002 to December 31, 2003,
primarily due to improved corporate credit quality and to a lesser extent
recognition of other-than-temporary impairments and asset sales, partially
offset by an increase in interest rates. The improvement in corporate credit
quality was largely due to the security issuers' renewed emphasis on improving
liquidity, reducing leverage and various cost cutting measures. Throughout 2003,
the general economic outlook has continued to rebound, the result of improved
profitability supported by improved manufacturing demand, a continued strong
housing market and robust consumer and government spending. The apparent
economic acceleration has resulted in the 10 year Treasury rate increasing over
40 basis points since December 31, 2002 and more than 100 basis points from its
low in June 2003.
Investment allocations as a percentage of total fixed maturities have
remained materially consistent since December 31, 2002, except for ABS and CMBS.
Although the fair value of the Company's ABS fixed maturities improved
slightly during 2003, portfolio allocations to ABS decreased in favor of other
sectors with higher relative yields. Portfolio allocations to CMBS increased due
to the asset class's stable spreads and high quality. CMBS securities have lower
prepayment risk than MBS due to contractual penalties.
38
<Page>
As of December 31, 2003 and 2002, 21% and 20%, respectively, of the fixed
maturities were invested in private placement securities, including 13% and 12%
of Rule 144A offerings to qualified institutional buyers. Private placement
securities are generally less liquid than public securities. Most of the private
placement securities are rated by nationally recognized rating agencies.
For a further discussion of risk factors associated with sectors with
significant unrealized loss positions, see the sector risk factor commentary
under the Total Securities with Unrealized Loss Greater than Six Months by Type
schedule in this section of the MD&A.
The following table identifies fixed maturities by credit quality, including
guaranteed separate accounts, as of December 31, 2003 and 2002. The ratings
referenced below 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.
<Table>
<Caption>
2003 2002
--------------------------------- ---------------------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
AMORTIZED FAIR AMORTIZED FAIR
FIXED MATURITIES BY CREDIT QUALITY COST FAIR VALUE VALUE COST FAIR VALUE VALUE
- ---------------------------------- --------- ---------- -------- --------- ---------- --------
United States Government/Government
agencies............................ $ 3,598 $ 3,661 8.8% $ 3,213 $ 3,341 9.3%
AAA................................... 6,652 6,922 16.5% 5,077 5,399 15.1%
AA.................................... 3,326 3,504 8.4% 3,334 3,507 9.8%
A..................................... 11,743 12,576 30.1% 11,019 11,687 32.5%
BBB................................... 10,833 11,561 27.6% 8,662 9,081 25.3%
BB & below............................ 1,925 2,040 4.9% 1,928 1,862 5.2%
Short-term............................ 1,554 1,556 3.7% 993 994 2.8%
------- ------- ----- ------- ------- -----
TOTAL FIXED MATURITIES................ $39,631 $41,820 100.0% $34,226 $35,871 100.0%
======= ======= ===== ======= ======= =====
TOTAL GENERAL ACCOUNT FIXED
MATURITIES.......................... $28,511 $30,085 71.9% $23,675 $24,786 69.1%
TOTAL GUARANTEED SEPARATE ACCOUNT
FIXED MATURITIES.................... $11,120 $11,735 28.1% $10,551 $11,085 30.9%
======= ======= ===== ======= ======= =====
</Table>
As of December 31, 2003 and 2002, over 95% and 94%, respectively, of the
fixed maturity portfolio was invested in short-term securities or securities
rated investment grade (BBB and above).
39
<Page>
The following table presents the Below Investment Grade ("BIG") fixed
maturities by type, including guaranteed separate accounts, as of December 31,
2003 and 2002.
BIG FIXED MATURITIES BY TYPE
<Table>
<Caption>
2003 2002
--------------------------------- ---------------------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
AMORTIZED FAIR AMORTIZED FAIR
COST FAIR VALUE VALUE COST FAIR VALUE VALUE
--------- ---------- -------- --------- ---------- --------
ABS................................... $ 231 $ 210 10.3% $ 149 $ 132 7.1%
CMBS.................................. 102 103 5.0% 102 108 5.8%
Corporate
Basic industry...................... 183 192 9.4% 197 198 10.6%
Capital goods....................... 103 106 5.3% 131 131 7.0%
Consumer cyclical................... 241 261 12.8% 213 218 11.7%
Consumer non-cyclical............... 256 268 13.1% 181 173 9.3%
Energy.............................. 78 85 4.2% 80 81 4.4%
Financial services.................. 12 12 0.6% 25 18 1.0%
Technology and communications....... 274 326 16.0% 383 345 18.5%
Transportation...................... 21 23 1.1% 19 18 1.0%
Utilities........................... 268 278 13.6% 287 261 14.0%
Foreign government.................... 145 164 8.0% 145 162 8.7%
Other................................. 11 12 0.6% 16 17 0.9%
------ ------ ----- ------ ------ -----
TOTAL FIXED MATURITIES................ $1,925 $2,040 100.0% $1,928 $1,862 100.0%
------ ------ ----- ------ ------ -----
TOTAL GENERAL ACCOUNT FIXED
MATURITIES.......................... $1,179 $1,258 61.7% $1,239 $1,178 63.3%
TOTAL GUARANTEED SEPARATE ACCOUNT
FIXED MATURITIES.................... $ 746 $ 782 38.3% $ 689 $ 684 36.7%
====== ====== ===== ====== ====== =====
</Table>
As of December 31, 2003 and 2002 the Company held no issuer of a BIG
security with a fair value in excess of 3% and 4%, respectively, of the total
fair value for BIG securities.
40
<Page>
The following table presents the Company's unrealized loss aging for total
fixed maturity and equity securities, including guaranteed separate accounts, as
of December 31, 2003 and 2002, by length of time the security was in an
unrealized loss position.
<Table>
<Caption>
2003 2002
----------------------------------- -----------------------------------
AMORTIZED UNREALIZED AMORTIZED UNREALIZED
UNREALIZED LOSS AGING OF TOTAL SECURITIES COST FAIR VALUE LOSS COST FAIR VALUE LOSS
- ----------------------------------------- --------- ---------- ---------- --------- ---------- ----------
Three months or less.................. $2,636 $2,615 $ (21) $1,382 $1,316 $ (66)
Greater than three months to six
months.............................. 1,795 1,739 (56) 1,211 1,158 (53)
Greater than six months to nine months... 230 216 (14) 519 465 (54)
Greater than nine months to twelve
months.............................. 133 126 (7) 1,247 1,181 (66)
Greater than twelve months............ 1,450 1,331 (119) 1,873 1,693 (180)
------ ------ ----- ------ ------ -----
TOTAL................................. $6,244 $6,027 $(217) $6,232 $5,813 $(419)
====== ====== ===== ====== ====== =====
TOTAL GENERAL ACCOUNTS................ $4,221 $4,076 $(145) $4,113 $3,820 $(293)
------ ------ ----- ------ ------ -----
TOTAL GUARANTEED SEPARATE
ACCOUNTS............................ $2,023 $1,951 $ (72) $2,119 $1,993 $(126)
====== ====== ===== ====== ====== =====
</Table>
The decrease in the unrealized loss amount since December 31, 2002 is
primarily the result of improved corporate fixed maturity credit quality and to
a lesser extent recognition of other-than-temporary impairments and asset sales,
partially offset by an increase in interest rates. (For further discussion, see
the economic commentary under the Fixed Maturities by Type table in this section
of the MD&A.)
As of December 31, 2003, fixed maturities represented $213, or 98%, of the
Company's total unrealized loss. There were no fixed maturities as of December
31, 2003 with a fair value less than 80% of the security's amortized cost basis
for six continuous months other than certain asset-backed and commercial
mortgage-backed securities. Other-than-temporary impairments for certain
asset-backed and commercial mortgage-backed securities are recognized if the
fair value of the security, as determined by external pricing sources, is less
than its carrying amount and there has been a decrease in the present value of
the expected cash flows since the last reporting period. There were no
asset-backed or commercial mortgage-backed securities included in the table
above, as of December 31, 2003 and 2002, for which management's best estimate of
future cash flows adversely changed during the reporting period. As of
December 31, 2003, no asset-backed or commercial mortgage backed securities had
an unrealized loss in excess of $12. (For a further discussion of the
other-than-temporary impairments criteria, see "Investments" included in the
Critical Accounting Estimates section of the MD&A and in Note 2 of Notes to
Consolidated Financial Statements.)
The Company held no securities of a single issuer that were at an unrealized
loss position in excess of 7% and 4% of the total unrealized loss amount as of
December 31, 2003 and 2002, respectively.
The total securities in an unrealized loss position for longer than six
months by type as of December 31, 2003 and 2002 are presented in the following
table.
41
<Page>
TOTAL SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS BY TYPE
<Table>
<Caption>
2003 2002
---------------------------------------------- ----------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMORTIZED FAIR UNREALIZED UNREALIZED AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE LOSS LOSS COST VALUE LOSS LOSS
--------- -------- ---------- ---------- --------- -------- ---------- ----------
ABS and CMBS
Aircraft lease
receivables.......... $ 153 $ 99 $ (54) 38.6% $ 90 $ 77 $ (13) 4.3%
CDOs.................. 132 113 (19) 13.6% 204 172 (32) 10.7%
Credit card
receivables.......... 118 108 (10) 7.1% 358 317 (41) 13.7%
Other ABS and
CMBS................. 569 555 (14) 10.0% 689 675 (14) 4.6%
Corporate
Financial services.... 524 502 (22) 15.7% 614 557 (57) 19.0%
Technology and
communications....... 37 36 (1) 0.7% 427 380 (47) 15.7%
Transportation........ 25 22 (3) 2.1% 60 50 (10) 3.3%
Utilities............. 80 74 (6) 4.3% 256 233 (23) 7.7%
Other................. 164 153 (11) 7.9% 585 563 (22) 7.3%
Diversified equity
mutual funds.......... 3 3 -- -- 64 48 (16) 5.3%
Other securities........ 8 8 -- -- 292 267 (25) 8.4%
------ ------ ----- ------ ------ ------ ----- ------
TOTAL................... $1,813 $1,673 $(140) 100.0% $3,639 $3,339 $(300) 100.0%
------ ------ ----- ------ ------ ------ ----- ------
TOTAL GENERAL
ACCOUNTS.............. $1,174 $1,080 $ (94) 67.1% $2,362 $2,164 $(198) 66.0%
TOTAL GUARANTEED
SEPARATE ACCOUNTS..... $ 639 $ 593 $ (46) 32.9% $1,277 $1,175 $(102) 34.0%
====== ====== ===== ====== ====== ====== ===== ======
</Table>
The ABS securities in an unrealized loss position for six months or more as
of December 31, 2003, were primarily supported by aircraft lease receivables,
CDOs and credit card receivables. The Company's current view of risk factors
relative to these fixed maturity types is as follows:
AIRCRAFT LEASE RECEIVABLES -- The securities supported by aircraft lease
receivables continued to decline in value during 2003 due to a reduction in
lease payments and aircraft values driven by a prolonged decline in airline
travel, which has resulted in the financial difficulties of many airline
carriers. As a result of the uncertainty surrounding the timing of any potential
recovery in this industry, significant risk premiums have been required by the
market for these securities, resulting in reduced liquidity and lower broker
quoted prices. Air travel began to improve in the second half of 2003, which
resulted in lease rates stabilizing on certain aircrafts. While the Company saw
some modest price increases and greater liquidity in this sector during the
fourth quarter of 2003, additional price recovery will depend on continued
improvement in economic fundamentals, political stability and airline operating
performance.
CDOS -- Adverse CDO experience can be attributed to higher than expected
default rates and downgrades of the collateral supporting these securities,
particularly in the technology and utilities sectors, causing a deterioration in
the subordinated tranches of these structures. As a result, significant risk
premiums have been required by the market for these securities, resulting in
reduced liquidity and lower broker quoted prices. Improved economic and
operating fundamentals of the underlying security issuers, along with better
market liquidity, should lead to improved pricing levels.
CREDIT CARD RECEIVABLES -- The unrealized loss position in credit card
securities has primarily been caused by exposure to companies originating loans
to sub-prime borrowers. While the unrealized loss
42
<Page>
position improved for these holdings during the year due to the better than
expected performance of the underlying collateral of credit card receivables,
concerns remain regarding the long-term viability of certain issuers within this
sub-sector.
As of December 31, 2003, security types other than ABS and CMBS that were in
a significant unrealized loss position for greater than six months were
corporate fixed maturities primarily within the financial services sector.
FINANCIAL SERVICES -- As of December 31, 2003, the securities in the
financial services sector unrealized loss position for greater than six months
were comprised of less than 50 different securities. The securities in this
category are primarily investment grade and substantially all of these
securities are priced at or greater than 90% of amortized cost as of December
31, 2003. These positions are primarily variable rate securities with extended
maturity dates, which have been adversely impacted by the reduction in forward
interest rates resulting in lower expected cash flows. Unrealized loss amounts
for these securities have declined during the year as interest rates have risen.
Additional changes in fair value of these securities are primarily dependent on
future changes in forward interest rates. A substantial percentage of these
securities are currently hedged with interest rate swaps, which convert the
variable rate earned on the securities to a fixed amount. The swaps receive cash
flow hedge accounting treatment and are currently in an unrealized gain
position.
As part of the Company's ongoing security monitoring process by a committee
of investment and accounting professionals, the Company has reviewed its
investment portfolio and concluded that there were no additional
other-than-temporary impairments as of December 31, 2003 and 2002. Due to the
issuers' continued satisfaction of the securities' obligations in accordance
with their contractual terms and the expectation that they will continue to do
so, management's intent and ability to hold these securities, as well as the
evaluation of the fundamentals of the issuers' financial condition and other
objective evidence, the Company believes that the prices of the securities in
the sectors identified above were temporarily depressed.
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. ABS and CMBS),
projections of expected future cash flows may change based upon new information
regarding the performance of the underlying collateral. As of December 31, 2003,
management's expectation of the discounted future cash flows on these securities
was in excess of the associated securities' amortized costs. (For a further
discussion, see "Investments" included in the Critical Accounting Estimates
section of MD&A and in Note 2 of Notes to Consolidated Financial Statements.)
The following table presents the Company's unrealized loss aging for BIG and
equity securities, including guaranteed separate accounts, as of December 31,
2003 and 2002.
<Table>
<Caption>
2003 2002
----------------------------------- -----------------------------------
UNREALIZED LOSS AGING AMORTIZED UNREALIZED AMORTIZED UNREALIZED
OF BIG AND EQUITY SECURITIES COST FAIR VALUE LOSS COST FAIR VALUE LOSS
- ---------------------------- --------- ---------- ---------- --------- ---------- ----------
Three months or less............... $ 47 $ 46 $ (1) $ 131 $104 $ (27)
Greater than three months to six
months........................... 90 86 (4) 188 165 (23)
Greater than six months to nine
months........................... 50 44 (6) 160 134 (26)
Greater than nine months to twelve
months........................... 17 16 (1) 299 264 (35)
Greater than twelve months......... 266 217 (49) 354 299 (55)
---- ---- ---- ------ ---- -----
TOTAL.............................. $470 $409 $(61) $1,132 $966 $(166)
==== ==== ==== ====== ==== =====
TOTAL GENERAL ACCOUNTS............. $350 $305 $(45) $ 800 $669 $(131)
TOTAL GUARANTEED SEPARATE
ACCOUNTS........................... $120 $104 $(16) $ 332 $297 $ (35)
==== ==== ==== ====== ==== =====
</Table>
43
<Page>
Similar to the decrease in the Unrealized Loss Aging of Total Securities
table from December 31, 2002 to December 31, 2003, the decrease in the BIG and
equity security unrealized loss amount was primarily the result of improved
corporate fixed maturity credit quality and to a lesser extent recognition of
other-than temporary impairments and assets sales, partially offset by an
increase in interest rates. (For a further discussion, see the economic
commentary under the Fixed Maturities by Type table in this section of the
MD&A.)
The BIG and equity securities in an unrealized loss position for longer than
six months by type as of December 31, 2003 and 2002 are presented in the
following table.
