<Page>
As filed with the Securities and Exchange Commission on April 4, 2005.
File No. 333-46376
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 5 TO
FORM S-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
HARTFORD LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
CONNECTICUT
(State or other jurisdiction of incorporation or organization)
6355
(Primary Standard Industrial Classification Code Number)
06-094148
(I.R.S. Employer Identification Number)
P.O. BOX 2999
HARTFORD, CONNECTICUT 06104-2999
(Address, Including Zip Code, and Telephone Number,
Including Area Code of Registrant's Principal Executive Office)
MARIANNE O'DOHERTY
HARTFORD LIFE INSURANCE COMPANY
P.O. BOX 2999
HARTFORD, CONNECTICUT 06104-2999
(860) 843-6733
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11 (a)(1)
of this form, check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
<Page>
PART I
<Page>
<Table>
CRC-REGISTERED TRADEMARK- COMPOUND RATE CONTRACT
MODIFIED GUARANTEED ANNUITY CONTRACT
HARTFORD LIFE INSURANCE COMPANY
P.O. BOX 5085
HARTFORD, CONNECTICUT 06102-5085
TELEPHONE: 1-800-862-6668 [The Hartford LOGO]
</Table>
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This Prospectus describes participating interests in a group deferred annuity
Contract and individual deferred annuity Contracts. Both are designed and
offered to provide retirement programs for you if you are an eligible
individual. With respect to the group Contract, eligible individuals include
persons who have established accounts with certain broker-dealers which have
entered into a distribution agreement to offer participating interests in the
Contract, and members of other eligible groups. (See "Distribution of
Contracts"). An individual deferred annuity Contract is offered in certain
states and to certain trusts. Certain Qualified Plans may also purchase the
Contract. (See Appendix A).
For a description of individual Contracts issued in certain states where this
Contract has not been approved, see Appendix B. Participation in a group
Contract will be separately accounted for by the issuance of a Certificate
evidencing your interest under the Contract. Participation in an individual
Contract is evidenced by the issuance of an individual annuity Contract. The
Certificate and individual annuity Contract are hereafter referred to as the
"Contract."
A minimum single purchase payment of at least $5,000 for Non-Qualified Contracts
($2,000 for Qualified Contracts) must accompany the application for a Contract.
Hartford Life Insurance Company ("Hartford") reserves the right to limit the
maximum single purchase payment amount. No additional payment is permitted on a
Contract although eligible individuals may purchase more than one Contract. (See
"Application and Purchase Payment").
Purchase payments become part of the general assets of Hartford. Hartford
intends generally to invest proceeds from the Contracts in investment-grade
securities. (See "Investments by Hartford").
THIS PROSPECTUS IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THE
SECURITIES AND EXCHANGE COMMISSION DOESN'T APPROVE OR DISAPPROVE THESE
SECURITIES OR DETERMINE IF THE INFORMATION IS TRUTHFUL OR COMPLETE. ANYONE WHO
REPRESENTS THAT THE SECURITIES AND EXCHANGE COMMISSION DOES THESE THINGS MAY BE
GUILTY OF A CRIMINAL OFFENSE.
This prospectus can also be obtained from the Securities and Exchange
Commission's website: (www.sec.gov).
Annuity contracts ARE 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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THE DATE OF THIS PROSPECTUS IS MAY 2, 2005
<Page>
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.
The Annual Report on Form 10-K for the fiscal year ended December 31, 2003,
previously filed by Hartford with the Commission under the 1934 Act is
incorporated herein by reference.
Hartford will provide without charge to each person to whom a copy of this
Prospectus has been delivered, upon the written or oral request of such person,
a copy of the document referred to above which has been incorporated by
reference in this Prospectus, other than exhibits to such document. Requests for
such copies should be directed to Hartford Life Insurance Company, P.O. Box
5085, Hartford, Connecticut 06102-5085, telephone: 1-800-862-6668.
<Page>
HARTFORD LIFE INSURANCE COMPANY 3
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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SUMMARY 5
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GLOSSARY OF SPECIAL TERMS 6
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DESCRIPTION OF CONTRACTS 7
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A. Application and Purchase Payment 7
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B. Accumulation Period 7
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1. Initial and Subsequent Guarantee Periods 7
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2. Establishment of Guarantee Rates and Current Rates 8
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3. Surrenders 8
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(a) General 8
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(b) Surrender Charge 9
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(c) Market Value Adjustment 9
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(d) Special Surrenders 9
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4. Guarantee Period Exchange Option 10
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5. Premium Taxes 10
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6. Death Benefit 10
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7. Payment Upon Partial or Full Surrender 10
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C. Annuity Period 10
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1. Electing the Annuity Commencement Date and Form of
Annuity 10
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2. Change of Annuity Commencement Date or Annuity Option 11
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3. Annuity Options 11
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4. Annuity Payment 11
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5. Death of Annuitant After Annuity Commencement Date 11
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INVESTMENTS BY HARTFORD 12
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AMENDMENT OF CONTRACTS 12
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ASSIGNMENT OF CONTRACTS 12
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DISTRIBUTION OF CONTRACTS 12
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FEDERAL TAX CONSIDERATIONS 14
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A. Introduction 14
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B. Taxation of Hartford 14
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C. Taxation of Annuities -- General Provisions Affecting
Contracts Not Held in Tax-Qualified Retirement Plans 14
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1. Non-Natural Persons as Owners 14
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2. Other Contract Owners (Natural Persons) 15
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a. Distributions Prior to the Annuity Commencement
Date 15
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b. Distributions After Annuity Commencement Date 15
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c. Aggregation of Two or More Annuity Contracts 15
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d. 10% Penalty Tax -- Applicable to Certain Surrenders
and Annuity Payments 16
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e. Special Provisions Affecting Contracts Obtained
through a Tax-Free Exchange of Other Annuity or
Life Insurance Contracts Purchased Prior to
August 14, 1982 16
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f. Required Distributions 16
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</Table>
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4 HARTFORD LIFE INSURANCE COMPANY
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<Table>
<Caption>
PAGE
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g. Addition of Riders 17
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h. Partial Exchanges 17
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D. Federal Income Tax Withholding 17
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E. General Provisions Affecting Qualified Retirement Plans 17
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F. Annuity Purchases By Nonresident Aliens and Foreign
Corporations 17
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G. Estate, Gift and Generation-Skipping Transfer Tax and
Related Tax Considerations 17
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INFORMATION REGARDING TAX-QUALIFIED RETIREMENT PLANS 18
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THE COMPANY 21
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Business of Hartford Life Insurance Company 21
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Selected Financial Data 28
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Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
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LEGAL OPINION 62
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EXPERTS 62
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APPENDIX A -- MODIFIED GUARANTEED ANNUITY FOR QUALIFIED
PLANS 63
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APPENDIX B -- SPECIAL PROVISIONS FOR INDIVIDUAL CONTRACTS
ISSUED IN THE STATES OF CALIFORNIA, MICHIGAN, MISSOURI,
NEW YORK, OREGON, SOUTH CAROLINA, TEXAS, VIRGINIA AND
WISCONSIN 64
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APPENDIX C -- MARKET VALUE ADJUSTMENT 65
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APPENDIX D -- FINANCIAL STATEMENTS F-1
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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.
<Page>
HARTFORD LIFE INSURANCE COMPANY 5
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SUMMARY
Upon application, or purchase order, you select an initial Guarantee Period from
among those then offered by Hartford. (See "Initial and Subsequent Guarantee
Periods" and "Establishment of Guarantee Rates and Current Rates"). Your
purchase payment (less surrenders and less applicable premium taxes, if any)
will earn interest at the initial Guarantee Rate which is an Annual Effective
Rate of Interest. Interest is credited daily to your account using the Compound
Interest Method. (See "Accumulation Period -- Initial and Subsequent Guarantee
Periods").
At the end of each Guarantee Period, a subsequent Guarantee Period of the same
duration will begin unless, within the 30-day period preceding the end of such
Guarantee Period, you elect a different duration from among those offered by us
at that time. In no event may subsequent Guarantee Periods extend beyond the
Annuity Commencement Date then in effect.
The Account Value as of the first day of each subsequent Guarantee Period will
earn interest at the Subsequent Guarantee Rate. Hartford's management will make
the final determination as to guarantee rates to be declared. We cannot predict,
nor can we guarantee, future guarantee rates. (See "Initial and Subsequent
Guarantee Periods" and "Establishment of Guarantee Rates and Current Rates").
Subject to certain restrictions, partial and total surrenders are permitted.
However, such surrenders may be subject to a surrender charge and/or a Market
Value Adjustment. A full or partial surrender made preceding the end of a
Guarantee Period will be subject to a Market Value Adjustment. Except as
described below, the surrender charge will be deducted from any partial or full
surrender made before the end of the seventh Contract Year. The surrender charge
will be equal to seven percent of the Gross Surrender Value in the first
Contract Year, and be reduced by one percentage point for each of the next six
Contract Years.
For a surrender made at the end of the initial guarantee period, no surrender
charge will be applied, provided such surrender occurs on or after the end of
the third contract year. For a surrender made at the end of any other guarantee
period, no surrender charge will be applied, provided such surrender occurs on
or after the end of the fifth contract year. A request for surrender at the end
of a guarantee period must be received in writing within 30 days preceding the
end of the guarantee period. A Market Value Adjustment will not be applied.
No surrender charges will be applicable to the application of your Account Value
to purchase an annuity on the Annuity Commencement Date. A Market Value
Adjustment will be applied if the Annuity Commencement Date is not at the end of
a Guarantee Period. To elect an Annuity Option you must notify us at least 30
days before the Annuity Commencement Date.
In addition, we will send you any interest that has been credited during the
prior 12 months if you so request in writing. We will not impose any surrender
charge or Market Value Adjustment on such interest payments. Any such surrender
may, however, be subject to tax. (See "Surrenders" and "Federal Tax
Considerations").
The Market Value Adjustment reflects the relationship between the Current Rate
for the duration remaining in the Guarantee Period at the time you request the
surrender and the applicable Guarantee Rate being applied to your Account Value.
Since Current Rates may reflect, in part, the investment yields available to
Hartford (see "Investments By Hartford"), the effect of the Market Value
Adjustment will be closely related to the levels of such yields. It is possible,
therefore, that should such yields increase significantly from the time you
purchased your Contract, the amount you would receive upon a full surrender of
your Contract may be less than your original purchase payment. If such yields
should decrease significantly, the amount you would receive upon a full
surrender may be more than your original purchase payment.
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 written notice of surrender or
the period permitted by state insurance law, if less. Such a deferral of payment
will be for a period greater than 30 days only under highly unusual
circumstances. Interest of at least 4 1/2% per annum will be paid on any amounts
deferred for more than 30 days if Hartford chooses to exercise this deferral
right. (See "Payment Upon Partial or Full Surrender").
On the Annuity Commencement Date specified by you, Hartford will make a lump-sum
payment or start to pay a series of payments based on the Annuity Options
selected by you. (See "Annuity Period").
The Contract provides for a Death Benefit. If the Annuitant dies before the
Annuity Commencement Date and there is no designated Contingent Annuitant
surviving, or if the Participant dies before the Annuity Commencement Date, the
Death Benefit will be payable to the Beneficiary as determined under the
Contract Control Provisions. With regard to joint Participants, at the first
death of a joint Participant preceding the Annuity Commencement Date, the
Beneficiary will be the surviving Participant notwithstanding that the
designated Beneficiary may be different. The Death Benefit is calculated as of
the date we receive written notification of Due Proof of Death at the offices of
Hartford.
The Death Benefit will equal the Account Value. If the named Beneficiary is the
spouse of the Participant and the Annuitant is living, the spouse may elect, in
lieu of receiving the Death Benefit, to become the Participant and continue the
Contract. (See "Death Benefit").
A deduction will be made for premium taxes for Contracts sold in certain states.
(See "Premium Taxes").
Certain special provisions apply only with respect to Contracts issued in the
states of California, Michigan, Missouri, New York, Oregon, South Carolina,
Texas, Virginia and Wisconsin. These are set forth in detail in Appendix B.
For Contracts issued as individual retirement annuities, Hartford will refund
the purchase payment to the Participant if the Contract is returned to Hartford
within seven days after Contract delivery.
<Page>
6 HARTFORD LIFE INSURANCE COMPANY
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GLOSSARY OF SPECIAL TERMS
In this Prospectus, "we," "us," and "our" refer to Hartford Life Insurance
Company. With respect to a group deferred annuity Contract, "you," "yours," and
"Participant" refer to a person/ persons who has/have been issued a Certificate.
With respect to an individual annuity Contract, "you," "yours," and
"Participant" refer to a person/persons who has/have been issued a Contract.
In addition, as used in this Prospectus, the following terms have the indicated
meanings:
ACCOUNT VALUE: As of any date on which the New York Stock Exchange is open for
business, the Account Value is the sum of the purchase payment and all interest
earned to date less the sum of the Gross Surrender Value of any surrenders made
to that date.
ANNUAL EFFECTIVE RATE OF INTEREST: At the beginning of a year, the rate of
return an investment will earn during that year, where interest is not paid
until the end of the year (i.e., no surrenders or interest surrenders are made
during the year). If interest surrenders are taken more frequently than
annually, the total interest for a given year will be less than the Annual
Effective Rate of Interest times the Account Value at the beginning of the year.
ANNUITANT: The person upon whose life Annuity payments are based.
ANNUITY COMMENCEMENT DATE: The date designated in the Contract or otherwise by
the Participant on which annuity payments are to start.
BENEFICIARY: The person entitled to receive benefits per the terms of the
Contract in case of the death of the Annuitant or the Participant or Joint
Participant, as applicable.
COMPOUND INTEREST METHOD: The process of interest being reinvested to earn
additional interest on a daily basis. This method results in an exponential
calculation of daily interest.
CONTRACT: For a group annuity Contract, "Contract" means the Certificate
evidencing a participating interest in the group annuity Contract as set forth
in this Prospectus. Any reference in this Prospectus to "Contract" includes the
underlying group annuity Contract. For an individual annuity Contract,
"Contract" means that individual annuity contract.
CONTRACT DATE: The effective date of Participant's participation under the group
annuity Contract, as designated in the Contract, or the date of issue of an
individual annuity Contract.
CONTRACT YEAR: A continuous 12 month period commencing on the Contract Date and
each anniversary thereof.
CONTINGENT ANNUITANT: The person so designated by the Participant, who upon the
Annuitant's death, prior to the Annuity Commencement Date, becomes the
Annuitant.
CURRENT RATE: The applicable interest rate contained in a schedule of rates
established by us from time to time for various durations.
DUE PROOF OF DEATH: A certified copy of a death certificate, an order of a court
of competent jurisdiction, a statement from a physician who attended the
deceased or any other proof acceptable to Hartford.
GROSS SURRENDER VALUE: As of any date, that portion of the Account Value
specified by you for a full or a partial surrender.
GUARANTEE PERIOD: The period for which either an initial Guarantee Rate or
Subsequent Guarantee Rate is credited.
HARTFORD: Hartford Life Insurance Company.
GUARANTEE RATE: The rate of interest credited and compounded annually during the
Guarantee Period.
IN WRITING: A written form satisfactory to us and received at our offices,
Attn.: Individual Product Services, P.O. Box 5085, Hartford, Connecticut
06102-5085.
MARKET VALUE ADJUSTMENT: A positive or negative financial adjustment made in
connection with a full or partial surrender or annuitization during a Guarantee
Period. The adjustment will reflect the relationship between the Current Rate
for a new contract of the duration remaining in the Guarantee Period(s) at
surrender or upon annuitization during a Guarantee Period and the interest rate
for the Guarantee Period then applicable under the Contract.
NET SURRENDER VALUE: The amount payable to you on a full or partial surrender
under the Contract after the application of any Contract charges and/or Market
Value Adjustment.
NON-QUALIFIED CONTRACT: A Contract which is not classified as, or issued in
connection with, a tax-qualified retirement plan using pre-tax dollars under the
Internal Revenue Code of 1986, as amended (the "Code").
PURCHASE PAYMENT: The payment made to Hartford pursuant to the terms of the
Contract.
QUALIFIED CONTRACT: A Contract which qualifies as, or issued in connection with,
a tax-qualified retirement plan using pre-tax dollars under the Code, such as an
employer-sponsored Section 401(k) plan or an eligible state deferred
compensation plan under Section 457.
SUBSEQUENT GUARANTEE RATE: The rate of interest established by us for the
applicable subsequent Guarantee Period.
<Page>
HARTFORD LIFE INSURANCE COMPANY 7
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DESCRIPTION OF CONTRACTS
A. APPLICATION AND PURCHASE PAYMENT
To apply for a Contract, you must complete an application form or an order to
purchase. The application, along with your purchase payment, must be submitted
to Hartford for its approval.
The Contracts are issued within a reasonable time after the payment of a single
purchase payment. You may not contribute additional purchase payments to a
Contract in the future. You may, however, purchase additional Contracts, if you
are an eligible individual, at then-prevailing Guarantee Rates and terms.
The minimum purchase payment for a Contract is $5,000 for Non- Qualified
Contracts ($2,000 for Qualified Contracts). Hartford retains the right to limit
the amount of the maximum purchase payment.
Your purchase payment becomes part of our general assets and is credited to an
account we establish for you. We will generally confirm your purchase payment in
writing within five business days of receipt. You start earning interest on your
account the day the purchase payment is applied.
In the event that your application or an order to purchase is not properly
completed, we will attempt to contact you in writing or by telephone. We will
return the purchase payment three weeks after its receipt by us if the
application or an order to purchase has not, by that time, been properly
completed.
B. ACCUMULATION PERIOD
1. INITIAL AND SUBSEQUENT GUARANTEE PERIODS
Upon application, you will select the duration of your Initial Guarantee Period
from among those durations offered by us. The duration you select will determine
your initial Guarantee Rate. Your purchase payment (less surrenders and less
applicable premium taxes, if any) will earn interest at the initial Guarantee
Rate which is an Annual Effective Rate of Interest. Interest is credited daily
to your account using the Compound Interest Method. With compound interest, the
total investment of principal and interest earned to date is invested at all
times. You continue to earn interest on interest already earned. However, when
surrenders are made during the year, interest on the amount of the surrenders is
lost for the remainder of the year.
Set forth below is an illustration of how interest would be credited to your
Account Value during each Guarantee Period, using a five year Guarantee Period.
For the purpose of this example, we have made the assumptions.
No full or partial surrenders or pre-authorized distributions of interest during
the entire five year period. A Market Value Adjustment, surrender charge, or
both may apply to any such surrenders or distributions (see "Surrenders"). The
hypothetical interest rates are illustrative only and are not intended to
predict future interest rates to be declared under the contract. Actual interest
rates declared for any given time may be more or less than those shown.
EXAMPLE OF COMPOUNDING AT THE INITIAL GUARANTEE RATE
<Table>
Beginning Account Value: $50,000
Guarantee Period: 5 years
Guarantee Rate: 5.50% per annum
</Table>
<Table>
<Caption>
END OF CONTRACT YEAR:
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
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Beginning Account Value $50,000.00
(1+Guarantee Rate) 1.055
$52,750.00
Account Value at end of Contract Year 1 $52,750.00
X (1+Guarantee Rate) 1.055
$55,651.25
Account Value at end of Contract Year 2 $55,651.25
X (1+Guarantee Rate) 1.055
$58,712.07
Account Value at end of Contract Year 3 $58,712.07
X (1+Guarantee Rate) 1.055
$61,941.23
Account Value at end of Contract Year 4 $61,941.23
X (1+Guarantee Rate) 1.055
$65,348.00
Account Value at end of Guarantee Period $65,348.00
Total Interest Credited in Guarantee Period $65,348.00 - 50,000.00 = $15,348.00
Account Value at end of Guarantee Period $50,000.00 + 15,348.00 = $65,348.00
$50,000 X (1.055) TO THE POWER OF 180/365 =
Account Value after 180 days from the Contract Date $51,337.77
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</Table>
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8 HARTFORD LIFE INSURANCE COMPANY
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Unless you elect to make a surrender (see "Surrenders"), a subsequent Guarantee
Period will automatically commence at the end of a Guarantee Period. Each
subsequent Guarantee Period will be of the same duration as the previous
Guarantee Period unless you elect in writing, on any day within the 30 day
period preceding the end of the current Guarantee Period, a Guarantee Period of
a different duration from among those offered by us at that time. Under a
program currently offered by Hartford, this 30-day period is extended to 90
days, however a Market Value Adjustment will apply to your current Account Value
if you do not elect the subsequent Guarantee Period during the 30-day period
preceding the end of the current Guarantee Period. Hartford may discontinue this
program at any time.
In no event may subsequent Guarantee Periods extend beyond the Annuity
Commencement Date then in effect. For example, if you are age 62 upon the
expiration of a Guarantee Period and you have chosen age 65 as an Annuity
Commencement Date, we will provide a three year Guarantee Period to equal the
number of years remaining before your Annuity Commencement Date. Your Account
Value will then earn interest at a Guarantee Rate which we have declared for
that duration. The Guarantee Rate for the Guarantee Period automatically applied
in these circumstances may be higher or lower than the Guarantee Rate for longer
durations.
The Account Value at the beginning of any subsequent Guarantee Period will be
equal to the Account Value at the end of the Guarantee Period just ending. This
Account Value (less surrenders made after the beginning of the subsequent
Guarantee Period) will earn interest compounded annually at the Subsequent
Guarantee Rate.
Within 30 days preceding the end of a Guarantee Period, we will notify you that
the current rate Guarantee Period is expiring.
2. ESTABLISHMENT OF GUARANTEE RATES AND CURRENT RATES
You will know the initial Guarantee Rate for the Guarantee Period you choose at
the time you purchase your Contract. Current Rates will be established
periodically along with the Guarantee Rates which will be applicable to
subsequent Guarantee Periods. After the end of each Contract Year, we will send
you a statement which will show (a) your Account Value as of the end of the
preceding Contract Year, (b) all transactions regarding your Contract during the
Contract Year, (c) your Account Value at the end of the current Contract Year,
and (d) the rate of interest being credited to your Contract.
Hartford has no specific formula for determining the rate of interest that it
will declare as Current Rates or Guarantee Rates in the future. The
determination of Current Rates and Guarantee Rates may reflect, in part, the
income anticipated from the types of debt instruments in which Hartford intends
to invest the proceeds attributable to the Contracts. (See "Investments by
Hartford"). In addition, Hartford's management may also consider various other
factors in determining Current Rates and Guarantee Rates for given periods,
including regulatory and tax requirements; sales commissions and administrative
expenses borne by Hartford; general economic trends; and competitive factors.
Hartford's management will make the final determination as to Current Rates and
Guarantee Rates to be declared. We cannot predict, nor can we guarantee, future
current rates or guarantee rates.
Under a program currently offered by Hartford, you may exchange your Contract
for a new CRC Contract and receive an enhanced rate. You must elect for this
program in writing within the 90-day period preceding the end of the current
Guarantee Period. A Market Value Adjustment will apply to your current Account
Value if this election is not made within the 30-day period preceding the end of
the current Guarantee Period. A new surrender charge schedule will begin under
the new Contract. This program is not available if your Contract is less than
five years old unless this will be the first renewal of an initial three-year
Guarantee Period. Hartford may discontinue or modify this program at any time.
3. SURRENDERS
(a) GENERAL
Full surrenders may be made under a Contract at any time. Partial surrenders may
only be made if:
i. the Gross Surrender Value is at least $1,000; and
ii. the remaining Account Value after the Gross Surrender Value has been
deducted is at least $5,000.
In the case of all surrenders, the Account Value will be reduced by the Gross
Surrender Value on the Surrender Date and the Net Surrender Value will be
payable to you. The Net Surrender Value equals:
(A - B) X C, where:
A = the Gross Surrender Value;
B = the surrender charge plus any unpaid premium tax; and
C = the Market Value Adjustment.
Hartford will, upon request, inform you of the amount payable upon a full or
partial surrender.
Any full, partial or special surrender may be subject to tax. (See "Federal Tax
Considerations")
THERE ARE CERTAIN RESTRICTIONS ON SECTION 403(b) TAX-SHELTERED ANNUITIES. AS OF
DECEMBER 31, 1988, ALL SECTION 403(b) ANNUITIES HAVE LIMITS ON FULL AND PARTIAL
SURRENDERS. CONTRIBUTIONS TO THE CONTRACT MADE AFTER DECEMBER 31, 1988 AND ANY
INCREASES IN CASH VALUE AFTER DECEMBER 31, 1988 MAY NOTBE DISTRIBUTED UNLESS THE
CONTRACTOWNER/EMPLOYEE HAS: (A) ATTAINED AGE 59 1/2, (B) TERMINATED EMPLOYMENT,
(C) DIED, (D) BECOME DISABLED, OR (E) EXPERIENCED FINANCIAL HARDSHIP.
<Page>
HARTFORD LIFE INSURANCE COMPANY 9
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DISTRIBUTIONS DUE TO FINANCIAL HARDSHIP OR SEPARATION FROM SERVICE MAY STILL BE
SUBJECT TO A PENALTY TAX OF 10%.
HARTFORD WILL NOT ASSUME ANY RESPONSIBILITY IN DETERMINING WHETHER A SURRENDER
IS PERMISSIBLE, WITH OR WITHOUT TAX PENALTY, IN ANY PARTICULAR SITUATION OR IN
MONITORING SURRENDER REQUESTS REGARDING PRE- OR POST-JANUARY 1, 1989 ACCOUNT
VALUES.
(b) SURRENDER CHARGE
No deduction for a sales charge is made from the purchase payment when received.
A surrender charge, however, may be deducted from the Gross Surrender Value
(before application of any Market Value Adjustment) of any partial or full
surrender made before the end of the seventh Contract Year regardless of the
length of Guarantee Periods, as follows:
<Table>
<Caption>
SURRENDER CHARGE AS
CONTRACT YEAR IN WHICH PERCENTAGE OF GROSS
SURRENDER IS MADE SURRENDER VALUE
- -------------------------------------------
1 7%
- -------------------------------------------
2 6%
- -------------------------------------------
3 5%
- -------------------------------------------
4 4%
- -------------------------------------------
5 3%
- -------------------------------------------
6 2%
- -------------------------------------------
7 1%
- -------------------------------------------
Thereafter 0%
- -------------------------------------------
</Table>
No surrender charge will be made for surrenders after Contract Year 7 or certain
surrenders effective at the end of a Guarantee Period. (See "Special
Surrenders").
The surrender charge may be reduced if you are surrendering to purchase a
variable annuity contract issued by Hartford or an affiliate of Hartford.
For example, assume you select an initial Guarantee Period of five years and
then you take no action to change the duration of the second Guarantee Period,
resulting in a second Guarantee Period also with a duration of five years. Any
surrenders made during the sixth Contract Year will be subject to a two percent
surrender charge even though you could have made a surrender of up to the
Account Value at the end of the initial five year Guarantee Period which would
not have been subject to a surrender charge.
(c) MARKET VALUE ADJUSTMENT
The amount payable on a partial or full surrender made during any Guarantee
Period may be adjusted up or down by the application of the Market Value
Adjustment. Where applicable, the Market Value Adjustment is applied to Gross
Surrender Value, net of any surrender charge.
In the case of either a partial or full surrender, the Market Value Adjustment
will reflect the relationship between the Current Rate for the duration
remaining in the Guarantee Period at the time you request the surrender, and the
Guarantee Rate then applicable to your Contract.
Generally, if your Guarantee Rate is lower than the applicable Current Rate,
then the application of the Market Value Adjustment will reduce the payment upon
surrender.
Similarly, if your Guarantee Rate is higher than the applicable Current Rate,
the application of the Market Value Adjustment will increase the payment upon
surrender.
For example, assume you purchase a Contract and select an initial Guarantee
Period of ten years and our Guarantee Rate for that duration is 8% per annum.
Assume that at the end of seven years you make a partial surrender. If the three
year Current Rate is then 6%, the amount payable upon partial surrender will
increase after the application of the Market Value Adjustment. On the other
hand, if such Current Rate is higher than your Guarantee Rate (for example,
10%), the application of the Market Value Adjustment will cause a decrease in
the amount payable to you upon this partial surrender.
Since Current Rates 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.
The formula for calculating the Market Value Adjustment is set forth in Appendix
C, which also contains an additional illustration of the application of the
Market Value Adjustment.
(d) SPECIAL SURRENDERS
No surrender charge is imposed:
(1) Upon a surrender made at the end of the initial Guarantee Period, provided
such surrender occurs on or after the end of the third Contract Year.
(2) Upon a surrender made at the end of any subsequent Guarantee Period,
provided such surrender occurs on or after the end of the fifth Contract
Year.
A request for surrender at the end of a Guarantee Period pursuant to (1) and (2)
above must be received in writing by Hartford during the 30 day period preceding
the end of that Guarantee Period. Under a program currently offered by Hartford,
this period is extended to 90 days if you exchange your Contract for a variable
or other annuity issued by Hartford or an affiliate. Hartford may discontinue or
modify this program at any time.
(3) Upon the application of your Account Value to purchase an annuity on the
Annuity Commencement Date. A Market Value Adjustment will be applied if the
Annuity Commencement Date is not at the end of a Guarantee Period. To elect
an Annuity Option, Hartford must receive your notice in writing at least 30
days before the end of that Guarantee Period.
In addition, we will send you any interest that has been credited during the
prior 12 months if you so request in writing. No surrender charge or Market
Value Adjustment will apply to such interest payments. Any such surrender may,
however, be subject to tax.
<Page>
10 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
For certain tax-qualified plans, we reserve the right to offer by rider an
extended surrender privilege, without imposing a surrender charge or Market
Value Adjustment.
4. GUARANTEE PERIOD EXCHANGE OPTION
Once each Contract Year you may elect to transfer from your current rate
Guarantee Period into a new rate Guarantee Period of a different duration. A
Market Value Adjustment will be applied to your current Account Value at the
time of transfer. There will be no surrender charge for this exchange. Surrender
charges will continue to be based on time elapsed from the original Contract
Date. While we currently do not impose a transfer charge, Hartford reserves the
right to charge a fee of up to $50 for each transfer.
5. PREMIUM TAXES
A deduction is also made for premium taxes, if applicable, imposed by a state or
other governmental entity, generally ranging up to 5.0%. Some states assess the
tax at the time purchase payments are made; others assess the tax when annuity
payments begin. Hartford will pay premium taxes at the time imposed under
applicable law. At its sole discretion, Hartford may deduct premium taxes at the
time Hartford pays such taxes to the applicable taxing authorities, upon
surrender, or when annuity payments commence.
6. DEATH BENEFIT
If the Annuitant dies before the Annuity Commencement Date and there is no
designated Contingent Annuitant surviving, or if the Participant dies before the
Annuity Commencement Date, the Death Benefit will be payable to the Beneficiary
as determined under the Contract Control Provisions. With regard to Joint
Participants, at the first death of a Joint Participant preceding the Annuity
Commencement Date, the Beneficiary will be the surviving Participant,
notwithstanding that the Designated Beneficiary may be different. The Death
Benefit is calculated as of the date we receive at the offices of Hartford
written notification of Due Proof of Death. The Death Benefit will equal the
Account Value.
The Death Benefit may be taken in one sum, to be paid within six months after
the date we receive Due Proof of Death, or under any of the Annuity Options
available under the Contract; provided, however, that: (a) in the event of the
death of a Participant prior to the Annuity Commencement Date, any Annuity
Option selected must provide that any amount payable as a Death Benefit will be
distributed within five years of the date of death; and (b) in the event of the
death of a Participant or Annuitant which occurs on or after the Annuity
Commencement Date, any remaining interest in the Contract will be paid at least
as rapidly as under the method of distribution in effect at the time of death,
or, if the benefit is payable over a period not extending beyond the life
expectancy of the Beneficiary or over the life of the Beneficiary, such
distribution must commence within one year of the date of death. In the event of
the Participant's death, where the sole Beneficiary is the spouse of the
Participant and the Annuitant or Contingent Annuitant is living, such sole
Beneficiary may elect, in lieu of receiving the Death Benefit, to be treated as
the Participant.
If the Contract is owned by a corporation or other non-individual, the Death
Benefit payable upon the death of the Annuitant preceding the Annuity
Commencement Date will be payable only as one sum or under the same Annuity
Options and in the same manner as if an individual Contract Owner died on the
date of the Annuitant's death.
Proceeds from the Death Benefit may be left with Hartford for a period not to
exceed five years from the date of the Participant's death preceding the Annuity
Commencement Date. The proceeds will remain in the same Guarantee Period and
continue to earn the same interest rate as at the time of death. If the
Guarantee Period ends before the end of the five year period, the Beneficiary
may elect a new Guarantee Period with a duration closest to but not to exceed
the time remaining in the period of five years from the date of the
Participant's death. Full or partial surrenders may be made at any time. In the
event of surrenders, the remaining value will equal the proceeds left with
Hartford, minus any surrenders, plus any interest earned. A Market Value
Adjustment will be applied to all surrenders except those occurring at the end
of a Guarantee Period.
The Beneficiary of a non-qualified Contract or IRA may also elect the "Single
Life Expectancy Only" option. This option allows the Beneficiary to take the
Death Benefit in a series of payments spread over a period equal to the
Beneficiary's remaining life expectancy. Distributions are calculated based on
IRS life expectancy tables. This option is subject to different limitations and
conditions depending on whether the Contract is non-qualified or an IRA.
7. PAYMENT UPON PARTIAL OR FULL SURRENDER
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 30 days and, if we do, we will pay interest of at least 4 1/2%
per annum on the amount deferred. While all circumstances under which we could
defer payment upon surrender may not be foreseeable at this time, such
circumstances could include, for example, a time of an unusually high surrender
rate under the Contracts, accompanied by a radical shift in interest rates. If
we intend to withhold payment for more than 30 days, we will notify you in
writing. We will not, however, defer payment for more than 30 days as to any
surrender which is to be effective at the end of any Guarantee Period.
C. ANNUITY PERIOD
1. ELECTING THE ANNUITY COMMENCEMENT DATE AND
FORM OF ANNUITY
Upon application for a Contract, you select an Annuity Commencement Date. Within
30 days preceding your Annuity Commencement Date you may elect to have all or a
portion of your Net Surrender Value paid in a lump sum on your Annuity
Commencement Date. Alternatively, or with respect to any portion of your Net
Surrender Value not paid in a lump sum, you may elect, at least 30 days
preceding the Annuity Commencement Date, to have your Account Value with a
Market Value Adjustment, if applicable, or a portion thereof multiplied by the
Market Value Adjustment (less applicable premium taxes, if any) applied on the
Annuity Commencement Date under any of the Annuity Options described below. In
the absence of such election, Account Value with a Market Value Adjustment, if
applicable, will be applied on the Annuity Commencement Date under the Life
<Page>
HARTFORD LIFE INSURANCE COMPANY 11
- --------------------------------------------------------------------------------
Annuity with 120 Monthly Payments Certain. This Contract may not be surrendered
for its Termination Value after the commencement of annuity payments, except
with respect to proceeds from the Death Benefit remaining at Hartford.
2. CHANGE OF ANNUITY COMMENCEMENT DATE OR
ANNUITY OPTION
You may change the Annuity Commencement Date and/or the Annuity Option from time
to time, but any such change must be made in writing and received by us at least
30 days preceding the scheduled Annuity Commencement Date. Once Annuity Payouts
begin, you cannot change the Annuity Payout Option. Also, the proposed Annuity
Commencement Date may not be beyond the Annuitant's 90th birthday.
3. ANNUITY OPTIONS
Any one of the following Annuity Options may be elected:
LIFE ANNUITY
An annuity payable monthly during the lifetime of the Annuitant, and terminating
with the last monthly payment due preceding the death of the Annuitant. It would
be possible under this Option for an Annuitant to receive only one Annuity
payment if he died preceding the due date of the second Annuity payment, two
payments if he died before the due date of the third Annuity payment, and so on.
LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN
An annuity providing monthly income to the Annuitant for a fixed period of 120
months, 180 months or 240 months (as selected), and for as long thereafter as
the Annuitant shall live.
