UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-32293

(Exact name of registrant as specified in its charter)

Connecticut		06-0974148
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

200 Hopmeadow Street, Simsbury, Connecticut 06089
(Address of principal executive offices)

(860) 547-5000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes o No þ

As of July 30, 2010 there were outstanding 1,000 shares of Common Stock, $5,690 par value per share, of the registrant, all of which were directly owned by Hartford Life and Accident Insurance Company. The Hartford Financial Services Group, Inc. is the ultimate parent of the registrant.

The registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format

 

 

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			5
Report of Independent Registered Public Accounting Firm			5
Condensed Consolidated Statements of Operations — For the Three and six months ended June 30, 2010 and 2009			6
Condensed Consolidated Balance Sheets — As of June 30, 2010 and December 31, 2009			7
Condensed Consolidated Statements of Changes in Stockholder’s Equity — For the Six months ended June 30, 2010 and 2009			8
Condensed Consolidated Statements of Cash Flows — For the Six months ended June 30, 2010 and 2009			9
Notes to Condensed Consolidated Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			46
Item 3. Quantitative and Qualitative Disclosures about Market Risk			78
Item 4. Controls and Procedures			78
PART II. OTHER INFORMATION			78
Item 1. Legal Proceedings			78
Item 1A. Risk Factors			79
Item 6. Exhibits			81
Signature			82
Exhibits Index			83
EX-12.01
EX-15.01
EX-31.01
EX-31.02
EX-32.01
EX-32.02

Forward - Looking Statements

Certain of the statements contained herein are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “projects,” and similar references to future periods.

Forward-looking statements are based on our current expectations and assumptions regarding economic, competitive and legislative developments. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. They have been made based upon management’s expectations and beliefs concerning future developments and their potential effect upon Hartford Life Insurance Company (“the Company”). Future developments may not be in line with management’s expectations or have unanticipated effects. Actual results could differ materially from expectations, depending on the evolution of various factors, including those set forth in Part I, Item 1A, Risk Factors in the Company’s 2009 Form 10-K Annual Report, Part II, Item 1A, Risk Factors of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, as well as in Part II, Item 1A Risk Factors of this Form 10-Q. These important risks and uncertainties include:

•		risks and uncertainties related to the Company’s current operating environment, which reflects continued volatility in financial markets, constrained capital and credit markets and uncertainty about the strength of an economic recovery and the impact of U.S. and other governmental stimulus, budgetary and legislative initiatives, and whether management’s efforts to identify and address these risks will be timely and effective;
•		risks associated with our continued execution of steps to realign our business and reposition our investment portfolio, including the potential need to take other actions, such as divestitures;
•		market risks associated with our business, including changes in interest rates, credit spreads, equity prices, and foreign exchange rates, as well as challenging or deteriorating conditions in key sectors such as the commercial real estate market, that have pressured our results and have continued to do so in 2010;
•		volatility in our earnings resulting from our adjustment of our risk management program to emphasize protection of statutory surplus;
•		the impact on our statutory capital of various factors, including many that are outside the Company’s control, which can in turn affect our credit and financial strength ratings, cost of capital, regulatory compliance and other aspects of our business and results;
•		risks to our business, financial position, prospects and results associated with negative ratings actions or downgrades in the Company’s financial strength and credit ratings or negative rating actions or downgrades relating to our investments;
•		the potential for differing interpretations of the methodologies, estimations and assumptions that underlie the valuation of the Company’s financial instruments that could result in changes to investment valuations;
•		the subjective determinations that underlie the Company’s evaluation of other-than-temporary impairments on available-for-sale securities;
•		losses due to nonperformance or defaults by others;
•		the potential for further acceleration of deferred policy acquisition cost amortization;
•		the potential for further impairments of our goodwill or the potential for establishing valuation allowances against deferred tax assets;
•		the possible occurrence of terrorist attacks and the Company’s ability to contain its exposure, including the effect of the absence or insufficiency of applicable terrorism legislation on coverage;
•		the possibility of a pandemic or man-made disaster that may adversely affect the financial condition of the Company’s businesses and cost and availability of reinsurance;
•		weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter conditions, natural disasters such as hurricanes and earthquakes, as well as climate change, including effects on weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain and snow;

•		the response of reinsurance companies under reinsurance contracts and the availability, pricing and adequacy of reinsurance to protect the Company against losses;
•		the possibility of unfavorable loss development;
•		actions by our competitors, many of which are larger or have greater financial resources than we do;
•		the restrictions, oversight, costs and other consequences of our parent, The Hartford Financial Services Group, Inc. (“The Hartford”), being a savings and loan holding company, including from the supervision, regulation and examination by the Office of Thrift Supervision (the “OTS”), and in the future, as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), The Federal Reserve and the Office of the Controller of the Currency as regulator of Federal Trust Bank, and arising from our participation in the Capital Purchase Program (the “CPP”), under the Emergency Economic Stabilization Act of 2008, certain elements of which will continue to apply to The Hartford for so long as the U.S. Department of the Treasury (“Treasury”), holds the warrant or shares of The Hartford’s common stock received on exercise of the warrant that The Hartford issued as part of its participation in the CPP;
•		the potential effect of domestic and foreign regulatory developments, including those that could adversely impact the demand for the Company’s products, operating costs and required capital levels, including changes to statutory reserves and/or risk-based capital requirements related to secondary guarantees under universal life and variable annuity products;
•		the cost and other effects of increased regulation as a result of the enactment of the Dodd-Frank Act, which will, among other effects, vest a newly created Financial Services Oversight Council with the power to designate “systemically important” institutions, require central clearing of, and/or impose new margin and capital requirements on, derivatives transactions, and as a savings and loan holding company, may affect The Hartford’s ability to manage our general account by limiting or eliminating investments in certain private equity and hedge funds;
•		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 ability of the Company’s subsidiaries to pay dividends to the Company;
•		the risk that our framework for managing business risks may not be effective in mitigating risk and loss to us that could adversely affect our business;
•		the Company’s ability to maintain the availability of its systems and safeguard the security of its data in the event of a disaster or other unanticipated events;
•		the potential for difficulties arising from outsourcing relationships;
•		the impact of potential changes in federal or state tax laws, including changes affecting the availability of the separate account dividend received deduction;
•		the impact of potential changes in accounting principles and related financial reporting requirements;
•		the Company’s ability to protect its intellectual property and defend against claims of infringement;
•		unfavorable judicial or legislative developments;
•		other factors described in such forward-looking statements.

