HARTFORD FINANCIAL SERVICES GROUP, INC. - Quarter Report: 2012 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________

FORM 10-Q

____________________________________

(Mark One)



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

For the quarterly period ended September 30, 2012



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

For the transition period from ____________ to ______________

Commission file number 001-13958

____________________________________

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)



Delaware		13-3317783
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Hartford Plaza, Hartford, Connecticut 06155

(Address of principal executive offices) (Zip Code)

(860) 547-5000

(Registrant’s telephone number, including area code)



Indicate by check mark:	Yes	No

• 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.	ý	¨

• 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).	ý	¨

• whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨



• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)	¨	ý

As of October 26, 2012, there were outstanding 436,307,932 shares of Common Stock, $0.01 par value per share, of the registrant.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

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Item	Description	Page

	Part I. FINANCIAL INFORMATION

1.	Financial Statements

	Report of Independent Registered Public Accounting Firm	5

	Condensed Consolidated Statements of Operations — For the Three and Nine Months Ended September 30, 2012 and 2011	6

	Condensed Consolidated Statements of Comprehensive Income — For the Three and Nine Months Ended September 30, 2012 and 2011	7

	Condensed Consolidated Balance Sheets — As of September 30, 2012 and December 31, 2011	8

	Condensed Consolidated Statements of Changes in Stockholders’ Equity — For the Nine Months Ended September 30, 2012 and 2011	9

	Condensed Consolidated Statements of Cash Flows — For the Nine Months Ended September 30, 2012 and 2011	10

	Notes to Condensed Consolidated Financial Statements	11

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	68

3.	Quantitative and Qualitative Disclosures About Market Risk	134

4.	Controls and Procedures	134

	Part II. OTHER INFORMATION

1.	Legal Proceedings	135

1A.	Risk Factors	136

2.	Unregistered Sales of Equity Securities and Use of Proceeds	136

6.	Exhibits	136

	Signature	137
	Exhibits Index	138

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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, legislative and other 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 The Hartford Financial Services Group, Inc. and its subsidiaries (collectively, the “Company” or “The Hartford”). Future developments may not be in line with management’s expectations or may 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 Hartford’s 2011 Form 10-K Annual Report; and Part II, Item IA, Risk Factors in The Hartford's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012 and June 30, 2012. These important risks and uncertainties include:

•

challenges related to the Company’s current operating environment, including continuing uncertainty about the strength and speed of the recovery in the United States and other key economies and the impact of governmental stimulus and austerity initiatives, sovereign credit concerns, including the potential consequences associated with recent and further potential downgrades to the credit ratings of debt issued by the United States government or European sovereigns and other adverse developments on financial, commodity and credit markets and consumer spending and investment, including in respect of Europe, and the effect of these events on our returns in our life and property and casualty investment portfolios and our hedging costs associated with our variable annuities business;

•

the risks, challenges and uncertainties associated with our March 21, 2012 announcement that we will focus on our Property and Casualty, Group Benefits and Mutual Fund businesses, place our Individual Annuity business into runoff and pursue sales or other strategic alternatives for the Individual Life, Woodbury Financial Services and Retirement Plans businesses and related implementation plans and goals and objectives, as set forth in our Current Report on Form 8-K dated March 21, 2012;

•

the success of our initiatives relating to the realignment of our business, including the continuing realignment of our hedge program for our variable annuity business, and plans to improve the profitability and long-term growth prospects of our key divisions, including through opportunistic acquisitions or divestitures or other actions or initiatives, and the impact of regulatory or other constraints on our ability to complete these initiatives and deploy capital among our businesses as and when planned;


•	market risks associated with our business, including changes in interest rates, credit spreads, equity prices, market volatility and foreign exchange rates, and implied volatility levels, as well as continuing uncertainty in key sectors such as the global real estate market;


•	the impact on our investment portfolio if our investment portfolio is concentrated in any particular segment of the economy;


•	volatility in our earnings and potential material changes to our results resulting from our adjustment of our risk management program to emphasize protection of statutory surplus and cash flows;


•	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 rating 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 changes in 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;

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•	the possibility of unfavorable loss development including with respect to long-tailed exposures;


•	the difficulty in predicting the Company’s potential exposure for asbestos and environmental claims;


•	the possibility of a pandemic, earthquake, or other natural or man-made disaster that may adversely affect our businesses and cost and availability of reinsurance;


•	weather and other natural physical events, including the severity and frequency of storms, hail, winter storms, hurricanes and tropical storms, as well as climate change and its potential impact on weather patterns;


•	the response of reinsurance companies under reinsurance contracts and the availability, pricing and adequacy of reinsurance to protect the Company against losses;


•	actions by our competitors, many of which are larger or have greater financial resources than we do;


•	the Company’s ability to distribute its products through distribution channels, both current and future;

•

the cost and other effects of increased regulation as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), which, among other effects, has resulted in the establishment of a newly created Financial Services Oversight Council with the power to designate “systemically important” institutions, will require central clearing of, and/or impose new margin and capital requirements on, derivatives transactions, and created a new “Federal Insurance Office” within the U.S. Department of the Treasury (“Treasury”);


•	unfavorable judicial or legislative developments;


•	the uncertain effects of emerging claim and coverage issues;

•

the potential effect of other 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 or changes in U.S. federal or other tax laws that affect the relative attractiveness of our investment products;


•	regulatory limitations on the ability of the Company and certain of its subsidiaries to declare and pay dividends, including dividends associated with the proceeds from a sale of any of our life businesses;


•	the Company’s ability to effectively price its property and casualty policies, including its ability to obtain regulatory consents to pricing actions or to non-renewal or withdrawal of certain product lines;


•	the Company’s ability to maintain the availability of its systems and safeguard the security of its data in the event of a disaster, cyber or other information security incident or other unanticipated event;


•	the risk that our framework for managing business risks may not be effective in mitigating material risk and loss to the Company;


•	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; and


•	other factors described in such forward-looking statements.

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

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

The Hartford Financial Services Group, Inc.

Hartford, Connecticut

We have reviewed the accompanying condensed consolidated balance sheet of The Hartford Financial Services Group, Inc. and subsidiaries (the "Company") as of September 30, 2012, and the related condensed consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2012 and 2011 and changes in stockholders' equity, and cash flows for the nine-month periods ended September 30, 2012 and 2011. 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, 2011, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for the year then ended prior to retrospective adjustment for the adoption of Accounting Standards Update (“ASU”) No. 2010-26 Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, (not presented herein); and in our report dated February 24, 2012 (which report includes an explanatory paragraph relating to the Company's change in its method of accounting and reporting for variable interest entities and embedded credit derivatives as required by accounting guidance adopted in 2010, and for other-than-temporary impairments as required by accounting guidance adopted in 2009), we expressed an unqualified opinion on those consolidated financial statements. We also audited the adjustments described in Note 1 that were applied to retrospectively adjust the December 31, 2011 consolidated balance sheet of the Company (not presented herein). In our opinion, such adjustments are appropriate and have been properly applied to the previously issued consolidated balance sheet in deriving the accompanying retrospectively adjusted condensed consolidated balance sheet as of December 31, 2011.

DELOITTE & TOUCHE LLP

Hartford, Connecticut

November 1, 2012

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

Condensed Consolidated Statements of Operations



	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions, except for per share data)	2012			As currently reported (see Note 1) 2011			2012			As currently reported (see Note 1) 2011
	(Unaudited)
Revenues
Earned premiums	$	3,401		$	3,518		$	10,243		$	10,582
Fee income	1,118			1,192			3,366			3,620
Net investment income (loss):
Securities available-for-sale and other	1,030			1,062			3,197			3,274
Equity securities, trading	710			(1,890		)	1,889			(1,684		)
Total net investment income (loss)	1,740			(828		)	5,086			1,590
Net realized capital gains (losses):
Total other-than-temporary impairment (“OTTI”) losses	(59		)	(71		)	(201		)	(221		)
OTTI losses recognized in other comprehensive income (“OCI”)	22			11			37			83
Net OTTI losses recognized in earnings	(37		)	(60		)	(164		)	(138		)
Net realized capital gains (losses), excluding net OTTI losses recognized in earnings	156			635			(38		)	379
Total net realized capital gains (losses)	119			575			(202		)	241
Other revenues	64			63			184			188
Total revenues	6,442			4,520			18,677			16,221
Benefits, losses and expenses
Benefits, losses and loss adjustment expenses	3,271			4,006			9,930			11,160
Benefits, losses and loss adjustment expenses – returns credited on international variable annuities	710			(1,889		)	1,888			(1,683		)
Amortization of deferred policy acquisition costs and present value of future profits	566			1,005			1,441			2,047
Insurance operating costs and other expenses	1,275			1,287			3,896			4,093
Loss on extinguishment of debt	—			—			910			—
Interest expense	109			128			348			384
Total benefits, losses and expenses	5,931			4,537			18,413			16,001
Income (loss) from continuing operations before income taxes	511			(17		)	264			220
Income tax expense (benefit)	108			(74		)	(136		)	(289		)
Income from continuing operations, net of tax	403			57			400			509
Income (loss) from discontinued operations, net of tax	(2		)	3			(4		)	85
Net income	$	401		$	60		$	396		$	594
Preferred stock dividends	10			10			31			31
Net income available to common shareholders	$	391		$	50		$	365		$	563
Income from continuing operations, net of tax, available to common shareholders per common share
Basic	$	0.90		$	0.11		$	0.84		$	1.07
Diluted	$	0.83		$	0.10		$	0.79		$	0.99
Net income available to common shareholders per common share
Basic	$	0.90		$	0.11		$	0.83		$	1.27
Diluted	$	0.83		$	0.11		$	0.78		$	1.17
Cash dividends declared per common share	$	0.10		$	0.10		$	0.30		$	0.30

See Notes to Condensed Consolidated Financial Statements.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

Condensed Consolidated Statements of Comprehensive Income



	Three Months Ended September 30,					Nine Months Ended September 30,
(In millions)	2012			As currently reported (see Note 1) 2011		2012		As currently reported (see Note 1) 2011
	(Unaudited)
Comprehensive Income
Net income	$	401		$	60	$	396	$	594
Other comprehensive income (loss):
Change in net unrealized gain on securities	882			914		1,870		1,801
Change in OTTI losses recognized in other comprehensive income	35			10		40		11
Change in net gain (loss) on cash-flow hedging instruments	(1		)	154		27		157
Change in foreign currency translation adjustments	88			78		8		104
Change in pension and other postretirement plan adjustments	35			24		99		72
Total other comprehensive income	1,039			1,180		2,044		2,145
Total comprehensive income	$	1,440		$	1,240	$	2,440	$	2,739

See Notes to Condensed Consolidated Financial Statements.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

Condensed Consolidated Balance Sheets



(In millions, except for share and per share data)	September 30, 2012			As currently reported (see Note 1) December 31, 2011
	(Unaudited)
Assets
Investments:
Fixed maturities, available-for-sale, at fair value (amortized cost of $80,690 and $78,978) (includes variable interest entity assets, at fair value, of $265 and $153)	$	86,726		$	81,809
Fixed maturities, at fair value using the fair value option (includes variable interest entity assets of $344 and $338)	1,355			1,328
Equity securities, trading, at fair value (cost of $30,454 and $32,928)	29,980			30,499
Equity securities, available-for-sale, at fair value (cost of $865 and $1,056)	878			921
Mortgage loans (net of allowances for loan losses of $83 and $102)	6,863			5,728
Policy loans, at outstanding balance	2,000			2,001
Limited partnerships and other alternative investments (includes variable interest entity assets of $6 and $7)	3,039			2,532
Other investments	1,540			2,394
Short-term investments (includes variable interest entity assets, at fair value, of $1 as of September 30, 2012)	4,787			7,736
Total investments	137,168			134,948
Cash	2,705			2,581
Premiums receivable and agents’ balances, net	3,646			3,446
Reinsurance recoverables, net	4,726			4,768
Deferred policy acquisition costs and present value of future profits	5,947			6,556
Deferred income taxes, net	1,248			2,131
Goodwill	1,006			1,006
Property and equipment, net	979			1,029
Other assets	3,124			2,274
Separate account assets	148,369			143,870
Total assets	$	308,918		$	302,609
Liabilities
Reserve for future policy benefits and unpaid losses and loss adjustment expenses	$	40,992		$	41,016
Other policyholder funds and benefits payable	43,086			45,612
Other policyholder funds and benefits payable – international variable annuities	29,938			30,461
Unearned premiums	5,370			5,222
Short-term debt	320			—
Long-term debt	6,806			6,216
Consumer notes	190			314
Other liabilities (includes variable interest entity liabilities of $420 and $471)	10,477			8,412
Separate account liabilities	148,369			143,870
Total liabilities	285,548			281,123
Commitments and Contingencies (Note 9)
Stockholders’ Equity
Preferred stock, $0.01 par value — 50,000,000 shares authorized, 575,000 shares issued, liquidation preference $1,000 per share	556			556
Common stock, $0.01 par value — 1,500,000,000 shares authorized, 469,746,638 and 469,750,171 shares issued	5			5
Additional paid-in capital	10,032			10,391
Retained earnings	11,235			11,001
Treasury stock, at cost — 33,680,760 and 27,211,115 shares	(1,753		)	(1,718		)
Accumulated other comprehensive income, net of tax	3,295			1,251
Total stockholders’ equity	23,370			21,486
Total liabilities and stockholders’ equity	$	308,918		$	302,609