CASH REFUND LIFE ANNUITY
An annuity payable monthly during the lifetime of the Annuitant, provided that,
at the death of the Annuitant, the Beneficiary will receive an additional
payment equal to (a) minus (b), where (a) is the Account Value applied on the
Annuity Commencement Date under this Option and (b) is the dollar amount of
annuity payments already paid.
JOINT AND LAST SURVIVOR LIFE ANNUITY
An annuity payable monthly during the joint lifetime of the Annuitant and a
designated second person, and thereafter during the remaining lifetime of the
survivor, ceasing with the last payment preceding the death of the survivor. It
would be possible under this Option for the Annuitant, and designated second
person in the event of the common or simultaneous death of the parties, to
receive only one payment in the event of death preceding the due date for the
second payment, and so on.
PAYMENTS FOR A DESIGNATED PERIOD
We will make Annuity Payments for the number of years that you select. You can
select any number of years between 5 and 100 years minus the Annuitant's age.
If, at the death of the Annuitant, Annuity Payments have been made for less than
the time period selected, then the Beneficiary may elect to continue the
remaining Annuity Payments or receive the commuted value in one sum.
The Tables in the Contract provide for guaranteed dollar amounts of monthly
payments for each $1,000 applied under the five Annuity Options. Under the
First, Second or Third Options, the amount of each payment will depend upon the
age and sex of the Annuitant at the time the first payment is due. Under the
Fourth Option, the amount of each payment will depend upon the sex of both
payees and their ages at the time the first payment is due.
The Tables for the First, Second, Third and Fourth Options are based on the
1983a Individual Annuity Mortality Table, with ages set back one year and a net
investment rate of 4% per annum. The table for the Fifth Option is based on a
net investment rate of 4% per annum.
We may, from time to time, at our discretion if mortality appears more favorable
and interest rates justify, apply other tables which will result in higher
monthly payments for each $1,000 applied under one or more of the five Annuity
Options.
IMPORTANT INFORMATION: YOU CANNOT SURRENDER YOUR CONTRACT ONCE ANNUITY PAYMENTS
BEGIN.
FOR QUALIFIED CONTRACTS, IF YOU ELECT AN ANNUITY OPTION WITH 120, 180 OR 240
MONTHLY PAYMENTS CERTAIN, THE GUARANTEED NUMBER OF YEARS MUST BE LESS THAN THE
LIFE EXPECTANCY OF THE ANNUITANT AT THE TIME THE ANNUITY PAYMENTS BEGIN. WE
COMPUTE LIFE EXPECTANCY USING THE IRS MORTALITY TABLES.
AUTOMATIC ANNUITY PAYMENTS. If you do not elect an Annuity Option, annuity
payments will automatically begin on the Annuity Commencement Date under the
Life Annuity with 120 Monthly Payments Certain.
4. ANNUITY PAYMENT
The first payment under any Annuity Option will be made following the Annuity
Commencement Date. Subsequent payments will be made on the same day in
accordance with the manner of payment selected.
The option elected must result in a payment of an amount at least equal to the
minimum payment amount according to Hartford's rules then in effect. If at any
time payments are less than the minimum payment amount, Hartford has the right
to change the frequency to an interval resulting in a payment at least equal to
the minimum. If any amount due is less than the minimum per year, Hartford may
make other arrangements that are equitable to the Annuitant.
Once annuity payments have commenced, no surrender of the annuity benefit
(including benefits under the Payments for a Designated Period Option) can be
made for the purpose of receiving a lump sum settlement in lieu thereof.
5. DEATH OF ANNUITANT AFTER ANNUITY
COMMENCEMENT DATE
In the event of the death of the Annuitant after the Annuity Commencement Date,
the present values on the date of death of the current dollar amount of any
remaining guaranteed payments will be paid in one sum to the Beneficiary unless
other provisions shall have been made and approved by us. Calculations of such
present value will be based on the interest rate that is used by us to determine
the amount of each certain payment.
<Page>
12 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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 "Establishment of Guarantee
Rates and Current Rate"). 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 reserve the right to amend the Contracts to meet the requirements of
applicable federal or state laws or regulations. We will notify you in writing
of any such amendments.
ASSIGNMENT OF CONTRACTS
- --------------------------------------------------------------------------------
Your rights as evidenced by a Contract may be assigned as permitted by
applicable law. An assignment will not be binding upon us until we receive
notice from you in writing. We assume no responsibility for the validity or
effect of any assignment. You should consult your tax adviser regarding the tax
consequences of an assignment.
DISTRIBUTION OF CONTRACTS
- --------------------------------------------------------------------------------
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.
The Contracts may also be sold directly to employees of Hartford and of Hartford
Fire Insurance Company, of which Hartford is a subsidiary. The Contracts will be
credited with an additional 2% of the employee's purchase payment by Hartford.
This additional percentage of purchase payment in no way affects present or
future charges, rights, benefits or current values of other Contract Owners.
DISTRIBUTION ARRANGEMENTS
Contracts issued by Hartford Life Insurance Company and Hartford Life and
Annuity Insurance Company (collectively "Hartford Life") are continuously
offered and sold by selected broker-dealers who have selling agreements with
Hartford Life. Except as discussed below, Hartford Life bears all the expenses
of providing services pursuant to Contracts including the payment of the
expenses relating to the distribution of prospectuses for sales purposes as well
as any advertising or sales literature.
In addition to the commissions described herein, Hartford Life and its
affiliates pay, out of their own assets, Additional Payments
<Page>
HARTFORD LIFE INSURANCE COMPANY 13
- --------------------------------------------------------------------------------
to Financial Intermediaries in connection with the sale and distribution of the
Contracts. Certain Additional Payments are generally based on average net assets
(or on aged assets) of the Contracts attributable to a particular Financial
Intermediary, on sales of the Contracts attributable to a particular Financial
Intermediary, and/or on reimbursement of related sales expenses. Such Additional
Payments are generally made for the placement of the Contracts on a Financial
Intermediary's list of annuity products available for purchase by its customers.
Separate Additional Payments may take the form of, among others: (1) "due
diligence" payments for a Financial Intermediary's examination of the annuity
products and payments for providing training and information relating to the
annuity product and (2) "marketing support" fees for providing assistance in
promoting the sale of the annuity product. (Negotiated Additional Amounts).
Subject to NASD regulations, Hartford Life and its affiliates may contribute
Negotiated Additional Amounts to various non-cash and cash incentive
arrangements to promote the sale of the Contracts, as well as sponsor various
annuity product educational programs, sales contests and/or promotions in which
Financial Intermediaries that participate may receive prizes such as travel
awards, merchandise and cash and/or investment research pertaining to particular
securities and other financial instruments or to the securities and financial
markets generally, educational information and related support materials and
hardware and/or software. Hartford Life and its affiliates may also pay for the
travel expenses, meals, lodging and entertainment of Financial Intermediaries
and their salespersons and guests in connection with education, sales and
promotional programs, subject to applicable NASD regulations. These programs,
which may be different for different Financial Intermediaries, will not change
the price an investor will pay for the Contracts or the amount that a registered
representative will receive from such sale. These Additional Payments and
Negotiated Additional Amounts may, in some cases, act as a financial incentive
for a Financial Intermediary to recommend the purchase of one annuity product
over another annuity product. Please consult your Financial Intermediary for
more information.
As of December 31, 2004 Hartford Life has entered into arrangements to make
Additional Payments that are generally based on average net assets (or on aged
assets) attributable to a particular Financial Intermediary, on sales of the
Contracts attributable to a particular Financial Intermediary, and/or on
reimbursement of related sales expenses to A.G. Edwards & Sons, Inc.,
Advest, Inc., AIG Advisors Group, AMSouth Investment Services, Inc., Bancwest
Investment Services, Inc., Cadaret Grant & Co., Inc., Capital Analyst Inc.,
Capital Investment Group, Inc., Centaurus Financial, Inc., Citigroup Global
Markets, Inc., Comerica Securities, Commonwealth Financial Network, Compass
Brokerage, Inc., Cuso Financial Services, L.P., Duerr Financial Corporation,
Edward D. Jones & Co., L.P., FFP Securities, Inc., Fifth Third Securities, First
Citizens Investor Services, First Tennessee Brokerage, Inc., Frost Brokerage
Services, Inc., Harbour Investments, Inc., Heim & Young Securities, The
Huntington Investment Company, Infinex Financial Group, ING Advisors Network,
Investacorp, Inc., Investment Professionals, Inc., James T. Borello & Co.,
Jefferson Pilot Securities Corporation, J.J.B. Hilliard, W.L. Lyons, Inc., Legg
Mason Wood Walker, Incorporated, Lincoln Financial, Linsco/Private Ledger Corp.,
M&T Securities, Merrill Lynch Pierce Fenner & Smith, First Montauk Securities
Corp., Morgan Keegan & Company, Inc., Morgan Stanley & Co., Incorporated, Mutual
Service Corporation, National Planning Holding, NEXT Financial Group, Inc., NFP
Securities, Inc., Parker/Hunter Incorporated, Pension Planners, PFIC Securities
Corporation, Piper Jaffray & Co., Prime Capital Services, Inc., Prospera
Financial Services, Inc., Raymond James Financial Services, RBC Dain Rauscher
Inc., Securities America, Inc., Sigma Financial Corporation, Southtrust
Securities, Inc., Stifel Nicolaus & Company, Incorporated, TFS
Securities, Inc., The Investment Center, Inc., Triad Advisors, Inc., UBS
Financial Services, Inc., Uvest Financial Services Group Inc., Wachovia
Securities, LLC., Walnut Street Securities, Inc., Wells Fargo Brokerage
Services, L.L.C., WM Financial Services, Inc., Woodbury Financial Services,
Inc., XCU Capital Corporation, Inc. Hartford Life may enter into arrangements
with other Financial Intermediaries to make such Additional Payments. Separate
Additional Payments in the form of Negotiated Additional Amounts may also be
made to the above-listed Financial Intermediaries and to other Financial
Intermediaries.
The Additional Payments to Financial Intermediaries in connection with the sale
and distribution of the Contracts are negotiated based on a range of qualitative
factors, including, but not limited to, access and opportunity to provide
product education and training, assistance with the development and
implementation of joint marketing and business plans, reputation in the
industry, ability to attract and retain assets, target markets, customer
relationships and quality of service. No one factor is determinative of the type
or amount of Additional Payments to be provided and factors are weighed in the
assessment of such determination.
For the fiscal year ended December 31, 2004, Hartford Life or its affiliates
paid approximately [$ ] in total Additional Payments, including Negotiated
Additional Amounts to Financial Intermediaries.
<Page>
14 HARTFORD LIFE INSURANCE COMPANY
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FEDERAL TAX CONSIDERATIONS
What are some of the federal tax consequences which affect these Contracts?
A. INTRODUCTION
The following summary of tax rules does not provide or constitute any tax
advice. It provides only a general discussion of certain of the expected federal
income tax consequences with respect to amounts contributed to, invested in or
received from a Contract, based on our understanding of the existing provisions
of the Code, Treasury Regulations thereunder, and public interpretations thereof
by the IRS (e.g., Revenue Rulings, Revenue Procedures or Notices) or by
published court decisions. This summary discusses only certain federal income
tax consequences to United States Persons, and does not discuss state, local or
foreign tax consequences. The term United States Persons means citizens or
residents of the United States, domestic corporations, domestic partnerships,
trust or estates that are subject to United States federal income tax,
regardless of the source of their income.
This summary has been prepared by us after consultation with tax counsel, but no
opinion of tax counsel has been obtained. We do not make any guarantee or
representation regarding any tax status (e.g., federal, state, local or foreign)
of any Contract or any transaction involving a Contract. In addition, there is
always a possibility that the tax treatment of an annuity contract could change
by legislation or other means (such as regulations, rulings or judicial
decisions). Moreover, it is always possible that any such change in tax
treatment could be made retroactive (that is, made effective prior to the date
of the change). Accordingly, you should consult a qualified tax adviser for
complete information and advice before purchasing a Contract.
In addition, this discussion does not address many of the tax consequences if
you use the Contract in various arrangements, including Charitable Remainder
Trusts, tax-qualified retirement arrangements, deferred compensation plans,
split-dollar insurance arrangements, or other employee benefit arrangements. The
tax consequences of any such arrangement may vary depending on the particular
facts and circumstances of each individual arrangement and whether the
arrangement satisfies certain tax qualification or classification requirements.
In addition, the tax rules affecting such an arrangement may have changed
recently, e.g., by legislation or regulations that affect compensatory or
employee benefit arrangements. Therefore, if you are contemplating the use of a
Contract in any arrangement the value of which to you depends in part on its tax
consequences, you should consult a qualified tax adviser regarding the tax
treatment of the proposed arrangement and of any Contract used in it.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY. SPECIAL
TAX RULES MAY APPLY WITH RESPECT TO CERTAIN SITUATIONS THAT ARE NOT DISCUSSED
HEREIN. EACH POTENTIAL PURCHASER OF A CONTRACT IS ADVISED TO CONSULT WITH A
QUALIFIED TAX ADVISER AS TO THE CONSEQUENCES OF ANY AMOUNTS INVESTED IN A
CONTRACT UNDER APPLICABLE FEDERAL, STATE, LOCAL OR FOREIGN TAX LAW.
B. TAXATION OF HARTFORD
Hartford is taxed as a life insurance company under Subchapter L of Chapter 1 of
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 CONTRACTS NOT HELD IN
TAX-QUALIFIED RETIREMENT PLANS
Section 72 of the Code governs the taxation of annuities in general.
1. NON-NATURAL PERSONS AS OWNERS
Pursuant to Code Section 72(u), an annuity contract held by a taxpayer other
than a natural person generally is not treated as an annuity contract under the
Code. Instead, such a non-natural Contract Owner generally could be required to
include in gross income currently for each taxable year the excess of (a) the
sum of the Contract Value as of the close of the taxable year and all previous
distributions under the Contract over (b) the sum of net premiums paid for the
taxable year and any prior taxable year and the amount includable in gross
income for any prior taxable year with respect to the Contract under
Section 72(u). However, Section 72(u) does not apply to:
- - A contract the nominal owner of which is a non-natural person but the
beneficial owner of which is a natural person (e.g., where the non-natural
owner holds the contract as an agent for the natural person),
- - A contract acquired by the estate of a decedent by reason of such decedent's
death,
- - Certain contracts acquired with respect to tax-qualified retirement
arrangements,
- - Certain contracts held in structured settlement arrangements that may qualify
under Code Section 130, or
- - A single premium immediate annuity contract under Code Section 72(u)(4), which
provides for substantially equal periodic payments and an annuity starting
date that is no later than 1 year from the date of the contract's purchase.
A non-natural Contract Owner that is a tax-exempt entity for federal tax
purposes (e.g., a tax-qualified retirement trust or a Charitable Remainder
Trust) generally would not be subject to federal income tax as a result of such
current gross income under Code Section 72(u). However, such a tax-exempt
entity, or any annuity contract that it holds, may need to satisfy certain tax
requirements in order to maintain its qualification for such favorable tax
treatment. See, e.g., IRS Tech. Adv. Memo. 9825001 for certain Charitable
Remainder Trusts.
Pursuant to Code Section 72(s), if the Contract Owner is a non-natural person,
the primary annuitant is treated as the "owner"
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HARTFORD LIFE INSURANCE COMPANY 15
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in applying the required distribution rules described below. These rules require
that certain distributions be made upon the death of an "owner." In addition,
for a non-natural owner, a change in the primary annuitant is treated as the
death of the "owner." However, the provisions of Code Section 72(s) do not apply
to certain contracts held in tax-qualified retirement arrangements or structured
settlement arrangements.
2. OTHER CONTRACT OWNERS (NATURAL PERSONS).
A Contract Owner is not taxed on increases in the value of the Contract until an
amount is received or deemed received, e.g., in the form of a lump sum payment
(full or partial value of a Contract) or as Annuity payments under the
settlement option elected.
The provisions of Section 72 of the Code concerning distributions are summarized
briefly below. Also summarized are special rules affecting distributions from
Contracts obtained in a tax-free exchange for other annuity contracts or life
insurance contracts which were purchased prior to August 14, 1982.
a. DISTRIBUTIONS PRIOR TO THE ANNUITY COMMENCEMENT DATE.
i. Total premium payments less amounts received which were not includable in
gross income equal the "investment in the contract" under Section 72 of the
Code.
ii. To the extent that the value of the Contract (ignoring any surrender
charges except on a full surrender) exceeds the "investment in the
contract," such excess constitutes the "income on the contract." It is
unclear what value should be used in determining the "income on the
contract." We believe that the current Contract value (determined without
regard to surrender charges) is an appropriate measure. However, the IRS
could take the position that the value should be the current Contract value
(determined without regard to surrender charges) increased by some measure
of the value of certain future benefits.
iii. Any amount received or deemed received prior to the Annuity Commencement
Date (e.g., upon a partial surrender) is deemed to come first from any
such "income on the contract" and then from "investment in the contract,"
and for these purposes such "income on the contract" shall be computed by
reference to any aggregation rule in subparagraph 2.c. below. As a result,
any such amount received or deemed received (1) shall be includable in
gross income to the extent that such amount does not exceed any such
"income on the contract," and (2) shall not be includable in gross income
to the extent that such amount does exceed any such "income on the
contract." If at the time that any amount is received or deemed received
there is no "income on the contract" (e.g., because the gross value of the
Contract does not exceed the "investment in the contract" and no
aggregation rule applies), then such amount received or deemed received
will not be includable in gross income, and will simply reduce the
"investment in the contract."
iv. The receipt of any amount as a loan under the Contract or the assignment or
pledge of any portion of the value of the Contract shall be treated as an
amount received for purposes of this subparagraph a. and the next
subparagraph b.
v. In general, the transfer of the Contract, without full and adequate
consideration, will be treated as an amount received for purposes of this
subparagraph a. and the next subparagraph b. This transfer rule does not
apply, however, to certain transfers of property between spouses or incident
to divorce.
b. DISTRIBUTIONS AFTER ANNUITY COMMENCEMENT DATE.
Annuity payments made periodically after the Annuity Commencement Date are
includable in gross income to the extent the payments exceed the amount
determined by the application of the ratio of the "investment in the contract"
to the total amount of the payments to be made after the Annuity Commencement
Date (the "exclusion ratio").
i. When the total of amounts excluded from income by application of the
exclusion ratio is equal to the investment in the contract as of the
Annuity Commencement Date, any additional payments (including surrenders)
will be entirely includable in gross income.
ii. If the annuity payments cease by reason of the death of the Annuitant and,
as of the date of death, the amount of annuity payments excluded from gross
income by the exclusion ratio does not exceed the investment in the
contract as of the Annuity Commencement Date, then the remaining portion of
unrecovered investment shall be allowed as a deduction for the last taxable
year of the Annuitant.
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 owner within the same calendar year (other than certain
contracts held in connection with tax-qualified retirement arrangements) will be
aggregated and 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 Contracts 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
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Annuity Commencement Date. Withdrawals will be treated first as withdrawals of
income until all of the income from all such Contracts is withdrawn. In
addition, the Treasury Department has specific authority under the aggregation
rules in Code Section 72(e)(11) to issue regulations to prevent the avoidance of
the income-out-first rules for non-periodic distributions through the serial
purchase of annuity contracts or otherwise. As of the date of this prospectus,
there are no regulations interpreting these aggregation provisions.
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.).
If the taxpayer avoids this 10% penalty tax by qualifying for the substantially
equal periodic payments exception and later such series of payments is modified
(other than by death or disability), the 10% penalty tax will be applied
retroactively to all the prior periodic payments (i.e., penalty tax plus
interest thereon), unless such modification is made after both (a) the taxpayer
has reached age 59 1/2 and (b) 5 years have elapsed since the first of these
periodic payments.
e. SPECIAL PROVISIONS AFFECTING CONTRACTS OBTAINED THROUGH A TAX-FREE
EXCHANGE OF OTHER ANNUITY OR LIFE INSURANCE CONTRACTS PURCHASED PRIOR TO
AUGUST 14, 1982.
If the Contract was obtained by a tax-free exchange of a life insurance or
annuity Contract purchased prior to August 14, 1982, then any amount received or
deemed received prior to the Annuity Commencement Date shall be deemed to come
(1) first from the amount of the "investment in the contract" prior to
August 14, 1982 ("pre-8/14/82 investment") carried over from the prior Contract,
(2) then from the portion of the "income on the contract" (carried over to, as
well as accumulating in, the successor Contract) that is attributable to such
pre-8/14/82 investment, (3) then from the remaining "income on the contract" and
(4) last from the remaining "investment in the contract." As a result, to the
extent that such amount received or deemed received does not exceed such
pre-8/14/82 investment, such amount is not includable in gross income. In
addition, to the extent that such amount received or deemed received does not
exceed the sum of (a) such pre-8/14/82 investment and (b) the "income on the
contract" attributable thereto, such amount is not subject to the 10% penalty
tax. In all other respects, amounts received or deemed received from such post-
exchange Contracts are generally subject to the rules described in this
subparagraph e.
f. REQUIRED DISTRIBUTIONS.
i. Death of Contract Owner or Primary Annuitant
Subject to the alternative election or spouse beneficiary provisions in ii
or iii below:
1. If any Contract Owner dies on or after the Annuity Commencement Date and
before the entire interest in the Contract has been distributed, the
remaining portion of such interest shall be distributed at least as
rapidly as under the method of distribution being used as of the date of
such death;
2. If any Contract Owner dies before the Annuity Commencement Date, the
entire interest in the Contract shall 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. Such distributions
must begin within a year of the Contract Owner's death.
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HARTFORD LIFE INSURANCE COMPANY 17
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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 RIDER OR MATERIAL CHANGE
The addition of a rider to the Contract, or a material change in the Contract's
provisions, could cause it to be considered newly issued or entered into for tax
purposes, and thus could cause the Contract to lose certain grandfathered tax
status. Please contact your tax adviser for more information.
h. PARTIAL EXCHANGES
The IRS in Rev. Rul. 2003-76 has confirmed that the owner of an annuity contract
can direct its insurer to transfer a portion of the contract's cash value
directly to another annuity contract (issued by the same insurer or by a
different insurer), and such a direct transfer can qualify for tax-free exchange
treatment under Code Section 1035 (a "partial exchange"). However, Rev. Rul.
2003-76 also refers to caveats and additional guidance in the companion Notice
2003-51, which discusses cases in which a partial exchange is followed by a
surrender, withdrawal or other distribution from either the old contract or the
new contract. Notice 2003-51 specifically indicates that the IRS is considering
(1) under what circumstances it should treat a partial exchange followed by such
a distribution within 24 months as presumptively for "tax avoidance" purposes
(e.g., to avoid the income-out-first rules on amounts received under Code
Section 72) and (2) what circumstances it should treat as rebutting such a
presumption (e.g., death, disability, reaching age 59 1/2, divorce or loss of
employment). Accordingly, we advise you to consult with a qualified tax adviser
as to potential tax consequences before attempting any partial exchange.
D. FEDERAL INCOME TAX WITHHOLDING
The portion of an amount received under a Contract that is taxable gross income
to the recipient is also subject to federal income tax withholding, pursuant to
Code Section 3405, which requires the following:
1. Non-Periodic Distributions. The portion of a non-periodic distribution
that is includable in gross income is subject to federal income tax
withholding unless the recipient elects not to have such tax withheld
("election out"). We will provide such an "election out" form at the
time such a distribution is requested. If the necessary "election out"
forms are not submitted to us in a timely manner, we are required to
withhold 10 percent of the includable amount of distribution.
2. Periodic Distributions (payable over a period greater than one year).
The portion of a periodic distribution that is includable in gross
income is subject to federal income tax withholding as if the recipient
were married claiming 3 exemptions, unless the recipient elects
otherwise. A recipient may elect out of such withholding, or elect to
have income tax withheld at a different rate, by providing a completed
election form. We will provide such an election form at the time such a
distribution is requested.
Regardless of any "election out" (or any amount of tax actually withheld) on an
amount received from a Contract, the recipient is generally liable for any
failure to pay the full amount of tax due on the includable portion of such
amount received. You also may be required to pay penalties under the estimated
income tax rules, if your withholding and estimated tax payments are
insufficient to satisfy your total tax liability.
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 refer to Appendix I 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.
G. ESTATE, GIFT AND GENERATION-SKIPPING TAX AND RELATED TAX CONSIDERATIONS
Any amount payable upon a Contract Owner's death, whether before or after the
Annuity Commencement Date, is generally includable in the Contract Owner's
estate for federal estate tax purposes. Similarly, prior to the Contract Owner's
death, the payment of any amount from the Contract, or the transfer of any
interest in the Contract, to a beneficiary or other person for less than
adequate consideration may have federal gift tax consequences. In addition, any
transfer to, or designation of, a non-spouse beneficiary who either is
(1) 37 1/2 or more years younger than a Contract Owner or (2) a grandchild (or
more remote further descendent) of a Contract Owner may have federal
generation-skipping-transfer ("GST") tax consequences under Code Section 2601.
Regulations under Code Section 2662 may require us to deduct any such GST tax
from your Contract, or from any applicable payment, and pay it directly to the
IRS. However, any federal estate, gift or GST tax payment with respect to a
Contract could produce an offsetting income tax deduction for a beneficiary or
transferee under Code Section 691(c) (partially offsetting such federal estate
or GST tax) or
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a basis increase for a beneficiary or transferee under Code Section 691(c) or
Section 1015(d). In addition, as indicated above in "Distributions Prior to the
Annuity Commencement Date," the transfer of a Contract for less than adequate
consideration during the Contract Owner's lifetime generally is treated as
producing an amount received by such Contract Owner that is subject to both
income tax and the 10% penalty tax. To the extent that such an amount deemed
received causes an amount to be includable currently in such Contract Owner's
gross income, this same income amount could produce a corresponding increase in
such Contract Owner's tax basis for such Contract that is carried over to the
transferee's tax basis for such Contract under Code
Section 72(e)(4)(C)(iii) and Section 1015.
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) $40,000 (adjusted for increases in
cost-of-living). The maximum elective deferral amount is equal to $14,000 for
2005 and $15,000 for 2006 and thereafter, indexed. The limitation on elective
deferrals may be increased to allow certain "catch-up" contributions for
individuals who have attained age 50.
Tax-sheltered annuity programs under section 403(b) are subject to a PROHIBITION
AGAINST DISTRIBUTIONS FROM THE CONTRACT ATTRIBUTABLE TO CONTRIBUTIONS MADE
PURSUANT TO A SALARY REDUCTION AGREEMENT, unless such distribution is made:
- - after the participating employee attains age 59 1/2;
- - upon severance from employment;
- - upon death or disability; or
- - in the case of hardship (and in the case of hardship, any income attributable
to such contributions may not be distributed).
Generally, the above restrictions do not apply to distributions attributable to
cash values or other amounts held under a section 403(b) contract as of
December 31, 1988.
If the death benefit under the Contract can exceed the greater of the amount
paid for the Contract and the Contract's cash value, it is possible that the IRS
would characterize such death benefit as an "incidental death benefit." If the
death benefit were so characterized, this could result in currently taxable
income to purchasers. In addition, there are limitations on the amount of
incidental death benefits that may be provided under a section 403(b)
arrangement.
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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 $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 to the expected return.
(a) PENALTY TAX ON EARLY DISTRIBUTIONS Section 72(t) of the Code imposes an
additional penalty tax equal to 10% of the taxable portion of a distribution
from certain tax-qualified retirement plans. However, the 10% penalty tax
does not apply to a distribution that is:
- - Made on or after the date on which the employee reaches age 59 1/2;
- - Made to a beneficiary (or to the estate of the employee) on or after the death
of the employee;
- - Attributable to the employee's becoming disabled (as defined in the Code);
- - Part of a series of substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the employee or the
joint lives (or joint life expectancies) of the employee and his or her
designated beneficiary. In determining whether a payment stream designed to
satisfy this exception qualifies, it is possible that the IRS could take the
position that the entire interest in the Contract should include not only the
current Contract value, but also some measure of the value of certain future
benefits;
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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.
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 entire value
of all benefits provided under a Contract as of the close of business on the
last day of the previous calendar year. The death benefit and any optional
benefits purchased under the Contract may affect the amount of the minimum
required distribution that must be taken. 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 if the
payment structure satisfies certain rules set forth in Income Tax Regulations.
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 and in 2004, the Internal Revenue Service issued final and temporary
regulations in the Federal Register relating to minimum required distributions.
Please consult with your tax or legal adviser with any questions regarding the
new regulations.
(c) WITHHOLDING We are generally required to withhold federal income tax from
the taxable portion of each distribution made under a Contract. The federal
income tax withholding requirements, including the rate at which withholding
applies, depend on whether a distribution is or is not an eligible rollover
distribution.
Federal income tax withholding from the taxable portion of distributions that
are not eligible rollover distributions is required unless the payee is eligible
to, and does in fact, elect not to have income tax withheld by filing an
election with us. Where the payee does not elect out of withholding, the rate of
income tax to be withheld depends on whether the distribution is nonperiodic or
periodic. Regardless of whether an election is made not to have federal income
taxes withheld, the recipient is still liable for payment of federal income tax
on the taxable portion of the distribution.
For periodic payments, federal income tax will be withheld from the taxable
portion of the distribution by treating the payment as wages under IRS
wage withholding tables, using the marital status and number of withholding
allowances elected by the payee on an IRS Form W-4P, or acceptable substitute,
filed us. Where the payee has not filed a Form W-4P, or acceptable substitute,
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HARTFORD LIFE INSURANCE COMPANY 21
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with us, the payee will be treated as married claiming three withholding
allowances. Special rules apply where the payee has not provided us with a
proper taxpayer identification number or where the payments are sent outside the
United States or U.S. possessions.
For nonperiodic distributions, where a payee has not elected out of withholding,
income tax will be withheld at a rate of 10 percent from the taxable portion of
the distribution.
Federal income tax withholding is required at a rate of 20 percent from the
taxable portion of any distribution that is an eligible rollover distribution to
the extent it is not directly rolled over to an eligible recipient plan. Payees
cannot elect out of income tax withholding with respect to such distributions.
Also, special withholding rules apply with respect to distributions from
non-governmental section 457(b) plans, and to distributions made to individuals
who are neither citizens or resident aliens of the United States.
6. ROLLOVER DISTRIBUTIONS -- Under present federal tax law, "eligible rollover
distributions" from qualified retirement plans under section 401(a) of the Code,
qualified annuities under section 403(a) of the Code, section 403(b)
arrangements, and governmental 457(b) plans generally can be rolled over
tax-free within 60 days to any of such plans or arrangements that accept such
rollovers. Similarly, distributions from an IRA generally are permitted to be
rolled over tax-free within 60 days to a qualified plan, qualified annuity,
section 403(b) arrangement, or governmental 457(b) plan. After tax contributions
may be rolled over from a qualified plan, qualified annuity or governmental
457 plan into another qualified plan or an IRA. In the case of such a rollover
of after tax contributions, the rollover is permitted to be accomplished only
through a direct rollover. In addition, a qualified plan is not permitted to
accept rollovers of after tax contributions unless the plan provides separate
accounting for such contributions (and earnings thereon). Similar rules apply
for purposes of rolling over after tax contributions from a section 403(b)
arrangement. After tax contributions (including nondeductible contributions to
an IRA) are not permitted to be rolled over from an IRA into a qualified plan,
qualified annuity, section 403(b) arrangement, or governmental 457(b) plan.
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) retail and institutional investment products, including variable
annuities, fixed market value adjusted ("MVA") annuities, private placement life
insurance, which includes life insurance products purchased by a company on the
lives of its employees, and retirement plan services for the savings and
retirement needs of over 5.0 million customers, (ii) life insurance for wealth
protection, accumulation and transfer needs for approximately 738,000 customers,
(iii) group benefits products such as group life and group disability insurance
for the benefit of millions of individuals and (iv) fixed annuity products
through its international operations. 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 the past year, the Company's total assets, increased 14% to $195.6 billion at
December 31, 2004 from $171.9 billion at December 31, 2003. The Company
generated revenues of $5.7 billion, $4.9 billion and $3.9 billion in 2004, 2003
and 2002, respectively. Additionally, Hartford Life Insurance Company generated
net income of $965, $626 and $426 in 2004, 2003, and 2002, 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 individual annuities, Hartford Life Insurance
Company was awarded the 2004 Annuity Service Award by DALBAR Inc., a recognized
independent financial services research organization, for the ninth 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 2004 the
Company earned its second 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 fourth consecutive DALBAR award for service of life insurance
customers and its third consecutive DALBAR Financial Intermediary Service Award
in 2004.
RISK MANAGEMENT
The Company's product designs, prudent underwriting standards and risk
management techniques are structured to protect
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22 HARTFORD LIFE INSURANCE COMPANY
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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, 2004, the Company had limited exposure to disintermediation risk on
approximately 97% 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 GMDB. The Company also uses reinsurance to
minimize the volatility associated with the GMWB liability.
REPORTING SEGMENTS
Hartford Life Insurance Company changed its reportable operating segments in
2004 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, structured
settlements, and private placement life insurance (formerly referred to as
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 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. During the third quarter of 2004,
Hartford Life introduced fixed MVA annuity products to provide a diversified
product portfolio to its customers in Japan. The fixed MVA product is written by
Hartford Life Insurance KK, a wholly owned Japanese subsidiary of HLA and
subsequently reinsured to the Company. The reinsurance of the fixed MVA product
is included in the Other category.
RETAIL PRODUCTS GROUP
The Retail Products segment focuses, through the sale of individual variable and
fixed annuities, retirement plan services and other investment products, on the
savings and retirement needs of the growing number of individuals who are
preparing for retirement or who have already retired. Retail Products generated
revenues of $2.6 billion in 2004, $1.8 billion in 2003 and $1.6 billion in 2002,
of which individual annuities accounted for $2.5 billion, $1.7 billion and $1.5
billion in 2004, 2003 and 2002, respectively. Net income in the Retail segment
was $392, $341 and $280 in 2004, 2003 and 2002, 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 $15.7 billion,
$16.5 billion, and $11.6 billion in 2004, 2003 and 2002, respectively. The
Company was the largest seller of individual retail variable annuities in the
United States with sales of $15.0 billion, $15.7 billion and $10.3 billion in
2004, 2003, and 2002, respectively. 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
$111.0 billion as of December 31, 2004. Of this total account value, $99.6
billion, or 90%, related to individual variable annuity products and $11.4
billion, or 10%, related primarily to fixed MVA annuity products. At December
31, 2003, the Company's total account value related to individual annuity
products was $97.7 billion. 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 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)").
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 Retail Products segment sells
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HARTFORD LIFE INSURANCE COMPANY 23
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variable annuity contracts that offer various guaranteed minimum death and
withdrawal benefits.
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 $99.6 billion as of December 31, 2004, have grown from
$86.5 billion as of December 31, 2003, due to strong net cash flow, resulting
from high levels of sales, low levels of surrenders and equity market
appreciation. Approximately 92% and 90% of the individual variable annuity
account values were held in non-guaranteed separate accounts as of December 31,
2004 and 2003, respectively.
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 to
maturity of approximately four years. Account values of fixed MVA annuities were
$11.4 billion and $11.2 billion as of December 31, 2004 and 2003, respectively.
401(K) -- 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, 2004, the Company administered over
8,200 Section 401(k) plans.
MARKETING AND DISTRIBUTION
The Retail Products distribution network is based on management's strategy of
utilizing multiple and competing distribution channels to achieve the broadest
distribution to reach target customers. The success of the Company's marketing
and distribution system depends on its product offerings, fund performance,
successful utilization of wholesaling organizations, quality of customer
service, and relationships with national and regional broker-dealer firms, banks
and other financial institutions, and independent financial advisors (through
which the sale of the Company's retail investment products to customers is
consummated).
The Company maintains a distribution network of approximately 1,500
broker-dealers and approximately 500 banks. As of December 31, 2004, the Company
was selling products through the 25 largest retail banks in the United States.