Any forward-looking statement made by us in this document speaks only as of the date of the filing of this Form 10-Q. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Item I. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of
Hartford Life Insurance Company
Hartford, Connecticut

We have reviewed the accompanying condensed consolidated balance sheet of Hartford Life Insurance Company and subsidiaries (the “Company”) as of June 30, 2010, and the related condensed consolidated statements of operations for the three-month and six-month periods ended June 30, 2010 and 2009, and changes in stockholder’s equity and cash flows for the six-month periods ended June 30, 2010 and 2009. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2009, and the related consolidated statements of operations, changes in stockholder’s equity, and cash flows for the year then ended (not presented herein); and in our report dated February 23, 2010, (which report includes an explanatory paragraph relating to the Company’s change in its method of accounting and reporting for other-than-temporary impairments in 2009 and for the fair value measurement of financial instruments in 2008), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

DELOITTE & TOUCHE LLP

Hartford, Connecticut

August 4, 2010

HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

		Three Months ended								Six Months ended
		June 30,								June 30,
(In millions)		2010				2009				2010				2009
		(Unaudited)								(Unaudited)
Revenues
Fee income and other		$	960			$	823			$	1,920			$	1,787
Earned premiums			62				96				117				336
Net investment income (loss)
Securities available-for-sale and other			690				644				1,327				1,237
Equity securities, trading			(105	)			120				13				9
Total net investment income			585				764				1,340				1,246
Net realized capital gains (losses):
Total other-than-temporary impairment (“OTTI”) losses			(247	)			(411	)			(563	)			(590	)
OTTI losses recognized in other comprehensive income			158				157				337				157
Net OTTI losses recognized in earnings			(89	)			(254	)			(226	)			(433	)
Net realized capital gains (losses), excluding net OTTI losses recognized in earnings			694				285				317				1,927
Total net realized capital gains (losses)			605				31				91				1,494
Total revenues			2,212				1,714				3,468				4,863
Benefits, losses and expenses
Benefits, losses and loss adjustment expenses			851				662				1,578				2,325
Benefits, loss and loss adjustment expenses — returns credited on International unit-linked bonds and pension products			(105	)			120				13				9
Insurance operating costs and other expenses			1,518				449				1,851				888
Amortization of deferred policy acquisition costs and present value of future profits			134				167				202				1,699
Dividends to policyholders			5				5				7				11
Total benefits, losses and expenses			2,403				1,403				3,651				4,932
Income (loss) before income tax expense (benefit)			(191	)			311				(183	)			(69	)
Income tax expense (benefit)			(106	)			94				(90	)			(78	)
Net income (loss)			(85	)			217				(93	)			9
Less: Net (income) loss attributable to the noncontrolling interest			(3	)			(1	)			(5	)			(6	)
Net income (loss) attributable to shareholder		$	(88	)		$	216			$	(98	)		$	3

See Notes to Condensed Consolidated Financial Statements

HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

		June 30,				December 31,
(In millions, except for share data)		2010				2009
		(Unaudited)
Assets
Investments
Fixed maturities, available for sale, at fair value (amortized cost of $46,388 and $44,284) (includes variable interest entity assets , at fair value, of $842 as of June 30, 2010)		$	45,011			$	40,403
Equity securities, trading, at fair value (cost of $2,063 and $2,359)			2,101				2,443
Equity securities, available-for-sale, at fair value (cost of $400 and $447)			372				419
Mortgage loans (net of allowance for loan losses of $88 and $260)			3,325				4,304
Policy loans, at outstanding balance			2,129				2,120
Limited partnership and other alternative investments (includes variable entity assets of $22 as of June 30, 2010)			782				759
Other investments			2,098				338
Short-term investments			4,545				5,128
Total investments			60,363				55,914
Cash			476				793
Premiums receivable and agents’ balances			68				69
Reinsurance recoverables			4,543				3,140
Deferred policy acquisition costs and present value of future profits			5,045				5,779
Deferred income taxes, net			2,805				3,066
Goodwill			470				470
Other assets			2,860				1,709
Separate account assets			154,870				150,380
Total assets		$	231,500			$	221,320
Liabilities
Reserve for future policy benefits and unpaid losses and loss adjustment expenses			11,680				11,318
Other policyholder funds and benefits payable			44,467				43,526
Other policyholder funds and benefits payable — International unit-linked bonds and pension products			2,078				2,419
Consumer notes			452				1,136
Other liabilities (including variable interest entity liabilities of $470 as of June 30, 2010)			10,604				6,245
Separate account liabilities			154,870				150,380
Total liabilities		$	224,151			$	215,024
Commitments and Contingencies (Note 9)
Equity
Common stock - 1,000 shares authorized, issued and outstanding, par value $5,690			6				6
Capital surplus			8,459				8,457
Accumulated other comprehensive loss, net of tax			(757	)			(1,941	)
Retained earnings			(359	)			(287	)
Total stockholder’s equity			7,349				6,235
Noncontrolling interest			—				61
Total equity			7,349				6,296
Total liabilities and stockholder’s equity		$	231,500			$	221,320

See Notes to Condensed Consolidated Financial Statements

HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements Of Changes in Stockholder’s Equity