BIG AND EQUITY SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS BY TYPE
<Table>
<Caption>
2003 2002
---------------------------------------------- ----------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMORTIZED FAIR UNREALIZED UNREALIZED AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE LOSS LOSS COST VALUE LOSS LOSS
--------- -------- ---------- ---------- --------- -------- ---------- ----------
ABS and CMBS
Aircraft lease
receivables.......... $ 45 $ 28 $ (17) 30.3% $ -- $ -- $ -- --
CDOs.................. 37 28 (9) 16.1% 2 1 (1) 0.9%
Credit card
receivables.......... 40 30 (10) 17.9% 26 17 (9) 7.8%
Other ABS and
CMBS................. 45 38 (7) 12.5% 37 32 (5) 4.3%
Corporate
Financial services.... 39 35 (4) 7.1% 9 8 (1) 0.9%
Technology and
communications....... 4 3 (1) 1.8% 211 177 (34) 29.3%
Transportation........ 9 8 (1) 1.8% 13 10 (3) 2.6%
Utilities............. 66 61 (5) 8.9% 123 107 (16) 13.8%
Other................. 44 42 (2) 3.6% 226 210 (16) 13.8%
Diversified equity
mutual funds.......... 3 3 -- -- 64 48 (16) 13.8%
Other securities........ 1 1 -- -- 102 87 (15) 12.8%
------ ------ ----- ------ ------ ------ ----- -----
TOTAL................... $ 333 $ 277 $ (56) 100.0% $ 813 $ 697 $(116) 100.0%
------ ------ ----- ------ ------ ------ ----- -----
TOTAL GENERAL
ACCOUNTS.............. $ 234 $ 193 $ (41) 73.2% $ 552 $ 464 $ (88) 75.9%
TOTAL GUARANTEED
SEPARATE ACCOUNTS..... $ 99 $ 84 $ (15) 26.8% $ 261 $ 233 $ (28) 24.1%
====== ====== ===== ====== ====== ====== ===== =====
</Table>
For a further discussion of the Company's current view of risk factors
relative to certain security types listed above, see the Total Securities with
Unrealized Loss Greater Than Six Months by Type table in this section of the
MD&A.
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
44
<Page>
regulatory requirements and are monitored internally and reviewed by senior
management. Derivatives play an important role in facilitating the management of
interest rate risk, mitigating equity market risk exposure associated with
certain variable annuity products and changes in currency exchange rates.
MARKET RISK
The Company is exposed to market risk, primarily relating to the market
price and/or cash flow variability associated with changes in interest rates,
market indices or foreign currency exchange rates.
INTEREST RATE RISK
The Company's exposure to interest rate risk relates to the market price
and/or cash flow variability associated with the changes in market interest
rates. The Company manages its exposure to interest rate risk through asset
allocation limits, asset/liability duration matching and through the use of
derivatives. 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. Measures the Company uses to quantify its exposure to interest rate
risk inherent in its invested assets and interest rate sensitive liabilities are
duration and key rate duration. Duration is the weighted average term-
to-maturity of a security's cash flows, and is used to approximate the
percentage change in the price of a security for a 100-basis-point change in
market interest rates. For example, a duration of 5 means the price of the
security will change by approximately 5% for a 1% change in interest rates. The
key rate duration analysis considers the expected future cash flows of assets
and liabilities assuming non-parallel interest rate movements.
To calculate duration, projections of asset and liability cash flows are
discounted to a present value using interest rate assumptions. These cash flows
are then revalued at alternative interest rate levels to determine the
percentage change in fair value due to an incremental change in rates. Cash
flows from corporate obligations are assumed to be consistent with the
contractual payment streams on a yield to worst basis. The primary assumptions
used in calculating cash flow projections include expected asset payment streams
taking into account prepayment speeds, issuer call options and contract holder
behavior. Asset-backed securities, collateralized mortgage obligations and
mortgage-backed securities are modeled based on estimates of the rate of future
prepayments of principal over the remaining life of the securities. These
estimates are developed 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.
EQUITY RISK
The Company's primary exposure to equity risk relates to the potential for
lower earnings associated with certain of the Company's businesses such as
variable annuities where fee income is earned based upon the fair value of the
assets under management. In addition, the Company offers certain guaranteed
benefits, primarily associated with variable annuity products, which increases
the Company's potential benefit exposure as the equity markets decline. (For a
further discussion, see the "Equity Risk" in the Key Market Risk Exposures
section.)
The Company does not have significant equity risk exposure from invested
assets. In March 2003, the Company decided to liquidate its hedge fund limited
partnership investments and certain equity securities and reinvest the proceeds
into fixed maturity investments, thereby reducing its exposure to equity price
risk. The Company has not materially changed other aspects of its overall asset
allocation position or market risk since December 31, 2002.
FOREIGN CURRENCY EXCHANGE RISK
The Company's currency exchange risk is related to non-US dollar denominated
investments, which primarily consist of fixed maturity investments. A
significant portion of the Company's foreign currency exposure is mitigated
through the use of derivatives.
45
<Page>
DERIVATIVE INSTRUMENTS
Hartford Life Insurance Company utilizes a variety of derivative
instruments, including swaps, caps, floors, forwards, futures and options, in
compliance with Company policy and regulatory requirements to mitigate interest
rate, equity market or currency exchange rate risk or volatility.
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 or principal payments are
exchanged at the inception of the contract. Typically, at the time a swap is
entered into, the cash flow streams exchanged by the counterparties are equal in
value.
Interest rate cap and floor contracts entitle the purchaser to receive from
the issuer at specified dates, the amount, if any, by which a specified market
rate exceeds the cap strike 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.
Foreign currency swaps exchange an initial principal amount in two
currencies, agreeing to re-exchange the currencies at a future date, at an
agreed upon exchange rate. There is also periodic exchange of payments at
specified intervals calculated using the agreed upon rates and exchanged
principal amounts.
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to the 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 used in the
management of market risk for both the general and guaranteed separate accounts
at December 31, 2003 and 2002 were $38.6 billion and $15.1 billion,
respectively.
KEY MARKET RISK EXPOSURES
The following discussions focus on the key market risk exposures within the
Company's portfolios.
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
support policyholder and corporate obligations. The Company's fixed maturity
portfolios and certain investment contract and insurance product liabilities
have material market exposure to interest rate risk. In addition, the 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.
INTEREST RATE RISK
The Company's 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 a reduction in net interest rate spread or
profit margins. The investments and liabilities primarily associated with
interest rate risk are included in the following discussion. Certain product
liabilities expose the Company to interest rate risk but also have significant
equity risk. These liabilities are discussed as part of the Equity Risk section
below.
46
<Page>
FIXED MATURITY INVESTMENTS
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 and collateralized mortgage obligations. The fair value of these
investments was $41.8 billion and $35.9 billion, at December 31, 2003 and 2002,
respectively. The fair value of these and 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. The weighted average duration of
the fixed maturity portfolio was approximately 4.6 and 4.2 as of December 31,
2003 and 2002, respectively.
LIABILITIES
The Company's investment contracts and certain insurance product
liabilities, other than non-guaranteed separate accounts, include asset
accumulation vehicles such as fixed annuities, guaranteed investment contracts,
other investment and universal life-type contracts and other insurance products
such as long-term disability.
Asset accumulation vehicles primarily require a fixed rate payment, often
for a specified period of time. Product examples include fixed rate annuities
with a market value adjustment feature and fixed rate guarantee investment
contracts. The duration of these contracts generally range from less than one
year to ten years. In addition, certain products such as universal life
contracts and the general account portion of the Company's variable annuity
products, credit interest to policyholders subject to market conditions and
minimum interest rate guarantees. The duration of these products is
short-to-intermediate term.
While interest rate risk associated with many of these products has been
reduced through the use of market value adjustment features and surrender
charges, the primary risk associated with these products is that the spread
between investment return and credited rate may not be sufficient to earn
targeted returns.
The Company also manages the risk of other insurance liabilities similarly
to investment type products due to the relative predictability of the aggregate
cash flow payment streams. Products in this category may contain significant
actuarial (including mortality and morbidity) pricing and cash flow risks.
Product examples include structured settlement contracts, on-benefit annuities
(i.e., the annuitant is currently receiving benefits thereon) and short and
long-term disability contracts. The cash out 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 differ from those anticipated, resulting in an
investment return lower than that assumed in pricing. Contract duration can
range from less than one year to typically up to ten years.
47
<Page>
PRODUCT LIABILITY CHARACTERISTICS
Hartford Life Insurance Company's product liabilities, other than
non-guaranteed separate accounts, include accumulation vehicles such as fixed
and variable annuities other investment and universal life-type contracts, and
other insurance products such as long-term disability and term life insurance.
The table below shows carrying values of insurance policy liabilities as of
December 31, 2003 and 2002.
<Table>
<Caption>
2003 2002
DESCRIPTION (1) TOTAL TOTAL
- --------------- -------- --------
Fixed rate asset accumulation vehicles...................... $14.6 $13.6
Weighted average credited rate............................ 6.0% 5.8%
Indexed asset accumulation vehicles......................... $ 1.6 $ 0.7
Weighted average credited rate............................ 1.8% 3.0%
Interest credited asset accumulation vehicles............... $16.7 $17.4
Weighted average credited rate............................ 3.7% 4.2%
Long-term pay out liabilities............................... $ 6.8 $ 5.6
Short-term pay out liabilities.............................. $ 0.2 $ --
===== =====
</Table>
The Company employs several risk management tools to quantify and manage
risk arising from investment contracts and other insurance liabilities, such as
duration and key rate duration and the use of derivative instruments. 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 reducing
techniques to improve the match between assets and liabilities, including the
use of derivative instruments. Derivatives used to mitigate interest rate risk
are discussed in more detail below.
DERIVATIVES
The Company utilizes a variety of derivative instruments to mitigate
interest rate risk. Interest rate swaps are primarily used to convert interest
receipts to a fixed or variable rate. In addition, interest rate swaps are used
to convert the contract rate on certain liability products offered by the
Company into a rate that trades in a more liquid and efficient market. The use
of such swaps enables the Company to customize contract terms and conditions to
customer objectives and satisfies the operation's asset/liability duration
matching policy. Occasionally, swaps are also used to hedge the variability in
the cash flow of a forecasted purchase or sale due to changes in interest rates.
Interest rate caps and floors, swaptions and option contracts are primarily
used to hedge against the risk of liability contract holder disintermediation in
a rising interest rate environment, and to offset the changes in fair value of
corresponding derivatives embedded in certain of the Company's fixed maturity
investments.
At December 31, 2003 and 2002, notional amounts pertaining to derivatives
utilized to manage interest rate risk totaled $7.5 billion and $8.3 billion,
respectively ($5.9 billion and $6.8 billion, respectively related to insurance
investments and $1.6 billion and $1.5, respectively related to life insurance
liabilities). The fair value of these derivatives as reflected on the
Consolidated Balance Sheet was $168 and $358 as of December 31, 2003 and 2002,
respectively.
CALCULATED INTEREST RATE SENSITIVITY
The after-tax change in the net economic value of investment contracts (e.g.
guaranteed investment contracts) and other insurance product liabilities (e.g.
short and long-term disability contracts), that are not substantially affected
by changes in interest rates ("fixed liabilities") and for which the investment
experience is substantially absorbed by Life, are included in the following
table along with the corresponding general and guaranteed separate account
assets. Also included in this analysis are the interest rate sensitive
derivatives used by Life to hedge its exposure to interest rate risk. Certain
financial instruments, such as limited partnerships, have been omitted from the
analysis because the investments are accounted for under the equity method and
lack sensitivity to interest rate changes. Interest rate sensitive investment
contracts and universal life-type contracts are excluded from the hypothetical
calculation below because the contracts generally allow
48
<Page>
Life 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. Non-guaranteed separate account
assets and liabilities are excluded from the hypothetical calculation below
because gains and losses in separate accounts generally accrue to policyholders.
The estimated change in net economic value assumes a 100 basis point upward and
downward parallel shift in the yield curve.
<Table>
<Caption>
CHANGE IN NET ECONOMIC VALUE
AS OF DECEMBER 31,
-------------------------------------------
2003 2002
-------------------------------------------
BASIS POINT SHIFT......................................... -100 +100 -100 +100
AMOUNT.................................................... $ (40) $ 2 $ 8 $ (22)
</Table>
These fixed liabilities included above represented approximately 50% and 46%
of Life's general and guaranteed separate account liabilities as of
December 31, 2003 and 2002, respectively. The assets supporting the fixed
liabilities are monitored and managed within rigorous duration guidelines using
scenario simulation techniques, and are evaluated on an annual basis, in
compliance with regulatory requirements.
The after-tax change in fair value of the general account invested asset
portfolios that support interest rate sensitive investment contracts and
universal life-type contracts and other insurance contracts that possess
significant mortality risk are shown in the following table. The cash flows
associated with these liabilities are less predictable than fixed liabilities.
The Company identifies the most appropriate investment strategy based upon the
expected policyholder behavior and liability crediting needs. The hypothetical
calculation of the estimated change in fair value below, assumes a 100 basis
point upward and downward parallel shift in the yield curve.
<Table>
<Caption>
CHANGE IN FAIR VALUE
AS OF DECEMBER 31,
-------------------------------------------
2003 2002
-------------------------------------------
BASIS POINT SHIFT......................................... -100 +100 -100 +100
AMOUNT.................................................... $ 462 $ (455) $ 403 $ (386)
</Table>
The above quantitative presentation was adopted in the current year and is
in lieu of the tabular presentation historically disclosed. The Company believes
the current presentation is preferable in understanding the Company's invested
asset interest rate risk exposure.
The selection of the 100 basis point parallel shift in the yield curve was
made only as a hypothetical illustration of the potential impact of such an
event and should not be construed as a prediction of future market events.
Actual results could differ materially from those illustrated above due to the
nature of the estimates and assumptions used in the above analysis. The
Company's sensitivity analysis calculation assumes that the composition of
invested assets and liabilities remain materially consistent throughout the year
and that the current relationship between short-term and long-term interest
rates will remain constant over time. As a result, these calculations may not
fully capture the impact of portfolio re-allocations, significant product sales
or non-parallel changes in interest rates.
EQUITY RISK
The 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. Prolonged and precipitous decline in the equity markets 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 to a lesser extent 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.
49
<Page>
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, 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. The
Company currently reinsures a significant portion of these death benefit
guarantees associated with its in-force block of business. The Company currently
records 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, 2003 is $11.4 billion. Due to the
fact that 81% of this amount is reinsured, the Company's net exposure is $2.2
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 stochastically generated scenarios and best estimate assumptions
related to mortality and lapse rates. A range of projected costs was developed
and discounted back to the financial 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 a 95% confidence interval of the present value
of the retained death benefit costs to be incurred in the future to be a range
of $88 to $282 for these contracts. The median of the stochastically generated
investment performance scenarios was $132.
On June 30, 2003, the Company recaptured a block of business previously
reinsured with an unaffiliated reinsurer. Under this treaty, the Company
reinsured a portion of the GMDB feature associated with certain of its annuity
contracts. As consideration for recapturing the business and final settlement
under the treaty, the Company has received assets valued at approximately $32
and one million warrants exercisable for the unaffiliated company's stock.
Prospectively, as a result of the recapture, the Company will be responsible for
all of the remaining and ongoing risks associated with the GMDB's related to
this block of business. The recapture increased the net amount at risk retained
by the Company, which is included in the net amount at risk discussed above
On January 1, 2004, the Company adopted the provisions of Statement of
Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts", (the "SOP").
The provisions of the SOP include a requirement for recording a liability for
variable annuity products with a guaranteed minimum death benefit feature. The
determination of this liability is also based on models that involve numerous
estimates and subjective judgments, including those regarding expected market
rates of return and volatility, contract surrender rates and mortality
experience. As of January 1, 2004, the Company has recorded a liability for GMDB
sold with variable annuity products of $191 and a related reinsurance
recoverable asset of $108. Net of estimated DAC and income tax effects, the
cumulative effect of establishing the required GMDB reserves resulted in a
reduction of net income of $50 during the first quarter of 2004.
In addition, the Company offers certain variable annuity products with a
GMWB rider. The GMWB provides the policyholder with a guaranteed remaining
balance ("GRB") if the account value is reduced to zero through a combination of
market declines and withdrawals. The GRB is generally equal to premiums less
withdrawals. However, annual withdrawals that exceed 7% of the premiums paid may
reduce the GRB by an amount greater than the withdrawals and may also impact
that guaranteed annual withdrawal amount that subsequently applies after the
excess annual withdrawals occur. The policyholder also has the option, after a
specified time period, to reset the GRB to the then-current account value, if
greater. The GMWB represents an embedded derivative liability in the variable
annuity contract that is required to be reported separately from the host
variable annuity contract. It is carried at fair value and reported in other
policyholder funds. The fair value of the GMWB obligations are calculated based
on actuarial assumptions related to the projected cash flows, including benefits
and related contract charges, over the lives of the contracts, incorporating
expectations
50
<Page>
concerning policyholder behavior. Because of the dynamic and complex nature of
these cash flows, stochastic techniques under a variety of market return
scenarios and other best estimate assumptions are used. Estimating cash flows
involves numerous estimates and subjective judgments including those regarding
expected market rates of return, market volatility, correlations of market
returns and discount rates.