The Company periodically negotiates provisions and terms of its relationships
with unaffiliated parties, and there can be no assurance that such terms will
remain acceptable to the Company or such third parties. The Company's primary
wholesaler of its individual annuities is PLANCO Financial Services, Inc. and
its affiliate, PLANCO, Incorporated (collectively "PLANCO") a wholly owned
subsidiary of HLA. PLANCO is one of the nation's largest wholesalers of
individual annuities and has played a significant role in The Hartford's growth
over the past decade. As a wholesaler, PLANCO distributes the Company's fixed
and variable annuities, and 401(k) plans and 529 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 Hartford Life and gives Hartford Life 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 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.
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24 HARTFORD LIFE INSURANCE COMPANY
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INSTITUTIONAL SOLUTIONS GROUP
The 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, institutional annuities, and
stable value investment products such as guaranteed investment contracts
("GICs").
Additionally, Hartford Life Insurance Company is a leader in the private
placement life insurance ("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 has recently introduced two products for the High Net Worth markets.
One is a specialized life insurance contract for ultra-wealthy, High Net Worth
investors, the other is a hedge fund designed to leverage the strengths of
Hartford Life Insurance Company's award winning customer service and
distribution capability.
The Company's total account values related to institutional investment products
were $14.3 billion and $12.4 billion as of December 31, 2004 and 2003,
respectively. Governmental account values were $10.0 billion and $9.0 billion as
of December 31, 2004 and 2003, respectively. Variable PPLI products account
values were $22.5 billion and $21.0 billion as of December 31, 2004 and 2003,
respectively. Leveraged COLI account values were $2.5 billion as of
December 31, 2004 and 2003, respectively. The Institutional segment generated
revenues of $1.8 billion, $2.0 billion and $1.7 billion for the years ended
December 31, 2004, 2003 and 2002, respectively and net income of $105, $119 and
$94 in 2004, 2003 and 2002, 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 (institutional annuities
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 managers. Under these contracts, the client deposits a
lump sum with the Hartford for a specified period of time 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. Also during 2004, the Company began
issuing fixed rate funding agreements to Hartford Life Global Funding trusts
that, in turn, issue registered notes to institutional and retail investors.
INSTITUTIONAL ANNUITIES -- Institutional annuities 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, 2004, the Company administered over 3,600 plans
under Sections 457 and 403(b).
VARIABLE PPLI PRODUCTS -- Private Placement Variable Life Insurance ("PPVLI")
products continue to be used by employers to fund non-qualified benefits or
other post-employment benefit liabilities. A key advantage to plan sponsors is
the opportunity to select from a range of tax deferred investment allocations.
Recent clarifications in regulatory policy have made PPVLI products particularly
attractive to banks with postretirement medical obligations. PPVLI has also been
widely used in the high net worth marketplace due to its low costs, range of
investment choices and ability to accommodate a fund of funds management style.
This institutionally priced hedge fund product is aimed at the rapidly growing
market composed of affluent investors unable to participate in the higher
minimums of some hedge funds.
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.
MARKETING AND DISTRIBUTION
In the Section 457 market, the Institutional segment 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, successful utilization of wholesaling organizations, quality of
customer service, and relationships with national and regional broker-dealer
firms, banks and other financial institutions.
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HARTFORD LIFE INSURANCE COMPANY 25
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In the structured settlement market, the Institutional segment 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 and Casualty operations.
In the stable value marketplace, the Institutional segment sells GICs, funding
agreements, and investor notes to retirement plan sponsors either through
investment management firms or directly, using Hartford employees.
In the institutional annuities 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.
In the PPVLI market, specialized strategic alliance partners with expertise in
the large case market assist in the placement of many cases. High Net Worth
PPVLI is often placed with the assistance of investment banking and wealth
management specialists.
The hedge fund of funds product is positioned to be sold through family office
arrangements, wealth management platforms of regional banks and other
specialists in the mass-affluent market.
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 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.,
institutional annuities, 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.
For PPVLI, competition in the large case market comes from other insurance
carriers, and from specialized agents with expertise in the benefit funding
marketplace. For high net worth programs, the competition is often from other
investment banking firms allied with other insurance carriers.
The hedge fund of funds product competes against a range of similar products
from respected vendors, including investment banking firms and wire houses. It
is distributed by former members of the PLANCO team which made The Hartford's
annuity business one of the most successful in the industry.
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. Account values
increased 9% to $9.0 billion as of December 31, 2004 from $8.2 billion as of
December 31, 2003. Revenues were $957, $893, and $858 for the years ended
December 31, 2004, 2003 and 2002, respectively. Net income in the Individual
Life segment was $141, $134, and $116 for the years ended December 31, 2004,
2003 and 2002, respectively.
PRINCIPAL PRODUCTS
Hartford Life Insurance Company holds a significant market share in the variable
universal life product market and was the number one seller of variable life
insurance, according to the Tillinghast VALUE Survey, in 2004, for the third
year in a row. In 2004, the Company's sales of individual life insurance were
50% variable universal life, 44% universal life and other, and 6% 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 $5.4 billion and
$4.7 billion as of December 31, 2004 and 2003, 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. Universal life provides
policyholders with flexibility in the timing and amount of premium payments and
the amount of the death benefit, provided there are sufficient policy funds to
cover all policy charges for the coming period, unless guaranteed no-lapse
coverage is in effect. At December 31, 2004, guaranteed no-lapse universal life
represents less than 2% of life insurance in-force. The Company also sells
second-to-die universal life insurance policies.
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. The Company sells both variable and fixed
individual life products through a wide distribution network of national and
regional broker-dealer organizations, banks and independent financial advisors.
The Company is a market leader in selling individual life
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26 HARTFORD LIFE INSURANCE COMPANY
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through national stockbroker and financial institutions. In addition, the
Company distributes individual life insurance through independent life and
property-casualty agents and Woodbury Financial Services, a subsidiary retail
broker dealer. To wholesale the Company's products, the Company has a group of
highly qualified life insurance professionals with specialized training in
sophisticated life insurance sales. These individuals are generally employees of
the Company who are managed through a regional sales office system.
COMPETITION
The Individual Life segment competes with approximately 1,200 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
Life insurance subsidiaries of the Company establish and carry as liabilities,
predominantly, three types of reserves: (1) a liability equal to the balance
that accrues to the benefit of the policyholder as of the financial statement
date, otherwise known as the account value, (2) a liability for unpaid claims,
including those that have been incurred but not yet reported, and (3) a
liability for future policy benefits, representing the present value of future
benefits to be paid to or on behalf of policyholders less the present value of
future net premiums. The liabilities for unpaid claims and future policy
benefits are calculated based on actuarially recognized methods using morbidity
and mortality tables, which are modified to reflect the Company's actual
experience when appropriate. Liabilities for unpaid claims include estimates of
amounts to fully settle known reported claims as well as claims related to
insured events that the Company estimates have been incurred but have not yet
been reported. Future policy benefit 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. Other insurance liabilities
include those for unearned premiums and benefits in excess of account value.
Reserves for assumed reinsurance are computed in a manner that is comparable to
direct insurance reserves. Additional information on 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, 2004, the largest amount of life insurance
retained on any one life by any one of the life operations was approximately
$2.9. In addition, the Company has reinsured the majority of the minimum death
benefit guarantees as well as the guaranteed minimum withdrawal benefits on
contracts issued prior to July 2003 offered in connection with its variable
annuity contracts. 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, 2004, 2003 and
2002, the Company did not make any significant changes in the terms under which
reinsurance is ceded to other insurers except for the Company's 2003 recapture
of a block of business previously reinsured with an unaffiliated reinsurer. For
further discussion see Note 6 of Notes to Consolidated Financial Statements.
INVESTMENT OPERATIONS
The investment portfolios of the Company are managed by Hartford Investment
Management Company ("HIM"), a wholly-owned subsidiary of The Hartford. HIM
manages the portfolios to maximize economic value, while attempting to generate
the income necessary to support the Company's various product obligations,
within internally established objectives, guidelines and risk tolerances. The
portfolio objectives and guidelines are developed based upon the asset/liability
profile, including duration, convexity and other characteristics within
specified risk tolerances. The risk tolerances considered include, for example,
asset and credit issuer allocation limits, maximum portfolio below investment
grade ("BIG") holdings and foreign currency exposure. The Company attempts to
minimize adverse impacts to the portfolio and the results of operations due to
changes in economic conditions through asset allocation limits, asset/liability
duration matching and through the use of derivatives. (For further discussion of
HIM's portfolio management approach, see the Investments General section of the
MD&A.)
REGULATION AND PREMIUM RATES
Insurance companies are subject to comprehensive and detailed regulation and
supervision throughout the United States. The extent of such regulation varies,
but generally has its source in statutes which delegate regulatory, supervisory
and administrative powers to state insurance departments. Such powers relate to,
among other things, the standards of solvency that must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; establishing premium rates; claim handling and trade practices;
restrictions on the size of risks which may be insured under a single policy;
deposits of securities for the benefit of policyholders; approval of policy
forms; periodic examinations of the affairs of companies; annual and other
reports required to be filed on the financial condition of companies or for
other purposes; fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values; and the adequacy of reserves
and other necessary provisions for unearned premiums, unpaid claims and claim
adjustment expenses and other liabilities, both reported and unreported.
Most states have enacted legislation that regulates insurance holding company
systems such as Hartford Life. This legislation
<Page>
HARTFORD LIFE INSURANCE COMPANY 27
- --------------------------------------------------------------------------------
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.
The extent of insurance regulation on business outside the United States varies
significantly among the countries in which the Company operates. Some countries
have minimal regulatory requirements, while others regulate insurers
extensively. Foreign insurers in many countries are faced with greater
restrictions than domestic competitors domiciled in that particular
jurisdiction. The Company's international operations are comprised of insurers
licensed in their respective countries and, therefore, are subject to the
generally less restrictive domestic insurance regulations.
EMPLOYEES
Hartford Life Insurance Company had approximately 3,800 employees as of
December 31, 2004.
PROPERTIES
The 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
January 1, 2010. Expenses associated with these offices are allocated on a
direct basis to the Company by Hartford Fire. The Company believes its
properties and facilities are suitable and adequate for current operations.
LEGAL PROCEEDINGS
The Hartford Financial Services Group, Inc. and its consolidated subsidiaries
("The Hartford") is involved in various legal actions arising in the ordinary
course of business, some of which assert claims for substantial amounts. These
actions include, among others, putative state and federal class actions seeking
certification of a state or national class. Such putative class actions have
alleged, for example, improper sales practices in connection with the sale of
life insurance and other investment products; and improper fee arrangements in
connection with mutual funds. The Hartford 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 estimated losses, will not be material to the consolidated
financial condition of the Company. Nonetheless, given the large or
indeterminate amounts sought in certain of these actions, and the inherent
unpredictability of litigation, 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.
BROKER COMPENSATION LITIGATION -- On October 14, 2004, the New York Attorney
General's Office filed a civil complaint (the "NYAG Complaint") against Marsh
Inc. and Marsh & McLennan Companies, Inc. (collectively, "Marsh") alleging,
among other things, that certain insurance companies, including The Hartford,
participated with Marsh in arrangements to submit inflated bids for business
insurance and paid contingent commissions to ensure that Marsh would direct
business to them. The Hartford is not joined as a defendant in the action. Since
the filing of the NYAG Complaint, several private actions have been filed
against The Hartford asserting claims arising from the allegations of the NYAG
Complaint.
Two securities class actions have been filed in the United States District Court
for the District of Connecticut alleging claims against The Hartford and five of
its executive officers under Section 10(b) of the Securities Exchange Act and
SEC Rule 10b-5. The complaints allege on behalf of a putative class of
shareholders that The Hartford and the five named individual defendants, as
control persons of The Hartford, "disseminated false and misleading financial
statements" by concealing that "[The Hartford] was paying illegal and concealed
'contingent commissions' pursuant to illegal 'contingent commission
agreements."' The class period alleged is November 5, 2003 through October 13,
2004, the day before the NYAG Complaint was filed. The complaints seek damages
and attorneys' fees. The Hartford and the individual defendants dispute the
allegations and intend to defend these actions vigorously.
In addition, three putative class actions have been filed in the same court on
behalf of participants in The Hartford's 401(k) plan against The Hartford,
Hartford Fire Insurance Company, The Hartford's Pension Fund Trust and
Investment Committee, The Hartford's Pension Administration Committee, The
Hartford's Chief Financial Officer, and John/Jane Does 1-15. The suits assert
claims under the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), alleging that The Hartford and the other named defendants breached
their fiduciary duties to plan participants by, among other things, failing to
inform them of the risk associated with investment in The Hartford's stock as a
result of the activity alleged in the NYAG Complaint. The class period alleged
is November 5, 2003 through the present. The complaints seek restitution of
losses to the plan, declaratory and injunctive relief, and attorneys' fees. All
defendants dispute the allegations and intend to defend these actions
vigorously.
Two corporate derivative actions also have been filed in the same court. The
complaints, brought in each case by a shareholder on behalf of The Hartford
against its directors and an executive officer, allege that the defendants knew
adverse non-public information about the activities alleged in the NYAG
Complaint and
<Page>
28 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
concealed and misappropriated that information to make profitable stock trades,
thereby breaching their fiduciary duties, abusing their control, committing
gross mismanagement, wasting corporate assets, and unjustly enriching
themselves. The complaints seek damages, injunctive relief, disgorgement, and
attorneys' fees. All defendants dispute the allegations and intend to defend
these actions vigorously.
Seven putative class actions also have been filed by alleged policyholders in
federal district courts, one in the Southern District of New York, two in the
Eastern District of Pennsylvania, three in the Northern District of Illinois,
and one in the Northern District of California, against several brokers and
insurers, including The Hartford. These actions assert, on behalf of a class of
persons who purchased insurance through the broker defendants, claims under the
Sherman Act and state law, and in some cases the Racketeer Influenced and
Corrupt Organizations Act ("RICO"), arising from the conduct alleged in the NYAG
Complaint. The class period alleged is 1994 through the date of class
certification, which has not yet occurred. The complaints seek treble damages,
injunctive and declaratory relief, and attorneys' fees. Putative class actions
also have been filed in the Circuit Court for Cook County, Illinois, Chancery
Division and in the Circuit Court for Seminole County, Florida, Civil Division,
on behalf of a class of all persons who purchased insurance from a class of
defendant insurers. These state court actions assert unjust enrichment claims
and violations of state unfair trade practices acts arising from the conduct
alleged in the NYAG Complaint and seek remedies including restitution of
premiums, and, in the Cook County action, imposition of a constructive trust,
and declaratory and injunctive relief. The class period alleged is 1994 through
the present. The Hartford has removed the Cook County action to the United
States District Court for the Northern District of Illinois. Pursuant to an
order of the Judicial Panel on Multidistrict Litigation, it is likely that most
or all of these actions will be transferred to the United States District Court
for the District of New Jersey. The Hartford disputes the allegations in all of
these actions and intends to defend the actions vigorously.
Additional complaints may be filed against The Hartford in various courts
alleging claims under federal or state law arising from the conduct alleged in
the NYAG Complaint. The Hartford's ultimate liability, if any, in the pending
and possible future suits is highly uncertain and subject to contingencies that
are not yet known, such as how many suits will be filed, in which courts they
will be lodged, what claims they will assert, what the outcome of investigations
by the New York Attorney General's Office and other regulatory agencies will be,
the success of defenses that The Hartford may assert, and the amount of
recoverable damages if liability is established. In the opinion of management,
it is possible that an adverse outcome in one or more of these suits could have
a material adverse effect on the Company's consolidated results of operations or
cash flows in particular quarterly or annual periods.
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 18, 2005, 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".
SELECTED FINANCIAL DATA
HLIC INCOME STATEMENTS (INCLUDES RECLASSES)*
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
Premiums and other considerations................. $3,076 $3,103 $2,653 $3,084 $2,815
Net investment income............................. 2,470 1,764 1,572 1,491 1,326
Net realized capital gains (losses)............... 129 1 (276) (87) (85)
Total Revenues.................................. 5,675 4,868 3,949 4,488 4,056
Benefits, claims, and claim adjustment expenses... 3,111 2,726 2,275 2,536 2,104
Amortization of deferred policy acquisition costs
and present value of future profits.............. 814 660 531 566 604
Dividends to policyholders........................ 29 63 65 69 67
Other insurance expenses.......................... 709 625 650 621 600
Total benefits, claims and expenses............. 4,663 4,074 3,521 3,792 3,375
Income before income tax expense and cumulative
effect of accounting changes..................... 1,012 794 428 696 681
Income tax expense................................ 29 168 2 44 194
Cumulative effect of Accounting changes, net of
tax.............................................. (18) -- -- (6) --
NET INCOME...................................... 965 626 426 646 487
</Table>
* Information is derived from the Financial Statements.
<Page>
HARTFORD LIFE INSURANCE COMPANY 29
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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, 2004, compared with December 31, 2003, and its
results of operations for each of the three years in the period ended
December 31, 2004. This discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes beginning on page F-1.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
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
possible occurrence of terrorist attacks; the response of reinsurance companies
under reinsurance contracts and the availability, pricing and adequacy of
reinsurance to protect the Company against losses; changes in the stock markets,
interest rates or other financial markets, including the potential effect on the
Company's statutory capital levels; 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 difficulty in predicting the Company's potential exposure arising out of
regulatory proceedings or private claims relating to incentive compensation or
payments made to brokers or other producers and alleged anti-competitive
conduct; the uncertain effect on the Company of regulatory and market-driven
changes in practices relating to the payment of incentive compensation to
brokers and other producers, including changes that have been announced and
those which may occur in the future; the possibility of more unfavorable loss
experience than anticipated; stronger than anticipated competitive activity;
unfavorable judicial or legislative developments, including the possibility that
the Terrorism Risk Insurance Act of 2002 is not extended beyond 2005; the
potential effect of domestic and foreign regulatory developments, including
those which could increase the Company's business costs and required capital
levels; the possibility of general economic and business conditions that are
less favorable than anticipated; 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.
INDEX
<Table>
Overview 12 Investment Credit Risk 33
Critical Accounting Estimates 16 Capital Markets Risk Management 39
Consolidated Results of Operations: Operating
Summary 21 Capital Resources and Liquidity 45
Retail Products Group 23 Effect of Inflation 49
Institutional Solutions Group 25 Impact of New Accounting Standards 49
Individual Life 26
Investments 27
</Table>
OVERVIEW
The Company has three reportable operating segments: Retail Products Group,
Institutional Solutions Group, and Individual Life. The Company provides
investment and retirement products such as variable and fixed annuities,
retirement plan services and other institutional investment products; structured
settlements; private placement life insurance; and individual life insurance
products including variable universal life, universal life, interest sensitive
whole life and term life.
The Company derives its revenues principally from: (a) fee income, including
asset management fees, on separate account and mutual fund assets and mortality
and expense fees, as well as cost of insurance charges; (b) net investment
income on general account assets; (c) fully insured premiums; and (d) certain
other fees. 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.
The Company's expenses essentially consist of interest credited to policyholders
on general account liabilities, insurance benefits provided, amortization of the
deferred policy acquisition costs, expenses related to the selling and servicing
the various products offered by the Company, dividends to policyholders, and
other general business expenses.
<Page>
30 HARTFORD LIFE INSURANCE COMPANY
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The Company's profitability in its variable annuity and to a lesser extent,
variable universal life businesses depends largely on the amount of the contract
holder account value on which it earns fees and the level of fees charged.
Changes in account value are driven by two main factors: net flows, which
measure the success of the Company's asset gathering and retention efforts and
the market return of the funds, which is heavily influenced by the return on the
equity markets. Net flows are comprised of new sales and other deposits less
surrenders, death benefits, policy charges and annuitizations of investment type
contracts, for instance variable annuity contracts. The Company uses the average
daily value of the S&P 500 Index as an indicator for evaluating market returns
of the underlying account portfolios in the United States. Relative
profitability of variable products is highly correlated to the growth in account
values since these products generally earn fee income on a daily basis. Thus, a
prolonged downturn in the financial markets could reduce revenues and
potentially raise the possibility of a charge against deferred policy
acquisition costs.
The profitability of the Company's fixed annuities and other spread based
products 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 the administration of its United
States variable annuity businesses in particular. In addition, the size and
persistency of gross profits from these businesses is an important driver of
earnings as it affects the rate of 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, actual mortality experience, and the efficiency of its
claims and expense management.
PERFORMANCE MEASURES
FEE INCOME
Fee income is largely driven from amounts collected as a result of contractually
defined percentages of assets under management on investment type contracts.
These fees are generally collected on a daily basis from the contract holder's
account. For individual life insurance products, fees are contractually defined
percentages based on levels of insurance, age, premiums and deposits collected
and contractholder account value. Life insurance fees are generally collected on
a monthly basis. Therefore, the growth in assets under management either through
positive net flows and favorable equity market performance will have a favorable
impact on fee income. Conversely, negative net flows and unfavorable equity
market performance will reduce fee income generated from investment type
contracts.
<Table>
<Caption>
FOR THE YEARS ENDED
------------------------------
PRODUCT/KEY INDICATOR INFORMATION 2004 2003 2002
- --------------------------------------------------------------------------------------------
VARIABLE ANNUITIES
Account value at December 31, $ 99,617 $ 86,501 $ 64,343
Net flows 5,471 7,709 2,127
Change in market value 7,645 14,449 (12,365)
INDIVIDUAL LIFE INSURANCE
Variable universal life account value at December 31, $ 5,356 $ 4,725 $ 3,648
Total life insurance in force 139,889 130,798 126,680
S&P 500 INDEX
Year end closing value 1,212 1,112 880
Daily average value 1,131 965 995
- --------------------------------------------------------------------------------------------
</Table>
NET INVESTMENT INCOME AND INTEREST CREDITED
Certain investment type contracts such as fixed annuities and other spread-based
contracts generate deposits that the Company collects and invests to earn
investment income. These deposits comprise the majority of the assets of the
general account that are invested to generate investment income for the Company.
The investment type contracts use this investment income to credit the contract
holder an amount of interest specified in the respective contract. As discussed
in the overview, the amount of investment income earned in excess of the
interest credited to the contract holder is the spread income earned by the
Company. For insurance type contracts, net
<Page>
HARTFORD LIFE INSURANCE COMPANY 31
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investment income earned during the time that premiums are invested prior to
paying claims and expenses supports the profitability of these products.
<Table>
<Caption>
FOR THE YEARS ENDED
-------------------------
2004 2003 2002
- -----------------------------------------------------------------------------
NET INVESTMENT INCOME
Retail Products Group segment $1,079 $ 493 $ 367
Institutional Solutions Group segment 1,044 976 958
Individual Life segment 267 222 224
Other 80 73 23
------ ------ ------
TOTAL NET INVESTMENT INCOME $2,470 $1,764 $1,572
====== ====== ======
INTEREST CREDITED ON GENERAL ACCOUNT ASSETS
Retail Products Group segment $ 880 $ 325 $ 256
Institutional Solutions Group segment 586 564 549
Individual Life segment 192 166 170
Other -- -- --
------ ------ ------
TOTAL INTEREST CREDITED ON GENERAL ACCOUNT
ASSETS $1,658 $1,055 $ 975
====== ====== ======
- -----------------------------------------------------------------------------
</Table>
The significant increase in net investment income and interest credited in the
Retail Products Group segment and, to a lesser extent Individual Life segment,
was largely the result of the adoption of SOP 03-1. The adoption of SOP 03-1
resulted in certain changes in presentation in the Company's financial
statements, including reporting of the spreads on the Company's MVA fixed
annuities on a gross basis in net investment income and interest credited.
EXPENSES
There are three major categories for expenses. The first category of expenses is
benefits and claims. These include the costs of mortality, in the individual
life business, as well as other contract holder benefits to policyholders.
The second major category is insurance operating costs and expenses, which is
commonly expressed in a ratio of a revenue measure depending on the type of
business. The third category is the amortization of deferred policy acquisition
costs and the present value of future profits, which is typically expressed as a
percentage of pretax income before the cost of this amortization. The individual
annuity business within the Retail Products Group segment accounts for the
majority of the amortization of deferred policy acquisition costs and present
value of future profits for the Company.
<Table>
<Caption>
FOR THE YEARS ENDED
-------------------------
2004 2003 2002
- -----------------------------------------------------------------------------
RETAIL PRODUCTS GROUP
Insurance expenses, net of deferrrals $ 445 $ 374 $ 358
Expense ratio (individual annuity) 18.3bps 22.0bps 24.5bps
DAC amortization ratio (individual annuity) 50.8% 49.6% 47.0%
INDIVIDUAL LIFE
Death benefits $ 211 $ 192 $ 205
Insurance expenses, net of deferrrals $ 153 $ 150 $ 144
- -----------------------------------------------------------------------------
</Table>
PROFITABILITY
Management evaluates the rates of return various businesses can provide as a way
of determining where additional capital is invested to increase net income and
shareholder returns. Specifically, because of the importance of its individual
annuity products, the Company uses the return on assets for the individual
annuity business for evaluating profitability.
<Table>
<Caption>
RATIOS 2004 2003 2002
- --------------------------------------------------------------------------------
Retail Products Group
Individual annuity return on assets 44.8bps 45.9bps 41.8bps
- --------------------------------------------------------------------------------
</Table>
<Page>
32 HARTFORD LIFE INSURANCE COMPANY
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REGULATORY DEVELOPMENTS
In June 2004, The Hartford received a subpoena from the New York Attorney
General's Office in connection with its inquiry into compensation arrangements
between brokers and carriers. In mid-September 2004 and subsequently, The
Hartford has received additional subpoenas from the New York Attorney General's
Office, which relate more specifically to possible anti-competitive activity
among brokers and insurers. Since the beginning of October 2004, The Hartford
has received subpoenas or other information requests from Attorneys General and
regulatory agencies in more than a dozen jurisdictions regarding broker
compensation and possible anti-competitive activity. The Hartford may receive
additional subpoenas and other information requests from Attorneys General or
other regulatory agencies regarding similar issues. The Hartford also has
received a subpoena from the New York Attorney General's Office requesting
information related to The Hartford's underwriting practices with respect to
legal professional liability insurance. In addition, The Hartford has received a
request for information from the New York Attorney General's Office concerning
The Hartford's compensation arrangements in connection with the administration
of workers compensation plans. The Hartford intends to continue cooperating
fully with these investigations, and is conducting an internal review, with the
assistance of outside counsel, regarding the issues under investigation.
On October 14, 2004, the New York Attorney General's Office filed a civil
complaint against Marsh & McLennan Companies, Inc., and Marsh, Inc.
(collectively, "Marsh"). The complaint alleges, among other things, that certain
insurance companies, including The Hartford, participated with Marsh in
arrangements to submit inflated bids for business insurance and paid contingent
commissions to ensure that Marsh would direct business to them. The Hartford is
not joined as a defendant in the action. Although no regulatory action has been
initiated against The Hartford in connection with the allegations described in
the civil complaint, it is possible that the New York Attorney General's Office
or one or more other regulatory agencies may pursue action against The Hartford
or one or more of its employees in the future. The potential timing of any such
action is difficult to predict. If such an action is brought, it could have a
material adverse effect on the Company.
On October 29, 2004, the New York Attorney General's Office informed The
Hartford that the Attorney General is conducting an investigation with respect
to the timing of the previously disclosed sale by Thomas Marra, a director and
executive officer of The Hartford, of 217,074 shares of The Hartford's common
stock on September 21, 2004. The sale occurred shortly after the issuance of two
additional subpoenas dated September 17, 2004 by the New York Attorney General's
Office. The Hartford has engaged outside counsel to review the circumstances
related to the transaction and is fully cooperating with the New York Attorney
General's Office. On the basis of the review, The Hartford has determined that
Mr. Marra complied with The Hartford's applicable internal trading procedures
and has found no indication that Mr. Marra was aware of the additional subpoenas
at the time of the sale.
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, including
market timing and late trading, revenue sharing and directed brokerage, fees,
transfer agents and other fund service providers, and other mutual-fund related
issues. The Hartford has received requests for information and subpoenas from
the Securities and Exchange Commission ("SEC"), subpoenas from the New York
Attorney General's Office, requests for information from the Connecticut
Securities and Investments Division of the Department of Banking, and requests
for information from the New York Department of Insurance, in each case
requesting documentation and other information regarding various mutual fund
regulatory issues.
The SEC's Division of Enforcement and the New York Attorney General's Office are
investigating aspects of The Hartford's variable annuity and mutual fund
operations related to market timing. The Hartford's mutual funds are available
for purchase by the separate accounts of different variable universal 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 Hartford with respect to certain owners of older variable annuity
products, The Hartford's ability to restrict transfers by these owners is
limited. In February 2005, the Company agreed in principle with the Boards of
Directors of the mutual funds to indemnify the mutual funds for any material
harm caused to the funds from frequent trading by these owners. The specific
terms of the indemnification have not been determined. The SEC's Division of
Enforcement also is investigating aspects of The Hartford's variable annuity and
mutual fund operations related to directed brokerage and revenue sharing. The
Hartford discontinued the use of directed brokerage in recognition of mutual
fund sales in late 2003. The Hartford also has received a subpoena from the New
York Attorney General's Office requesting information related to The Hartford's
group annuity products. The Hartford continues to cooperate fully with the SEC,
the New York Attorney General's Office and other regulatory agencies.
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, which have included a range of monetary penalties and
restitution. While no such action has been initiated against The Hartford, the
SEC, and the New York Attorney General's Office are likely to take some action
at the conclusion of the on-going investigations related to market timing and
directed brokerage. The potential timing of any such action is difficult to
predict, and The Hartford's ultimate liability, if any, from any such action is
not reasonably estimable at this time. If such an action is brought, it could
have a material
<Page>
HARTFORD LIFE INSURANCE COMPANY 33
- --------------------------------------------------------------------------------
adverse effect on the Company's consolidated results of operations or cash flows
in particular quarterly or annual periods.
BROKER COMPENSATION
As The Hartford has disclosed previously, the Company pays brokers and
independent agents commissions and other forms of incentive compensation in
connection with the sale of many of the Company's insurance products. Since the
New York Attorney General's Office filed a civil complaint against Marsh &
McLennan Companies, Inc. and Marsh, Inc. (collectively, "Marsh") on October 14,
2004, several of the largest national insurance brokers, including Marsh, have
announced that they have discontinued the use of contingent compensation
arrangements. Other industry participants may make similar, or different,
determinations in the future. In addition, legal, legislative, regulatory,
business or other developments may require changes to industry practices
relating to incentive compensation. At this time, it is not possible to predict
the effect of these announced or potential changes on the Company's business or
distribution strategies.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America ("GAAP"), requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability; insurance reserves; deferred policy acquisition costs and present
value of future profits; the valuation of investments and derivative instruments
and the evaluation of other-than-temporary impairments; 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.
RESERVES FOR FUTURE POLICY BENEFITS, UNPAID CLAIMS, CLAIM ADJUSTMENT EXPENSES,
OTHER POLICYHOLDER FUNDS, AND BENEFITS PAYABLE
The Company's life insurance subsidiaries establish and carry as liabilities,
predominantly, three types of reserves: (1) a liability for amounts that accrue
to the benefit of the policyholder as of the financial statement date, (2) a
liability for unpaid claims, including those that have been incurred but not yet
reported, and (3) a liability for future policy benefits. Reserves also include
amounts for unearned premiums. Reserves for assumed reinsurance are computed in
a manner that is comparable to direct insurance reserves.
The Company has classified its fixed and variable annuities, 401(k), certain
governmental annuities, private placement life insurance, variable life
insurance, universal life insurance and interest sensitive whole life insurance
as universal life-type contracts. The liability for universal life-type
contracts is equal to the balance that accrues to the benefit of the
policyholders as of the financial statement date (commonly referred to as the
account value), 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. Certain contracts classified as universal life-type
may also include additional death or other insurance benefit features, such as
guaranteed minimum death or income benefits offered with variable annuity
contracts or no lapse guarantees offered with universal life insurance
contracts. An additional liability is established for these benefits by
estimating the expected present value of the benefits in excess of the projected
account value in proportion to the present value of total expected assessments.
Excess benefits are accrued as a liability as actual assessments are recorded.
Determination of the expected value of excess benefits and assessments are based
on a range of scenarios and assumptions including those related to market rates
of return and volatility, contract surrender rates and mortality experience.
The Company has classified its institutional and governmental products, without
life contingencies, including funding agreements, structured settlements and
guaranteed investment contracts, as investment contracts. The liability for
investment contracts is equal to the balance that accrues to the benefit of the
contract holder as of the financial statement date, which includes the
accumulation of deposits plus credited interest, less withdrawals and amounts
assessed through the financial statement date.
Liabilities for the Company's individual term life insurance policies include
amounts for unpaid claims and future policy benefits. Liabilities for unpaid
claims include estimates of amounts to fully settle known reported claims as
well as claims related to insured events that the Company estimates have been
incurred but have not yet been reported. Liabilities for future policy benefits
are calculated by estimating the present value of future policy benefits to be
paid to or on behalf of policyholders less the estimated present value of future
net premiums. The methods used in determining the liability for unpaid claims
and future policy benefits are standard actuarial methods recognized by the
American Academy of Actuaries. For the tabular reserves, discount rates are
based on the Company's earned investment yield and the mortality tables used are
standard industry tables modified to reflect the Company's actual experience
when appropriate. Future policy benefits 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
<Page>
34 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
mortality, expected future premiums and interest can significantly affect the
Company's reserve levels and related future operations and, as such, provisions
for adverse deviation are built into the long-tailed liability assumptions.
VALUATION OF INVESTMENTS AND DERIVATIVE INSTRUMENTS AND EVALUATION OF
OTHER-THAN-TEMPORARY IMPAIRMENTS
The Company's investments in fixed maturities, which include bonds, redeemable
preferred stock and commercial paper; and certain 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" ("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 stockholders' equity as a component of
accumulated other comprehensive income ("AOCI"). Equity investments classified
as "trading", as defined in SFAS No. 115, are recorded at fair value, with
changes in fair value recorded in net investment income. 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 Company's share of 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 service market
quotations, 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, certain 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 an independent 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
the 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, 2004 and 2003, primarily consisted of non-144A private placements
and have an average duration of 4.7 and 4.3, respectively.
The following table identifies the fair value of fixed maturity securities by
pricing source as of December 31, 2004 and 2003:
<Table>
<Caption>
2004 2003
---------------------- ----------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE
- --------------------------------------------------------------------------------------------------
Priced via independent market quotations $34,429 80.6% $33,838 80.9%
Priced via broker quotations 3,074 7.2% 3,060 7.3%
Priced via matrices 3,508 8.2% 3,086 7.4%
Priced via other methods 61 0.2% 280 0.7%
Short-term investments (1) 1,619 3.8% 1,556 3.7%
------- ----- ------- -----
TOTAL $42,691 100.0% $41,820 100.0%
------- ----- ------- -----
TOTAL GENERAL ACCOUNTS $30,085 71.9%
TOTAL GUARANTEED SEPARATE ACCOUNTS (2) $11,735 28.1%
- --------------------------------------------------------------------------------------------------
</Table>
(1) Short-term investments are primarily valued at amortized cost, which
approximates fair value.
(2) Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting SOP 03-1.
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between knowledgeable, unrelated
willing parties. 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.
<Page>
HARTFORD LIFE INSURANCE COMPANY 35
- --------------------------------------------------------------------------------
VALUATION OF DERIVATIVE INSTRUMENTS
Derivative instruments are reported at fair value based upon either independent
market quotations or pricing valuation models which utilize independent third
party data as inputs. Other than the guaranteed minimum withdrawal benefit
("GMWB") and the associated reinsurance contracts, which are discussed below,
approximately 76% of derivatives, based upon notional values, were priced via
valuation models and the remaining 24% of derivatives were priced via
independent market quotations.