		Accumulated Other
		Comprehensive Income (Loss)
										Net
										Unrealized
										Capital				Net (Loss)
										Gains				Gain On
										(Losses)				Cash Flow				Foreign
						Additional				On				Hedging				Currency												Non-
(Unaudited)		Common				Paid In				Securities,				Instruments,				Translation				Retained				Total				Controlling				Total
(In millions)		Stock				Capital				Net of Tax				Net of Tax				Adjustments				Earnings				S.E.				Interest				Equity
Six months ended June 30, 2010
Balance, December 31, 2009		$	6			$	8,457			$	(2,039	)		$	148			$	(50	)		$	(287	)		$	6,235			$	61			$	6,296
Comprehensive income
Net income (loss)																							(98	)			(98	)							(98	)
Other comprehensive income, net of tax (1)
Net change in unrealized capital losses on securities (2)											1,058																1,058								1,058
Net gains (losses) on cash flow hedging instruments															185												185								185
Cumulative translation adjustments																			(59	)							(59	)							(59	)
Total other comprehensive income (loss)																											1,184								1,184
Total comprehensive income (loss)																											1,086								1,086
Capital contribution from parent							2																				2								2
Dividends declared																							—				—								—
Cumulative effect of accounting changes, net of DAC and tax																							26				26								26
Change in noncontrolling interest ownership																															(66	)			(66	)
Noncontrolling income (loss)																															5				5
Balance, June 30, 2010		$	6			$	8,459			$	(981	)		$	333			$	(109	)		$	(359	)		$	7,349			$	0			$	7,349
Six months ended June 30, 2009
Balance, December 31, 2008		$	6			$	6,157			$	(4,806	)		$	440			$	(165	)		$	1,446			$	3,078			$	165			$	3,243
Comprehensive income
Net income (loss)																							3				3								3
Other comprehensive income, net of tax (1)
Net change in unrealized capital gains on securities (2)											1,163																1,163								1,163
Net losses on cash flow hedging instruments															(273	)											(273	)							(273	)
Cumulative translation adjustments																			117								117								117
Total other comprehensive income (loss)																											1,007								1,007
Total comprehensive income (loss)																											1,010								1,010
Capital contribution from parent							908																				908								908
Dividends declared																							(39	)			(39	)							(39	)
Cumulative effect of accounting changes, net of tax											(462	)											462				—								—
Change in noncontrolling interest ownership																															(84	)			(84	)
Noncontrolling income (loss)																															6				6
Balance, June 30, 2009		$	6			$	7,065			$	(4,105	)		$	167			$	(48	)		$	1,872			$	4,957			$	87			$	5,044

(1)		Net change in unrealized capital gains on securities is reflected net of tax benefit and other items of $(570) and $(626) for the six months ended June 30, 2010 and 2009, 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 $(23) and $(443) for the six months ended June 30, 2010 and 2009, respectively.

See Notes to Condensed Consolidated Financial Statements

HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

		Six months ended June 30,
(In millions)		2010				2009
		(Unaudited)
Operating Activities
Net income (loss)		$	(93	)		$	9
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of deferred policy acquisition costs and present value of future profits			202				1,699
Additions to deferred policy acquisition costs and present value of future profits			(254	)			(366	)
Change in:
Reserve for future policy benefits and unpaid losses and loss adjustment expenses			109				1,012
Reinsurance recoverables			(6	)			(300	)
Receivables and other assets			(84	)			4
Payables and accruals			1,087				(380	)
Accrued and deferred income taxes			68				513
Net realized capital losses			(91	)			(1,494	)
Net receipts from investment contracts related to policyholder funds — International unit-linked bonds and pension products			(342	)			357
Net increase in equity securities held for trading			342				(365	)
Depreciation and amortization			111				95
Other, net			(101	)			35
Net cash provided by operating activities			948				819
Investing Activities
Proceeds from the sale/maturity/prepayment of:
Fixed maturities and short-term investments, available-for-sale			11,871				25,703
Equity securities, available-for-sale			99				100
Mortgage loans			1,020				255
Partnerships			90				111
Proceeds from business sold			130				—
Payments for the purchase of:
Fixed maturities and short-term investments, available-for-sale			(12,976	)			(25,507	)
Equity securities, available-for-sale			(84	)			(32	)
Mortgage loans			(29	)			(183	)
Partnerships			(66	)			(70	)
Purchase price of business acquired			—				(8	)
Change in policy loans, net			(9	)			3
Change in payables for collateral under securities lending, net			(46	)			(1,142	)
Derivatives, net			484				24
Change in all other, net			3				120
Net cash provided by (used for) investing activities			487				(626	)
Financing Activities
Deposits and other additions to investment and universal life-type contracts			8,769				5,742
Withdrawals and other deductions from investment and universal life-type contracts			(13,848	)			(9,685	)
Net transfers from (to) separate accounts related to investment and universal life-type contracts			4,010				3,249
Capital Contributions (1)			—				821
Dividends paid (1)			—				(39	)
Net issuances/(Repayments) at maturity or settlement of consumer notes			(683	)			(11	)
Net cash provided by (used for) financing activities			(1,752	)			77
Impact of foreign exchange			—				60
Net increase (decrease) in cash			(317	)			330
Cash — beginning of period			793				661
Cash — end of period		$	476			$	991
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid (Received) During the Period For:
Income taxes		$	(153	)		$	(574	)

Supplemental schedule of noncash operating and financing activities:

(1)		For the six months ended June 30, 2010, there were no noncash net dividends or capital contributions made or received. For the six months ended June 30, 2009, the Company made noncash net dividends of $6 to its parent company related to the guaranteed minimum income and accumulation benefit reinsurance agreements with Hartford Life Insurance K.K. (“HLIKK”) and received a noncash asset capital contribution of $87 from its parent during the Six months ended June 30, 2009.

See Notes to Condensed Consolidated Financial Statements

HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES

1. Basis of Presentation and Accounting Policies

Basis of Presentation

Hartford Life Insurance Company (together with its subsidiaries, “HLIC”, “Company”, “we” or “our”) is a provider of insurance and investment products in the United States (“U.S.”) and is an indirect wholly-owned subsidiary of The Hartford Financial Services Group, Inc. (“The Hartford”).

The Consolidated Financial Statements have been prepared on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), which differ materially from the accounting practices prescribed by various insurance regulatory authorities.

The accompanying condensed consolidated financial statements and notes as of June 30, 2010, and for the three and six months ended June 30, 2010 and 2009 are unaudited. These financial statements reflect all adjustments (consisting only of normal accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations, and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in The Company’s 2009 Form 10-K Annual Report. The results of operations for the interim periods should not be considered indicative of the results to be expected for the full year.

Consolidation

The Condensed Consolidated Financial Statements include the accounts of Hartford Life Insurance Company, companies in which the Company directly or indirectly has a controlling financial interest and those variable interest entities (“VIEs”) in which the Company is required to consolidate. Entities in which HLIC has significant influence over the operating and financing decisions but are not required to consolidate are reported using the equity method. For further information on VIEs, see Note 4. Material intercompany transactions and balances between HLIC and its subsidiaries have been eliminated.

