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CRC GENERATIONS
MODIFIED GUARANTEED ANNUITY CONTRACT
HARTFORD LIFE INSURANCE COMPANY
P.O. BOX 5085
HARTFORD, CONNECTICUT 06102-5085 [The
TELEPHONE: 1-800-862-6668 (CONTRACT OWNERS) Hartford
1-800-862-7155 (REGISTERED REPRESENTATIVES) LOGO]
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This prospectus describes information you should know before you purchase CRC
Generations. Please read it carefully.
CRC Generations is a contract between you and Hartford Life Insurance Company
where you agree to make one Purchase Payment to us and we agree to pay you
interest for a Guarantee Period you select and we agree to make a series of
Annuity Payouts at a later date. This annuity is a single premium, tax-deferred,
modified guaranteed annuity offered to both individuals and groups. It is:
X Single premium, because you make a one-time Purchase Payment.
X Tax-deferred, which means you don't pay taxes until you take money out or
until we start to make Annuity Payouts.
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It is a "modified guaranteed" annuity because Hartford guarantees to pay you
your Purchase Payment and the interest earned on that Purchase Payment unless
you cancel during the right to examine period, fully or partially Surrender your
Contract, transfer to a different Guarantee Period or request Annuity Payouts
before the end of your Guarantee Period.
Although we file this prospectus with the Securities and Exchange Commission
("SEC"), the SEC doesn't approve or disapprove of these securities or determine
if this prospectus is truthful or complete. Anyone who represents that the SEC
does these things may be guilty of a criminal offense.
This prospectus can also be obtained from the Securities and Exchange
Commission's website: (www.sec.gov).
This annuity IS NOT:
- - A bank deposit or obligation
- - Federally insured
- - Endorsed by any bank or governmental agency
This annuity may not be available for sale in all states.
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PROSPECTUS DATED: AUGUST 2, 2004
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2 HARTFORD LIFE INSURANCE COMPANY
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AVAILABLE INFORMATION
We are required by the Securities Exchange Act of 1934 to file reports and other
information with the SEC. You may read or copy these reports at the SEC's Public
Reference 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.
This prospectus incorporates by reference the following documents:
(a) Our Annual Report on Form 10-K for the fiscal year ended December 31, 2003;
(b) Our Quarterly Report on Form 10-Q for the period ended March 31, 2004;
(c) Our Current Report on Form 8-K filed on May 27, 2004, which updated certain
historical segment information included in our Annual Report on Form 10-K
for the year ended December 31, 2003, to give effect to our new reportable
operating segments, which were disclosed in our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004; and
(d) Until this offering has been completed, any future filings we will make with
the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934.
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.
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HARTFORD LIFE INSURANCE COMPANY 3
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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DEFINITIONS 4
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HIGHLIGHTS 5
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THE CONTRACT 6
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Annuity Payouts 12
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Miscellaneous Provisions 14
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Investments by Hartford 14
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Amendment of Contracts 14
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Assignment of Contracts 14
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Distribution of Contracts 14
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FEDERAL TAX CONSIDERATIONS 15
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THE COMPANY 21
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LEGAL OPINION 57
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EXPERTS 57
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APPENDIX A -- MODIFIED GUARANTEED ANNUITY FOR QUALIFIED
PLANS 58
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APPENDIX B -- MARKET VALUE ADJUSTMENT 59
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APPENDIX C -- UNAUDITED INTERIM FINANCIAL STATEMENTS 60
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APPENDIX D -- FINANCIAL STATEMENTS
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</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.
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4 HARTFORD LIFE INSURANCE COMPANY
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DEFINITIONS
These terms are capitalized when used throughout this prospectus. Please refer
to these defined terms if you have any questions as you read your prospectus.
ADMINISTRATIVE OFFICE OF THE COMPANY -- Our location and overnight mailing
address is: 200 Hopmeadow Street, Simsbury, Connecticut 06089. Our standard
mailing address is: Investment Product Services, P.O. Box 5085, Hartford, CT
06102-5085
ANNUITANT -- The person on whose life this Contract is based. The Annuitant may
not be changed.
ANNUITY COMMENCEMENT DATE -- The date we start to make Annuity Payouts.
CODE -- The Internal Revenue Code of 1986, as amended.
CONTINGENT ANNUITANT -- The person you designate to become the Annuitant if the
Annuitant dies prior to the Annuity Commencement Date.
CONTRACT -- The individual Annuity Contract and any endorsements or riders.
Group participants and some individuals will receive a certificate rather than a
Contract.
CONTRACT OWNER OR YOU -- The owner or holder of this Contract.
CONTRACT VALUE -- The sum of your Purchase Payment and all interest earned minus
any Surrenders and any applicable Premium Taxes.
CONTRACT YEAR -- The 12 months following the date you purchased your annuity and
then each subsequent year.
HARTFORD, WE, US OR OUR -- Hartford Life Insurance Company. Only Hartford is a
capitalized term in the prospectus.
JOINT ANNUITANT -- The person on whose life Annuity Payouts are based if the
Annuitant dies after the Annuity Calculation Date. You may name a Joint
Annuitant only if your Annuity Payout Option provides for a survivor. The Joint
Annuitant may not be changed.
MARKET VALUE ADJUSTMENT -- An adjustment that either increases or decreases the
amount we pay you under certain circumstances.
POWER OF ATTORNEY -- You may authorize another person to act on your behalf by
submitting a completed Power of Attorney form. Once we have the completed form
on file, we will accept instructions from your designated third party until we
receive instructions terminating the power of attorney in writing from you. You
may not be able to make changes to your Contract if you have authorized someone
else to act under a Power of Attorney.
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HARTFORD LIFE INSURANCE COMPANY 5
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HIGHLIGHTS
HOW DO I PURCHASE THIS ANNUITY?
You must complete our application or order request and submit it to us for
approval with your Purchase Payment. Your Purchase Payment must be at least
$5,000, unless this Contract is purchased as part of certain retirement plans.
- - For a limited time, usually within ten days after you receive your annuity,
you may cancel it without paying a Surrender Charge. Your Purchase Payment
will be subject to a Market Value Adjustment.
WHAT IS A GUARANTEE PERIOD?
A Guarantee Period is the length of time you select for which Hartford
guarantees to pay you interest.
WHAT HAPPENS AT THE END OF EACH GUARANTEE PERIOD?
We will notify you of your options before the end of your Guarantee Period.
These options currently include:
- - Fully Surrendering your Contract,
- - Having your Contract Value rollover to a Subsequent Guarantee Period of the
same length of time,
- - Transferring to a Guarantee Period of a different duration,
- - Asking us to begin making Annuity Payouts,
- - Purchasing a variable annuity issued by Hartford, or
- - Any other option that may become available.
UNLESS WE RECEIVE WRITTEN INSTRUCTIONS FROM YOU SELECTING A DIFFERENT OPTION,
HARTFORD WILL ROLL YOUR CONTRACT VALUE INTO A SUBSEQUENT GUARANTEE PERIOD FOR
THE SAME LENGTH OF TIME. YOUR CONTRACT WILL RECEIVE THE INTEREST RATE WE HAVE
ESTABLISHED FOR THAT NEW GUARANTEE PERIOD.
CAN I TAKE OUT ANY OF MY MONEY?
You may Surrender all or part of your Contract Value or transfer to a different
Guarantee Period at any time before we start making Annuity Payouts. You may not
Surrender any of your Contract Value after we begin making Annuity Payouts.
- - You may have to pay a Surrender Charge.
We may charge you a Surrender Charge when you partially or fully Surrender your
annuity. The percentage of the Surrender Charge assessed will depend on the
length of time that has lapsed from the beginning of the Guarantee Period in
effect at the time you request your Surrender to the date we receive your
request for Surrender. You may take out all or some of the interest we have
credited to your Contract Value in the 12 months prior to your request without a
Surrender Charge.
- - You may have a Market Value Adjustment.
If you request a Surrender, cancel during the right to examine period, transfer
to a new Guarantee Period, or begin to take Annuity Payouts before the end of
your Guarantee Period, the amount you receive will be modified to include a
Market Value Adjustment. A Market Value Adjustment, which is described later,
may decrease or increase the amount you receive, depending on whether interest
rates have risen or fallen since the beginning of your Guarantee Period. You may
take out all or some of the interest we have credited to your Contract Value in
the 12 months prior to your request without a Market Value Adjustment.
- - You may have to pay income tax on any money you take out and, if you
Surrender before you are age 59 1/2, you may have to pay an income tax
penalty.
WILL HARTFORD PAY A DEATH BENEFIT?
There is a Death Benefit if the Contract Owner, joint contract owner or
Annuitant die before we begin to make Annuity Payouts. This Death Benefit is
equal to the Contract Value on the date we receive a certified death certificate
or other proof of death acceptable to us.
Depending on the Annuity Payout Option you select, we may pay a Death Benefit
after we begin to make Annuity Payouts.
WHAT ANNUITY PAYOUT OPTIONS ARE AVAILABLE?
You may choose one of the following Annuity Payout Options: Life Annuity, Life
Annuity with a Cash Refund, Life Annuity with Payments for a Period Certain,
Joint and Last Survivor Life Annuity, Joint and Last Survivor Life Annuity with
Payments for a Period Certain, and Payments for a Period Certain. We may make
other Annuity Payout Options available at any time.
You must begin to take Annuity Payouts by end of the Guarantee Period
immediately following the Annuitant's 90th birthday or the end of the 10th
Contract Year, whichever is later, unless you elect a later date to begin
receiving payments subject to the laws and regulations then in effect and our
approval.
If the end of your Guarantee Period occurs after the Annuity Commencement Date,
we begin Annuity Payouts on the Annuity Commencement Date, unless you change
that date to coincide with the end of the Guarantee Period. If we begin to make
Annuity Payouts before the end of your Guarantee Period, a Market Value
Adjustment will be made to your Contract Value.
If you do not tell us what Annuity Payout Option you want before the Annuity
Commencement Date, we will make payments under the Life Annuity with a 10-year
Period Certain Annuity Payout Option.
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6 HARTFORD LIFE INSURANCE COMPANY
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THE CONTRACT
WHAT TYPES OF CONTRACTS ARE AVAILABLE?
The Contract is an individual tax-deferred modified guaranteed annuity contract.
It is designed for retirement planning purposes and may be purchased by any
individual, group, or trust, including:
- - IRAs adopted according to Section 408 of the Code;
- - Annuity purchase plans adopted by public school systems and certain tax-exempt
organizations according to Section 403(b) of the Code;
The examples above represent Qualified Contracts, as defined by the Code. In
addition, individuals and trusts can also purchase Contracts that are not part
of a tax qualified retirement plan. These are known as Non-Qualified Contracts.
If you are purchasing the Contract for use in an IRA or qualified retirement
plan, you should consider other features of the Contract besides tax deferral,
since any investment vehicle used within an IRA or qualified plan receives tax
deferred treatment under the Code.
This Contract is not available in Puerto Rico or Maryland.
HOW DO I PURCHASE A CONTRACT?
You may purchase a Contract by completing and submitting an application or an
order request along with your Purchase Payment. For most Contracts, the minimum
Purchase Payment is $5,000, unless the Contract is purchased as part of certain
retirement plans. Prior approval is required for a Purchase Payment of
$1,000,000 or more.
You may not make additional Purchase Payments to this Contract, but you may
purchase a new contract. The new contracts may have different Guarantee Periods
and will earn interest at the rate set for those new contracts.
You must be of legal age in the state where the Contract is being purchased or a
guardian must act on your behalf.
HOW IS THE PURCHASE PAYMENT APPLIED TO MY CONTRACT?
Your Contract will be issued after we receive your Purchase Payment. Your
Purchase Payment becomes part of a non-unitized separate account established by
Hartford. You have no priority claim on assets in this separate account. All
assets of Hartford, including those in this separate account, are available to
meet Hartford's guarantees under the Contract and are available to meet the
general obligations of Hartford.
If the request or other information accompanying the Purchase Payment is
incomplete when we receive it, we will hold the money in a non-interest bearing
account for up to three weeks while we try to obtain complete information. For
Contracts issued in New York, we will hold the money in a non-interest bearing
account for up to ten days. If we cannot obtain the information within that
time, we will either return the Purchase Payment and explain why the Purchase
Payment could not be processed or keep the Purchase Payment if you authorize us
to keep it until you provide the necessary information.
We will send you a confirmation after we apply your Purchase Payment.
CAN I CANCEL MY CONTRACT AFTER I PURCHASE IT?
We want you to be satisfied with the Contract you have purchased. We urge you to
closely examine its provisions. If for any reason you are not satisfied with
your Contract, simply return it within ten days after you receive it with a
written request for cancellation that indicates your tax-withholding
instructions. In some states, you may be allowed more time to cancel your
Contract. We will not deduct any Surrender Charge during this time, however a
Market Value Adjustment, which is described later, may apply. We may require
additional information, including a signature guarantee, before we can cancel
your Contract.
The amount we pay you upon cancellation depends on the requirements of the state
where you purchased your Contract, the method of purchase, the type of Contract
you purchased and your age.
WHAT IS A GUARANTEE PERIOD?
A Guarantee Period is the length of time you select for which Hartford
guarantees to pay you interest. There are two types of Guarantee Periods:
Initial Guarantee Periods and Subsequent Guarantee Periods.
WHAT IS AN INITIAL GUARANTEE PERIOD?
The Initial Guarantee Period is the first Guarantee Period when you purchase
your Contract. We currently offer Initial Guarantee Periods of five and ten
years. For Contract Owners under age 86 the Initial Guarantee Period is ten
years. For Contract Owners age 86 or older the Initial Guarantee Period is five
years. During the Initial Guarantee Period, your Contract earns interest at the
Initial Guarantee Rate, which will never be less than 3% on an annual basis. The
Initial Guarantee Rate depends on your Initial Guarantee Period. During the
Initial Guarantee Period we may, in our sole discretion, credit interest greater
than the Initial Guarantee Rate to all Contracts of the same Initial Guarantee
Period.
WHAT IS A SUBSEQUENT GUARANTEE PERIOD?
If you transfer to a new Guarantee Period or reach the end of your Initial
Guarantee Period and allow this Contract to "rollover" to another Guarantee
Period of the same length of time, this is a Subsequent Guarantee Period.
Basically, any Guarantee Period that is not an Initial Guarantee Period is a
Subsequent Guarantee Period. We currently offer a Subsequent Guarantee Period of
ten years. During a Subsequent Guarantee Period, your Contract earns interest at
the Subsequent Guarantee Rate, which will never be less than 3% on an annual
basis. The Subsequent Guarantee Rate depends on the Subsequent Guarantee Period
you select.
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HARTFORD LIFE INSURANCE COMPANY 7
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Hartford, in its sole discretion, determines the interest rates credited to each
Guarantee Period. These interest rates generally reflect prevailing interest
rates of other investments that are similar in nature and duration. In computing
our interest rates, we may also consider the impact of regulations, taxes, sales
commissions, administrative expenses, general economic trends and competitive
factors. Contracts with Purchase Payments of $1,000,000 or more may earn
interest at a different rate than other Contracts with the same Guarantee
Period. Hartford or its agents cannot predict nor guarantee our future interest
rates.
CAN I TRANSFER INTO A DIFFERENT GUARANTEE PERIOD?
Once each Contract Year, beginning after the first Contract Year, you may
transfer from your Guarantee Period into a Guarantee Period of a different
duration, provided the new Guarantee Period you select is at least five years or
longer. There is no Surrender Charge for transfers between Guarantee Periods. If
your Contract was issued in Florida you will not be able to transfer to a
Subsequent Guarantee Period until the end of your Initial Guarantee Period.
While we currently do not impose a transfer charge, we reserve the right to
charge a fee of up to $50 for each transfer. A Market Value Adjustment, which is
described later, will be applied to your Contract Value at the time of transfer,
unless the transfer occurs at the end of the Guarantee Period. The amount
transferred into the new Guarantee Period is equal to the Contract Value of the
old Guarantee Period on the date of the transfer minus or plus the Market Value
Adjustment.
While you may transfer to a different Guarantee Period with a duration of 5
years or more, you cannot transfer into a Guarantee Period with a duration that
will take you past your Annuity Commencement Date. That means that if you
elected to begin Annuity Payouts on your Annuitant's 90th birthday and your
Annuitant is 87 years old, you would not be able to transfer into a new
Guarantee Period unless you extended your Annuity Commencement Date.
WHAT HAPPENS AT THE END OF EACH GUARANTEE PERIOD?
We will notify you of your options before the end of your Guarantee Period.
These options currently include:
- - Fully Surrendering your Contract,
- - Having your Contract Value rollover to a Subsequent Guarantee Period of the
same length of time,
- - Transferring to a Guarantee Period of a different duration,
- - Asking us to begin making Annuity Payouts,
- - Purchase a variable annuity from Hartford, or
- - Any other option that may become available.
Unless we receive written instructions from you selecting a different option,
Hartford will roll your Contract Value into a Subsequent Guarantee Period of the
same length of time. Your Contract will receive the interest rate we have
established for that new Guarantee Period. If we roll your Contract Value into a
Subsequent Guarantee Period because we have not received any other instructions
from you, Hartford will, for some period of time after the end of your Guarantee
Period, allow you to exercise a different option. Currently, we will allow 21
days after the end of a Guarantee Period to request a different option. However,
Hartford reserves the right to change or terminate this administrative
processing period. A request for a different option received during this time
will be treated as if it was received prior to the end of the current Guarantee
Period. However, a request to transfer to another Guarantee Period of a
different duration is processed as of the date we receive the request and
receives the interest rate credited to that Guarantee Period as of that date.
If you rollover into a Subsequent Guarantee Period or transfer to a Guarantee
Period of a different duration, you cannot rollover or transfer into a Guarantee
Period with a duration that will take you past your Annuity Commencement Date.
That means that if you elected to begin Annuity Payouts on your Annuitant's 90th
birthday and your Annuitant is 87 years old, you would not be able to rollover
or transfer into a new Guarantee Period with a duration longer than three years
unless you extended your Annuity Commencement Date.