See Notes to Condensed Consolidated Financial Statements.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity



	Nine Months Ended September 30,
(In millions, except for share data)	2012			As currently reported (see Note 1) 2011
	(Unaudited)
Preferred Stock	$	556		$	556
Common Stock	5			5
Additional Paid-in Capital, beginning of period	10,391			10,448
Repurchase of warrants	(300		)	—
Issuance of shares under incentive and stock compensation plans	(58		)	(43		)
Tax expense on employee stock options and awards	(1		)	(10		)
Additional Paid-in Capital, end of period	10,032			10,395
Retained Earnings, beginning of period	11,001			10,509
Net income	396			594
Dividends on preferred stock	(31		)	(31		)
Dividends declared on common stock	(131		)	(134		)
Retained Earnings, end of period	11,235			10,938
Treasury Stock, at Cost, beginning of period	(1,718		)	(1,774		)
Treasury stock acquired	(149		)	—
Issuance of shares under incentive and stock compensation plans from treasury stock	121			94
Return of shares under incentive and stock compensation plans and other to treasury stock	(7		)	(7		)
Treasury Stock, at Cost, end of period	(1,753		)	(1,687		)
Accumulated Other Comprehensive Income (Loss), net of tax, beginning of period	1,251			(990		)
Total other comprehensive income	2,044			2,145
Accumulated Other Comprehensive Income (Loss), net of tax, end of period	3,295			1,155
Total Stockholders’ Equity	$	23,370		$	21,362
Preferred Shares Outstanding (in thousands)	575			575
Common Shares Outstanding, at beginning of period (in thousands)	442,539			444,549
Treasury stock acquired	(8,045		)	—
Issuance of shares under incentive and stock compensation plans	1,905			1,203
Return of shares under incentive and stock compensation plans and other to treasury stock	(333		)	(238		)
Common Shares Outstanding, at end of period	436,066			445,514

See Notes to Condensed Consolidated Financial Statements.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

Condensed Consolidated Statements of Cash Flows



	Nine Months Ended September 30,
(In millions)	2012			As currently reported (see Note 1) 2011
	(Unaudited)
Operating Activities
Net income	$	396		$	594
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of deferred policy acquisition costs and present value of future profits	1,441			2,047
Additions to deferred policy acquisition costs and present value of future profits	(1,251		)	(1,271		)
Change in reserve for future policy benefits and unpaid losses and loss adjustment expenses and unearned premiums	153			1,309
Change in reinsurance recoverables	(332		)	(31		)
Change in receivables and other assets	(442		)	(452		)
Change in payables and accruals	778			(141		)
Change in accrued and deferred income taxes	(118		)	(449		)
Net realized capital losses	202			(360		)
Net disbursements from investment contracts related to policyholder funds—international variable annuities	(523		)	(2,059		)
Net decrease in equity securities, trading	519			2,050
Depreciation and amortization	366			532
Loss on extinguishment of debt	910			—
Other operating activities, net	113			(145		)
Net cash provided by operating activities	2,212			1,624
Investing Activities
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	35,928			26,124
Fixed maturities, fair value option	191			40
Equity securities, available-for-sale	213			130
Mortgage loans	332			366
Partnerships	124			151
Payments for the purchase of:
Fixed maturities, available-for-sale	(34,556		)	(26,513		)
Fixed maturities, fair value option	(182		)	(664		)
Equity securities, available-for-sale	(74		)	(200		)
Mortgage loans	(1,467		)	(1,503		)
Partnerships	(728		)	(594		)
Proceeds from business sold	—			278
Derivatives, net	(1,593		)	1,603
Change in policy loans, net	1			5
Other investing activities, net	(51		)	(119		)
Net cash used for investing activities	(1,862		)	(896		)
Financing Activities
Deposits and other additions to investment and universal life-type contracts	8,907			8,419
Withdrawals and other deductions from investment and universal life-type contracts	(18,373		)	(16,123		)
Net transfers from separate accounts related to investment and universal life-type contracts	8,406			7,661
Repayments at maturity or settlement of consumer notes	(124		)	(33		)
Net increase (decrease) in securities loaned or sold under agreements to repurchase	1,585			—
Repurchase of warrants	(300		)	—
Repayment of long-term debt	(2,133		)	—
Proceeds from the issuance of long-term debt	2,123			—
Proceeds from net issuance of shares under incentive and stock compensation plans, excess tax benefit and other	10			6
Treasury stock acquired	(154		)	—
Dividends paid on preferred stock	(32		)	(32		)
Dividends paid on common stock	(132		)	(107		)
Changes in bank deposits and payments on bank advances	—			(30		)
Net cash provided by (used for) financing activities	(217		)	(239		)
Foreign exchange rate effect on cash	(9		)	38
Net increase in cash	124			527
Cash – beginning of period	2,581			2,062
Cash – end of period	$	2,705		$	2,589
Supplemental Disclosure of Cash Flow Information
Income taxes paid (received)	$	(448	)	$	245
Interest paid	$	314		$	340
Supplemental Disclosure of Non-Cash Investing Activity
Conversion of fixed maturities, available-for-sale to equity securities, available-for-sale	$	67		$	—

See Notes to Condensed Consolidated Financial Statements

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in millions, except for per share data, unless otherwise stated)

(Unaudited)

1. Basis of Presentation and Accounting Policies

Basis of Presentation

The Hartford Financial Services Group, Inc. is a holding company for insurance and financial services subsidiaries that provide investment products and life and property and casualty insurance to both individual and business customers in the United States (collectively, “The Hartford”, the “Company”, “we” or “our”). Also, The Hartford continues to administer business previously sold in Japan and the U.K.

On March 21, 2012, the Company announced the completion of its businesses and strategy evaluation. As a result of this review, the Company announced that it will focus on its Property and Casualty, Group Benefits and Mutual Fund businesses, place its existing Individual Annuity business into runoff and pursue sales or other strategic alternatives for the Individual Life and Retirement Plans businesses and Woodbury Financial Services, Inc. ("Woodbury Financial Services", "WFS"), an indirect wholly-owned subsidiary.

On April 26, 2012, the Company announced it had entered into an agreement to sell its U.S. individual annuity new business capabilities to a third party. A purchase and sale agreement was entered into with Forethought Financial Group in mid-June 2012 and the anticipated transaction closing date is in late 2012 or early 2013. Effective May 1, 2012, all new U.S. annuity policies sold by the Company are reinsured to Forethought Life Insurance Company. The Company will cease the sale of such annuity policies and the reinsurance agreement will terminate as to new business in the second quarter of 2013. The reinsurance agreement has no impact on in-force policies issued on or before April 27, 2012.

On July 31, 2012, the Company entered into a definitive agreement to sell Woodbury Financial Services to AIG Advisor Group, Inc. ("AIG Advisor Group"), a subsidiary of American International Group, Inc. The transaction is expected to close by the end of 2012, pending regulatory approval. The WFS broker-dealer business is included in the Corporate reporting category.

On September 4, 2012, the Company announced it had entered into a definitive agreement to sell its Retirement Plans business to Massachusetts Mutual Life Insurance Company ("MassMutual") for a cash ceding commission of $400, subject to a downward adjustment at closing of up to $51 based upon net flows adjusted for retirement plan discontinuances. The sale, which is structured as a reinsurance transaction, is expected to close in the fourth quarter of 2012 or the first quarter of 2013, subject to regulatory approvals and customary closing conditions. As part of the agreement, the Company will continue to sell retirement plans during a transition period, and MassMutual will assume all expenses and risk for these sales through the reinsurance agreement.

On September 27, 2012, the Company announced it had entered into a definitive agreement to sell its Individual Life insurance business to Prudential Financial, Inc. ("Prudential") for cash consideration of $615 consisting primarily of a ceding commission. The sale, which is structured as a reinsurance transaction, is expected to close in the first quarter of 2013, subject to regulatory approvals and customary closing conditions. As part of the agreement, the Company will continue to sell life insurance products and riders during a transition period, and Prudential will assume all expenses and risk for these sales through a reinsurance agreement.

The Condensed 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. These Condensed Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in The Hartford’s 2011 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.

The accompanying Condensed Consolidated Financial Statements and Notes as of September 30, 2012, and for the three and nine months ended September 30, 2012 and 2011 are unaudited. These financial statements reflect all adjustments (generally 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.

On January 1, 2012, the Company retrospectively adopted Accounting Standards Update (“ASU”) No. 2010-26, Financial Services – Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts which clarifies the definition of policy acquisition costs that are eligible for deferral. Previously reported financial information has been revised to reflect the effect of the Company’s adoption of this accounting standard. As a result of this accounting change, total stockholders’ equity as of January 1, 2011, decreased by approximately $1.6 billion, after-tax from $20.3 billion, as previously reported, to $18.7 billion due to a reduction of the Company’s deferred acquisition cost asset ("DAC") balance related to certain costs that do not meet the provisions of the revised standard.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Basis of Presentation and Accounting Policies (continued)

The effect of adoption of this accounting standard on the Company’s Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Operations was as follows:



	December 31, 2011
	As previously reported		Effect of change			As currently reported
Deferred policy acquisition costs and present value of future profits	$	8,744	$	(2,188	)	$	6,556
Deferred income taxes, net	$	1,398	$	733		$	2,131
Other liabilities	$	8,443	$	(31	)	$	8,412
Retained earnings	$	12,519	$	(1,518	)	$	11,001
Accumulated other comprehensive income, net of tax	$	1,157	$	94		$	1,251
Total stockholders’ equity	$	22,910	$	(1,424	)	$	21,486



	Three Months Ended September 30, 2011
	As previously reported			Effect of change			As currently reported
Amortization of deferred policy acquisition costs and present value of future profits	$	1,320		$	(315	)	$	1,005
Insurance operating costs and other expenses	$	1,059		$	228		$	1,287
Income (loss) from continuing operations before income taxes	$	(104	)	$	87		$	(17	)
Income tax expense (benefit)	$	(101	)	$	27		$	(74	)
Net income	$	—		$	60		$	60
Net income (loss) available to common shareholders	$	(10	)	$	60		$	50
Income (loss) from continuing operations, net of tax, available to common shareholders per common share:
Basic	$	(0.03	)	$	0.14		$	0.11
Diluted	$	(0.03	)	$	0.13		$	0.10
Net income (loss) available to common shareholders per common share:
Basic	$	(0.02	)	$	0.13		$	0.11
Diluted	$	(0.02	)	$	0.13		$	0.11



	Nine Months Ended September 30, 2011
	As previously reported			Effect of change			As currently reported
Amortization of deferred policy acquisition costs and present value of future profits	$	2,819		$	(772	)	$	2,047
Insurance operating costs and other expenses	$	3,403		$	690		$	4,093
Income from continuing operations before income taxes	$	138		$	82		$	220
Income tax expense (benefit)	$	(312	)	$	23		$	(289	)
Net income	$	535		$	59		$	594
Net income available to common shareholders	$	504		$	59		$	563
Income from continuing operations, net of tax, available to common shareholders per common share:
Basic	$	0.94		$	0.13		$	1.07
Diluted	$	0.87		$	0.12		$	0.99
Net income available to common shareholders per common share:
Basic	$	1.13		$	0.14		$	1.27
Diluted	$	1.05		$	0.12		$	1.17

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Basis of Presentation and Accounting Policies (continued)

Consolidation

The Condensed Consolidated Financial Statements include the accounts of The Hartford Financial Services Group, Inc., 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 the Company has significant influence over the operating and financing decisions but are not required to consolidate are reported using the equity method. Material intercompany transactions and balances between The Hartford and its subsidiaries and affiliates have been eliminated. For further discussions on VIEs see Note 5 of the Notes to Condensed Consolidated Financial Statements.

Discontinued Operations

The results of operations of a component of the Company that either has been disposed of or is classified as held-for-sale are reported in discontinued operations if the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the Company as a result of the disposal transaction and the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction.

The Company is presenting the operations of certain businesses that meet the criteria for reporting as discontinued operations. Amounts for prior periods have been retrospectively reclassified. See Note 12 of the Notes to Condensed Consolidated Financial Statements for information on the specific subsidiaries and related impacts.

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 property and casualty insurance product reserves, net of reinsurance; 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; pension and other postretirement benefit obligations; 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 Condensed Consolidated Financial Statements.

Mutual Funds

The Company maintains a retail mutual fund operation whereby the Company provides investment management, administrative and distribution services to The Hartford Mutual Funds, Inc. and The Hartford Mutual Funds II, Inc. (collectively, “mutual funds”). These mutual funds are registered with the Securities and Exchange Commission (“SEC”) under the Investment Company Act of 1940. The mutual funds are owned by the shareholders of those funds and not by the Company. As such, the mutual fund assets and liabilities and related investment returns are not reflected in the Company’s Condensed Consolidated Financial Statements since they are not assets, liabilities and operations of the Company.