Reclassifications

Certain reclassifications have been made to prior period financial information to conform to the current period classifications.

Use of Estimates

The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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 estimated gross profits used in the valuation and amortization of assets and liabilities associated with variable annuity and other universal life-type contracts; evaluation of other-than-temporary impairments on available-for-sale securities and valuation allowances on investments; living benefits required to be fair valued; goodwill impairment; valuation of investments and derivative instruments, valuation allowance on deferred tax assets; and contingencies relating to corporate litigation and regulatory matters. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the Consolidated Financial Statements.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in HLIC’s 2009 Form 10-K Annual Report, which should be read in conjunction with these accompanying Condensed Consolidated Financial Statements.

Adoption of New Accounting Standards

Variable Interest Entities

In June 2009, the Financial Accounting Standards Board (“FASB”) updated the guidance which amends the consolidation requirements applicable to variable interest entities (“VIE”). Under this new guidance, an entity would consolidate a VIE when the entity has both (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. The FASB also issued an amendment to this guidance in February 2010 which defers application of this guidance to certain entities that apply specialized accounting guidance for investment companies. The Company adopted this guidance on January 1, 2010. As a result of adoption, in addition to those VIEs the Company consolidates under the previous guidance, the Company consolidated a Company sponsored Collateralized Debt Obligation (“CDO”) electing the fair value option, and a Company sponsored Collateralized Loan Obligation, at carrying values carried forward as if the Company had been the primary beneficiary from the date the Company entered into the VIE arrangement. The impact on the Company’s Condensed Consolidated Balance Sheet as a result of adopting this new guidance was an increase in assets of $432, an increase in liabilities of $406, and an increase in January 1, 2010 retained earnings, net of tax, of $26. The Company has investments in mutual funds, limited partnerships and other alternative investments including hedge funds, mortgage and real estate funds, mezzanine debt funds, and private equity and other funds which may be VIEs. The accounting for these investments will remain unchanged as they fall within the scope of the deferral of this new consolidation guidance. See Note 4 for further discussion.

Future Adoption of New Accounting Standards

Embedded Credit Derivatives

In March 2010, the FASB issued guidance clarifying the scope exception for credit derivatives embedded within structured securities which may result in bifurcation of these credit derivatives. Embedded credit derivatives resulting only from subordination of one financial instrument to another continue to qualify for the exemption. As a result, investments with an embedded credit derivative in a form other than the above mentioned subordination may need to be separately accounted for as an embedded credit derivative, meaning that in changes in the fair value of the embedded credit derivative are recorded in current period earnings. Upon adoption, an entity may elect the fair value option, with changes in fair value of the investment in its entirety recognized in earnings, rather than bifurcate the embedded credit derivative. The guidance is effective, on a prospective basis only, for fiscal years and interim periods within those fiscal years, beginning on or after June 15, 2010. The Company adopted this guidance on July 1, 2010, and reclassified approximately $175, after-tax, of unrealized capital losses recorded in Accumulated Other Comprehensive Income, to Retained Earnings.

Income Taxes

A reconciliation of the tax provision at the U.S. Federal statutory rate to the provision (benefit) for income taxes is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Tax expense (benefit) at the U.S. federal statutory rate		$	(67	)		$	109			$	(64	)		$	(24	)
Dividends received deduction			(39	)			(37	)			(78	)			(75	)
Foreign related investments			—				20				(3	)			26
Investment valuation allowance			—				—				56				—
Other			—				2				(1	)			(5	)
Income tax expense (benefit)			(106	)			94				(90	)			(78	)

The separate account dividends received deduction (“DRD”) is estimated for the current year using information from the prior year-end, adjusted for current year equity market performance and other appropriate factors, including estimated levels of corporate dividend payments. The actual current year DRD can vary from estimates based on, but not limited to, changes in eligible dividends received by the mutual funds, amounts of distribution from these mutual funds, amounts of short-term capital gains at the mutual fund level and the Company’s taxable income before the DRD. Given recent financial markets’ volatility, the Company is reviewing its DRD computations on a quarterly basis.

The Company’s federal income tax returns are routinely audited by the Internal Revenue Service (“IRS”) as part of the Hartford’s consolidated tax return. Audits have been concluded for all years through 2006. The audit of 2007 and 2008 commenced in the second quarter of 2010. In addition, the Company is working with the IRS on a possible settlement of a DRD issue related to prior periods which, if settled, may result in the booking of tax benefits. Such benefits are not expected to be material to the statement of operations.

The Company has recorded a deferred tax asset valuation allowance that is adequate to reduce the total deferred tax asset to an amount that will more likely than not be realized. The deferred tax asset valuation allowance as of June 30, 2010 was approximately $137, which has not materially changed from the first quarter of 2010. In assessing the need for a valuation allowance, management considered future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and taxable income in prior carry back years, as well as tax planning strategies that include holding debt

securities with market value losses until recovery, selling appreciated securities to offset capital losses, and sales of certain corporate assets, including subsidiaries. Such tax planning strategies are viewed by management as prudent and feasible and will be implemented if necessary to realize the deferred tax asset. An increase in interest rates can adversely impact the Company’s tax planning strategies and in particular the Company’s ability to utilize tax benefits to offset certain previously recognized realized capital losses. Even under a “separate entity” approach, the Company would not record an additional valuation allowance relating to realized capital losses. Under a “separate entity” approach, the current tax benefit related to any of the Company’s tax attributes realized by virtue of its inclusion in The Hartford’s consolidated tax return would have been recorded directly to surplus rather than income. These benefits would have been $0 and $79 for the six months ended June 30, 2010 and 2009, respectively.