FOR CONTRACTS ISSUED IN NEW YORK -- We will notify you of your options at least
15 days, but no more than 45 days, before the end of your Guarantee Period. If
you fully or partially Surrender your Contract within the 30 day period prior to
the end of your Guarantee Period, no Surrender Charge is deducted or Market
Value Adjustment made.
HOW IS THE VALUE OF MY CONTRACT CALCULATED BEFORE THE ANNUITY COMMENCEMENT DATE?
We calculate your Contract Value by deducting any applicable Premium Tax from
your Purchase Payment, or your rollover value, if you are in a Subsequent
Guarantee Period. We then credit your Contract Value on a daily basis with an
amount that is equivalent to your Guarantee Period's interest rate on an annual
basis and deduct any partial Surrenders.
The following example shows how interest would be credited to your Contract
Value. The example assumes you purchased a Contract with a five-year Guarantee
Period crediting a hypothetical Initial Guarantee Rate of 5% on an annual basis.
The example assumes no money is taken from the Contract during the Guarantee
Period. We are using a hypothetical interest rate of 5%. This interest rate is
for illustration only and is no indication of future interest rates. Actual
interest rates may be more or less than those shown.
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Year one $10,000 Purchase Payment or rollover value
$ 500 total year's interest payments
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$10,500 end of year Contract Value
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8 HARTFORD LIFE INSURANCE COMPANY
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<Table>
Year two $10,500 beginning Contract Value
$ 525 total year's interest payments
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$11,025 end of year Contract Value
Year three $11,025 beginning Contract Value
$ 551 total year's interest payments
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$11,576 end of year Contract Value
Year four $11,576 beginning Contract Value
$ 579 total year's interest payments
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$12,155 end of year Contract Value
Year five $12,155 beginning Contract Value
$ 608 total year's interest payments
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$12,763 end of year Contract Value
</Table>
Once each Contract Year, we will send you a statement which shows
- - your Contract Value as of the end of the preceding Contract Year,
- - any money you take out of your Contract during the Contract Year,
- - your Contract Value at the end of the current Contract Year, and
- - the annual rate of interest being credited to your Contract.
FEES AND CHARGES
WHAT HAPPENS IF I REQUEST A SURRENDER BEFORE THE END OF THE GUARANTEE PERIOD?
We don't charge you a sales charge when you purchase this Contract or assess any
annual fees. However, if you want to take money out of the Contract before the
end of your Guarantee Period, there are two charges we may assess, plus a Market
Value Adjustment that may, at times, result in a deduction. The two charges are
Premium Tax and a Surrender Charge.
X PREMIUM TAXES
We deduct Premium Taxes, if required, by a state or other government agency.
Some states collect the taxes when Purchase Payments are made; others collect at
annuitization. Since we pay Premium Taxes when they are required by applicable
law, we may deduct them from your Contract when we pay the taxes, upon
Surrender, or on the Annuity Commencement Date. The Premium Tax rate varies by
state or municipality. Currently, the maximum rate charged by any state is 5.0%.
X SURRENDER CHARGE -- The Surrender Charge covers some of the expenses relating
to the sale and distribution of the Contract, including commissions paid to
registered representatives and the cost of preparing sales literature and
other promotional activities.
We assess a Surrender Charge when you request a full or partial Surrender,
unless your Surrender occurs at the end of a Guarantee Period. The percentage we
assess for the Surrender Charge varies according to the length of time between
the beginning of the Guarantee Period in effect at the time of your Surrender
and the date of your request for Surrender. When you request a Surrender, we
deduct the dollar amount you request from your Contract Value. Then we subtract
any interest we have credited to your Contract in the 12 months prior to the
request for Surrender that has not already been withdrawn from the amount
requested for Surrender. This difference is then the amount subject to a
Surrender Charge. We then determine the appropriate percentage of Surrender
Charge, if any, to be deducted by calculating the length of time the money has
been part of your present Guarantee Period. We deduct the percentage of the
amount Surrendered from the amount you requested, and, provided there is no
Market Value Adjustment, pay you that amount.
If you are in your Initial Guarantee Period, the percentage we deduct is equal
to:
<Table>
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<Caption>
NUMBER OF YEARS FROM THE
BEGINNING OF THE INITIAL
GUARANTEE PERIOD SURRENDER CHARGE
1 6%
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2 6%
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3 5%
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4 4%
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5 3%
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6+ 2%
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</Table>
We do not deduct a Surrender Charge for Subsequent Guarantee Periods.
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HARTFORD LIFE INSURANCE COMPANY 9
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If your Contract is issued in New York or Washington, and you are in your
Initial Guarantee Period or Subsequent Guarantee Period, the percentage we
deduct is equal to:
<Table>
<Caption>
CONTRACT YEAR IN WHICH
SURRENDER IS MADE SURRENDER CHARGE
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1 7%
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2 6%
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3 5%
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4 4%
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5 3%
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6 2%
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7 1%
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8+ 0%
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</Table>
THE FOLLOWING SITUATIONS ARE NOT SUBJECT TO A SURRENDER CHARGE:
- - Surrenders made at the end of a Guarantee Period.
- - Surrender of interest that has been credited to the Contract Value during the
12 months prior to the Surrender that has not previously been withdrawn.
- - Upon death of the Annuitant, joint owner or Contract Owner.
- - Upon Annuitization.
- - Upon cancellation during the right to examine period.
- - Required Minimum Distributions from IRAs or 403(b) plans.
SURRENDERS MADE UNDER THE NURSING HOME WAIVER RIDER. We will waive any Surrender
Charge applicable to a partial or full Surrender if you, the joint owner or the
Annuitant, is confined for at least 180 calendar days to a: (a) hospital
recognized as a general hospital by the proper authority of the state in which
it is located; or (b) hospital recognized as a general hospital by the Joint
Commission on the Accreditation of Hospitals; or (c) facility certified by
Medicare as a hospital or long-term care facility; or (d) nursing home licensed
by the state in which it is located and offers the services of a registered
nurse 24 hours a day. If you, the joint owner or the Annuitant is confined when
you purchase the Contract, this waiver is not available. For the waiver to
apply, you must: (a) have owned the Contract continuously since it was issued,
(b) provide written proof of confinement satisfactory to us, and (c) request the
Surrender within 91 calendar days of the last day of confinement. Your
confinement must be at the recommendation of a physician for medically necessary
reasons. This waiver may not be available in all states. Please contact your
registered representative or us to determine if it is available for you.
MARKET VALUE ADJUSTMENT
If you request to Surrender, cancel during the right to examine period, transfer
to a new Guarantee Period or ask that we begin to make Annuity Payouts at any
time other than at the end of your Guarantee Period, we may apply a Market Value
Adjustment. That means that the amount we pay you for a Surrender or the
Contract Value we transfer to a new Guarantee Period or use to determine your
Annuity Payouts will be adjusted up or down.
The Market Value Adjustment reflects both the amount of time left in your
Guarantee Period, and, the difference between the Guarantee Rate credited to
your current Guarantee Period and the interest rate we are crediting to a new
Guarantee Period with a duration equal to the amount of time left in your
Guarantee Period. If your Guarantee Period's interest rate is lower than the
interest rate we are currently crediting the new Guarantee Period, then the
application of the Market Value Adjustment will reduce the amount you receive.
Conversely, if your Guarantee Period's interest rate is higher than the interest
rate we are crediting for the new Guarantee Period, then the application of the
Market Value Adjustment will increase the amount you receive.
For example, assume you purchase a Contract with an Initial Guarantee Period of
ten years crediting interest at an Initial Guarantee Rate of 8% on an annual
basis. You request a partial Surrender at the end of the seventh Contract Year.
At that time you request a Surrender, Hartford's interest rate was 6% on an
annual basis for Subsequent Guarantee Periods with a three-year duration, the
amount of time left in your Initial Guarantee Period. Then the amount payable
upon partial Surrender will increase after the application of the Market Value
Adjustment. On the other hand, if Hartford was crediting an interest rate higher
than your 8% Initial Guarantee Rate, then the application of the Market Value
Adjustment will decrease the amount payable to you upon partial Surrender.
The Market Value Adjustment will apply to any request to Surrender, cancel
during the right to examine period, transfer to a new Guarantee Period prior to
the end of a Guarantee Period, or if you ask us to begin Annuity Payouts prior
to the end of a Guarantee Period except:
- - Previous 12 months' interest payments that you ask us to send to you that you
have not previously Surrendered.
- - Distributions made due to death.
- - Payments we make to you as part of your Annuity Payout.
The actual formula for calculating the Market Value Adjustment is set forth in
the Appendix B that also contains an additional illustrations of the application
of the Market Value Adjustment.
Since the interest rates Hartford credits may reflect, in part, the investment
yields available to Hartford (see "Investments by Hartford"); the Market Value
Adjustment may also reflect, in part, the levels of such yields. It is possible,
therefore, that should such yields increase significantly from the time you
purchased your Contract, coupled with the application of the Surrender Charges,
the amount you would receive upon a full Surrender of your Contract could be
less than your original Purchase Payment.
WE MAY OFFER, IN OUR DISCRETION, REDUCED FEES AND CHARGES FOR CERTAIN CONTRACTS
THAT MAY RESULT IN DECREASED COSTS
<Page>
10 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
AND EXPENSES. REDUCTIONS IN THESE FEES AND CHARGES WILL NOT BE UNFAIRLY
DISCRIMINATORY AGAINST ANY CONTRACT OWNER.
SURRENDERS
ARE THERE ANY RESTRICTIONS ON PARTIAL SURRENDERS?
If you request a partial Surrender before we begin to make Annuity Payouts,
there are two restrictions:
- - The amount you want to Surrender must be at least equal to $1,000, our current
minimum for partial Surrenders, and
- - The Contract must have a minimum Contract Value of $5,000 after the Surrender.
The above restrictions do not apply if you Surrender interest that has been
credited to the Contract Value during the 12 months prior to Surrender.
We reserve the right to terminate your Contract and pay you the Contract Value
minus any applicable charges or adjustments if your Contract Value is under the
minimum after the Surrender.
HOW DO I REQUEST A SURRENDER?
Requests for Surrenders must be in writing. To request a full or partial
Surrender, complete a Surrender Form or send us a letter, signed by you,
stating:
- - the dollar amount that you want to receive, either before or after we withhold
taxes and deduct for any applicable charges,
- - your tax withholding amount or percentage, if any, and
- - your mailing address.
If there are joint Contract Owners, both must authorize all Surrenders.
We may defer payment of any partial or full Surrender for a period not exceeding
six months from the date of our receipt of your notice of Surrender or the
period permitted by state insurance law, if less. We may defer a Surrender
payment more than 10 days and, if we do, we will pay interest of at least 3% per
annum on the amount deferred.
WHAT SHOULD BE CONSIDERED ABOUT TAXES?
There are certain tax consequences associated with Surrenders:
PRIOR TO AGE 59 1/2 -- If you make a Surrender prior to age 59 1/2, there may be
adverse tax consequences including a 10% federal income tax penalty on the
taxable portion of the Surrender payment. Surrendering before age 59 1/2 may
also affect the continuing tax-qualified status of some Contracts.
WE DO NOT MONITOR SURRENDER REQUESTS. TO DETERMINE WHETHER A SURRENDER IS
PERMISSIBLE, WITH OR WITHOUT FEDERAL INCOME TAX PENALTY, PLEASE CONSULT YOUR
PERSONAL TAX ADVISER.
MORE THAN ONE CONTRACT ISSUED IN THE SAME CALENDAR YEAR -- If you own more than
one Contract issued by us or our affiliates in the same calendar year, then
these Contracts may be treated as one Contract for the purpose of determining
the taxation of distributions prior to the Annuity Commencement Date. Please
consult your tax adviser for additional information.
INTERNAL REVENUE CODE SECTION 403(b) ANNUITIES -- As of December 31, 1988, all
section 403(b) annuities have limits on full and partial Surrenders.
Contributions to your Contract made after December 31, 1988 and any increases in
cash value after December 31, 1988 may not be distributed unless you are:
(a) age 59 1/2, (b) no longer employed, (c) deceased, (d) disabled, or
(e) experiencing a financial hardship (cash value increases may not be
distributed for hardships prior to age 59 1/2). Distributions prior to age
59 1/2 due to financial hardship; unemployment or retirement may still be
subject to a penalty tax of 10%.
WE ENCOURAGE YOU TO CONSULT WITH YOUR TAX ADVISER BEFORE MAKING ANY SURRENDERS.
PLEASE SEE THE "FEDERAL TAX CONSIDERATIONS" SECTION FOR MORE INFORMATION.
DEATH BENEFIT
WHAT IS THE DEATH BENEFIT AND HOW IS IT CALCULATED?
Before we begin to make Annuity Payouts, we will pay a Death Benefit upon the
death of the Contract Owner, joint owner, or the Annuitant, if there is no
surviving Contingent Annuitant. The Death Benefit is calculated when we receive
a certified death certificate or other legal document acceptable to us. The
Death Benefit we pay is equal to the Contract Value on the date we receive the
certified death certificate or other legal document.
HOW IS THE DEATH BENEFIT PAID?
The Death Benefit may be taken in one lump sum or under any of the Annuity
Payout Options then being offered by us. On the date we receive complete
instructions from the Beneficiary, we will compute the Death Benefit amount to
be paid out or applied to a selected Annuity Payout Option. When there is more
than one Beneficiary, we will calculate the Death Benefit amount for each
Beneficiary's portion of the proceeds and then pay it out or apply it to a
selected Annuity Payout Option according to each Beneficiary's instructions
acceptable to us.
If the Contract Owner dies before we begin to make Annuity Payouts, the
Beneficiary may elect to leave proceeds from the Death Benefit with us for up to
five years from the date of the Contract Owner's death under the Annuity
Proceeds Settlement Option "Death Benefit Remaining with the Company". The
proceeds will remain in the same Guarantee Period in effect at the time of death
and receive the same interest rate credited to that Contract. If the Guarantee
Period has more than five years remaining, then Hartford will, before the
completion of the 5th Contract Year after the death of the Contract Owner,
terminate the Contract and waiving all Surrender Charges, pay the Contract Value
to the Beneficiary. A Market Value Adjustment will be applicable.
The Beneficiary of a non-qualified Contract or IRA may also elect the "Single
Life Expectancy Only" option. This option allows the Beneficiary to take the
Death Benefit in a series of payments spread over a period equal to the
Beneficiary's remaining life
<Page>
HARTFORD LIFE INSURANCE COMPANY 11
- --------------------------------------------------------------------------------
expectancy. Distributions are calculated based on IRS life expectancy tables.
This option is subject to different limitations and conditions depending on
whether the Contract is non-qualified or an IRA.
REQUIRED DISTRIBUTIONS -- If the Contract Owner dies before the Annuity
Commencement Date, the Death Benefit must be distributed within five years after
death. The Beneficiary can choose any Annuity Payout Option that results in
complete Annuity Payout within five years.
If the Contract Owner dies on or after the Annuity Commencement Date under an
Annuity Payout Option with a Payout upon Death Benefit, any remaining value must
be distributed at least as rapidly as under the Annuity Payout Option being used
as of the Contract Owner's death.
If the Contract Owner is not an individual (e.g. a trust), then the original
Annuitant will be treated as the Contract Owner in the situations described
above and any change in the original Annuitant will be treated as the death of
the Contract Owner.
WHAT SHOULD THE BENEFICIARY CONSIDER?
ALTERNATIVES TO THE REQUIRED DISTRIBUTIONS -- The selection of an Annuity Payout
Option and the timing of the selection will have an impact on the tax treatment
of the Death Benefit. To receive favorable tax treatment, the Annuity Payout
Option selected: (a) cannot extend beyond the Beneficiary's life or life
expectancy, and (b) must begin within one year of the date of death.
If these conditions are NOT met, the Death Benefit will be treated as a lump sum
payment for tax purposes. This sum will be taxable in the year in which it is
considered received.
SPOUSAL CONTRACT CONTINUATION -- If the Contract Owner dies, the Contract
Owner's spouse, if named as a Beneficiary, may elect to continue the Contract as
the new Contract Owner. This spousal continuation is available only once for
each Contract. The spouse may, in the alternative, elect to receive the Death
Benefit in one lump sum payment or have the Death Benefit paid under one of the
Annuity Payout Options.
WHO WILL RECEIVE THE DEATH BENEFIT?
The distribution of the Death Benefit is based on whether death is before, on or
after the Annuity Commencement Date.
IF DEATH OCCURS BEFORE THE ANNUITY COMMENCEMENT DATE:
<Table>
<Caption>
IF THE DECEASED IS THE . . . AND . . . AND . . . THEN THE . . .
Contract Owner There is a surviving joint The Annuitant is living or Joint Contract Owner
Contract Owner deceased receives the Death
Benefit.
Contract Owner There is no surviving The Annuitant is living or Designated Beneficiary
joint Contract Owner deceased receives the Death
Benefit.
Contract Owner There is no surviving The Annuitant is living or Contract Owner's estate
joint Contract Owner or deceased receives the Death
surviving Beneficiary Benefit.
Annuitant The Annuitant is also the There is no named Designated Beneficiary
Contract Owner Contingent Annuitant receives the Death
Benefit.
Annuitant The Contract Owner is a There is no named The Contract Owner
trust or other non-natural Contingent Annuitant receives the Death
person Benefit.
Annuitant The Contract Owner is There is no named The Contract Owner is
living Contingent Annuitant presumed to be the
Contingent Annuitant and
the Contract continues.
The Contract Owner may
waive this presumption and
receive the Death Benefit.
Annuitant The Contract Owner is The Contingent Annuitant Contingent Annuitant
living is living becomes the Annuitant, and
the Contract continues.
</Table>
<Page>
12 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
IF DEATH OCCURS ON OR AFTER THE ANNUITY COMMENCEMENT DATE:
<Table>
<Caption>
IF THE DECEASED IS THE . . . AND . . . THEN THE . . .
Contract Owner The Annuitant is living Designated Beneficiary becomes the
Contract Owner, and the payments
continue.
Annuitant The Contract Owner is living Contract Owner receives the Death
Benefit.
Annuitant The Annuitant is also the Contract Owner Designated Beneficiary receives the
Death Benefit.