Reclassifications

Certain reclassifications have been made to prior year financial information to conform to the current year presentation.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in The Hartford’s 2011 Form 10-K Annual Report, which should be read in conjunction with these accompanying Condensed Consolidated Financial Statements.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Basis of Presentation and Accounting Policies (continued)

Income Taxes

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Tax expense (benefit) at U.S. Federal statutory rate	$	179		$	(6	)	$	92		$	77
Tax-exempt interest	(35		)	(37		)	(106		)	(112		)
Dividends-received deduction	(28		)	(42		)	(91		)	(169		)
Valuation allowance	(3		)	6			(17		)	(83		)
Other	(5		)	5			(14		)	(2		)
Income tax expense (benefit)	$	108		$	(74	)	$	(136	)	$	(289	)

The current year separate account dividends-received deduction (“DRD”) is estimated based on information from the prior year-end, adjusted for current year equity market performance and other appropriate factors, including estimated levels of corporate dividend payments and level of policy owner equity account balances. 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. The Company evaluates its DRD computations on a quarterly basis.

The Company’s unrecognized tax benefits were unchanged during the three and nine months ended September 30, 2012, remaining at $48 as of September 30, 2012. This entire amount, if it were recognized, would affect the effective tax rate in the period it is released.

The Internal Revenue Service (“IRS”) routinely audits the Company's federal income tax returns. Audits have concluded for all years through 2006. The audit of the years 2007—2009 commenced during 2010 and is expected to conclude in 2013. In addition, for the nine months ended September 30, 2011, the Company recorded a tax benefit of $52 as a result of a resolution of a tax matter with the IRS for the computation of DRD for years 1998, 2000 and 2001.

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, which related predominantly to foreign net operating losses, was $67 as of September 30, 2012 and $84 as of December 31, 2011. In evaluating the need for a valuation allowance, management considers many factors, including: future taxable temporary differences reversals, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in open carry back years, and other tax planning strategies. Based on the availability of additional tax planning strategies identified during the nine months ended September 30, 2011, the Company released $86, or 100%, of the valuation allowance associated with realized capital losses.

For federal income tax purposes, the tax law distinguishes between assets that are treated as ordinary versus capital in nature. The Company’s September 30, 2012 $1.2 billion net deferred tax asset includes $2.7 billion of assets relating to items treated as ordinary and a $1.5 billion net deferred tax liability for items classified as capital. The $1.5 billion for capital items is comprised of $665 of gross deferred tax assets related to realized capital losses and $2.1 billion of gross deferred tax liabilities related to net unrealized capital gains.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Earnings (Loss) Per Common Share

The following table presents a reconciliation of net income and shares used in calculating basic earnings (loss) per common share to those used in calculating diluted earnings (loss) per common share.



	Three Months Ended September 30,					Nine Months Ended September 30,
(In millions, except for per share data)	2012			2011		2012			2011
Earnings
Income from continuing operations
Income from continuing operations, net of tax	$	403		$	57	$	400		$	509
Less: Preferred stock dividends	10			10		31			31
Income from continuing operations, net of tax, available to common shareholders	393			47		369			478
Add: Dilutive effect of preferred stock dividends	10			—		—			—
Income from continuing operations, net of tax, available to common shareholders and assumed conversion of preferred shares	$	403		$	47	$	369		$	478
Income (loss) from discontinued operations, net of tax	$	(2	)	$	3	$	(4	)	$	85
Net income
Net income	$	401		$	60	$	396		$	594
Less: Preferred stock dividends	10			10		31			31
Net income available to common shareholders	391			50		365			563
Add: Dilutive effect of preferred stock dividends	10			—		—			—
Net income available to common shareholders and assumed conversion of preferred shares	$	401		$	50	$	365		$	563
Shares
Weighted average common shares outstanding, basic	435.8			445.3		438.2			445.0
Dilutive effect of warrants	23.8			27.4		25.1			34.8
Dilutive effect of stock compensation plans	2.1			0.7		1.9			1.2
Dilutive effect of mandatory convertible preferred shares	21.0			—		—			—
Weighted average shares outstanding and dilutive potential common shares	482.7			473.4		465.2			481.0
Earnings (loss) per common share
Basic
Income from continuing operations, net of tax, available to common shareholders	$	0.90		$	0.11	$	0.84		$	1.07
Income from discontinued operations, net of tax	—			—		(0.01		)	0.20
Net income available to common shareholders	$	0.90		$	0.11	$	0.83		$	1.27
Diluted
Income from continuing operations, net of tax, available to common shareholders	$	0.83		$	0.10	$	0.79		$	0.99
Income from discontinued operations, net of tax	—			0.01		(0.01		)	0.18
Net income available to common shareholders	$	0.83		$	0.11	$	0.78		$	1.17

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Earnings (Loss) Per Common Share (continued)

For the nine months ended September 30, 2012, 20.9 million shares for mandatory convertible preferred shares, along with the related dividend adjustment, would have been antidilutive to the earnings per share calculations. Assuming the impact of the mandatory convertible preferred shares was not antidilutive, weighted average common shares outstanding and dilutive potential common shares would have totaled 486.1 million for the nine months ended September 30, 2012.

For the three and nine months ended September 30, 2011, 20.7 million and 20.8 million shares, respectively, for mandatory convertible preferred shares, along with the related dividend adjustment, would have been antidilutive to the earnings per share calculations. Assuming the impact of the mandatory convertible preferred shares was not antidilutive, weighted average common shares outstanding and dilutive potential common shares would have totaled 494.1 million and 501.8 million, for the three and nine months ended September 30, 2011, respectively.

The declaration of a quarterly common stock dividend of $0.10 during the first, second, and third quarters of 2012 triggered a provision in The Hartford’s Warrant Agreement with The Bank of New York Mellon, relating to warrants to purchase common stock issued in connection with the Company’s participation in the Capital Purchase Program, resulting in an adjustment to the warrant exercise price. The warrant exercise price at September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011 was $9.622 $9.649, $9.676 and $9.699, respectively.

In addition, the declaration of a quarterly common stock dividend in the first quarter of 2012 triggered a provision in The Hartford’s Fixed Conversion Rate Agreement, relating to the Company’s mandatory convertible preferred stock, resulting in an adjustment to the minimum conversion rate to 29.8831 from 29.536 shares of Common Stock per share of Series F Preferred Stock and the maximum conversion rate to 36.4596 from 36.036 shares of Common Stock per share of Series F Preferred Stock.

On March 30, 2012 the Company entered into an agreement with Allianz and repurchased the outstanding Series B and Series C warrants. As a result, Allianz no longer holds potentially dilutive outstanding warrants. See Note 15 for additional information regarding the warrant repurchase.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Segment Information

The Company is organized into four divisions: Commercial Markets, Consumer Markets, Wealth Management and Runoff Operations and conducts business principally in eight reporting segments, as well as a Corporate category. Starting in the second quarter of 2012, financial results for the former Individual Annuity segment have been reported in the Life Other Operations segment and segment data for prior reporting periods has been adjusted accordingly. The Company’s reporting segments as of September 30, 2012 are as follows:

Commercial Markets

Property & Casualty Commercial

Property & Casualty Commercial provides workers’ compensation, property, automobile, marine, livestock, liability and umbrella coverages primarily throughout the United States (“U.S.”), along with a variety of customized insurance products and risk management services including professional liability, fidelity, surety, and specialty casualty coverages.

Group Benefits

Group Benefits provides employers, associations, affinity groups and financial institutions with group life, accident and disability coverage, along with other products and services, including voluntary benefits, and group retiree health.

Consumer Markets

Consumer Markets provides standard automobile, homeowners and home-based business coverages to individuals across the U.S., including a special program designed exclusively for members of AARP. Consumer Markets also operates a member contact center for health insurance products offered through the AARP Health program.

Wealth Management

Individual Life

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

Retirement Plans

Retirement Plans provides products and services to corporations pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), and products and services to municipalities and not-for-profit organizations under Sections 457 and 403(b) of the Code, collectively referred to as government plans.

Mutual Funds

Mutual Funds offers retail mutual funds, investment-only mutual funds and college savings plans under Section 529 of the Code (collectively referred to as non-proprietary) and proprietary mutual funds supporting insurance products issued by The Hartford.

Runoff Operations

Life Other Operations

Life Other Operations includes the Company's management of certain life operations that have discontinued writing new business encompassing U.S. individual, international (primarily in Japan and Europe) and institutional annuity products and private placement life insurance.

Property & Casualty Other Operations

Property & Casualty Other Operations includes the Company’s management of certain property and casualty operations that have discontinued writing new business and substantially all of the Company’s asbestos and environmental exposures.

Corporate

The Company includes in the Corporate category the Company’s debt financing and related interest expense, as well as other capital raising activities; banking operations; certain fee income and commission expenses associated with sales of non-proprietary products by broker-dealer subsidiaries; and certain purchase accounting adjustments and other charges not allocated to the segments.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Segment Information (continued)

Financial Measures and Other Segment Information

Certain transactions between segments occur during the year that primarily relate to tax settlements, insurance coverage, expense reimbursements, services provided, security transfers and capital contributions. Also, one segment may purchase group annuity contracts from another to fund pension costs and annuities to settle casualty claims. In addition, certain inter-segment transactions occur that relate to interest income on allocated surplus. Consolidated net investment income is unaffected by such transactions.

The following table presents net income (loss) for each reporting segment, as well as the Corporate category.



	Three Months Ended September 30,						Nine Months Ended September 30,
Net income (loss)	2012			2011			2012			2011
Property & Casualty Commercial	$	164		$	53		$	502		$	494
Group Benefits	30			25			83			77
Consumer Markets	94			(16		)	152			(80		)
Individual Life	11			(9		)	66			55
Retirement Plans	(7		)	(23		)	9			9
Mutual Funds	18			24			56			79
Life Other Operations	145			105			344			439
Property & Casualty Other Operations	24			8			36			(135		)
Corporate	(78		)	(107		)	(852		)	(344		)
Net income	$	401		$	60		$	396		$	594

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Segment Information (continued)

The following table presents revenues by product line for each reporting segment, as well as the Corporate category.



	Three Months Ended September 30,					Nine Months Ended September 30,
Revenues	2012		2011			2012			2011
Earned premiums, fees, and other considerations
Property & Casualty Commercial
Workers’ compensation	$	762	$	721		$	2,232		$	2,071
Property	127		129			378			398
Automobile	148		146			440			437
Package business	290		289			871			857
Liability	142		135			419			404
Fidelity and surety	53		55			156			164
Professional liability	60		78			195			237
Total Property & Casualty Commercial	1,582		1,553			4,691			4,568
Group Benefits
Group disability	426		467			1,308			1,460
Group life and accident	468		501			1,425			1,529
Other	47		48			146			147
Total Group Benefits	941		1,016			2,879			3,136
Consumer Markets
Automobile	632		649			1,894			1,978
Homeowners	280		281			831			847
Total Consumer Markets [1]	912		930			2,725			2,825
Individual Life
Variable life	82		122			254			304
Universal life	112		109			360			324
Term / Other life	13		13			40			37
Total Individual Life	207		244			654			665
Retirement Plans
401(k)	79		82			244			254
Government plans	12		11			37			37
Total Retirement Plans	91		93			281			291
Mutual Funds
Non-Proprietary	133		138			403			461
Proprietary	15		15			44			45
Total Mutual Funds	148		153			447			506
Life Other Operations	593		666			1,792			2,050
Property & Casualty Other Operations	—		—			(2		)	—
Corporate	45		55			142			161
Total earned premiums, fees, and other considerations	4,519		4,710			13,609			14,202
Net investment income:
Securities available-for-sale and other	1,030		1,062			3,197			3,274
Equity securities, trading	710		(1,890		)	1,889			(1,684		)
Total net investment income (loss)	1,740		(828		)	5,086			1,590
Net realized capital gains (losses)	119		575			(202		)	241
Other revenues	64		63			184			188
Total revenues	$	6,442	$	4,520		$	18,677		$	16,221


[1]	For the three months ended September 30, 2012 and 2011, AARP members accounted for earned premiums of $679 and $687, respectively. For the nine months ended September 30, 2012 and 2011, AARP members accounted for earned premiums of $2.0 billion and $2.1 billion, respectively.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements

The following financial instruments are carried at fair value in the Company’s Condensed Consolidated Financial Statements: fixed maturity and equity securities, available-for-sale (“AFS”), fixed maturities at fair value using fair value option (“FVO”), 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 or 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 securities, open-ended mutual funds reported in separate account assets 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, including those reported in separate account assets, are model priced by vendors using observable inputs and are classified within Level 2.

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, guaranteed product embedded and reinsurance derivatives and other complex derivative securities. Because Level 3 fair values, by their nature, contain one or more significant unobservable 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. As of September 30, 2012, the amount of transfers from Level 1 to Level 2 was $2.0 billion , which represented previously on-the-run U.S. Treasury securities that are now off-the-run, and there were no transfers from Level 2 to Level 1. 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 because these securities are primarily priced by independent brokers and/or within illiquid markets.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)

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.