2. Segment Information

Effective for first quarter 2010 reporting, Life made changes to its segments as described below. Life changed its reporting structure to realign mutual funds businesses into Retirement from Global Annuity – U.S (formerly the Retail Products Group or “Retail”). In addition, certain fee revenue and commission expenses associated with sales of non-proprietary products by a subsidiary broker-dealer have been moved from Global Annuity – U.S. to Other, with no impact on net income in either Global Annuity – U.S. or Other. The impact of these changes on the annual periods presented in Hartford Life Insurance Company’s 2009 Annual Report Form 10-K, which annual periods are not contained in the accompanying interim financial statements, is disclosed in the following tables:

Revenues – Total earned premiums, fees and other considerations

		As Reported in the				Realignment of				Movement of				Segment
		2009 Annual Report				Mutual Fund				Non-Proprietary				Results,
		on Form 10-K				Businesses				Product Results				As Revised
For the year ended December 31, 2009
Global Annuity – U.S. (formerly Retail)		$	2,110			$	(437	)		$	(124	)		$	1,549
Retirement			324				437				—				761
Life- Other			292				—				124				416
For the year ended December 31, 2008
Global Annuity – U.S. (formerly Retail)		$	2,677			$	(589	)		$	(150	)		$	1,938
Retirement			338				589				—				927
Life- Other			285				—				150				435
For the year ended December 31, 2007
Global Annuity – U.S. (formerly Retail)		$	2,977			$	(611	)		$	(140	)		$	2,226
Retirement			242				611				—				853
Life-Other			221				—				140				361

Net Income (loss)

		As Reported in the				Realignment of				Segment
		2009 Annual Report				Mutual Fund				Results,
		on Form 10-K				Businesses				As Revised
For the year ended December 31, 2009
Global Annuity – U.S. (formerly Retail)		$	(1,929	)		$	(33	)		$	(1,962	)
Retirement			(222	)			33				(189	)
For the year ended December 31, 2008
Global Annuity – U.S. (formerly Retail)		$	(1,248	)		$	(36	)		$	(1,284	)
Retirement			(157	)			36				(121	)
For the year ended December 31, 2007
Global Annuity – U.S. (formerly Retail)		$	809			$	(64	)		$	745
Retirement			61				64				125

The Company is organized into four reporting segments: Global Annuity – U.S., Individual Life, Retirement and Institutional. Life’s Other category includes: corporate items not directly allocated to any of its reportable operating segments; intersegment eliminations; assumed and ceded reinsurance of death and living benefits from The Hartford’s Japan operations; certain direct group life and group disability insurance that is ceded to an affiliate; as well as revenues and expenses related to the sale of non-proprietary insurance and investment products by the Company’s broker-dealer subsidiaries; as well as other International operations.

Global Annuity – U.S. offers individual variable, fixed market value adjusted (“MVA”), and single premium immediate annuities.

Retirement provides products and services to corporations pursuant to Section 401(k) and products and services to municipalities and not-for-profit organizations under Section 457 and 403(b) of the IRS code, as well as Retail mutual funds, Insurance Product mutual funds, Investment – only mutual funds and 529 college savings plans.

Institutional, primarily offers institutional liability products, such as variable Private Placement Life Insurance (“PPLI”) owned by corporations and high net worth individuals and stable value products. Institutional continues to service existing customers of its suspended businesses, which includes Leveraged PPLI, structured settlements and institutional annuities (primarily terminal funding cases).

Individual Life sells a variety of life insurance products, including variable universal life, universal life and term life.

The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies in Note 1. The Company primarily evaluates performance of its segments based on revenues, net income and the segment’s return on allocated capital. Each operating segment is allocated corporate surplus as needed to support its business.

The Company charge direct operating expenses to the appropriate segment and allocates the majority of indirect expenses to the segments under an intercompany expense arrangement. Inter-segment revenues primarily occur between the Company’s Other category and the reporting segments. These amounts primarily include interest income on allocated surplus and interest charges on excess separate account surplus. Consolidated net investment income is unaffected by such transactions.

For further discussion of the types of products offered by each segment, see Note 2 of Notes to the Consolidated Financial Statements included in the Company’s 2009 Form 10-K Annual Report filed on February 23, 2010.

The following tables represent summarized financial information concerning the Company’s segments.

		Three Months ended June 30,								Six Months ended June 30,
Revenues by product line		2010				2009				2010				2009
Revenues
Life
Earned premiums, fees and other considerations
Global Annuity – U.S.
Individual Annuity:
Individual Variable Annuity		$	429				313			$	833				727
Fixed/MVA Annuity [1]			2				2				5				1
Total Global Annuity – U.S.			431				315				838				728
Individual Life
Variable Life			101				109				203				273
Universal Life			97				91				196				180
Term Life			9				9				19				19
Total Individual Life			207				209				418				472
Retirement
401(k)			80				71				156				134
403(b)/457			9				9				20				19
Mutual funds			121				102				242				189
Other [2]			33				3				64				6
Total Retirement Division			243				185				482				348
Institutional
Institutional investment products			5				81				20				298
PPLI [3]			41				31				82				65
Total Institutional			46				112				102				363
Other			95				98				197				212
Total Life premiums, fees and considerations			1,022				919				2,037				2,123
Net investment income			585				764				1,340				1,246
Net realized capital gains (losses)			605				31				91				1,494
Total Life [4]		$	2,212				1,714			$	3,468				4,863
		Three Months ended June 30,								Six Months ended June 30,
		2010				2009				2010				2009
Net Income (Loss)
Global Annuity – U.S.		$	(213	)			187			$	(107	)			(559	)
Individual Life			80				14				96				(7	)
Retirement			36				(35	)			55				(122	)
Institutional			(3	)			(69	)			(94	)			(246	)
Other [4],[5]			12				119				(48	)			937
Total net income (loss)		$	(88	)			216			$	(98	)			3

[1]		Single premium immediate annuities were transferred from Institutional to Global Annuity — U.S. effective January 1, 2010.
[2]		Includes Insurance Product, Investment Only, and Canadian mutual funds and 529 plan assets.
[3]		Includes leveraged PPLI transferred from Other effective January 1, 2010.
[4]		As of June 30, 2010 Other segment contains the free standing derivative associated with the GMIB, GMWB and GMAB reinsurance from the Company’s affiliate, HLIKK. Effective October 1, 2009, HLAI entered into a modified coinsurance and coinsurance with funds withheld reinsurance agreement with an affiliated captive reinsurer, which passed this economic risk and reward related to the reinsured business to the affiliated captive reinsurer through modco adjustments
[5]		As of June 30, 2009, Other segment contains the free standing derivative associated with the GMIB, GMWB and GMAB reinsurance from the Company’s affiliate, HLIKK. The reinsurance agreement is the primary driver of the revenue and net income (loss) for the Other segment.