Declines in the equity market may increase the Company's exposure to
benefits under these contracts. For all contracts in effect through July 6,
2003, the Company entered into a third party reinsurance arrangement to offset
its exposure to the GMWB for the remaining lives of those contracts. As of
July 6, 2003, the Company exhausted all but a small portion of the reinsurance
capacity for new business under this current arrangement and will be ceding only
a very small number of new contracts subsequent to July 6, 2003. Substantially
all new contracts with the GMWB are covered by a reinsurance arrangement with a
related party. See Note 13 "Transactions with Affiliates" for information on
this arrangement.
CURRENCY EXCHANGE RISK
Currency exchange risk exists with respect to investments in non-US dollar
denominated fixed maturities, primarily denominated in Euro, Sterling, Yen and
Canadian dollars.
The risk associated with these investments relates to potential decreases in
value and income resulting from unfavorable changes in foreign exchange rates.
At December 31, 2003 and 2002, the Company had approximately $1.9 billion and
$1.2 billion of non-US dollar denominated fixed maturities, respectively.
In order to manage its currency exposures, the Company enters into foreign
currency swaps and options to hedge the variability in cash flow associated with
certain foreign denominated fixed maturities. These foreign currency swap
agreements are structured to match the foreign currency cash flows of the hedged
foreign denominated securities. As of December 31, 2002, substantially all the
fixed maturity investments were hedged into US dollars mitigating the foreign
currency exchange risk. At December 31, 2003 and 2002, the derivatives used to
hedge currency exchange risk had a total notional value of $1.2 billion and $1.3
billion, respectively, and total fair value of $(297) and $(71), respectively.
Based on the fair values of the Company's non-US dollar denominated
investments and derivative instruments as of December 31, 2003 and 2002,
management estimates that a 10% unfavorable change in exchange rates would
decrease the fair values by a total of $32 and $3, respectively. The estimated
impact was based upon a 10% change in December 31 spot rates. The selection of
the 10% unfavorable change was made only for hypothetical illustration of the
potential impact of such an event and should not be construed as a prediction of
future market events. Actual results could differ materially from those
illustrated above due to the nature of the estimates and assumptions used in the
above analysis.
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 totaling $1.3 billion and $1.0 billion as of December 31,
2003 and 2002.
CASH FLOW
<Table>
<Caption>
2003 2002 2001
Cash provided by operating activities...................... $ 1,221 $ 611 $ 1,067
Cash used for investing activities......................... (3,634) (4,423) (3,654)
Cash provided by financing activities...................... 2,430 3,802 2,620
Cash -- end of year........................................ 96 79 87
</Table>
2003 COMPARED TO 2002 -- The increase in cash provided by operating
activities was primarily the result of the timing of the settlement of
receivables, payables and other related liabilities. The decrease in cash
provided by financing activities primarily relates to the decrease in net
general account 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.
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
51
<Page>
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.
DIVIDENDS
The Company declared $175 in dividends to HLA for 2003. Future dividend
decisions will be based on, and affected by, a number of factors, including the
operating results and financial requirements of the Company on a stand-alone
basis and the impact of regulatory restrictions discussed in Liquidity
Requirements below.
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 20, 2004:
<Table>
<Caption>
STANDARD &
INSURANCE RATINGS A.M. BEST FITCH MOODY'S POOR'S
Hartford Life Insurance Company............................ A+ AA Aa3 AA-
Hartford Life and Annuity.................................. A+ AA Aa3 AA-
</Table>
<Table>
<Caption>
STANDARD &
OTHER RATINGS A.M. BEST FITCH MOODY'S POOR'S
Hartford Life Insurance Company:
Short Term Rating......................................... NR NR P-1 A-1+
</Table>
Upon completion of the Hartford's asbestos reserve study and the Hartford's
capital-raising activities, certain of the major independent ratings
organizations revised The Hartford's financial ratings as follows:
On May 23, 2003, Fitch affirmed all ratings on The Hartford Financial
Services Group, Inc. including the fixed income ratings and the insurer
financial strength rating of the Hartford Fire Intercompany Pool. Further, these
ratings have been removed from Rating Watch Negative and now have a Stable
Rating Outlook.
On May 20, 2003, Standard & Poor's removed from CreditWatch and affirmed the
long-term counterparty credit and senior debt rating of The Hartford Financial
Services Group, Inc. and the counterparty credit and financial strength ratings
on the operating companies following the Company's completion of capital-raising
activities. The outlook is stable.
On May 14, 2003, Moody's downgraded the debt ratings of both The Hartford
Financial Services Group, Inc. and Hartford Life, Inc. to A3 from A2 and their
short-term commercial paper ratings to P-2 from P-1. The outlook on all of the
ratings except for the P-2 rating on commercial paper is negative.
On May 13, 2003, A.M. Best affirmed the financial strength ratings of A+
(Superior) of The Hartford Fire Intercompany Pool and the main operating life
insurance subsidiaries of Hartford Life, Inc. Concurrently, A.M. Best downgraded
to "a-" from "a+" the senior debt ratings of The Hartford Financial Services
Group, Inc. and Hartford Life Inc. and removed the ratings from under review.
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, 2003, Hartford Life Insurance
Company had more than sufficient capital to meet the NAIC's minimum RBC
requirements.
52
<Page>
REGULATORY INITIATIVES AND CONTINGENCIES
LEGAL PROCEEDINGS -- The 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.
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.
TERRORISM RISK INSURANCE ACT OF 2002
The Terrorism Risk Insurance Act of 2002 ("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 deductibles 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 10% for 2004 and 15% for 2005.
On August 15, 2003, the Treasury Department announced that it would not use
its legislatively-granted authority to include group life insurance under the
Federal backstop for terrorism losses in the Terrorism Risk Insurance Act of
2002. In announcing this decision, the Treasury stated that they would continue
to monitor the group life situation.
LEGISLATIVE INITIATIVES
Certain elements of the Jobs and Growth Tax Relief Reconciliation Act of
2003, in particular the reduction in tax rates on long-term capital gains and
most dividend distributions, could have a material effect on the Company's sales
of variable annuities and other investment products. While sales of these
products do not appear to have been reduced to date, the long-term effect of the
Jobs and Growth Act of 2003 on the Company's financial condition or results of
operations cannot be reasonably estimated at this time.
There are proposals in the federal 2005 budget submitted by President Bush
which would create new investment vehicles with larger annual contribution
limits for individuals. Some of these proposed vehicles would have significant
tax advantages, and could have a material effect on the sales of the Company's
life insurance and investment products. There also have been proposals regarding
the estate tax and deferred compensation arrangements that could have negative
effects on the Company's product sales. Prospects for enactment of this
legislation in 2004 are uncertain. Therefore, any potential effect on the
Company's financial condition or results of operations cannot be reasonably
estimated at this time.
In addition, other tax proposals and regulatory initiatives which have been
or are being considered by Congress could have a material effect on the
insurance business. These proposals and initiatives include changes pertaining
to the tax treatment of insurance companies and life insurance products and
annuities, and reductions in benefits currently received by the Company stemming
from the dividends received deduction. Legislation to restructure the Social
Security system and expand private pension plans incentives also may be
considered. Prospects for enactment and the ultimate effect of these proposals
are uncertain.
53
<Page>
Congress is likely to consider a number of legal reform proposals this year.
Among them is legislation that would reduce the number and type of national
class actions certified by state judges by updating the federal rules on
diversity jurisdiction. Prospects for enactment of these proposals in 2004 are
uncertain.
GUARANTY FUND
Under insurance guaranty fund laws in each state, the District of Columbia
and Puerto Rico, insurers 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 were
$0 and $2 in guaranty fund assessment refunds in 2003 and 2002, respectively.
There was no guaranty fund assessment payments (net of refunds) in 2001.
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.
IMPACT OF NEW ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 2 of Notes to
Consolidated Financial Statements.
In July 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 03-1,
"Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts" (the "SOP"). The SOP
addresses a wide variety of topics, some of which have a significant impact on
the Company. The major provisions of the SOP require:
- Recognizing expenses for a variety of contracts and contract features,
including guaranteed minimum death benefits ("GMDB"), certain death
benefits on universal-life type contracts and annuitization options, on an
accrual basis versus the previous method of recognition upon payment;
- Reporting and measuring assets and liabilities of certain separate account
products as general account assets and liabilities when specified criteria
are not met;
- Reporting and measuring the Company's interest in its separate accounts as
general account assets based on the insurer's proportionate beneficial
interest in the separate account's underlying assets; and
- Capitalizing sales inducements that meet specified criteria and amortizing
such amounts over the life of the contracts using the same methodology as
used for amortizing deferred acquisition costs ("DAC").
The SOP is effective for financial statements for fiscal years beginning
after December 15, 2003. At the date of initial application, January 1, 2004,
the estimated cumulative effect of the adoption of the SOP on net income and
other comprehensive income was comprised of the following individual impacts:
<Table>
<Caption>
OTHER
COMPREHENSIVE
CUMULATIVE EFFECT OF ADOPTION NET INCOME INCOME
- ----------------------------- ---------- -------------
Establishing GMDB reserves for annuity contracts............ $(50) $ --
Reclassifying certain separate accounts to general
accounts.................................................. 30 294
Other....................................................... (1) (2)
---- ----
Total cumulative effect of adoption......................... $(21) $292
==== ====
</Table>
54
<Page>
Exclusive of the cumulative effect, overall application of the SOP is
expected to have a small positive impact to earnings over the next few years,
with individual impacts described below.
DEATH BENEFITS AND OTHER INSURANCE BENEFIT FEATURES
The Company 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. As of January 1, 2004, the Company has recorded a
liability for GMDB and other benefits sold with variable annuity products of
$191 and a related reinsurance recoverable asset of $108. The determination of
the GMDB liability and related reinsurance recoverable is based on models that
involve a range of scenarios and assumptions, including those regarding expected
market rates of return and volatility, contract surrender rates and mortality
experience. The assumptions used are consistent with those used in determining
estimated gross profits for purposes of amortizing deferred acquisition costs.
Exclusive of the cumulative effect adjustment, the establishment of the required
liability at January 1, 2004 is expected to result in slightly higher earnings
in future years as well as a more stable pattern of death benefit expense.
The Company sells universal life-type contracts with certain secondary
guarantees, such as a guarantee that the policy will not lapse, even if the
account value is reduced to zero, as long as the policyholder makes scheduled
premium payments. The assumptions used in the determination of the secondary
guarantee liability are consistent with those used in determining estimated
gross profits for purposes of amortizing deferred policy acquisition costs.
Based on current estimates, the Company expects the cumulative effect on net
income upon recording this liability to be not material. The establishment of
the required liability will change the earnings pattern of these products,
lowering earnings in the early years of the contract and increasing earnings in
the later years. Based on the current in-force of these products, the impact is
not expected to be material in the near term. Currently there is diversity in
industry practice and inconsistent guidance surrounding the application of the
SOP to universal life-type contracts. The Company believes consensus or further
guidance surrounding the methodology for determining reserves for secondary
guarantees will develop in the future. This may result in an adjustment to the
cumulative effect of adopting the SOP and could impact future earnings.
SEPARATE ACCOUNT PRESENTATION
The Company has recorded certain MVA fixed annuity and modified guarantee
life insurance products (primarily the Company's Compound Rate Contract ("CRC")
and associated assets) as separate account assets and liabilities through
December 31, 2003. Notwithstanding the market value adjustment feature in this
product, all of the investment performance of the separate account assets is not
being passed to the contractholder, and it therefore, does not meet the
conditions for separate account reporting under the SOP. On January 1, 2004, the
cumulative adjustments to earnings and other comprehensive income as a result of
recording the separate account assets and liabilities in the general account
were recorded net of amortization of deferred acquisition costs and income
taxes. Through December 31, 2003, the Company had recorded CRC assets and
liabilities on a market value basis with all changes in value (market value
spread) included in current earnings as a component of other revenues. Upon
adoption of the SOP, the component of CRC spread on a book value basis will be
recorded in net investment income and interest credited. Realized gains and
losses on investments and market value adjustments on contract surrenders will
be recognized as incurred. On balance, exclusive of the cumulative effect gain
recognized, these changes will result in smaller future earnings from the
in-force block of CRC contracts.
Certain other products offered by the Company recorded in separate account
assets and liabilities through December 31, 2003, were reclassified to the
general account upon adoption of the SOP.
INTERESTS IN SEPARATE ACCOUNTS
As of December 31, 2003, the Company had $24 representing unconsolidated
interests in its own separate accounts. On January 1, 2004, the Company
reclassified $11 to investment in trading securities, where the Company's
proportionate beneficial interest in the separate account was less than 20%. In
55
<Page>
instances where the Company's proportionate beneficial interest was between
20-50%, the Company reclassified $13 of its investment to reflect the Company's
proportionate interest in each of the underlying assets of the separate account.
Future impacts to net income as a result of adopting these provisions of the SOP
are expected to be insignificant.
SALES INDUCEMENTS
The Company currently offers enhanced or bonus crediting rates to
contractholders on certain of its individual and group annuity products.
Effective January 1, 2004, upon adopting the SOP, the future expense associated
with offering a bonus will be deferred and amortized over the life of the
related contract in a pattern consistent with the amortization of deferred
acquisition costs. Effective January 1, 2004, amortization expense associated
with expenses previously deferred will be recorded over the remaining life of
the contract rather than over the contingent deferred sales charge period. Due
to the longer deferral periods, this provision is expected to have a small
positive impact to earnings in future periods.
LEGAL OPINIONS
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 as of December 31, 2003 and 2002, and for each of
the three years in the period ended December 31, 2003 of Hartford Life Insurance
Company, included as Appendix B and incorporated by reference in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is included and incorporated by reference herein, (which
report expresses an unqualified opinion and includes an explanatory paragraph
relating to the changes in our method of accounting for (a) goodwill and
indefinite-lived intangible assets in 2002, (b) derivative instruments and
hedging activities in 2001, and (c) the recognition of interest income and
impairment on purchased retained beneficial interests in securitized financial
assets in 2001), and have been so included and incorporated in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
56
<Page>
APPENDIX A
MARKET VALUE LUMP SUM OPTION
If A is greater than B, the Market Value Adjustment factor equals 1.
If B is greater than A, the Market Value Adjustment factor equals 1 - (6(B -
A))
- WHERE:
<Table>
A = The weighted average interest rate (expressed as a decimal,
e.g., 1% = .01) being credited under the General Account
Option as of the date of termination.
B = The average yield (expressed as a decimal, e.g. 1% = .01)
for the month prior to the date of termination of the higher
of the Salomon Brothers weekly index of new Long Term Public
Utilities rated Aa by Moody's Investors Service, Inc. and
the Salomon Brothers weekly Index of Current Coupon 30 year
Federal National Mortgage Association Securities, or the
equivalents of such indices.
</Table>
BOOK VALUE SPREAD OPTION
Interest to be credited on unpaid balance ("i") equals (A - 2(B-A)) - .005,
where A and B are defined as above.
- Examples of Contract Termination:
(Assuming a 5% Contingent Deferred Sales Charge, and no Policy Fees or
Premium Taxes are applicable)
<Table>
<Caption>
INTEREST RATE ACTIVE LIFE FUND
CREDITED TO ATTRIBUTABLE TO
CONTRIBUTIONS CONTRIBUTIONS
DEPOSITED IN THE GIVEN DEPOSITED IN THE GIVEN
CALENDAR YEAR CALENDAR YEAR
---------------------- ----------------------
1992............. 6.00% $ 300,000
1993............. 6.50% 600,000
1994............. 7.00% 700,000
----------
TOTAL............ 6.63%* $1,600,000
</Table>
- ---------
* Total = the weighted average interest rate being credited on the date of
termination ("A"), calculated as follows:
<Table>
300,000 X .06 + 600,000 X .065 + 700,000 X .07
---------------------------------------------- = .0663 = 6.63%
300,000 + 600,000 + 700,000
</Table>
At termination, the book value of the General Account Option portion of the
Active Life Fund would be $1,600,000. This amount is reduced by Contingent Sales
Charges of 5%, or $80,000. The remaining $1,520,000 would be payable under
either Option 1 (Book Value Spread Option) or Option 2 (Market Value Lump Sum
Option.)
- Example 1
<Table>
B = .09
If the Book Value Spread Option is selected, the Book Value
Spread rate of interest would equal 1.39% (.0663 - 2
(.09 - .0663)) - .005 = .0139). The Contract Owner would
receive six annual payments (beginning immediately) of
$262,153.80.