	September 30, 2012
	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
Asset-backed securities (“ABS”)	$	2,758		$	—		$	2,443		$	315
Collateralized debt obligations ("CDOs")	3,072			—			2,142			930
Commercial mortgage-backed securities ("CMBS")	6,273			—			5,402			871
Corporate	43,433			—			41,413			2,020
Foreign government/government agencies	4,216			—			4,166			50
States, municipalities and political subdivisions (“Municipal")	14,291			—			14,087			204
Residential mortgage-backed securities ("RMBS")	7,477			—			6,185			1,292
U.S. Treasuries	5,206			497			4,709			—
Total fixed maturities	86,726			497			80,547			5,682
Fixed maturities, FVO	1,355			—			830			525
Equity securities, trading	29,980			1,946			28,034			—
Equity securities, AFS	878			334			458			86
Derivative assets
Credit derivatives	(11		)	—			(20		)	9
Equity derivatives	44			—			—			44
Foreign exchange derivatives	282			—			282			—
Interest rate derivatives	226			—			260			(34		)
U.S. guaranteed minimum withdrawal benefit ("GMWB") hedging instruments	192			—			11			181
U.S. macro hedge program	63			—			—			63
International program hedging instruments	653			—			457			196
Other derivative contracts	24			—			(1		)	25
Total derivative assets [1]	1,473			—			989			484
Short-term investments	4,787			278			4,509			—
Reinsurance recoverable for U.S. GMWB	199			—			—			199
Separate account assets [2]	142,382			102,884			38,119			1,379
Total assets accounted for at fair value on a recurring basis	$	267,780		$	105,939		$	153,486		$	8,355
Percentage of level to total	100		%	40		%	57		%	3		%
Liabilities accounted for at fair value on a recurring basis
Other policyholder funds and benefits payable
U.S guaranteed withdrawal benefits	$	(1,413	)	$	—		$	—		$	(1,413	)
International guaranteed withdrawal benefits	(37		)	—			—			(37		)
International other guaranteed living benefits	1			—			—			1
Equity linked notes	(10		)	—			—			(10		)
Total other policyholder funds and benefits payable	(1,459		)	—			—			(1,459		)
Derivative liabilities
Credit derivatives	(332		)	—			(42		)	(290		)
Equity derivatives	24			—			—			24
Foreign exchange derivatives	150			—			150			—
Interest rate derivatives	(481		)	—			(483		)	2
U.S. GMWB hedging instruments	482			—			47			435
U.S. macro hedge program	19			—			—			19
International program hedging instruments	(91		)	—			12			(103		)
Total derivative liabilities [3]	(229		)	—			(316		)	87
Other Liabilities	(43		)	—			—			(43		)
Consumer notes [4]	(2		)	—			—			(2		)
Total liabilities accounted for at fair value on a recurring basis	$	(1,733	)	$	—		$	(316	)	$	(1,417	)

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)



	December 31, 2011
	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
ABS	$	3,153		$	—		$	2,792		$	361
CDOs	2,487			—			2,119			368
CMBS	6,951			—			6,363			588
Corporate	44,011			—			41,756			2,255
Foreign government/government agencies	2,161			—			2,112			49
States, municipalities and political subdivisions (“Municipal”)	13,260			—			12,823			437
RMBS	5,757			—			4,694			1,063
U.S. Treasuries	4,029			750			3,279			—
Total fixed maturities	81,809			750			75,938			5,121
Fixed maturities, FVO	1,328			—			833			495
Equity securities, trading	30,499			1,967			28,532			—
Equity securities, AFS	921			352			476			93
Derivative assets
Credit derivatives	(24		)	—			(11		)	(13		)
Equity derivatives	31			—			—			31
Foreign exchange derivatives	519			—			519			—
Interest rate derivatives	195			—			147			48
U.S. GMWB hedging instruments	494			—			11			483
U.S. macro hedge program	357			—			—			357
International program hedging instruments	731			—			692			39
Other derivative contracts	28			—			—			28
Total derivative assets [1]	2,331			—			1,358			973
Short-term investments	7,736			750			6,986			—
Reinsurance recoverable for U.S. GMWB	443			—			—			443
Separate account assets [2]	139,432			101,644			36,757			1,031
Total assets accounted for at fair value on a recurring basis	$	264,499		$	105,463		$	150,880		$	8,156
Percentage of level to total	100		%	40		%	57		%	3		%

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)



	December 31, 2011
	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Liabilities accounted for at fair value on a recurring basis
Other policyholder funds and benefits payable
U.S guaranteed withdrawal benefits	$	(2,538	)	$	—	$	—		$	(2,538	)
International guaranteed withdrawal benefits	(66		)	—		—			(66		)
International other guaranteed living benefits	(5		)	—		—			(5		)
Equity linked notes	(9		)	—		—			(9		)
Total other policyholder funds and benefits payable	(2,618		)	—		—			(2,618		)
Derivative liabilities
Credit derivatives	(573		)	—		(25		)	(548		)
Equity derivatives	9			—		—			9
Foreign exchange derivatives	134			—		134			—
Interest rate derivatives	(527		)	—		(421		)	(106		)
U.S. GMWB hedging instruments	400			—		—			400
International program hedging instruments	19			—		23			(4		)
Total derivative liabilities [3]	(538		)	—		(289		)	(249		)
Other Liabilities	(9		)	—		—			(9		)
Consumer notes [4]	(4		)	—		—			(4		)
Total liabilities accounted for at fair value on a recurring basis	$	(3,169	)	$	—	$	(289	)	$	(2,880	)

[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 September 30, 2012 and December 31, 2011, $320 and $1.4 billion, respectively, of 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]	Approximately $6.0 billion and $4.0 billion of investment sales receivable that are not subject to fair value accounting are excluded as of September 30, 2012 and December 31, 2011, respectively.


[3]	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 4, 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.

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, 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.

The fair value process is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company that meets at least quarterly. The Valuation Committee is co-chaired by the Heads of Investment Operations and Accounting and has representation from various investment sector professionals, accounting, operations, legal, compliance and risk management. The purpose of the committee is to oversee the pricing policy and procedures by ensuring objective and reliable valuation practices and pricing of financial instruments, as well as addressing fair valuation issues and approving changes to valuation methodologies and pricing sources. There is also a Fair Value Working Group (“Working Group”) which includes the Heads of Investment Operations and Accounting, as well as other investment, operations, accounting and risk management professionals that meet monthly to review market data trends, pricing and trading statistics and results, and any proposed pricing methodology changes described in more detail in the following paragraphs.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)

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

The fair value of AFS securities, fixed maturities, FVO, equity securities, trading, and short-term investments in an active and orderly market (e.g. not distressed or forced liquidation) are 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 private placement securities for which the Company is unable to obtain a price from a third-party pricing service 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 appropriate credit spreads determined through this survey approach are based upon the issuer’s financial strength and term to maturity, utilizing an independent public security index and trade information and adjusting for the non-public nature of the securities.

The Working Group performs ongoing analysis of the prices and credit spreads received from third parties to ensure that the prices represent a reasonable estimate of the fair value. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. As a part of this analysis, the Company considers trading volume, new issuance activity and other factors to determine whether the market activity is significantly different than 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. 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 and approved by the Valuation Committee. 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 conducts other specific activities to monitor controls around pricing. Daily analyses identify price changes over 3-5%, sale trade prices that differ over 3% from the prior day’s price and purchase trade prices that differ more than 3% from the current day’s price. Weekly analyses identify prices that differ more than 5% from published bond prices of a corporate bond index. Monthly analyses identify price changes over 3%, prices that haven’t changed, missing prices and second source validation on most sectors. Analyses are conducted by a dedicated pricing unit that follows up with trading and investment sector professionals and challenges prices with vendors when the estimated assumptions used differ from what the Company feels a market participant would use. Any changes from the identified pricing source are verified by further confirmation of assumptions used. Examples of other 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 and back testing recent trades. For a sample of structured securities, a comparison of the vendor’s assumptions to our internal econometric models is also performed; any differences are challenged in accordance with the process described above.

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 with observable market data.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)

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 September 30, 2012 and December 31, 2011, 99% and 98%, 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 various controls on derivative valuations which include both quantitative and qualitative analysis. Analyses are conducted by a dedicated derivative pricing team that works directly with investment sector professionals to analyze impacts of changes in the market environment and investigate variances. There is a monthly analysis to identify market value changes greater than pre-defined thresholds, stale prices, missing prices and zero prices. Also on a monthly basis, a second source validation, typically to broker quotations, is performed for certain of the more complex derivatives, as well as for all new deals during the month. A model validation review is performed on any new models, which typically includes detailed documentation and validation to a second source. The model validation documentation and results of validation are presented to the Valuation Committee for approval. There is a monthly control to review changes in pricing sources to ensure that new models are not moved to production until formally approved.

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.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)

Valuation Techniques and Inputs for Investments

Generally, the Company determines the estimated fair value of its AFS securities, fixed maturities, FVO, equity securities, trading, 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 on-the-run U.S. Treasuries, exchange-traded 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 and/or estimated cash flows. For securities except U.S. Treasuries, inputs also include issuer spreads, which may consider 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 ABS and RMBS, estimated prepayment rates.


•	Corporates, including investment grade private placements – Primary inputs also include observations of credit default swap curves related to the issuer.


•	Foreign government/government agencies—Primary inputs also include observations of 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 – Primary inputs include the swap yield curve and credit default swap curves.


•	Foreign exchange derivatives – Primary inputs include the swap yield curve, currency spot and forward rates, and cross currency basis curves.


•	Interest rate derivatives – Primary input is the swap yield curve.

Level 3

Most of the Company’s securities classified as Level 3 include less liquid securities such as lower quality ABS, CMBS, commercial real estate (“CRE”) CDOs and RMBS primarily backed by below-prime loans. Securities included in level 3 are primarily valued based on broker prices or broker spreads, without adjustments. Primary inputs for non-broker priced investments, including structured securities, are consistent with the typical inputs used in Level 2 measurements noted above, but are Level 3 due to their less liquid markets. Additionally, certain long-dated securities are priced based on third party pricing services, including municipal securities, foreign government/government agencies, bank loans and below investment grade private placement securities. 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 include equity and interest rate volatility and swap yield curves beyond observable limits.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)

Significant Unobservable Inputs for Level 3 Assets Measured at Fair Value

The following table presents information about significant unobservable inputs used in Level 3 assets measured at fair value.



Securities	As of September 30, 2012
Assets accounted for at fair value on a recurring basis	Fair Value		Predominant Valuation Method	Significant Unobservable Input	Range of Values – Unobservable Inputs (Weighted Average) [1]	Impact of Increase in Input on Fair Value [2]
CMBS	$	871	Discounted cash flows	Spread (encompasses prepayment, default risk and loss severity)	300 - 3,151 bps (1,202 bps)	Decrease
Corporate [3]	620		Discounted cash flows	Spread	87 -1,223 bps (213 bps)	Decrease
Municipal	204		Discounted cash flows	Spread	118 - 371 bps (265 bps)	Decrease
RMBS	1,292		Discounted cash flows	Spread	52 - 1,948 bps (463 bps)	Decrease
				Constant prepayment rate	0% - 12% (2%)	Decrease [4]
				Constant default rate	1% - 28% (8%)	Decrease
				Loss severity	45% - 100% (79%)	Decrease


[1]	The weighted average is determined based on the fair value of the securities.


[2]	Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table above.


[3]	Level 3 corporate securities excludes those for which the Company bases fair value on broker quotations as discussed below.


[4]	Decrease for above market rate coupons and increase for below market rate coupons.



Freestanding Derivatives	As of September 30, 2012
	Fair Value			Predominant Valuation Method	Significant Unobservable Input	Range of Values – Unobservable Inputs	Impact of Increase in Input on Fair Value [1]
Equity derivatives
Equity options	$	68		Option model	Equity volatility	14% – 29%	Increase
Interest rate derivative
Interest rate swaps	(58		)	Discounted cash flows	Swap curve beyond 30 years	2.6%	Increase
Long interest rate swaptions	26			Option model	Interest rate volatility	24% – 65%	Increase
U.S. GMWB hedging instruments
Equity options	347			Option model	Equity volatility	23% – 36%	Increase
Customized swaps	269			Discounted cash flows	Equity volatility	10% – 50%	Increase
U.S. macro hedge program
Equity options	82			Option model	Equity volatility	22% – 33%	Increase
International program hedging
Equity options	80			Option model	Equity volatility	19% – 28%	Increase


[1]	Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table. Changes are based on long positions, unless otherwise noted. Changes in fair value will be inversely impacted for short positions.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)

Securities and derivatives for which the Company bases fair value on broker quotations predominately include ABS, CDOs, corporate, fixed maturities, FVO and certain credit derivatives. Due to the lack of transparency in the process brokers use to develop prices for these investments, the Company does not have access to the significant unobservable inputs brokers use to price these securities and derivatives. The Company believes however, the types of inputs brokers may use would likely be similar to those used to price securities and derivatives for which inputs are available to the Company, and therefore may include, but not be limited to, loss severity rates, constant prepayment rates, constant default rates and counterparty credit spreads. Therefore, similar to non broker priced securities and derivatives, generally, increases in these inputs would cause fair values to decrease. For the three and nine months ended September 30, 2012, no significant adjustments were made by the Company to broker prices received.