3. Fair Value Measurements

Fair Value Disclosures

The following financial instruments are carried at fair value in the Company’s Condensed Consolidated Financial Statements: fixed maturities and equity securities, available-for-sale (“AFS”), equity securities, trading, short-term investments, freestanding and embedded derivatives, separate account assets and certain other liabilities.

The following section applies the fair value hierarchy and disclosure requirements for the Company’s financial instruments that are carried at fair value. The fair value hierarchy prioritizes the inputs in the valuation techniques used to measure fair value into three broad Levels (Level 1, 2 and 3).

Level 1		Observable inputs that reflect quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. Level 1 securities include highly liquid U.S. Treasuries, money market funds and exchange traded equity and derivative securities.
Level 2		Observable inputs, other than quoted prices included in Level 1, for the asset or liability or prices for similar assets and liabilities. Most fixed maturities and preferred stocks are model priced by vendors using observable inputs and are classified within Level 2. Also included in the Level 2 category are derivative instruments that are priced using models with observable market inputs, including interest rate, foreign currency and certain credit default swap contracts and have no significant unobservable market inputs.
Level 3		Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). Level 3 securities include less liquid securities such as highly structured and/or lower quality asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”), commercial real estate (“CRE”) collateralized debt obligations (“CDOs”), residential mortgage-backed securities (“RMBS”) primarily backed by below-prime loans, and private placement securities. Also included in Level 3 are guaranteed product embedded and reinsurance derivatives and other complex derivative securities, including customized GMWB hedging derivatives, equity derivatives, long dated derivatives, swaps with optionality, certain complex credit derivatives and certain other liabilities. Because Level 3 fair values, by their nature, contain unobservable market inputs as there is little or no observable market for these assets and liabilities, considerable judgment is used to determine the Level 3 fair values. Level 3 fair values represent the Company’s best estimate of an amount that could be realized in a current market exchange absent actual market exchanges.

In many situations, inputs used to measure the fair value of an asset or liability position may fall into different levels of the fair value hierarchy. In these situations, the Company will determine the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value. Transfers of securities among the levels occur at the beginning of the reporting period. Transfers between Level 1 and Level 2 were not material for the three and six months ended June 30, 2010. In most cases, both observable (e.g., changes in interest rates) and unobservable (e.g., changes in risk assumptions) inputs are used in the determination of fair values that the Company has classified within Level 3. Consequently, these values and the related gains and losses are based upon both observable and unobservable inputs. The Company’s fixed maturities included in Level 3 are classified as such as they are primarily priced by independent brokers and/or within illiquid markets (i.e., below-prime RMBS).

These disclosures provide information as to the extent to which the Company uses fair value to measure financial instruments and information about the inputs used to value those financial instruments to allow users to assess the relative reliability of the measurements. The following tables present assets and (liabilities) carried at fair value by hierarchy level.

		June 30, 2010
						Quoted Prices
						in Active				Significant				Significant
						Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
ABS		$	2,136			$	—			$	1,666			$	470
CDOs			2,078				—				46				2,032
CMBS			5,553				—				5,053				500
Corporate			26,152				—				20,387				5,765
Foreign government/government agencies			1,110				—				1,069				41
States, municipalities and political subdivisions (“Municipal”)			928				—				656				272
RMBS			3,541				—				2,322				1,219
U.S. Treasuries			3,513				1,181				2,332				—
Total fixed maturities. AFS			45,011				1,181				33,531				10,299
Equity securities, trading			2,101				2,101				—				—
Equity securities, AFS			372				160				169				43
Derivative assets
Credit derivatives			(26	)			—				(4	)			(22	)
Equity derivatives			(1	)			—				—				(1	)
Foreign exchange			441				—				441				—
Interest rate derivatives			(9	)			—				7				(16	)
Variable annuity hedging derivatives and macro hedge program			1,703				4				139				1,560
Total derivatives assets [1]			2,108				4				583				1,521
Short-term investments			4,545				942				3,603				—
Reinsurance recoverable for U.S. GMWB and Japan GMWB, GMIB, and GMAB			2,446				—				—				2,446
Separate account assets [2]			139,459				103,505				35,017				937
Total assets accounted for at fair value on a recurring basis		$	196,042			$	107,893			$	72,903			$	15,246
Liabilities accounted for at fair value on a recurring basis
Other policyholder funds and benefits payable
Guaranteed living benefits		$	(5,345	)		$				$				$	(5,345	)
Institutional notes			2				—				—				2
Equity linked notes			(7	)			—				—				(7	)
Total other policyholder funds and benefits payable			(5,350	)			—				—				(5,350	)
Derivative liabilities
Credit derivatives			(490	)			—				(43	)			(447	)
Equity derivatives			1				—				—				1
Foreign exchange			(44	)			—				(44	)			—
Interest rate derivatives			(46	)			—				(13	)			(33	)
Variable annuity hedging derivatives and macro hedge program			(13	)			(1	)			(43	)			31
Total derivative liabilities [3]			(592	)			(1	)			(143	)			(448	)
Other liabilities			(16	)			—				—				(16	)
Consumer notes [4]			(4	)			—				—				(4	)
Total liabilities accounted for at fair value on a recurring basis		$	(5,962	)		$	(1	)		$	(143	)		$	(5,818	)

[1]		Includes over-the-counter derivative instruments in a net asset value position which may require the counterparty to pledge collateral to the Company. As of June 30, 2010, $1.5 billion of a cash collateral liability was netted against the derivative asset value in the Condensed Consolidated Balance Sheet and is excluded from the table above. See footnote 3 below for derivative liabilities.
[2]		As June 30, 2010, excludes approximately $15 billion of investment sales receivable that are not subject to fair value accounting.
[3]		Includes over-the-counter derivative instruments in a net negative market value (derivative liability). In the Level 3 roll forward table included below in this Note 3, the derivative asset and liability are referred to as “freestanding derivatives” and are presented on a net basis.
[4]		Represents embedded derivatives associated with non-funding agreement-backed consumer equity-linked notes.