If the Market Value Lump Sum Option is selected, the Market
Value Factor is 1 - (6(.09 - .0663)) = .8578 and the payout
would be $1,520,000 X .8578 = $1,303,856.
</Table>
57
<Page>
- Example 2
<Table>
B = .07
If the Book Value Spread Option is selected, the Book Value
Spread rate of interest would equal 7% (the maximum value of
i) and the Contract Owner would receive six annual payments
(beginning immediately) of $298,027.68.
If the Market Value Lump Sum Option is selected, the Market
Value factor would be 1 and the amount payable to the
Contract Owner upon termination of the Contract would be
$1,520,000.
The assessment of Policy Fees, if any, will reduce the
amount payable to the Contract Owner upon termination of the
contract.
</Table>
58
<Page>
HARTFORD
LIFE INSURANCE
COMPANY
THE GENERAL ACCOUNT OPTION PROSPECTUS
under Group Variable Annuity Contracts
May 3, 2004
[HARTFORD LIFE LOGO]
PRINCIPAL UNDERWRITER
Hartford Securities Distribution Company, Inc. (HSD)
Hartford Plaza, Hartford, CT 06115
INSURER
Hartford Life Insurance Company
Executive Offices: P.O. Box 1583
Hartford, CT 06144-1583
HV-1928-16
HARTFORD LIFE INSURANCE COMPANY
P.O. BOX 1583, HARTFORD, CT 06144-1583
<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, 2003 and 2002, and the related consolidated statements of income,
changes in stockholder's equity and cash flows for each of the three years in
the period ended December 31, 2003. 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 2 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 and retained
beneficial interests in securitized financial assets in 2001.
Deloitte & Touche LLP
Hartford, Connecticut
February 25, 2004
F-1
<Page>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2003 2002 2001
------------------------
(In millions)
REVENUES
Fee income $2,169 $2,079 $2,157
Earned premiums and other 934 574 927
Net investment income 1,764 1,572 1,491
Net realized capital gains (losses) 1 (276) (87)
------------------------
TOTAL REVENUES 4,868 3,949 4,488
------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,726 2,275 2,536
Insurance expenses and other 625 650 621
Amortization of deferred policy acquisition
costs and present value of future profits 660 531 566
Dividends to policyholders 63 65 69
------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,074 3,521 3,792
------------------------
Income before income tax expense and cumulative
effect of accounting changes 794 428 696
Income tax expense 168 2 44
Income before cumulative effect of accounting
changes 626 426 652
Cumulative effect of accounting changes, net of
tax -- -- (6)
------------------------
NET INCOME $ 626 $ 426 $ 646
------------------------
</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,
-------------------------
2003 2002
-------------------------
(In millions, except for
share data)
ASSETS
Investments
Fixed maturities, available for sale, at fair
value (amortized cost of $28,511 and $23,675) $ 30,085 $ 24,786
Equity securities, available for sale, at fair
value (cost of $78 and $137) 85 120
Policy loans, at outstanding balance 2,470 2,895
Other investments 639 918
-------------------------
TOTAL INVESTMENTS 33,279 28,719
-------------------------
Cash 96 79
Premiums receivable and agents' balances 17 15
Reinsurance recoverables 1,297 1,477
Deferred policy acquisition costs and present
value of future profits 6,088 5,479
Deferred income taxes (486) (243)
Goodwill 186 186
Other assets 1,238 1,073
Separate account assets 130,225 105,316
-------------------------
TOTAL ASSETS $171,940 $142,101
-------------------------
LIABILITIES
Reserve for future policy benefits $ 6,518 $ 5,724
Other policyholder funds 25,263 23,037
Other liabilities 3,330 2,207
Separate account liabilities 130,225 105,316
-------------------------
TOTAL LIABILITIES 165,336 136,284
-------------------------
COMMITMENTS AND CONTINGENT LIABILITIES, NOTE 12
STOCKHOLDER'S EQUITY
Common stock -- 1,000 shares authorized, issued
and outstanding, par value $5,690 6 6
Capital surplus 2,240 2,041
Accumulated other comprehensive income
Net unrealized capital gains on securities,
net of tax 711 574
Foreign currency translation adjustments (1) (1)
-------------------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME 710 573
-------------------------
Retained earnings 3,648 3,197
-------------------------
TOTAL STOCKHOLDER'S EQUITY 6,604 5,817
-------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $171,940 $142,101
-------------------------
</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 Net (Loss)
Unrealized 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)
2003
Balance, December 31, 2002 $6 $2,041 $463 $111 $(1) $3,197 $5,817
Comprehensive income
Net income 626 626
Other comprehensive income,
net of tax (1)
Net change in unrealized
capital gains (losses) on
securities (3) 265 265
Net loss on cash flow
hedging instruments (128) (128)
Cumulative translation
adjustments --
Total other comprehensive
income 137
Total comprehensive income 763
Capital contribution from
parent 199 199
Dividends declared (175) (175)
----------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 $6 $2,240 $728 $(17) $(1) $3,648 $6,604
----------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------
</Table>
(1) Net change in unrealized capital gain (losses) on securities is reflected
net of tax and other items of $143, $188 and $62 for the years ended
December 31, 2003, 2002 and 2001, respectively. Cumulative effect of
accounting change is net of tax benefit of $2 for the year ended
December 31, 2001. Net (loss) gain on cash flow hedging instruments is net
of tax (benefit) provision of $(69) and $26 for the years ended
December 31, 2003 and 2002, 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 no reclassification adjustments for after-tax losses realized in
net income for the year ended December 31, 2003. There were reclassification
adjustments for after-tax losses realized in net income of $(170) and $(40)
for the years ended December 31, 2002 and 2001, 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,
---------------------------
2003 2002 2001
---------------------------
(In millions)
OPERATING ACTIVITIES
Net income $ 626 $ 426 $ 646
Adjustments to reconcile net income to net cash
provided by operating activities
Net realized capital (gains) losses (1) 276 87
Cumulative effect of accounting changes, net of
tax -- -- 6
Amortization of deferred policy acquisition
costs and present value of future profits 660 531 566
Additions to deferred policy acquisition costs
and present value of future profits (1,319) (987) (975)
Depreciation and amortization 117 19 (18)
(Increase) decrease in premiums receivable and
agents' balances (2) (5) 5
Increase (decrease) in other liabilities 299 (61) (84)
Change in receivables, payables, and accruals 227 2 (72)
(Decrease) increase in accrued tax (67) 76 115
Decrease in deferred income tax 65 23 7
Increase in future policy benefits 794 560 837
(Increase) decrease in reinsurance recoverables (1) (127) 21
Increase in other assets (177) (122) (74)
---------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,221 611 1,067
---------------------------
INVESTING ACTIVITIES
Purchases of investments (13,628) (12,470) (9,766)
Sales of investments 6,676 5,781 4,568
Maturity and principal paydowns of fixed
maturity investments 3,233 2,266 2,227
Purchase of business/affiliate, net of cash
acquired -- -- (683)
Other 85 -- --
---------------------------
NET CASH USED FOR INVESTING ACTIVITIES (3,634) (4,423) (3,654)
---------------------------
FINANCING ACTIVITIES
Capital contributions 199 235 761
Dividends paid (175) -- --
Net receipts from investment and universal
life-type contracts charged against
policyholder accounts 2,406 3,567 1,859
---------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,430 3,802 2,620
---------------------------
Net increase (decrease) in cash 17 (10) 33
Impact of foreign exchange -- 2 (2)
Cash -- beginning of year 79 87 56
---------------------------
Cash -- end of year $ 96 $ 79 $ 87
---------------------------
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid (Received) During the Year for:
Income taxes $ 35 $ (2) $ (69)
</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.
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
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.
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, income taxes and contingencies.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial information to
conform to the current year classifications.
ADOPTION OF NEW ACCOUNTING STANDARDS
Effective December 31, 2003, the Company adopted the disclosure requirements of
Emerging Issues Task Force ("EITF") Issue No. 03-01, "The Meaning of Other-Than-
Temporary Impairment and Its Application to Certain Investments". Under the
consensus, disclosures are required for unrealized losses on fixed maturity and
equity securities accounted for under SFAS No. 115, "Accounting for Certain
Investment in Debt and Equity Securities," and SFAS No. 124, "Accounting for
Certain Investments Held by Not-for-Profit Organizations," that are classified
as either available-for-sale or held-to-maturity. The disclosure requirements
include quantitative information regarding the aggregate amount of unrealized
losses and the associated fair value of the investments in an unrealized loss
position, segregated into time periods for which the investments have been in an
unrealized loss position. The consensus also requires certain qualitative
disclosures about the unrealized holdings in order to provide additional
information that the Company considered in concluding that the unrealized losses
were not other-than-temporary. For further discussion, see disclosures in Note
3.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Generally, SFAS No. 150 requires
liability classification for two broad classes of financial instruments:
(a) instruments that represent, or are indexed to, an obligation to buy back the
issuer's shares regardless of whether the instrument is settled on a net-cash or
gross physical basis and (b) obligations that (i) can be settled in shares but
derive their value predominately from another underlying instrument or index
(e.g., security prices, interest rates, and currency rates), (ii) have a fixed
value, or (iii) have a value inversely related to the issuer's shares.
Mandatorily redeemable equity and written options requiring the issuer to buy
back shares are examples of financial instruments that should be reported as
liabilities under this new guidance.
SFAS No. 150 specifies accounting only for certain freestanding financial
instruments and does not affect whether an embedded derivative must be
bifurcated and accounted for in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 150 is effective for
instruments entered into or modified after May 31, 2003 and for all other
F-6
<Page>
instruments beginning with the first interim reporting period beginning after
June 15, 2003. Adoption of this Statement did not have a material impact on the
Company's consolidated financial condition or results of operations.
In April 2003, the FASB issued guidance in Statement 133 Implementation Issue
No. B36, "Embedded Derivatives: Modified Coinsurance Arrangements and Debt
Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only
Partially Related to the Creditworthiness of the Obligor of Those Instruments",
("DIG B36") that addresses the instances in which bifurcation of an instrument
into a debt host contract and an embedded derivative is required. The effective
date of DIG B36 was October 1, 2003. DIG B36 indicates that bifurcation is
necessary in a modified coinsurance arrangement when the yield on the receivable
and payable is based on a specified proportion of the ceding company's return on
either its general account assets or a specified block of those assets, rather
than the overall creditworthiness of the ceding company. The Company has
evaluated its modified coinsurance and funds withheld agreements and believes
all but one are not impacted by the provisions of DIG B36. The one modified
coinsurance agreement that requires the separate recording of an embedded
derivative contains two total return swap embedded derivatives that virtually
offset each other. Due to the offsetting nature of these total return swaps, the
net value of the embedded derivatives in the modified coinsurance agreement had
no material effect on the consolidated financial statements upon adoption of DIG
B36 on October 1, 2003 and at December 31, 2003.
DIG B36 is also applicable to corporate issued debt securities that incorporate
credit risk exposures that are unrelated or only partially related to the
creditworthiness of the obligor. The adoption of DIG B36, as it relates to
corporate issued debt securities, did not have a material effect on the
Company's consolidated financial condition or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 amends SFAS No. 133 for decisions made as part of the
Derivatives Implementation Group (DIG) process that effectively required
amendments to SFAS No. 133, in connection with other FASB projects dealing with
financial instruments. SFAS No. 149 also clarifies under what circumstances a
contract with an initial net investment and purchases and sales of when-issued
securities that do not yet exist meet the characteristic of a derivative as
discussed in SFAS No. 133. In addition, it clarifies when a derivative contains
a financing component that warrants special reporting in the statement of cash
flows. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003, except as stated below and for hedging relationships designated
after June 30, 2003. The provisions of this statement should be applied
prospectively, except as stated below.
The provisions of SFAS No. 149 that relate to SFAS No. 133 DIG issues that have
been effective for fiscal quarters that began prior to June 15, 2003, should
continue to be applied in accordance with their respective effective dates. In
addition, the guidance in SFAS No. 149 related to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after
June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on
the Company's financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"), which
requires an enterprise to assess whether consolidation of an entity is
appropriate based upon its interests in a variable interest entity ("VIE"). 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. 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. An enterprise shall consolidate a VIE if it has a variable interest that
will absorb a majority of the VIEs expected losses if they occur, receive a
majority of the entity's expected residual returns if they occur or both. FIN 46
was effective immediately for new VIEs established or purchased subsequent to
January 31, 2003. For VIEs established or purchased subsequent to January 31,
2003, the adoption of FIN 46 did not have a material impact on the Company's
consolidated financial condition or results of operations as there were no
material VIEs identified which required consolidation.
In December 2003, the FASB issued a revised version of FIN 46 ("FIN 46R"), which
incorporates a number of modifications and changes made to the original version.
FIN 46R replaces the previously issued FIN 46 and, subject to certain special
provisions, is effective no later than the first reporting period that ends
after December 15, 2003 for entities considered to be special-purpose entities
and no later than the end of the first reporting period that ends after
March 15, 2004 for all other VIEs. Early adoption is permitted. The Company
adopted FIN 46R in the fourth quarter of 2003. The adoption of FIN 46R did not
result in the consolidation of any material VIEs.
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" or "the Interpretation"). 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
F-7
<Page>
to the guaranteed party based on changes in an underlying instrument or indices
(e.g., security prices, interest rates, or currency rates) that are 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. Adoption of this statement did not have
a material impact on the Company's consolidated financial condition or results
of operations.
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. Adoption of this statement did not have a material impact on
the Company's consolidated financial condition or results of operations.
In April 2002, the FASB issued 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 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 17.)
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. 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 6.)
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
F-8
<Page>
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 accounting
criteria under which a derivative can qualify for hedge accounting. In order to
receive hedge 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. Hedge 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.)
FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In December 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC") issued Statement of
Position 03-3, "Accounting for Certain Loans or Debt Securities", (SOP 03-3).
SOP 03-3 addresses the accounting for differences between contractual and
expected cash flows to be collected from an investment in loans or fixed
maturity securities (collectively hereafter referred to as "loan(s)") acquired
in a transfer if those differences are attributable, at least in part, to credit
quality. SOP 03-3 limits the yield that may be accreted to the excess of the
estimated undiscounted expected principal, interest and other cash flows over
the initial investment in the loan. SOP 03-3 also requires that the excess of
contractual cash flows over cash flows expected to be collected not be
recognized as an adjustment of yield, loss accrual or valuation allowance. SOP
03-3 is effective for loans acquired in fiscal years beginning after
December 15, 2004. For loans acquired in fiscal years beginning on or before
December 15, 2004 and within the scope of Practice Bulletin 6 "Amortization of
Discount on Certain Acquired Loans", SOP 03-3, as it pertains to decreases in
cash flows expected to be collected, should be applied prospectively for fiscal
years beginning after December 15, 2004. Adoption of this statement is not
expected to have a material impact on the Company's consolidated financial
condition or results of operations.
In July 2003, AcSEC issued a final Statement of Position 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" (the "SOP"). The SOP addresses a wide
variety of topics, some of which have a significant impact on the Company. The
major provisions of the SOP require:
- - Recognizing expenses for a variety of contracts and contract features,
including guaranteed minimum death benefits ("GMDB"), certain death benefits
on universal-life type contracts and annuitization options, on an accrual
basis versus the previous method of recognition upon payment;
- - Reporting and measuring assets and liabilities of certain separate account
products as general account assets and liabilities when specified criteria
are not met;
- - Reporting and measuring the Company's interest in its separate accounts as
general account assets based on the insurer's proportionate beneficial
interest in the separate account's underlying assets; and
- - Capitalizing sales inducements that meet specified criteria and amortizing
such amounts over the life of the contracts using the same methodology as
used for amortizing deferred acquisition costs ("DAC").
F-9
<Page>
The SOP is effective for financial statements for fiscal years beginning after
December 15, 2003. At the date of initial application, January 1, 2004, the
estimated cumulative effect of the adoption of the SOP on net income and other
comprehensive income was comprised of the following individual impacts:
<Table>
<Caption>
Other
Comprehensive
Net Income Income
------------------------------
CUMULATIVE EFFECT OF ADOPTION
Establishing GMDB reserves for annuity contracts $(50)* $ --
Reclassifying certain separate accounts to general accounts 30 294
Other (1) (2)
------------------------------
TOTAL CUMULATIVE EFFECT OF ADOPTION $(21) $292
------------------------------
</Table>
* As of September 30, 2003, the Company estimated the cumulative effect of
adopting this provision of the SOP to be between $25 and $35, net of
amortization of DAC and taxes. During the fourth quarter, industry and the
largest public accounting firms reached general consensus on how to record the
reinsurance recovery asset related to GMDB's. This refinement resulted in the
increase to the cumulative effect adjustment as of January 1, 2004.