</Table>
THESE ARE THE MOST COMMON DEATH BENEFIT SCENARIOS, HOWEVER, THERE ARE OTHERS.
SOME OF THE ANNUITY PAYOUT OPTIONS MAY NOT RESULT IN THE PAYMENT OF A DEATH
BENEFIT. IF YOU HAVE QUESTIONS ABOUT THESE AND ANY OTHER SCENARIOS, PLEASE
CONTACT YOUR REGISTERED REPRESENTATIVE OR US.
ANNUITY PAYOUTS
This section describes what happens when we begin to make regular Annuity
Payouts from your Contract. You, as the Contract Owner, should answer four
questions:
1. When do you want Annuity Payouts to begin?
2. What Annuity Payout Option do you want to use?
3. How often do you want the Payee to receive Annuity Payouts?
4. How are Annuity Payouts calculated?
Please check with your financial adviser to select the Annuity Payout Option
that best meets your income needs.
1. WHEN DO YOU WANT ANNUITY PAYOUTS TO BEGIN?
You select an Annuity Commencement Date when you purchase your Contract or at
any time before we begin making Annuity Payouts. You may change the Annuity
Commencement Date by notifying us before we begin to make Annuity Payouts.
The Annuity Commencement Date cannot be deferred beyond the end of the Guarantee
Period immediately following the Annuitant's 90th birthday or the end of the
Guarantee Period immediately following the end of the 10th Contract Year,
whichever is later, unless you elect a later date to begin receiving payments,
subject to the laws and regulations then in effect and our approval. Unless you
elect an Annuity Payout Option before the Annuity Commencement Date, we will
begin to make Annuity Payouts under the Life Annuity with a 10-Year Period
Certain Annuity Payout Option.
If the Annuity Commencement Date does not coincide with the end of a Guarantee
Period, a Market Value Adjustment will apply. In that case, Hartford will
determine the amount available for Annuity Payouts by taking your Contract
Value, deducting any applicable Premium Taxes and then multiplying that amount
by the Market Value Adjustment. No Market Value Adjustment will apply if the
Annuity Commencement Date coincides with the end of your Guarantee Period.
If you rollover into a Subsequent Guarantee Period or transfer to a Guarantee
Period of a different duration, you cannot rollover or transfer into a Guarantee
Period with a duration that will take you past your Annuity Commencement Date.
That means that if you elected to begin Annuity Payouts on your Annuitant's 90th
birthday and your Annuitant is 87 years old, you would not be able to rollover
or transfer into a new Guarantee Period with a duration longer than three years
unless you extended your Annuity Commencement Date.
All Annuity Payouts, regardless of frequency, will occur on the same day of the
month as the Annuity Commencement Date.
Once you pass the Annuitant's 90th birthday or the end of your 10th Contract
Year, some Guarantee Period durations, may not be available.
In New York, you must give Hartford 30 days advance written notice of your
intent to change your Annuity Commencement Date, and cannot defer that date past
the Annuitant's 90th birthday.
2. WHICH ANNUITY PAYOUT OPTION DO YOU WANT TO USE?
Your Contract contains the Annuity Payout Options described below. We may at
times offer other Annuity Payout Options. Once Annuity Payouts begin, you cannot
change the Annuity Payout Option.
LIFE ANNUITY -- We make Annuity Payouts as long as the Annuitant is living. When
the Annuitant dies, we stop making Annuity Payouts. A Payee would receive only
one Annuity Payout if the Annuitant dies after the first Payout, two Annuity
Payouts if the Annuitant dies after the second Payout, and so forth.
LIFE ANNUITY WITH A CASH REFUND -- We make Annuity Payouts as long as the
Annuitant is living. When the Annuitant dies, we stop making Annuity Payouts. At
the death of the Annuitant, if the Contract Value on the Annuity Commencement
Date minus any Premium Tax is greater than the sum of all Annuity Payouts
already made, any difference will be paid to the Beneficiary.
LIFE ANNUITY WITH PAYMENTS FOR A PERIOD CERTAIN -- We make Annuity Payouts
during the lifetime of the Annuitant but Annuity Payouts are at least guaranteed
for a period of time you select between 5 years and 100 years minus the age of
the Annuitant. If, at the death of the Annuitant, Annuity Payouts have been made
for less than the minimum elected number of years, then the Beneficiary may
elect to (a) continue Annuity Payouts for the remainder of the minimum elected
number of years or (b) receive the commuted value in one sum.
<Page>
HARTFORD LIFE INSURANCE COMPANY 13
- --------------------------------------------------------------------------------
JOINT AND LAST SURVIVOR LIFE ANNUITY -- We will make Annuity Payouts as long as
either the Annuitant or Joint Annuitant are living. When one Annuitant dies, we
continue to make Annuity Payouts to the other Annuitant until that second
Annuitant dies. When choosing this option, you must decide what will happen to
the Annuity Payouts after the first Annuitant dies. You must select Annuity
Payouts that:
- - Remain the same at 100%, or
- - Decrease to 66.67%, or
- - Decrease to 50%.
The percentages represent actual dollar amounts. The percentage will also impact
the Annuity Payout amount we pay while both Annuitants are living. If you pick a
lower percentage, your original Annuity Payouts will be higher while both
Annuitants are alive.
JOINT AND LAST SURVIVOR LIFE ANNUITY WITH PAYMENTS FOR A PERIOD CERTAIN -- We
will make Annuity Payouts as long as either the Annuitant or Joint Annuitant are
living, but Annuity Payouts are at least guaranteed for a period of time you
select between 5 years and 100 years minus the age of the Annuitant. If, at the
death of the last Annuitant, Annuity Payouts have been made for less than the
minimum elected number of years, then the Beneficiary may elect to (a) continue
Annuity Payouts for the remainder of the minimum elected number of years or (b)
receive the commuted value in one sum. When one Annuitant dies, we continue to
make Annuity Payouts to the other Annuitant until that second Annuitant dies.
When choosing this option, you must decide what will happen to the Annuity
Payouts after the first Annuitant dies and the Period Certain has ended. You
must select Annuity Payouts that:
- - Remain the same at 100%, or
- - Decrease to 66.67%, or
- - Decrease to 50%.
The percentages represent actual dollar amounts. The percentage will also impact
the Annuity Payout amount we pay while both Annuitants are living. If you pick a
lower percentage, your original Annuity Payouts will be higher while both
Annuitants are alive.
PAYMENTS FOR A PERIOD CERTAIN -- We will make Annuity Payouts for the number of
years that you select. During the first Contract Year, you can select any period
of time between 10 years and 100 years minus the Annuitant's age. After the
first Contract Year, you can select any period of time between 5 and 100 years
minus the Annuitant's age. If, at the death of the Annuitant, Annuity Payouts
have been made for less than the period certain, then the Beneficiary may elect
to (a) continue Annuity Payouts for the remainder of the minimum elected number
of years or (b) receive the commuted value in one sum.
IMPORTANT INFORMATION:
- - YOU CANNOT SURRENDER YOUR CONTRACT ONCE ANNUITY PAYOUTS BEGIN.
- - For Qualified Contracts, if you elect an Annuity Payout Option with a Period
Certain, the guaranteed number of years must be less than the life expectancy
of the Annuitant at the time the Annuity Payouts begin. We compute life
expectancy using the IRS mortality tables.
- - AUTOMATIC ANNUITY PAYMENTS -- If you do not elect an Annuity Payout Option,
Annuity Payouts will automatically begin on the Annuity Commencement Date
under the Life Annuity with Payments for a Period Certain Annuity Payout
Option with a ten-year period certain.
3. HOW OFTEN DO YOU WANT THE PAYEE TO RECEIVE ANNUITY PAYOUTS?
In addition to selecting an Annuity Commencement Date and an Annuity Payout
Option, you must also decide how often you want the Payee to receive Annuity
Payouts. You may choose to receive Annuity Payouts:
- - monthly,
- - quarterly,
- - semi-annually, or
- - annually.
Once you select a frequency, it cannot be changed after the Annuity Commencement
Date. If you do not make a selection, the Payee will receive monthly Annuity
Payouts. The first payment must be at least equal to the minimum payment amount
according to our rules then in effect. If at any time, payments become less than
the minimum payment amount, we have the right to change the payment frequency to
meet the minimum payment requirements. If any payment amount is less than the
minimum annual payment amount, we may make an alternative arrangement with you.
4. HOW ARE ANNUITY PAYOUTS CALCULATED?
The Tables in the Contract provide for guaranteed dollar amounts of monthly
payments for each $1,000 applied under the Annuity Payout Options. Under the
Life Annuity, Life Annuity with Cash Refund and Life Annuity with Payments for a
Period Certain, the amount of each Annuity Payout will depend upon the age and
gender of the Annuitant at the time the first Annuity Payout is due. Under the
Joint and Last Survivor Life Annuity and Joint and Last Survivor Life Annuity
with Payments for a Period Certain, the amount of the first Annuity Payout will
depend upon the gender of both Annuitants and their ages at the time the Annuity
Payout is due.
Gender will not be used to determine the amount of the Annuity Payouts if the
Contract is issued to qualify under certain sections of the Code. If gender is
used to determine the amount of Annuity Payouts, the Annuity tables in the
Contract will provide rates of payment for male Annuitants and female
Annuitants.
The fixed payment Annuity tables for the Annuity Payout Options, except for
Payments for a Period Certain Annuity Payout Option are based on the 1983a
Individual Annuity Mortality Table projected to the year 2000 using Projection
Scale G and an
<Page>
14 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
interest rate of 2.5%. The table for the Payments for a Period Certain Annuity
Payout Option is based on an interest rate of 2.5% per annum.
The Annuity tables for the Annuity Payout Options, except for Payments for a
Period Certain Annuity Payout Option are age dependent. For Annuity payments
beginning after 2000, the amount of the first payment will be based on an age a
specified number of years younger than the Annuitant's then attained age. The
age setback is as follows:
<Table>
<Caption>
DATE OF FIRST PAYMENT AGE SETBACK
- ------------------------------------
Prior to 2005 1 year
- ------------------------------------
2005 - 2014 2 years
- ------------------------------------
2015 - 2019 3 years
- ------------------------------------
2020 - 2029 4 years
- ------------------------------------
2030 - 2039 5 years
- ------------------------------------
2040 or later 6 years
- ------------------------------------
</Table>
MISCELLANEOUS PROVISIONS
INVESTMENTS BY HARTFORD
Assets of Hartford must be invested in accordance with the requirements
established by applicable state laws regarding the nature and quality of
investments that may be made by life insurance companies and the percentage of
their assets that may be committed to any particular type of investment. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages, real estate and
certain other investments.
Contract reserves will be accounted for in a non-unitized separate account.
Contract Owners have no priority claims on assets accounted for in this separate
account. All assets of Hartford, including those accounted for in this separate
account, are available to meet the guarantees under the Contracts and are
available to meet the general obligations of Hartford.
Nonetheless, in establishing Guarantee Rates and Current Rates, Hartford intends
to take into account the yields available on the instruments in which it intends
to invest the proceeds from the Contracts. (See "Guarantee Rates"). Hartford's
investment strategy with respect to the proceeds attributable to the Contracts
will generally be to invest in investment-grade debt instruments having
durations tending to match the applicable Guarantee Periods.
Investment-grade debt instruments in which Hartford intends to invest the
proceeds from the Contracts include:
Securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the United
States Government.
Debt securities which have an investment grade, at the time of purchase, within
the four highest grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A
or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB) or any other
nationally recognized rating service.
Other debt instruments, including, but not limited to, issues of or guaranteed
by banks or bank holding companies and corporations, which obligations, although
not rated by Moody's Investors Services, Inc. or Standard & Poor's Corporation
are deemed by Hartford's management to have an investment quality comparable to
securities which may be purchased as stated above.
While the foregoing generally describes our investment strategy with respect to
the proceeds attributable to the Contracts, we are not obligated to invest the
proceeds attributable to the Contract according to any particular strategy,
except as may be required by Connecticut and other state insurance laws.
AMENDMENT OF CONTRACTS
We may modify the Contract, but no modification will affect the amount or term
of any Contract unless a modification is required to conform the Contract to
applicable Federal or State law. No modification will affect the method by which
Contract Values are determined. We will notify you in writing of any
modifications.
ASSIGNMENT OF CONTRACTS
Ownership of this Contract is generally assignable. However, if the Contract is
issued to a tax qualified retirement plan, it is possible that the ownership of
the Contract may not be transferred or assigned. An assignment of a
Non-Qualified Contract may subject the Contract Values or Surrender Value to
income taxes and certain penalty taxes.
DISTRIBUTION OF CONTRACTS
Hartford Securities Distribution Company, Inc. ("HSD") serves as principal
underwriter for the Contracts. HSD is a wholly owned subsidiary of Hartford. The
principal business address of HSD is the same as Hartford. HSD is registered
with the Commission under the 1934 Act as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc.
The Contracts are sold by certain independent broker-dealers registered under
the 1934 Act to persons who have established an account with the broker-dealer.
In addition, the Contracts may be offered to members of certain other eligible
groups or certain individuals. Hartford will pay a maximum commission of 5% for
the sale of a Contract. From time to time, customers of certain broker-dealers
may be offered special initial Guarantee Rates and negotiated commissions.
Broker-dealers or financial institutions are compensated according to a schedule
set forth by HSD and any applicable rules or regulations for insurance
compensation. Compensation is generally based on premium payments made by
policyholders or contract owners.
In addition, a broker-dealer or financial institution may also receive
additional compensation for, among other things, training, marketing or other
services provided. HSD, its affiliates or Hartford may also make compensation
arrangements with certain broker-dealers or financial institutions based on
total sales by
<Page>
HARTFORD LIFE INSURANCE COMPANY 15
- --------------------------------------------------------------------------------
the broker-dealer or financial institution of insurance products. These
payments, which may be different for different broker-dealers or financial
institutions, will be made by HSD, its affiliates or Hartford out of their own
assets and will not effect the amounts paid by the policyholders or contract
owners to purchase, hold or Surrender insurance products.
FEDERAL TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
What are some of the federal tax consequences which affect these Contracts?
A. GENERAL
Since federal tax law is complex, the tax consequences of purchasing this
contract will vary depending on your situation. You may need tax or legal advice
to help you determine whether purchasing this contract is right for you.
Our general discussion of the tax treatment of this contract is based on our
understanding of federal income tax laws as they are currently interpreted. A
detailed description of all federal income tax consequences regarding the
purchase of this contract cannot be made in the prospectus. We also do not
discuss state, municipal or other tax laws that may apply to this contract. For
detailed information, you should consult with a qualified tax adviser familiar
with your situation.
B. TAXATION OF HARTFORD
Hartford is taxed as a life insurance company under Subchapter L of Chapter 1 of
the Internal Revenue Code of 1986, as amended (the "Code"). The assets
underlying the Contracts will be owned by Hartford. The income earned on such
assets will be Hartford's income.
C. TAXATION OF ANNUITIES -- GENERAL PROVISIONS AFFECTING PURCHASERS OTHER THAN
QUALIFIED RETIREMENT PLANS
Section 72 of the Code governs the taxation of annuities in general.
1. NON-NATURAL PERSONS, CORPORATIONS, ETC.
Code Section 72 contains provisions for contract owners which are not natural
persons. Non-natural persons include corporations, trusts, limited liability
companies, partnerships and other types of legal entities. The tax rules for
contracts owned by non-natural persons are different from the rules for
contracts owned by individuals. For example, the annual net increase in the
value of the contract is currently includable in the gross income of a
non-natural person, unless the non-natural person holds the contract as an agent
for a natural person. There are additional exceptions from current inclusion
for:
- - certain annuities held by structured settlement companies,
- - certain annuities held by an employer with respect to a terminated qualified
retirement plan and
- - certain immediate annuities.
A non-natural person which is a tax-exempt entity for federal tax purposes will
not be subject to income tax as a result of this provision.
If the contract owner is a non-natural person, the primary annuitant is treated
as the contract owner in applying mandatory distribution rules. These rules
require that certain distributions be made upon the death of the contract owner.
A change in the primary annuitant is also treated as the death of the contract
owner.
2. OTHER CONTRACT OWNERS (NATURAL PERSONS).
A Contract Owner is not taxed on increases in the value of the Contract until an
amount is received or deemed received, e.g., in the form of a lump sum payment
(full or partial value of a Contract) or as Annuity payments under the
settlement option elected.
The provisions of Section 72 of the Code concerning distributions are summarized
briefly below. Also summarized are special rules affecting distributions from
Contracts obtained in a tax-free exchange for other annuity contracts or life
insurance contracts which were purchased prior to August 14, 1982.
a. DISTRIBUTIONS PRIOR TO THE ANNUITY COMMENCEMENT DATE.
i. Total premium payments less amounts received which were not includable in
gross income equal the "investment in the contract" under Section 72 of the
Code.
ii. To the extent that the value of the Contract (ignoring any surrender
charges except on a full surrender) exceeds the "investment in the
contract," such excess constitutes the "income on the contract." It is
unclear what value should be used in determining the "income on the
contract." We believe that the current Contract value (determined without
regard to surrender charges) is an appropriate measure. However, the IRS
could take the position that the value should be the current Contract value
(determined without regard to surrender charges) increased by some measure
of the value of certain future benefits.
iii. Any amount received or deemed received prior to the Annuity Commencement
Date (e.g., upon a partial surrender) is deemed to come first from any
such "income on the contract" and then from "investment in the contract,"
and for these purposes such "income on the contract" shall be computed by
reference to any aggregation rule in subparagraph 2.c. below. As a result,
any such amount received or deemed received (1) shall be includable in
gross income to the extent that such amount does not exceed any such
"income on the contract," and (2) shall not be includable in gross income
to the extent that such amount does exceed any such "income on the
contract." If at the time that any amount is received or deemed received
there is no "income on the contract" (e.g., because the gross value of the
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Contract does not exceed the "investment in the contract" and no aggregation
rule applies), then such amount received or deemed received will not be
includable in gross income, and will simply reduce the "investment in the
contract."
iv. The receipt of any amount as a loan under the Contract or the assignment or
pledge of any portion of the value of the Contract shall be treated as an
amount received for purposes of this subparagraph a. and the next
subparagraph b.
v. In general, the transfer of the Contract, without full and adequate
consideration, will be treated as an amount received for purposes of this
subparagraph a. and the next subparagraph b. This transfer rule does not
apply, however, to certain transfers of property between spouses or incident
to divorce.
b. DISTRIBUTIONS AFTER ANNUITY COMMENCEMENT DATE.