		December 31, 2009
						Quoted Prices
						in Active				Significant				Significant
						Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
ABS		$	1,903			$	—			$	1,406			$	497
CDOs			2,165				—				56				2,109
CMBS			5,365				—				5,096				269
Corporate			23,667				—				18,428				5,239
Foreign government/government agencies			846				—				766				80
Municipal			780				—				562				218
RMBS			3,336				—				2,341				995
U.S. Treasuries			2,341				325				2,016				—
Total fixed maturities, AFS			40,403				325				30,671				9,407
Equity securities, trading			2,443				2,443				—				—
Equity securities, AFS			419				113				274				32
Other investments
Variable annuity hedging derivatives and macro hedge program			212				8				16				188
Other derivatives [1]			8				—				(4	)			12
Total other investments			220				8				12				200
Short-term investments			5,128				3,785				1,343				—
Reinsurance recoverable for U.S. GMWB and Japan GMWB, GMIB, and GMAB [2]			1,108				—				—				1,108
Separate account assets [3]			147,418				112,863				33,593				962
Total assets accounted for at fair value on a recurring basis		$	197,139			$	119,537			$	65,893			$	11,709
Liabilities accounted for at fair value on a recurring basis
Other policyholder funds and benefits payable
Guaranteed living benefits		$	(3,439	)		$	—			$	—			$	(3,439	)
Institutional notes			(2	)			—				—				(2	)
Equity linked notes			(10	)			—				—				(10	)
Total other policyholder funds and benefits payable			(3,451	)			—				—				(3,451	)
Other liabilities [4]
Variable annuity hedging derivatives and macro hedge program			158				(2	)			(178	)			338
Other derivative liabilities			(45	)			—				125				(170	)
Total other liabilities			113				(2	)			(53	)			168
Consumer notes [5]			(5	)			—				—				(5	)
Total liabilities accounted for at fair value on a recurring basis		$	(3,343	)		$	(2	)		$	(53	)		$	(3,288	)

[1]		Includes over-the-counter derivative instruments in a net asset value position which may require the counterparty to pledge collateral to the Company. At December 31, 2009, $104 of a cash collateral liability was netted against the derivative asset value on the Consolidated Balance Sheet, and is excluded from the table above. See footnote 3 below for derivative liabilities.
[2]		Includes fair value of reinsurance recoverables from an affiliated reinsurer of approximately $761.
[3]		As of December 31, 2009, excludes approximately $3 billion of investment sales receivable that are not subject to fair value accounting.
[4]		Includes over-the-counter derivative instruments in a net negative market value position (derivative liability). In the Level 3 roll forward table included below in this Note, the derivative asset and liability are referred to as “freestanding derivatives” and are presented on a net basis.
[5]		Represents embedded derivatives associated with non-funding agreement-backed consumer equity-linked notes.

Determination of Fair Values

The valuation methodologies used to determine the fair values of assets and liabilities under the “exit price” notion reflect market-participant objectives and are based on the application of the fair value hierarchy that prioritizes relevant observable market inputs over unobservable inputs. The Company determines the fair values of certain financial assets and financial liabilities based on quoted market prices, where available and where prices represent a reasonable estimate of fair value. The Company also determines fair value based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s default spreads, and liquidity and, where appropriate, risk margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for the financial instruments listed in the above tables.

Available-for-Sale Securities, Equity Securities, Trading, and Short-term Investments

The fair value of AFS securities, equity securities, trading, and short-term investments in an active and orderly market (e.g. not distressed or forced liquidation) is determined by management after considering one of three primary sources of information: third party pricing services, independent broker quotations or pricing matrices. Security pricing is applied using a “waterfall” approach whereby publicly available prices are first sought from third party pricing services, the remaining unpriced securities are submitted to independent brokers for prices, or lastly, securities are priced using a pricing matrix. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services will normally derive the security prices from recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recently reported trades, the third-party pricing services and independent brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of ABS and RMBS are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. Actual prepayment experience may vary from these estimates.

Prices from third party pricing services are often unavailable for securities that are rarely traded or are traded only in privately negotiated transactions. As a result, certain securities are priced via independent broker quotations which utilize inputs that may be difficult to corroborate with observable market based data. Additionally, the majority of these independent broker quotations are non-binding. A pricing matrix is used to price securities for which the Company is unable to obtain either a price from a third party pricing service or an independent broker quotation by discounting the expected future cash flows from the security by a developed market discount rate utilizing current credit spreads. Credit spreads are developed each month using market based data for public securities adjusted for credit spread differentials between public and private securities which are obtained from a survey of multiple private placement brokers.

The Company performs a monthly analysis of the prices and credit spreads received from third parties to ensure that the prices represent a reasonable estimate of the fair value. As a part of this analysis, the Company considers trading volume and other factors to determine whether the decline in market activity is significant when compared to normal activity in an active market, and if so, whether transactions may not be orderly considering the weight of available evidence. If the available evidence indicates that pricing is based upon transactions that are stale or not orderly, the Company places little, if any, weight on the transaction price and will estimate fair value utilizing an internal pricing model. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. Examples of procedures performed include, but are not limited to, initial and on-going review of third-party pricing services methodologies, review of pricing statistics and trends, back testing recent trades, and monitoring of trading volumes, new issuance activity and other market activities. In addition, the Company ensures that prices received from independent brokers represent a reasonable estimate of fair value through the use of internal and external cash flow models developed based on spreads, and when available, market indices. As a result of this analysis, if the Company determines that there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly. The Company’s internal pricing model utilizes the Company’s best estimate of expected future cash flows discounted at a rate of return that a market participant would require. The significant inputs to the model include, but are not limited to, current market inputs, such as credit loss assumptions, estimated prepayment speeds and market risk premiums.

The Company has analyzed the third party pricing services’ valuation methodologies and related inputs, and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Most prices provided by third-party pricing services are classified into Level 2 because the inputs used in pricing the securities are market observable. Due to a general lack of transparency in the process that brokers use to develop prices, most valuations that are based on brokers’ prices are classified as Level 3. Some valuations may be classified as Level 2 if the price can be corroborated. Internal matrix priced securities, primarily consisting of certain private placement securities, are also classified as Level 3 due to significant non-observable inputs.