DEATH BENEFITS AND OTHER INSURANCE BENEFIT FEATURES
The Company 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. The Company currently reinsures a significant portion
of these death benefit guarantees associated with its in-force block of
business. As of January 1, 2004, the Company has recorded a liability for GMDB
and other benefits sold with variable annuity products of $191 and a related
reinsurance recoverable asset of $108. The determination of the GMDB liability
and related reinsurance recoverable is based on models that involve a range of
scenarios and assumptions, including those regarding expected market rates of
return and volatility, contract surrender rates and mortality experience. The
assumptions used are consistent with those used in determining estimated gross
profits for purposes of amortizing deferred acquisition costs.
Through December 31, 2003, the Company had not recorded a liability for the
risks associated with GMDB offered on the Company's variable annuity business,
but had consistently recorded the related expenses in the period the benefits
were paid to contractholders. Net of reinsurance, the Company paid $51 and $49
for the years ended December 31, 2003 and 2002, respectively, in GMDB benefits
to contractholders.
At December 31, 2003, the Company held $86.5 billion of variable annuities that
contained guaranteed minimum death benefits. The Company's total gross exposure
(i.e. before reinsurance), or net amount at risk (the amount by which current
account values in the variable annuity contracts are not sufficient to meet its
GMDB commitments), related to these guaranteed death benefits as of
December 31, 2003 was $11.4 billion. Due to the fact that 81% of this amount was
reinsured, the Company's net exposure was $2.2 billion. 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.
The Individual Life segment sells universal life-type contracts with certain
secondary guarantees, such as a guarantee that the policy will not lapse, even
if the account value is reduced to zero, as long as the policyholder makes
scheduled premium payments. The assumptions used in the determination of the
secondary guarantee liability are consistent with those used in determining
estimated gross profits for purposes of amortizing deferred policy acquisition
costs. Based on current estimates, the Company expects the cumulative effect on
net income upon recording this liability to be not material. The establishment
of the required liability will change the earnings pattern of these products,
lowering earnings in the early years of the contract and increasing earnings in
the later years. Currently there is diversity in industry practice and
inconsistent guidance surrounding the application of the SOP to universal
life-type contracts. The Company believes consensus or further guidance
surrounding the methodology for determining reserves for secondary guarantees
will develop in the future. This may result in an adjustment to the cumulative
effect of adopting the SOP and could impact future earnings.
SEPARATE ACCOUNT PRESENTATION
The Company has recorded certain MVA fixed annuity products and modified
guarantee life insurance (primarily the Company's Compound Rate Contract ("CRC")
and associated assets) as separate account assets and liabilities through
December 31, 2003. Notwithstanding the market value adjustment feature in this
product, all of the investment performance of the separate account assets is not
being passed to the contractholder, and it therefore, does not meet the
conditions for separate account reporting under the SOP. On January 1, 2004,
market value reserves included in separate account liabilities for CRC, of $10.8
billion, were revalued at current account value in the general account to $10.1
billion. The related separate account assets of $11.0 billion were also
reclassified to the general account. Fixed maturities and equity securities were
reclassified to the general account, as
F-10
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available for sale securities, and will continue to be recorded at fair value,
however, subsequent changes in fair value, net of amortization of deferred
acquisition costs and income taxes, will be recorded in other comprehensive
income rather than net income. On January 1, 2004, the Company recorded a
cumulative effect adjustment to earnings equal to the revaluation of the
liabilities from fair value to account value plus the adjustment to record
unrealized gains (losses) on available for sale invested assets, previously
recorded as a component of net income, as other comprehensive income. The
cumulative adjustments to earnings and other comprehensive income were recorded
net of amortization of deferred acquisition costs and income taxes Through
December 31, 2003, the Company had recorded CRC assets and liabilities on a
market value basis with all changes in value (market value spread) included in
current earnings as a component of other revenues. Upon adoption of the SOP, the
components of CRC spread on a book value basis will be recorded in interest
income and interest credited. Realized gains and losses on investments and
market value adjustments on contract surrenders will be recognized as incurred.
Certain other products offered by the Company recorded in separate account
assets and liabilities through December 31, 2003, were reclassified to the
general account upon adoption of the SOP.
INTERESTS IN SEPARATE ACCOUNTS
As of December 31, 2003, the Company had $24 representing unconsolidated
interests in its own separate accounts. These interests were recorded as
available for sale equity securities, with changes in fair value recorded
through other comprehensive income. On January 1, 2004, the Company reclassified
$11 to investment in trading securities, where the Company's proportionate
beneficial interest in the separate account was less than 20%. Trading
securities are recorded at fair value with changes in fair value recorded to net
investment income. In instances where the Company's proportionate beneficial
interest was between 20-50%, the Company reclassified $13 of its investment to
reflect the Company's proportionate interest in each of the underlying assets of
the separate account. The Company has designated its proportionate interest in
these equity securities and fixed maturities as available for sale.
SALES INDUCEMENTS
The Company currently offers enhanced or bonus crediting rates to
contractholders on certain of its individual and group annuity products. Through
December 31, 2003, the expense associated with offering certain of these bonuses
was deferred and amortized over the contingent deferred sales charge period.
Others were expensed as incurred. Effective January 1, 2004, upon adopting the
SOP, the future expense associated with offering a bonus will be deferred and
amortized over the life of the related contract in a pattern consistent with the
amortization of deferred acquisition costs. Effective January 1, 2004,
amortization expense associated with expenses previously deferred will be
recorded over the remaining life of the contract rather than over the contingent
deferred sales charge period.
STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure an 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 SFAS No. 123. In January 2003, The Hartford adopted the fair
value recognition provisions of accounting for employee stock-based compensation
and used the prospective transition method. Under the prospective method,
stock-based compensation expense is recognized for awards granted or modified
after the beginning of the fiscal year in which the change is made. The Hartford
expenses all stock-based compensation awards granted after January 1, 2003. The
allocated expense to the Company from The Hartford associated with these awards
for the year ended December 31, 2003, was immaterial.
All stock-based compensation awards granted or modified prior to January 1,
2003, will continue to be valued using the intrinsic value-based provisions set
forth in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees". Under the intrinsic value method, compensation
expense is determined on the measurement date, which 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. The expense, including non-option plans,
related to stock-based employee compensation included in the determination of
net income for the years ended December 31, 2003, 2002 and 2001 is less than
that which would have been recognized if the fair value method had been applied
to all awards granted since the effective date of SFAS No. 123.
INVESTMENTS
Hartford Life Insurance 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" as defined in 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 of the immediate participation guaranteed contracts and
certain life and annuity deferred policy acquisition costs, reflected in
stockholder's equity as a component of AOCI. Policy loans are carried at
outstanding balance, which approximates fair value. Other investments primarily
consist of limited partnership interests, derivatives and mortgage loans. The
limited partnerships are accounted for under the equity method and accordingly
the partnership earnings are included in net
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investment income. Derivatives are carried at fair value and mortgage loans on
real estate are recorded at the outstanding principal balance adjusted for
amortization of premiums or discounts and net of valuation allowances, if any.
VALUATION OF FIXED MATURITIES
The fair value for fixed maturity securities is largely determined by one of
three primary pricing methods: independent third party pricing services,
independent broker quotations or pricing matrices which use data provided by
external sources. With the exception of short-term securities for which
amortized cost is predominantly used to approximate fair value, security pricing
is applied using a hierarchy or "waterfall" approach whereby prices are first
sought from independent pricing services with the remaining unpriced securities
submitted to brokers for prices or lastly priced via a pricing matrix.
Prices from independent pricing services are often unavailable for securities
that are rarely traded or are traded only in privately negotiated transactions.
As a result, a significant percentage of the Company's asset-backed and
commercial mortgage-backed securities are priced via broker quotations. A
pricing matrix is used to price securities for which the Company is unable to
obtain either a price from a third party service or an independent broker
quotation. The pricing matrix begins with current treasury rates and uses credit
spreads and issuer-specific yield adjustments received from an independent third
party source to determine the market price for the security. The credit spreads
incorporate the issuer's credit rating as assigned by a nationally recognized
rating agency and a risk premium, if warranted, due to the issuer's industry and
security's time to maturity. The issuer-specific yield adjustments, which can be
positive or negative, are updated twice annually, as of June 30 and
December 31, by an independent third-party source and are intended to adjust
security prices for issuer-specific factors. The matrix-priced securities at
December 31, 2003 and 2002, primarily consisted of non-144A private placements
and have an average duration of 4.3 and 4.5, respectively.
The following table identifies the fair value of fixed maturity securities by
pricing source as of December 31, 2003 and 2002:
<Table>
<Caption>
2003 2002
-----------------------------------------------------------------------------
Percentage Percentage
General Account Fixed of Total General Account Fixed of Total
Maturities at Fair Value Fair Value Maturities at Fair Value Fair Value
-----------------------------------------------------------------------------
Priced via independent market
quotations $24,668 82.0% $19,149 77.2%
Priced via broker quotations 2,037 6.8% 2,819 11.4%
Priced via matrices 2,129 7.1% 1,825 7.4%
Priced via other methods 151 0.5% 155 0.6%
Short-term investments (1) 1,100 3.6% 838 3.4%
-----------------------------------------------------------------------------
TOTAL $30,085 100.0% $24,786 100.0%
-----------------------------------------------------------------------------
</Table>
(1) Short-term investments are valued at amortized cost, which approximates
fair value.
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. As such, the estimated fair value of a
financial instrument may differ significantly from the amount that could be
realized if the security was sold immediately.
OTHER-THAN-TEMPORARY INVESTMENTS
One of the significant estimations inherent in the valuation of investments is
the evaluation of other-than-temporary impairments. The evaluation of
impairments is a quantitative and qualitative process, which is subject to risks
and uncertainties and is intended to determine whether declines in the fair
value of investments should be recognized in current period earnings. 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. 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
other-than-temporarily impaired, 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 other-than-temporarily impaired
investment becomes its new cost basis. The Company has a security monitoring
process overseen by a committee of investment and accounting professionals that
identifies securities that, due to certain characteristics, as described below,
are subjected to an enhanced analysis on a quarterly basis.
Securities not subject to EITF Issue No. 99-20, ("non-EITF Issue No. 99-20
securities"), that are depressed by twenty percent or more for six months are
presumed to be other-than-temporarily impaired unless the depression is the
result of rising interest rates or significant objective verifiable evidence
supports that the security price is temporarily depressed and is expected to
recover within a reasonable period of time. Non-EITF Issue No. 99-20 securities
depressed less than twenty percent or depressed twenty percent or more but for
less than six months are also reviewed to determine if an other-than-temporary
impairment is present. The primary factors considered in evaluating whether a
decline in value for non-EITF Issue
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No. 99-20 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
condition, credit rating 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 recovery.
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 the fair value of a 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.
Projections of expected future cash flows may change based upon new information
regarding the performance of the underlying collateral.
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 continues to review the
other-than-temporarily impaired securities for additional other-than-temporary
impairments
NET REALIZED CAPITAL GAINS AND LOSSES
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 for the years ended
December 31, 2003, 2002 and 2001. 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.
NET INVESTMENT INCOME
Interest income from fixed maturities is recognized when earned on a constant
effective yield basis. The Company stops recognizing interest income when it
does not expect to receive amounts in accordance with the contractual terms of
the security. Net investment income on these investments is recognized only when
interest payments are received.
DERIVATIVE INSTRUMENTS
OVERVIEW
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards, futures and options through one of four Company-approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; to control transaction costs; or to enter
into income enhancement and replication transactions. (For a further discussion,
see Note 3.)
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 the 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. Fair value is based
upon either independent market quotations for exchange traded derivative
contracts, independent third party pricing sources or pricing valuation models
which utilize independent third party data as inputs. The derivative contracts
are reported as assets or liabilities in other investments and other
liabilities, respectively, in the Consolidated Balance Sheet, excluding embedded
derivatives. Embedded derivatives are recorded in the Consolidated Balance
Sheets with the associated host instrument.
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.
FAIR-VALUE HEDGES
Changes in the fair value of a derivative that is designated and qualifies as a
fair-value hedge, along with the changes in the fair value of the hedged asset
or liability that is attributable to the hedged risk, are recorded in current
period earnings with any differences between the net change in fair value of
derivative and the hedged item representing the hedge ineffectiveness. Periodic
derivative net coupon settlements are recorded in net investment income.
CASH-FLOW HEDGES
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 the
variability of the cash flow of the hedged item impacts earnings. Gains and
losses on derivative contracts that are reclassified from AOCI to current period
earnings are included in the line item in the Consolidated Statements of
Operations in which the hedged item is recorded. Any hedge ineffectiveness is
recorded immediately in current period earnings.
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Periodic derivative net coupon settlements are recorded in net investment
income.
FOREIGN-CURRENCY HEDGES
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 hedged transaction is a fair-value hedge or a cash-flow
hedge, respectively. Any hedge ineffectiveness is recorded immediately in
current period earnings. Periodic derivative net coupon settlements are recorded
in net investment income.
NET INVESTMENT IN A FOREIGN OPERATION HEDGES
Changes in fair value of a derivative used as a hedge of a net investment in a
foreign operation, to the extent effective as a hedge, are recorded in the
foreign currency translation adjustments account within AOCI. Cumulative changes
in fair value recorded in AOCI are reclassified into earnings upon the sale or
complete or substantially complete liquidation of the foreign entity. Any hedge
ineffectiveness is recorded immediately in current period earnings. Periodic
derivative net coupon settlements are recorded in net investment income.
OTHER INVESTMENT AND RISK MANAGEMENT ACTIVITIES
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 under SFAS No. 133. Changes in the fair value,
including periodic net coupon settlements, of derivative instruments held for
other investment and risk management purposes are reported in current period
earnings as net realized capital gains and losses. During 2003, the Company
began recording periodic net coupon settlements in net realized capital gains
and losses and reclassified prior period amounts to conform to the current year
presentation.
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, foreign-currency or net-investment
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 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 assessed using the quantitative
methods, prescribed by SFAS No. 133, as amended, including the "Change in
Variable Cash Flows Method," the "Change in Fair Value Method" and the
"Hypothetical Derivative Method" depending on the hedge strategy. 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 the derivative
became ineffective and prospectively, as discussed below under discontinuance of
hedge accounting.
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 not probable that the forecasted transaction will occur, the
derivative continues to be carried on the balance sheet at its fair value, and
gains and losses that were accumulated in AOCI are recognized immediately in
earnings. In 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.
EMBEDDED DERIVATIVES
The Company occasionally purchases or issues financial instruments or products
that contain a derivative instrument that is embedded in the financial
instruments or products. When it is determined that (1) the embedded derivative
possesses economic characteristics that are not clearly and closely related to
the economic characteristics of the host contract, and (2) a separate instrument
with the same terms would qualify as a derivative instrument, the embedded
derivative is bifurcated from the host for measurement purposes. The embedded
derivative, which is reported with the host instrument in the Consolidated
Balance Sheets, is carried at fair value with changes in fair value reported in
net realized capital gains and losses.
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
F-14
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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
Company's Finance Committee of the 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 the right of offset.
In addition, the Company periodically enters into swap agreements in which the
Company assumes credit exposure from a single entity, referenced index or asset
pool.
PRODUCT DERIVATIVES AND RISK MANAGEMENT
The Company offers certain variable annuity products with a GMWB rider. The GMWB
provides the policyholder with a guaranteed remaining balance ("GRB") if the
account value is reduced to zero through a combination of market declines and
withdrawals. The GRB is generally equal to premiums less withdrawals. However,
annual withdrawals that exceed 7% of the premiums paid may reduce the GRB by an
amount greater than the withdrawals and may also impact the guaranteed annual
withdrawal amount that subsequently applies after the excess annual withdrawals
occur. The policyholder also has the option, after a specified time period, to
reset the GRB to the then-current account value, if greater. The GMWB represents
an embedded derivative in the variable annuity contract that is required to be
reported separately from the host variable annuity contract. It is carried at
fair value and reported in other policyholder funds. The fair value of the GMWB
obligations is calculated based on actuarial assumptions related to the
projected cash flows, including benefits and related contract charges, over the
lives of the contracts, incorporating expectations concerning policyholder
behavior. Because of the dynamic and complex nature of these cash flows,
stochastic techniques under a variety of market return scenarios and other best
estimate assumptions are used. Estimating these cash flows involves numerous
estimates and subjective judgments including those regarding expected market
rates of return, market volatility, correlations of market returns and discount
rates. In valuing the embedded derivative, the Company attributes a portion of
the fees collected from the policyholder equal to the present value of future
GMWB claims (the "Attributed Fees"). All changes in the fair value of the
embedded derivative are recorded in net realized capital gains and losses. The
excess of fees collected from the policyholder for the GMWB over the Attributed
Fees are recorded in fee income.