Annuity payments made periodically after the Annuity Commencement Date are
includable in gross income to the extent the payments exceed the amount
determined by the application of the ratio of the "investment in the contract"
to the total amount of the payments to be made after the Annuity Commencement
Date (the "exclusion ratio").
i. When the total of amounts excluded from income by application of the
exclusion ratio is equal to the investment in the contract as of the
Annuity Commencement Date, any additional payments (including surrenders)
will be entirely includable in gross income.
ii. If the annuity payments cease by reason of the death of the Annuitant and,
as of the date of death, the amount of annuity payments excluded from gross
income by the exclusion ratio does not exceed the investment in the
contract as of the Annuity Commencement Date, then the remaining portion of
unrecovered investment shall be allowed as a deduction for the last taxable
year of the Annuitant.
iii. Generally, nonperiodic amounts received or deemed received after the
Annuity Commencement Date are not entitled to any exclusion ratio and
shall be fully includable in gross income. However, upon a full surrender
after such date, only the excess of the amount received (after any
surrender charge) over the remaining "investment in the contract" shall be
includable in gross income (except to the extent that the aggregation rule
referred to in the next subparagraph c. may apply).
c. AGGREGATION OF TWO OR MORE ANNUITY CONTRACTS.
Contracts issued after October 21, 1988 by the same insurer (or affiliated
insurer) to the same Contract Owner within the same calendar year (other than
certain contracts held in connection with a tax-qualified retirement
arrangement) will be treated as one annuity Contract for the purpose of
determining the taxation of distributions prior to the Annuity Commencement
Date. An annuity contract received in a tax-free exchange for another annuity
contract or life insurance contract may be treated as a new Contract for this
purpose. We believe that for any annuity subject to such aggregation, the values
under the Contracts and the investment in the contracts will be added together
to determine the taxation under subparagraph 2.a., above, of amounts received or
deemed received prior to the Annuity Commencement Date. Withdrawals will first
be treated as withdrawals of income until all of the income from all such
Contracts is withdrawn. As of the date of this prospectus, there are no
regulations interpreting this provision.
d. 10% PENALTY TAX -- APPLICABLE TO CERTAIN WITHDRAWALS AND ANNUITY
PAYMENTS.
i. If any amount is received or deemed received on the Contract (before or
after the Annuity Commencement Date), the Code applies a penalty tax equal
to ten percent of the portion of the amount includable in gross income,
unless an exception applies.
ii. The 10% penalty tax will not apply to the following distributions:
1. Distributions made on or after the date the recipient has attained the
age of 59 1/2.
2. Distributions made on or after the death of the holder or where the
holder is not an individual, the death of the primary annuitant.
3. Distributions attributable to a recipient's becoming disabled.
4. A distribution that is part of a scheduled series of substantially equal
periodic payments (not less frequently than annually) for the life (or
life expectancy) of the recipient (or the joint lives or life
expectancies of the recipient and the recipient's designated
Beneficiary). In determining whether a payment stream designed to
satisfy this exception qualifies, it is possible that the IRS could take
the position that the entire interest in the Contract should include not
only the current Contract value, but also some measure of the value of
certain future benefits.
5. Distributions made under certain annuities issued in connection with
structured settlement agreements.
6. Distributions of amounts which are allocable to the "investment in the
contract" prior to August 14, 1982 (see next subparagraph e.).
e. SPECIAL PROVISIONS AFFECTING CONTRACTS OBTAINED THROUGH A TAX-FREE
EXCHANGE OF OTHER ANNUITY OR LIFE INSURANCE CONTRACTS PURCHASED PRIOR TO
AUGUST 14, 1982.
If the Contract was obtained by a tax-free exchange of a life insurance or
annuity Contract purchased prior to August 14, 1982, then any amount received or
deemed received prior to the Annuity Commencement Date shall be deemed to come
(1) first from the amount of the "investment in the contract" prior to
August 14, 1982 ("pre-8/14/82 investment") carried over from the prior Contract,
(2) then from the portion of the
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"income on the contract" (carried over to, as well as accumulating in, the
successor Contract) that is attributable to such pre-8/14/82 investment,
(3) then from the remaining "income on the contract" and (4) last from the
remaining "investment in the contract." As a result, to the extent that such
amount received or deemed received does not exceed such pre-8/14/82 investment,
such amount is not includable in gross income. In addition, to the extent that
such amount received or deemed received does not exceed the sum of (a) such
pre-8/14/82 investment and (b) the "income on the contract" attributable
thereto, such amount is not subject to the 10% penalty tax. In all other
respects, amounts received or deemed received from such post-exchange Contracts
are generally subject to the rules described in this subparagraph e.
f. REQUIRED DISTRIBUTIONS.
i. Death of Contract Owner or Primary Annuitant
Subject to the alternative election or spouse beneficiary provisions in ii
or iii below:
1. If any Contract Owner dies on or after the Annuity Commencement Date and
before the entire interest in the Contract has been distributed, the
remaining portion of such interest shall be distributed at least as
rapidly as under the method of distribution being used as of the date of
such death;
2. If any Contract Owner dies before the Annuity Commencement Date, the
entire interest in the Contract will be distributed within 5 years after
such death; and
3. If the Contract Owner is not an individual, then for purposes of 1. or
2. above, the primary annuitant under the Contract shall be treated as
the Contract Owner, and any change in the primary annuitant shall be
treated as the death of the Contract Owner. The primary annuitant is the
individual, the events in the life of whom are of primary importance in
affecting the timing or amount of the payout under the Contract.
ii. Alternative Election to Satisfy Distribution Requirements
If any portion of the interest of a Contract Owner described in i. above is
payable to or for the benefit of a designated beneficiary, such beneficiary
may elect to have the portion distributed over a period that does not extend
beyond the life or life expectancy of the beneficiary. Distributions must
begin within a year of the Contract Owner's death.
iii. Spouse Beneficiary
If any portion of the interest of a Contract Owner is payable to or for the
benefit of his or her spouse, and the Annuitant or Contingent Annuitant is
living, such spouse shall be treated as the Contract Owner of such portion
for purposes of section i. above. This spousal contract continuation shall
apply only once for this contract.
g. ADDITION OF RIDERS.
The addition of a rider to the Contract could cause it to be considered newly
issued or entered into, for tax purposes, and thus could result in the loss of
certain grandfathering with respect to the Contract. Please contact your tax
adviser for more information.
D. FEDERAL INCOME TAX WITHHOLDING
Any portion of a distribution that is current taxable income to the Contract
Owner will generally be subject to federal income tax withholding and reporting
under the Code. Generally, however, a Contract Owner may elect not to have
income taxes withheld or to have income taxes withheld at a different rate by
filing a completed election form with us. Election forms will be provided at the
time distributions are requested.
E. GENERAL PROVISIONS AFFECTING QUALIFIED RETIREMENT PLANS
The Contract may be used for a number of qualified retirement plans. If the
Contract is being purchased with respect to some form of qualified retirement
plan, please see "Information Regarding Tax-Qualified Retirement Plans" below
for information relative to the types of plans for which it may be used and the
general explanation of the tax features of such plans.
F. ANNUITY PURCHASES BY NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
The discussion above provides general information regarding U.S. federal income
tax consequences to annuity purchasers that are U.S. citizens or residents.
Purchasers that are not U.S. citizens or residents will generally be subject to
U.S. federal income tax and withholding on taxable annuity distributions at a
30% rate, unless a lower treaty rate applies and any required tax forms are
submitted to us. In addition, purchasers may be subject to state premium tax,
other state and/or municipal taxes, and taxes that may be imposed by the
purchaser's country of citizenship or residence. Prospective purchasers are
advised to consult with a qualified tax adviser regarding U.S., state, and
foreign taxation with respect to an annuity purchase.
G. GENERATION SKIPPING TRANSFER TAX
Under certain circumstances, the Code may impose a "generation skipping transfer
tax" when all or part of an annuity contract is transferred to, or a death
benefit is paid to, an individual two or more generations younger than the
owner. Regulations issued under the Code may require us to deduct the tax from
your Contract, or from any applicable payment, and pay it directly to the IRS.
H. ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA")
repealed the Federal estate tax and replaced it with a carryover basis income
tax regime effective for estates of decedents dying after December 31, 2009.
EGTRRA also repealed the generation skipping transfer tax, but not the gift tax,
for transfers made after December 31, 2009. EGTRRA contains
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a sunset provision, which essentially returns the Federal estate, gift and
generation skipping transfer taxes to their pre-EGTRRA form, beginning in 2011.
Congress may or may not enact permanent repeal between now and then.
During the period prior to 2010, EGTRRA provides for periodic decreases in the
maximum estate tax rate coupled with periodic increases in the unified credit
exemption amount. For 2003, the maximum estate tax rate is 48% and the unified
credit exemption amount is $1,500,000.
The complexity of the new tax law, along with uncertainty as to how it might be
modified in coming years, underscores the importance of seeking guidance from a
qualified advisor to help ensure that your estate plan adequately addresses your
needs and that of your beneficiaries under all possible scenarios.
INFORMATION REGARDING TAX-QUALIFIED RETIREMENT PLANS
This summary does not attempt to provide more than general information about the
federal income tax rules associated with use of a Contract by a tax-qualified
retirement plan. State income tax rules applicable to tax-qualified retirement
plans often differ from federal income tax rules, and this summary does not
describe any of these differences. Because of the complexity of the tax rules,
owners, participants and beneficiaries are encouraged to consult their own tax
advisors as to specific tax consequences.
The Contracts may offer death benefits that may exceed the greater of the
amounts paid for the Contract or the Contract's cash value. Owners who intend to
use the Contract in connection with tax-qualified retirement plans should
consider the income tax effects that such a death benefit may have on the plan.
The federal tax rules applicable to owners of Contracts under tax-qualified
retirement plans vary according to the type of plan as well as the terms and
conditions of the plan itself. Contract owners, plan participants and
beneficiaries are cautioned that the rights and benefits of any person may be
controlled by the terms and conditions of the tax-qualified retirement plan
itself, regardless of the terms and conditions of a Contract. We are not bound
by the terms and conditions of such plans to the extent such terms conflict with
a Contract, unless we specifically consent to be bound.
Some tax-qualified retirement plans are subject to distribution and other
requirements that are not incorporated into our administrative procedures.
Contract owners, participants and beneficiaries are responsible for determining
that contributions, distributions and other transactions comply with applicable
law. Tax penalties may apply to transactions with respect to tax-qualified
retirement plans if applicable federal income tax rules and restrictions are not
carefully observed.
WE DO NOT CURRENTLY OFFER THE CONTRACTS IN CONNECTION WITH ALL OF THE TYPES OF
TAX-QUALIFIED RETIREMENT PLANS DISCUSSED BELOW AND MAY NOT OFFER THE CONTRACTS
FOR ALL TYPES OF TAX-QUALIFIED RETIREMENT PLANS IN THE FUTURE.
1. TAX-QUALIFIED PENSION OR PROFIT-SHARING PLANS -- Eligible employers can
establish certain tax-qualified pension and profit-sharing plans under
section 401 of the Code. Rules under section 401(k) of the Code govern certain
"cash or deferred arrangements" under such plans. Rules under
section 408(k) govern "simplified employee pensions." Tax-qualified pension and
profit-sharing plans are subject to limitations on the amount that may be
contributed, the persons who may be eligible to participate, the time when
distributions must commence, and the form in which distributions must be paid.
Employers intending to use the Contracts in connection with tax-qualified
pension or profit-sharing plans should seek competent tax and other legal
advice. If the death benefit under the Contract can exceed the greater of the
amount paid for the Contract and the Contract's cash value, it is possible that
the IRS would characterize such death benefit as an "incidental death benefit."
There are limitations on the amount of incidental benefits that may be provided
under pension and profit sharing plans. In addition, the provision of such
benefits may result in currently taxable income to the participants.
2. TAX SHELTERED ANNUITIES UNDER SECTION 403(B) -- Public schools and certain
types of charitable, educational and scientific organizations, as specified in
section 501(c)(3) of the Code, can purchase tax-sheltered annuity contracts for
their employees. Tax-deferred contributions can be made to tax-sheltered annuity
contracts under section 403(b) of the Code, subject to certain limitations. In
general, total contributions may not exceed the lesser of (1) 100% of the
participant's compensation, and (2) $41,000 (adjusted for increases in
cost-of-living). The maximum elective deferral amount is equal to $13,000 for
2004, $14,000 for 2005, and $15,000 for 2006 and thereafter, indexed. The
limitation on elective deferrals may be increased to allow certain "catch-up"
contributions for individuals who have attained age 50.
Tax-sheltered annuity programs under section 403(b) are subject to a PROHIBITION
AGAINST DISTRIBUTIONS FROM THE CONTRACT ATTRIBUTABLE TO CONTRIBUTIONS MADE
PURSUANT TO A SALARY REDUCTION AGREEMENT, unless such distribution is made:
- - after the participating employee attains age 59 1/2;
- - upon severance from employment;
- - upon death or disability; or
- - in the case of hardship (and in the case of hardship, any income attributable
to such contributions may not be distributed).
Generally, the above restrictions do not apply to distributions attributable to
cash values or other amounts held under a section 403(b) contract as of
December 31, 1988.
If the death benefit under the Contract can exceed the greater of the amount
paid for the Contract and the Contract's cash value, it is possible that the IRS
would characterize such death benefit as an "incidental death benefit." If the
death benefit were so characterized, this could result in currently taxable
income to purchasers. In addition, there are limitations on the amount of
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HARTFORD LIFE INSURANCE COMPANY 19
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incidental death benefits that may be provided under a section
403(b) arrangement.
3. DEFERRED COMPENSATION PLANS UNDER SECTION 457 -- Certain governmental
employers or tax-exempt employers other than a governmental unit can establish a
Deferred Compensation Plan under section 457 of the Code. For these purposes, a
"governmental employer" is a State, a political subdivision of a State, or an
agency or an instrumentality of a State or political subdivision of a State.
Employees and independent contractors performing services for a governmental or
tax-exempt employer can elect to have contributions made to a Deferred
Compensation Plan of their employer in accordance with the employer's plan and
section 457 of the Code.
Deferred Compensation Plans that meet the requirements of section 457(b) of the
Code are called "eligible" Deferred Compensation Plans. Section 457(b) limits
the amount of contributions that can be made to an eligible Deferred
Compensation Plan on behalf of a participant. Generally, the limitation on
contributions is the lesser of (1) 100% of a participant's includible
compensation or (2) the applicable dollar amount, equal to $12,000 for 2003,
$13,000 for 2004, $14,000 for 2005, and $15,000 for 2006 and thereafter,
indexed. The plan may provide for additional "catch-up" contributions during the
three taxable years ending before the year in which the participant attains
normal retirement age. In addition, the contribution limitation may be increased
to allow certain "catch-up" contributions for individuals who have attained age
50.
All of the assets and income of an eligible Deferred Compensation Plan for a
governmental employer must be held in trust for the exclusive benefit of
participants and their beneficiaries. For this purpose, certain custodial
accounts and annuity contracts are treated as trusts. The requirement of a trust
does not apply to amounts under an eligible Deferred Compensation Plan of a
tax-exempt (non-governmental) employer. In addition, the requirement of a trust
does not apply to amounts under a Deferred Compensation Plan of a governmental
employer if the Deferred Compensation Plan is not an eligible plan within the
meaning of section 457(b) of the Code. In the absence of such a trust, amounts
under the plan will be subject to the claims of the employer's general
creditors.
In general, distributions from an eligible Deferred Compensation Plan to a
participant or beneficiary are prohibited under section 457 of the Code unless
made after the participating employee:
- - attains age 70 1/2
- - has a severance from employment as defined in the Code (including death of the
participating employee), or
- - suffers an unforeseeable financial emergency as defined in the Code.
4. INDIVIDUAL RETIREMENT ANNUITIES ("IRAS") UNDER SECTION 408
TRADITIONAL IRAs -- Eligible individuals can establish individual retirement
programs under section 408 of the Code through the purchase of an IRA.
Section 408 imposes limits with respect to IRAs, including limits on the amount
that may be contributed to an IRA, the amount of such contributions that may be
deducted from taxable income, the persons who may be eligible to contribute to
an IRA, and the time when distributions commence from an IRA. See Section 6
below for a discussion of rollovers involving IRAs.
SIMPLE IRAs -- Eligible employees may establish SIMPLE IRAs in connection with a
SIMPLE IRA plan of an employer under section 408(p) of the Code. Special
rollover rules apply to SIMPLE IRAs. Amounts can be rolled over from one SIMPLE
IRA to another SIMPLE IRA. However, amounts can be rolled over from a SIMPLE IRA
to a Traditional IRA only after two years have expired since the employee first
commenced participation in the employer's SIMPLE IRA plan. Amounts cannot be
rolled over to a SIMPLE IRA from a qualified plan or a Traditional IRA. Hartford
is a non-designated financial institution for purposes of the SIMPLE IRA rules.
ROTH IRAs -- Eligible individuals may establish Roth IRAs under section 408A of
the Code. Contributions to a Roth IRA are not deductible. Subject to special
limitations, a Traditional IRA, SIMPLE IRA or Simplified Employee Pension under
Section 408(k) of the Code may be converted into a Roth IRA or a distribution
from such an arrangement may be rolled over to a Roth IRA. However, a conversion
or a rollover to a Roth IRA is not excludable from gross income. If certain
conditions are met, qualified distributions from a Roth IRA are tax-free.
5. FEDERAL TAX PENALTIES AND WITHHOLDING -- Distributions from tax-qualified
retirement plans are generally taxed as ordinary income under section 72 of the
Code. Under these rules, a portion of each distribution may be excludable from
income. The excludable amount is the portion of the distribution that bears the
same ratio as the after-tax contributions bear, if any, to the expected return.