Product Derivatives

The Company currently offers and subsequently reinsures certain variable annuity products with GMWB riders in the U.S., and formerly in the U.K. and Japan. 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 is carried at fair value, with changes in fair value reported in net realized capital gains and losses. The Company’s GMWB liability is reported in other policyholder funds and benefits payable in the Condensed Consolidated Balance Sheets.

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”). 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 and reported in fee income.

U.S. GMWB Reinsurance Derivative

The Company has reinsurance arrangements in place to transfer a portion of its risk of loss due to GMWB. These arrangements are recognized as derivatives and carried at fair value in reinsurance recoverables. Changes in the fair value of the reinsurance agreements are reported in net realized capital gains and losses.

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 inputs, as well as policyholder behavior inputs, identical to those used in calculating the underlying liability, such as lapses, fund selection, resets and withdrawal utilization and risk margins.

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

Living benefits required to be fair valued include U.S. GMWB, international GMWB and international other guaranteed living benefits. Fair values for GMWB and guaranteed minimum accumulation benefit (“GMAB”) contracts are calculated using the income approach based upon internally developed models because active, observable markets do not exist for those items. The fair value of the Company’s guaranteed benefit liabilities, classified as embedded derivatives, and the related reinsurance and customized freestanding derivatives is calculated as an aggregation of the following components: Best Estimate Claim Payments; Credit Standing Adjustment; and Margins. The resulting aggregation is reconciled or calibrated, if necessary, to market information that is, or may be, available to the Company, but may not be observable by other market participants, including reinsurance discussions and transactions. The Company believes the aggregation of these components, as necessary and as reconciled or calibrated to the market information available to the Company, results in an amount that the Company would be required to transfer or receive, for an asset, to or from market participants in an active liquid market, if one existed, for those market participants to assume the risks associated with the guaranteed minimum benefits and the related reinsurance and customized derivatives. The fair value is likely to materially diverge from the ultimate settlement of the liability as the Company believes settlement will be based on our best estimate assumptions rather than those best estimate assumptions plus risk margins. In the absence of any transfer of the guaranteed benefit liability to a third party, the release of risk margins is likely to be reflected as realized gains in future periods’ net income. Each component described below is unobservable in the marketplace and require subjectivity by the Company in determining their value.

Oversight of the Company’s valuation policies and processes for product and U.S. GMWB reinsurance derivatives is performed by a multidisciplinary group comprised of finance, actuarial and risk management professionals. This multidisciplinary group reviews and approves changes and enhancements to the Company’s valuation model as well as associated controls.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)

Best Estimate

Claim Payments

The Best Estimate Claim Payments is calculated based on actuarial and capital market assumptions related to projected cash flows, including the present value of benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning policyholder behavior such as lapses, fund selection, resets and withdrawal utilization. For the customized derivatives, policyholder behavior is prescribed in the derivative contract. Because of the dynamic and complex nature of these cash flows, best estimate assumptions and a Monte Carlo stochastic process is used in valuation. The Monte Carlo stochastic process involves the generation of thousands of scenarios that assume risk neutral returns consistent with swap rates and a blend of observable implied index volatility levels. Estimating these cash flows involves numerous estimates and subjective judgments regarding a number of variables –including expected market rates of return, market volatility, correlations of market index returns to funds, fund performance, discount rates and assumptions about policyholder behavior which emerge over time.

At each valuation date, the Company assumes expected returns based on:


•	risk-free rates as represented by the euro dollar futures, LIBOR deposits and swap rates to derive forward curve rates;


•	market implied volatility assumptions for each underlying index based primarily on a blend of observed market “implied volatility” data;


•	correlations of historical returns across underlying well known market indices based on actual observed returns over the ten years preceding the valuation date; and


•	three years of history for fund indexes compared to separate account fund regression.

On a daily basis, the Company updates capital market assumptions used in the GMWB liability model such as interest rates, equity indices and the blend of implied equity index volatilities. The Company monitors various aspects of policyholder behavior and may modify certain of its assumptions, including living benefit lapses and withdrawal rates, if credible emerging data indicates that changes are warranted. In addition, the Company will continue to evaluate policyholder behavior assumptions as we begin to implement initiatives to reduce the size of the variable annuity business. At a minimum, all policyholder behavior assumptions are reviewed and updated, as appropriate, in conjunction with the completion of the Company’s comprehensive study to refine its estimate of future gross profits during the third quarter of each year.

Credit Standing Adjustment

This assumption makes an adjustment that market participants would make, in determining fair value, to reflect the risk that guaranteed benefit obligations or the GMWB reinsurance recoverables will not be fulfilled (“nonperformance risk”). The Company incorporates a blend of observable Company and reinsurer credit default spreads from capital markets, adjusted for market recoverability. The credit standing adjustment assumption, net of reinsurance, resulted in pre-tax realized gains (losses) of $(31) and $75, for the three months ended September 30, 2012 and 2011, respectively, and $(64) and $75 for the nine months ended September 30, 2012 and 2011. As of September 30, 2012 and December 31, 2011 the credit standing adjustment was $16 and $80, respectively.

Margins

The behavior risk margin adds a margin that market participants would require, in determining fair value, for the risk that the Company’s assumptions about policyholder behavior could differ from actual experience. The behavior risk margin is calculated by taking the difference between adverse policyholder behavior assumptions and best estimate assumptions.

Assumption updates, including policyholder behavior assumptions, affected best estimates and margins for total pre-tax realized gains of $301 and $51 for the three and nine months ended September 30, 2012 and 2011. As of September 30, 2012 and December 31, 2011 the behavior risk margin was $291 and $419, respectively.

In addition to the non-market-based updates described above, the Company recognized non-market-based updates driven by the relative outperformance (underperformance) of the underlying actively managed funds as compared to their respective indices resulting in pre-tax realized gains (losses) of approximately $25 and $(131), for the three months ended September 30, 2012 and 2011, respectively and $34 and $(102) for the nine months ended September 30, 2012 and 2011.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)

Significant unobservable inputs used in the fair value measurement of living benefits required to be fair valued and the U.S. GMWB reinsurance derivative are withdrawal utilization and withdrawal rates, lapse rates, reset elections and equity volatility. The following table provides quantitative information about the significant unobservable inputs and is applicable to all of the Living Benefits Required to be Fair Valued and the U.S. GMWB Reinsurance Derivative. Significant increases in any of the significant unobservable inputs, in isolation, will generally have an increase or decrease correlation with the fair value measurement, as shown in the table.



Significant Unobservable Input	Range of Values-Unobservable Inputs	Impact of Increase in Input on Fair Value Measurement [1]
Withdrawal Utilization[2]	20% to 100%	Increase
Withdrawal Rates [2]	0% to 8%	Increase
Lapse Rates [3]	0% to 75%	Decrease
Reset Elections [4]	20% to 75%	Increase
Equity Volatility [5]	10% to 50%	Increase


[1]	Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.


[2]	Ranges represent assumed cumulative percentages of policyholders taking withdrawals and the annual amounts withdrawn.


[3]	Range represents assumed annual percentages of full surrender of the underlying variable annuity contracts across all policy durations for in force business.


[4]	Range represents assumed cumulative percentages of policyholders that would elect to reset their guaranteed benefit base.


[5]	Range represents implied market volatilities for equity indices based on multiple pricing sources.

Generally a change in withdrawal utilization assumptions would be accompanied by a directionally opposite change in lapse rate assumptions, as the behavior of policyholders that utilize GMWB or GMAB riders is typically different from policyholders that do not utilize these riders.

Separate Account Assets

Separate account assets are primarily invested in mutual funds. Other separate account assets include fixed maturities, limited partnerships, equity securities, short-term investments and derivatives that are valued in the same manner, and using the same pricing sources and inputs, as those investments held by the Company. Separate account assets classified as Level 3 primarily include limited partnerships in which fair value represents the separate account’s share of the fair value of the equity in the investment (“net asset value”) and are classified in level 3 based on the Company’s ability to redeem its investment.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

The tables below provide fair value roll-forwards for the three and nine months ended September 30, 2012 and 2011, for the financial instruments classified as Level 3.

For the three months ended September 30, 2012



	Fixed Maturities, AFS
Assets	ABS			CDOs			CMBS			Corporate			Foreign govt./govt. agencies			Municipal			RMBS			Total Fixed Maturities, AFS			Fixed Maturities, FVO
Fair value as of June 30, 2012	$	323		$	900		$	986		$	1,805		$	55		$	650		$	1,208		$	5,927		$	493
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	1			(8		)	(33		)	(4		)	—			(4		)	(17		)	(65		)	32
Included in OCI [3]	10			46			53			(47		)	1			14			155			232			—
Purchases	11			—			8			40			11			—			81			151			—
Settlements	(5		)	(8		)	(36		)	(3		)	(1		)	—			(41		)	(94		)	—
Sales	(9		)	—			(127		)	(9		)	(16		)	(22		)	(56		)	(239		)	—
Transfers into Level 3 [4]	9			—			20			283			—			—			1			313			—
Transfers out of Level 3 [4]	(25		)	—			—			(45		)	—			(434		)	(39		)	(543		)	—
Fair value as of September 30, 2012	$	315		$	930		$	871		$	2,020		$	50		$	204		$	1,292		$	5,682		$	525
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7]	$	1		$	(8	)	$	(26	)	$	(4	)	$	—		$	(4	)	$	1		$	(40	)	$	23

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)



				Freestanding Derivatives [5]
Assets (Liabilities)	Equity Securities, AFS			Credit			Equity			Interest Rate			U.S. GMWB Hedging			U.S. Macro Hedge Program			Intl. Program Hedging			Other Contracts			Total Free- Standing Derivatives [5]
Fair value as of June 30, 2012	$	86		$	(439	)	$	53		$	(66	)	$	756		$	180		$	161		$	26		$	671
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	(4		)	64			(16		)	1			(159		)	(98		)	(92		)	(1		)	(301		)
Included in OCI [3]	1			—			—			—			—			—			—			—			—
Purchases	5			—			31			1			19			—			6			—			57
Settlements	—			94			—			—			—			—			18			—			112
Sales	(2		)	—			—			—			—			—			—			—			—
Transfers into Level 3 [4]	—			—			—			—			—			—			—			—			—
Transfers out of Level 3 [4]	—			—			—			32			—			—			—			—			32
Fair value as of September 30, 2012	$	86		$	(281	)	$	68		$	(32	)	$	616		$	82		$	93		$	25		$	571
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7]	$	(3	)	$	26		$	(14	)	$	1		$	(159	)	$	(98	)	$	(69	)	$	(1	)	$	(314	)



Assets	Reinsurance Recoverable for U.S. GMWB			Separate Accounts
Fair value as of June 30, 2012	$	376		$	1,335
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	(184		)	(2		)
Included in OCI [3]	—			—
Purchases	—			97
Settlements	7			—
Sales	—			(41		)
Transfers into Level 3 [4]	—			(3		)
Transfers out of Level 3 [4]	—			(7		)
Fair value as of September 30, 2012	$	199		$	1,379
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7]	$	(184	)	$	8

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)



	Other Policyholder Funds and Benefits Payable
Liabilities	U.S. Guaranteed Withdrawal Benefits			International Guaranteed Living Benefits			International Other Living Benefits			Equity Linked Notes			Total Other Policyholder Funds and Benefits Payable			Other Liabilities			Consumer Notes
Fair value as of June 30, 2012	$	(2,203	)	$	(53	)	$	(4	)	$	(10	)	$	(2,270	)	$	(29	)	$	(4	)
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	823			20			6			—			849			(14		)	2
Included in OCI [3]	—			(1		)	—			—			(1		)	—			—
Settlements	(33		)	(3		)	(1		)	—			(37		)	—			—
Fair value as of September 30, 2012	$	(1,413	)	$	(37	)	$	1		$	(10	)	$	(1,459	)	$	(43	)	$	(2	)
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7]	$	823		$	20		$	6		$	—		$	849		$	(14	)	$	2

For the nine months ended September 30, 2012



	Fixed Maturities, AFS
Assets	ABS			CDOs			CMBS			Corporate			Foreign govt./govt. agencies			Municipal			RMBS			Total Fixed Maturities, AFS			Fixed Maturities, FVO
Fair value as of January 1, 2012	$	361		$	368		$	588		$	2,255		$	49		$	437		$	1,063		$	5,121		$	495
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	—			(9		)	(67		)	(7		)	—			(4		)	7			(80		)	53
Included in OCI [3]	43			122			112			(50		)	3			38			202			470			—
Purchases	36			—			21			205			18			275			364			919			—
Settlements	(43		)	(31		)	(106		)	(56		)	(3		)	—			(111		)	(350		)	—
Sales	(24		)	(3		)	(198		)	(63		)	(17		)	(87		)	(195		)	(587		)	(23		)
Transfers into Level 3 [4]	9			483			621			605			—			—			1			1,719			—
Transfers out of Level 3 [4]	(67		)	—			(100		)	(869		)	—			(455		)	(39		)	(1,530		)	—
Fair value as of September 30, 2012	$	315		$	930		$	871		$	2,020		$	50		$	204		$	1,292		$	5,682		$	525
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7]	$	(2	)	$	(10	)	$	(27	)	$	(4	)	$	—		$	(4	)	$	1		$	(46	)	$	62