For all contracts in effect through July 6, 2003, the Company entered into a
third party reinsurance arrangement to offset its exposure to the GMWB for the
lives of those contracts. This arrangement is recognized as a derivative and
carried at fair value in reinsurance recoverables. Changes in the fair value of
both the derivative assets and liabilities related to this reinsured GMWB are
recorded in net realized capital gains and losses. As of July 6, 2003, the
Company exhausted all but a small portion of the reinsurance capacity under this
current arrangement, as it relates to new business, and will be ceding only a
very small number of new contracts subsequent to July 6, 2003. Substantially all
new contracts with the GMWB are covered by a reinsurance arrangement with a
related party. See Note 13 "Transactions with Affiliates" for information on
this arrangement.
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. Beginning January 1, 2004, products previously recorded
in guaranteed separate accounts through December 31, 2003, will be recorded in
the general account in accordance with the Company's adoption of the SOP. See
Note 2 of Notes to Consolidated Financial Statements for a more complete
discussion of the Company's adoption of the SOP.
DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
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. These deferred costs, together with the present value of future profits
of acquired business, are recorded as an asset commonly referred to as deferred
policy acquisition costs and present value of future profits ("DAC"). At
December 31, 2003 and 2002, the carrying value of the Company's DAC was $6.1
billion and $5.5 billion, respectively. For statutory accounting purposes, such
costs are expensed as incurred.
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DAC related to traditional policies are amortized over the premium-paying period
in proportion to the present value of annual expected premium income. 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"), arising principally from projected
investment, mortality and expense margins and surrender charges. The
attributable portion of the DAC amortization is allocated to realized gains and
losses on investments. The DAC balance is also adjusted through other
comprehensive income by an amount that represents the amortization of deferred
policy acquisition costs that would have been required as a charge or credit to
operations had unrealized gains and losses on investments 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 EGPs to determine if actual experience or
other evidence suggests that earlier estimates should be revised. In the event
that the Company were to revise its EGPs, the cumulative DAC amortization would
be adjusted to reflect such revised EGPs in the period the revision was
determined to be necessary. Several 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 to a lesser extent, variable
universal life insurance businesses. The average annual long-term rate of
assumed separate account fund performance (before mortality and expense charges)
used in estimating gross profits for the variable annuity and variable universal
life business was 9% for the years ended December 31, 2003 and 2002. For other
products including fixed annuities and other universal life-type contracts, the
average assumed investment yield ranged from 5% to 8.5% for both years ended
December 31, 2003 and 2002.
The Company has developed sophisticated modeling capabilities to evaluate its
DAC asset, which allowed it to run a large number of stochastically determined
scenarios of separate account fund performance. These scenarios were then
utilized to calculate a statistically significant range of reasonable estimates
of EGPs. This range was then compared to the present value of EGPs currently
utilized in the DAC amortization model. As of December 31, 2003, the present
value of the EGPs utilized in the DAC amortization model fall within a
reasonable range of statistically calculated present value of EGPs. As a result,
the Company does not believe there is sufficient evidence to suggest that a
revision to the EGPs (and therefore, a revision to the DAC) as of December 31,
2003 is necessary; however, if in the future the EGPs utilized in the DAC
amortization model were to exceed the margin of the reasonable range of
statistically calculated EGPs, a revision could be necessary. Furthermore, the
Company has estimated that the present value of the EGPs is likely to remain
within a reasonable range if overall separate account returns decline by 15% or
less for 2004, and if certain other assumptions that are implicit in the
computations of the EGPs are achieved.
Additionally, the Company continues to perform analyses with respect to the
potential impact of a revision to future EGPs. If such a revision to EGPs were
deemed necessary, the Company would adjust, as appropriate, all of its
assumptions for products accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments", and reproject its future EGPs based on
current account values at the end of the quarter in which a revision is deemed
to be necessary. To illustrate the effects of this process, assume the Company
had concluded that a revision of the Company's EGPs was required at
December 31, 2003. If the Company assumed a 9% average long-term rate of growth
from December 31, 2003 forward along with other appropriate assumption changes
in determining the revised EGPs, the Company estimates the cumulative increase
to amortization would be approximately $60-$70, after-tax. If instead the
Company were to assume a long-term growth rate of 8% in determining the revised
EGPs, the adjustment would be approximately $75-$90, after-tax. Assuming that
such an adjustment were to have been required, the Company anticipates that
there would have been immaterial impacts on its DAC amortization for the 2004
and 2005 years exclusive of the adjustment, and that there would have been
positive earnings effects in later years. Any such adjustment would not affect
statutory income or surplus, due to the prescribed accounting for such amounts
that is discussed above.
Aside from absolute levels and timing of market performance assumptions,
additional factors that will influence this determination include the degree of
volatility in separate account fund performance 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 (which closed at 1,112 on December 31, 2003), although no assurance
can be provided that this correlation will continue in the future.
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 the present value of 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' funds in the separate accounts is invested in the
equity market. As of December 31, 2003,
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<Page>
the Company believed variable annuity separate account assets could fall by at
least 40% before portions of its DAC asset would be unrecoverable.
RESERVE FOR FUTURE POLICY BENEFITS
The Company 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 stated at amounts determined
by estimates on individual cases and estimates of unreported claims based on
past experience.
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, $24.0
billion and $21.6 billion, as of December 31, 2003 and 2002, 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.
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.
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.
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.
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%, 6% and 8% as of
December 31, 2003, 2002 and 2001, respectively, of total life insurance in
force. Dividends to policyholders were $63, $65 and $68 for the years ended
December 31, 2003, 2002 and 2001, 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.
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.
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.
F-17
<Page>
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS
<Table>
<Caption>
For the years ended
December 31,
------------------------------
2003 2002 2001
------------------------------
COMPONENTS OF NET INVESTMENT INCOME
Fixed maturities income $1,425 $1,235 $1,105
Policy loans income 207 251 304
Other investment income 152 103 95
------------------------------
Gross investment income 1,784 1,589 1,504
Less: Investment expenses 20 17 13
------------------------------
NET INVESTMENT INCOME $1,764 $1,572 $1,491
------------------------------
COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
Fixed maturities $ (6) $ (285) $ (52)
Equity securities (7) (4) (17)
Periodic net coupon settlements on non-qualifying
derivatives 29 13 4
Other (16) (1) (23)
Change in liability to policyholders for net realized
capital gains 1 1 1
------------------------------
NET REALIZED CAPITAL GAINS (LOSSES) $ 1 $ (276) $ (87)
------------------------------
COMPONENTS OF UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES
Gross unrealized gains $ 11 $ 2 $ 1
Gross unrealized losses (4) (19) (8)
------------------------------
Net unrealized gains (losses) 7 (17) (7)
Deferred income taxes and other items 2 (6) (1)
------------------------------
Net unrealized gains (losses), net of tax 5 (11) (6)
Balance -- beginning of year (11) (6) (2)
------------------------------
CHANGE IN UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES $ 16 $ (5) $ (4)
------------------------------
COMPONENTS OF UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES
Gross unrealized gains $1,715 $1,389 $ 514
Gross unrealized losses (141) (278) (305)
Net unrealized gains credited to policyholders (63) (58) (24)
------------------------------
Net unrealized gains 1,511 1,053 185
Deferred income taxes and other items 788 579 65
------------------------------
Net unrealized gains, net of tax 723 474 120
Balance -- beginning of year 474 120 18
------------------------------
CHANGE IN UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES $ 249 $ 354 $ 102
------------------------------
</Table>
F-18
<Page>
COMPONENTS OF FIXED MATURITY INVESTMENTS
<Table>
<Caption>
As of December 31, 2003
----------------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Gains Unrealized Losses Fair Value
----------------------------------------------------------------------
Bonds and Notes
U.S. Gov't and Gov't agencies and
authorities (guaranteed and sponsored) $ 641 8 (2) 647
U.S. Gov't and Gov't agencies and
authorities (guaranteed and
sponsored) -- asset-backed 2,059 33 (4) 2,088
States, municipalities and political
subdivisions 307 6 (7) 306
International governments 641 55 (1) 695
Public utilities 1,195 103 (5) 1,293
All other corporate including
international 13,808 1,170 (41) 14,937
All other corporate -- asset-backed 8,649 339 (81) 8,907
Short-term investments 1,210 1 -- 1,211
Redeemable preferred stock 1 -- -- 1
----------------------------------------------------------------------
TOTAL FIXED MATURITIES $28,511 $1,715 $(141) $30,085
----------------------------------------------------------------------
</Table>
<Table>
<Caption>
As of December 31, 2002
----------------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Gains Unrealized Losses Fair Value
----------------------------------------------------------------------
Bonds and Notes
U.S. Gov't and Gov't agencies and
authorities (guaranteed and sponsored) $ 255 $ 9 $ -- $ 264
U.S. Gov't and Gov't 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>
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 2003 by contractual maturity year are shown below. Estimated
maturities may 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. Actual prepayment experience may vary from
these estimates.
F-19
<Page>
<Table>
<Caption>
Amortized Cost Fair Value
-------------------------------
MATURITY
One year or less $ 3,129 $ 3,141
Over one year through five years 10,692 11,146
Over five years through ten years 7,437 7,912
Over ten years 7,253 7,886
-------------------------------
TOTAL $28,511 $ 30,085
-------------------------------
</Table>
NON-INCOME PRODUCING INVESTMENTS
Investments that were non-income producing as of December 31, are as follows:
<Table>
<Caption>
2003 2002
-----------------------------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
-----------------------------------------------
SECURITY TYPE
All other corporate --
asset-backed $ 2 $ 4 $-- $--
All other corporate including
international 12 30 24 36
-----------------------------------------------
TOTAL $14 $34 $24 $36
-----------------------------------------------
</Table>
For 2003, 2002 and 2001, net investment income was $17, $13 and $2,
respectively, lower than it would have been if interest on non-accrual
securities had been recognized in accordance with the original terms of these
investments.
SALES OF FIXED MATURITY AND EQUITY SECURITY INVESTMENTS
<Table>
<Caption>
For the years ended
December 31,
------------------------------
2003 2002 2001
------------------------------
SALE OF FIXED MATURITIES
Sale proceeds $6,205 $5,617 $4,613
Gross gains 196 117 82
Gross losses (71) (60) (44)
SALE OF EQUITY SECURITIES
Sale proceeds $ 107 $ 11 $ 42
Gross gains 4 -- --
Gross losses (3) (3) (17)
------------------------------
</Table>
CONCENTRATION OF CREDIT RISK
The Company is not exposed to any credit concentration risk of a single issuer
greater than 10% of the Company's stockholder's equity.
SECURITY UNREALIZED LOSS AGING
The following table presents the Company's unrealized loss, fair value and
amortized cost for fixed maturity and equity securities, excluding securities
subject to EITF Issue No. 99-20, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, as of December 31, 2003.
F-20
<Page>
<Table>
<Caption>
Less Than 12 Months 12 Months or More
----------------------------------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Losses Cost Value Losses
----------------------------------------------------------------
U.S. Gov't and Gov't agencies and
authorities (guaranteed and sponsored) $ 235 $ 233 $ (2) $ -- $ -- $ --
U.S. Gov't and Gov't agencies and
authorities (guaranteed and
sponsored) -- asset-backed 372 368 (4) 1 1 --
States, municipalities and political
subdivisions 160 153 (7) -- -- --
International governments 26 25 (1) -- -- --
Public utilities 120 119 (1) 56 52 (4)
All other corporate including
international 1,176 1,147 (29) 291 279 (12)
All other corporate -- asset-backed 768 759 (9) 142 141 (1)
----------------------------------------------------------------
TOTAL FIXED MATURITIES 2,857 2,804 (53) 490 473 (17)
Common stock 2 2 -- 3 3 --
Nonredeemable preferred stock 39 35 (4) -- -- --
----------------------------------------------------------------
TOTAL EQUITY 41 37 (4) 3 3 --
----------------------------------------------------------------
TOTAL TEMPORARILY IMPAIRED SECURITIES $2,898 $2,841 $(57) $493 $476 $(17)
----------------------------------------------------------------
</Table>
<Table>
<Caption>
Total
-------------------------------
Amortized Fair Unrealized
Cost Value Losses
-------------------------------
U.S. Gov't and Gov't agencies and authorities (guaranteed
and sponsored) $ 235 $ 233 $ (2)
U.S. Gov't and Gov't agencies and authorities (guaranteed
and sponsored) --
asset-backed 373 369 (4)
States, municipalities and political subdivisions 160 153 (7)
International governments 26 25 (1)
Public utilities 176 171 (5)
All other corporate including international 1,467 1,426 (41)
All other corporate -- asset-backed 910 900 (10)
-------------------------------
TOTAL FIXED MATURITIES 3,347 3,277 (70)
-------------------------------
Common stock 5 5 --
Nonredeemable preferred stock 39 35 (4)
-------------------------------
TOTAL EQUITY 44 40 (4)
-------------------------------
TOTAL TEMPORARILY IMPAIRED SECURITIES $3,391 $3,317 $(74)
-------------------------------
</Table>
The following discussion refers to the data presented in the table above.
There were no fixed maturities or equity securities as of December 31, 2003,
with a fair value less than 80% of the security's amortized cost. As of
December 31, 2003, fixed maturities represented approximately 95% of the
Company's unrealized loss amount, which was comprised of approximately 425
different securities. As of December 31, 2003, the Company held no securities
presented in the table above that were at an unrealized loss position in excess
of $4.2.
The majority of the securities in an unrealized loss position for less than
twelve months are depressed due to the rise in long-term interest rates. This
group of securities was comprised of approximately 375 securities. Of the less
than twelve months total unrealized loss amount $48, or 84%, was comprised of
securities with fair value to amortized cost ratios as of December 31, 2003 at
or greater than 90%. As of December 31, 2003, $47 of the less than twelve months
total unrealized loss amount was comprised of securities in an unrealized loss
position for less than six continuous months.
The securities depressed for twelve months or more were comprised of less than
100 securities. Of the twelve months or more unrealized loss amount $15, or 88%,
was comprised of securities with fair value to amortized cost ratios as of
December 31, 2003 at or greater than 90%.
As of December 31, 2003, the securities in an unrealized loss position for
twelve months or more were primarily interest rate related. The sector in the
greatest gross unrealized loss position in the schedule above was financial
services which is included within the other corporate including international
and nonredeemable preferred stock categories above. A description of the events
contributing to the security type's unrealized loss position and the factors
considered in determining that recording an other-than-temporary impairment was
not warranted are outlined below.
Financial services represents approximately $10 of the securities in an
unrealized loss position for twelve months or more. All of these positions
continue to be priced at or
F-21
<Page>
greater than 80% of amortized cost. The financial services securities in an
unrealized loss position are primarily investment grade variable rate securities
with extended maturity dates, which have been adversely impacted by the
reduction in forward interest rates after the purchase date, resulting in lower
expected cash flows. Unrealized loss amounts for these securities have declined
during the year as interest rates have risen. Additional changes in fair value
of these securities are primarily dependent on future changes in forward
interest rates. A substantial percentage of these securities are currently
hedged with interest rate swaps, which convert the variable rate earned on the
securities to a fixed amount. The swaps generally receive cash flow hedge
accounting treatment and are currently in an unrealized gain position.
The remaining balance of $7 in the twelve months or more unrealized loss
category is comprised of approximately 50 securities with fair value to
amortized cost ratios greater than 80%.
As part of the Company's ongoing security monitoring process by a committee of
investment and accounting professionals, the Company has reviewed its investment
portfolio and concluded that there were no additional other-than-temporary
impairments as of December 31, 2003 and 2002. Due to the issuers' continued
satisfaction of the securities' obligations in accordance with their contractual
terms and the expectation that they will continue to do so, management's intent
and ability to hold these securities, as well as the evaluation of the
fundamentals of the issuers' financial condition and other objective evidence,
the Company believes that the prices of the securities in the sectors identified
above were temporarily depressed.
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.
DERIVATIVE INSTRUMENTS
Derivative instruments are recorded at fair value and presented in the
Consolidated Balance Sheets as of December 31, as follows:
<Table>
<Caption>
Asset Values Liability Values
--------------------------------------------
2003 2002 2003 2002
--------------------------------------------
Other investments $ 116 $179 $ -- --
Fixed maturities 7 10 -- --
Reinsurance recoverables -- 48 115 --
Other policyholder funds and benefits payable 115 -- -- 48
Other liabilities -- -- 186 78
--------------------------------------------
TOTAL $ 238 $237 $301 $ 126
--------------------------------------------
</Table>
F-22
<Page>
The following table summarizes the primary derivative instruments used by the
Company and the hedging strategies to which they relate. Derivatives in the
Company's separate accounts are not included because associated gains and losses
generally accrue directly to policyholders. The notional value of derivative
contracts represent the basis upon which pay or receive amounts are calculated
and are not reflective of credit risk. The fair value amounts of derivative
assets (liabilities) are presented on a net basis as of December 31 in the
following table.