(a) PENALTY TAX ON EARLY DISTRIBUTIONS Section 72(t) of the Code imposes an
additional penalty tax equal to 10% of the taxable portion of a distribution
from certain tax-qualified retirement plans. However, the 10% penalty tax
does not apply to a distribution that is:
- - Made on or after the date on which the employee reaches age 59 1/2;
- - Made to a beneficiary (or to the estate of the employee) on or after the death
of the employee;
- - Attributable to the employee's becoming disabled (as defined in the Code);
- - Part of a series of substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the employee or the
joint lives (or joint life expectancies) of the employee and his or her
designated beneficiary;
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- - Except in the case of an IRA, made to an employee after separation from
service after reaching age 55; or
- - Not greater than the amount allowable as a deduction to the employee for
eligible medical expenses during the taxable year.
IN ADDITION, THE 10% PENALTY TAX DOES NOT APPLY TO A DISTRIBUTION FROM AN IRA
THAT IS:
- - Made after separation from employment to an unemployed IRA owner for health
insurance premiums, if certain conditions are met;
- - Not in excess of the amount of certain qualifying higher education expenses,
as defined by section 72(t)(7) of the Code; or
- - A qualified first-time homebuyer distribution meeting the requirements
specified at section 72(t)(8) of the Code.
Certain other exceptions also are available.
If you are a participant in a SIMPLE IRA plan, you should be aware that the 10%
penalty tax is increased to 25% with respect to non-exempt early distributions
made from your SIMPLE IRA during the first two years following the date you
first commenced participation in any SIMPLE IRA plan of your employer.
(b) MINIMUM DISTRIBUTION PENALTY TAX If the amount distributed is less than the
minimum required distribution for the year, the Participant is subject to a
50% penalty tax on the amount that was not properly distributed.
An individual's interest in a tax-qualified retirement plan generally must be
distributed, or begin to be distributed, not later than the Required Beginning
Date. Generally, the Required Beginning Date is April 1 of the calendar year
following the later of:
- - the calendar year in which the individual attains age 70 1/2; or
- - the calendar year in which the individual retires from service with the
employer sponsoring the plan.
The Required Beginning Date for an individual who is a five (5) percent owner
(as defined in the Code), or who is the owner of an IRA, is April 1 of the
calendar year following the calendar year in which the individual attains age
70 1/2.
The entire interest of the Participant must be distributed beginning no later
than the Required Beginning Date over:
- - the life of the Participant or the lives of the Participant and the
Participant's designated beneficiary (as defined in the Code), or
- - over a period not extending beyond the life expectancy of the Participant or
the joint life expectancy of the Participant and the Participant's designated
beneficiary.
Each annual distribution must equal or exceed a "minimum distribution amount"
which is determined generally by dividing the account balance by the applicable
life expectancy. This account balance is generally based upon the account value
as of the close of business on the last day of the previous calendar year. In
addition, minimum distribution incidental benefit rules may require a larger
annual distribution. Required minimum distributions also can be made in the form
of annuity payments. The death benefit under the contract may affect the amount
of the minimum required distribution that must be taken.
If an individual dies before reaching his or her Required Beginning Date, the
individual's entire interest must generally be distributed within five years of
the individual's death. However, this rule will be deemed satisfied, if
distributions begin before the close of the calendar year following the
individual's death to a designated beneficiary and distribution is over the life
of such designated beneficiary (or over a period not extending beyond the life
expectancy of the beneficiary). If the beneficiary is the individual's surviving
spouse, distributions may be delayed until the individual would have attained
age 70 1/2.
If an individual dies after reaching his or her Required Beginning Date or after
distributions have commenced, the individual's interest must generally be
distributed at least as rapidly as under the method of distribution in effect at
the time of the individual's death.
The minimum distribution requirements apply to Roth IRAs after the Contract
owner dies, but not while the Contract owner is alive. In addition, if the owner
of a Traditional or Roth IRA dies and the Contract owner's spouse is the sole
designated beneficiary, the surviving spouse may elect to treat the Traditional
or Roth IRA as his or her own.
In 2002, the Internal Revenue Service issued final and temporary regulations in
the Federal Register relating to minimum required distributions. The death
benefit under your Contract may affect the amount of the required distribution
that must be taken from your Contract. Please consult with your tax or legal
adviser with any questions regarding these new regulations.
(c) WITHHOLDING We are generally required to withhold federal income tax from
the taxable portion of each distribution made under a Contract. The federal
income tax withholding requirements, including the rate at which withholding
applies, depend on whether a distribution is or is not an eligible rollover
distribution.
Federal income tax withholding from the taxable portion of distributions that
are not eligible rollover distributions is required unless the payee is eligible
to, and does in fact, elect not to have income tax withheld by filing an
election with us. Where the payee does not elect out of withholding, the rate of
income tax to be withheld depends on whether the distribution is nonperiodic or
periodic. Regardless of whether an election is made not to have federal income
taxes withheld, the recipient is still liable for payment of federal income tax
on the taxable portion of the distribution.
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HARTFORD LIFE INSURANCE COMPANY 21
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For periodic payments, federal income tax will be withheld from the taxable
portion of the distribution by treating the payment as wages under IRS wage
withholding tables, using the marital status and number of withholding
allowances elected by the payee on an IRS Form W-4P, or acceptable substitute,
filed us. Where the payee has not filed a Form W-4P, or acceptable substitute,
with us, the payee will be treated as married claiming three withholding
allowances. Special rules apply where the payee has not provided us with a
proper taxpayer identification number or where the payments are sent outside the
United States or U.S. possessions.
For nonperiodic distributions, where a payee has not elected out of withholding,
income tax will be withheld at a rate of 10 percent from the taxable portion of
the distribution.
Federal income tax withholding is required at a rate of 20 percent from the
taxable portion of any distribution that is an eligible rollover distribution to
the extent it is not directly rolled over to an eligible retirement plan. Payees
cannot elect out of income tax withholding with respect to such distributions.
Also, special withholding rules apply with respect to distributions from
non-governmental section 457(b) plans, and to distributions made to individuals
who are neither citizens or resident aliens of the United States.
6. ROLLOVER DISTRIBUTIONS -- Under present federal tax law, "eligible rollover
distributions" from qualified retirement plans under section 401(a) of the Code,
qualified annuities under section 403(a) of the Code,
section 403(b) arrangements, and governmental 457(b) plans generally can be
rolled over tax-free within 60 days to any of such plans or arrangements that
accept such rollovers. Similarly, distributions from an IRA generally are
permitted to be rolled over tax-free within 60 days to a qualified plan,
qualified annuity, section 403(b) arrangement, or governmental 457(b) plan.
After-tax contributions may be rolled over from a qualified plan, qualified
annuity or governmental 457 plan into another qualified plan or an IRA. In the
case of such a rollover of after-tax contributions, the rollover is permitted to
be accomplished only through a direct rollover. In addition, a qualified plan is
not permitted to accept rollovers of after tax contributions unless the plan
provides separate accounting for such contributions (and earnings thereon).
Similar rules apply for purposes of rolling over after tax contributions from a
section 403(b) arrangement. After tax contributions (including nondeductible
contributions to an IRA) are not permitted to be rolled over from an IRA into a
qualified plan, qualified annuity, section 403(b) arrangement, or governmental
457(b) plan.
For this purpose, an eligible rollover distribution is generally a distribution
to an employee of all or any portion of the balance to the credit of the
employee in a qualified trust under section 401(a) of the Code, qualified
annuity under section 403(a) of the Code, a 403(b) arrangement or a governmental
457(b) plan. However, an eligible rollover distribution does not include: any
distribution which is one of a series of substantially equal periodic payments
(not less frequently than annually) made (1) for the life (or life expectancy)
of the employee or the joint lives (or joint life expectancies) of the employee
and the employee's designated beneficiary, or (2) for a specified period of 10
years or more; any distribution to the extent it is a required minimum
distribution amount (discussed above); or any distribution which is made upon
hardship of the employee.
Separate accounting is required on amounts rolled from plans described under
Code sections 401, 403(b) or 408(IRA), when those amounts are rolled into plans
described under section 457(b) sponsored by governmental employers. These
amounts, when distributed from the governmental 457(b) plan, will be subject to
the 10% early withdrawal tax applicable to distributions from plans described
under sections 401, 403(b) or 408(IRA), respectively.
THE COMPANY
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BUSINESS OF HARTFORD LIFE INSURANCE COMPANY
(Dollar amounts in millions, unless otherwise stated)
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,
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22 HARTFORD LIFE INSURANCE COMPANY
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respectively. Additionally, Hartford Life Insurance Company generated net income
of $626, $426 and $646 in 2003, 2002, and 2001, respectively.
CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE
The Company maintains advantageous economies of scale and operating efficiencies
due to its growth, attention to expense and claims management and commitment to
customer service and technology. These advantages allow the Company to
competitively price its products for its distribution network and policyholders.
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 has changed its reportable operating segments
from Investment Products, Individual Life and Corporate Owned Life Insurance
("COLI") to Retail Products Group ("Retail"), Institutional Solutions Group
("Institutional") and Individual Life. The Company also includes, in an "Other"
category, net realized capital gains and losses other than periodic net coupon
settlements on non-qualifying derivatives and net realized capital gains and
losses related to guaranteed minimum withdrawal benefits; corporate items not
directly allocable to any of its reportable operating segments and intersegment
eliminations, 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. 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.
RETAIL PRODUCTS GROUP
The Retail Products Group 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. Retail
generated revenues of $1.8 billion in 2003, $1.6 billion in 2002 and $1.5
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
Retail segment was $341, $280 and $319 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 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)").
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HARTFORD LIFE INSURANCE COMPANY 23
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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 ("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.
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.
MARKETING AND DISTRIBUTION
The Retail Products Group 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.
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24 HARTFORD LIFE INSURANCE COMPANY
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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 and the portfolio of products which they
wholesale. In addition, the Company uses internal personnel with extensive
experience in the Section 401(k) market, to sell its products and services in
the retirement plan market.
COMPETITION
The Retail 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.
INSTITUTIONAL SOLUTIONS GROUP
Hartford Life Insurance Company is among the top providers of retirement
products and services, including asset management and plan administration sold
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").
Additionally, Hartford Life Insurance Company is a leader in the private
placement life insurance (formerly, COLI) ("PPLI") 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 PPLI, leveraged
COLI and variable products.
The Company's total account values related to institutional investment products
were $12.4 billion and $9.4 billion as of December 31, 2003 and 2002,
respectively. Governmental account values were $9.0 billion and $7.2 billion as
of December 31, 2003 and 2002, respectively. Variable PPLI products 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. The Institutional Solutions Group generated revenues of $2.0
billion, $1.7 billion and $2.1 billion for the years ended December 31, 2003,
2002 and 2001, respectively and net income of $119, $94 and $92 in 2003, 2002
and 2001, respectively.
PRINCIPAL PRODUCTS
INSTITUTIONAL INVESTMENT PRODUCTS -- The Company sells the following
institutional investment products; structured settlements, GICs and other short
term funding agreements, and other annuity contracts for special purposes such
as funding of terminated defined benefit pension plans (terminal funding
arrangements).
STRUCTURED SETTLEMENTS -- Structured settlement annuity 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.
STABLE VALUE PRODUCTS -- Guaranteed Interest Contracts (GICs) are group annuity
contracts issued to sponsors of qualified pension or profit-sharing plans or
stable value pooled fund
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HARTFORD LIFE INSURANCE COMPANY 25
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managers. Under these contracts, the client deposits a lump sum with the
Hartford for a specified period of time (usually 1-7 years) for a guaranteed
interest rate. At the end of the specified period, the client receives principal
plus interest earned. Funding agreements are investment contracts that perform a
similar function for non-qualified assets.
TERMINAL FUNDING -- Terminal funding arrangements are group annuity contracts
used to fund pension liabilities that exist when a qualified retirement plan
sponsor decides to terminate an existing defined benefit pension plan. Group
annuity contracts are very long-term in nature, since they must pay the pension
liabilities typically on a monthly basis to all participants covered under the
pension plan which is being terminated.
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).
LEVERAGED COLI -- 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 PRODUCTS -- Variable products continue to be used by employers to fund
non-qualified benefits or other post-employment benefit liabilities.
MARKETING AND DISTRIBUTION
In the Section 457 market, the Institutional Solutions Group distribution
network uses internal personnel with extensive experience to sell its products
and services in the retirement plan and institutional markets. The success of
the Company's marketing and distribution system depends on its product
offerings, fund performance, quality of customer service, and relationships with
brokers, banks and other financial institutions.
In the structured settlement market, the Institutional Solutions Group sells
individual fixed immediate annuity products through a small number of specialty
brokerage firms that work closely with The Hartford's property and casualty
claim operations. The Company also works directly with the brokerage firms on
cases that do not involve the Hartford's property/casualty operations.
In the stable value marketplace, the Institutional Solutions Group sells its
GICs and funding agreements to retirement plan sponsors either through
investment management firms or directly, using Hartford employees.
In the terminal funding market, the Company sells its group annuity products to
retirement plan sponsors through three different channels -- (1) a small number
of specialty brokers, (2) large benefits consulting firms and (3) directly,
using Hartford employees.
COMPETITION
The Institutional 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.
For institutional product lines offering fixed annuity products (i.e., terminal
funding, structured settlements and stable value), financial strength, stability
and credit ratings are key buying factors. As a result, the competitors in those
marketplaces tend to be other large, long-established insurance companies.
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 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
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26 HARTFORD LIFE INSURANCE COMPANY
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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.
RESERVES
In accordance with applicable insurance regulations under which the Company
operates, life insurance subsidiaries of Hartford Life establish and carry as
liabilities actuarially determined reserves which are calculated to meet the
Company's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States, which are modified to
reflect the Company's actual experience when appropriate. These reserves are
computed at amounts that, with additions from estimated premiums to be received
and with interest on such reserves compounded annually at certain assumed rates,
are expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's disability or death. Reserves also
include unearned premiums, premium deposits, claims incurred but not reported
and claims reported but not yet paid. Reserves for assumed reinsurance are
computed in a manner that is comparable to direct insurance reserves. Additional
information on Hartford Life 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,
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HARTFORD LIFE INSURANCE COMPANY 27
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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 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.
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".
<Page>
28 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
The following selected financial data for Hartford Life, its subsidiaries and
affiliated companies should be read in conjunction with the consolidated
financial statements and notes thereto included in this Prospectus.
HLIC INCOME STATEMENTS (INCLUDES RECLASSES)
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(IN MILLIONS)
Premiums and other considerations................. $3,103 $2,653 $3,084 $2,815 $2,462
Net investment income............................. 1,764 1,572 1,491 1,326 1,359
Net realized capital gains (losses)............... 1 (276) (87) (85) (4)
Total Revenues.................................. 4,868 3,949 4,488 4,056 3,817
Benefits, claims, and claim adjustment expenses... 2,726 2,275 2,536 2,104 1,991
Amortization of deferred policy acquisition costs
and present value of future profits.............. 660 531 566 604 539
Dividends to policyholders........................ 63 65 69 67 104
Other insurance expenses.......................... 625 650 621 600 631
Total benefits, claims and expenses............. 4,074 3,521 3,792 3,375 3,265
Income before income tax expense.................. 794 428 696 681 552
Income tax expense................................ 168 2 44 194 191
Cumulative effect of Accounting change............ -- -- (6) -- --
NET INCOME...................................... 626 426 646 487 361
</Table>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollar amounts in millions, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of Hartford Life Insurance
Company and its subsidiaries ("Hartford Life Insurance Company" or the
"Company") as of December 31, 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.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
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
<Page>
HARTFORD LIFE INSURANCE COMPANY 29
- --------------------------------------------------------------------------------
significant degree of variability: deferred policy acquisition costs and present
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 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
<Page>
30 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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
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.
<Page>
HARTFORD LIFE INSURANCE COMPANY 31
- --------------------------------------------------------------------------------
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 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
<Page>
32 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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.
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 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
<Page>
HARTFORD LIFE INSURANCE COMPANY 33
- --------------------------------------------------------------------------------
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 2002 VS. 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).
The Company has changed its reportable operating segments from Investment
Products, Individual Life and Corporate Owned Life Insurance (COLI) to Retail
Products Group ("Retail"), Institutional Solutions Group ("Institutional") and
Individual Life. Retail offers individual variable and fixed annuities,
retirement plan products and services to corporations under Section 401(k) plans
and other investment products. Institutional primarily offers retirement plan
products and services to municipalities under Section 457 plans, other
institutional investment products and private placement life insurance (formerly
COLI). Individual Life sells a variety of life insurance products, including
variable universal life, universal life, interest sensitive whole life and term
life insurance. The Company also includes, in an Other category, net realized
capital gains and losses other than periodic net coupon settlements on
non-qualifying derivatives and net realized capital gains and losses related to
guaranteed minimum withdrawal benefits; corporate items not directly allocated
to any of its reportable operating segments; and intersegment eliminations, 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
the parent HLA. Periodic net coupon settlements on non-qualifying derivatives
and net realized capital gains and losses related to guaranteed minimum
withdrawal benefits are reflected in each applicable segment in net realized
capital gains and losses. The Company defines "NM" as not meaningful for
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 in the
Institutional segment and higher net investment income in the Retail segment as
compared to the prior year.
The increase in earned premiums was primarily attributed to higher sales in the
institutional investment products business, specifically, in the institutional
annuities and structured settlement businesses. Additionally, net investment
income in the Retail segment increased due to higher general account assets in
the individual annuity business. Fee income in the Retail segment was higher in
2003 compared to a year ago, as a result of higher average account values,
specifically in the individual annuities
<Page>
34 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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 was lower net investment income in the Institutional
segment, primarily due to lower average leveraged COLI account values as a
result of surrender activity.
Benefits, claims and expenses increased primarily due to increases in the Retail
and Institutional segments 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 Institutional
related to the decline in leveraged COLI account values. For the year ended
December 31, 2003, Institutional other expenses decreased as a result of 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 Retail and Institutional segments 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. 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, Institutional 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 earned premiums in the institutional
investment product business, which was partially offset by revenue growth across
the other operating segments. Partially offsetting these decreases were
increases in revenues in the Retail and Individual Life segments. Revenue in the
Retail segment increased primarily due to an increase in earned premiums. The
increase in Individual Life was 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 Institutional 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 Institutional 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 Retail 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 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
- --------------------------------------------------------------------
Retail Products Group $341 $280 $319
- --------------------------------------------------------------------
Institutional Solutions Group 119 94 92
- --------------------------------------------------------------------
Individual Life 134 116 106
- --------------------------------------------------------------------
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.