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)



				Freestanding Derivatives [5]
Assets (Liabilities)	Equity Securities, AFS			Credit			Equity			Interest Rate			U.S. GMWB Hedging			U.S. Macro Hedge Program			Intl. Program Hedging			Other Contracts			Total Free- Standing Derivatives [5]
Fair value as of January 1, 2012	$	93		$	(561	)	$	40		$	(58	)	$	883		$	357		$	35		$	28		$	724
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	7			192			(30		)	(9		)	(332		)	(275		)	51			(3		)	(406		)
Included in OCI [3]	(3		)	—			—			2			—			—			—			—			2
Purchases	19			—			77			1			42			—			(59		)	—			61
Settlements	—			89			(19		)	—			—			—			58			—			128
Sales	(30		)	—			—			—			—			—			—			—			—
Transfers into Level 3 [4]	—			—			—			—			—			—			—			—			—
Transfers out of Level 3 [4]	—			(1		)	—			32			23			—			8			—			62
Fair value as of September 30, 2012	$	86		$	(281	)	$	68		$	(32	)	$	616		$	82		$	93		$	25		$	571
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7]	$	4		$	142		$	(16	)	$	(9	)	$	(332	)	$	(274	)	$	71		$	(3	)	$	(421	)



Assets	Reinsurance Recoverable for U.S. GMWB			Separate Accounts
Fair value as of January 1, 2012	$	443		$	1,031
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	(265		)	31
Included in OCI [3]	—			—
Purchases	—			336
Settlements	21			(1		)
Sales	—			(442		)
Transfers into Level 3 [4]	—			451
Transfers out of Level 3 [4]	—			(27		)
Fair value as of September 30, 2012	$	199		$	1,379
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7]	$	(265	)	$	(18	)

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)



	Other Policyholder Funds and Benefits Payable
Liabilities	U.S. Guaranteed Withdrawal Benefits			International Guaranteed Living Benefits			International Other Living Benefits			Equity Linked Notes			Total Other Policyholder Funds and Benefits Payable			Other Liabilities			Consumer Notes
Fair value as of January 1, 2012	$	(2,538	)	$	(66	)	$	(5	)	$	(9	)	$	(2,618	)	$	(9	)	$	(4	)
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	1,235			36			9			(1		)	1,279			(34		)	2
Included in OCI [3]	—			—			—			—			—			—			—
Settlements	(110		)	(7		)	(3		)	—			(120		)	—			—
Fair value as of September 30, 2012	$	(1,413	)	$	(37	)	$	1		$	(10	)	$	(1,459	)	$	(43	)	$	(2	)
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2012 [2] [7]	$	1,235		$	36		$	9		$	(1	)	$	1,279		$	(34	)	$	2

For the three months ended September 30, 2011



	Fixed Maturities, AFS
Assets	ABS			CDOs			CMBS			Corporate			Foreign govt./govt. agencies			Municipal		RMBS			Total Fixed Maturities, AFS			Fixed Maturities, FVO
Fair value as of June 30, 2011	$	452		$	2,575		$	654		$	2,110		$	51		$	280	$	1,114		$	7,236		$	556
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	(15		)	(26		)	—			(9		)	—			—		—			(50		)	(24		)
Included in OCI [3]	(2		)	(34		)	(56		)	(63		)	(1		)	46		(39		)	(149		)	—
Purchases	58			—			25			42			1			85		—			211			—
Settlements	(14		)	(50		)	(12		)	(41		)	(1		)	—		(36		)	(154		)	(1		)
Sales	(8		)	—			(2		)	(7		)	(1		)	—		—			(18		)	(39		)
Transfers into Level 3 [4]	14			—			45			268			28			—		68			423			—
Transfers out of Level 3 [4]	(15		)	—			—			(81		)	—			—		—			(96		)	—
Fair value as of September 30, 2011	$	470		$	2,465		$	654		$	2,219		$	77		$	411	$	1,107		$	7,403		$	492
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2011 [2] [7]	$	(15	)	$	(26	)	$	—		$	(9	)	$	—		$	—	$	—		$	(50	)	$	(24	)

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)



				Freestanding Derivatives [5]
Assets (Liabilities)	Equity Securities, AFS			Credit			Equity		Interest Rate			U.S. GMWB Hedging			U.S. Macro Hedge Program		Intl. Program Hedging			Other Contracts			Total Free- Standing Derivatives [5]
Fair value as of June 30, 2011	$	100		$	(402	)	$	6	$	7		$	548		$	251	$	6		$	30		$	446
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	—			(142		)	5		(16		)	516			171		(6		)	(1		)	527
Included in OCI [3]	(6		)	—			—		—			—			—		—			—			—
Purchases	—			—			25		—			—			—		—			—			25
Settlements	—			1			—		—			(3		)	—		—			—			(2		)
Sales	(1		)	—			—		—			—			—		—			—			—
Transfers into Level 3 [4]	—			—			—		—			—			—		—			—			—
Transfers out of Level 3 [4]	—			—			—		—			—			—		—			—			—
Fair value as of September 30, 2011	$	93		$	(543	)	$	36	$	(9	)	$	1,061		$	422	$	—		$	29		$	996
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2011 [2] [7]	$	—		$	(140	)	$	5	$	(16	)	$	510		$	171	$	(6	)	$	(1	)	$	523



Assets	Reinsurance Recoverable for U.S. GMWB		Separate Accounts
Fair value as of June 30, 2011	$	237	$	1,068
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	241		11
Included in OCI [3]	—		—
Purchases	—		131
Settlements	7		—
Sales	—		(11		)
Transfers into Level 3 [4]	—		1
Transfers out of Level 3 [4]	—		(16		)
Fair value as of September 30, 2011	$	485	$	1,184
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2011 [2] [7]	$	241	$	8

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)



	Other Policyholder Funds and Benefits Payable
Liabilities	U.S. Guaranteed Withdrawal Benefits			International Guaranteed Living Benefits			International Other Living Benefits			Equity Linked Notes			Total Other Policyholder Funds and Benefits Payable			Other Liabilities			Consumer Notes
Fair value as of June 30, 2011	$	(1,420	)	$	(30	)	$	—		$	(10	)	$	(1,460	)	$	(44	)	$	(4	)
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	(1,315		)	(49		)	(5		)	4			(1,365		)	31			—
Included in OCI [3]	—			—			—			—			—			—			—
Settlements	(36		)	(2		)	(1		)	—			(39		)	—			—
Fair value as of September 30, 2011	$	(2,771	)	$	(81	)	$	(6	)	$	(6	)	$	(2,864	)	$	(13	)	$	(4	)
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2011 [2] [7]	$	(1,315	)	$	(49	)	$	(5	)	$	4		$	(1,365	)	$	31		$	—

For the nine months ended September 30, 2011



	Fixed Maturities, AFS
Assets	ABS			CDOs			CMBS			Corporate			Foreign govt./govt. agencies			Municipal			RMBS			Total Fixed Maturities, AFS			Fixed Maturities, FVO
Fair value as of January 1, 2011	$	477		$	2,581		$	689		$	2,129		$	56		$	272		$	1,285		$	7,489		$	522
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	(21		)	(41		)	11			(37		)	—			—			(9		)	(97		)	12
Included in OCI [3]	35			89			91			(44		)	—			55			(14		)	212			—
Purchases	58			—			25			94			3			85			25			290			—
Settlements	(32		)	(128		)	(42		)	(114		)	(3		)	—			(103		)	(422		)	(3		)
Sales	(10		)	(66		)	(317		)	(141		)	(6		)	(2		)	(16		)	(558		)	(39		)
Transfers into Level 3 [4]	82			30			197			541			39			4			82			975			—
Transfers out of Level 3 [4]	(119		)	—			—			(209		)	(12		)	(3		)	(143		)	(486		)	—
Fair value as of September 30, 2011	$	470		$	2,465		$	654		$	2,219		$	77		$	411		$	1,107		$	7,403		$	492
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2011 [2] [7]	$	(21	)	$	(41	)	$	11		$	(37	)	$	—		$	—		$	(9	)	$	(97	)	$	12

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)



				Freestanding Derivatives [5]
Assets (Liabilities)	Equity Securities, AFS			Credit			Equity		Interest Rate			U.S. GMWB Hedging			U.S. Macro Hedge Program			Intl. Program Hedging			Other Contracts			Total Free- Standing Derivatives [5]
Fair value as of January 1, 2011	$	154		$	(390	)	$	4	$	(53	)	$	600		$	203		$	5		$	32		$	401
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	(10		)	(148		)	7		(21		)	457			74			(10		)	(3		)	356
Included in OCI [3]	(5		)	—			—		—			—			—			—			—			—
Purchases	37			1			25		64			23			180			5			—			298
Settlements	—			—			—		—			(19		)	(35		)	—			—			(54		)
Sales	(2		)	(6		)	—		1			—			—			—			—			(5		)
Transfers into Level 3 [4]	—			—			—		—			—			—			—			—			—
Transfers out of Level 3 [4]	(81		)	—			—		—			—			—			—			—			—
Fair value as of September 30, 2011	$	93		$	(543	)	$	36	$	(9	)	$	1,061		$	422		$	—		$	29		$	996
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2011 [2] [7]	$	(11	)	$	(148	)	$	7	$	(19	)	$	449		$	91		$	(11	)	$	(3	)	$	366



Assets	Reinsurance Recoverable for U.S. GMWB		Separate Accounts
Fair value as of January 1, 2011	$	280	$	1,247
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	180		35
Included in OCI [3]	—		—
Purchases	—		165
Settlements	25		—
Sales	—		(180		)
Transfers into Level 3 [4]	—		13
Transfers out of Level 3 [4]	—		(96		)
Fair value as of September 30, 2011	$	485	$	1,184
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2011 [2] [7]	$	180	$	9

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)



	Other Policyholder Funds and Benefits Payable
Liabilities	U.S. Guaranteed Withdrawal Benefits			International Guaranteed Living Benefits			International Other Living Benefits			Equity Linked Notes			Total Other Policyholder Funds and Benefits Payable			Other Liabilities			Consumer Notes
Fair value as of January 1, 2011	$	(1,611	)	$	(36	)	$	3		$	(9	)	$	(1,653	)	$	(37	)	$	(5	)
Total realized/unrealized gains (losses)
Included in net income [1], [2], [6]	(1,047		)	(38		)	(6		)	3			(1,088		)	24			1
Included in OCI [3]	—			—			—			—			—			—			—
Settlements	(113		)	(7		)	(3		)	—			(123		)	—			—
Fair value as of September 30, 2011	$	(2,771	)	$	(81	)	$	(6	)	$	(6	)	$	(2,864	)	$	(13	)	$	(4	)
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2011 [2] [7]	$	(1,047	)	$	(38	)	$	(6	)	$	3		$	(1,088	)	$	24		$	1


[1]	The Company classifies gains and losses on GMWB reinsurance derivatives and Guaranteed Living Benefit embedded derivatives as unrealized gains (losses) for purposes of disclosure in this table because it is impracticable to track on a contract-by-contract basis the realized gains (losses) for these derivatives and embedded derivatives.


[2]	All amounts in these rows are reported in net realized capital gains/losses. The realized/unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on net income for the Company. All amounts are before income taxes and amortization DAC.


[3]	All amounts are before income taxes and amortization of DAC.


[4]	Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs.


[5]	Derivative instruments are reported in this table on a net basis for asset/(liability) positions and reported in the Condensed Consolidated Balance Sheet in other investments and other liabilities.


[6]	Includes both market and non-market impacts in deriving realized and unrealized gains (losses).


[7]	Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)

Fair Value Option

The Company holds fair value option investments that contain an embedded credit derivative with underlying credit risk primarily related to corporate bonds and commercial real estate. Also included are foreign government securities that align with the accounting for yen-based fixed annuity liabilities, which are adjusted for changes in spot rates through realized gains and losses. Similar to other fixed maturities, income earned from these securities is recorded in net investment income. Changes in the fair value of these securities are recorded in net realized capital gains and losses.

The Company previously elected the fair value option for one of its consolidated VIEs in order to apply a consistent accounting model for the VIE’s assets and liabilities. The VIE is an investment vehicle that holds high quality investments, derivative instruments that reference third-party corporate credit and issues notes to investors that reflect the credit characteristics of the high quality investments and derivative instruments. The risks and rewards associated with the assets of the VIE inure to the investors. The investors have no recourse against the Company. As a result, there has been no adjustment to the market value of the notes for the Company’s own credit risk.