<Table>
<Caption>
Notional Amount Fair Value
--------------------------------------------
HEDGING STRATEGY 2003 2002 2003 2002
--------------------------------------------
CASH-FLOW HEDGES
Interest rate swaps
Interest rate swaps are primarily used to convert interest
receipts on floating-rate fixed maturity investments to fixed
rates. These derivatives are predominantly used to better match
cash receipts from assets with cash disbursements required to
fund liabilities. $ 1,889 $ 2,494 $ 98 $ 184
Foreign currency swaps
Foreign currency swaps are used to convert foreign denominated
cash flows associated with certain foreign denominated fixed
maturity investments to U.S. dollars. The foreign fixed
maturities are primarily denominated in Euros and are swapped
to minimize cash flow fluctuations due to changes in currency
rates. 703 386 (147) (30)
FAIR-VALUE HEDGES
Interest rate swaps
A portion of the Company's fixed debt is hedged against
increases in LIBOR (the benchmark interest rate). In addition,
interest rate swaps are used to hedge the changes in fair value
of certain fixed rate liabilities due to changes in LIBOR. 112 30 (5) --
Interest rate caps and floors
Interest rate caps and floors are used to offset the changes in
fair value related to corresponding interest rate caps and
floors that exist in certain of the Company's variable-rate
fixed maturity investments. 51 129 (1) (3)
OTHER INVESTMENT AND RISK MANAGEMENT ACTIVITIES
Interest rate caps and swaption contracts
The Company is exposed to policyholder surrenders during a
rising interest rate environment. Interest rate cap and
swaption contracts are used to mitigate the Company's loss in a
rising interest rate environment. The increase in yield from
the cap and swaption contract in a rising interest rate
environment may be used to raise credited rates, thereby
increasing the Company's competitiveness and reducing the
policyholder's incentive to surrender.
The Company also uses an interest rate cap as an economic hedge
of the interest rate risk related to fixed rate debt. In a
rising interest rate environment, the cap will limit the net
interest expense on the hedged fixed rate debt. 1,466 516 11 --
</Table>
F-23
<Page>
<Table>
<Caption>
Notional Amount Fair Value
--------------------------------------------
HEDGING STRATEGY 2003 2002 2003 2002
--------------------------------------------
Credit default and total return swaps
The Company enters into swap agreements in which the Company
assumes credit exposure from an individual entity, referenced
index or asset pool. The Company assumes credit exposure to
individual entities through credit default swaps. These
contracts entitle the company to receive a periodic fee in
exchange for an obligation to compensate the derivative
counterparty should a credit event occur on the part of the
issuer. Credit events typically include failure on the part of
the issuer to make a fixed dollar amount of contractual
interest or principal payments or bankruptcy. The maximum
potential future exposure to the Company is the notional value
of the swap contracts, $49 and $49, after-tax, as of
December 31, 2003 and 2002, respectively.
The Company also assumes exposure to the change in value of
indices or asset pools through total return swaps. As of
December 31, 2003 and 2002, the maximum potential future
exposure to the Company from such contracts is $130 and $68,
after-tax, respectively. $ 275 $ 307 $ (18) $ (42)
Options
The Company writes option contracts for a premium to monetize
the option embedded in certain of its fixed maturity
investments. 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. 276 742 1 --
Interest rate swaps
The Company enters into interest rates swaps to terminate
existing swaps in hedging relationships, and thereby offsetting
the changes in value in the original swap. In addition, the
Company uses interest rate swaps to convert interest receipts
on floating-rate fixed maturity investments to fixed rate. 1,702 1,512 29 10
Foreign currency swaps and put and call options
The Company enters into foreign currency swaps, purchases
foreign put options and writes foreign call options to hedge
the foreign currency exposures in certain of its foreign fixed
maturity investments. Currency options were closed in January
2003 for a loss of $1, after-tax. 104 353 (31) (8)
Product derivatives
The Company offers certain variable annuity products with a
GMWB rider. The GMWB is an embedded derivative that provides
the policyholder with a guaranteed remaining balance ('GRB') if
the account value is reduced to zero through a combination of
market declines and withdrawals. The GRB is generally equal to
premiums less withdrawals. The policyholder also has the
option, after a specified time period, to reset the GRB to the
then-current account value, if greater (For a further
discussion, see Note 2). The notional value of the embedded
derivative is the GRB balance. 14,961 2,760 115 (48)
--------------------------------------------
Reinsurance contracts
Reinsurance arrangements are used to offset the Company's
exposure to the GMWB embedded derivative for the lives of the
host variable annuity contracts. The notional amount of the
reinsurance contracts is the GRB amount. 14,961 2,760 (115) 48
--------------------------------------------
TOTAL $36,500 $11,989 $ (63) $ 111
--------------------------------------------
</Table>
F-24
<Page>
For the years ended December 31, 2003, 2002 and 2001, the Company's gross gains
and losses representing the total ineffectiveness of all cash-flow, fair-value
and net investment hedges were immaterial. For the years ended December 31,
2003, 2002 and 2001, the Company recognized an after-tax net gain (loss) of
$(3), $1 and ($11), respectively, (reported as net realized capital gains and
losses in the Consolidated Statements of Operations), which represented the
total change in value for other derivative-based strategies which do not qualify
for hedge accounting treatment including the periodic net coupon settlements.
As of December 31, 2003 and 2002, the after-tax deferred net gains on derivative
instruments accumulated in AOCI that are expected to be reclassified to earnings
during the next twenty-four months are $6 and $7, respectively. This expectation
is based on the anticipated interest payments on hedged investments in fixed
maturity securities that will occur over the next twenty-four 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 twenty-four months. For the years ended December 31,
2003, 2002 and 2001, the net reclassifications from AOCI to earnings resulting
from the discontinuance of cash-flow hedges were immaterial.
SECURITIES LENDING AND COLLATERAL ARRANGEMENTS
The Company participates in a securities lending program to generate additional
income, whereby certain domestic fixed income securities are loaned for a short
period of time from the Company's portfolio to qualifying third parties, via a
lending agent. Borrowers of these securities provide collateral of 102% of the
market value of the loaned securities. Acceptable collateral may be in the form
of cash or U.S. Government securities. The market value of the loaned securities
is monitored and additional collateral is obtained if the market value of the
collateral falls below 100% of the market value of the loaned securities. Under
the terms of the securities lending program, the lending agent indemnifies the
Company against borrower defaults. As of December 31, 2003, the fair value of
the loaned securities was approximately $780 and was included in fixed
maturities in the Consolidated Balance Sheets. The Company retains a portion of
the income earned from the cash collateral or receives a fee from the borrower.
The Company recorded before-tax income from securities lending transactions, net
of lending fees, of $0.5 for the year ended December 31, 2003, which was
included in net investment income.
The Company enters into various collateral arrangements, which require both the
pledging and accepting of collateral in connection with its derivative
instruments. As of December 31, 2003 and 2002, collateral pledged of $209 and
$8, respectively, was included in fixed maturities in the Consolidated Balance
Sheets.
The classification and carrying amount of the loaned securities associated with
the lending program and the collateral pledged at December 31, 2003 and 2002
were as follows:
<Table>
<Caption>
2003 2002
--------------
LOANED SECURITIES AND COLLATERAL PLEDGED
U.S. Gov't and Gov't agencies and authorities (guaranteed
and sponsored) $410 $ --
U.S. Gov't and Gov't agencies and authorities (guaranteed
and sponsored -- asset-backed) 3 8
International governments 11 --
Public utilities 15 --
All other corporate including international 366 --
All other corporate -- asset-backed 184 --
--------------
TOTAL $989 $ 8
--------------
</Table>
As of December 31, 2003 and 2002, the Company had accepted collateral relating
to the securities lending program and collateral arrangements consisting of
cash, U.S. Government, and U.S. Government agency securities with a fair value
of $996 and $407, respectively. At December 31, 2003 and 2002, only cash
collateral of $869 and $173, respectively, was invested and recorded in the
Consolidated Balance Sheets in fixed maturities and with a corresponding amount
recorded in 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, 2003 and
2002. As of December 31, 2003 and 2002 all collateral accepted was held in
separate custodial accounts.
4. 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.
F-25
<Page>
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, 2003 and 2002 were as follows:
<Table>
<Caption>
2003 2002
-----------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------
ASSETS
Fixed maturities $30,085 $30,085 $24,786 $24,786
Equity securities 85 85 120 120
Policy loans 2,470 2,470 2,895 2,895
Other investments 639 639 918 918
LIABILITIES
Other policyholder funds (1) $23,957 $24,320 $20,418 $20,591
-----------------------------------------------------------
</Table>
(1) Excludes universal life insurance contracts, including corporate owned
life insurance.
5. 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.
6. 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, 2003, 2002
and 2001, with the 2001 period adjusted for goodwill amortization recorded.
<Table>
<Caption>
2003 2002 2001
--------------------------
NET INCOME
Income before cumulative effect of accounting changes $626 $426 $652
Goodwill amortization, net of tax -- -- 4
--------------------------
Adjusted income before cumulative effect of accounting
changes 626 426 656
Cumulative effect of accounting changes, net of tax -- -- (6)
--------------------------
ADJUSTED NET INCOME $626 $426 $650
--------------------------
</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>
2003 2002
-------------------------------------------------------------
Accumulated Accumulated
Carrying Net Carrying Net
Amount Amortization Amount Amortization
-------------------------------------------------------------
AMORTIZED INTANGIBLE ASSETS
PRESENT VALUE OF FUTURE PROFITS $490 $115 $529 $76
-------------------------------------------------------------
</Table>
Net amortization expense for the years ended December 31, 2003, 2002 and 2001
was $39, $39 and $37, respectively.
F-26
<Page>
Estimated future net amortization expense for the succeeding five years is as
follows.
<Table>
<Caption>
For the year ended December 31,
- ----------------------------------------------
2004 $ 35
2005 $ 30
2006 $ 29
2007 $ 25
2008 $ 24
- ----------------------------------------------
</Table>
The Company's tests of its goodwill for other-than-temporary impairment in
accordance with SFAS No. 142 resulted in no write-downs for the years ended
December 31, 2003 and 2002. For further discussions of the adoption of SFAS
No. 142, see Note 2.
7. SEPARATE ACCOUNTS
Hartford Life Insurance Company maintained separate account assets and
liabilities totaling $130.2 billion and $105.3 billion at December 31, 2003 and
2002, 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 $118.1 billion and $93.5
billion at December 31, 2003 and 2002, respectively, wherein the policyholder
assumes substantially all the investment risks and rewards, and guaranteed
separate accounts totaling $12.1 and $11.8 billion at December 31, 2003 and
2002, 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
$139 and $384 at December 31, 2003 and 2002, 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 $1.3 billion, $1.1
billion and $1.2 billion in 2003, 2002 and 2001, 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 6.0% and 6.3% as of December 31, 2003 and 2002,
respectively. The assets that support these liabilities were comprised of $11.7
billion and $11.1 billion in fixed maturities at December 31, 2003 and 2002,
respectively, and $106 and $385 of other invested assets at December 31, 2003
and 2002, 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 $(81) and $135 in
carrying value and $2.6 billion and $3.6 billion in notional amounts as of
December 31, 2003 and 2002, respectively.
8. STATUTORY RESULTS
<Table>
<Caption>
For the years ended December 31,
------------------------------------
2003 2002 2001
------------------------------------
Statutory net income
(loss) $ 801 $ (305) $ (485)
------------------------------------
Statutory capital and
surplus $3,115 $2,354 $2,412
------------------------------------
</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 payment of dividends by
Connecticut-domiciled insurers is limited under the insurance holding company
laws of Connecticut. Under these laws, the insurance subsidiaries may only make
their dividend payments out of unassigned surplus. These laws require notice to
and approval by the state insurance commissioner for the declaration or payment
of any dividend, which, together with other dividends or distributions made
within the preceding twelve months, exceeds the greater of (i) 10% of the
insurer's policyholder surplus as of December 31 of the preceding year or
(ii) net income (or net gain from operations, if such company is a life
insurance company) for the twelve-month period ending on the thirty-first day of
December last preceding, in each case determined under statutory insurance
accounting policies. In addition, if any dividend of a Connecticut-domiciled
insurer exceeds the insurer's earned surplus, it requires the prior approval of
the Connecticut Insurance Commissioner. The insurance holding company laws of
the other jurisdictions in which The Hartford's insurance subsidiaries are
incorporated (or deemed commercially domiciled) generally contain similar
(although in certain instances somewhat more restrictive) limitations on the
payment of dividends. As of December 31, 2003, the maximum amount of statutory
dividends which may be paid by the insurance subsidiaries of the Company in
2004, without prior approval, is $550.
The domestic insurance subsidiaries of Hartford Life Insurance Company prepare
their statutory financial statements in accordance with accounting practices
prescribed by the applicable insurance department. 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
impact of applying the new guidance resulted in a benefit of approximately $38
in statutory surplus.
F-27
<Page>
9. PENSION PLANS, POSTRETIREMENT, HEALTH CARE AND LIFE INSURANCE BENEFIT AND
SAVINGS PLANS
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 $19, $10 and $11 in 2003, 2002 and 2001, respectively.
Postretirement health care and life insurance benefits expense, allocated by The
Hartford, was not material to the results of operations for 2003, 2002 and 2001.
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 $6, $5 and $6 for the years ended
December 31, 2003, 2002 and 2001, respectively.
10. REINSURANCE
Hartford Life Insurance Company cedes insurance to other insurers in order to
limit its maximum losses and to 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, 2003, Hartford Life Insurance Company 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, 2003, 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,
------------------------------------
2003 2002 2001
------------------------------------
Gross premiums $3,780 $3,324 $4,033
Reinsurance assumed 43 45 79
Reinsurance ceded (720) (716) (1,028)
------------------------------------
NET RETAINED PREMIUMS $3,103 $2,653 $3,084
------------------------------------
</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.
Hartford Life Insurance Company also purchases reinsurance covering the death
benefit guarantees on a portion of its variable annuity business. On March 16,
2003, a final decision and award was issued in the previously disclosed
arbitration between subsidiaries of the Company and one of their primary
reinsurers relating to policies with death benefits written from 1994 to 1999
(see further discussion in Note 12).
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 $550, $670 and
$693 for the years ended December 31, 2003, 2002 and 2001, 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.
On June 30, 2003, the Company recaptured a block of business previously
reinsured with an unaffiliated reinsurer. Under this treaty, the Company
reinsured a portion of the guaranteed minimum death benefit (GMDB) feature
associated with certain of its annuity contracts. As consideration for
recapturing the business and final settlement under the
F-28
<Page>
treaty, the Company has received assets valued at approximately $32 and one
million warrants exercisable for the unaffiliated company's stock. This amount
represents to the Company an advance collection of its future recoveries under
the reinsurance agreement and will be recognized as future losses are incurred.
Prospectively, as a result of the recapture, the Company will be responsible for
all of the remaining and ongoing risks associated with the GMDB's related to
this block of business. The recapture increased the net amount at risk retained
by the Company, which is included in the net amount at risk discussed in Note 2.
On January 1, 2004, upon adoption of the SOP, the $32 was included in the
Company's GMDB reserve calculation as part of the net reserve benefit ratio and
as a claim recovery to date.
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 $78, $96 and
$178 in 2003, 2002 and 2001, respectively, and accident and health premium of
$305, $373 and $418, respectively, to HLA.
11. 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 21%, 1% and 6% in 2003, 2002 and
2001, respectively.
Income tax expense (benefit) is as follows:
<Table>
<Caption>
For the years ended December 31,
-----------------------------------
2003 2002 2001
-----------------------------------
Current $ 13 $4 $(202)
Deferred 155 (2) 246
-----------------------------------
INCOME TAX EXPENSE $168 $2 $ 44
-----------------------------------
</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,
----------------------------------
2003 2002 2001
----------------------------------
Tax provision at the U.S. federal statutory rate $278 $150 $244
Tax preferred investments (87) (63) (60)
IRS audit settlement (See Note 13) -- (76) --
Tax adjustment (See Note 13) (21) -- (144)
Foreign related investments (4) (6) --
Other 2 (3) 4
----------------------------------
TOTAL $168 $ 2 $ 44
----------------------------------
</Table>
Deferred tax assets (liabilities) include the following as of December 31:
<Table>
<Caption>
2003 2002
-----------------------------
Tax basis deferred policy acquisition costs $ 638 $ 699
Financial statement deferred policy acquisition costs and
reserves (713) (751)
Employee benefits 5 13
Net unrealized capital losses (gains) on securities (535) (422)
Net operating loss carryforward/Minimum tax credits 124 249
Investments and other (5) (31)
-----------------------------
TOTAL $(486) $(243)
-----------------------------
</Table>
Hartford Life Insurance Company had a current tax receivable of $141 and $89 as
of December 31, 2003 and 2002, respectively.