<Page>
HARTFORD LIFE INSURANCE COMPANY 35
- --------------------------------------------------------------------------------
RETAIL PRODUCTS GROUP
OPERATING SUMMARY
<Table>
<Caption>
2003 VS. 2002 2002 VS. 2001
2003 2002 2001 CHANGE CHANGE
- -----------------------------------------------------------------------------------------------------------------------
Fee income and other $ 1,302 $ 1,207 $ 1,305 8% (8)%
Earned premiums (37) (25) (63) (48)% 60%
Net investment income 493 367 279 34% 32%
Net realized capital gains 16 7 2 NM NM
-------- ------- ------- --- ---
TOTAL REVENUES 1,774 1,556 1,523 14% 2%
Benefits, claims and claim adjustment expenses 567 486 375 17% 30%
Insurance operating costs and other expenses 374 358 337 5% 6%
Amortization of deferred policy acquisition costs 462 377 406 23% (7)%
-------- ------- ------- --- ---
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,403 1,221 1,118 15% 9%
-------- ------- ------- --- ---
INCOME BEFORE INCOME TAXES 371 335 405 11% (17)%
Income tax expense 30 55 86 (46)% (36)%
-------- ------- ------- --- ---
NET INCOME $ 341 $ 280 $ 319 22% (12)%
======== ======= ======= === ===
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 4,606 2,972 2,518 56% 18%
-------- ------- ------- --- ---
TOTAL ACCOUNT VALUES $102,322 $77,880 $86,671 31% (10)%
- -----------------------------------------------------------------------------------------------------------------------
</Table>
The Retail Products Group 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 retail 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.
2003 COMPARED TO 2002 -- Revenues in the Retail Products Group segment increased
primarily driven by higher net investment income and higher fee income. 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. Fee income in the Retail Products
Group 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. 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.
Total benefits, claims and expenses increased primarily due to 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 401(k) 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 $20,
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 $79 as compared to $58 for the year ended
December 31, 2002.
2002 COMPARED TO 2001 -- Revenues in the Retail Products Group segment
increased, primarily due to an increase in net investment income in the
individual annuity business. Partially offsetting this increase was 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.
Total benefits, claims and expenses increased, due primarily to increases in
interest credited on general account assets, commissions and wholesaling
expenses and individual annuity death benefit costs due to the lower equity
markets. Partially offsetting these increases was a decrease in amortization of
policy acquisition cost 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.
<Page>
36 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
Net income decreased, driven primarily by the lower equity markets resulting in
the decline in revenue 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 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 Retail
Products Group segment, the future growth will depend on the ability to earn
targeted returns on new business, given competition and the future interest rate
environment.
INSTITUTIONAL SOLUTIONS GROUP
OPERATING SUMMARY
<Table>
<Caption>
2003 VS. 2002 2002 VS. 2001
2003 2002 2001 CHANGE CHANGE
- ------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 301 $ 349 $ 411 (14)% (15)%
Earned premiums 793 420 792 89% (47)%
Net investment income 976 958 938 2% 2%
Net realized capital gains 12 3 -- NM NM
------- ------- ------- --- ---
TOTAL REVENUES 2,082 1,730 2,141 20% (19)%
Benefits, claims and claim adjustment expenses 1,733 1,356 1,773 28% (24)%
Insurance operating costs and other expenses 140 226 227 (38)% NM
Amortization of deferred policy acquisition costs 33 8 7 NM 14%
------- ------- ------- --- ---
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,906 1,590 2,007 20% (21)%
------- ------- ------- --- ---
INCOME BEFORE INCOME TAXES 176 140 134 26% 4%
Income tax expense 57 46 42 24% (10)%
------- ------- ------- --- ---
NET INCOME $ 119 $ 94 $ 92 27% 2%
======= ======= ======= === ===
Institutional account values $12,357 $ 9,433 $ 8,659 31% 9%
Governmental account values 8,965 7,211 7,735 24% (7)%
Private Placement Life Insurance account values
Variable Products 20,993 19,674 18,019 7% 9%
Leveraged COLI 2,524 3,321 4,315 (24)% (23)%
------- ------- ------- --- ---
TOTAL ACCOUNT VALUES $44,839 $39,639 $38,728 13% 2%
- ------------------------------------------------------------------------------------------------------------------------
</Table>
The Institutional Solutions Group primarily offers retirement plan products and
services to municipalities under Section 457 plans, other institutional
investment products and private placement life insurance ("PPLI") (formerly
Corporate Owned Life Insurance or "COLI").
<Page>
HARTFORD LIFE INSURANCE COMPANY 37
- --------------------------------------------------------------------------------
2003 COMPARED TO 2002 -- Revenues in the Institutional Solutions Group segment
increased due to higher earned premiums and higher net investment income. The
increase in earned premiums is due primarily to higher sales of institutional
annuities and structured settlement products in the institutional investment
products business. Net investment income increased due to the increase in
average account values. Partially offsetting these increases was lower fee
income. Fee income decreased as a result of lower cost of insurance charges due
to the decline in leveraged COLI account values as a result of surrender
activity and lower sales volume of PPLI products in 2003 as compared to prior
year.
Total benefits, claims and expenses increased primarily due to higher
institutional annuities and structured settlement sales in the institutional
investment business causing an increase in reserve levels, partially offset by a
decline in interest credited due to a decline in the leveraged COLI account
assets as compared to 2002, related to the surrender activity noted above.
Amortization of deferred policy acquisition costs increased as a result of the
higher level of sales in the institutional investment products business.
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.) 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, compared to the $11 after tax expense recorded in 2002. Additionally, net
income for the year ended December 31, 2003 includes the favorable impact of $1
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 $2
for the year ended December 31, 2002.
2002 COMPARED TO 2001 -- Revenues in the Institutional Solutions Group segment
decreased, primarily due to lower earned premiums in the institutional
investment products business and lower fee income was due primarily to the
declining block of leveraged COLI compared to a year ago. Total benefits, claims
and expenses decreased, which was 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. The
segment's net income increased due to additional earnings from the institutional
investment products business, partially offset by 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 future net income of this segment will depend on the Company's ability to
maintain its investment spread earnings on the majority of the products sold in
the institutional investment products and governmental business. The focus of
the private placement life insurance business is variable products, which
continues to be a product generally used by employers to fund non-qualified
benefits or other post employment benefit liabilities. The leveraged COLI
product has been an important contributor to PPLI'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.
PPLI continues to be subject to a changing legislative and regulatory
environment that could have a material adverse effect on its business.
INDIVIDUAL LIFE
OPERATING SUMMARY
<Table>
<Caption>
2003 VS. 2002 2002 VS. 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>
<Page>
38 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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.
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.
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".
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
<Page>
HARTFORD LIFE INSURANCE COMPANY 39
- --------------------------------------------------------------------------------
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.
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
<Page>
40 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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 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 private placement life
insurance.
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
- -------------------------------------------------------------------
-- 10 --
- -------------------------------------------------------------------
Other Corporate
- -------------------------------------------------------------------
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 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
<Page>
HARTFORD LIFE INSURANCE COMPANY 41
- --------------------------------------------------------------------------------
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 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
<Page>
42 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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.
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
-------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED PERCENT OF
FIXED MATURITIES BY TYPE COST GAINS LOSSES FAIR VALUE TOTAL 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>
<Page>
HARTFORD LIFE INSURANCE COMPANY 43
- --------------------------------------------------------------------------------
<Table>
<Caption>
2002
-------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED PERCENT OF
FIXED MATURITIES BY TYPE COST GAINS LOSSES FAIR VALUE TOTAL 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.
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.
<Page>
44 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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
---------------------------------------
AMORITZED PERCENT OF
FIXED MATURITIES BY CREDIT QUALITY COST FAIR VALUE TOTAL FAIR VALUE
- ---------------------------------------------------------------------------------
United States Government/Government
agencies $ 3,598 $ 3,661 8.8%
AAA 6,652 6,922 16.5%
AA 3,326 3,504 8.4%
A 11,743 12,576 30.1%
BBB 10,833 11,561 27.6%
BB & below 1,925 2,040 4.9%
Short-term 1,554 1,556 3.7%
------- ------- ------
TOTAL FIXED MATURITIES $39,631 $41,820 100.0%
======= ======= ======
Total general account fixed maturities $28,511 $30,085 71.9%
Total guaranteed separate account fixed
maturities $11,120 $11,735 28.1%
- ---------------------------------------------------------------------------------
<Caption>
2002
---------------------------------------
AMORITZED PERCENT OF
FIXED MATURITIES BY CREDIT QUALITY COST FAIR VALUE TOTAL FAIR VALUE
- ---------------------------------------- ---------------------------------------
United States Government/Government
agencies $ 3,213 $ 3,341 9.3%
AAA 5,077 5,399 15.1%
AA 3,334 3,507 9.8%
A 11,019 11,687 32.5%
BBB 8,662 9,081 25.3%
BB & below 1,928 1,862 5.2%
Short-term 993 994 2.8%
------- ------- ------
TOTAL FIXED MATURITIES $34,226 $35,871 100.0%
======= ======= ======
Total general account fixed maturities $23,675 $24,786 69.1%
Total guaranteed separate account fixed
maturities $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).
The following table presents the Below Investment Grade ("BIG") fixed maturities
by type, including guaranteed separate accounts, as of December 31, 2003 and
2002.
<Table>
<Caption>
2003
---------------------------------------
AMORITZED PERCENT OF
BIG FIXED MATURITIES BY TYPE COST FAIR VALUE TOTAL FAIR VALUE
- ---------------------------------------------------------------------------------
ABS $ 231 $ 210 10.3%
CMBS 102 103 5.0%
Corporate
Basic industry 183 192 9.4%
Capital goods 103 106 5.3%
Consumer cyclical 241 261 12.8%
Consumer non-cyclical 256 268 13.1%
Energy 78 85 4.2%
Financial services 12 12 0.6%
Technology and communications 274 326 16.0%
Transportation 21 23 1.1%
Utilities 268 278 13.6%
Foreign government 145 164 8.0%
Other 11 12 0.6%
------- ------- ------
TOTAL FIXED MATURITIES $ 1,925 $ 2,040 100.0%
------- ------- ------
Total general account fixed maturities $ 1,179 $ 1,258 61.7%
------- ------- ------
Total guaranteed separate account fixed
maturities $ 746 $ 782 38.3%
- ---------------------------------------------------------------------------------
<Caption>
2002
---------------------------------------
AMORITZED PERCENT OF
BIG FIXED MATURITIES BY TYPE COST FAIR VALUE TOTAL FAIR VALUE
- ---------------------------------------- ---------------------------------------
ABS $ 149 $ 132 7.1%
CMBS 102 108 5.8%
Corporate
Basic industry 197 198 10.6%
Capital goods 131 131 7.0%
Consumer cyclical 213 218 11.7%
Consumer non-cyclical 181 173 9.3%
Energy 80 81 4.4%
Financial services 25 18 1.0%
Technology and communications 383 345 18.5%
Transportation 19 18 1.0%
Utilities 287 261 14.0%
Foreign government 145 162 8.7%
Other 16 17 0.9%
------- ------- ------
TOTAL FIXED MATURITIES $ 1,928 $ 1,862 100.0%
------- ------- ------
Total general account fixed maturities $ 1,239 $ 1,178 63.3%
------- ------- ------
Total guaranteed separate account fixed
maturities $ 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.
<Page>
HARTFORD LIFE INSURANCE COMPANY 45
- --------------------------------------------------------------------------------
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
---------------------------------
AMORITZED UNREALIZED
UNREALIZED LOSS AGING OF TOTAL SECURITIES COST FAIR VALUE LOSS
- ----------------------------------------------------------------------------
Three months or less $ 2,636 $ 2,615 $ (21)
Greater than three months to six months 1,795 1,739 (56)
Greater than six months to nine months 230 216 (14)
Greater than nine months to twelve months 133 126 (7)
Greater than twelve months 1,450 1,331 (119)
------- ------- -------
TOTAL $ 6,244 $ 6,027 $ (217)
======= ======= =======
Total general accounts $ 4,221 $ 4,076 $ (145)
------- ------- -------
Total guaranteed separate accounts $ 2,023 $ 1,951 $ (72)
- ----------------------------------------------------------------------------
<Caption>
2002
---------------------------------
AMORITZED UNREALIZED
UNREALIZED LOSS AGING OF TOTAL SECURITIES COST FAIR VALUE LOSS
- ----------------------------------------- ---------------------------------
Three months or less $ 1,382 $ 1,316 $ (66)
Greater than three months to six months 1,211 1,158 (53)
Greater than six months to nine months 519 465 (54)
Greater than nine months to twelve months 1,247 1,181 (66)
Greater than twelve months 1,873 1,693 (180)
------- ------- -------
TOTAL $ 6,232 $ 5,813 $ (419)
======= ======= =======
Total general accounts $ 4,113 $ 3,820 $ (293)
------- ------- -------
Total guaranteed separate accounts $ 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.
<Page>
46 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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.
TOTAL SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS BY TYPE
<Table>
<Caption>
2003 2002
---------------------------------------------- ----------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMORITZED FAIR UNREALIZED UNREALIZED AMORITZED 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 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
<Page>
HARTFORD LIFE INSURANCE COMPANY 47
- --------------------------------------------------------------------------------
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.
UNREALIZED LOSS AGING OF BIG AND EQUITY SECURITIES
<Table>
<Caption>
2003 2002
----------------------------------------- -----------------------------------------
AMORITZED UNREALIZED AMORITZED UNREALIZED
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>
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.)
<Page>
48 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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.
<Table>
<Caption>
2003
-------------------------------------------
PERCENT OF
TOTAL
BIG AND EQUITY SECURITIES WITH UNREALIZED AMORITZED FAIR UNREALIZED UNREALIZED
LOSS GREATER THAN SIX MONTHS BY TYPE COST VALUE LOSS LOSS
- --------------------------------------------------------------------------------------
ABS and CMBS
Aircraft lease receivables $ 45 $ 28 $ (17) 30.3%
CDOs 37 28 (9) 16.1%
Credit card receivables 40 30 (10) 17.9%
Other ABS and CMBS 45 38 (7) 12.5%
Corporate
Financial services 39 35 (4) 7.1%
Technology and communications 4 3 (1) 1.8%
Transportation 9 8 (1) 1.8%
Utilities 66 61 (5) 8.9%
Other 44 42 (2) 3.6%
Diversified equity mutual funds 3 3 -- --
Other securities 1 1 -- --
------- ------- ------- ------
TOTAL $ 333 $ 277 $ (56) 100.0%
------- ------- ------- ------
Total general accounts $ 234 $ 193 $ (41) 73.2%
Total guaranteed separate accounts $ 99 $ 84 $ (15) 26.8%
- --------------------------------------------------------------------------------------
<Caption>
2002
-------------------------------------------
PERCENT OF
TOTAL
BIG AND EQUITY SECURITIES WITH UNREALIZED AMORITZED FAIR UNREALIZED UNREALIZED
LOSS GREATER THAN SIX MONTHS BY TYPE COST VALUE LOSS LOSS
- ----------------------------------------- -------------------------------------------
ABS and CMBS
Aircraft lease receivables $ -- $ -- $ -- --
CDOs 2 1 (1) 0.9%
Credit card receivables 26 17 (9) 7.8%
Other ABS and CMBS 37 32 (5) 4.3%
Corporate
Financial services 9 8 (1) 0.9%
Technology and communications 211 177 (34) 29.3%
Transportation 13 10 (3) 2.6%
Utilities 123 107 (16) 13.8%
Other 226 210 (16) 13.8%
Diversified equity mutual funds 64 48 (16) 13.8%
Other securities 102 87 (15) 12.8%
------- ------- ------- ------
TOTAL $ 813 $ 697 $ (116) 100.0%
------- ------- ------- ------
Total general accounts $ 552 $ 464 $ (88) 75.9%
Total guaranteed separate accounts $ 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 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
<Page>
HARTFORD LIFE INSURANCE COMPANY 49
- --------------------------------------------------------------------------------
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.
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.
<Page>
50 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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.
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
<Page>
HARTFORD LIFE INSURANCE COMPANY 51
- --------------------------------------------------------------------------------
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 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
<Page>
52 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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 Retail Products Group and Institutional Solutions Group 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.
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 Retail Products Group 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 concerning policyholder behavior. Because of the dynamic and
complex nature of these cash flows, stochastic techniques
<Page>
HARTFORD LIFE INSURANCE COMPANY 53
- --------------------------------------------------------------------------------
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 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
<Page>
54 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
ratings from the major independent rating organizations as of February 20,
2004:
<Table>
<Caption>
STANDARD &
A.M. BEST FITCH MOODY'S POOR'S
- -----------------------------------------------------------------------
INSURANCE RATINGS
Hartford Life
Insurance Company A+ AA Aa3 AA-
- -----------------------------------------------------------------------
Hartford Life and
Annuity A+ AA Aa3 AA-
- -----------------------------------------------------------------------
OTHER RATINGS
Hartford Life
Insurance
Company:
Short Term Rating 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.
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
<Page>
HARTFORD LIFE INSURANCE COMPANY 55
- --------------------------------------------------------------------------------
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.
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>
<Page>
56 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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
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.
<Page>
HARTFORD LIFE INSURANCE COMPANY 57
- --------------------------------------------------------------------------------
LEGAL OPINION
The validity of the interests in the Contracts described in this Prospectus will
be passed upon for Hartford by Christine Hayer Repasy, Senior Vice President,
General Counsel and Corporate Secretary of Hartford.
EXPERTS
- --------------------------------------------------------------------------------
The financial statements 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 D and incorporated by reference in this prospectus
have been audited by Deloitte & Touche LLP, independent registered public
accounting firm, 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.