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 the security is deemed to be
other-than-temporarily impaired, a charge is recorded in net realized capital
losses equal to the difference between the fair value and amortized cost basis
of the security. In addition, 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. 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 ("the
committee") 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 in an unrealized loss position, are reviewed at least
quarterly to determine if an other-than-temporary impairment is present based on
certain quantitative and qualitative factors. 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. Non-EITF Issue No. 99-20 securities depressed by twenty
percent or more for six months are presumed to be other-than-temporarily
impaired unless significant objective verifiable evidence supports that the
security price is temporarily depressed and is expected to recover within a
reasonable period of time. The evaluation of non-EITF Issue No. 99-20 securities
depressed more than ten percent is documented and discussed quarterly by the
committee.
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.
Estimating future cash flows is a quantitative and qualitative process that
incorporates information received from third party sources along with certain
internal assumptions and judgments regarding the future performance of the
underlying collateral. As a result, actual results may differ from current
estimates. In addition, projections of expected future cash flows may change
based upon new information regarding the performance of the underlying
collateral.
Once an impairment charge has been recorded, the Company continues to review the
other-than-temporarily impaired securities for additional other-than-temporary
impairments. As discussed in Note 2 of the Notes to Consolidated Financial
Statements, the Financial Accounting Standards Board ("FASB") voted to delay the
implementation of the impairment measurement and recognition guidance contained
in paragraphs 10-20 of EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairments and Its Application to Certain Investments" ("EITF Issue No. 03-1"),
in order to redeliberate certain aspects of the consensus. The ultimate
completion of EITF Issue No. 03-1 may impact the Company's current
other-than-temporary impairment evaluation process.
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
<Page>
36 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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.
DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
Policy acquisition costs include commissions and certain other expenses that
vary with and are primarily associated with acquiring business. Present value of
future profits is an intangible asset recorded upon applying purchase accounting
in an acquisition of a life insurance company. Deferred policy acquisition costs
and the present value of future profits intangible asset are amortized in the
same way. Both are amortized over the estimated life of the contracts acquired,
usually 20 years. Within the following discussion, deferred policy acquisition
costs and the present value of future profits intangible asset will be referred
to as "DAC". At December 31, 2004 and 2003, the carrying value of the Company's
DAC was $6.5 billion and $6.1 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, 2004 and 2003,
respectively. For other products, including fixed annuities and other universal
life-type contracts, the average assumed investment yield ranged from 5.7% to
7.9% for both years ended December 31, 2004 and 2003.
The Company had developed models 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, 2004, 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, 2004 is necessary;
however, if in the future the EGPs utilized in the DAC amortization model were
to fall outside of 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 25% 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, 2004. If the Company assumed a 9% average long-term rate of growth
from December 31, 2004 forward along with other appropriate assumption changes
in determining the revised EGPs, the Company estimates the cumulative decrease
to amortization would be approximately $70-$75, 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 $35-$40, 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
<Page>
HARTFORD LIFE INSURANCE COMPANY 37
- --------------------------------------------------------------------------------
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
1,212 on December 31, 2004), 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, 2004, the Company believed variable annuity
separate account assets could fall by at least 45% before portions of its DAC
asset would be unrecoverable.
CONTINGENCIES
Management follows the requirements of SFAS No. 5 "Accounting for
Contingencies." This statement requires management to evaluate each contingent
matter separately. A loss is recorded if estimable and probable. 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 matters, which are inherently difficult to evaluate and subject
to significant changes.
CONSOLIDATED RESULTS OF OPERATIONS
OPERATING SUMMARY
<Table>
<Caption>
2004 VS. 2003 2003 VS. 2002
2004 2003 2002 CHANGE CHANGE
- ---------------------------------------------------------------------------------------------------------------------------
Fee income $2,592 $2,169 $2,079 20% 4%
Earned premiums 484 806 453 (40)% 78%
Net investment income (1) 2,470 1,764 1,572 40% 12%
Other revenues -- 128 121 NM 6%
Net realized capital gains (losses) 129 1 (276) 128% NM
------ ------ ------ ---- ----
TOTAL REVENUES 5,675 4,868 3,949 17% 23%
Benefits, claims and claim adjustment expenses (1) 3,111 2,726 2,275 14% 20%
Amortization of deferred policy acquisition costs and
present value of future profits 814 660 531 23% 24%
Insurance expenses and other 738 688 715 7% (4)%
------ ------ ------ ---- ----
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,663 4,074 3,521 14% 16%
------ ------ ------ ---- ----
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 1,012 794 428 27% 86%
Income Tax expense 29 168 2 (83)% NM
Income before cumulative effect of accounting change 983 626 426 57% 47%
Cumulative effect of accounting change, net of tax (2) (18) -- -- -- --
Net Income $ 965 $ 626 $ 426 54% 47%
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
(1) With the adoption of SOP 03-1, certain annuity and individual life products
were required to be accounted for in the general account. This change in
accounting resulted in an increase of $619 in net investment income, an
increase of $589 in benefits, claims, and claim adjustment expenses and a
decrease of $128 in other revenues for the year ended December 31, 2004,
respectively.
(2) For the years ended December 31, 2004, represents cumulative impact of the
Company's adoption of SOP 03-1.
The Company changed its reportable operating segments in 2004 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, structured settlements, and private placement
life insurance. 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
<Page>
38 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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.
2004 COMPARED TO 2003 -- Net income increased due primarily to a lower effective
income tax rate, higher net realized capital gains, and business growth in the
Retail segment as discussed below. (See the Investments section for further
discussion of investment results and related realized capital gains.) During the
third quarter of 2004, the Internal Revenue Service completed its examination of
the 1998-2001 tax years. (For further discussion see Note 11 of Notes to
Condensed Consolidated Financial Standards under Tax Matters). The Company
recorded in the third quarter of 2004 a tax benefit of $191, consisting
primarily of a change in estimate of the dividends-received deduction ("DRD")
tax benefit reported during 2003 and prior years and interest, and changed the
estimate of the after-tax benefit for the DRD benefit related to the 2004 tax
year.
Net income in the Retail segment increased, principally driven by growth in the
variable annuity business as a result of increasing assets under management.
Partially offsetting the increase in the Retail segment was lower spread income
on market value adjusted ("MVA") fixed annuities due to the adoption of SOP
03-1. Additionally, net income was higher for Individual Life. The increase in
Individual Life earnings was primarily driven by improved net investment spread
including the effects of prepayments and growth in account values and life
insurance in force.
The effective tax rate was 3% for the current year as compared to an effective
tax rate of 21% for the respective prior year period. The lower effective tax
rate was attributed to tax related items, as discussed above, of $191 and a 2004
tax year DRD benefit of $132, as compared to tax related items of $23 and a 2003
tax year DRD benefit of $87 reported for the years ended December 31, 2004 and
2003, respectively.
Slightly offsetting the positive earnings drivers for the year ended
December 31, 2004 was the cumulative effect of accounting change from the
Company's adoption of SOP 03-1 and a decrease in net income in the Institutional
segment. The adoption of SOP 03-1 also resulted in certain changes in
presentation in the Company's financial statements, including reporting of the
spreads on the Company's MVA fixed annuities on a gross basis in net investment
income and benefits expense. Exclusive of the cumulative effect, overall
application of SOP 03-1 resulted in an immaterial reduction in net income. (For
further discussion of the impact of the Company's adoption of SOP 03-1, see Note
2 of Notes to Condensed Consolidated Financial Statements). Additionally, the
net income for the Institutional segment decreased primarily due to a $9
after-tax benefit, recorded in the third quarter ended September 30, 2003,
associated with the settlement of the Bancorp Services, LLC ("Bancorp")
litigation. Also contributing to this decrease was lower income from the
institutional business due to lower spread income.
2003 COMPARED TO 2002 -- Net income increased for the year ended December 31,
2003 due primarily to net realized capital gains in 2003 compared to net
realized capital losses in 2002, and the growth in the Retail and Institutional
segments. The earnings growth in the Retail segment is due to an increase in fee
income and net investment income. Fee income in the Retail segment was higher in
2003 compared to 2002, as a result of higher average account values,
specifically in the individual annuities business, due primarily to stronger
variable annuity sales as well as market appreciation. Net investment income in
Retail increased due to higher general account assets in the individual annuity
business. Institutional's earnings increased principally as a result of higher
income from the PPLI business due to a $9 after-tax benefit, associated with the
settlement of the Bancorp litigation recorded in 2003, compared to the $11
after-tax expense recorded in 2002. Additionally, Individual Life experienced
earnings growth in 2003 due to increases in fees and cost of insurance, as life
insurance in-force grew and aged, and variable universal life account values
increased 30% due primarily to growth in the equity markets and favorable
mortality. 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 related to the 2002 tax year
for the year ended December 31, 2002.
OUTLOOK
In 2004, the Company experienced record earnings driven by strong growth in
assets under management, strong expense management, and a DRD tax benefit
related to prior years of $191. Due to gains in the equity markets and positive
net flows, assets under management grew 14% resulting in increased fee income
earned on those assets. The growth and profitability of the Company in the
future is dependent to a large degree on the performance of the equity markets
as well as each segment's ability to attract new customers and attract and
retain assets under management. Please refer to each segment's results for
outlooks on specific segments and products.
<Page>
HARTFORD LIFE INSURANCE COMPANY 39
- --------------------------------------------------------------------------------
SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
<Table>
<Caption>
2004 2003 2002
- --------------------------------------------------------------------
Retail Products $392 $341 $280
- --------------------------------------------------------------------
Institutional Solutions 105 119 94
- --------------------------------------------------------------------
Individual Life 141 134 116
- --------------------------------------------------------------------
Other (1) 327 32 (64)
- --------------------------------------------------------------------
Net Income $965 $626 $426
- --------------------------------------------------------------------
</Table>
(1) For 2004, includes a $191 tax benefit recorded in the Other category, which
relates to the agreement with the IRS on the resolution of matters
pertaining to tax years prior to 2004. For further discussion of this tax
benefit, see Note 11.
A description of each segment as well as an analysis of the operating results
summarized above is included on the following pages.
RETAIL PRODUCTS GROUP
OPERATING SUMMARY
<Table>
<Caption>
2004 VS. 2003 2003 VS. 2002
2004 2003 2002 CHANGE CHANGE
- ----------------------------------------------------------------------------------------------------------------------
Fee income and other $ 1,592 $ 1,302 $ 1,207 22% 8%
Earned premiums (41) (37) (25) (11)% (48)%
Net investment income 1,079 493 367 119% 34%
Net realized capital (losses) gains (4) 16 7 NM 129%
-------- ------- -------- --- ---
TOTAL REVENUES 2,626 1,774 1,556 48% 14%
Benefits, claims and claim adjustment expenses 1,119 567 486 97% 17%
Insurance operating costs and other expenses 445 374 358 19% 4%
Amortization of deferred policy acquisition costs 608 462 377 32% 23%
-------- ------- -------- --- ---
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,172 1,403 1,221 55% 15%
-------- ------- -------- --- ---
INCOME BEFORE INCOME TAXES ANDCUMULATIVE EFFECT OF
ACCOUNTING CHANGE 454 371 335 22% 11%
Income tax expense 43 30 55 43% (45)%
Income before cumulative effect of accounting change 411 341 280 21% 22%
Cumulative effect of accounting change, net of tax (1) (19) -- -- NM --
-------- ------- -------- --- ---
NET INCOME $ 392 $ 341 $ 280 15% 22%
- ----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
2004 VS. 2003 2003 VS. 2002
ACCOUNT VALUE 2004 2003 2002 CHANGE CHANGE
- ----------------------------------------------------------------------------------------------------------------------
Individual variable annuity account values $ 99,617 $86,501 $ 64,343 15% 34%
Individual fixed annuity and other account values 11,384 11,215 10,565 2% 6%
Other retail products account values (2) 6,531 4,606 2,972 42% 55%
-------- ------- -------- --- ---
TOTAL ACCOUNT VALUE $117,532 $102,322 $ 77,880 15% 31%
- ----------------------------------------------------------------------------------------------------------------------
</Table>
(1) Represents the cumulative impact of the Company's adoption of SOP 03-1.
(2) Includes policyholders balances for investments contracts and reserve for
future policy benefits for insurance contracts.
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 investment products. The Company is both a
leading writer of individual variable annuities and a top seller of individual
variable annuities through banks in the United States.
2004 COMPARED TO 2003 -- Net income increased for the year ended December 31,
2004, principally driven by higher fee income from double digit growth in
account value in virtually all businesses of the segment and strong expense
management. Fee income generated by the variable annuity operation increased, as
average account values were higher in the current year compared to the
respective prior year periods. The increase in average account values can be
attributed to market appreciation of $7.6 billion and net flows of $5.5 billion
during 2004. Another contributing factor to the increase in fee income was the
increase in account value in the 401(k) business of 42% to $6.5 billion as a
result of favorable net flows and market conditions.
Partially offsetting the positive earnings drivers discussed above were higher
DAC amortization costs, lower income from the fixed annuity business and the
cumulative effect of accounting change from the Company's adoption of SOP 03-1.
DAC amortization was higher in the current year as compared to the prior
<Page>
40 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
year due to higher subsequent deposit activity primarily in individual annuity.
The decrease in net income in the fixed annuity business in 2004 compared to
2003 was principally due to lower investment spread from the market value
adjusted ("MVA") product. With the adoption of SOP 03-1, the Company includes
the investment return from the fixed annuity product in net investment income
and includes interest credited to contract holders in the benefits, claims and
expenses line on the income statement rather than reporting the net spread in
fee income and other.
Additionally, income tax expense was higher for the current year due primarily
to higher income earned by the segment. This increase was largely offset by a
higher DRD tax benefit of $116 related to the 2004 tax year reported for the
year ended December 31, 2004, as discussed above, as compared to the DRD tax
benefit of $79 related to the 2003 tax year reported in the prior year.
2003 COMPARED TO 2002 -- Net income was higher driven by an increase in revenues
in the individual annuity and other retail product operations as a result of the
strong net flows and growth in the equity markets during 2003 and strong expense
management. Net income increased due to an increase in fee income in Retail. Fee
income in Retail was higher in 2003 compared to 2002, as a result of higher
average account values, specifically in the individual annuities business, due
primarily to stronger variable annuity sales and the higher equity market values
compared to the prior year. 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 or 9% from 2002, due primarily to an increase in individual annuity sales,
with the majority of those new sales electing to use the dollar cost averaging
("DCA") feature. The DCA feature allows policyholders to earn a credited
interest rate in the general account for a defined period of time as their
invested assets are systematically invested into the separate account funds.
Additionally, there was increased interest credited in the individual annuity
operation as a result of higher general account asset levels and an increase in
amortization of deferred policy acquisition costs related to the individual
annuity business due to higher gross profits.
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 related to the
2002 tax year for the year ended December 31, 2002.
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. Individual
annuity sales in 2004 were $15.7 billion (a 5% decrease) compared to $16.5
billion in 2003, and 401(k) products experienced an increase of 37% in sales in
2004 compared to 2003.
Significantly contributing to the Company's variable annuity sales during 2004
and 2003 was Principal First, a guaranteed minimum withdrawal benefit (GMWB)
rider, which was developed in response to our customers' needs. However,
competition has increased substantially in this market with most major variable
annuity writers now offering GMWB riders and as a result, the Company may not be
able to sustain the level of sales attained in 2004. In an effort to meet
diverse customer needs, in the fourth quarter of 2004 the Company introduced
Principal First Preferred, a lower cost GMWB alternative to Principal First. The
success of this new product will ultimately be based on customer acceptance.
According to VARDS, the Company had 11.87% market share as of December 31, 2004
as compared to 12.6% at December 31, 2003. With the increased competition in the
variable annuity market causing lower sales levels from the record level in
2003, combined with an aging block of business, net flows may decline from
levels experienced in 2004. This will be largely dependent on the Company's
ability to retain contractholder's account values as they reach the end of the
surrender charge period of their contract. In addition, new flows in the
Company's fixed annuity block may be impacted by approximately $2 billion of
contracts reaching renewal dates in 2005 at crediting rates significantly above
those offered currently.
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 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, 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. For spread based products sold in the Retail segment, the
future growth will depend on the ability to earn targeted returns on new
business given competition, retention of account values in the fixed annuity
business where the contract holder's rate guarantee expires in the upcoming
year, and the future interest rate environment.
<Page>
HARTFORD LIFE INSURANCE COMPANY 41
- --------------------------------------------------------------------------------
INSTITUTIONAL SOLUTIONS GROUP
OPERATING SUMMARY
<Table>
<Caption>
2004 VS. 2003 2003 VS. 2002
2004 2003 2002 CHANGE CHANGE
- ----------------------------------------------------------------------------------------------------------------------
Fee income and other $ 297 $ 301 $ 349 (1%) (14%)
Earned premiums 472 793 420 (40)% 89%
Net investment income 1,044 976 958 7% 2%
Net realized capital gains 7 12 3 (42)% NM
-------- ------- -------- --- ---
TOTAL REVENUES 1,820 2,082 1,730 (13)% 20%
-------- ------- -------- --- ---
Benefits, claims and claim adjustment expenses 1,510 1,733 1,356 (13)% 28%
Insurance operating costs and other expenses 128 140 226 (9)% (38)%
Amortization of deferred policy acquisition costs 37 33 8 12% NM
-------- ------- -------- --- ---
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,675 1,906 1,590 (12)% 20%
-------- ------- -------- --- ---
INCOME BEFORE INCOME TAXES 145 176 140 (18)% 26%
Income tax expense 40 57 46 (30)% 24%
-------- ------- -------- --- ---
NET INCOME $ 105 $ 119 $ 94 (12)% 27%
- ----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
2004 VS. 2003 2003 VS. 2002
ACCOUNT VALUE 2004 2003 2002 CHANGE CHANGE
- ----------------------------------------------------------------------------------------------------------------------
Institutional account values $ 14,309 $12,357 $ 9,433 16% 31%
Governmental account values 9,962 8,965 7,211 11% 24%
PRIVATE PLACEMENT LIFE INSURANCE ACCOUNT VALUES:
Variable Products 22,498 20,993 19,674 7% 7%
Leveraged COLI 2,529 2,524 3,321 -- (24)%
Total Private Placement Life Insurance Account Values
(1) 25,027 23,517 22,995 6% 2%
Total Account Values $ 49,298 $44,839 $ 39,639 10% 13%
- ----------------------------------------------------------------------------------------------------------------------
</Table>
(1) Includes policyholder balances for investment contracts and reserves for
future policy benefits for insurance contracts.
The Institutional Solutions Group primarily offers customized wealth creation
and financial protection for institutions, corporate and government employers
and high net worth individuals through its three business units: Government,
Institutional Investment Products ("IIP") and private placement life insurance
("PPLI") (formerly Corporate Owned Life Insurance or "COLI").
2004 COMPARED TO 2003 -- Net income for the year ended December 31, 2004
decreased primarily due to a $9 after-tax benefit, recorded in 2003, associated
with the settlement of the Bancorp litigation. Also contributing to this
decrease was lower income from the IIP business. The decrease in net income in
IIP was due primarily to lower spread income and slightly higher insurance
operating costs for the year ended December 31, 2004 as compared to 2003. In
addition, IIP reported lower earnings for the current year compared to the prior
year due to favorable mortality experience in 2003. Private placement life
insurance also experienced lower earnings, excluding the settlement of the
Bancorp litigation, for the year ended December 31, 2004 as compared to the
prior year periods due to lower average leveraged COLI account values. Partially
offsetting the decrease in net income was higher income in the governmental
business for current year. This increase was primarily attributable to higher
revenues earned from the growth in the average account values as a result of
positive net flows and market appreciation since the prior year coupled with
improved spreads and expense management. Additionally, income tax expense was
lower for the year ended December 31, 2004 due primarily to lower income, as
discussed above and a higher DRD tax benefit of $11 related to the 2004 tax
year, as compared to the DRD tax benefit of $4 related to the 2003 tax year
reported in the prior year period.
2003 COMPARED TO 2002 -- Net income increased in 2003 compared to 2002
principally as a result of higher income from the PPLI business due to a
decrease in other expenses. Other expenses decreased due primarily to a $9
after-tax benefit, related to the Bancorp litigation settlement recorded in 2003
compared with the $11 after-tax expense recorded in 2002. Additionally, IIP
earnings increased as a result of favorable mortality experience and growth in
average assets over the last twelve months. General account assets under
management related to the IIP increased to $9.9 billion as of December 31, 2003.
The increase in general account assets was primarily due to higher net flows and
market appreciation related to institutional annuities and structured settlement
products. Partially offsetting the increase in earnings in the IIP was lower
PPLI income 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 the prior year. In addition, amortization of deferred policy acquisition
costs increased as a result of higher sales in the institutional investment
products business.
<Page>
42 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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 related to the 2002 tax year for the year ended
December 31, 2002.
OUTLOOK
The future net income of this segment will depend on the Company's ability to
increase assets under management and maintain its investment spread earnings on
the majority of the products sold in largely the IIP and Government businesses.
These markets are highly competitive from a pricing perspective, and a small
number of cases often account for a significant portion of sales, therefore the
Company may not be able to sustain the level of assets under management growth
attained in 2004. In 2004, IIP introduced the Hartford Income Notes, a new
funding agreement backed product that provides the Company with opportunity for
future growth. This product provides access to both a multi-billion-dollar
retail market, and a nearly trillion dollar institutional market. These markets
are very competitive and the Company's success depends in part on the level of
credited interest rates and the Company's credit rating. The focus of the PPLI
business is variable PPLI products to fund non-qualified benefits or other post
employment benefit liabilities. The leveraged COLI business, while in run-off,
has been an important contributor to PPLI's profitability in recent years and
will continue to contribute to the profitability of the Company albeit at lower
levels. The market served by PPLI is subject to extensive legal and regulatory
review that could have an adverse effect on its business.
INDIVIDUAL LIFE
OPERATING SUMMARY
<Table>
<Caption>
2004 VS. 2003 2003 VS. 2002
2004 2003 2002 CHANGE CHANGE
- ---------------------------------------------------------------------------------------------------------------------------
Fee income and other $ 705 $ 685 $ 639 3% 7%
Earned premiums (16) (14) (4) (14)% NM
Net investment income 267 222 224 20% (1)%
Net realized capital gains (losses) 1 -- (1) -- 100%
------ ------ ------ --- ---
TOTAL REVENUES 957 893 858 7% 4%
------ ------ ------ --- ---
Benefits, claims and claim adjustment expenses 424 380 393 12% (3)%
Insurance operating costs and other expenses 153 150 144 2% 4%
Amortization of deferred policy acquisition costs 169 165 146 2% 13%
------ ------ ------ --- ---
TOTAL BENEFITS, CLAIMS AND EXPENSES 746 695 683 7% 2%
------ ------ ------ --- ---
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 211 198 175 7% 13%
Income tax expense 69 64 59 8% 8%
Income before cumulative effect of accounting change 142 134 116 6% 16%
Cumulative effect of accounting change, net of tax (1) (1) -- -- NM --
------ ------ ------ --- ---
NET INCOME $ 141 $ 134 $ 116 5% 16%
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
2004 VS. 2003 2003 VS. 2002
ACCOUNT VALUE 2004 2003 2002 CHANGE CHANGE
- ----------------------------------------------------------------------------------------------------------------------
Variable universal life $ 5,356 $ 4,725 $ 3,648 13% 30%
Total account values $ 8,975 $ 8,200 $ 7,019 9% 17%
- ----------------------------------------------------------------------------------------------------------------------
</Table>
(1) Represents the cumulative impact of the Company's adoption of SOP 03-1.
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.
2004 COMPARED TO 2003 -- Net income in the Individual Life segment increased for
the year ended December 31, 2004 as compared to the prior year, primarily driven
by business growth and improved investment spreads. Account values grew 9% from
2003 to 2004. Net investment income increased for the current year as compared
to the prior year primarily due to the adoption of SOP 03-1, growth in general
account values and prepayments on bonds. The adoption of SOP 03-1 also resulted
in increases in benefits, claims and claim adjustment expenses and a decrease to
fee income and other for the year ended December 31, 2004 as compared to the
prior year period for the segment's Modified Guarantee Life Insurance product,
which was formerly classified as a separate account product. Fee income
increased primarily due to increased cost of insurance charges as life insurance
inforce grew and aged and variable universal life account values increased
driven by favorable equity markets and new sales. The increased in benefits,
claims and claim adjustment expenses was primarily due to the absence in 2004 of
the unusually favorable mortality experienced in 2003,
<Page>
HARTFORD LIFE INSURANCE COMPANY 43
- --------------------------------------------------------------------------------
along with continued growth and aging of the inforce. Business growth resulted
in increased insurance operating costs and expenses for the year compared to
prior year. Additionally, income tax expense was higher for the year ended
December 31, 2004 due primarily to earnings growth, as discussed above. Income
tax expense includes a DRD tax benefit of $5 related to the 2004 tax year,
whereas, income tax expense for 2003 includes a total DRD tax benefit of $6.
2003 COMPARED TO 2002 -- Net income increased due to increases in fee income.
Fees increased primarily due to increased cost of insurance charges as life
insurance inforce grew and aged, and variable universal life account values
increased 30%, driven by the growth in the equity markets in 2003. Also
contributing to the increase in net income was a decrease in benefit costs in
2003 as compared to 2002 due to favorable mortality rates compared to the prior
year. 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.
OUTLOOK
Individual Life sales grew to $233 in 2004 from $196 in 2003 with renewed
customer interest in variable universal life products and the successful
introduction of new universal life and variable universal life products.
Variable universal life sales and account values remain sensitive to equity
market levels and returns. The Company also continues to introduce new and
enhanced products, which are expected to increase new sales. The Company
continues to pursue broader and deeper distribution opportunities to increase
sales. However, the Company continues to face uncertainty surrounding estate tax
legislation, aggressive competition from life insurance providers, reduced
availability and higher price of reinsurance, and the current regulatory
environment regarding reserving practices for universal life products with
no-lapse guarantees.
INVESTMENTS
GENERAL
The investment portfolios of the Company are managed by Hartford Investment
Management Company ("HIM"), a wholly-owned subsidiary of The Hartford. HIM
manages the portfolios to maximize economic value, while attempting to generate
the income necessary to support the Company's various product obligations,
within internally established objectives, guidelines and risk tolerances. The
portfolio objectives and guidelines are developed based upon the asset/liability
profile, including duration, convexity and other characteristics within
specified risk tolerances. The risk tolerances considered include, for example,
asset and credit issuer allocation limits, maximum portfolio below investment
grade ("BIG") holdings and foreign currency exposure. The Company attempts to
minimize adverse impacts to the portfolio and the results of operations due to
changes in economic conditions through asset allocation limits, asset/liability
duration matching and through the use of derivatives. (For a further discussion
of how the investment portfolio's credit and market risks are assessed and
managed, see the Investment Credit Risk and Capital Markets Risk Management
sections of the MD&A.)
HIM's security selection process is a multi-dimensional approach that combines
independent internal credit research along with a macro economic outlook of
technical trends (e.g. interest rates, slope of the yield curve and credit
spreads) and market pricing to identify valuation inefficiencies and relative
value buying and selling opportunities. Security selection and monitoring is
performed by asset class specialists working within dedicated portfolio
management teams.
HIM portfolio managers may sell securities, except those securities in an
unrealized loss position for which the Company has indicated its intent and
ability to hold until the price recovers, due to portfolio guidelines or market
technicals or trends. For example, the Company may sell securities to capture
market valuation inefficiencies or relative value opportunities through security
or sector rotation, to remain compliant with internal asset/liability duration
matching guidelines often times a result of changes in interest rates, or to
modify a portfolio's duration to capitalize on interest rate levels or yield
curve slope.
HIM believes that advantageously buying and selling securities within a
structured purchasing, monitoring and selling framework, provides the greatest
economic value for the Company over the long-term.
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 of the MD&A under "Market Risk -- Key Market Risk Exposures."
Pursuant to the adoption of SOP 03-1, as discussed in Note 2 of Notes to
Consolidated Financial Statements, on January 1, 2004, the Company reclassified
$11.7 billion of separate account assets, comprised primarily of fixed
maturities, to the general account. The majority of these assets are designated
as available-for-sale securities with changes in fair value reported in other
comprehensive income.
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
<Page>
44 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
and net realized capital gains and losses accounted for approximately 46%, 36%
and 33% of the Company's consolidated revenues for the years ended December 31,
2004, 2003 and 2002, respectively. The increase in the percentage of
consolidated revenues for 2004, as compared to the prior years, is primarily due
to income earned on separate account assets reclassified to the general account
as a result of the adoption of SOP 03-1.
Fluctuations in interest rates affect the Company's return on, and the fair
value of, general account fixed maturity investments, which comprised
approximately 92% and 90% of the fair value of its invested assets as of
December 31, 2004 and 2003, respectively. Other events beyond the Company's
control could also adversely impact the fair value of these investments.
Specifically, a downgrade of an issuer's credit rating or default of payment by
an issuer could reduce the Company's investment return.
The Company invests in private placement securities, mortgage loans and limited
partnership arrangements in order to further diversify its investment portfolio.
These investment types comprised approximately 23% and 19% of the fair value of
its invested assets as of December 31, 2004 and 2003, respectively. 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 of the evaluation of other-than-temporary
impairments, see the Critical Accounting Estimates section of the MD&A under
"Valuation of Investments and Derivative Instruments".)
The following table identifies the invested assets by type held in the general
account as of December 31, 2004 and 2003.
COMPOSITION OF INVESTED ASSETS
<Table>
<Caption>
2004 2003
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------------------------
Fixed maturities, available-for-sale, at fair value $42,691 91.7% $30,085 90.4%
Equity securities, available-for-sale, at fair value 179 0.4% 85 0.3%
Policy loans, at outstanding balance 2,617 5.6% 2,470 7.4%
Mortgage loans, at cost 794 1.7% 354 1.1%
Limited partnerships, at fair value 247 0.5% 169 0.5%
Other investments 43 0.1% 116 0.3%
------- ----- ------- -----
TOTAL INVESTMENTS $46,571 100.0% $33,279 100.0%
- ----------------------------------------------------------------------------------------------------------------
</Table>
Fixed maturity investments increased 42%, since December 31, 2003, primarily the
result of fixed maturities that were reclassified from separate accounts to the
general account as a result of the adoption of SOP 03-1 coupled with positive
operating cash flow.
Mortgage loans increased $440, or 124%, since December 31, 2003, as a result of
a decision to increase the Company's investment in this asset class primarily
due to its attractive yields and diversification opportunities.
INVESTMENT RESULTS
The following table summarizes the Company's investment results.
<Table>
<Caption>
(BEFORE-TAX) 2004 2003 2002
- -------------------------------------------------------------------
Net investment income --
excluding policy loan income $2,287 $1,557 $1,321
- -------------------------------------------------------------------
Policy loan income 183 207 251
- -------------------------------------------------------------------
Net investment income -- total $2,470 $1,764 $1,572
- -------------------------------------------------------------------
Yield on average invested
assets (1) 5.8% 6.1% 6.2%
- -------------------------------------------------------------------
Gross gains on sale 326 215 138
- -------------------------------------------------------------------
Gross losses on sale (133) (95) (80)
- -------------------------------------------------------------------
Impairments (18) (139) (340)
- -------------------------------------------------------------------
Periodic net coupon
settlements on
non-qualifying derivatives 4 29 13
- -------------------------------------------------------------------
Other, net (2) (50) (9) (7)
- -------------------------------------------------------------------
Net realized capital gains
(losses), before-tax $ 129 $ 1 $ (276)
- -------------------------------------------------------------------
</Table>
(1) Represents annualized net investment income divided by the monthly weighted
average invested assets at cost or amortized cost, as applicable, excluding
trading securities
<Page>
HARTFORD LIFE INSURANCE COMPANY 45
- --------------------------------------------------------------------------------
and the collateral received associated with the securities lending program.
(2) Primarily consists of changes in fair value on non-qualifying derivatives
and hedge ineffectiveness on qualifying derivative instruments, as well as,
the amortization of deferred acquisition costs.
2004 COMPARED TO 2003 -- Net investment income, excluding income on policy
loans, increased $730, or 47%, compared to the prior year. The increase in net
investment income was primarily due to income earned on a higher average
invested assets base, as compared to the prior year, and an increase in income
from prepayment penalties primarily associated with commercial mortgage-backed
securities ("CMBS") and yield adjustments related to changes in prepayment
speeds associated with mortgage-backed securities ("MBS") held at a premium or
discount. These increases were partially offset by a decrease in the average new
invested asset yield and the repositioning of the portfolio into higher quality
assets as described below.
The increase in the average invested assets base, as compared to the prior year,
was primarily the result of separate account assets reclassified to the general
account pursuant to the adoption of SOP 03-1 and, to a lesser extent, operating
cash flows. Income earned on separate account assets reclassified to the general
account was $619 for 2004.
During 2004, the yield on average invested assets decreased from the prior year
as a result of new investment purchases at rates below the average portfolio
yield due to the continued low interest rate environment and decreased policy
loan income. Since the Company invests primarily in long-term fixed rate debt
securities, current period changes in long-term interest rates impact the yield
on new asset purchases and, therefore, have a gradual impact on the overall
portfolio yield. The weighted average yield on new invested asset purchases in
2004 of approximately 4.9%, before-tax, continues to be below the average
portfolio yield. The Company expects the average before-tax new investment
yields in 2005 to range from 4.8% to 5.0%. If future interest rates differ from
the forward rates as of December 31, 2004, the actual average new investment
yields may be significantly different than yields currently expected.
Net realized capital gains during 2004 increased by $128 compared to the prior
year, primarily the result of lower other-than-temporary impairments. (For
further discussion of other-than-temporary impairments, see the
Other-Than-Temporary Impairments commentary in this section of the MD&A.)
In 2004, gross gains were realized as fixed maturity credit spreads tightened
and portions of the Company's portfolios were repositioned into higher quality
assets where HIM believed greater relative value existed. Credit spreads
tightened primarily due to improved credit quality, market liquidity and demand
for higher yielding assets, as well as the relatively low interest rate
environment. It is expected that the higher quality assets will provide greater
liquidity if the credit environment and issuer default rates return to
historical norms. In addition, foreign government securities were sold,
primarily in the first and fourth quarters of 2004, to reduce the portfolios'
exposure to foreign holdings and realize gains associated with the decline in
value of the U.S. dollar against foreign currencies.
In 2004, securities sold at a loss were predominantly corporate securities, U.S.
government securities, certain asset-backed securities ("ABS") and CMBS, with no
single security sold at a loss in excess of $5 and an average loss as a
percentage of the fixed maturity's amortized cost of less than 5%, which under
the Company's current impairment policy, were deemed to be depressed only to a
minor extent. In 2003, no single security was sold at a loss in excess of $8.
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 increased 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. Sales were
the result of normal trading activity and were primarily attributable to the
improvement in the corporate credit environment, general economic conditions and
operating fundamentals, the decrease in interest rates and improved pricing
levels for ABS. (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. Prior to
January 1, 2004, the Company's separate accounts reflected two categories of
risk assumption: non-guaranteed separate accounts wherein the policyholder
assumes substantially all the risk and reward; and guaranteed separate accounts
wherein the Company contractually guarantees either a minimum return or the
account value to the policyholder. Effective January 1, 2004, the guaranteed
separate accounts are included with general account assets pursuant to SOP 03-1.
As of December 31, 2004, the Company's separate accounts totaled $139.8 billion.
As of December 31, 2003, the Company's total separate accounts totaled $130.2
billion, of which $12.1 billion was guaranteed 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. Separate
account products include variable annuities, variable universal life insurance
contracts and variable COLI.
<Page>
46 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
Products, previously recorded as guaranteed separate accounts but now recorded
in the general account upon adoption of SOP 03-1, 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
these assets 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 of the MD&A under "Market Risk --
Key Market Risk Exposures."