In management's judgment, the gross deferred tax asset will more likely than not
be realized as reductions of future taxable income. Accordingly, no valuation
allowance has been recorded. Included in the total net deferred tax liability is
a deferred tax asset for net operating losses of $50, which expire in 2017 -
2023.
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
F-29
<Page>
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, 2003.
12. COMMITMENTS AND CONTINGENT LIABILITIES
LITIGATION
The Company is or may become involved in various kinds of legal actions, some of
which assert claims for substantial amounts. These actions may include, among
others, putative state and federal class actions seeking certification of a
state or national class. The Company also is involved in individual actions in
which punitive damages are sought, such as claims alleging bad faith in the
handling of insurance claims. Management expects that the ultimate liability, if
any, with respect to such lawsuits, after consideration of provisions made for
potential losses and costs of defense, will not be material to the consolidated
financial condition of the Company. Nonetheless, given the large or
indeterminate amounts sought in certain of these actions, and the inherent
unpredictability of litigation, it is possible that an adverse outcome in
certain matters could, from time to time, have a material adverse effect on the
Company's consolidated results of operations or cash flows in particular
quarterly or annual periods.
In the third quarter of 2003, Hartford Life Insurance Company ("HLIC") and its
affiliate International Corporate Marketing Group, LLC ("ICMG") settled their
intellectual property dispute with Bancorp Services, LLC ("Bancorp"). The
dispute concerned, among other things, Bancorp's claims for alleged patent
infringement, breach of a confidentiality agreement, and misappropriation of
trade secrets related to certain stable value corporate-owned life insurance
products. The dispute was the subject of litigation in the United States
District Court for the Eastern District of Missouri, in which Bancorp obtained
in 2002 a judgment exceeding $134 against HLIC and ICMG after a jury trial on
the trade secret and breach of contract claims, and HLIC and ICMG obtained
summary judgment on the patent infringement claim. Based on the advice of legal
counsel following entry of the judgment, the Company recorded an $11 after-tax
charge in the first quarter of 2002 to increase litigation reserves. Both
components of the judgment were appealed.
Under the terms of the settlement, HLIC and ICMG will pay a minimum of $70 and a
maximum of $80, depending on the outcome of the patent appeal, to resolve all
disputes between the parties. The appeal from the trade secret and breach of
contract judgment will be dismissed. The settlement resulted in the recording of
a $9 after-tax benefit in the third quarter of 2003, to reflect the Company's
portion of the settlement.
On March 16, 2003, a final decision and award was issued in the previously
disclosed reinsurance arbitration between subsidiaries of the Company and one of
their primary reinsurers relating to policies with guaranteed minimum death
benefits written from 1994 to 1999. The arbitration involved alleged breaches
under the reinsurance treaties. Under the terms of the final decision and award,
the reinsurer's reinsurance obligations to the Company's subsidiaries were
unchanged and not limited or reduced in any manner. The award was confirmed by
the Connecticut Superior Court on May 5, 2003.
LEASES
The rent paid to Hartford Fire for operating leases entered into by the Company
was $31, $31 and $22 in 2003, 2002 and 2001, respectively. Future minimum rental
commitments are as follows:
<Table>
2004 $ 28
2005 25
2006 23
2007 21
2008 20
Thereafter 37
--------
TOTAL $ 154
--------
</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 $12, $10 and
$11 in 2003, 2002 and 2001, respectively.
TAX MATTERS
The Company's federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). The Company is currently under audit for the 1998-2001
tax years. 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
Throughout the IRS audit of the 1996-1997 years, the Company and the IRS engaged
in a 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.
F-30
<Page>
Early 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 total DRD benefit related to the 2002
tax year was $63.
During the second quarter of 2003 the Company recorded a benefit of $23,
consisting primarily of a change in estimate of the DRD tax benefit reported
during 2002. The change in estimate was the result of actual 2002 investment
performance on the related separate accounts being unexpectedly out of pattern
with past performance, which had been the basis for the estimate. The total DRD
benefit relating to the 2003 tax year recorded during the twelve months ended
December 31, 2003 was $87.
The Company will continue to monitor further developments surrounding the
computation of the separate account DRD, as well as other tax-related items, and
will adjust its estimate of the probable outcome of these issues as developments
warrant.
UNFUNDED COMMITMENTS
At December 31, 2003, Hartford Life Insurance Company has outstanding
commitments totaling $214, of which $152 is committed to fund limited
partnership investments. These capital commitments can be called by the
partnership during the commitment period (on average 2 to 5 years) to fund
working capital needs or purchase new investments. Once the commitment period
expires, the Company is under no obligation to fund the remaining unfunded
commitment but may elect to do so. The remaining $62 of outstanding commitments
are primarily related to various funding obligations associated with investments
in mortgage loans. These have a commitment period that expires in less than one
year.
13. TRANSACTIONS WITH AFFILIATES
In connection with a comprehensive evaluation of various capital maintenance and
allocation strategies by The Hartford, an intercompany asset sale transaction
was completed in April 2003. The transaction resulted in certain of The
Hartford's Property & Casualty subsidiaries selling ownership interests in
certain high quality fixed maturity securities to the Company for cash equal to
the fair value of the securities as of the effective date of the sale. For the
Property and Casualty subsidiaries, the transaction monetized the embedded gain
in certain securities on a tax deferred basis to The Hartford because no capital
gains tax will be paid until the securities are sold to unaffiliated third
parties. The transfer re-deployed to the Company desirable investments without
incurring substantial transaction costs that would have been payable in a
comparable open market transaction. The fair value of securities transferred was
$1.7 billion.
The Company's employees are included in The Hartford's non-contributory defined
benefit pension benefit plans and the Company is allocated expense for these
plans by The Hartford. On September 30, 2003, Hartford Life, Inc. assumed the
Company's intercompany payable of $49 for the reimbursement of costs associated
with the defined benefit pension plans. As a result, the Company reported $49 as
a capital contribution during the quarter ended September 30, 2003 to reflect
the extinguishment of the intercompany payable.
Effective July 7, 2003, the Company and its subsidiary, Hartford Life and
Annuity Insurance Company ("HLAI") entered into an indemnity reinsurance
arrangement with Hartford Life and Accident Company ("HLA"). Through this
arrangement, both the Company and HLAI will automatically cede 100% of the
GMWB's incurred on variable annuity contracts issued between July 7, 2003 and
December 31, 2003 that were otherwise not reinsured. The Company and HLAI, in
total, ceded an immaterial amount of premiums to HLA. As of December 31, 2003,
HLIC and HLAI, combined, have recorded a reinsurance recoverable from HLA of
$(26).
The Company has issued a guarantee to retirees and vested terminated employees
(Retirees) of The Hartford Retirement Plan for U.S. Employees (the Plan) who
retired or terminated prior to January 1, 2004. The Plan is sponsored by The
Hartford. The guarantee is an irrevocable commitment to pay all accrued benefits
which the Retiree or the Retiree's designated beneficiary is entitled to receive
under the Plan in the event the Plan assets are insufficient to fund those
benefits and The Hartford is unable to provide sufficient assets to fund those
benefits. The Company believes that the likelihood that payments will be
required under this guarantee is remote.
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 universal
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-31
<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 primarily occur between Corporate and the
operating segments. These amounts primarily include interest income on allocated
surplus, interest charges on excess separate account surplus, the allocation of
net realized capital gains and losses and the allocation of credit risk CHARGES.
Each operating segment is allocated corporate surplus as needed to support its
business. Portfolio management is a corporate function and net realized capital
gains and losses on invested assets are recognized in Corporate. Those net
realized capital gains and losses that are interest rate related are
subsequently allocated back to the operating segments in future periods, with
interest, over the average estimated duration of the operating segment's
investment portfolios, through an adjustment to each respective operating
segment's net investment income, with an offsetting adjustment in Corporate.
Credit related net capital losses are retained by Corporate. However, in
exchange for retaining credit related losses, Corporate charges each operating
segment a "credit-risk" fee through net investment income. The "credit-risk" fee
covers fixed income assets included in each operating segment's general account
and guaranteed separate accounts. The "credit-risk" fee is based upon historical
default rates in the corporate bond market, the Company's actual default
experience and estimates of future losses. 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.
F-32
<Page>
<Table>
<Caption>
For the years ended December 31,
----------------------------------
2003 2002 2001
----------------------------------
TOTAL REVENUES
Investment Products $ 3,374 $ 2,694 $ 2,947
Individual Life 893 858 774
COLI 482 592 717
Other 119 (195) 50
----------------------------------
TOTAL REVENUES $ 4,868 $ 3,949 $ 4,488
----------------------------------
NET INVESTMENT INCOME
Investment Products $ 1,254 $ 1,049 $ 865
Individual Life 222 224 205
COLI 215 276 352
Other 73 23 69
----------------------------------
TOTAL NET INVESTMENT INCOME $ 1,764 $ 1,572 $ 1,491
----------------------------------
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS AND
PRESENT VALUE OF FUTURE PROFITS
Investment Products $ 494 $ 385 $ 413
Individual Life 165 146 153
COLI 1 -- --
Other -- -- --
----------------------------------
TOTAL AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS
AND PRESENT VALUE OF FUTURE PROFITS $ 660 $ 531 $ 566
----------------------------------
INCOME TAX EXPENSE (BENEFIT)
Investment Products $ 65 $ 87 $ 111
Individual Life 64 59 54
COLI 22 14 17
Other 17 (158) (138)
----------------------------------
TOTAL INCOME TAX EXPENSE $ 168 $ 2 $ 44
----------------------------------
NET INCOME (LOSS)
Investment Products $ 414 $ 343 $ 375
Individual Life 134 116 106
COLI 46 31 36
Other 32 (64) 129
----------------------------------
TOTAL NET INCOME $ 626 $ 426 $ 646
----------------------------------
ASSETS
Investment Products $126,158 $ 96,865 $106,497
Individual Life 9,484 8,173 9,248
COLI 29,593 30,326 26,835
Other 6,705 6,737 2,853
----------------------------------
TOTAL ASSETS $171,940 $142,101 $145,433
----------------------------------
REVENUES BY PRODUCT
Investment Products
Individual Annuities $ 1,656 $ 1,451 $ 1,397
Other 1,718 1,243 1,550
----------------------------------
TOTAL INVESTMENT PRODUCTS 3,374 2,694 2,947
----------------------------------
Individual Life 893 858 774
COLI 482 592 717
----------------------------------
TOTAL REVENUES BY PRODUCT $ 4,749 $ 4,144 $ 4,438
----------------------------------
</Table>
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.
F-33
<Page>
16. QUARTERLY RESULTS FOR 2003 AND 2002 (UNAUDITED)
<Table>
<Caption>
Three Months Ended
March 31, June 30, September 30, December 31,
------------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002 2003 2002
------------------------------------------------------------------------------
Revenues $1,018 $1,072 $1,186 $921 $1,449 $952 $1,215 $1,004
Benefits, claims and expenses 888 895 970 863 1,229 873 987 890
Net income 100 132 189 57 167 146 170 91
------------------------------------------------------------------------------
</Table>
17. 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.
F-34
<Page>
PART II
<Page>
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
-------------------------------------------
Not applicable.
Item 15. Indemnification of Directors and Officers.
-----------------------------------------
Sections 33-770 to 33-778, inclusive, of the Connecticut General
Statutes ("CGS") provide the standards under which a corporation may indemnify
an individual for liability, including legal expenses, incurred because such
individual is a party to a proceeding because the individual was a director,
officer, employee, or agent of the corporation. Specifically, Section
33-771(a)(2) permits a corporation to indemnify a director if the corporation,
pursuant to Section 33-636(5)(b), obligated itself under its certificate of
incorporation to indemnify a director for liability except for certain liability
involving conduct described in Section 33-636(5)(b). Section 33-776 permits a
corporation to indemnify an officer, employee, or agent of the corporation to
the same extent as a director as may be provided by the corporation's bylaws,
certificate of incorporation, or resolution of the board of directors.
Consistent with the statutes referenced above, under the Depositor's Certificate
of Incorporation, the Depositor must indemnify directors for liability except
liability that:
(A) involved a knowing and culpable violation of law by the director;
(B) enabled the director or an associate to receive an improper personal gain;
(C) showed a lack of good faith and a conscious disregard for the duty of the
director of the corporation under circumstances in which the director was
aware that his conduct or omission created an unjustifiable risk of serious
injury to the corporation;
(D) constituted a sustained and unexcused pattern of inattention that amounted
to an abdication of the director's duty to the corporation or
(E) created liability under section 33-757 relating to unlawful distributions.
The Depositor's Certificate of Incorporation also permits the Depositor, at the
discretion of the board of directors, to indemnify any current or former
director, officer, employee or agent of the corporation to the fullest extent
permitted by law. Accordingly, under the Depositor's bylaws, the Depositor must,
to the fullest extent permitted by applicable law, indemnify directors and
officers of the Depositor against all expenses, including attorney's fees, in
connection with any proceeding by reason of the fact that such person was a
director or officer of the Depositor.
Section 33-777 permits a corporation to procure insurance on behalf of an
individual who was a director or officer of the corporation. Consistent with the
statute, the directors and officers of the Depositor and Hartford Securities
Distribution Company, Inc. ("HSD") are covered under a directors and officers
liability insurance policy.
<Page>
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 16. Exhibits and Financial Statement Schedules.
------------------------------------------
<Table>
<Caption>
NUMBER DESCRIPTION METHOD OF FILING
------- ------------- ------------------
1 Underwriting Agreement Incorporated by reference to the Registration
Statement File No. 33-17324, dated May 1, 1996.
3(a) Articles of Incorporation Incorporated by reference to Post-Effective
Amendment No. 6 to the Registration Statement
File No. 333-66343, dated February 8, 2001.
3(b) By-laws Incorporated by reference to Post-Effective
Amendment No. 6 to the Registration Statement
File No. 333-66343, dated February 8, 2001.
4 Group Annuity Contract Incorporated by reference to the Registration
Statement File No. 33-17324, dated May 1, 1995.
5 Opinion re: Legality Filed herewith.
23(a) Legal Consent Filed herewith as Exhibit 5.
23(b) Consent of Deloitte & Touche Filed herewith.
LLP.
24 Power of Attorney Filed herewith.
</Table>
<Page>
Item 17. Undertakings.
------------
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
i. To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
ii. To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
iii. To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement,
including (but not limited to) any addition or
deletion of a managing underwriter;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes to, for purposes
of determining any liability under the Securities Act of 1933,
each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be initial
bona fide offering thereof.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has reasonable grounds to believe that it meets all the requirements for
filing this Post-Effective Amendment on Form S-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Town of Simsbury, and State of Connecticut
on this 5th day of April, 2004.
HARTFORD LIFE INSURANCE COMPANY
By: Thomas M. Marra *By: /s/ Shane Daly
------------------------------------------- -----------------------
Thomas M. Marra, President, Chief Executive Shane Daly
Officer and Chairman of the Board* Attorney-In-Fact
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on this
5th day of April, 2004.
David A. Carlson, Senior Vice President &
Deputy Chief Financial Officer, Director*
Robert A. Kerzner, Executive Vice President,
Director*
Thomas M. Marra, President, Chief Executive
Officer and Chairman of the Board, Director*
Ernest M. McNeill, Jr. Vice President & Chief
Accounting Officer*
Christine Hayer Repasy, Senior Vice President, *By: /s/ Shane Daly
General Counsel & Corporate Secretary, ----------------------
Director* Shane Daly
John C. Walters, Executive Vice President, Attorney-in-Fact
Director*
Lizabeth H. Zlatkus, Executive Vice President Date: April 5, 2004
& Chief Financial Officer, Director*
David M. Znamierowski, Senior Vice President &
Chief Investment Officer, Director*
333-85520
<Page>
EXHIBIT INDEX
5 Opinion and Consent of Christine Hayer Repasy, Senior Vice President,
General Counsel and Corporate Secretary regarding legality of securities
to be issued.
23(a) Legal Consent filed as Exhibit 5.
23(b) Consent of Deloitte & Touche LLP.
24 Copy of Power of Attorney.