With respect to the unaudited interim financial information for the periods
ended March 31, 2004 and 2003 which is included as Appendix C and incorporated
by reference herein, Deloitte & Touche LLP, independent registered public
accounting firm, have applied limited procedures in accordance with the
standards of the Public Company Accounting Oversight Board (United States)for a
review of such information. However, as stated in their report included in the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004,
and included and incorporated by reference herein, they did not audit and they
do not express an opinion on that interim financial information. Accordingly,
the degree of reliance on their report on such information should be restricted
in light of the limited nature of the review procedures applied. Deloitte &
Touche LLP are not subject to the liability provisions of Section 11 of the
Securities Act of 1933 for their reports on the unaudited interim financial
information because those reports are not "reports" or a "part" of the
registration statement prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
<Page>
58 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
APPENDIX A -- MODIFIED GUARANTEED ANNUITY FOR QUALIFIED PLANS
The CRC-Registered Trademark- (Compound Rate Contract) Select Annuity for
Qualified Plans is a group deferred annuity Contract under which one or more
purchase payments may be made. Plans eligible to purchase the Contract are
pension and profit-sharing plans qualified under Section401(a) of the Internal
Revenue Code (the "Code"), Keogh Plans and eligible state deferred compensation
plans under Section457 of the Code ("Qualified Plans").
To apply for a Group Annuity Contract, the trustee or other applicant need only
complete an application for the Group Annuity Contract and make its initial
purchase payment. A Group Annuity Contract will then be issued to the applicant
and subsequent Purchase Payments may be made, subject to the same $2,000 minimum
applicable to qualified purchasers of Certificates. While no Certificates are
issued, each purchase payment, and the Account established thereby, are
confirmed to the Contract Owner. The initial and subsequent purchase payments
operate to establish Accounts under the Group Annuity Contract in the same
manner as non-qualified purchases. Each Account will have its own Initial and
Subsequent Guarantee Periods and Guaranteed Rates. Surrenders under the Group
Annuity Contract may be made, at the election of the Contract Owner, from one or
more of the Accounts established under the Contract. Account surrenders are
subject to the same limitations, adjustments and charges as surrenders made
under a certificate (see "Surrenders"). Net Surrender Values may be surrendered
or applied to purchase annuities for the Contract Owners' Qualified Plan
Participants.
Because there are no individual participant accounts, the Qualified Group
Annuity Contract issued in connection with a Qualified Plan does not provide for
death benefits. Annuities purchased for Qualified Plan Participants may provide
for a payment upon the death of the Annuitant, depending on the option chosen
(see "Annuity Options"). Additionally, since there are no Annuitants prior to
the actual purchase of an Annuity by the Contract Owner, the provisions
regarding the Annuity Commencement Date are not applicable.
If you are purchasing the Contract for use in an IRA or other qualified
retirement plan, you should consider other features of the Contract besides tax
deferral, since any investment vehicle used within an IRA or other qualified
plan receives tax deferred treatment under the Code.
<Page>
HARTFORD LIFE INSURANCE COMPANY 59
- --------------------------------------------------------------------------------
APPENDIX B -- MARKET VALUE ADJUSTMENT
The formula that will be used to determine the Market Value Adjustment is: [(1 +
i)/(1 + j)](n/12), where
<Table>
i = The Guarantee Rate in effect for the Current Guarantee
Period (expressed as a decimal, e.g., 1% = .01).
j = The Current Rate (expressed as a decimal, e.g., 1% = .01) in
effect for durations equal to the number of years remaining
in the current Guarantee Period (years are rounded to the
nearest whole number of years).
n = The number of complete months from the surrender date to the
end of the current Guarantee Period.
</Table>
EXAMPLE OF MARKET VALUE ADJUSTMENT (MVA)
<Table>
Beginning Account Value: $50,000
Guarantee Period: 5 years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of contract year 3
Last 12 months interest: $2,980
</Table>
EXAMPLE 1 (FEATURING A CURRENT RATE THAT IS HIGHER THAN THE GUARANTEE RATE):
<Table>
Gross surrender value at middle of Contract Year = $50,000 (1.055) to the power of 2.5 = $57,161.18
3:
Net surrender value at middle of Contract Year 3: = ($57,161.18 - $2980 - (.05)($57,161.18 -- $2980))
X MVA + $2980
= $51,472.12 X MVA + $2980
</Table>
<Table>
Market Value Adjustment Calculation:
i = .055
j = .061
n = 30
MVA = [(1.055)/(1.061)] to the power of 30/12
= .985922299
Net Surrender Value at middle of Contract Year 3: = $51,472.12 X MVA + $2980
= $51,472.12 X .985922299 + $2980
= $53,727.51
</Table>
EXAMPLE 2: (FEATURING A CURRENT RATE THAT IS LOWER THAN THE GUARANTEE RATE):
<Table>
Gross surrender value at middle of Contract Year = $50,000 (1.055) to the power of 2.5 = $57,161.18
3:
Net surrender value at middle of Contract Year 3: = ($57,161.18 - $2980 - (.05)($57,161.18 - $2980))
X MVA + $2980
= $51,472.12 X MVA + $2980
</Table>
<Table>
Market Value Adjustment Calculation:
i = .055
j = .050
n = 30
MVA = [(1.055)/(1.050)] to the power of 30/12
= 1.011947313
Net Surrender Value at middle of Contract Year 3: = $51,472.12 X MVA + $2980
= $51,472.12 X 1.011947313 + $2980
= $55,067.07
</Table>
Note: These examples do not include any applicable taxes
<Page>
60 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
APPENDIX C -- UNAUDITED INTERIM FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholder
Hartford Life Insurance Company
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of
Hartford Life Insurance Company and subsidiaries (the "Company") as of
March 31, 2004, and the related condensed consolidated statements of income,
changes in stockholder's equity, and cash flows for the first quarter ended
March 31, 2004 and 2003. These interim financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company as of December 31, 2003, and the related consolidated statements of
income, changes in stockholder's equity, and cash flows for the year then ended
(not presented herein); and in our report dated February 25, 2004 except for
Note 14, as to which the date is May 27, 2004, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2003 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
Deloitte & Touche, LLP
Hartford, Connecticut
May 10, 2004
<Page>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
FIRST QUARTER
ENDED
MARCH 31,
--------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------
(In millions)
(Unaudited)
REVENUES
Fee income $ 618 $ 494
Earned premiums and other 103 131
Net investment income 609 431
Net realized capital gains (losses) 64 (38)
--------------------------------------------------------------------
TOTAL REVENUES 1,394 1,018
--------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims, and claim adjustment expenses 744 586
Insurance expenses and other 164 149
Amortization of deferred policy acquisition
costs and present value of future profits 199 138
Dividends to policyholders 14 15
--------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,121 888
--------------------------------------------------------------------
Income before income tax expense and cumulative
effect of accounting change 273 130
Income tax expense 74 30
Income before cumulative effect of accounting
change 199 100
Cumulative effect of accounting change, net of
tax (18) --
--------------------------------------------------------------------
NET INCOME $ 181 $ 100
--------------------------------------------------------------------
</Table>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<Page>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
March 31, December 31,
2004 2003
---------------------------------------------------------------------------------
(In millions, except for
share data)
(Unaudited)
ASSETS
Investments
Fixed maturities, available for sale, at fair
value (amortized cost of $39,007 and $28,511) $ 41,770 $ 30,085
Equity securities, available for sale, at fair
value (cost of $119 and $78) 123 85
Equity securities, held for trading, at fair
value 1 --
Policy loans, at outstanding balance 2,612 2,470
Other investments 847 639
---------------------------------------------------------------------------------
TOTAL INVESTMENTS 45,353 33,279
---------------------------------------------------------------------------------
Cash 54 96
Premiums receivable and agents' balances 20 17
Reinsurance recoverables 1,342 1,297
Deferred policy acquisition costs and present
value of future profits 5,919 6,088
Deferred income taxes (873) (486)
Goodwill 186 186
Other assets 1,299 1,238
Separate account assets 127,050 130,225
---------------------------------------------------------------------------------
TOTAL ASSETS $180,350 $171,940
---------------------------------------------------------------------------------
LIABILITIES
Reserve for future policy benefits $ 6,721 $ 6,518
Other policyholder funds 36,141 25,263
Other liabilities 3,267 3,330
Separate account liabilities 127,050 130,225
---------------------------------------------------------------------------------
TOTAL LIABILITIES 173,179 165,336
---------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY
Common Stock -- 1,000 shares authorized, issued
and outstanding; par value $5,690 6 6
Capital surplus 2,240 2,240
Accumulated other comprehensive income
Net unrealized capital gains on securities,
net of tax 1,397 711
Foreign currency translation adjustments (1) (1)
---------------------------------------------------------------------------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME 1,396 710
---------------------------------------------------------------------------------
Retained earnings 3,529 3,648
---------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 7,171 6,604
---------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $180,350 $171,940
---------------------------------------------------------------------------------
</Table>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<Page>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<Table>
<Caption>
Accumulated Other
Comprehensive Income
--------------------------------------
Net Net Gain
Unrealized (Loss) on
Capital Gains Cash Flow Foreign
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) (Unaudited)
FIRST QUARTER ENDED MARCH 31, 2004
Balance, December 31, 2003 $6 $2,240 $ 728 $(17) $(1) $3,648 $6,604
Comprehensive income
Net income 181 181
Other comprehensive income, net of tax
(1)
Cumulative effect of accounting change 292 292
Net change in unrealized capital gains
on securities (2) 355 355
Net gain on cash flow hedging
instruments 39 39
Total other comprehensive income 686
Total comprehensive income 867
Dividends declared (300) (300)
----------------------------------------------------------------------------
BALANCE, MARCH 31, 2004 $6 $2,240 $1,375 $ 22 $(1) $3,529 $7,171
----------------------------------------------------------------------------
FIRST QUARTER ENDED MARCH 31, 2003
Balance, December 31, 2002 $6 $2,041 $ 463 $111 $(1) $3,197 $5,817
Comprehensive income
Net income 100 100
Other comprehensive income, net of tax
(1)
Net change in unrealized capital gains
on securities (2) 100 100
Net loss on cash flow hedging
instruments (17) (17)
Cumulative translation adjustments --
Total other comprehensive income 83
Total comprehensive income 183
----------------------------------------------------------------------------
BALANCE, MARCH 31, 2003 $6 $2,041 $ 563 $ 94 $(1) $3,297 $6,000
----------------------------------------------------------------------------
</Table>
(1) Unrealized capital gains on securities is reflected net of tax and other
items of $191 and $54 for the three months ended March 31, 2004 and 2003,
respectively. Net gain (loss) on cash flow hedging instruments is net of tax
provision (benefit) of $21 and $(9) for the first quarters ended March 31,
2004 and 2003, respectively. There is no tax effect on cumulative
translation adjustments.
(2) Net of reclassification adjustment for gains (losses) realized in net income
of $34 and $(23) for the first quarters ended March 31, 2004 and 2003,
respectively.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-4
<Page>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FIRST QUARTER ENDED
MARCH 31,
-------------------
2004 2003
-------------------
(In millions)
(Unaudited)
OPERATING ACTIVITIES
Net income $ 181 $ 100
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net realized capital (gains) losses (64) 38
Cumulative effect of adoption of SOP 03-1 18 --
Amortization of deferred policy acquisition
costs and present value of future profits 199 138
Additions to deferred policy acquisition costs
and present value of future profits (381) (282)
Depreciation and amortization 25 17
Increase in premiums receivable and agents'
balances (3) (1)
Decrease in other liabilities (50) (37)
Increase in receivables (185) (34)
Decrease in payables and accruals (227) (9)
Decrease in accrued tax (5) (27)
Increase in deferred income tax 506 25
Amortization of sales inducements 6 15
Additions to deferred sales inducements (33) (31)
Increase in future policy benefits 203 109
(Increase) decrease in reinsurance recoverables 12 (61)
Decrease in other assets 216 97
-------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 418 57
-------------------
INVESTING ACTIVITIES
Purchases of fixed maturity and equity security
investments, available-for-sale (2,520) (4,463)
Sales of fixed maturity and equity security
investments, available-for-sale 1,935 2,380
Maturities of fixed maturity and equity security
investments, available-for-sale 575 810
Decrease in other assets 1 --
-------------------
NET CASH USED FOR INVESTING ACTIVITIES (9) (1,273)
-------------------
FINANCING ACTIVITIES
Dividends paid (300) --
Net (disbursements) receipts for investment and
universal life-type contracts charged against
policyholder accounts (151) 1,265
NET CASH (USED FOR) PROVIDED BY FINANCING
ACTIVITIES (451) 1,265
-------------------
Net (decrease) increase in cash (42) 49
Cash -- beginning of period 96 79
-------------------
CASH -- END OF PERIOD $ 54 $ 128
-------------------
Supplemental Disclosure of Cash Flow Information
Net cash paid (received) during the period for
Income taxes $ 10 $ (2)
</Table>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<Page>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS, UNLESS OTHERWISE STATED)
(UNAUDITED)
-----------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Hartford Life Insurance Company, together with its consolidated subsidiaries
("Hartford Life Insurance Company" or the "Company"), is a leading financial
services and insurance organization which provides investment, retirement,
estate planning and group benefits products. 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.
(a) BASIS OF PRESENTATION
The condensed 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, its subsidiaries and affiliates have been
eliminated.
The accompanying condensed consolidated financial statements and notes as of
March 31, 2004, and for the first quarters ended March 31, 2004 and 2003 are
unaudited. These financial statements reflect all adjustments (consisting only
of normal accruals) which are, in the opinion of management, necessary for the
fair presentation of the financial position, results of operations, and cash
flows for the interim periods. These financial statements and condensed notes
should be read in conjunction with the consolidated financial statements and
notes thereto included in Hartford Life Insurance Company's 2003 Form 10-K
Annual Report. The results of operations for the interim periods should not be
considered indicative of results to be expected for the full year.
(b) RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial information to
conform to the current year classifications.
(c) 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 for
future policy benefits and other policyholder funds; deferred policy acquisition
costs and present value of future profits; investments; and commitments and
contingencies.
(d) SIGNIFICANT ACCOUNTING POLICIES
For a description of accounting policies, see Note 2 of Notes to Consolidated
Financial Statements included in Hartford Life Insurance Company's 2003 Form
10-K Annual Report.
(e) INVESTMENTS
As discussed in the "Adoption of New Accounting Standards" section below, on
January 1, 2004 the Company reclassified certain separate account assets to the
general account. In addition, also in connection with the SOP, the Company has
classified certain interests it holds in its separate accounts as trading
securities. Trading securities are recorded at fair value with periodic changes
in fair value recognized in net investment income.
(f) STOCK BASED COMPENSATION
In January 2003, The Hartford began expensing all stock-based compensation
awards granted or modified after January 1, 2003 under the fair value
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock Issued to Employees". The fair value of these
awards will be recognized over the awards' vesting period, generally 3 years.
The allocated expense associated with stock-based compensation for the first
quarters ending March 31, 2004 and 2003, was not material. Prior to January 1,
2004, The Hartford used the Black-Scholes model to estimate the fair value of
The Hartford's stock-based compensation. For all awards granted or modified on
or after January 1, 2004, The Hartford used a binomial option-pricing model that
incorporates the possibility of early exercise of options into the valuation.
The binomial model also incorporates The Hartford's historical forfeiture and
exercise experience to determine the option value. For these reasons, The
Hartford believes the binomial model provides a fair value that is more
representative of actual historical experience than the value calculated in
previous years under the Black-Scholes model.
All stock-based awards granted or modified prior to January 1, 2003, 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
F-6
<Page>
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 first quarters ended March 31, 2004 and 2003 is less than that which
would have been recognized if the fair value method had been applied to all
awards since the effective date of SFAS No. 123. (For further discussion of the
stock compensation plans, see Note 2 of Notes to Consolidated Financial
Statements included in Hartford Life Insurance Company's 2003 Form 10-K Annual
Report.)
(g) ADOPTION OF NEW ACCOUNTING STANDARDS
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
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 and other
benefit reserves for
annuity contracts $(50) $ --
- -------------------------------------------------------------
Reclassifying certain
separate accounts to
general accounts 30 294
- -------------------------------------------------------------
Other 2 (2)
- -------------------------------------------------------------
Total cumulative effect of
adoption $(18) $292
- -------------------------------------------------------------
</Table>
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. For certain variable annuity contracts sold beginning
in June of 2003, the Company pays the greater of (1) the account value at death;
or (2) the maximum anniversary value; not to exceed the account value plus the
greater of (a) 25% of premium payments, or (b) 25% of the maximum anniversary
value of the contract. 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 $217 and a related reinsurance
recoverable asset of $108. As of March 31, 2004, the liability from GMDB and
other benefits sold with variable annuity products was $206 with a related
reinsurance recoverable asset of $101. 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.
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 cumulative effect on net income upon recording
liabilities for secondary guarantees was not material. Currently there is
diversity in industry practice and inconsistent guidance surrounding the
application of the SOP to universal life-type contracts. An AICPA task force has
been convened to develop guidance surrounding the methodology for determining
reserves for universal life-type contracts and the related secondary guarantees.
This may result in an adjustment to the cumulative effect of adopting the SOP
and could impact future earnings but is not expected to be material to the
Company's financial position or results of operations.
SEPARATE ACCOUNT PRESENTATION
The Company had recorded certain market value adjusted ("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,
F-7
<Page>
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 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. Since
adoption of the SOP, the components of CRC spread on a book value basis are
recorded in interest income and interest credited. Realized gains and losses on
investments and market value adjustments on contract surrenders are recognized
as incurred.
INTERESTS IN SEPARATE ACCOUNTS
As of December 31, 2003, the Company had $20 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%. In instances
where the Company's proportionate beneficial interest was between 20-50%, the
Company reclassified $9 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
maturity as available for sale. As of March 31, 2004, the Company had $1 of
interests in separate accounts recorded as trading securities and $0 recorded as
available-for-sale securities.
SALES INDUCEMENTS
The Company currently offers enhanced crediting rates or bonus payments to
contract holders 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 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. For the quarter ended March 31, 2004, amortization
of sales inducements was $6.