Derivative Instruments, including embedded derivatives within investments

Derivative instruments are fair valued using pricing valuation models; that utilize independent market data inputs, quoted market prices for exchange-traded derivatives, or independent broker quotations. Excluding embedded and reinsurance related derivatives, as of June 30, 2010 and December 31, 2009, 98% and 96%, respectively, of derivatives, based upon notional values, were priced by valuation models or quoted market prices. The remaining derivatives were priced by broker quotations. The Company performs a monthly analysis on derivative valuations which includes both quantitative and qualitative analysis. Examples of procedures performed include, but are not limited to, review of pricing statistics and trends, back testing recent trades, analyzing the impacts of changes in the market environment, and review of changes in market value for each derivative including those derivatives priced by brokers.

The Company utilizes derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instrument may not be classified with the same fair value hierarchy level as the associated assets and liabilities. Therefore the realized

and unrealized gains and losses on derivatives reported in Level 3 may not reflect the offsetting impact of the realized and unrealized gains and losses of the associated assets and liabilities.

Valuation techniques and inputs for investments

Generally, the Company determines the estimated fair value of its AFS securities and short-term investments using the market approach. The income approach is used for securities priced using a pricing matrix as well as for derivative instruments. For Level 1 investments, which are comprised of U.S. Treasuries, equity securities, short-term investments, and exchange traded futures and option contracts, valuations are based on observable inputs that reflect quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date.

For most of the Company’s debt securities, the following inputs are typically used in the Company’s pricing methods: reported trades, benchmark yields, bids, offers and/or estimated cash flows. For securities except U.S. Treasuries, inputs also include issuer spreads, which may utilize credit default swaps. Derivative instruments are valued using mid-market inputs that are predominantly observable in the market.

A description of additional inputs used in the Company’s Level 2 and Level 3 measurements is listed below:

Level 2		The fair values of most of the Company’s Level 2 investments are determined by management after considering prices received from third party pricing services. These investments include most fixed maturities and preferred stocks, including those reported in separate account assets.

	•		ABS, CDOs, CMBS and RMBS – Primary inputs also include monthly payment information, collateral performance, which varies by vintage year and includes delinquency rates, collateral valuation loss severity rates, collateral refinancing assumptions, credit default swap indices and, for RMBS, estimated prepayment rates.
	•		Corporates - Primary inputs also include observations of equity and credit default swap curves related to the issuer.
	•		Foreign government/government agencies - Primary inputs also include observations of equity and credit default swap curves related to the issuer and political events in emerging markets.
	•		Municipals - Primary inputs also include Municipal Securities Rulemaking Board reported trades and material event notices, and issuer financial statements.
	•		Short-term investments – Primary inputs also include material event notices and new issue money market rates.
	•		Equity securities, trading – Consist of investments in mutual funds. Primary inputs include net asset values obtained from third party pricing services.
	•		Credit derivatives- Significant inputs primarily include the swap yield curve and credit curves.
	•		Foreign exchange derivatives- Significant inputs primarily include the swap yield curve, currency spot and forward rates, and cross currency basis curves.
	•		Interest rate derivatives- Significant input is primarily the swap yield curve.

Level 3		Most of the Company’s securities classified as Level 3 are valued based on brokers’ prices. Certain long-dated securities are priced based on third party pricing services, including municipal securities and foreign government/government agencies, as well as bank loans. Primary inputs for these long-dated securities are consistent with the typical inputs used in Level 1 and Level 2 measurements noted above, but include benchmark interest rate or credit spread assumptions that are not observable in the marketplace. Also included in Level 3 are certain derivative instruments that either have significant unobservable inputs or are valued based on broker quotations. Significant inputs for these derivative contracts primarily include the typical inputs used in the Level 1 and Level 2 measurements noted above, but also may include the following:

	•		Credit derivatives- Significant unobservable inputs may include credit correlation and swap yield curve and credit curve extrapolation beyond observable limits.
	•		Equity derivatives – Significant unobservable inputs may include equity volatility.
	•		Interest rate contracts – Significant unobservable inputs may include swap yield curve extrapolation beyond observable limits and interest rate volatility.

Product Derivatives

The Company currently offers certain variable annuity products with a GMWB riders in the U.S., and formerly offered such products in the U.K. The Company has also assumed, through reinsurance, from HLIKK GMIB, GMWB and GMAB. As of October 1, 2009 the Company has subsequently ceded the GMWB and assumed reinsurance from HLIKK to an affiliated captive reinsurer. The GMWB represents an embedded derivative in the variable annuity contract. 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 Condensed Consolidated Balance Sheets, is carried at fair value with changes in fair value reported in net realized capital gains and losses. The Company’s GMWB liability is carried at fair value and reported in other policyholder funds.

In valuing the embedded derivative, the Company attributes to the derivative a portion of the expected fees to be collected over the expected life of the contract from the contract holder 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 contract holder in the current period over the current period’s Attributed Fees are associated with the host variable annuity contract reported in fee income.

The reinsurance assumed on the HLIK.K. GMIB, GMWB, and GMAB and ceded to an affiliated captive reinsurer meet the characteristics of a free-standing derivative instrument. As a result, the derivative asset or liability is recorded at fair value with changes in the fair value reported in net realized capital gains and losses.

U.S. GMWB Ceded Reinsurance Derivative

The fair value of the U.S. GMWB reinsurance derivative is calculated as an aggregation of the components described in the Living Benefits Required to be Fair Valued discussion below and is modeled using significant unobservable policyholder behavior inputs, identical to those used in calculating the underlying liability, such as lapses, fund selection, resets and withdrawal utilization and risk margins.

During 2009, the Company entered into a reinsurance arrangement with an affiliated captive reinsurer to transfer a portion of its risk of loss associated with direct US GMWB and assumed HLIKK GMIB, GMWB, and GMAB. This arrangement is recognized as a derivative and carried at fair value in reinsurance recoverables. Changes in the fair value of the reinsurance agreement are reported in net realized capital gains and losses. Please see Note 10 for more information on this transaction.

Separate Account Assets

Separate account assets are primarily invested in mutual funds but also have investments in fixed maturity and equity securities. The separate account investments are valued in the same manner, and using the same pricing sources and inputs, as the fixed maturity, equity security, and short-term investments of the Company.

Living Benefits Required to be Fair Valued (in Other Policyholder Funds and Benefits Payable)