INVESTMENT MANAGEMENT ACTIVITIES
During 2004, HIM issued one and began serving as the collateral asset manager
for an additional synthetic collateralized loan obligation ("CLO"), both of
which the Company has an investment in. The synthetic CLOs invest in senior
secured bank loans through total return swaps ("referenced bank loan
portfolios"). The notional value of the referenced bank loan portfolios from the
two synthetic CLOs as of December 31, 2004 was approximately $700. The synthetic
CLOs issued approximately $135 of notes and preferred shares ("CLO issuances"),
approximately $120 of which was to third party investors. The proceeds from the
CLO issuances were invested in collateral accounts consisting of high credit
quality securities that were pledged to the referenced bank loan portfolios'
swap counterparties. Investors in the CLO issuances receive the net proceeds
from the referenced bank loan portfolios. Any principal losses incurred by the
swap counterparties associated with the referenced bank loan portfolios are
borne by the CLO issuances investors through the total return swaps.
Pursuant to the requirements of FIN 46R, the Company has concluded that the two
synthetic CLOs are variable interest entities ("VIEs") and for the CLO issued in
2004, the Company is the primary beneficiary and must consolidate this CLO.
Accordingly, the Company has recorded in the consolidated balance sheets $65 of
cash and invested assets, total return swaps with a fair value of $3 in other
assets, which reference a bank loan portfolio with a maximum notional of $400,
and $52 in other liabilities related to the CLO issuances. The total return from
the referenced bank loan portfolio of $3 was received via the total return swap
and recorded in realized capital gains and losses. Income from the fixed
maturity collateral account and CLO issuance investor payments were recorded in
net investment income in the consolidated statements of income. The Company's
investment in the consolidated synthetic CLO issuance is $14, which is its
maximum exposure to loss. In addition, the Company has a $2 preferred share
investment in the non-consolidated synthetic CLO issuance, which is its maximum
exposure to loss. The investors in the two synthetic CLO issuances have recourse
only to the VIE assets and not to the general credit of the Company.
OTHER-THAN-TEMPORARY IMPAIRMENTS
The Company has a security monitoring process overseen by a committee of
investment and accounting professionals that, on a quarterly basis, identifies
securities that could potentially be other-than-temporarily impaired. When a
security is deemed to be other-than-temporarily impaired its carrying amount is
written-down to current market value and a realized loss is recorded in the
Company's consolidated statements of income. (For further discussion regarding
the Company's other-than-temporary impairment policy, see "Valuation of
Investments and Derivative Instruments" included in the Critical Accounting
Estimates section of the MD&A and Note 2 of Notes to Consolidated Financial
Statements.)
The following table identifies the Company's other-than-temporary impairments by
type.
OTHER-THAN-TEMPORARY IMPAIRMENTS BY TYPE
<Table>
<Caption>
(BEFORE-TAX) 2004 2003 2002
- ------------------------------------------------------------------------
ABS
- ------------------------------------------------------------------------
Aircraft lease receivables $ 2 $ 29 $ 65
- ------------------------------------------------------------------------
Collaterized debt obligations
("CDO") 4 15 29
- ------------------------------------------------------------------------
Credit card receivables -- 12 9
- ------------------------------------------------------------------------
Interest only securities -- 5 3
- ------------------------------------------------------------------------
Manufactured housing ("MH")
receivables -- 9 14
- ------------------------------------------------------------------------
Mutual fund fee receivables -- 3 16
- ------------------------------------------------------------------------
Other ABS -- 2 13
- ------------------------------------------------------------------------
Total ABS 6 75 149
- ------------------------------------------------------------------------
Commercial mortgages 3 -- --
- ------------------------------------------------------------------------
CMBS 3 5 4
- ------------------------------------------------------------------------
Corporate
- ------------------------------------------------------------------------
Food and beverage 3 25 --
- ------------------------------------------------------------------------
Technology and communications 1 2 137
- ------------------------------------------------------------------------
Transportation -- 7 1
- ------------------------------------------------------------------------
Utilities -- 3/4 22
- ------------------------------------------------------------------------
Other Corporate -- 11 16
Total Corporate 4 45 176
- ------------------------------------------------------------------------
Equity -- 8 --
- ------------------------------------------------------------------------
Foreign government -- -- (11)
- ------------------------------------------------------------------------
MBS -- interest only securities 2 6 --
- ------------------------------------------------------------------------
TOTAL OTHER-THAN-TEMPORARY
IMPAIRMENTS $18 $139 $340
- ------------------------------------------------------------------------
</Table>
The decrease in other-than-temporary impairments during 2003 and 2004 in
comparison to 2002 levels is due to an improvement in the corporate credit
environment, general economic conditions and operating fundamentals, and
improved pricing levels for ABS. In general, security issuers' operating
fundamentals have improved due to reduced company leverage, improved liquidity
<Page>
HARTFORD LIFE INSURANCE COMPANY 47
- --------------------------------------------------------------------------------
and the successful implementation of various cost cutting measures. Improvement
in pricing levels for ABS has been driven by a general stabilization in the
performance of the underlying collateral and an increase in demand for these
asset types due to improved economic and operating fundamentals of the
underlying security issuers, better market liquidity and attractive yields. The
following discussion provides an analysis of significant other-than-temporary
impairments recognized during 2004, 2003 and 2002, the related circumstances
giving rise to the other-than-temporary impairments and the potential impact
such circumstances may have on other material investments held.
2004
During 2004 there were no significant other-than-temporary impairments (e.g. $15
or greater) recorded on any single security or issuer. In aggregate,
other-than-temporary impairments recorded on ABS and corporate fixed maturities
primarily relate to the decline in market values of certain previously impaired
securities.
2003
During 2003, other-than-temporary impairments were primarily recorded on ABS and
corporate fixed maturities. The ABS other-than-temporary impairments were
primarily due to the continued deterioration of the underlying collateral
supporting the various transactions. A significant portion of corporate fixed
maturity other-than-temporary impairments during 2003 resulted from various
issuers who experienced fraud or accounting irregularities. In addition, during
the first half of the year, corporate debt issuers in the transportation sector,
specifically issuers in the airline sector, deteriorated as a result of the
continued decline in airline travel. During 2003, there was one security for
which a significant (e.g. $15 or greater) other-than-temporary impairment was
recorded, the circumstances of which are discussed in more detail below.
- - The $25 of impairments on corporate fixed maturities within the food and
beverage sector related to securities issued by the Italian dairy concern,
Parmalat SpA. Parmalat filed for bankruptcy in December 2003 due to liquidity
problems when it was discovered that 4 billion euros of liquid investments
previously reported on its balance sheet were non-existent.
The following list identifies ABS impairment losses recognized in 2003 that by
issuer did not exceed $15 but did when combined with securities supported with
similar collateral or equity security types. The circumstances giving rise to
those losses are as follows:
- - The $29 of other-than-temporary impairments recognized on ABS supported by
aircraft lease receivables primarily consisted of investments in lower
tranches of four transactions. These securities are supported by aircraft
leases and enhanced equipment trust certificates (together, "aircraft lease
receivables") issued by multiple airlines that had sustained a steep decline
in market value and adverse change in expected cash flows due to continued
lower aircraft lease rates, airline bankruptcies and the prolonged decline in
airline travel.
- - The $15 of CDO other-than-temporary impairments consisted of approximately six
securities, the majority of which were interests in the lower tranches of
securities backed by high yield corporate debt. These impairments were
primarily the result of continued high default rates in 2003 and lower
expected recovery rates on the CDO's underlying collateral.
In addition to the impairments described above, fixed maturity and equity
securities were sold at losses during 2003, with no single security sold at a
loss in excess of $8.
2002
During 2002, other-than-temporary impairments on ABS were primarily driven by
collateral deterioration associated with securities backed by aircraft lease
receivables and high yield debt. Impairments recognized on corporate fixed
maturities were concentrated in the technology and communications sector and
were primarily driven by weakening economic conditions and operating
fundamentals in the sector. During 2002, there were 3 securities for which a
significant (e.g. $15 or greater) other-than-temporary impairment was recorded
which are discussed in more detail below.
- - Of the technology and communications sector impairments, $75 related to
securities issued by WorldCom and its subsidiary MCI, which filed for Chapter
11 bankruptcy protection in July 2002 as a result of liquidity problems driven
by economic and operating weakness in this sector, and specific issues related
to accounting fraud.
- - Of the $65 of impairments relating to ABS backed by aircraft lease
receivables, $29 related to investments in the lower tranches of one
transaction that experienced a steep decline in fair value as a result of a
significant decrease in aircraft lease payments and lower appraised values on
the underlying collateral. This transaction was primarily supported by lower
quality aircraft and was significantly impacted by the decline in airline
travel and numerous airline bankruptcies resulting from the catastrophic
events of September 11, 2001. The remaining $36 of impairments on aircraft
lease receivables were primarily related to two other transactions that were
also adversely impacted by similar circumstances surrounding the airline
industry in 2002.
- - In the technology and telecommunications sector, $19 of impairments were
recognized on fixed maturity securities issued by a major U.S. telecom
equipment manufacturer. This issuer had amassed high levels of debt to acquire
assets and subsequently experienced liquidity difficulties due to the downturn
in demand and economic conditions within the technology and telecommunications
sector. As a result, this issuer initiated a debt restructuring in 2002.
The following identifies ABS impairment losses recognized in 2002 that by issuer
did not exceed $15 but did when combined with securities supported with similar
collateral. The circumstances giving rise to those losses are as follows:
- - The $29 of CDO impairments consisted of approximately eight securities, the
majority of which were interests in the
<Page>
48 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
lower tranches of transactions backed by high yield corporate debt. These
impairments were primarily driven by deterioration in the underlying
collateral resulting from corporate bankruptcies and above average defaults on
high yield bonds.
In addition to the impairments described above, fixed maturity and equity
securities were sold at losses during 2002, with no single security sold at a
loss in excess of $13.
The favorable other-than-temporary impairments trend will depend on continued
strong economic fundamentals, political stability and collateral performance. In
addition, as discussed in Note 2 of Notes to Consolidated Financial Statements,
the future adoption of EITF Issue No. 03-1 could result in the recognition of
additional other-than-temporary impairments. While the ultimate impact of the
adoption of this standard is still unknown, depending on the nature of the
ultimate guidance, adoption of this standard could potentially result in the
recognition of unrealized losses, including those declines in value that are
attributable to interest rate movements, as other-than-temporary impairments,
except those deemed to be minor in nature. As of December 31, 2004, the Company
had $154 of total gross unrealized losses. The amount of impairments to be
recognized, if any, will depend on the final standard, market conditions and
management's intent and ability to hold securities with unrealized losses at the
time of the impairment evaluation. (For further discussion of risk factors
associated with sectors with significant unrealized loss positions, see the
sector risk factor commentary under the Total Available-for-Sale Securities with
Unrealized Loss Greater than Six Months by Type schedule in the Investment
Credit Risk section of the MD&A.)
INVESTMENT CREDIT RISK
The 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 Finance
Committee of The Hartford's 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 Company limits and monitored on a regular basis.
The Company is not exposed to any credit concentration risk of a single issuer
greater than 10% of the Company's stockholders' equity other than certain U.S.
government and government agencies.
DERIVATIVE INSTRUMENTS
The Company's derivative 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 daily, netted by
counterparty for each legal entity of the Company, and collateral is pledged to
and held by, or on behalf of, the Company to the extent the current value of
derivatives exceeds the exposure policy thresholds which do not exceed $10. The
Company also minimizes the credit risk in derivative instruments by entering
into transactions with high quality counterparties rated Aa/A or better, which
are monitored by the Company's internal compliance unit and reviewed frequently
by senior management. In addition, the compliance unit monitors counterparty
credit exposure on a monthly basis to ensure compliance with Company policies
and statutory limitations. The Company also maintains a policy of requiring that
all derivative contracts be governed by an International Swaps and Dealers
Association Master Agreement which is structured by legal entity and by
counterparty and permits right of offset. To date, the Company has not incurred
any losses on derivative instruments due to counterparty nonperformance.
In addition to counterparty credit risk, the Company periodically enters into
swap agreements in which the Company assumes credit exposure from a single
entity, referenced index or asset pool. Total return swaps involve the periodic
exchange of payments with other parties, at specified intervals, calculated
using the agreed upon index and notional principal amounts. Generally, no cash
or principal payments are exchanged at the inception of the contract. Typically,
at the time a swap is entered into, the cash flow streams exchanged by the
counterparties are equal in value.
Credit default swaps involve a transfer of credit risk from one party to another
in exchange for periodic payments. One party to the contract will make a payment
based on an agreed upon rate and a notional amount. The second party, who
assumes credit exposure will only make a payment when there is a credit event,
and such payment will be equal to the notional value of the swap contract less
the value of the referenced security issuer debt obligation. A credit event is
generally defined as default on contractually obligated interest or principal
payments or bankruptcy. The average S&P rating for these referenced security
issuer debt obligations is A-.
The Company also uses credit defaults swaps to reduce its credit exposure by
entering into agreements in which the Company pays a derivative counterparty a
periodic fee in exchange for compensation from the counterparty should a credit
event occur on the part of the referenced security issuer. The Company entered
into these agreements as an efficient means to reduce credit exposure to the
specified issuers. The average S&P rating for all of these referenced securities
issuer is A.
<Page>
HARTFORD LIFE INSURANCE COMPANY 49
- --------------------------------------------------------------------------------
As of December 31, 2004 and 2003, the notional value of total return and credit
default swaps totaled $1.4 billion and $450, respectively, and the swap fair
value totaled $6 and $(17), respectively.
FIXED MATURITIES
The following table identifies fixed maturity securities by type as of
December 31, 2004 and 2003.
<Table>
<Caption>
2004 2003
----------------------------------------------------------- ----------------------
PERCENT OF
TOTAL
AMORTIZED UNREALIZED UNREALIZED FAIR FAIR AMORTIZED UNREALIZED
FIXED MATURITIES BY TYPE COST GAINS LOSSES VALUE VALUE COST GAINS
- ------------------------------------------------------------------------------------------------------------------------------
ABS $ 5,881 $ 72 $ (61) $ 5,892 13.8% $ 5,118 $ 109
CMBS 7,390 329 (17) 7,702 18.0% 7,010 384
Collateralized mortgage obligations
("CMOs") 882 9 (3) 888 2.1% 681 12
Corporate
Basic industry 2,130 171 (5) 2,296 5.4% 2,227 160
Capital goods 1,324 118 (4) 1,438 3.4% 1,343 106
Consumer cyclical 2,194 158 (5) 2,347 5.5% 2,225 159
Consumer non-cyclical 2,294 196 (4) 2,486 5.8% 2,533 188
Energy 1,172 116 (1) 1,287 3.0% 1,374 115
Financial services 5,419 448 (18) 5,849 13.7% 5,101 413
Technology and communications 3,197 314 (10) 3,501 8.2% 3,383 363
Transportation 586 44 (1) 629 1.5% 568 41
Utilities 2,040 215 (7) 2,248 5.3% 1,861 167
Other 710 46 (2) 754 1.8% 570 33
Government/Government agencies
Foreign 649 60 (2) 707 1.7% 810 77
United States 774 19 (4) 789 1.8% 981 30
MBS -- agency 1,542 18 (2) 1,558 3.6% 1,916 30
Municipal
Taxable 675 30 (5) 700 1.6% 374 14
Redeemable preferred stock 1 -- -- 1 -- 1 --
Short-term investments 1,619 -- -- 1,619 3.8% 1,555 1
------- ------ ----- ------- ----- ------- ------
TOTAL FIXED MATURITIES $40,479 $2,363 $(151) $42,691 100.0% $39,631 $2,402
======= ====== ===== ======= ===== ======= ======
Total general account fixed maturities $28,511 $1,715
Total guaranteed separate account fixed
maturities (1) $11,120 $ 687
- ------------------------------------------------------------------------------------------------------------------------------
<Caption>
2003
----------------------------------
PERCENT OF
TOTAL
UNREALIZED FAIR FAIR
FIXED MATURITIES BY TYPE LOSSES VALUE VALUE
- ---------------------------------------- ----------------------------------
ABS $ (96) $ 5,131 12.3%
CMBS (21) 7,373 17.6%
Collateralized mortgage obligations
("CMOs") (2) 691 1.7%
Corporate
Basic industry (9) 2,378 5.7%
Capital goods (5) 1,444 3.5%
Consumer cyclical (5) 2,379 5.7%
Consumer non-cyclical (8) 2,713 6.5%
Energy (5) 1,484 3.5%
Financial services (24) 5,490 13.2%
Technology and communications (10) 3,736 9.0%
Transportation (3) 606 1.4%
Utilities (10) 2,018 4.8%
Other (1) 602 1.4%
Government/Government agencies
Foreign (1) 886 2.1%
United States (4) 1,007 2.4%
MBS -- agency (2) 1,944 4.6%
Municipal
Taxable (7) 381 0.9%
Redeemable preferred stock -- 1 --
Short-term investments -- 1,556 3.7%
----- ------- -----
TOTAL FIXED MATURITIES $(213) $41,820 100.0%
===== ======= =====
Total general account fixed maturities $(141) $30,085 71.9%
Total guaranteed separate account fixed
maturities (1) $ (72) $11,735 28.1%
- ----------------------------------------
</Table>
(1) Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting SOP 03-1.
The Company's fixed maturity portfolio gross unrealized gains and losses as of
December 31, 2004 in comparison to December 31, 2003 were primarily impacted by
changes in interest rates, foreign currency exchange rates, credit spreads and
security sales. The Company's fixed maturity gross unrealized gains decreased
$39 from December 31, 2003 to December 31, 2004 primarily due to sales of
securities in a gain position and the increase in interest rates (e.g.
short-term through five-year rates) offset by credit spread tightening and
changes in foreign currency exchange rates. The gross unrealized loss amount
decreased by $62 from December 31, 2003 to December 31, 2004 primarily due to
credit spread tightening, improved pricing levels for certain CDOs and ABS,
security sales and, to a lesser extent, other-than-temporary impairments, offset
by interest rate increases.
(For further discussion of risk factors associated with sectors with significant
unrealized loss positions, see the sector risk factor commentary under the Total
Available-for-Sale Securities with Unrealized Loss Greater than Six Months by
Type schedule in this section of the MD&A.)
Investment sector allocations as a percentage of total fixed maturities have
remained materially consistent since December 31, 2003, except for ABS. In 2004,
HIM continued to overweight, in comparison to the Lehman Aggregate Index, ABS
supported by diversified pools of consumer loans (e.g. home equity and auto
loans and credit card receivables) and CMBS due to the securities attractive
spread levels and underlying asset diversification and quality. CMBS securities
have lower prepayment risk than MBS due to contractual penalties.
As of December 31, 2004 and 2003, 22% and 21% respectively, of the fixed
maturities were invested in private placement securities, including 14% and 13%,
respectively, 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.
At the December 14th, 2004 Federal Open Market Committee policy meeting, the
overnight funds rate was raised a quarter-point for the fifth time in 2004 to
2.25%. The Fed members indicated that the economy is growing at a moderate pace
and the job market continues to show gradual improvement despite
<Page>
50 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
higher energy and commodity prices. The Company continues to expect the Fed to
raise short-term interest rates at a measured pace for the foreseeable future
unless inflationary pressures accelerate. The risk of inflation could increase
if energy and commodity prices continue to rise, productivity growth slows or
the U.S. dollar continues to devalue in comparison to foreign currencies.
Increases in future interest rates may result in lower fixed maturity
valuations.
The following table identifies fixed maturities by credit quality as of
December 31, 2004 and 2003. 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>
2004
---------------------------------------
AMORTIZED PERCENT OF
FIXED MATURITIES BY CREDIT QUALITY COST FAIR VALUE TOTAL FAIR VALUE
- ---------------------------------------------------------------------------------
United States Government/Government
agencies $ 3,205 $ 3,242 7.6%
AAA 7,814 8,039 18.8%
AA 4,088 4,278 10.0%
A 11,068 11,987 28.2%
BBB 11,111 11,890 27.8%
BB & below 1,574 1,636 3.8%
Short-term 1,619 1,619 3.8%
------- ------- ------
TOTAL FIXED MATURITIES $40,479 $42,691 100.0%
======= ======= ======
Total general account fixed maturities
Total guaranteed separate account fixed
maturities (1)
- ---------------------------------------------------------------------------------
<Caption>
2003
---------------------------------------
AMORTIZED 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 11,742 12,576 30.1%
BBB 10,833 11,561 27.6%
BB & below 1,925 2,040 4.9%
Short-term 1,555 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 (1) $11,120 $11,735 28.1%
- ----------------------------------------
</Table>
(1) Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting SOP 03-1.
As of December 31, 2004 and 2003, 95% or greater of the fixed maturity portfolio
was invested in short-term securities or securities rated investment grade (BBB
and above).
<Page>
HARTFORD LIFE INSURANCE COMPANY 51
- --------------------------------------------------------------------------------
The following table presents the BIG fixed maturities by type as of
December 31, 2004 and 2003.
<Table>
<Caption>
2004
---------------------------------------
AMORTIZED PERCENT OF
BIG FIXED MATURITIES BY TYPE COST FAIR VALUE TOTAL FAIR VALUE
- ---------------------------------------------------------------------------------
ABS $ 183 $ 159 9.7%
CMBS 82 88 5.4%
Corporate
Basic industry 164 176 10.7%
Capital goods 115 116 7.1%
Consumer cyclical 120 127 7.8%
Consumer non-cyclical 141 149 9.1%
Energy 51 54 3.3%
Financial services 22 23 1.4%
Technology and communications 267 288 17.6%
Transportation 8 8 0.5%
Utilities 226 237 14.5%
Foreign government 176 193 11.8%
Other 19 18 1.1%
------- ------- ------
TOTAL FIXED MATURITIES $ 1,574 $ 1,636 100.0%
======= ======= ======
Total general account fixed maturities
Total guaranteed separate account fixed
maturities (1)
- ---------------------------------------------------------------------------------
<Caption>
2003
---------------------------------------
AMORTIZED 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 201 211 10.3%
Capital goods 103 106 5.3%
Consumer cyclical 250 270 13.2%
Consumer non-cyclical 250 261 12.8%
Energy 61 67 3.3%
Financial services 20 21 1.0%
Technology and communications 274 326 16.0%
Transportation 21 23 1.1%
Utilities 256 266 13.1%
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 (1) $ 746 $ 782 38.3%
- ----------------------------------------
</Table>
(1) Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting SOP 03-1.
As of December 31, 2004 and 2003, the Company held no issuer of a BIG security
with a fair value in excess of 3% of the total fair value for BIG securities.
Total BIG securities decreased since December 31, 2003 as a result of decisions
to reduce exposure to lower credit quality assets resulting from the securities
significant credit spread tightening and re-invest in higher quality securities.
The following table presents the Company's unrealized loss aging for total fixed
maturity and equity securities classified as available-for-sale as of
December 31, 2004 and 2003, by length of time the security was in an unrealized
loss position.
<Table>
<Caption>
2004
---------------------------------
UNREALIZED LOSS AGING OF TOTAL AVAILABLE-FOR-SALE AMORTIZED UNREALIZE
SECURITIES COST FAIR VALUE LOSS
- ------------------------------------------------------------------------------------
Three months or less $ 4,627 $ 4,601 $ (26)
Greater than three months to six months 420 417 (3)
Greater than six months to nine months 1,667 1,638 (29)
Greater than nine months to twelve months 351 337 (14)
Greater than twelve months 1,175 1,093 (82)
------- ------- -----
TOTAL $ 8,240 $ 8,086 $(154)
======= ======= =====
Total general account
Total guaranteed separate accounts (1)
- ------------------------------------------------------------------------------------
<Caption>
2003
----------------------------------
UNREALIZED LOSS AGING OF TOTAL AVAILABLE-FOR-SALE AMORTIZED UNREALIZED
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 account $ 4,221 $ 4,076 $(145)
Total guaranteed separate accounts (1) $ 2,023 $ 1,951 $ (72)
- -------------------------------------------------
</Table>
(1) Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting SOP 03-1.
The decrease in the unrealized loss amount since December 31, 2003 is primarily
the result of credit spread tightening, improved pricing levels for certain CDOs
and ABS, asset sales, and, to a lesser extent, other-than-temporary impairments,
offset in part by an increase in the short-term through five-year interest
rates. (For further discussion, see the economic commentary under the Fixed
Maturities by Type table in this section of the MD&A.)
As a percentage of amortized cost, the average security or fixed maturity
unrealized loss at December 31, 2004 and 2003 was less than 2% and 4%,
respectively. As of December 31, 2004 and 2003, fixed maturities represented
$151, or 98%, and $213, or 98%, respectively, of the Company's total unrealized
loss associated with securities classified as available-for-sale. There were no
fixed maturities as of December 31, 2004 and 2003 with a fair value less than
80% of the security's amortized cost basis for six continuous months other than
certain ABS and CMBS subject to EITF Issue No. 99-20. Other-than-temporary
impairments for certain ABS and CMBS are recognized if the fair value of the
security, as determined by external pricing sources, is less
<Page>
52 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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 ABS or
CMBS included in the table above, as of December 31, 2004 and 2003, for which
management's best estimate of future cash flows adversely changed during the
reporting period. (For further discussion of the other-than-temporary
impairments criteria, see "Valuation of Investments and Derivative Instruments"
included in the Critical Accounting Estimates section of the MD&A and 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 9% and 7% of the total unrealized loss amount as of
December 31, 2004 and 2003, respectively.
The total securities classified as available-for-sale in an unrealized loss
position for longer than six months by type as of December 31, 2004 and 2003 are
presented in the following table.
TOTAL AVAILABLE-FOR-SALE SECURITIES WITH UNREALIZED LOSS GREATER THAN SIX MONTHS
BY TYPE
<Table>
<Caption>
2004 2005
---------------------------------------------- ----------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMORTIZED FAIR UNREALIZED UNREALIZED AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE LOSS LOSS COST VALUE LOSS LOSS
- --------------------------------------------------------------------------------------------------------------------------------
ABS
Aircraft lease receivables $ 177 $ 127 $ (50) 40.0% $ 153 $ 99 $ (54) 38.6%
CDOs 54 52 (2) 1.6% 132 113 (19) 13.6%
Credit card receivables 61 60 (1) 0.8% 118 108 (10) 7.1%
Other ABS 328 323 (5) 4.0% 407 400 (7) 5.0%
CMBS 500 492 (8) 6.4% 162 155 (7) 5.0%
Corporate
Financial services 595 576 (19) 15.2% 524 502 (22) 15.7%
Technology and communications 200 191 (9) 7.2% 37 36 (1) 0.7%
Utilities 140 135 (5) 4.0% 80 74 (6) 4.3%
Other 629 614 (15) 12.0% 189 175 (14) 10.0%
Other securities 509 498 (11) 8.8% 11 11 -- --
------ ------ ----- ----- ------ ------ ----- -----
TOTAL $3,193 $3,068 $(125) 100.0% $1,813 $1,673 $(140) 100.0%
====== ====== ===== ===== ====== ====== ===== =====
Total general accounts $1,174 $1,080 $ (94) 67.1%
Total guaranteed separate
accounts (1) $ 639 $ 593 $ (46) 32.9%
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting SOP 03-1.
The decrease in the unrealized loss greater than six months amounts during 2004
was primarily driven by improved pricing levels for certain CDOs and ABS. This
increase was partially offset by the aging of securities depressed due to
interest rate changes from the date of purchase.
With the exception of ABS, the majority of the securities in an unrealized loss
position for six months or more as of December 31, 2004 were depressed primarily
due to interest rate changes from the date of purchase. The sectors with the
most significant concentration of unrealized losses were ABS supported by
aircraft lease receivables and corporate fixed maturities primarily within the
financial services sector. The Company's current view of risk factors relative
to these fixed maturity types is as follows:
AIRCRAFT LEASE RECEIVABLES -- The decrease in the unrealized loss position
during 2004 was primarily the result of improving pricing levels for certain
issuers in this sector, as well as by other-than-temporary impairments taken
during the year. In prior years, these securities had suffered a decrease in
value as a result of a prolonged decline in airline travel, the uncertainty of a
potential industry recovery and lack of market liquidity in this sector.
Although uncertainty surrounding the stability of domestic airlines continues to
weigh heavily on this sector, worldwide travel and aircraft demand appears to be
improving. While the Company has seen modest price increases and greater
liquidity in this sector during 2004, any additional price recovery will depend
on continued improvement in economic fundamentals, political stability and
airline operating performance.
FINANCIAL SERVICES -- As of December 31, 2004, the Company held approximately 60
different securities in the financial services sector that had been in an
unrealized loss position for greater than six months. Substantially all of these
securities are investment grade securities priced at or greater than 90% of
amortized cost as of December 31, 2004. These positions are a
<Page>
HARTFORD LIFE INSURANCE COMPANY 53
- --------------------------------------------------------------------------------
mixture of fixed and variable rate securities with extended maturity dates,
which have been adversely impacted by changes in interest rates after the
purchase date. Additional changes in fair value of these securities are
primarily dependent on future changes in interest rates.
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, 2004 and 2003. 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, 2004
and 2003, management's expectation of the discounted future cash flows on these
securities was in excess of the associated securities' amortized cost. (For a
further discussion, see "Valuation of Investments and Derivative Instruments"
included in the Critical Accounting Estimates section of the MD&A and Note 2 of
Notes to Consolidated Financial Statements.)
The following table presents the Company's unrealized loss aging for BIG and
equity securities as of December 31, 2004 and 2003.
<Table>
<Caption>
2004
---------------------------------
UNREALIZED LOSS AGING OF AVAILABLE-FOR-SALE BIG AND AMORTIZED UNREALIZED
EQUITY SECURITIES COST FAIR VALUE LOSS
- --------------------------------------------------------------------------------------
Three months or less $ 146 $ 143 $ (3)
Greater than three months to six months 13 12 (1)
Greater than six months to nine months 93 88 (5)
Greater than nine months to twelve months 59 54 (5)
Greater than twelve months 153 117 (36)
------- ------- -------
TOTAL $ 464 $ 414 $ (50)
======= ======= =======
Total general accounts
Total guaranteed separate accounts (1)
- --------------------------------------------------------------------------------------
<Caption>
2005
---------------------------------
UNREALIZED LOSS AGING OF AVAILABLE-FOR-SALE BIG AND AMORTIZED UNREALIZED
EQUITY SECURITIES COST FAIR VALUE LOSS
- --------------------------------------------------- ---------------------------------
Three months or less $ 47 $ 46 $ (1)
Greater than three months to six months 90 86 (4)
Greater than six months to nine months 50 44 (6)
Greater than nine months to twelve months 17 16 (1)
Greater than twelve months 266 217 (49)
------- ------- -------
TOTAL $ 470 $ 409 $ (61)
======= ======= =======
Total general accounts $ 350 $ 305 $ (45)
Total guaranteed separate accounts (1) $ 120 $ 104 $ (16)
- ---------------------------------------------------
</Table>
(1) Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting SOP 03-1.
The decrease in the BIG and equity security unrealized loss amount for
securities classified as available-for-sale during 2004 was primarily the result
of credit spread tightening, improved pricing levels for certain CDOs and ABS
and other-than-temporary impairments, partially offset by rating agency
downgrades for certain issuers in the aircraft lease receivables sector and the
aging of securities depressed due to interest rate changes from the date of
purchase. (For a further discussion, see the economic commentary under the Fixed
Maturities by Type table in this section of the MD&A.)
<Page>
54 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
The BIG and equity securities classified as available-for-sale in an unrealized
loss position for longer than six months by type as of December 31, 2004 and
2003 are presented in the following table.
AVAILABLE-FOR-SALE BIG AND EQUITY SECURITIES WITH UNREALIZED LOSS GREATER THAN
SIX MONTHS BY TYPE
<Table>
<Caption>
2004 2003
---------------------------------------------- ----------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMORTIZED FAIR UNREALIZED UNREALIZED AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE LOSS LOSS COST VALUE LOSS LOSS
- --------------------------------------------------------------------------------------------------------------------------------
ABS
Aircraft lease receivables $ 96 $ 66 $ (30) 65.2% $ 45 $ 28 $ (17) 30.4%
CDOs 17 16 (1) 2.2% 37 28 (9) 16.1%
Credit card receivables 8 8 -- -- 40 30 (10) 17.9%
Other ABS 4 3 (1) 2.2% 45 38 (7) 12.5%
Corporate
Financial services 45 41 (4) 8.7% 39 35 (4) 7.1%
Technology and communications 59 54 (5) 10.8% 4 3 (1) 1.8%
Utilities 38 35 (3) 6.5% 66 61 (5) 8.9%
Other 37 35 (2) 4.4% 53 50 (3) 5.3%
Other securities 1 1 -- -- 4 4 -- --
------ ------ ----- ----- ------ ------ ----- -----
TOTAL $ 305 $ 259 $ (46) 100.0% $ 333 $ 277 $ (56) 100.0%
------ ------ ----- ----- ------ ------ ----- -----
Total general accounts $ 234 $ 193 $ (41) 73.2%
Total guaranteed separate
accounts (1) $ 99 $ 84 $ (15) 26.8%
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Effective January 1, 2004, guaranteed separate account assets were included
with general account assets as a result of adopting SOP 03-1.
The decrease in the available-for-sale BIG and equity securities greater than
six months unrealized loss amount since December 31, 2003 was primarily the
result of credit spread tightening, improved pricing levels for certain CDOs and
ABS, other-than-temporary impairments taken during the year and, to a lesser
extent, asset sales. This decrease was partially offset by rating agency
downgrades for certain issuers in the aircraft lease receivables sector and the
aging of securities depressed due to interest rate changes from the date of
purchase. (For a further discussion of the Company's current view of risk
factors relative to certain security types listed above, see the Total
Available-for-Sale 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 the specific classes of investments, while asset/liability
management is the responsibility of a dedicated risk management unit supporting
the Company. Derivative instruments are utilized in compliance with established
Company policy and regulatory requirements and are monitored internally and
reviewed by senior management.
MARKET RISK
Hartford Life Insurance 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. The Company
analyzes interest rate risk using various models including parametric models
that forecast cash flows of the liabilities and the supporting investments,
including derivative instruments under various market scenarios.
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
parametric models that forecast cash flows of the liabilities and the supporting
investments, including derivative instruments under various market scenarios.
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.
<Page>
HARTFORD LIFE INSURANCE COMPANY 55
- --------------------------------------------------------------------------------
To calculate duration, projections of asset and liability cash flows are
discounted to a present value using interest rate assumptions. These cash flows
are then revalued at alternative interest rate levels to determine the
percentage change in fair value due to an incremental change in rates. Cash
flows from corporate obligations are assumed to be consistent with the
contractual payment streams on a yield to worst basis. The primary assumptions
used in calculating cash flow projections include expected asset payment streams
taking into account prepayment speeds, issuer call options and contract holder
behavior. Asset-backed securities, collateralized mortgage obligations and
mortgage-backed securities are modeled based on estimates of the rate of future
prepayments of principal over the remaining life of the securities. These
estimates are developed using prepayment speeds provided in broker consensus
data. Such estimates are derived from prepayment speeds previously experienced
at the interest rate levels projected for the underlying collateral. Actual
prepayment experience may vary from these estimates.
The Company is also exposed to interest rate risk based upon the discount rate
assumption associated with the Company's pension and other postretirement
benefit obligation. The discount rate assumption is based upon an interest rate
yield curve comprised of AAA/AA bonds with maturities between zero and thirty
years. Declines in long-term interest rates have had a negative impact on the
funded status of the plans.
The Company believes that an increase in interest rates from the current levels
is generally a favorable development for the Company. Rate increases are
expected to provide additional net investment income, increase sales of fixed
rate investment products, limit the potential risk of margin erosion due to
minimum guaranteed crediting rates in certain products and, if sustained, could
reduce the Company's prospective pension expense. Conversely, a rise in interest
rates will reduce the net unrealized gain position of the investment portfolio,
increase interest expense on the Company's variable rate debt obligations and,
if long-term interest rates rise dramatically within a six to twelve month time
period, certain businesses may be exposed to disintermediation risk.
Disintermediation risk refers to the risk that policyholders will surrender
their contracts in a rising interest rate environment requiring the Company to
liquidate assets in an unrealized loss position. In conjunction with the
interest rate risk measurement and management techniques, significant portions
of the Company's fixed income product offerings have market value adjustment
provisions at contract surrender.