The following table presents the changes in fair value of those assets and liabilities accounted for using the fair value option reported in net realized capital gains and losses in the Company’s Condensed Consolidated Statements of Operations.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Assets
Fixed maturities, FVO
Corporate	$	6		$	(3	)	$	6		$	11
CRE CDOs	17			(64		)	26			(43		)
Foreign government	13			33			(16		)	44
Other liabilities
Credit-linked notes	(14		)	31			(34		)	24
Total realized capital gains (losses)	$	22		$	(3	)	$	(18	)	$	36

The following table presents the fair value of assets and liabilities accounted for using the fair value option included in the Company’s Condensed Consolidated Balance Sheets.



	As of
	September 30, 2012		December 31, 2011
Assets
Fixed maturities, FVO
ABS	$	65	$	65
CRE CDOs	247		225
Corporate	281		272
Foreign government	762		766
Total fixed maturities, FVO	$	1,355	$	1,328
Other liabilities
Credit-linked notes [1]	$	43	$	9


[1]	As of September 30, 2012 and December 31, 2011, the outstanding principal balance of the notes was $243.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements (continued)

Financial Instruments Not Carried at Fair Value

The following table presents carrying amounts and fair values of The Hartford’s financial instruments not carried at fair value and not included in the above fair value discussion as of September 30, 2012 and December 31, 2011.



		September 30, 2012				December 31, 2011
	Fair Value Hierarchy Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Policy loans	Level 3	$	2,000	$	2,176	$	2,001	$	2,153
Mortgage loans	Level 3	6,863		7,156		5,728		5,977
Liabilities
Other policyholder funds and benefits payable [1]	Level 3	$	9,937	$	10,241	$	10,343	$	11,238
Senior notes [2]	Level 2	6,026		6,874		4,481		4,623
Junior subordinated debentures [2]	Level 2	1,100		1,247		500		498
Private placement junior subordinated debentures [2]	Level 3	—		—		1,235		1,932
Consumer notes [3]	Level 3	188		189		310		305


[1]	Excludes guarantees on variable annuities, group accident and health and universal life insurance contracts, including corporate owned life insurance.


[2]	Included in long-term debt in the Condensed Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.


[3]	Excludes amounts carried at fair value and included in disclosures above.

The Company has not made any changes in its valuation methodologies for the following assets and liabilities since December 31, 2011.


•	Fair value for policy loans and consumer notes were estimated using discounted cash flow calculations using current interest rates adjusted for estimated loan durations.


•	Fair values for mortgage loans were estimated using discounted cash flow calculations based on current lending rates for similar type loans. Current lending rates reflect changes in credit spreads and the remaining terms of the loans.


•	Fair values for other policyholder funds and benefits payable, not carried at fair value, are estimated based on the cash surrender values of the underlying policies or by estimating future cash flows discounted at current interest rates adjusted for credit risk.


•	Fair values for senior notes and junior subordinated debentures are determined using the market approach based on reported trades, benchmark interest rates and issuer spread for the Company which may consider credit default swaps.


•	Fair values for private placement junior subordinated debentures are based primarily on market quotations from independent third party brokers.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments

Significant Investment Accounting Policies

Recognition and Presentation of Other-Than-Temporary Impairments

The Company deems debt securities and certain equity securities with debt-like characteristics (collectively “debt securities”) to be other-than-temporarily impaired (“impaired”) if a security meets the following conditions: a) the Company intends to sell or it is more likely than not the Company will be required to sell the security before a recovery in value, or b) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell or it is more likely than not the Company will be required to sell the security before a recovery in value, a charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security. For those impaired debt securities which do not meet the first condition and for which the Company does not expect to recover the entire amortized cost basis, the difference between the security’s amortized cost basis and the fair value is separated into the portion representing a credit other-than-temporary impairment (“impairment”), which is recorded in net realized capital losses, and the remaining impairment, which is recorded in OCI. Generally, the Company determines a security’s credit impairment as the difference between its amortized cost basis and its best estimate of expected future cash flows discounted at the security’s effective yield prior to impairment. The remaining non-credit impairment, which is recorded in OCI, is the difference between the security’s fair value and the Company’s best estimate of expected future cash flows discounted at the security’s effective yield prior to the impairment, which typically represents current market liquidity and risk premiums. The previous amortized cost basis less the impairment recognized in net realized capital losses becomes the security’s new cost basis. The Company accretes the new cost basis to the estimated future cash flows over the expected remaining life of the security by prospectively adjusting the security’s yield, if necessary. The following table presents the change in non-credit impairments recognized in OCI as disclosed in the Company’s Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2012 and 2011, respectively.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
OTTI losses recognized in OCI	$	(22	)	$	(11	)	$	(37	)	$	(83	)
Changes in fair value and/or sales	91			21			125			88
Tax and deferred acquisition costs	(34		)	—			(48		)	6
Change in OTTI losses recognized in OCI	$	35		$	10		$	40		$	11

The Company’s evaluation of whether a credit impairment exists for debt securities includes, but is not limited to, the following factors: (a) changes in the financial condition of the security’s underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) changes in the financial condition, credit rating and near-term prospects of the issuer, (d) the extent to which the fair value has been less than the amortized cost of the security and (e) the payment structure of the security. The Company’s best estimate of expected future cash flows used to determine the credit loss amount 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 security. The Company’s best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, current and projected delinquency rates, and loan-to-value (“LTV”) ratios. In addition, for structured securities, the Company considers factors including, but not limited to, average cumulative collateral loss rates that vary by vintage year, commercial and residential property value declines that vary by property type and location and commercial real estate delinquency levels. These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries which may include estimating the underlying collateral value. In addition, projections of expected future debt security cash flows may change based upon new information regarding the performance of the issuer and/or underlying collateral such as changes in the projections of the underlying property value estimates.

For equity securities where the decline in the fair value is deemed to be other-than-temporary, a charge is recorded in net realized capital losses equal to the difference between the fair value and cost basis of the security. The previous cost basis less the impairment becomes the security’s new cost basis. The Company asserts its intent and ability to retain those equity securities deemed to be temporarily impaired until the price recovers. Once identified, these securities are systematically restricted from trading unless approved by a committee of investment and accounting professionals (“Committee”). The Committee will only authorize the sale of these securities based on predefined criteria that relate to events that could not have been reasonably foreseen. Examples of the criteria include, but are not limited to, the deterioration in the issuer’s financial condition, security price declines, a change in regulatory requirements or a major business combination or major disposition.

The primary factors considered in evaluating whether an impairment exists for an equity security include, but are not limited to: (a) the length of time and extent to which the fair value has been less than the cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on preferred stock dividends and (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)

Mortgage Loan Valuation Allowances

The Company’s security monitoring process reviews mortgage loans on a quarterly basis to identify potential credit losses. Commercial mortgage loans are considered to be impaired when management estimates that, based upon current information and events, it is probable that the Company will be unable to collect amounts due according to the contractual terms of the loan agreement. Criteria used to determine if an impairment exists include, but are not limited to: current and projected macroeconomic factors, such as unemployment rates, and property-specific factors such as rental rates, occupancy levels, LTV ratios and debt service coverage ratios (“DSCR”). In addition, the Company considers historic, current and projected delinquency rates and property values. These assumptions require the use of significant management judgment and include the probability and timing of borrower default and loss severity estimates. In addition, projections of expected future cash flows may change based upon new information regarding the performance of the borrower and/or underlying collateral such as changes in the projections of the underlying property value estimates.

For mortgage loans that are deemed impaired, a valuation allowance is established for the difference between the carrying amount and the Company’s share of either (a) the present value of the expected future cash flows discounted at the loan’s effective interest rate, (b) the loan’s observable market price or, most frequently, (c) the fair value of the collateral. A valuation allowance has been established for either individual loans or as a projected loss contingency for loans with an LTV ratio of 90% or greater and consideration of other credit quality factors, including DSCR. Changes in valuation allowances are recorded in net realized capital gains and losses. Interest income on impaired loans is accrued to the extent it is deemed collectible and the loans continue to perform under the original or restructured terms. Interest income ceases to accrue for loans when it is probable that the Company will not receive interest and principal payments according to the contractual terms of the loan agreement, or if a loan is more than 60 days past due. Loans may resume accrual status when it is determined that sufficient collateral exists to satisfy the full amount of the loan and interest payments, as well as when it is probable cash will be received in the foreseeable future. Interest income on defaulted loans is recognized when received.

Net Realized Capital Gains (Losses)



	Three Months Ended September 30,						Nine Months Ended September 30,
(Before-tax)	2012			2011			2012			2011
Gross gains on sales	$	205		$	197		$	710		$	519
Gross losses on sales	(131		)	(63		)	(387		)	(294		)
Net OTTI losses recognized in earnings	(37		)	(60		)	(164		)	(138		)
Valuation allowances on mortgage loans	—			—			1			23
Japanese fixed annuity contract hedges, net [1]	(24		)	9			(42		)	(2		)
Periodic net coupon settlements on credit derivatives/Japan	2			1			1			(8		)
Results of variable annuity hedge program
GMWB derivatives, net	381			(323		)	451			(300		)
U.S. macro hedge program	(109		)	107			(292		)	6
Total U.S. program	272			(216		)	159			(294		)
International program	(167		)	1,132			(633		)	865
Total results of variable annuity hedge program	105			916			(474		)	571
Other, net [2]	(1		)	(425		)	153			(430		)
Net realized capital gains (losses)	$	119		$	575		$	(202	)	$	241


[1]	Relates to the Japanese fixed annuity product (adjustment of product liability for changes in spot currency exchange rates, related derivative hedging instruments, excluding net period coupon settlements, and Japan FVO securities).


[2]	Primarily consists of gains and losses on non-qualifying derivatives and fixed maturities, FVO, Japan 3Win related foreign currency swaps, and other investment gains and losses.

Net realized capital gains and losses from investment sales, after deducting the life and pension policyholders’ share for certain products, are reported as a component of revenues and are determined on a specific identification basis. Gross gains and losses on sales and impairments previously reported as unrealized gains in AOCI were $37 and $159 , respectively, for the three and nine months ended September 30, 2012 and $74 and $87 for the three and nine months ended September 30, 2011, respectively. Proceeds from sales of AFS securities totaled $10.8 billion and $34.2 billion for the three and nine months ended September 30, 2012, respectively, and $8.7 billion and $26.3 billion for the three and nine months ended September 30, 2011, respectively. For the three and nine months ended September 30, 2012, the gain on U.S. GMWB related derivatives, net, was primarily due to liability model assumption updates of $301 related to lower benefit utilization by policyholders.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)

Other-Than-Temporary Impairment Losses

The following table presents a roll-forward of the Company’s cumulative credit impairments on debt securities held.



	Three Months Ended September 30,						Nine Months Ended September 30,
(Before-tax)	2012			2011			2012			2011
Balance as of beginning of period	$	(1,407	)	$	(1,933	)	$	(1,676	)	$	(2,072	)
Additions for credit impairments recognized on [1]:
Securities not previously impaired	(5		)	(4		)	(21		)	(40		)
Securities previously impaired	(9		)	(38		)	(19		)	(63		)
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period	104			157			392			349
Securities due to an increase in expected cash flows	2			4			9			12
Balance as of end of period	$	(1,315	)	$	(1,814	)	$	(1,315	)	$	(1,814	)


[1]	These additions are included in the net OTTI losses recognized in earnings in the Condensed Consolidated Statements of Operations.

Available-for-Sale Securities

The following table presents the Company’s AFS securities by type.



	September 30, 2012												December 31, 2011
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Non-Credit OTTI [1]			Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Non-Credit OTTI [1]
ABS	$	2,916	$	69	$	(227	)	$	2,758	$	(3	)	$	3,430	$	55	$	(332	)	$	3,153	$	(7	)
CDOs [2]	3,279		50		(217		)	3,072		(13		)	2,819		16		(348		)	2,487		(44		)
CMBS	6,114		403		(244		)	6,273		(13		)	7,192		271		(512		)	6,951		(31		)
Corporate [2]	39,032		4,794		(393		)	43,433		(23		)	41,161		3,661		(739		)	44,011		—
Foreign govt./govt. agencies	4,019		202		(5		)	4,216		—			2,030		141		(10		)	2,161		—
Municipal	12,939		1,372		(20		)	14,291		—			12,557		775		(72		)	13,260		—
RMBS	7,382		337		(242		)	7,477		(47		)	5,961		252		(456		)	5,757		(105		)
U.S. Treasuries	5,009		213		(16		)	5,206		—			3,828		203		(2		)	4,029		—
Total fixed maturities, AFS	80,690		7,440		(1,364		)	86,726		(99		)	78,978		5,374		(2,471		)	81,809		(187		)
Equity securities, AFS	865		77		(64		)	878		—			1,056		68		(203		)	921		—
Total AFS securities	$	81,555	$	7,517	$	(1,428	)	$	87,604	$	(99	)	$	80,034	$	5,442	$	(2,674	)	$	82,730	$	(187	)


[1]	Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses as of September 30, 2012 and December 31, 2011.


[2]	Gross unrealized gains (losses) exclude the change in fair value of bifurcated embedded derivative features of certain securities. Changes in fair value are recorded in net realized capital gains (losses).

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)

The following table presents the Company’s fixed maturities, AFS, by contractual maturity year.