(h) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus
on Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("EITF 03-1"). EITF 03-1 adopts a three-step
impairment model for securities within its scope. The three-step model must be
applied on a security-by-security basis as follows:
Step 1: Determine whether an investment is impaired. An investment is impaired
if the fair value of the investment is less than its cost basis.
Step 2: Evaluate whether an impairment is other-than-temporary. For debt
securities that cannot be contractually prepaid or otherwise settled in
such a way that the investor would not recover substantially all of its
cost, an impairment is deemed other-than-temporary if the investor does
not have the ability and intent to hold the investment until a
forecasted market price recovery or it is probable that the investor
will be unable to collect all amounts due according to the contractual
terms of the debt security.
Step 3: If the impairment is other-than-temporary, recognize an impairment loss
equal to the difference between the investment's cost basis and its
fair value.
Subsequent to an other-than-temporary impairment loss, a debt security will be
accounted for in accordance with Statement of Position ("SOP") 03-3, "Accounting
for Loans and Certain Debt Securities Acquired in a Transfer". EITF 03-1 does
not replace the impairment guidance for investments accounted for under
EITF Issue 99-20, "Recognition of Interest Income and Impairments on Purchased
and Retained Beneficial Interests in Securitized Financial Assets"
("EITF 99-20"), however investors will be required to determine if a security is
other-than-temporarily impaired under EITF 03-1 if the security is determined
not to be impaired under EITF 99-20. The disclosure provisions of EITF 03-1
adopted by the Company effective December 31, 2003 and included in Note 3 of
Notes to Consolidated Financial Statements included in Hartford Life Insurance
Company's 2003 Form 10-K Annual Report will prospectively include securities
subject to EITF 99-20.
The impairment evaluation and recognition guidance in EITF 03-1 should be
applied prospectively for all relevant current and future investments, effective
in reporting periods beginning after June 15, 2004. Besides the disclosure
requirements adopted by the Company effective December 31, 2003, the final
version of EITF 03-1
F-8
<Page>
included additional disclosure requirements that are effective for fiscal years
ending after June 15, 2004. The adoption of this standard is not expected to
have a material impact on the Company's consolidated financial condition or
results of operations
In March 2004, the EITF reached a final consensus on Issue 03-16, "Accounting
for Investments in Limited Liability Companies" ("EITF 03-16"). EITF 03-16 will
require investors in limited liability corporations that have specific ownership
accounts, to follow the equity method accounting for investments that are more
than minor (e.g. greater than 3% ownership interest) as prescribed in SOP 78-9,
"Accounting for Investments in Real Estate Ventures" and EITF Topic Number D-46,
"Accounting for Limited Partnership Investments". Investors that do not have
specific ownership accounts or minor ownership interests should follow the
significant influence model prescribed in APB No. 18, "Accounting for Certain
Investments in Debt and Equity Securities", for corporate investments.
EITF 03-16 excludes securities that are required to be accounted for as debt
securities based on the guidance in paragraph 14 of SFAS 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
and EITF 99-20. EITF 03-16 is effective for quarters beginning after June 15,
2004 and should be applied as a change in accounting principle. The adoption of
this standard is not expected to have a material impact on the Company's
consolidated financial condition or results of operations.
2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards, futures and options designed to achieve one of four
Company-approved objectives: to hedge risk arising from interest rate, price or
currency exchange rate volatility; to manage liquidity; to control transaction
costs; or to enter into and replication transactions.
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, "Accounting for Derivative Instruments
and Hedging Activities".
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.
For a detailed discussion of the Company's use of derivative instruments, see
Notes 2 and 3 of Notes to Consolidated Financial Statements included in Hartford
Life Insurance Company's 2003 Form 10-K Annual Report.
Due to the adoption of the SOP, derivatives previously included in separate
accounts were reclassified into various other balance sheet classifications. On
January 1, 2004, the notional amount and net fair value of derivative
instruments reclassified totaled $2.9 billion and $(71), respectively. As of
March 31, 2004, $50 of the derivatives were reported in other investments, $(93)
in other liabilities, and $6 in fixed maturities in the condensed consolidated
balance sheets. Management's objective with regard to the reclassified
derivatives along with the notional amount and net fair value as of March 31,
2004 are as follows:
<Table>
<Caption>
Notional Fair
HEDGING STRATEGY Amount Value
--------------------
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. $1,511 $ 68
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. 413 (98)
</Table>
F-9
<Page>
<Table>
<Caption>
Notional Fair
HEDGING STRATEGY Amount Value
--------------------
FAIR VALUE HEDGES
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. 111 (3)
OTHER INVESTMENT AND RISK MANAGEMENT ACTIVITIES
Credit default and total return swaps
The Company enters into swap agreements in which the Company
assumes credit exposure or reduces credit exposure from an
individual entity, referenced index or asset pool. 234 1
Interest rate swaps
The Company enters into interest rate swaps to economically
terminate existing swaps in hedging relationships, and thereby
offset the changes in value in the original swap. In addition,
the Company uses interest rate swaps to manage interest rate
risk. 345 --
Options
The Company writes option contracts for a premium to monetize
the option embedded in certain of its fixed maturity
investments. 417 --
Foreign currency swaps
The Company enters into foreign currency swaps to hedge the
foreign currency exposures in certain of its foreign fixed
maturity investments. 13 (5)
- ---------------------------------------------------------------------------------------
TOTAL $3,044 $ (37)
- ---------------------------------------------------------------------------------------
</Table>
In addition to the derivatives transferred to the general account as a result of
the adoption of the SOP, during the first quarter of 2004, the Company entered
into a series of interest rate swap agreements with a combined notional value of
$350, to hedge a portion of the Company's floating rate guaranteed investment
contracts. These swaps have been designated as cash flow hedges, with the
objective of hedging changes in the benchmark interest rate (i.e. LIBOR), and
were structured to offset the payments associated with the guaranteed investment
contracts. As of March 31, 2004, the notional amount and net fair value of these
swaps totaled $350 and $(7), respectively.
Derivative instruments are recorded at fair value and presented in the condensed
consolidated balance sheets as follows:
<Table>
<Caption>
March 31, 2004 December 31, 2003
------------------ -------------------
Asset Liability Asset Liability
Values Values Values Values
- -----------------------------------------------------------------------------------------------------
Other investments $ 173 $ -- $ 116 $ --
Reinsurance recoverables -- 79 -- 115
Other policyholder funds and benefits payable 79 -- 115 --
Fixed maturities 15 -- 7 --
Other liabilities -- 241 -- 186
---------------------------------------
TOTAL $ 267 $ 320 $ 238 $ 301
---------------------------------------
</Table>
The increase in the asset values of derivative instruments since December 31,
2003 was primarily due to derivatives transferred to the general account
pursuant to the adoption of the SOP and market appreciation associated with
interest rate swaps due to a decrease in interest rates.
F-10
<Page>
The following table summarizes the notional amount and fair value of derivatives
by hedge designation as of March 31, 2004 and December 31, 2003. The notional
amount of derivative contracts represents the basis upon which pay or receive
amounts are calculated and are not reflective of credit risk. The fair value
amounts of derivative assets and liabilities are presented on a net basis in the
following table.
<Table>
<Caption>
March 31, 2004 December 31, 2003
---------------- -------------------
Notional Fair Notional Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------
Cash flow hedge $ 5,227 $ (66) $ 2,592 $ (49)
Fair value hedge 259 (6) 163 (6)
Other investment and risk management activities 42,747 19 33,745 (8)
-------------------------------------
TOTAL $48,233 $ (53) $36,500 $ (63)
-------------------------------------
</Table>
For the quarters ended March 31, 2004 and March 31, 2003, the Company's gross
gains and losses representing the total ineffectiveness of all cash flow, and
fair value hedges were immaterial, with the net impact reported as net realized
capital gains and losses.
For the quarters ended March 31, 2004 and 2003, the Company recognized an
after-tax net gain (loss) of $8 and $(2), respectively, (reported as net
realized capital gains and losses in the condensed 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 March 31, 2004, the after-tax deferred net gains on derivative instruments
accumulated in accumulated other comprehensive income ("AOCI") that are expected
to be reclassified to earnings during the next twelve months are $13. This
expectation is based on the anticipated interest payments on hedged investments
in fixed maturity securities that will occur over the next twelve months, at
which time the Company will recognize the deferred net gains (losses) as an
adjustment to 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 fixed maturities) is twenty-four months. For the
quarters ended March 31, 2004 and 2003, the net reclassifications from AOCI to
earnings resulting from the discontinuance of cash flow hedges were immaterial.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", and accordingly ceased all amortization of goodwill. For the
three months ended March 31, 2004 no goodwill was acquired, impaired or written
off. As of March 31, 2004 and December 31, 2003, the carrying amount of goodwill
$186.
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>
As of March 31, 2004 As of December 31, 2003
------------------------ -------------------------
Gross Accumulated Gross Accumulated
Carrying Net Carrying Net
Amortized Intangible Assets Amount Amortization Amount Amortization
- -----------------------------------------------------------------------------------------------------------------
Present value of future profits $ 608 $ 123 $ 605 $ 115
---------------------------------------------------
TOTAL $ 608 $ 123 $ 605 $ 115
---------------------------------------------------
</Table>
Net amortization expense for the three months ended March 31, 2004 and 2003 was
$8 and $5, respectively.
Assuming no future acquisitions, dispositions or impairments of intangible
assets, estimated future net amortization expense for the succeeding five years
is as follows:
<Table>
<Caption>
For the year ending December 31,
- -------------------------------------------------------------------
2004 $ 34
2005 $ 30
2006 $ 29
2007 $ 26
2008 $ 23
- -------------------------------------------------------------------
</Table>
F-11
<Page>
4. COMMITMENTS AND CONTINGENCIES
(a) LITIGATION
Hartford Life Insurance Company is or may become involved in various 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 the provisions made for potential losses and costs of defense, will not be
material to the consolidated financial position 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 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 settlement
provided that the Company and ICMG would 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 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 1, 2004, the Federal Circuit Court of Appeals decided the
patent appeal adversely to the Company, and on March 22, 2004, the Company and
ICMG each paid Bancorp an additional $5, constituting full and final
satisfaction of their obligations under the settlement. Because the charge taken
in the third quarter of 2003 reflected the maximum amount payable under the
settlement, the amount paid in the first quarter of 2004 had no effect on the
Company's results of operations.
REGULATORY DEVELOPMENTS
There continues to be significant 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
has received requests for information and subpoenas from the Securities and
Exchange Commission ("SEC"), a subpoena from the New York Attorney General's
Office, and requests for information from the Connecticut Securities and
Investments Division of the Department of Banking, in each case requesting
documentation and other information regarding various mutual fund regulatory
issues. Representatives from the SEC's Office of Compliance Inspections and
Examinations continue to request documents and information in connection with
their ongoing compliance examination. In addition, the SEC's Division of
Enforcement has commenced an investigation of the Company's variable annuity and
mutual fund operations. The Company continues to cooperate fully with the SEC
and other regulatory agencies.
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 have announced settlements of enforcement actions with
various regulatory agencies, primarily the SEC and the New York Attorney
General's Office. While no such action has been initiated against the Company,
it is possible that the SEC or one or more other regulatory agencies may pursue
action against the Company in the future. If such an action is brought, it could
have a material effect on the Company.
For further information on other contingencies, see Note 12 of Notes to
Consolidated Financial Statements included in Hartford Life Insurance Company's
Form 10-K Annual Report.
(b) 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.
Although there has been no agreement reached between the Company and the IRS at
this time, the amount of tax related to the separate account dividends received
deduction ("DRD") that is under the discussion for all open years could result
in a benefit to the Company's future results of operations. There can be no
assurances that such an agreement will be reached. (For further discussion of
the Company's separate account DRD, see Note 12 of Notes to Consolidated
Financial Statements included in the Company's 2003 Form 10-K Annual Report)
5. TRANSACTIONS WITH AFFILIATES
For a description of transactions with affiliates, see Note 13 of Notes to
Consolidated Financial Statements included in Hartford Life Insurance Company's
Form 10-K Annual Report.
6. SEGMENT INFORMATION
With the recent change in Hartford Life Insurance Company's internal
organization, the Company has
F-12
<Page>
changed its reportable operating segments from Investment Products, Individual
Life and Corporate Owned Life Insurance ("COLI") to Retail Products Group
("Retail"), Institutional Solutions Group ("Institutional") and Individual Life.
Retail offers individual variable and fixed annuities, retirement plan products
and services to corporations under Section 401(k) plans and other investment
products. Institutional primarily offers retirement plan products and services
to municipalities under Section 457 plans, other institutional investment
products and private placement life insurance (formerly COLI). Individual Life
sells a variety of life insurance products, including variable universal life,
universal life, interest sensitive whole life and term life insurance. Hartford
Life Insurance Company also includes in an Other category net realized capital
gains and losses other than periodic net coupon settlements on non-qualifying
derivatives and net realized capital gains and losses related to guaranteed
minimum withdrawal benefits; corporate items not directly allocable to any of
its reportable operating segments, intersegment eliminations 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 the parent HLA.
Periodic net coupon settlements on non-qualifying derivatives and net realized
capital gains and losses related to guaranteed minimum withdrawal benefits are
reflected in each applicable segment in net realized capital gains and losses.
The accounting policies of the reportable operating segments are the same as
those described in "Basis of Presentation and Accounting Policies" in Note 2 in
the Company's 2003 Form 10-K Annual Report. 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.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. Segment information for the previous period has been
restated to reflect the change in composition of reportable operating segments.
<Table>
<Caption>
Retail Institutional
First Quarter Ended Products Solutions Individual
March 31, 2004 Group Group Life Other Total
- -----------------------------------------------------------------------------------------------------------------
Total revenues $ 628 $ 434 $ 230 $ 102 $1,394
Net income 76 18 32 55 181
- -----------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
Retail Institutional
First Quarter Ended Products Solutions Individual
March 31, 2003 Group Group Life Other Total
- -----------------------------------------------------------------------------------------------------------------
Total revenues $ 392 $ 416 $ 220 $ (10) $1,018
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) 61 28 29 (18) 100
- -----------------------------------------------------------------------------------------------------------------
</Table>
F-13
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-----------------------------------------------------------------------
To the Board of Directors and Stockholder of
Hartford Life Insurance Company
Hartford, Connecticut
We have audited the accompanying consolidated balance sheets of Hartford Life
Insurance Company and 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. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 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 except for Note 14,
as to which the date is May 27, 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").
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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
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<Page>
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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<Page>
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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<Page>
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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<Page>
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
<Page>
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.
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
F-15
<Page>
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, the Company believed variable annuity
separate account assets could fall by at least 40% before portions of its DAC
asset would be unrecoverable.
F-16
<Page>
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.
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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
With the recent change in Hartford Life Insurance Company's internal
organization, the Company has changed its reportable operating segments from
Investment Products, Individual Life and Corporate Owned Life Insurance ("COLI")
to Retail Products Group ("Retail"), Institutional Solutions Group
("Institutional") and Individual Life. Retail offers individual variable and
fixed annuities, retirement plan products and services to corporations under
Section 401(k) plans and other investment products. Institutional primarily
offers retirement plan products and services to municipalities under
Section 457 plans, other institutional investment products and private placement
life insurance (formerly COLI). Individual Life sells a variety of life
insurance products, including variable universal life, universal life, interest
sensitive whole life and term life insurance. Hartford Life Insurance Company
also includes in an Other category net realized capital gains and losses other
than periodic net coupon settlements on
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non-qualifying derivatives and net realized capital gains and losses related to
guaranteed minimum withdrawal benefits; corporate items not directly allocable
to any of its reportable operating segments, intersegment eliminations 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
the parent HLA. Periodic net coupon settlements on non-qualifying derivatives
and net realized capital gains and losses related to guaranteed minimum
withdrawal benefits are reflected in each applicable segment in net realized
capital gains and losses.
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.
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<Page>
<Table>
<Caption>
For the years ended December 31,
----------------------------------
2003 2002 2001
----------------------------------
TOTAL REVENUES
Retail Products Group $ 1,774 $ 1,556 $ 1,523
Institutional Solutions Group 2,082 1,730 2,141
Individual Life 893 858 774
Other 119 (195) 50
----------------------------------
TOTAL REVENUES $ 4,868 $ 3,949 $ 4,488
----------------------------------
NET INVESTMENT INCOME
Retail Products Group $ 493 $ 367 $ 279
Institutional Solutions Group 976 958 938
Individual Life 222 224 205
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
Retail Products Group $ 462 $ 377 $ 406
Institutional Solutions Group 33 8 7
Individual Life 165 146 153
Other -- -- --
----------------------------------
TOTAL AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS
AND PRESENT VALUE OF FUTURE PROFITS $ 660 $ 531 $ 566
----------------------------------
INCOME TAX EXPENSE (BENEFIT)
Retail Products Group $ 30 $ 55 $ 86
Institutional Solutions Group 57 46 42
Individual Life 64 59 54
Other 17 (158) (138)
----------------------------------
TOTAL INCOME TAX EXPENSE $ 168 $ 2 $ 44
----------------------------------
NET INCOME (LOSS)
Retail Products Group $ 341 $ 280 $ 319
Institutional Solutions Group 119 94 92
Individual Life 134 116 106
Other 32 (64) 129
----------------------------------
TOTAL NET INCOME $ 626 $ 426 $ 646
----------------------------------
ASSETS
Retail Products Group 105,903 81,672 92,061
Institutional Solutions Group 50,968 47,988 41,271
Individual Life 10,162 8,840 9,146
Other 4,907 3,601 2,955
----------------------------------
TOTAL ASSETS $171,940 $142,101 $145,433
----------------------------------
REVENUES BY PRODUCT
Retail Products Group
Individual Annuities $ 1,656 $ 1,451 $ 1,431
Other 118 105 92
----------------------------------
TOTAL RETAIL PRODUCTS GROUP 1,774 1,556 1,523
----------------------------------
Institutional Solutions Group 2,082 1,730 2,141
Individual Life 893 858 774
----------------------------------
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
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subsidiaries of Fortis, Inc. The acquisition was accounted for as a purchase
transaction and, as such, the revenues and expenses generated by this business
from April 2, 2001 forward are included in the Company's Consolidated Statements
of Income.
16. QUARTERLY RESULTS FOR 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.
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