EQUITY RISK
The Company's primary exposure to equity risk relates to the potential for lower
earnings associated with certain 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 "Equity
Risk" in the Key Market Risk Exposures section of the MD&A.)
The Company does not have significant equity risk exposure from invested assets.
In March 2003, the Company decided to liquidate 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, 2003.
The Company is also subject to equity risk based upon the expected long-term
rate of return assumption associated with the Company's pension and other
postretirement benefit obligation. The Company determines the long-term rate of
return assumption for the plans' portfolio based upon an analysis of historical
returns. Declines in equity returns have had a negative impact on the funded
status of the plans.
FOREIGN CURRENCY EXCHANGE RISK
The Company's currency exchange risk is related to non-U.S. dollar denominated
investments, which primarily consist of fixed maturity investments and a yen
denominated individual fixed annuity product. 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
<Page>
56 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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 may also be a 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 and reviewed
frequently by senior management. 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, 2004 and 2003 were $63.3 billion and $38.6
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. Fixed maturity portfolios and certain
investment contract and insurance product liabilities have material market
exposure to interest rate risk. In addition, the 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. The Company's foreign currency
exposure is primarily related to non-U.S. dollar denominated fixed income
securities and certain foreign currency based individual fixed annuity
contracts.
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,
including those containing guaranteed minimum withdrawal or death benefits,
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.
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, tax-exempt municipal securities and collateralized mortgage
obligations. The fair value of these investments was $42.7 billion and $41.8
billion at December 31, 2004 and 2003, respectively. The fair value of these
investments 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 4.9 and 4.6
as of December 31, 2004 and 2003, respectively. In 2004, the duration of certain
portfolios were modestly lengthened, which generated additional interest income.
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 guaranteed 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 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 will differ from those anticipated, resulting in an
investment return lower than that
<Page>
HARTFORD LIFE INSURANCE COMPANY 57
- --------------------------------------------------------------------------------
assumed in pricing. Contract duration can range from less than one year to
typically up to ten years.
DERIVATIVES
The Company utilizes a variety of derivative instruments to mitigate interest
rate risk. Interest rate swaps are primarily used to convert interest receipts
to a fixed or variable rate. In addition, interest rate swaps are used to
convert the contract rate on certain liability products offered by the Company
into a rate that trades in a more liquid and efficient market. The use of such
swaps enables the Company to customize contract terms and conditions to customer
objectives and satisfies the operation's asset/liability duration matching
policy. Occasionally, swaps are also used to hedge the variability in the cash
flow of a forecasted purchase or sale due to changes in interest rates.
Interest rate caps and floors, swaptions and option contracts are primarily used
to hedge against the risk of liability contract holder disintermediation in a
rising interest rate environment, and to offset the changes in fair value of
corresponding derivatives embedded in certain of the Company's fixed maturity
investments.
At December 31, 2004 and 2003, notional amounts pertaining to derivatives
utilized to manage interest rate risk totaled $8.3 billion and $7.5 billion,
respectively ($6.1 billion and $5.9 billion, respectively related to insurance
investments and $2.2 billion and $1.6 billion, respectively related to life
insurance liabilities). The fair value of these derivatives as reflected on the
consolidated balance sheets was $44 and $168 as of December 31, 2004 and 2003,
respectively.
CALCULATED INTEREST RATE SENSITIVITY
The after-tax change in the net economic value of investment contracts (e.g.
guaranteed investment contracts) and certain other insurance product liabilities
(e.g. short and long-term disability contracts), for which the payment rates are
fixed at contract issuance and the investment experience is substantially
absorbed by the Company, 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 the Company to
hedge its exposure to interest rate risk. Certain financial instruments, such as
limited partnerships, have been omitted from the analysis because the
investments lack sensitivity to interest rate changes. Non-guaranteed separate
account assets and liabilities are excluded from the analysis because gains and
losses in separate accounts accrue to policyholders. The estimated change in net
economic value below 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,
----------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Basis point shift -100 +100 -100 +100
------------- ------------- ------------- -------------
Amount $(59) $14 $(40) $2
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
The fixed liabilities included above represented approximately 60% and 50% of
the Company's general account liabilities as of December 31, 2004 and general
and guaranteed separate account liabilities as of December 31, 2003,
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 certain 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,
------------------------------------------------------------------------
2004 2005
- ---------------------------------------------------------------------------------------------------------------------------------
Basis point shift -100 +100 -100 +100
------------- -------------- ------------- --------------
Amount $482 $(472) $462 $(455)
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
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.
<Page>
58 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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 declines in the equity markets can have a
significant impact on the Company's operations, as sales of variable products
may decline and surrender activity may increase, as customer sentiment towards
the equity market turns negative. 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, the 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.
The Company sells variable annuity contracts that offer one or more benefit
guarantees that generally increase with declines in equity markets. As is
described in more detail below, the Company manages the equity market risks
embedded in these guarantees through reinsurance, product design and hedging
programs. The Company believes its ability to manage these equity market risks
by these means gives it a competitive advantage; and, in particular, its ability
to create innovative product designs that allow the Company to meet identified
customer needs while generating manageable amounts of equity market risk. The
Company's relative sales and variable annuity market share have generally
increased during periods when it has recently introduced new products to the
market. In contrast, the Company's relative sales and market share have
generally decreased when competitors introduce products that cause an issuer to
assume larger amounts of equity and other market risk than the Company is
confident it can prudently manage. The Company believes its long-term success in
the variable annuity market will continue to be aided by successful innovation
in both product design and in equity market risk management and that, in the
absence of this innovation, its market share could decline.
The Company sells variable annuity contracts that offer various guaranteed death
benefits. The Company maintains a liability for the death benefit costs, net of
reinsurance, of $110, as of December 31, 2004. Declines in the equity market may
increase the Company's net exposure to death benefits under these contracts. The
majority of the contracts with the guaranteed death benefit feature are sold by
the Retail Products Group segment. For certain guaranteed death benefits, The
Hartford 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 guaranteed death
benefits sold with variable annuity contracts beginning in June 2003, the Retail
Products Group segment 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.
The Company's total gross exposure (i.e. before reinsurance) to these guaranteed
death benefits as of December 31, 2004 is $8.2 billion. Due to the fact that 80%
of this amount is reinsured, the Company's net exposure is $1.6 billion. This
amount is often referred to as the retained net amount at risk. However, the
Company will incur these guaranteed death benefit payments in the future only if
the policyholder has an in-the-money guaranteed death benefit at their time of
death.
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 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.
<Page>
HARTFORD LIFE INSURANCE COMPANY 59
- --------------------------------------------------------------------------------
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. For further discussion of this arrangement, see Note 15 of Notes to
Consolidated Financial Statements.
In December 2004, the Company purchased one and two year S&P 500 put option
contracts to economically hedge certain liabilities that could increase if the
equity markets decline. As of December 31, 2004, the notional and market value
related to this strategy was $1.9 billion and $32, respectively. Because this
strategy is intended to partially hedge certain equity-market sensitive
liabilities calculated under statutory accounting (see Capital Resources and
Liquidity), changes in the value of the put options may not be closely aligned
to changes in liabilities determined in accordance with Generally Accepted
Accounting Principles ("GAAP"), causing volatility in GAAP net income. The
Company anticipates employing similar strategies in the future, which could
further increase volatility in GAAP net income.
CURRENCY EXCHANGE RISK
Currency exchange risk exists with respect to investments in non-U.S. dollar
denominated fixed maturities, primarily denominated in Euro, Sterling, Yen and
Canadian dollars and the yen based individual fixed annuity product.
The risk associated with the non-U.S. dollar denominated fixed maturities
relates to potential decreases in value and income resulting from unfavorable
changes in foreign exchange rates. The fair value of the non-U.S. dollar
denominated fixed maturities at December 31, 2004 and 2003, were approximately
$2.4 billion and $1.9 billion, respectively. In order to manage its currency
exposures, the Company enters into foreign currency swaps and forwards 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. At
December 31, 2004 and 2003, the derivatives used to hedge currency exchange risk
related to non-U.S. dollar denominated fixed maturities had a total notional
value of $1.6 billion and $1.2 billion, respectively, and total fair value of
$(494) and $(297), respectively.
The yen based fixed annuity product is written by Hartford Life Insurance KK, a
wholly-owned Japanese subsidiary of Hartford Life and Accident Insurance
Company, and subsequently reinsured to the Company. The yen denominated fixed
annuity product is recorded in the consolidated balance sheets in other
policyholder funds and benefits payable in U.S. dollars based upon the
December 31, 2004 yen to dollar spot rate. To mitigate the yen exposure
associated with the product, during the fourth quarter of 2004, the Company
entered into pay fixed U.S. dollar receive fixed yen, zero coupon currency swaps
and forwards (dollar to yen derivatives). As of December 31, 2004 the dollar to
yen derivatives had a notional and fair value of $611 and $10, respectively.
Based on the fair values of the Company's non-U.S. dollar denominated
investments and derivative instruments (including its yen based individual fixed
annuity product) as of December 31, 2004 and 2003, management estimates that a
10% unfavorable change in exchange rates would decrease the fair values by an
after-tax total of $9 and $20, 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 $1.8 billion and $1.3 billion as of December 31, 2004 and
2003, respectively.
CONTRACTUAL OBLIGATIONS
The following table identifies the Company's contractual obligations by payment
due period.
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
--------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
- ----------------------------------------------------------------------------------------------------------------------
Operating leases $ 139 $ 30 $ 51 $ 39 $ 19
- ----------------------------------------------------------------------------------------------------------------------
Policyholder obligations (1) 258,905 16,219 34,727 37,367 170,592
- ----------------------------------------------------------------------------------------------------------------------
Total $259,044 $16,249 $34,778 $37,406 $170,611
- ----------------------------------------------------------------------------------------------------------------------
</Table>
(1) Estimated life and annuity obligations include death claims, policy
surrenders, policyholder dividends, and trail commissions offset by expected
future deposits and premiums on in-force contracts. Estimated contractual
policyholder obligations are based on mortality and lapse assumptions
comparable with Company's historical experience, modified for recent
observed trends. The
<Page>
60 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
Company has also assumed market growth and interest crediting consistent
with assumptions used in amortizing deferred acquisition costs. In contrast
to this table, the majority of the Company's obligations are recorded on the
balance sheet at the current account value, as described in Critical
Accounting Estimates, and do not incorporate an expectation of future market
growth, interest crediting, or future deposits. Therefore, the estimated
contractual policyholder obligations presented in this table significantly
exceed the liabilities recorded in reserve for future policy benefits and
unpaid claims and claim adjustment expenses, other policyholder funds and
benefits payable and separate account liabilities. Due to the significance
of the assumptions used, the amounts presented could materially differ from
actual results. As separate account obligations are legally insulated from
general account obligations, the separate account obligations will be fully
funded by cash flows from separate account assets. The Company expects to
fully fund the general account obligations from cash flows from general
account investments and future deposits and premiums.
CASH FLOW
<Table>
<Caption>
2004 2003 2002
- -----------------------------------------------------------------
Cash provided by operating
activities $ 755 $ 1,221 $ 611
- -----------------------------------------------------------------
Cash used for investing
activities (915) (3,634) (4,423)
- -----------------------------------------------------------------
Cash provided by financing
activities 280 2,430 3,802
- -----------------------------------------------------------------
Cash -- End of Year 216 96 79
- -----------------------------------------------------------------
</Table>
2004 COMPARED TO 2003 -- The decrease in cash provided by operating activities
was primarily the result of the timing of the settlement of receivables and
payables. The cash used for investing activities as compared to the prior year
period was lower primarily due to higher sales of investments, partially offset
by slightly higher purchases of investments. The decrease in net cash provided
by financing activities was primarily due to a decrease in net receipts from
policyholders accounts related to investment and universal life contracts, and
increased dividends to shareholders. Operating cash flows in both periods have
been more than adequate to meet liquidity requirements.
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.
DIVIDENDS
The Company declared $549 in dividends to HLA for 2004. 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 above.
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.
On August 4, 2004, Moody's affirmed Hartford Life, Inc.'s A3 senior debt ratings
as well as the Aa3 insurance financial strength ratings of its life insurance
operating subsidiaries. In addition, Moody's changed the outlook for all of
these ratings from negative to stable.
Since the announcement of the suit filed by the New York Attorney General's
Office against Marsh & McLennan Companies, Inc., and Marsh, Inc. on October 14,
2004, the major independent ratings agencies have indicated that they continue
to monitor developments relating to the suit. The outlook on the life insurance
subsidiaries and corporate debt was unaffected.
The following table summarizes Hartford Life Insurance Company's significant
United States member companies' financial ratings from the major independent
rating organizations as of February 25, 2005:
<Table>
<Caption>
STANDARD &
A.M. BEST FITCH POOR'S MOODY'S
- -----------------------------------------------------------------------
INSURANCE RATINGS
Hartford Life
Insurance Company A+ AA AA- Aa3
- -----------------------------------------------------------------------
Hartford Life and
Annuity A+ AA AA- Aa3
- -----------------------------------------------------------------------
OTHER RATINGS
Hartford Life
Insurance
Company:
Short Term Rating -- -- A-1+ P-1
- -----------------------------------------------------------------------
</Table>
The agencies consider many factors in determining the final rating of an
insurance company. One consideration is the relative level of statutory surplus
necessary to support the business written. Statutory surplus represents the
capital of the insurance company reported in accordance with accounting
practices prescribed by the applicable state insurance department.
EQUITY MARKETS
For a discussion of equity markets impact to capital and liquidity, see the
Capital Markets Risk Management section under "Market Risk".
<Page>
HARTFORD LIFE INSURANCE COMPANY 61
- --------------------------------------------------------------------------------
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, 2004, Hartford Life Insurance
Company had more than sufficient capital to meet the NAIC's minimum RBC
requirements.
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 percentage is 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.
CONTINGENCIES
LEGAL PROCEEDINGS -- For a discussion regarding contingencies related to the
Company's legal proceedings, please see Item 3, "Legal Proceedings".
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS -- The 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.
For a discussion regarding contingencies related to the manner in which the
Company compensates brokers and other producers, please see "Overview-Broker
Compensation" above.
REGULATORY DEVELOPMENTS -- For a discussion regarding contingencies related to
regulatory developments that affect the Company, please see "Overview-Regulatory
Developments" above.
For further information on other contingencies, see Note 11 of Notes to
Consolidated Financial Statements
LEGISLATIVE INITIATIVES
On November 18, 2004, the House Financial Services Committee approved
legislation which would have extended the Terrorism Risk Insurance Act (TRIA)
beyond its December 31, 2005, termination. Efforts will continue in 2005 to
extend TRIA and to enact permanent legislation. The prospects for enactment of a
simple extension or more permanent legislation are uncertain. Therefore, any
potential effect on the Company's financial condition or results of operations
cannot be reasonably estimated at this time.
President Bush has proposed new investment vehicles with larger annual
contribution limits for individuals and permanent changes to the estate tax.
These changes could have a material effect on sales of the Company's life
insurance and investment products. Prospects for enactment of this legislation
in 2005 are uncertain. Therefore, any potential effect on the Company's
financial condition or results of operations from such potential legislative
changes cannot be reasonably estimated at this time. The American Jobs Creation
Act of 2004 imposes new restrictions on non-qualified deferred compensation
plans. The Company does not believe these changes will have a material effect on
the sale of its products.
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. The President has also established an advisory
panel to study reform of the Internal Revenue Code. The panel is scheduled to
report its findings and make recommendations to the Secretary of the Treasury by
the end of July, 2005. 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 expected to consider provisions regarding age discrimination in
defined benefit plans, transition relief for older and longer service workers
affected by changes to traditional defined benefit pension plans and the
replacement of the interest rate used to determine pension plan funding
requirements. These changes could affect the Company's pension plan.
The President has signed into law the Class Action Fairness Act of 2005. The Act
will reduce the number and type of national class actions certified by state
judges by updating the federal rules on diversity jurisdiction. Any potential
effect on the Company cannot be reasonably estimated at this time.
<Page>
62 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
Congress may consider a number of other legal reform proposals this year.
Prospects for enactment of these proposals in 2005 are uncertain.
GUARANTY FUND AND OTHER INSURANCE-RELATED ASSESSMENTS
In all states, insurers licensed to transact certain classes of insurance are
required to become members of a guaranty fund. In most states, in the event of
the insolvency of an insurer writing any such class of insurance in the state,
members of the fund are assessed to pay certain claims of the insolvent insurer.
A particular state's fund assesses its members based on their respective written
premiums in the state for the classes of insurance in which the insolvent
insurer is engaged. Assessments are generally limited for any year to one or two
percent of premiums written per year depending on the state. There were no
guaranty fund assessment payments or refunds in 2004 and 2003. There were
guaranty fund assessment refunds of $2 in 2002.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by Item 7A is set forth in the Capital Markets Risk
Management section of the Management's Discussion and Analysis of Financial
Condition and Results of Operations and is incorporated herein by reference.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
LEGAL OPINION
- --------------------------------------------------------------------------------
The validity of the interests in the Contracts described in this Prospectus will
be passed upon for Hartford by Christopher M. Grinnell, Counsel for Hartford
Life Insurance Company.
EXPERTS
- --------------------------------------------------------------------------------
The consolidated financial statements included and incorporated by reference in
this prospectus and the related financial statement schedules as of
December 31, 2004 and 2003, and for each of the three years in the period ended
December 31, 2004, have been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their reports, which are
included and incorporated by reference herein (which reports express an
unqualified opinion and includes an explanatory paragraph relating to the
Company's change in its method of accounting for certain nontraditional
long-duration contracts and for separate accounts in 2004) and have been so
included and incorporated in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
<Page>
HARTFORD LIFE INSURANCE COMPANY 63
- --------------------------------------------------------------------------------
APPENDIX A -- MODIFIED GUARANTEED ANNUITY FOR QUALIFIED PLANS
The CRC-Registered Trademark- (Compound Rate Contract) 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 Section 401(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>
64 HARTFORD LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
APPENDIX B -- SPECIAL PROVISIONS FOR INDIVIDUAL CONTRACTS ISSUED IN THE STATE OF
CALIFORNIA, MICHIGAN, MISSOURI, NEW YORK, OREGON, SOUTH CAROLINA, TEXAS,
VIRGINIA AND WISCONSIN
The following provision, among others, applies only to individual Contracts
issued in the States of California, Michigan, Missouri, New York, Oregon, South
Carolina, Texas, Virginia and Wisconsin:
(1) The Contract Owner has the right to request, in writing, a surrender of the
Contract within ten (10) days after it was purchased. In such event, in
California, New York, Oregon, Texas, Virginia and Wisconsin, Hartford will
pay the Contract Owner an amount equal to the sum of (a) the Account Value
on the date the written request for surrender was received multiplied by the
Market Value Adjustment formula and (b) any charges deducted from the
Purchase Payment. In Michigan, Missouri and South Carolina, the Contract
will be cancelled and any premium paid will be refunded in full.
<Page>
HARTFORD LIFE INSURANCE COMPANY 65
- --------------------------------------------------------------------------------
APPENDIX C -- MARKET VALUE ADJUSTMENT
The formula which will be used to determine the Market Value Adjustment is:
[(1 + i)/(1 + J)](n/12)
<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
next highest 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
<Table>
Beginning Account Value: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3
</Table>
EXAMPLE 1:
<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 - (0.05) X $57,161.18]
X Market Value Adjustment
= $54,303.12 X Market Value Adjustment
</Table>
<Table>
Market Value Adjustment
i = 0.055
J = 0.061
N = 30
Market Value Adjustment = [(1 + i)/(1 + J)] TO THE POWER OF n/12
= (1.055/1.061) TO THE POWER OF 30/12
= 0.985922
Net Surrender Value at middle of Contract Year 3 = $54,303.12 x 0.985922
= $53,538.64
</Table>
EXAMPLE OF MARKET VALUE ADJUSTMENT
<Table>
Beginning Account Value: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3
</Table>
EXAMPLE 2:
<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 - (0.05) X $57,161.18]
X Market Value Adjustment
= $54,303.12 x Market Value Adjustment
</Table>
<Table>
Market Value Adjustment
i = .055
J = 0.050
N = 30
Market Value Adjustment = [(1 + i)/(1 + J)] TO THE POWER OF n/12
= (1.055/1.05) TO THE POWER OF 30/12
= 1.011947
Net Surrender Value at middle of Contract Year 3 = $54,303.12 X 1.011947
= $54,951.88
</Table>
This example does not include any applicable taxes.
<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, 2004 and 2003, 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, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
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, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 2 of the consolidated financial statements, the Company
changed its method of accounting and reporting for certain nontraditional
long-duration contracts and for separate accounts in 2004.
Deloitte & Touche LLP
Hartford, Connecticut
February 24, 2005
F-1
<Page>
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2004 2003 2002
------------------------
(In millions)
REVENUES
Fee income $2,592 $2,169 $2,079
Earned premiums and other 484 934 574
Net investment income 2,470 1,764 1,572
Net realized capital gains (losses) 129 1 (276)
------------------------
TOTAL REVENUES 5,675 4,868 3,949
------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 3,111 2,726 2,275
Insurance expenses and other 709 625 650
Amortization of deferred policy acquisition
costs and present value of future profits 814 660 531
Dividends to policyholders 29 63 65
------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,663 4,074 3,521
------------------------
Income before income tax expense and cumulative
effect of accounting changes 1,012 794 428
Income tax expense 29 168 2
Income before cumulative effect of accounting
changes 983 626 426
Cumulative effect of accounting changes, net of
tax (18) -- --
------------------------
NET INCOME $ 965 $ 626 $ 426
------------------------
</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,
-------------------------
2004 2003
-------------------------
(In millions, except for
share data)
ASSETS
Investments
Fixed maturities, available for sale, at fair
value (amortized cost of $40,479 and $28,511) $ 42,691 $ 30,085
Equity securities, available for sale, at fair
value (cost of $171 and $78) 179 85
Equity securities, held for trading, at fair
value 1 --
Policy loans, at outstanding balance 2,617 2,470
Other investments 1,083 639
-------------------------
TOTAL INVESTMENTS 46,571 33,279
-------------------------
Cash 216 96
Premiums receivable and agents' balances 20 17
Reinsurance recoverables 1,460 1,297
Deferred policy acquisition costs and present
value of future profits 6,453 6,088
Deferred income taxes (638) (486)
Goodwill 186 186
Other assets 1,562 1,238
Separate account assets 139,812 130,225
-------------------------
TOTAL ASSETS $195,642 $171,940
-------------------------
LIABILITIES
Reserve for future policy benefits $ 7,244 $ 6,518
Other policyholder funds 37,493 25,263
Other liabilities 3,844 3,330
Separate account liabilities 139,812 130,225
-------------------------
TOTAL LIABILITIES 188,393 165,336
-------------------------
COMMITMENTS AND CONTINGENT LIABILITIES, NOTE 11
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 940 711
Foreign currency translation adjustments (1) (1)
-------------------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME 939 710
-------------------------
Retained earnings 4,064 3,648
-------------------------
TOTAL STOCKHOLDER'S EQUITY 7,249 6,604
-------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $195,642 $171,940
-------------------------
</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)
2004
Balance, December 31, 2003 $6 $2,240 $ 728 $ (17) $(1) $3,648 $6,604
Comprehensive income
Net income 965 965
Other comprehensive income,
net of tax (1)
Cumulative effect of
accounting change 292 292
Net change in unrealized
capital gains (losses) on
securities (2) 104 104
Net loss on cash flow
hedging instruments (167) (167)
Total other comprehensive
income 229
Total comprehensive income 1,194
Dividends declared (549) (549)
----------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 $6 $2,240 $1,124 $(184) $(1) $4,064 $7,249
----------------------------------------------------------------------------------------
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 (2) 265 265
Net loss on cash flow
hedging instruments (128) (128)
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 (2) 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
----------------------------------------------------------------------------------------
</Table>
(1) Net change in unrealized capital gain on securities is reflected net of tax
and other items of $56, $143, and $188 for the years ended December 31,
2004, 2003 and 2002, respectively. Net (loss) gain on cash flow hedging
instruments is net of tax (benefit) provision of $(90), $(69) and $26 for
the years ended December 31, 2004, 2003 and 2002, respectively. There is no
tax effect on cumulative translation adjustments.
(2) There were reclassification adjustments for after-tax gains (losses)
realized in net income of $78, and $(170) for the years ended December 31,
2004, and 2002, respectively. There were no reclassification adjustments for
after-tax gains (losses) realized in net income for the year ended
December 31, 2003.
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,
---------------------------
2004 2003 2002
---------------------------
(In millions)
OPERATING ACTIVITIES
Net income $ 965 $ 626 $ 426
Adjustments to reconcile net income to net cash
provided by operating activities
Net realized capital (gains) losses (129) (1) 276
Cumulative effect of accounting changes, net of
tax 18 -- --
Amortization of deferred policy acquisition
costs and present value of future profits 814 660 531
Additions to deferred policy acquisition costs
and present value of future Profits (1,375) (1,319) (987)
Depreciation and amortization 43 117 19
Increase in premiums receivable and agents'
balances (3) (2) (5)
(Decrease) increase in other liabilities (7) 299 (61)
Change in receivables, payables, and accruals (205) 227 2
Increase (decrease) in accrued tax 34 (67) 76
(Increase) decrease in deferred income tax (55) 65 23
Amortization of sales inducements 30 68 67
Additions to deferred sales inducements (141) (136) (106)
Increase in future policy benefits 726 794 560
Increase in reinsurance recoverables (15) (1) (127)
Decrease (increase) in other assets 55 (109) (83)
---------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 755 1,221 611
---------------------------
INVESTING ACTIVITIES
Purchases of investments (17,192) (13,628) (12,470)
Sales of investments 13,306 6,676 5,781
Maturity and principal paydowns of fixed
maturity investments 2,971 3,233 2,266
Other -- 85 --
---------------------------
NET CASH USED FOR INVESTING ACTIVITIES (915) (3,634) (4,423)
---------------------------
FINANCING ACTIVITIES
Capital contributions -- 199 235
Dividends paid (549) (175) --
Net receipts from investment and universal
life-type contracts charged against
policyholder accounts 829 2,406 3,567
---------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 280 2,430 3,802
---------------------------
Net increase (decrease) in cash 120 17 (10)
Impact of foreign exchange -- -- 2
Cash -- beginning of year 96 79 87
---------------------------
Cash -- end of year $ 216 $ 96 $ 79
---------------------------
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid (received) During the Year for:
Income taxes $ 42 $ 35 $ (2)
</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)
-----------------------------------------------------------------------------
NOTE 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.
NOTE 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.
In 2004, the Company sponsored and purchased an investment interest in a
synthetic collateralized loan obligation transaction, a variable interest entity
("VIE") for which the Company determined itself to be the primary beneficiary.
Accordingly, the assets, liabilities and results of operations of the entity are
included in the Company's consolidated financial statements. For further
discussion of the synthetic collateralized loan transaction see Note 4.
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 evaluation of
other-than-temporary impairments, 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
In July 2003, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 03-1, "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" ("SOP 03-1"). SOP 03-1 addresses a wide variety of topics,
some of which have a significant impact on the Company. The major provisions of
SOP 03-1 require:
- - Recognizing expenses for a variety of contracts and contract features,
including guaranteed minimum death benefits ("GMDB"), certain death benefits
on universal-life type contracts and annuitization options, on an accrual
basis versus the previous method of recognition upon payment;
- - Reporting and measuring assets and liabilities of certain separate account
products as general account assets and liabilities when specified criteria
are not met;
- - Reporting and measuring the Company's interest in its separate accounts as
general account assets based on the insurer's proportionate beneficial
interest in the separate account's underlying assets; and
- - Capitalizing sales inducements that meet specified criteria and amortizing
such amounts over the life of the contracts using the same methodology as
used for amortizing deferred acquisition costs ("DAC").
F-6
<Page>
SOP 03-1 was 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 SOP 03-1 on net income and other
comprehensive income was comprised of the following individual impacts shown net
of income tax benefit of $10:
<Table>
<Caption>
Other
Comprehensive
Components of Cumulative Effect of Adoption Net Income Income
------------------------------
Establishing GMDB and other benefit reserves for annuity
contracts $(50) $ --
Reclassifying certain separate accounts to general account 30 294
Other 2 (2)
------------------------------
TOTAL CUMULATIVE EFFECT OF ADOPTION $(18) $292
------------------------------
</Table>
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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
buyback 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 separately. SFAS No.
150 was effective for instruments entered into or modified after May 31, 2003
and for all other 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 January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"), which
required an enterprise to assess whether consolidation of an entity is
appropriate based upon its interests in a variable interest entity. A VIE is an
entity in which the equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. 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 which required consolidation.
In December 2003, the FASB issued a revised version of FIN 46 ("FIN 46R"), which
incorporated a number of modifications and changes made to the original version.
FIN 46R replaced the previously issued FIN 46 and, subject to certain special
provisions, was effective no later than the end of 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 was 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.
FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), which replaces SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") and supercedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees". SFAS No. 123R requires all companies
to recognize compensation costs for share-based payments to employees based on
the grant-date fair value of the award for financial statements for reporting
periods beginning after June 15, 2005. The pro forma disclosures previously
permitted under SFAS No. 123 will no longer be an alternative to financial
statement recognition. The transition methods include prospective and
retrospective adoption options. The prospective method requires that
compensation expense be recorded for all unvested stock-based awards including
those granted prior to adoption of the fair value recognition provisions of SFAS
No. 123, at the beginning of the first quarter of adoption of SFAS No. 123R,
while the retrospective methods would record compensation expense for all
unvested stock-based awards beginning with the first period restated. The
Hartford will adopt SFAS No. 123R in the third quarter of fiscal 2005 using the
prospective method. 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 SFAS No. 123 and therefore, the
adoption is not expected to have a
F-7
<Page>
material impact on the Company's consolidated financial condition or results of
operations.
EITF ISSUE NO. 03-1
In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus
on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("EITF Issue No. 03-1"). EITF Issue No. 03-1
was effective for periods beginning after June 15, 2004 and 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 should be
accounted for in accordance with SOP 03-3, "Accounting for Certain Loans and
Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 requires that the
amount of a security's expected cash flows in excess of the investor's initial
cost or amortized cost investment be recognized as interest income on a
level-yield basis over the life of the security. EITF Issue No. 03-1 does not
replace the impairment guidance for investments accounted for under EITF Issue
No. 99-20, "Recognition of Interest Income and Impairments on Purchased and
Retained Beneficial Interests in Securitized Financial Assets" ("EITF Issue No.
99-20"), however, it requires investors to determine if a security is
other-than-temporarily impaired under EITF Issue No. 03-1 if the security is
determined not to be other-than-temporarily impaired under EITF Issue No. 99-20.
In September 2004, the FASB staff issued clarifying guidance for comment in FASB
Staff Position ("FSP") EITF Issue No. 03-1-a, "Implementation Guidance for the
Application of Paragraph 16 of EITF Issue No. 03-1, 'The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"',
("FSP Issue No. 03-1-a") and subsequently voted to delay the implementation of
the impairment measurement and recognition guidance contained in paragraphs
10-20 of EITF Issue No. 03-1 in order to redeliberate certain aspects of the
consensus as well as the implementation guidance included in FSP Issue No.
03-1-a. The disclosure requirements including quantitative and qualitative
information regarding investments in an unrealized loss position remain
effective and are included in Note 4.
The ultimate impact the adoption of EITF Issue No. 03-1 will have on the
Company's consolidated financial condition and results of operations is still
unknown. Depending on the nature of the ultimate guidance, adoption of the
standard could potentially result in the recognition of unrealized losses,
including those declines in value that are attributable to interest rate
movements, as other-than-temporary impairments, except those deemed to be minor
in nature. As of December 31, 2004, the Company had $154 of total gross
unrealized losses. The amount of impairments to be recognized, if any, will
depend on the final standard, market conditions and management's intent and
ability to hold securities with unrealized losses at the time of the impairment
evaluation.
STOCK-BASED COMPENSATION
In January 2003, The Hartford adopted the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock Issued to Employees", 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, and is recognized over the award's
vesting period. 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, 2004, 2003 and 2002 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 fixed maturities, which include
bonds, redeemable preferred stock and commercial paper; and certain equity
securities, which include common and non-redeemable preferred stocks, are
classified as "available-for-sale" as defined in SFAS No. 115, "Accounting for
Certain Investments in
F-8
<Page>
Debt and Equity Securities" ("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 stockholders' equity as a
component of accumulated other comprehensive income ("AOCI"). Equity investments
classified as "trading", as defined in SFAS No. 115, are recorded at fair value
with changes in fair value recorded in net investment income. Policy loans are
carried at outstanding balance, which approximates fair value. Other investments
primarily consist of limited partnership interests, derivatives and mortgage
loans. Limited partnerships are accounted for under the equity method and
accordingly the Company's share of 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 service market
quotations, 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, certain 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
an independent 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
the 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, 2004 and 2003, primarily consisted of non-144A private placements
and have an average duration of 4.7 and 4.3, respectively.
The following table identifies the fair value of fixed maturity securities by
pricing source as of December 31, 2004 and 2003:
<Table>
<Caption>
2004 2003
-----------------------------------------------------------------------------
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 $34,429 80.6% $24,557 81.6%
Priced via broker quotations 3,074 7.2% 2,037 6.8%
Priced via matrices 3,508 8.2% 2,129 7.1%
Priced via other methods 61 0.2% 151 0.5%
Short-term investments [1] 1,619 3.8% 1,211 4.0%
-----------------------------------------------------------------------------
TOTAL [2] $42,691 100.0% $30,085 100.0%
-----------------------------------------------------------------------------
</Table>
(1) Short-term investments are primarily valued at amortized cost, which
approximates fair value.
(2) Effective January 1, 2004, guaranteed separate account assets were
included with general account assets as a result of adopting SOP 03-1.
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between knowledgeable, unrelated
willing parties. 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 the security is deemed to be
other-than-temporarily impaired, a charge is recorded in net realized capital
losses equal to the difference between the fair value and amortized cost basis
of the security. In addition,
F-9
<Page>
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. 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 ("the committee") 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 in an unrealized loss position, are reviewed at least
quarterly to determine if an other-than-temporary impairment is present based on
certain quantitative and qualitative factors. 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. Non-EITF Issue No. 99-20 securities depressed by twenty
percent or more for six months are presumed to be other-than-temporarily
impaired unless significant objective verifiable evidence supports that the
security price is temporarily depressed and is expected to recover within a
reasonable period of time. The evaluation of non-EITF Issue No. 99-20 securities
depressed more than ten percent is documented and discussed quarterly by the
committee.
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.
Estimating future cash flows is a quantitative and qualitative process that
incorporates information received from third party sources along with certain
internal assumptions and judgments regarding the future performance of the
underlying collateral. As a result, actual results may differ from current
estimates. In addition, projections of expected future cash flows may change
based upon new information regarding the performance of the underlying
collateral.
Once an impairment charge has been recorded, the Company then continues to
review the other-than-temporarily impaired securities for additional
other-than-temporary impairments. The ultimate completion of EITF Issue No. 03-1
may impact the Company's current other-than-temporary impairment evaluation
process. (For further discussion of EITF Issue No. 03-1, see the Future Adoption
of New Accounting Standards section of Note 2.)
NET REALIZED CAPITAL GAINS AND LOSSES
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 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 less than $1 for the year ended December 31, 2004 and
were $1 for the years ended December 31, 2003 and 2002. 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 INVESTMENT INCOME
Interest income from fixed maturities is recognized when earned on a constant
effective yield basis based on estimated principal repayments, if applicable.
Prepayment fees are recorded in net investment income when earned. The Company
stops recognizing interest income when it does not expect to receive amounts in
accordance with the contractual terms of the security. Interest 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 replication transactions. (For a further discussion of derivative
instruments, see the Derivative Instruments section of Note 4.)
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
Derivatives are recognized on the balance sheet at fair value. Fair value is
based upon either independent market quotations 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 sheets, excluding
embedded derivatives and guaranteed minimum withdrawal benefits ("GMWB")
reinsurance contracts. Embedded derivatives are recorded in
F-10
<Page>
the consolidated balance sheets with the associated host instrument. GMWB
reinsurance contract amounts are recorded in reinsurance recoverables in the
consolidated balance sheets.
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.
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 the
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 income
in which the hedged item is recorded. Any hedge ineffectiveness is recorded
immediately in current period earnings as net realized capital gains and losses.
Periodic derivative net coupon settlements are recorded in 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 as net realized capital gains and losses. 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 as net
realized capital gains and losses. 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. 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.
HEDGE DOCUMENTATION AND EFFECTIVENESS TESTING
To qualify for hedge accounting treatment, a derivative must be highly effective
in mitigating the designated change in value of the hedged item. At hedge
inception, the Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking each hedge transaction. The documentation process
includes linking all derivatives that are designated as fair-value, cash-flow,
foreign-currency or net-investment hedges to specific assets or 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.
Hedge effectiveness is assessed using qualitative and quantitative methods.
Qualitative methods may include comparison of critical terms of the derivative
to the hedged item. Depending on the hedging strategy, quantitative methods may
include the "Change in Variable Cash Flows Method," the "Change in Fair Value
Method" and the "Hypothetical Derivative Method". In addition, certain 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. 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 hedging 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.
F-11
<Page>
When hedge accounting is discontinued because the Company becomes aware that it
is not probable that the forecasted transaction will occur, the derivative
continues to be carried on the balance sheet at its fair value, and gains and
losses that were accumulated in AOCI are recognized immediately in earnings.
In other situations in which hedge accounting is discontinued on a cash-flow
hedge, including those where the derivative is sold, terminated or exercised,
amounts previously deferred in AOCI are amortized into earnings when earnings
are impacted by the variability of the cash flow of the hedged item.
EMBEDDED DERIVATIVES
The Company purchases financial instruments and issues products, such as GMWB,
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 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 daily, netted by counterparty
for each legal entity of the Company, and then 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 monitored by the Company's internal compliance unit and
reviewed frequently by senior management. In addition, the compliance unit
monitors counterparty credit exposure on a monthly basis to ensure compliance
with Company policies and statutory limitations. 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 guaranteed minimum
withdrawal benefit ("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 a
specific percentage 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. For certain
of the withdrawal benefit features, 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 to the derivative 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 associated with the host variable annuity contract and
recorded in fee income.
For contracts issued prior to July 2003, the Company has a reinsurance
arrangement in place to offset its exposure to the GMWB. 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 the reinsured GMWB are recorded in net realized capital
gains and losses. As of July 2003, the Company had substantially exhausted all
of its reinsurance capacity with respect to contracts issued after July 2003.
Substantially all new contracts with the GMWB are covered by a reinsurance
arrangement with a related party. For further discussion of this arrangement,
see Note 15 of Notes to Consolidated Financial Statements.
F-12
<Page>
DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
Policy acquisition costs include commissions and certain other expenses that
vary with and are primarily associated with acquiring business. Present value of
future profits is an intangible asset recorded upon applying purchase accounting
in an acquisition of a life insurance company. Deferred policy acquisition costs
and the present value of future profits intangible asset are amortized in the
same way. Both are amortized over the estimated life of the contracts acquired,
usually 20 years. Within the following discussion, deferred policy acquisition
costs and the present value of future profits intangible asset will be referred
to as "DAC". At December 31, 2004 and 2003, the carrying value of the Company's
DAC was $6.5 billion and $6.1 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 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, 2004 and 2003. For other
products including fixed annuities and other universal life-type contracts, the
average assumed investment yield ranged from 5.7% to 7.9% for both years ended
December 31, 2004 and 2003.
The Company had developed models 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, 2004, 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, 2004 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.
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.
Aside from absolute levels and timing of market performance assumptions,
additional factors that will influence the determination to adjust assumptions
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 1,212 on December 31,
2004), 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.
RESERVE FOR FUTURE POLICY BENEFITS AND UNPAID CLAIMS AND CLAIM ADJUSTMENT
EXPENSES
Liabilities for the Company's group life and disability contracts as well its
individual term life insurance policies
F-13
<Page>
include amounts for unpaid claims and future policy benefits. Liabilities for
unpaid claims include estimates of amounts to fully settle known reported claims
as well as claims related to insured events that the Company estimates have been
incurred but have not yet been reported. Liabilities for future policy benefits
are calculated by the net level premium method using interest, withdrawal and
mortality assumptions appropriate at the time the policies were issued. The
methods used in determining the liability for unpaid claims and future policy
benefits are standard actuarial methods recognized by the American Academy of
Actuaries. For the tabular reserves, discount rates are based on the Company's
earned investment yield and the morbidity/mortality tables used are standard
industry tables modified to reflect the Company's actual experience when
appropriate. In particular, for the Company's group disability known claim
reserves, the morbidity table for the early durations of claim is based
exclusively on the Company's experience, incorporating factors such as sex,
elimination period and diagnosis. These reserves are computed such that they are
expected to meet the Company's future policy obligations. Future policy benefits
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 and, as such, provisions for adverse
deviation are built into the long-tailed liability assumptions.
OTHER POLICYHOLDER FUNDS AND BENEFITS PAYABLE
The Company has classified its fixed and variable annuities, 401(k), certain
governmental annuities, private placement life insurance ("PPLI"), variable
universal life insurance, universal life insurance and interest sensitive whole
life insurance as universal life-type contracts. The liability for universal
life-type contracts is equal to the balance that accrues to the benefit of the
policyholders as of the financial statement date (commonly referred to as the
account value), 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. Certain contracts classified as universal life-type
may also include additional death or other insurance benefit features, such as
guaranteed minimum death or income benefits offered with variable annuity
contracts or no lapse guarantees offered with universal life insurance
contracts. An additional liability is established for these benefits by
estimating the expected present value of the benefits in excess of the projected
account value in proportion to the present value of total expected assessments.
Excess benefits are accrued as a liability as actual assessments are recorded.
Determination of the expected value of excess benefits and assessments are based
on a range of scenarios and assumptions including those related to market rates
of return and volatility, contract surrender rates and mortality experience.
The Company has classified its institutional and governmental products, without
life contingencies, including funding agreements, certain structured settlements
and guaranteed investment contracts, as investment contracts. The liability for
investment contracts is equal to the balance that accrues to the benefit of the
contract holder as of the financial statement date, which includes the
accumulation of deposits plus credited interest, less withdrawals and amounts
assessed through the financial statement date.
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. The Company's traditional life and
group disability products are classified as long duration contracts, and
premiums are recognized as revenue when due from policyholders.
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 inforce accounted for 5%, 6%, and 6% as of
December 31, 2004, 2003 and 2002, respectively, of total life insurance in
force. Dividends to policyholders were $29, $63, and $65 for the years ended
December 31, 2004, 2003 and 2002, 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 stockholders, the policyholder's share of net income on those
contracts that cannot be distributed is excluded from stockholders' 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
F-14
<Page>
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.
NOTE 3. SEGMENT INFORMATION
The Company has changed its reportable operating segments in 2004 from
Investment Products, Individual Life and Corporate Owned Life Insurance ("COLI")
to Retail Products ("Retail"), Institutional Solutions ("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, structured settlements, 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 its direct parent HLA.
Periodic net coupon settlements on non-qualifying derivatives and net realized
capital gains 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. The
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 the Other category 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 the Other category. 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 the Other
category. Credit related net capital losses are retained by the Other category.
However, in exchange for retaining credit related losses, the Other category
charges each operating segment a "credit-risk" fee through net investment
income. The "credit-risk" fee covers fixed income assets included in each
operating segment's general account and guaranteed separate accounts. The
"credit-risk" fee is based upon historical default rates in the corporate bond
market, the Company's actual default experience and estimates of future losses.
The Company's revenues are primarily derived from customers within the United
States. The Company's long-lived assets primarily consist of deferred policy
acquisition costs and deferred tax assets from within the United States. The
following tables present summarized financial information concerning the
Company's segments.
F-15
<Page>
<Table>
<Caption>
For the years ended
December 31,
------------------------------
2004 2003 2002
------------------------------
TOTAL REVENUES
Retail Products Group
Individual Annuities $2,481 $1,656 $1,451
Other 145 118 105
Total Retail Products Group 2,626 1,774 1,556
Institutional Solutions Group 1,820 2,082 1,730
Individual Life 957 893 858
Other 272 119 (195)
------------------------------
TOTAL REVENUES $5,675 $4,868 $3,949
------------------------------
NET INVESTMENT INCOME
Retail Products Group $1,079 $ 493 $ 367
Institutional Solutions Group 1,044 976 958
Individual Life 267 222 224
Other 80 73 23
------------------------------
TOTAL NET INVESTMENT INCOME $2,470 $1,764 $1,572
------------------------------
AMORTIZATION OF DAC
Retail Products Group $ 608 $ 462 $ 377
Institutional Solutions Group 37 33 8
Individual Life 169 165 146
------------------------------
TOTAL AMORTIZATION OF DAC 814 660 531
------------------------------
INCOME TAX EXPENSE (BENEFIT)
Retail Products Group $ 43 $ 30 $ 55
Institutional Solutions Group 40 57 46
Individual Life 69 64 59
Other (123) 17 (158)
------------------------------
TOTAL INCOME TAX EXPENSE $ 29 $ 168 $ 2
------------------------------
NET INCOME (LOSS)
Retail Products Group $ 392 $ 341 $ 280
Institutional Solutions Group 105 119 94
Individual Life 141 134 116
Other 327 32 (64)
------------------------------
TOTAL NET INCOME $ 965 $ 626 $ 426
------------------------------
</Table>
[1] The Company includes tax benefits reflecting the impact of audit settlements
of $191, $0, and $76 for the years ended December 31, 2004, 2003, and 2002,
respectively.
F-16
<Page>
<Table>
<Caption>
December 31,
----------------------
2004 2003
----------------------
ASSETS
Retail Products Group $121,255 $106,058
Institutional Solutions Group 57,983 51,212
Individual Life 11,425 10,555
Other 4,979 4,115
----------------------
TOTAL ASSETS $195,642 $171,940
----------------------
DAC
Retail Products Group $ 4,474 $ 4,271
Institutional Solutions Group 159 106
Individual Life 1,809 1,689
Other 11 22
----------------------
TOTAL DAC $ 6,453 $ 6,088
----------------------
RESERVE FOR FUTURE POLICY BENEFITS
Retail Products Group $ 732 $ 495
Institutional Solutions Group 4,845 4,356
Individual Life 538 533
Other 1,129 1,134
----------------------
TOTAL RESERVE FOR FUTURE POLICY BENEFITS $ 7,244 $ 6,518
----------------------
OTHER POLICYHOLDER FUNDS
Retail Products Group $ 19,395 $ 9,777
Institutional Solutions Group 13,447 12,059
Individual Life 4,150 3,428
Other 501 (1)
----------------------
TOTAL OTHER POLICYHOLDER FUNDS $ 37,493 $ 25,263
----------------------
</Table>
F-17
<Page>
NOTE 4. INVESTMENTS AND DERIVATIVE INSTRUMENTS
<Table>
<Caption>
For the years ended
December 31,
------------------------------
2004 2003 2002
------------------------------
COMPONENTS OF NET INVESTMENT INCOME
Fixed maturities $2,122 $1,425 $1,235
Policy loans 183 207 251
Other investments 195 152 103
Gross investment income 2,500 1,784 1,589
Less: Investment expenses 30 20 17
------------------------------
NET INVESTMENT INCOME $2,470 $1,764 $1,572
------------------------------
</Table>
<Table>
COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
Fixed maturities $ 168 $ (6) $ (285)
Equity securities 7 (7) (4)
Periodic net coupon settlements on non-qualifying
derivatives 4 29 13
Other [1] (50) (16) (1)
Change in liability to policyholders for net realized
capital gains -- 1 1
------------------------------
NET REALIZED CAPITAL GAINS (LOSSES) $ 129 $ 1 $ (276)
</Table>
[1] Primarily consists of changes in fair value on non-qualifying derivatives
and hedge ineffectiveness on qualifying derivate instruments, as well as,
the amortization of deferred acquisition costs.
<Table>
COMPONENTS OF UNREALIZED GAINS (LOSSES) ON
AVAILABLE-FOR-SALE EQUITY SECURITIES
Gross unrealized gains $ 11 $ 11 $ 2
Gross unrealized losses (3) (4) (19)
------------------------------
Net unrealized gains (losses) 8 7 (17)
Deferred income taxes and other items 3 2 (6)
------------------------------
Net unrealized gains (losses), net of tax 5 5 (11)
Balance -- beginning of year 5 (11) (6)
------------------------------
CHANGE IN UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES $ -- $ 16 $ (5)
------------------------------
</Table>
<Table>
<Caption>
For the years ended
December 31,
------------------------------
2004 2003 2002
------------------------------
COMPONENTS OF UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES
Gross unrealized gains $2,363 $1,715 $1,389
Gross unrealized losses (151) (141) (278)
Net unrealized gains credited to policyholders (20) (63) (58)
------------------------------
Net unrealized gains 2,192 1,511 1,053
Deferred income taxes and other items 1,073 788 579
------------------------------
Net unrealized gains, net of tax 1,119 723 474
Balance -- beginning of year 723 474 120
------------------------------
CHANGE IN UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES $ 396 $ 249 $ 354
------------------------------
</Table>
F-18
<Page>
COMPONENTS OF FIXED MATURITY INVESTMENTS
<Table>
<Caption>
As of December 31, 2004
----------------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Gains Unrealized Losses Fair Value
----------------------------------------------------------------------
BONDS AND NOTES
Asset-backed securities ("ABS") $ 5,881 $ 72 $ (61) $ 5,892
Collateralized mortgage obligations
("CMOs")
Agency backed 834 9 (3) 840
Non-agency backed 48 -- -- 48
Commercial mortgage-backed securities
("CMBS")
Agency backed 54 -- -- 54
Non-agency backed 7,336 329 (17) 7,648
Corporate 21,066 1,826 (57) 22,835
Government/Government agencies
Foreign 649 60 (2) 707
United States 774 19 (4) 789
Mortgage-backed securities ("MBS") --
U.S. Government/Government agencies 1,542 18 (2) 1,558
States, municipalities and political
subdivisions 675 30 (5) 700
Redeemable preferred stock 1 -- -- 1
Short-term investments 1,619 -- -- 1,619
----------------------------------------------------------------------
TOTAL FIXED MATURITIES $40,479 $2,363 $(151) $42,691
----------------------------------------------------------------------
</Table>
<Table>
<Caption>
As of December 31, 2003
----------------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Gains Unrealized Losses Fair Value
----------------------------------------------------------------------
BONDS AND NOTES
Asset-backed securities ("ABS") $ 3,777 $ 91 $ (67) $ 3,801
Collateralized mortgage obligations
("CMOs")
Agency backed 508 8 (2) 514
Non-agency backed 19 -- -- 19
Commercial mortgage-backed securities
("CMBS")
Agency backed 28 -- -- 28
Non-agency backed 4,853 248 (14) 5,087
Corporate 15,003 1,273 (46) 16,230
Government/Government agencies
Foreign 641 55 (1) 695
United States 641 8 (2) 647
Mortgage-backed securities ("MBS") --
U.S. Government/Government agencies 1,523 25 (2) 1,546
States, municipalities and political
subdivisions 307 6 (7) 306
Redeemable preferred stock 1 -- -- 1
Short-term investments 1,210 1 -- 1,211
----------------------------------------------------------------------
TOTAL FIXED MATURITIES $28,511 $1,715 $(141) $30,085
----------------------------------------------------------------------
</Table>
F-19
<Page>
Included in the fair value of total fixed maturities as of December 31, 2004 are
$11.7 billion of guaranteed separate account assets. Guaranteed separate account
assets were reclassified to the general account on January 1, 2004 as a result
of the adoption of SOP 03-1. (For further discussion, see the Adoption of New
Accounting Standards section of Note 2.)
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 2004 by contractual maturity year are shown below. Estimated
maturities may differ from contractual maturities due to call or prepayment
provisions. Asset-backed securities, including MBS and CMOs, 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.
<Table>
<Caption>
Amortized Cost Fair Value
-------------------------------
MATURITY
One year or less $ 4,509 $ 4,538
Over one year through five years 12,977 13,558
Over five years through ten years 11,743 12,395
Over ten years 11,250 12,200
-------------------------------
TOTAL $40,479 $42,691
-------------------------------
</Table>
NON-INCOME PRODUCING INVESTMENTS
Investments that were non-income producing as of December 31, are as follows:
<Table>
<Caption>
2004 2003
-----------------------------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
-----------------------------------------------
SECURITY TYPE
ABS $ 6 $ 5 $ 2 $ 4
CMOs 1 1 -- --
Corporate 4 7 12 30
-----------------------------------------------
TOTAL $11 $13 $14 $34
-----------------------------------------------
</Table>
For 2004, 2003 and 2002, net investment income was $11, $17 and $13,
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,
-------------------------------
2004 2003 2002
-------------------------------
SALE OF FIXED MATURITIES
Sale proceeds $13,022 $6,205 $5,617
Gross gains 311 196 117
Gross losses (125) (71) (60)
SALE OF AVAILABLE-FOR-SALE EQUITY SECURITIES
Sale proceeds $ 75 $ 107 $ 11
Gross gains 12 4 --
Gross losses (5) (3) (3)
-------------------------------
</Table>
F-20
<Page>
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 stockholders' equity other than certain U.S.
government and government agencies.
SECURITY UNREALIZED LOSS AGING
The Company has a security monitoring process overseen by a committee of
investment and accounting professionals that, on a quarterly basis, identifies
securities in an unrealized loss position that could potentially be other-
than-temporarily impaired. (For further discussion regarding the Company's
other-than-temporary impairment policy, see the Investments section of Note 2.)
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 for
a period of time sufficient to allow for any anticipated recovery in market
value, 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 in the tables below were temporarily
depressed as of December 31, 2004 and 2003.
The following table presents amortized cost, fair value and unrealized losses
for the Company's fixed maturity and available-for-sale equity securities,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position as of December 31, 2004.
<Table>
<Caption>
2004
-----------------------------------------------------------------
-----------------------------------------------------------------
Less Than 12 Months 12 Months or More
-----------------------------------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Losses Cost Value Losses
-----------------------------------------------------------------
-----------------------------------------------------------------
ABS $1,112 $1,102 $(10) $ 343 $ 292 $(51)
CMOs
Agency backed 494 491 (3) 2 2 --
Non-agency backed 40 40 -- -- -- --
CMBS
Agency backed 19 19 -- -- -- --
Non-agency backed 1,563 1,548 (15) 73 71 (2)
Corporate 2,685 2,652 (33) 657 633 (24)
Government/Government agencies
Foreign 116 115 (1) 27 26 (1)
United States 445 442 (3) 7 6 (1)
MBS -- U.S. Government/Government
agencies 398 396 (2) 24 24 --
States, municipalities and political
subdivisions 163 158 (5) 2 2 --
Short-term investments 11 11 -- -- -- --
-----------------------------------------------------------------
TOTAL FIXED MATURITIES 7,046 6,974 (72) 1,135 1,056 (79)
Common stock -- -- -- 1 1 --
Nonredeemable preferred stock 19 19 -- 39 36 (3)
-----------------------------------------------------------------
TOTAL EQUITY 19 19 -- 40 37 (3)
-----------------------------------------------------------------
TOTAL TEMPORARILY IMPAIRED SECURITIES $7,065 $6,993 $(72) $1,175 $1,093 $(82)
-----------------------------------------------------------------
</Table>
F-21
<Page>
<Table>
<Caption>
Total
-------------------------------
Amortized Fair Unrealized
Cost Value Losses
-------------------------------
ABS $1,455 $1,394 $ (61)
CMOs
Agency backed 496 493 (3)
Non-agency backed 40 40 --
CMBS
Agency backed 19 19 --
Non-agency backed 1,636 1,619 (17)
Corporate 3,342 3,285 (57)
Government/Government agencies
Foreign 143 141 (2)
United States 452 448 (4)
MBS -- U.S. Government/Government agencies 422 420 (2)
States, municipalities and political subdivisions 165 160 (5)
Short-term investments 11 11 --
-------------------------------
TOTAL FIXED MATURITIES 8,181 8,030 (151)
Common stock 1 1 --
Nonredeemable preferred stock 58 55 (3)
-------------------------------
TOTAL EQUITY 59 56 (3)
-------------------------------
TOTAL TEMPORARILY IMPAIRED SECURITIES $8,240 $8,086 $(154)
-------------------------------
</Table>
As of December 31, 2004, fixed maturities represented approximately 98% of the
Company's total unrealized loss amount, which was comprised of approximately
1,200 different securities. The Company held no securities as of December 31,
2004 that were in an unrealized loss position in excess of $11. There were no
fixed maturities or equity securities as of December 31, 2004, with a fair value
less than 80% of the security's amortized cost for six continuous months other
than certain ABS and CMBS. Other-than-temporary impairments for certain ABS and
CMBS 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.
Based on management's best estimate of future cash flows, there were no such ABS
and CMBS in an unrealized loss position as of December 31, 2004 that were deemed
to be other-than-temporarily impaired.
Securities in an unrealized loss position for less than twelve months were
comprised of over 1,000 securities of which 88%, or $63, were comprised of
securities with fair value to amortized cost ratios at or greater than 90%. The
majority of these securities are investment grade fixed maturities depressed due
to changes in interest rates from the date of purchase.
The securities depressed for twelve months or more as of December 31, 2004 were
comprised of approximately 165 securities, with the majority of the unrealized
loss amount relating to ABS and corporate fixed maturities within the financial
services sector. A description of these events contributing to the security
types' unrealized loss position and the factors considered in determining that
recording an other-than-temporary impairment was not warranted are outlined
below.
ABS -- ABS represents $51 of the securities in an unrealized loss position for
twelve months or more. These securities were primarily supported by aircraft
lease receivables that had suffered a decrease in value in recent years as a
result of a prolonged decline in airline travel, the uncertainty of a potential
industry recovery and lack of market liquidity in this sector. Although
uncertainty surrounding the stability of domestic airlines continues to weigh
heavily on this sector, worldwide travel and aircraft demand appears to be
improving, resulting in a modest increase in market prices and greater liquidity
in this sector during 2004. As of December 31, 2004, the estimated future cash
flows for these securities indicated full recovery and as a result, based on
management's intent and ability to hold these securities, the prices of these
securities were deemed to be temporarily depressed.
FINANCIAL SERVICES -- Financial services represents approximately $12 of the
securities in an unrealized loss position for twelve months or more. These
securities are investment grade securities priced at or greater than 90% of
amortized cost. As of December 31, 2004, the financial services twelve months or
more unrealized loss amount primarily related to 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 losses 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. The
majority of these variable rate 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
F-22
<Page>
cash flow hedge accounting treatment and are currently in an unrealized gain
position.
The remaining balance of $19 in the twelve months or more unrealized loss
category is comprised of approximately 90 securities, substantially all of which
were depressed only a minor extent with fair value to amortized cost ratios at
or greater than 90% as of December 31, 2004. The decline in market value for
these securities is primarily attributable to changes in interest rates.
The following table presents the Company's unrealized loss, fair value and
amortized cost for fixed maturity and equity securities, aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position as of December 31, 2003.
<Table>
<Caption>
2003
----------------------------------------------------------------
----------------------------------------------------------------
Less Than 12 Months 12 Months or More
----------------------------------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Losses Cost Value Losses
----------------------------------------------------------------
ABS $ 238 $ 235 $ (3) $ 85 $ 84 $ (1)
CMOs
Agency backed 206 204 (2) 1 1 --
Non-agency backed 3 3 -- -- -- --
CMBS
Non-agency backed 527 521 (6) 57 57 --
Corporate 1,296 1,266 (30) 347 331 (16)
Government/Government agencies
Foreign 26 25 (1) -- -- --
United States 235 233 (2) -- -- --
MBS -- U.S. Government/Government
agencies 166 164 (2) -- -- --
States, municipalities and political
subdivisions 160 153 (7) -- -- --
----------------------------------------------------------------
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 [1] $2,898 $2,841 $(57) $493 $476 $(17)
----------------------------------------------------------------
</Table>
<Table>
<Caption>
Total
-------------------------------
Amortized Fair Unrealized
Cost Value Losses
-------------------------------
ABS $ 323 $ 319 $ (4)
CMOs
Agency backed 207 205 (2)
Non-agency backed 3 3 --
CMBS
Non-agency backed 584 578 (6)
Corporate 1,643 1,597 (46)
Government/Government agencies
Foreign 26 25 (1)
United States 235 233 (2)
MBS -- U.S. Government/Government agencies 166 164 (2)
States, municipalities and political subdivisions 160 153 (7)
-------------------------------
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 (1) $3,391 $3,317 $(74)
-------------------------------
</Table>
[1] Excludes securities subject to EITF Issue No. 99-20 and guaranteed separate
account assets.
F-23
<Page>
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 for six
continuous months. 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 were 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 table above was financial
services, which is included within the corporate category 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 -- Financial services represents approximately $10 of the
securities in an unrealized loss position for twelve months or more. All of
these positions were priced at or greater than 80% of amortized cost as of
December 31, 2003. 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 declined during 2003 as interest
rates increased. 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 at or greater than 80%.
INVESTMENT MANAGEMENT ACTIVITIES
During 2004, Hartford Investment Management Company issued one and began serving
as the collateral asset manager for an additional synthetic collateralized loan
obligation ("CLO"), both of which the Company has an investment in. The
synthetic CLOs invest in senior secured bank loans through total return swaps
("referenced bank loan portfolios"). The notional value of the referenced bank
loan portfolios from the two synthetic CLOs as of December 31, 2004 was
approximately $700. The synthetic CLOs issued approximately $135 of notes and
preferred shares ("CLO issuances"), approximately $120 of which was to third
party investors. The proceeds from the CLO issuances were invested in collateral
accounts consisting of high credit quality securities that were pledged to the
referenced bank loan portfolios' swap counterparties. Investors in the CLO
issuances receive the net proceeds from the referenced bank loan portfolios. Any
principal losses incurred by the swap counterparties associated with the
referenced bank loan portfolios are borne by the CLO issuances investors through
the total return swaps.
Pursuant to the requirements of FIN 46R, the Company has concluded that the two
synthetic CLOs are VIEs and that the Company is the primary beneficiary and must
consolidate the CLO issued in 2004. Accordingly, the Company has recorded in the
consolidated balance sheets $65 of cash and invested assets, total return swaps
with a fair value of $3 in other assets, which reference a bank loan portfolio
with a maximum notional of $400, and $52 in other liabilities related to the CLO
issuances. The total return from the referenced bank loan portfolio of $3 was
received via the total return swap and recorded in realized capital gains and
losses. Income from the fixed maturity collateral account and CLO issuance
investor payments were recorded in net investment income in the consolidated
statements of income. The Company's investment in the consolidated synthetic CLO
issuance is $14, which is its maximum exposure to loss. In addition, the Company
has a $2 preferred share investment in the non-consolidated synthetic CLO
issuance, which is its maximum exposure to loss. The investors in the two
synthetic CLO issuances have recourse only to the VIE assets and not to the
general credit of the Company.
F-24
<Page>
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
---------------------------------------
2004 2003 2004 2003
---------------------------------------
Other investments $ 42 $116 $ -- $ --
Reinsurance recoverables -- -- 129 115
Other policyholder funds and benefits
payable 129 115 -- --
Fixed maturities 4 7 -- --
Other liabilities -- -- 449 186
---------------------------------------
TOTAL $175 $238 $578 $301
---------------------------------------
</Table>
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 the associated gains and
losses 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 and liabilities are presented on a net basis as of December 31.
<Table>
<Caption>
Notional Amount Fair Value
--------------------------------------------
HEDGING STRATEGY 2004 2003 2004 2003
--------------------------------------------
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. The Company also enters into forward starting
swap agreements to hedge the interest rate exposure on
anticipated fixed-rate asset purchases due to changes in the
benchmark interest rate London-Interbank Offered Rate
('LIBOR'). These derivatives were structured to hedge interest
rate exposure inherent in the assumptions used to price
primarily certain long-term disability products.
Interest rate swaps are also used to hedge a portion of the
Company's floating rate guaranteed investment contracts. These
derivatives convert the floating rate guaranteed investment
contract payments to a fixed rate to better match the cash
receipts earned from the supporting investment portfolio. $ 4,944 $ 1,889 $ 40 $ 98
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. 1,311 703 (421) (147)
FAIR-VALUE HEDGES
Interest rate swaps
A portion of the Company's fixed debt is hedged against
increases in LIBOR, the designated 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. 201 112 (5) (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. 148 51 (1) (1)
</Table>
F-25
<Page>
<Table>
<Caption>
Notional Amount Fair Value
--------------------------------------------
HEDGING STRATEGY 2004 2003 2004 2003
--------------------------------------------
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. These derivatives are
also used to reduce the duration risk in certain investment
portfolios. These derivative instruments are structured to
hedge the durations of fixed maturity investments to match
certain products in accordance with the Company's asset and
liability management policy.
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 $ 1,466 $ 2 $ 11
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 manage duration risk
between assets and liabilities. 1,441 1,702 7 29
Foreign currency swaps, forwards and put and call options
The Company enters into foreign currency swaps and forwards and
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 $3, after-tax.
The Company also enters into pay fixed U.S. dollar receive
fixed yen zero coupon swaps and forwards to mitigate the
foreign currency exposure associated with the yen denominated
individual fixed annuity product. In addition, forward settling
fixed maturity investments are traded to manage duration and
foreign currency risk associated with this product. 923 104 (64) (31)
</Table>
F-26
<Page>
<Table>
<Caption>
Notional Amount Fair Value
--------------------------------------------
HEDGING STRATEGY 2004 2003 2004 2003
--------------------------------------------
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
referenced security issuer. Credit events typically include
failure on the part of the referenced security 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,
$193 and $49, after-tax, as of December 31, 2004 and 2003,
respectively.
The Company also assumes exposure to the change in value of
indices or asset pools through total return swaps. As of
December 31, 2004 and 2003, the maximum potential future
exposure to the Company from such contracts is $458 and $130,
after-tax, respectively.
The Company enters into credit default swaps agreements, in
which the Company pays a derivative counterparty a periodic fee
in exchange for compensation from the counterparty should a
credit event occur on the part of the referenced security
issuer. The Company entered into these agreements as an
efficient means to reduce credit exposure to specified issuers. $ 1,418 $ 275 $ 6 $ (18)
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. 95 276 1 1
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 the Derivative Instruments section of Note 2).
The notional value of the embedded derivative is the GRB
balance. 25,433 14,961 129 115
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. 25,433 14,961 (129) (115)
</Table>
F-27
<Page>
<Table>
<Caption>
Notional Amount Fair Value
--------------------------------------------
HEDGING STRATEGY 2004 2003 2004 2003
--------------------------------------------
Statutory Reserve hedging instruments
The Company purchased one and two year S&P 500 put option
contracts to economically hedge the statutory reserve impact of
equity exposure arising primarily from GMDB obligations against
a decline in the equity markets. $ 1,921 $ -- $ 32 $ --
--------------------------------------------
TOTAL $64,734 $36,500 $(403) $ (63)
--------------------------------------------
</Table>
The increase in notional amount since December 31, 2003 is primarily due to an
increase in embedded derivatives associated with GMWB product sales, and, to a
lesser extent, derivatives transferred to the general account as a result of the
adoption of SOP 03-1 and new hedging strategies. The decrease in the net fair
value of derivative instruments since December 31, 2003 was primarily due to the
changes in foreign currency exchange rates, the rise in short-term interest
rates during 2004 and derivatives transferred to the general account pursuant to
the adoption of SOP 03-1.
Due to the adoption of SOP 03-1, 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.
For the year ended December 31, 2004, gross gains and losses representing the
total ineffectiveness of all fair-value and net investment hedges were
immaterial. For the year ended December 31, 2004, the Company's net gain and
loss representing hedge ineffectiveness on cash flow hedges was $(12),
after-tax. For the years ended December 31, 2003 and 2002, the Company's gross
gains and losses representing the total ineffectiveness of all cash-flow,
fair-value and net investment hedges were immaterial.
The total change in value for other derivative-based strategies which do not
qualify for hedge accounting treatment, including periodic net coupon
settlements, are reported as net realized capital gains and losses in the
consolidated statements of income. For the years ended December 31, 2004, 2003
and 2002, the Company recognized an after-tax net (loss) gain of $(8), $(3) and
$1 respectively, for derivative-based strategies, which do not qualify for hedge
accounting treatment.
As of December 31, 2004 and 2003, the after-tax deferred net gains on derivative
instruments accumulated in AOCI that are expected to be reclassified to earnings
during the next twelve months are $6. 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 Company does not hedge any
exposure to the variability of future cash flows other than interest payments on
variable-rate debt. For the years ended December 31, 2004, 2003 and 2002, the
net reclassifications from AOCI to earnings resulting from the discontinuance of
cash-flow hedges were immaterial.
Hartford Life began issuing a yen denominated individual fixed annuity product
from a related party, Hartford Life Insurance KK, a wholly owned Japanese
subsidiary of Hartford Life and Accident Insurance Company, in the fourth
quarter of 2004. The yen denominated fixed annuity product is recorded in the
consolidated balance sheets in other policyholder funds and benefits payable in
U.S. dollars based upon the December 31, 2004 yen to dollar spot rate. To
mitigate the yen exposure associated with the product, during the fourth quarter
of 2004, the Company entered into pay fixed U.S. dollar receive fixed yen, zero
coupon currency swaps (dollar to yen derivatives). As of December 31, 2004 the
dollar to yen derivatives had a notional and fair value of $408 and $9,
respectively. Changes in fair value of the dollar to yen derivatives totaled $9
for the year ended December 31, 2004. Although economically an effective hedge,
a divergence between the yen denominated fixed annuity product liability and the
dollar to yen derivatives exists primarily due to the difference in the basis of
accounting between the liability and the derivative instruments (i.e. historical
cost versus fair value). The yen denominated fixed annuity product liabilities
are recorded on a historical cost basis and are only adjusted for changes in
foreign spot rates and accrued income. The dollar to yen derivatives are
recorded at fair value incorporating changes in value due to changes in forward
foreign exchange rates, interest rates and accrued income.
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, 2004 and
F-28
<Page>
2003, the fair value of the loaned securities was approximately $1.0 billion and
$780, respectively, 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 $1.3 and
$0.5 for the years ended December 31, 2004 and 2003, respectively, 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, 2004 and 2003, collateral pledged of $276 and
$209, 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, 2004 and 2003
were as follows:
<Table>
<Caption>
2004 2003
----------------
LOANED SECURITIES AND
COLLATERAL PLEDGED
ABS $ 24 $ 41
CMBS 158 143
Corporate 681 381
Government/Government
Agencies
Foreign 16 11
United States 404 413
----------------
TOTAL $1,283 $989
----------------
</Table>
As of December 31, 2004 and 2003, 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 $1 billion and $996, respectively. At December 31, 2004 and 2003, cash
collateral of $1 billion and $869, respectively, was invested and recorded in
the consolidated balance sheets in fixed maturities 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, 2004 and
2003. As of December 31, 2004 and 2003, all collateral accepted was held in
separate custodial accounts.
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosure about Fair Value of Financial Instruments", requires
disclosure of fair value information of financial instruments. For certain
financial instruments where quoted market prices are not available, other
independent valuation techniques and assumptions are used. Because considerable
judgment is used, these estimates are not necessarily indicative of amounts that
could be realized in a current market exchange. SFAS No. 107 excludes certain
financial instruments from disclosure, including insurance contracts other than
financial guarantees and investment contracts. Hartford Life Insurance Company
uses the following methods and assumptions in estimating the fair value of each
class of financial instrument.
Fair value for fixed maturities and marketable equity securities approximates
those quotations published by applicable stock exchanges or received from other
reliable sources.
For policy loans, carrying amounts approximate fair value.
Fair value of other investments, which primarily consist of partnership
investments, is based on external market valuations from partnership management.
Other investments also include mortgage loans, whereby the carrying value
approximates fair value.
Derivative instruments are reported at fair value based upon internally
established valuations that are consistent with external valuation models,
quotations furnished by dealers in such instrument or market quotations. Other
policyholder funds and benefits payable fair value information is determined by
estimating future cash flows, discounted at the current market rate.
The carrying amount and fair values of Hartford Life Insurance Company's
financial instruments as of December 31, 2004 and 2003 were as follows:
<Table>
<Caption>
2004 2003
-----------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------
ASSETS
Fixed maturities $42,691 $42,691 $30,085 $30,085
Equity securities 180 180 85 85
Policy loans 2,617 2,617 2,470 2,470
Other investments 1,083 1,083 639 639
LIABILITIES
Other policyholder funds [1] $ 9,244 $ 9,075 $ 7,654 $ 7,888
-----------------------------------------------------------
</Table>
[1] Excludes universal life type insurance contracts, including corporate owned
life insurance.
F-29
<Page>
NOTE 6. REINSURANCE
Hartford Life Insurance Company cedes insurance to other insurers in order to
limit its maximum losses and to diversify its exposures. Such transfers do 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, 2004, Hartford Life Insurance Company had no reinsurance
recoverables and related concentrations of credit risk greater than 10% of the
Company's stockholder's 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, 2004, the largest amount of life
insurance retained on any one life by any one of the life operations was
approximately $2.9. In addition, the Company reinsures the majority of the
minimum death benefit guarantees as well as the guaranteed withdrawal benefits
offered in connection with its variable annuity contracts. Substantially all
contracts written since July 2003 with the GMWB are covered by a reinsurance
arrangement with a related party.
Insurance fees, earned premiums and other were comprised of the following:
<Table>
<Caption>
For the years ended
December 31,
--------------------------------
2004 2003 2002
--------------------------------
Gross fee income, earned premiums and other $3,834 $3,780 $3,324
Reinsurance assumed 49 43 45
Reinsurance ceded (807) (720) (716)
--------------------------------
NET FEE INCOME, EARNED PREMIUMS AND OTHER $3,076 $3,103 $2,653
--------------------------------
</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.
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 $426, $550,
and $670 for the years ended December 31, 2004, 2003 and 2002, respectively.
Hartford Life Insurance Company also assumes reinsurance from other insurers.
Hartford Life Insurance Company records a receivable for reinsured benefits paid
and the portion of insurance liabilities that are reinsured, net of a valuation
allowance, if necessary. The amounts recoverable from reinsurers are estimated
based on assumptions that are consistent with those used in establishing the
reserves related to the underlying reinsured contracts. Management believes the
recoverables are appropriately established; however, in the event that future
circumstances and information require Hartford Life Insurance Company to change
its estimates of needed loss reserves, the amount of reinsurance recoverables
may also require adjustments.
Hartford Life Insurance Company maintains certain reinsurance agreements with
HLA, whereby the Company cedes both group life and group accident and health
risk. Under these treaties, the Company ceded group life premium of $133, $78,
and $96 in 2004, 2003 and 2002, respectively, and accident and health premium of
$230, $305, and $373, respectively, to HLA.
REINSURANCE RECAPTURE
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. This
amount represents to the Company an advance collection of its future recoveries
under the reinsurance
F-30
<Page>
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 9. 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.
NOTE 7. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
Changes in deferred policy acquisition costs and present value of future profits
is as follows:
<Table>
<Caption>
2004 2003 2002
--------------------------------
BALANCE, JANUARY 1 $6,088 $5,479 $5,338
Capitalization 1,375 1,319 987
Amortization -- Deferred Policy Acquisitions costs (774) (620) (491)
Amortization -- Present Value of Future Profits (40) (39) (39)
Amortization -- Realized Capital Gains/(Losses) (12) 14 8
Adjustments to unrealized gains and losses on securities
available-for-sale and other (79) (65) (324)
Cumulative effect of accounting changes (SOP 03-1) (105) -- --
--------------------------------
BALANCE, DECEMBER 31 $6,453 $6,088 $5,479
--------------------------------
</Table>
The following table shows the carrying amount and accumulated net amortization
of the present value of future profits for the years ended December 31, 2004 and
2003.
<Table>
<Caption>
2004 2003
---------------------------------------------------------------
Accumulated Accumulated
Carrying Net Carrying Net
Amount Amortization Amount Amortization
---------------------------------------------------------------
Present value of future profits $608 $155 $605 $115
---------------------------------------------------------------
</Table>
Net amortization expense for the years ended December 31, 2004, 2003 and 2002
was $40, $39 and $39, respectively.
Estimated future net amortization expense for the succeeding five years is as
follows.
<Table>
<Caption>
For the year ended December 31,
- ----------------------------------------------
2005 $ 39
2006 $ 35
2007 $ 31
2008 $ 28
2009 $ 26
- ----------------------------------------------
</Table>
NOTE 8. 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. As of
December 31, 2004 and December 31, 2003, the carrying amount of goodwill for the
Company's Retail Products segment was $119 and the Company's Individual Life
segment was $67.
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, 2004 and 2003.
For a discussion of the Company's acquired intangible assets that continue to be
subject to amortization and aggregate amortization expense, see Note 7. Except
for goodwill, the Company has no material intangible assets with indefinite
useful lives.
F-31
<Page>
NOTE 9. SEPARATE ACCOUNTS, DEATH BENEFITS AND OTHER INSURANCE BENEFIT FEATURES
The Hartford records the variable portion of individual variable annuities,
401(k), institutional, governmental, private placement life and variable life
insurance products within separate account assets and liabilities, which are
reported at fair value. Separate account assets are segregated from other
investments. Investment income and gains and losses from those separate account
assets, which accrue directly to, and whereby investment risk is borne by, the
policyholder, are offset by the related liability changes within the same line
item in the statement of income. The fees earned for administrative and contract
holder maintenance services performed for these separate accounts are included
in fee income. During 2004, there were no gains or losses on transfers of assets
from the general account to the separate account. 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 contract holder. Therefore, it does not meet the conditions
for separate account reporting under SOP 03-1. Separate account assets and
liabilities related to CRC of $11.7 billion were reclassified to, and revalued
in, the general account upon adoption of SOP 03-1 on January 1, 2004.
Many of the variable annuity contracts issued by the Company offer various
guaranteed minimum death, withdrawal and income benefits. Guaranteed minimum
death benefits are offered in various forms as described in the footnotes to the
table below. The Company currently reinsures a significant portion of the death
benefit guarantees associated with its in-force block of business. Upon adoption
of SOP 03-1, the Company recorded a liability for GMDB sold with variable
annuity products of $217 and a related GMDB reinsurance recoverable asset of
$108. As of December 31, 2004, the liability from GMDB sold with annuity
products was $174. The reinsurance recoverable asset, related to GMDB was $64 as
of December 31, 2004. During 2004, the Company incurred guaranteed death
benefits of $123, and paid guaranteed death benefits of $166. Guaranteed minimum
death benefits paid during 2003 were $289. Guaranteed minimum death benefits
paid during 2002 were $264.
The net GMDB liability is established by estimating the expected value of net
reinsurance costs and death benefits in excess of the projected account balance.
The excess death benefits and net reinsurance costs are recognized ratably over
the accumulation period based on total expected assessments. The GMDB liability
is recorded in Future Policy Benefits on the Company's balance sheet. Changes in
the GMDB liability are recorded in Benefits, Claims and Claims Adjustment
Expenses on the Company's statement of income. The Company regularly evaluates
estimates used and adjusts the additional liability balances, with a related
charge or credit to benefit expense, if actual experience or other evidence
suggests that earlier assumptions should be revised.
The determination of the GMDB liabilities and related GMDB 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 following
assumptions were used to determine the GMDB liability as of December 31, 2004:
- 250 stochastically generated investment performance scenarios
- Returns, representing the Company's long-term assumptions, varied by asset
class with a low of 3% for cash, a high of 11% for aggressive equities,
and a weighted average of 9%
- Volatilities also varied by asset class with a low of 1% for cash, a high
of 15% for aggressive equities, and a weighted average of 12%
- 80% of the 1983 GAM mortality table was used for mortality assumptions
- Lapse rates by calendar year vary from a low of 8% to a high of 14%, with
an average of 12%
- Discount rate of 7.5%
F-32
<Page>
The following table provides details concerning GMDB exposure:
<Table>
<Caption>
BREAKDOWN OF VARIABLE ANNUITY ACCOUNT VALUE BY GMDB TYPE
Retained Weighted Average
Account Net Amount Net Amount Attained Age
Maximum anniversary value (MAV) [1] Value at Risk at Risk of Annuitant
-----------------------------------------------------
MAV only $ 61,675 $6,568 $ 683 63
With 5% rollup [2] 4,204 575 104 62
With Earnings Protection Benefit Rider (EPB) [3] 4,849 228 67 59
With 5% rollup & EPB 1,499 124 21 61
Total MAV 72,227 7,495 875 63
Asset Protection Benefit (APB) [4] 17,173 5 4 61
Ratchet [5] (5 years) 40 2 -- 65
Reset [6] (5-7 years) 8,262 640 640 60
Return of Premium [7]/Other 8,548 18 18 60
Total $106,250 $8,160 $1,537 63
-----------------------------------------------------
</Table>
[1] MAV: the death benefit is the greatest of current account value, net
premiums paid and the highest account value on any anniversary before age 80
(adjusted for withdrawals).
[2] Rollup: the death benefit is the greatest of the MAV, current account value,
net premium paid and premiums (adjusted for withdrawals) accumulated at
generally 5% simple interest up to the earlier of age 80 or 100% of adjusted
premiums.
[3] EPB: The death benefit is the greatest of the MAV, current account value, or
contract value plus a percentage of the contract's growth. The contract's
growth is account value less premiums net of withdrawals, subject to a cap
of 200% of premiums net of withdrawals.
[4] APB: the death benefit is the greater of current account value or MAV, not
to exceed current account value plus 25% times the greater of net premiums
and MAV (each adjusted for premiums in the past 12 months).
[5] Ratchet: the death benefit is the greatest of current account value, net
premiums paid and the highest account value on any specified anniversary
before age 85 (adjusted for withdrawals).
[6] Reset: the death benefit is the greatest of current account value, net
premiums paid and the most recent five to seven year anniversary account
value before age 80 (adjusted for withdrawals).
[7] Return of premium: the death benefit is the greater of current account value
and net premiums paid.
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 a specified percentage 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. In certain contracts, 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 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.
As of December 31, 2004 and December 31, 2003, the embedded derivative asset
recorded for GMWB, before reinsurance, was $129 and $115, respectively. During
2004 and 2003, the change in value of the GMWB, reported in realized gains was
$33 and $165 was incurred, respectively. There were no payments made for the
GMWB during 2004, 2003 or 2002.
Account balances of contracts with guarantees were invested in variable separate
accounts as follows:
<Table>
<Caption>
As of
December 31,
Asset type 2004
- --------------------------------------------------
Equity securities (including
mutual funds) $88,782
Cash and cash equivalents 7,379
----------------
TOTAL $96,161
- --------------------------------------------------
</Table>
As of December 31, 2004, approximately 16% of the equity securities above were
invested in fixed income
F-33
<Page>
securities and approximately 84% were in equity securities.
The Individual Life segment sells universal life-type contracts with and without
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 additional liabilities for universal life-type contracts and the
related secondary guarantees, in accordance with SOP 03-1, was not material. As
of December 31, 2004, the liability for secondary guarantees as well as the
amounts incurred and paid during the year was immaterial.
NOTE 10. 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 the
Company's adoption of SOP 03-1, the expense associated with offering a bonus is
deferred and amortized over the life of the related contract in a pattern
consistent with the amortization of deferred policy acquisition costs. Also,
effective January 1, 2004, amortization expense associated with expenses
previously deferred is recorded over the remaining life of the contract rather
than over the contingent deferred sales charge period.
Changes in deferred sales inducement activity were as follows for the year ended
December 31, 2004:
<Table>
Balance, beginning of period $ 198
Sales inducements deferred 141
Amortization charged to income (30)
--------
BALANCE AT DECEMBER 31 $ 309
- ----------------------------------------------------
</Table>
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES
LITIGATION
The Hartford Financial Services Group, Inc. and its consolidated subsidiaries
("The Hartford") is involved in various legal actions arising in the ordinary
course of business, some of which assert claims for substantial amounts. These
actions include, among others, putative state and federal class actions seeking
certification of a state or national class. Such putative class actions have
alleged, for example, improper sales practices in connection with the sale of
life insurance and other investment products; and improper fee arrangements in
connection with mutual funds. The Hartford 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 estimated losses, will not be material to the consolidated
financial condition of the Company. Nonetheless, given the large or
indeterminate amounts sought in certain of these actions, and the inherent
unpredictability of litigation, 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.
BROKER COMPENSATION LITIGATION -- On October 14, 2004, the New York Attorney
General's Office filed a civil complaint (the "NYAG Complaint") against Marsh
Inc. and Marsh & McLennan Companies, Inc. (collectively, "Marsh") alleging,
among other things, that certain insurance companies, including The Hartford,
participated with Marsh in arrangements to submit inflated bids for business
insurance and paid contingent commissions to ensure that Marsh would direct
business to them. The Hartford is not joined as a defendant in the action. Since
the filing of the NYAG Complaint, several private actions have been filed
against The Hartford asserting claims arising from the allegations of the NYAG
Complaint.
Two securities class actions have been filed in the United States District Court
for the District of Connecticut alleging claims against The Hartford and five of
its executive officers under Section 10(b) of the Securities Exchange Act and
SEC Rule 10b-5. The complaints allege on behalf of a putative class of
shareholders that The Hartford and the five named individual defendants, as
control persons of The Hartford, "disseminated false and misleading financial
statements" by concealing that "[The Hartford] was paying illegal and concealed
"contingent commissions" pursuant to illegal 'contingent commission agreements."
The class period alleged is November 5, 2003 through October 13, 2004, the day
before the NYAG Complaint was filed. The complaints seek damages and attorneys'
fees. The Hartford and the individual defendants dispute the allegations and
intend to defend these actions vigorously.
In addition, three putative class actions have been filed in the same court on
behalf of participants in The Hartford's 401(k) plan against The Hartford,
Hartford Fire Insurance Company, The Hartford's Pension Fund Trust and
Investment Committee, The Hartford's Pension Administration Committee, The
Hartford's Chief Financial Officer, and John/Jane Does 1-15. The suits assert
claims under the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), alleging that The Hartford and the other named defendants breached
their fiduciary duties to plan participants by, among other things, failing to
inform them of the risk associated with investment in The Hartford's stock as a
result of the activity alleged in the NYAG Complaint. The class period alleged
is November 5, 2003 through the present. The complaints seek restitution of
losses to the plan, declaratory and injunctive relief, and attorneys' fees. All
defendants dispute the allegations and intend to defend these actions
vigorously.
F-34
<Page>
Two corporate derivative actions also have been filed in the same court. The
complaints, brought in each case by a shareholder on behalf of The Hartford
against its directors and an executive officer, allege that the defendants knew
adverse non-public information about the activities alleged in the NYAG
Complaint and concealed and misappropriated that information to make profitable
stock trades, thereby breaching their fiduciary duties, abusing their control,
committing gross mismanagement, wasting corporate assets, and unjustly enriching
themselves. The complaints seek damages, injunctive relief, disgorgement, and
attorneys' fees. All defendants dispute the allegations and intend to defend
these actions vigorously.
Seven putative class actions also have been filed by alleged policyholders in
federal district courts, one in the Southern District of New York, two in the
Eastern District of Pennsylvania, three in the Northern District of Illinois,
and one in the Northern District of California, against several brokers and
insurers, including The Hartford. These actions assert, on behalf of a class of
persons who purchased insurance through the broker defendants, claims under the
Sherman Act and state law, and in some cases the Racketeer Influenced and
Corrupt Organizations Act ("RICO"), arising from the conduct alleged in the NYAG
Complaint. The class period alleged is 1994 through the date of class
certification, which has not yet occurred. The complaints seek treble damages,
injunctive and declaratory relief, and attorneys' fees. Putative class actions
also have been filed in the Circuit Court for Cook County, Illinois, Chancery
Division and in the Circuit Court for Seminole County, Florida, Civil Division,
on behalf of a class of all persons who purchased insurance from a class of
defendant insurers. These state court actions assert unjust enrichment claims
and violations of state unfair trade practices acts arising from the conduct
alleged in the NYAG Complaint and seek remedies including restitution of
premiums, and, in the Cook County action, imposition of a constructive trust,
and declaratory and injunctive relief. The class period alleged is 1994 through
the present. The Hartford has removed the Cook County action to the United
States District Court for the Northern District of Illinois. Pursuant to an
order of the Judicial Panel on Multidistrict Litigation, it is likely that most
or all of these actions will be transferred to the United States District Court
for the District of New Jersey. The Hartford disputes the allegations in all of
these actions and intends to defend the actions vigorously.
Additional complaints may be filed against The Hartford in various courts
alleging claims under federal or state law arising from the conduct alleged in
the NYAG Complaint. The Hartford's ultimate liability, if any, in the pending
and possible future suits is highly uncertain and subject to contingencies that
are not yet known, such as how many suits will be filed, in which courts they
will be lodged, what claims they will assert, what the outcome of investigations
by the New York Attorney General's Office and other regulatory agencies will be,
the success of defenses that The Hartford may assert, and the amount of
recoverable damages if liability is established. In the opinion of management,
it is possible that an adverse outcome in one or more of these suits could 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 and its affiliate International Corporate Marketing Group, LLC 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 Hartford 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, reflecting the Company's
portion of the settlement. On March 1, 2004, the Federal Circuit Court of
Appeals decided the patent appeal adversely to The Hartford, and on March 22,
2004, The Hartford paid Bancorp an additional $10 in full and final satisfaction
of its 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.
REINSURANCE ARBITRATION -- On March 16, 2003, a final decision and award was
issued in the previously disclosed reinsurance arbitration between subsidiaries
of The Hartford and one of their primary reinsurers relating to policies with
guaranteed death benefits written from 1994 to 1999. The arbitration involved
alleged breaches under the reinsurance treaties. Under the terms of the final
decision and award, the reinsurer's reinsurance obligations to The Hartford's
subsidiaries were unchanged and not limited or reduced in any manner. The award
was confirmed by the Connecticut Superior Court on May 5, 2003.
REGULATORY DEVELOPMENTS
In June 2004, The Hartford received a subpoena from the New York Attorney
General's Office in connection with its inquiry into compensation arrangements
between brokers and carriers. In mid-September 2004 and subsequently, The
Hartford has received additional subpoenas from the New York Attorney General's
Office, which relate more specifically to possible anti-competitive activity
among brokers and insurers. Since the beginning of October 2004, The Hartford
has received subpoenas or other information requests from Attorneys General and
regulatory agencies in more than a dozen jurisdictions regarding broker
compensation and possible anti-competitive activity. The Hartford may receive
additional subpoenas and other information requests from Attorneys General or
other regulatory agencies regarding similar issues. The Hartford also has
received a subpoena from the New York Attorney General's Office requesting
information related to The Hartford's underwriting practices with respect to
legal
F-35
<Page>
professional liability insurance. In addition, The Hartford has received a
request for information from the New York Attorney General's Office concerning
The Hartford's compensation arrangements in connection with the administration
of workers compensation plans. The Hartford intends to continue cooperating
fully with these investigations, and is conducting an internal review, with the
assistance of outside counsel, regarding the issues under investigation.
On October 14, 2004, the New York Attorney General's Office filed a civil
complaint against Marsh & McLennan Companies, Inc., and Marsh, Inc.
(collectively, "Marsh"). The complaint alleges, among other things, that certain
insurance companies, including The Hartford, participated with Marsh in
arrangements to submit inflated bids for business insurance and paid contingent
commissions to ensure that Marsh would direct business to them. The Hartford is
not joined as a defendant in the action. Although no regulatory action has been
initiated against The Hartford in connection with the allegations described in
the civil complaint, it is possible that the New York Attorney General's Office
or one or more other regulatory agencies may pursue action against The Hartford
or one or more of its employees in the future. The potential timing of any such
action is difficult to predict. If such an action is brought, it could have a
material adverse effect on the Company.
On October 29, 2004, the New York Attorney General's Office informed The
Hartford that the Attorney General is conducting an investigation with respect
to the timing of the previously disclosed sale by Thomas Marra, a director and
executive officer of The Hartford, of 217,074 shares of The Hartford's common
stock on September 21, 2004. The sale occurred shortly after the issuance of two
additional subpoenas dated September 17, 2004 by the New York Attorney General's
Office. The Hartford has engaged outside counsel to review the circumstances
related to the transaction and is fully cooperating with the New York Attorney
General's Office. On the basis of the review, The Hartford has determined that
Mr. Marra complied with The Hartford's applicable internal trading procedures
and has found no indication that Mr. Marra was aware of the additional subpoenas
at the time of the sale.
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, including
market timing and late trading, revenue sharing and directed brokerage, fees,
transfer agents and other fund service providers, and other mutual-fund related
issues. The Hartford has received requests for information and subpoenas from
the Securities and Exchange Commission ("SEC"), subpoenas from the New York
Attorney General's Office, requests for information from the Connecticut
Securities and Investments Division of the Department of Banking, and requests
for information from the New York Department of Insurance, in each case
requesting documentation and other information regarding various mutual fund
regulatory issues.
The SEC's Division of Enforcement and the New York Attorney General's Office are
investigating aspects of The Hartford's variable annuity and mutual fund
operations related to market timing. The Hartford's mutual funds are available
for purchase by the separate accounts of different variable universal 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 Hartford with respect to certain owners of older variable annuity
products, The Hartford's ability to restrict transfers by these owners is
limited. In February 2005, the Company agreed in principle with the Boards of
Directors of the mutual funds to indemnify the mutual funds for any material
harm caused to the funds from frequent trading by these owners. The specific
terms of the indemnification have not been determined. The SEC's Division of
Enforcement also is investigating aspects of The Hartford's variable annuity and
mutual fund operations related to directed brokerage and revenue sharing. The
Hartford discontinued the use of directed brokerage in recognition of mutual
fund sales in late 2003. The Hartford also has received a subpoena from the New
York Attorney General's Office requesting information related to The Hartford's
group annuity products. The Hartford continues to cooperate fully with the SEC,
the New York Attorney General's Office and other regulatory agencies.
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, which have included a range of monetary penalties and
restitution. While no such action has been initiated against The Hartford, the
SEC, and the New York Attorney General's Office are likely to take some action
at the conclusion of the on-going investigations related to market timing and
directed brokerage. The potential timing of any such action is difficult to
predict, and The Hartford's ultimate liability, if any, from any such action is
not reasonably estimable at this time. If such an action is brought, it could
have a material adverse effect on the Company's consolidated results of
operations or cash flows in particular quarterly or annual periods.
LEASES
The rent paid to Hartford Fire for operating leases entered into by the Company
was $36, 31, and $31 for the years ended December 31, 2004, 2003 and 2002,
respectively. Included in Hartford Fire's operating leases are the principal
executive offices of Hartford Life Insurance Company, together with its parent,
which 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 $15, $12 and $10 for the years
ended December 31, 2004, 2003 and 2002, respectively.
F-36
<Page>
Future minimum rental commitments on all operating leases are as follows:
<Table>
2005 $ 30
2006 27
2007 24
2008 21
2009 18
- -------------------------------------------------
Thereafter 19
- -------------------------------------------------
TOTAL $ 139
- -------------------------------------------------
</Table>
TAX MATTERS
The Company's federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). During the third quarter of 2004, the IRS completed its
examination of the 1998-2001 tax years, and the IRS and the Company agreed upon
all adjustments. As a result, during the third quarter of 2004 the Company
booked a $191 tax benefit to reflect the impact of the audit settlement on tax
years covered by the examination as well as other tax years prior to 2004. The
benefit relates primarily to the separate account DRD and interest. During the
fourth quarter of 2004, the IRS issued a Revenue Agent's Report, reflecting the
adjustments computed and agreed upon in the prior quarter with respect to the
Company's federal taxes for the years under examination. No additional tax
adjustments were recorded, as the results reflected in the Report were included
in the tax benefit recorded in the third quarter. The IRS is expected to begin
its audit of the 2002-2004 tax years sometime in 2005. Management believes that
adequate provision has been made in the financial statements for any potential
assessments that may result from future tax examinations and other tax-related
matters for all open tax years.
UNFUNDED COMMITMENTS
At December 31, 2004, Hartford Life Insurance Company has outstanding
commitments totaling $389, of which $196 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 $193 of outstanding commitments
are primarily related to various funding obligations associated with investments
in mortgage and construction loans. These have a commitment period of one month
to 3 years.
GUARANTY FUND AND OTHER INSURANCE-RELATED ASSESSMENTS
In all states, insurers licensed to transact certain classes of insurance are
required to become members of a guaranty fund. In most states, in the event of
the insolvency of an insurer writing any such class of insurance in the state,
members of the fund are assessed to pay certain claims of the insolvent insurer.
A particular state's fund assesses its members based on their respective written
premiums in the state for the classes of insurance in which the insolvent
insurer is engaged. Assessments are generally limited for any year to one or two
percent of premiums written per year depending on the state. There were no
guaranty fund assessment payments or refunds in 2004 and 2003. There were
guaranty fund assessment refunds of $2 in 2002.
NOTE 12. INCOME TAX
Hartford Life Insurance Company and The Hartford have entered into a tax sharing
agreement under which each member in the consolidated U.S. Federal income tax
return will make payments between them such that, with respect to any period,
the amount of taxes to be paid by the Company, subject to certain tax
adjustments, generally will be determined as though the Company were filing a
separate Federal income tax return with current credit for net losses to the
extent the losses provide a benefit in the consolidated return.
The Company is included in The Hartford's consolidated Federal income tax
return. The Company's effective tax rate was 3%, 21%, and 1% in 2004, 2003 and
2002, respectively.
Income tax expense (benefit) is as follows:
<Table>
<Caption>
For the years ended December 31,
-----------------------------------
2004 2003 2002
-----------------------------------
Current $ (34) $ 13 $ 4
Deferred 63 155 (2)
-----------------------------------
INCOME TAX EXPENSE $ 29 $ 168 $ 2
-----------------------------------
</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,
-----------------------------------
2004 2003 2002
-----------------------------------
Tax provision at the
U.S.federal
statutory rate $ 354 $ 278 $ 150
Dividends received
deduction (132) (87) (63)
IRS audit settlement
(See Note 11) (191) -- (76)
Tax adjustment (2) (21) --
Foreign related
investments (2) (4) (6)
Other 2 2 (3)
-----------------------------------
TOTAL $ 29 $ 168 $ 2
-----------------------------------
</Table>
F-37
<Page>
Deferred tax assets (liabilities) include the following as of December 31:
<Table>
<Caption>
2004 2003
-----------------
DEFERRED TAX ASSETS
Tax basis deferred policy
acquisition costs $ 607 $ 638
Employee benefits -- 5
Net operating loss carryforward -- 17
Minimum tax credits 126 80
Foreign tax credit carryovers 6 27
Other 36 --
-----------------
TOTAL DEFERRED TAX ASSETS 775 767
DEFERRED TAX LIABILITIES
Financial statement deferred
policy acquisition costs and
reserves (677) (713)
Net unrealized gains on
securities (669) (535)
Employee benefits (16) --
Investment related items and
other (51) (5)
-----------------
TOTAL DEFERRED TAX LIABILITIES (1,413) (1,253)
-----------------
TOTAL DEFERRED TAX
ASSET/(LIABILITY) $ (638) $ (486)
-----------------
</Table>
Hartford Life Insurance Company had a current tax receivable of $121 and $141 as
of December 31, 2004 and 2003, respectively.
In management's judgment, the gross deferred tax asset will more likely than not
be realized through reductions of future taxes. Accordingly, no valuation
allowance has been recorded.
Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax Act
of 1959 permitted the deferral from taxation of a portion of statutory income
under certain circumstances. In these situations, the deferred income was
accumulated in a "Policyholders' Surplus Account" and would be taxable only
under conditions which management considered to be remote; therefore, no federal
income taxes have been provided on the balance sheet in this account, which for
tax return purposes was $104 as of December 31, 2004. The American Jobs Creation
Act of 2004, which was enacted in October 2004, allows distributions to be made
from the Policyholders' Surplus Account free of tax in 2005 and 2006. The
Company anticipates that, based on currently available information, this change
will permanently eliminate the potential tax of $37 on such a distribution.
NOTE 13. STATUTORY RESULTS
<Table>
<Caption>
For the years ended
December 31,
--------------------------------
2004 2003 2002
--------------------------------
Statutory net income
(loss) $ 536 $ 801 $ (305)
--------------------------------
Statutory capital and
surplus $3,191 $3,115 $2,354
--------------------------------
</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, 2004, the maximum amount of statutory
dividends which may be paid by the insurance subsidiaries of the Company in
2005, without prior approval, is $498.
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.
NOTE 14. 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, postretirement health care and life insurance
benefits expense allocated by The Hartford to Hartford Life Insurance Company,
was $20, $19 and $10 in 2004, 2003 and 2002, respectively.
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 $8, $6 and $5 for the years ended
December 31, 2004, 2003 and 2002, respectively.
F-38
<Page>
NOTE 15. 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.
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, 2004 that were otherwise not reinsured. The Company and HLAI, in
total, ceded an immaterial amount of premiums to HLA. As of December 31, 2004,
HLIC and HLAI, combined, have recorded a reinsurance recoverable from HLA of
$(62).
During the third quarter of 2004, Hartford Life introduced fixed MVA annuity
products to provide a diversified product portfolio to customers in Japan. The
yen based MVA product is written by Hartford Life Insurance KK, a wholly owned
Japanese subsidiary of HLA and subsequently reinsured to the Company. As of
December 31, 2004, $522 of the account value had been assumed by the Company.
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.
NOTE 16. QUARTERLY RESULTS FOR 2004 AND 2003 (UNAUDITED)
<Table>
<Caption>
Three Months Ended
March 31, June 30, September 30, December 31,
------------------------------------------------------------------------------
2004 2003 2004 2003 2004 2003 2004 2003
------------------------------------------------------------------------------
Revenues $1,394 $1,018 $1,340 $1,186 $1,453 $1,449 $1,488 $1,215
Benefits, claims and expenses [1] 1,121 888 1,097 970 1,205 1,229 1,240 987
Net income [1],[2],[3] 181 100 180 189 395 167 209 170
------------------------------------------------------------------------------
</Table>
[1] Included in the quarter ended September 30, 2003 is an after-tax benefit of
$9 related to the Bancorp litigation dispute.
[2] Included in the quarter ended June 30, 2003 is a $23 tax benefit primarily
related to the favorable treatment of certain tax items arising during the
1996-2000 tax years.
[3] Included in the quarter ended September 30, 2004 is a $191 tax benefit which
relates to agreement with IRS on the resolution of matters pertaining to tax
years prior to 2004.
F-39
<Page>
PART II
<Page>
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not applicable.
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 33-770 to 33-779, inclusive, of the Connecticut General
Statutes provide the standards under which a corporation may
indemnify an individual for liability, including legal expenses,
incurred because such individual is a party to a proceeding because
the individual was a director, officer, employee, or agent of the
corporation. Specifically, Section 33-771(a)(2) permits a
corporation to indemnify a director if the corporation, pursuant to
Section 33-636(b)(5), obligated itself under its certificate of
incorporation to indemnify a director for liability except for
certain liability involving conduct described in Section
33-636(b)(5). Section 33-776 permits a corporation to indemnify an
officer, employee, or agent of the corporation to the same extent
as a director as may be provided by the corporation's bylaws,
certificate of incorporation, or resolution of the board of
directors.
Section 33-771(e) provides that a corporation incorporated prior to
January 1, 1995, must, except to the extent that the certificate of
incorporation provides otherwise, indemnify a director to the
extent that indemnification is permissible under Sections 33-770 to
33-779, inclusive. Section 33-776(d) sets forth a similar
provision with respect to officers, employees and agents of a
corporation.
1. Based on the statutes referenced above, the Depositor must
indemnify a director if the director:
A. conducted himself in good faith;
B. reasonably believed (a) in the case of conduct in his official
capacity, that his conduct was in the best interests of the
corporation or (b) in all other cases, that his conduct was at
least not opposed to the best interests of the corporation; and
C. in the case of any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful; or
2. engaged in conduct for which broader indemnification had been
made permissible or obligatory under a provision of the Depositor's
certificate of incorporation.
In addition, the Depositor must indemnify officers, employees and
agents for liability if the individual:
A. conducted himself in good faith;
B. reasonably believed (a) in the case of conduct in his official
capacity, that his conduct was in the best interests of the
corporation or (b) in all other cases, that his conduct was at
least not opposed to the best interests of the corporation; and
C. in the case of any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful.
Section 33-777 permits a corporation to procure insurance on behalf
of an individual who was a director or officer of the corporation.
Consistent with the statute, the directors and officers of the
Depositor and Hartford Securities Distribution Company, Inc.
("HSD") are covered under a directors and officers liability
insurance policy.
<Page>
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Depositor pursuant to the foregoing
provisions, or otherwise, the Depositor has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Depositor of expenses incurred or paid by a director, officer
or controlling person of the Depositor in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the Depositor will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
1 Underwriting Agreement Incorporated by reference to Registration
Statement File No. 333-24885, dated May 1, 1997.
3(a) Articles of Incorporation Incorporated by reference to Post-Effective
Amendment No. 6 to the Registration Statement
File No. 333-66343, dated February 8, 2001.
3(b) By-laws Incorporated by reference to Post-Effective
Amendment No. 6 to the Registration Statement
File No. 333-66343, dated February 8, 2001.
4(a) Group Annuity Contract Incorporated by reference to Amendment No. 1 to
the Registration Statement File No. 33-88786,
dated April 28, 1995.
4(b) Group Annuity Certificate Incorporated by reference to Amendment No. 1 to
the Registration Statement File No. 33-88786,
dated April 28, 1995.
4(c) Individual Annuity Contract Incorporated by reference to Amendment No. 1 to
the Registration Statement File No. 33-88786,
dated April 28, 1995.
5 Opinion re: legality Filed herewith.
23(a) Legal Consent Filed herewith as Exhibit 5.
23(b) Consent of Deloitte & Filed herewith.
Touche LLP.
99 Copy of Power of Attorney Filed herewith.
</Table>
<Page>
Item 18. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
i. To include any Prospectus required by section 10(a)(3) of
the Securities Act of 1933;
ii. To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
iii.To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act that is incorporated by reference
in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
reasonable grounds to believe that it meets all the requirements for filing
this Amendment No. 5 to the Registration Statement on Form S-2 and
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Simsbury, State of
Connecticut on this 4th day of April, 2005.
HARTFORD LIFE INSURANCE COMPANY
*By: Thomas M. Marra *By: /s/ Marianne O'Doherty
------------------------------------------- ----------------------
Thomas M. Marra, President, Chief Executive Marianne O'Doherty
Officer and Chairman of the Board* Attorney-In-Fact
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated
on this 4th day of April, 2005.
David A. Carlson, Senior Vice President & Deputy
Chief Financial Officer, Director*
Michael L. Kalen, Executive Vice President,
Director*
Thomas M. Marra, President, Chief Executive
Officer and Chairman of the Board, Director* *By: /s/ Marianne O'Doherty
Ernest M. McNeil, Jr., Vice President & ----------------------
Chief Accounting Officer* Marianne O'Doherty
John C. Walters, Executive Vice President, Attorney-in-Fact
Director*
Lizabeth H. Zlatkus, Executive Vice President &
Chief Financial Officer, Director* Date: April 4, 2005
David M. Znamierowski, Executive Vice President &
Chief Investment Officer, Director*
333-46376
<Page>
EXHIBIT INDEX
5 Opinion and Consent of Christopher M. Grinnell,
Counsel and Assistant Vice President regarding
legality of securities to be issued.
23(a) Legal Consent filed as part of Exhibit 5.
23(b) Consent of Deloitte & Touche LLP.
99 Copy of Power of Attorney