	September 30, 2012
Contractual Maturity	Amortized Cost		Fair Value
One year or less	$	2,178	$	2,195
Over one year through five years	14,920		15,851
Over five years through ten years	15,614		17,161
Over ten years	28,287		31,939
Subtotal	60,999		67,146
Mortgage-backed and asset-backed securities	19,691		19,580
Total fixed maturities, AFS	$	80,690	$	86,726

Estimated maturities may differ from contractual maturities due to security call or prepayment provisions. Due to the potential for variability in payment speeds (i.e. prepayments or extensions), mortgage-backed and asset-backed securities are not categorized by contractual maturity.

Securities Unrealized Loss Aging

The following tables present the Company’s unrealized loss aging for AFS securities by type and length of time the security was in a continuous unrealized loss position.



	September 30, 2012
	Less Than 12 Months							12 Months or More							Total
	Amortized Cost		Fair Value		Unrealized Losses			Amortized Cost		Fair Value		Unrealized Losses			Amortized Cost		Fair Value		Unrealized Losses
ABS	$	12	$	11	$	(1	)	$	1,071	$	845	$	(226	)	$	1,083	$	856	$	(227	)
CDOs [1]	20		19		(1		)	3,169		2,914		(216		)	3,189		2,933		(217		)
CMBS	232		201		(31		)	1,575		1,362		(213		)	1,807		1,563		(244		)
Corporate	1,402		1,332		(70		)	2,289		1,966		(323		)	3,691		3,298		(393		)
Foreign govt./govt. agencies	272		270		(2		)	19		16		(3		)	291		286		(5		)
Municipal	135		131		(4		)	183		167		(16		)	318		298		(20		)
RMBS	148		146		(2		)	1,147		907		(240		)	1,295		1,053		(242		)
U.S. Treasuries	1,085		1,069		(16		)	—		—		—			1,085		1,069		(16		)
Total fixed maturities	3,306		3,179		(127		)	9,453		8,177		(1,237		)	12,759		11,356		(1,364		)
Equity securities	112		106		(6		)	278		220		(58		)	390		326		(64		)
Total securities in an unrealized loss	$	3,418	$	3,285	$	(133	)	$	9,731	$	8,397	$	(1,295	)	$	13,149	$	11,682	$	(1,428	)

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)



	December 31, 2011
	Less Than 12 Months							12 Months or More							Total
	Amortized Cost		Fair Value		Unrealized Losses			Amortized Cost		Fair Value		Unrealized Losses			Amortized Cost		Fair Value		Unrealized Losses
ABS	$	629	$	594	$	(35	)	$	1,169	$	872	$	(297	)	$	1,798	$	1,466	$	(332	)
CDOs [1]	81		59		(22		)	2,709		2,383		(326		)	2,790		2,442		(348		)
CMBS	1,297		1,194		(103		)	2,144		1,735		(409		)	3,441		2,929		(512		)
Corporate	4,388		4,219		(169		)	3,268		2,627		(570		)	7,656		6,846		(739		)
Foreign govt./govt. agencies	218		212		(6		)	51		47		(4		)	269		259		(10		)
Municipal	299		294		(5		)	627		560		(67		)	926		854		(72		)
RMBS	415		330		(85		)	1,206		835		(371		)	1,621		1,165		(456		)
U.S. Treasuries	343		341		(2		)	—		—		—			343		341		(2		)
Total fixed maturities	7,670		7,243		(427		)	11,174		9,059		(2,044		)	18,844		16,302		(2,471		)
Equity securities	167		138		(29		)	439		265		(174		)	606		403		(203		)
Total securities in an unrealized loss	$	7,837	$	7,381	$	(456	)	$	11,613	$	9,324	$	(2,218	)	$	19,450	$	16,705	$	(2,674	)


[1]	Unrealized losses exclude the change in fair value of bifurcated embedded derivative features of certain securities. Changes in fair value are recorded in net realized capital gains (losses).

As of September 30, 2012, AFS securities in an unrealized loss position, comprised of 2,191 securities, primarily related to commercial real estate, corporate securities within the financial services sector RMBS and ABS which have experienced price deterioration. As of September 30, 2012, 81% of these securities were depressed less than 20% of cost or amortized cost. The decline in unrealized losses during 2012 was primarily attributable to credit spread tightening and declining interest rates.

Most of the securities depressed for twelve months or more relate to structured securities with exposure to commercial and residential real estate, as well as certain floating rate corporate securities or securities with greater than 10 years to maturity, concentrated in the financial services sector. Current market spreads continue to be significantly wider than spreads at the security's respective purchase date for structured securities with exposure to commercial and residential real estate largely due to the economic and market uncertainties regarding future performance of commercial and residential real estate. The majority of these securities have a floating-rate coupon referenced to a market index that has declined substantially. In addition, equity securities include investment grade perpetual preferred securities that contain “debt-like” characteristics where the decline in fair value is not attributable to issuer-specific credit deterioration, none of which have, nor are expected to, miss a periodic dividend payment. These securities have been depressed due to the securities’ floating-rate coupon in the current low interest rate environment, general market credit spread widening since the date of purchase and the long-dated nature of the securities. The Company neither has an intention to sell nor does it expect to be required to sell the securities outlined above.

Mortgage Loans



	September 30, 2012							December 31, 2011
	Amortized Cost [1]		Valuation Allowance			Carrying Value		Amortized Cost [1]		Valuation Allowance			Carrying Value
Commercial	$	6,946	$	(83	)	$	6,863	$	5,830	$	(102	)	$	5,728
Total mortgage loans	$	6,946	$	(83	)	$	6,863	$	5,830	$	(102	)	$	5,728


[1]	Amortized cost represents carrying value prior to valuation allowances, if any.

As of September 30, 2012 and December 31, 2011, the carrying value of mortgage loans associated with the valuation allowance was $546 and $621, respectively. Included in the table above are mortgage loans held-for-sale with a carrying value and valuation allowance of $57 and $4, respectively, as of September 30, 2012 and $74 and $4, respectively, as of December 31, 2011. The carrying value of these loans is included in mortgage loans in the Company’s Condensed Consolidated Balance Sheets. As of September 30, 2012, loans within the Company’s mortgage loan portfolio that have had extensions or restructurings other than what is allowable under the original terms of the contract are immaterial.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)

The following table presents the activity within the Company’s valuation allowance for mortgage loans. These loans have been evaluated both individually and collectively for impairment. Loans evaluated collectively for impairment are immaterial.



	2012			2011
Balance, as of January 1	$	(102	)	$	(155	)
(Additions)/Reversals	1			(27		)
Deductions	18			35
Balance, as of September 30	$	(83	)	$	(147	)

The current weighted-average LTV ratio of the Company’s commercial mortgage loan portfolio was 64% as of September 30, 2012, while the weighted-average LTV ratio at origination of these loans was 63%. LTV ratios compare the loan amount to the value of the underlying property collateralizing the loan. The loan values are updated no less than annually through property level reviews of the portfolio. Factors considered in the property valuation include, but are not limited to, actual and expected property cash flows, geographic market data and capitalization rates. DSCRs compare a property’s net operating income to the borrower’s principal and interest payments. The current weighted average DSCR of the Company’s commercial mortgage loan portfolio was 2.29x as of September 30, 2012. The Company held only two delinquent commercial mortgage loans past due by 90 days or more. The total carrying value and valuation allowance of these loans totaled $32 and $50, respectively, as of September 30, 2012, and are not accruing income.

The following table presents the carrying value of the Company’s commercial mortgage loans by LTV and DSCR.



Commercial Mortgage Loans Credit Quality
	September 30, 2012			December 31, 2011
Loan-to-value	Carrying Value		Avg. Debt-Service Coverage Ratio	Carrying Value		Avg. Debt-Service Coverage Ratio
Greater than 80%	$	372	1.54x	$	707	1.45x
65% - 80%	2,569		2.12x	2,384		1.60x
Less than 65%	3,922		2.49x	2,637		2.40x
Total commercial mortgage loans	$	6,863	2.29x	$	5,728	1.94x

The following tables present the carrying value of the Company’s mortgage loans by region and property type.



Mortgage Loans by Region
	September 30, 2012				December 31, 2011
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
East North Central	$	145	2.1	%	$	94	1.6	%
Middle Atlantic	498		7.3	%	508		8.9	%
Mountain	100		1.5	%	125		2.2	%
New England	335		4.9	%	294		5.1	%
Pacific	2,054		29.9	%	1,690		29.5	%
South Atlantic	1,388		20.2	%	1,149		20.1	%
West North Central	16		0.2	%	30		0.5	%
West South Central	435		6.3	%	224		3.9	%
Other [1]	1,892		27.6	%	1,614		28.2	%
Total mortgage loans	$	6,863	100.0	%	$	5,728	100.0	%


[1]	Primarily represents loans collateralized by multiple properties in various regions.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)



Mortgage Loans by Property Type
	September 30, 2012				December 31, 2011
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
Commercial
Agricultural	$	155	2.3	%	$	249	4.3	%
Industrial	2,082		30.3	%	1,747		30.5	%
Lodging	82		1.2	%	93		1.6	%
Multifamily	1,329		19.4	%	1,070		18.7	%
Office	1,517		22.1	%	1,078		18.8	%
Retail	1,449		21.1	%	1,234		21.5	%
Other	249		3.6	%	257		4.6	%
Total mortgage loans	$	6,863	100.0	%	$	5,728	100.0	%

Variable Interest Entities

The Company is involved with various special purpose entities and other entities that are deemed to be VIEs primarily as a collateral manager and as an investor through normal investment activities, as well as a means of accessing capital. A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest or lacks sufficient funds to finance its own activities without financial support provided by other entities.

The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in the VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. Based on the Company’s assessment, if it determines it is the primary beneficiary, the Company consolidates the VIE in the Company’s Condensed Consolidated Financial Statements.

Consolidated VIEs

The following table presents the carrying value of assets and liabilities, and the maximum exposure to loss relating to the VIEs for which the Company is the primary beneficiary. Creditors have no recourse against the Company in the event of default by these VIEs nor does the Company have any implied or unfunded commitments to these VIEs. The Company’s financial or other support provided to these VIEs is limited to its investment management services and original investment.



	September 30, 2012						December 31, 2011
	Total Assets		Total Liabilities [1]		Maximum Exposure to Loss [2]		Total Assets		Total Liabilities [1]		Maximum Exposure to Loss [2]
CDOs [3]	$	446	$	420	$	15	$	491	$	471	$	29
Investment funds [4]	164		—		157		—		—		—
Limited partnerships	6		—		6		7		—		7
Total	$	616	$	420	$	178	$	498	$	471	$	36


[1]	Included in other liabilities in the Company’s Condensed Consolidated Balance Sheets.


[2]	The maximum exposure to loss represents the maximum loss amount that the Company could recognize as a reduction in net investment income or as a realized capital loss and is the cost basis of the Company’s investment.


[3]	Total assets included in fixed maturities, AFS, and fixed maturities, FVO, in the Company’s Condensed Consolidated Balance Sheets.


[4]	Total assets included in fixed maturities, AFS, and short-term investments in the Company’s Condensed Consolidated Balance Sheets.

CDOs represent structured investment vehicles for which the Company has a controlling financial interest as it provides collateral management services, earns a fee for those services and also holds investments in the securities issued by these vehicles. Investment funds represents wholly-owned fixed income funds established in 2012 for which the Company has exclusive management and control of this investment which is the activity that most significantly impacts its economic performance. Limited partnerships represent one hedge fund for which the Company holds a majority interest in the fund as an investment.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)

Non-Consolidated VIEs

The Company holds a significant variable interest for one VIE for which it is not the primary beneficiary and, therefore, was not consolidated on the Company’s Condensed Consolidated Balance Sheets. This VIE represents a contingent capital facility (“facility”) that has been held by the Company since February 2007 for which the Company has no implied or unfunded commitments. Assets and liabilities recorded for the facility were $24 and $23, respectively as of September 30, 2012 and $28 and $28, respectively, as of December 31, 2011. Additionally, the Company has a maximum exposure to loss of $3 and $3, respectively, as of September 30, 2012 and December 31, 2011, which represents the issuance costs that were incurred to establish the facility. The Company does not have a controlling financial interest as it does not manage the assets of the facility nor does it have the obligation to absorb losses or the right to receive benefits that could potentially be significant to the facility, as the asset manager has significant variable interest in the vehicle. The Company’s financial or other support provided to the facility is limited to providing ongoing support to cover the facility’s operating expenses. For further information on the facility, see Note 14 of the Notes to Consolidated Financial Statements included in The Hartford’s 2011 Form 10-K Annual Report.

In addition, the Company, through normal investment activities, makes passive investments in structured securities issued by VIEs for which the Company is not the manager which are included in ABS, CDOs, CMBS and RMBS in the Available-for-Sale Securities table and fixed maturities, FVO, in the Company’s Condensed Consolidated Balance Sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the relative size of the Company’s investment in comparison to the principal amount of the structured securities issued by the VIEs, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits and the Company’s inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of the Company’s investment.

Repurchase Agreements and Dollar Roll Agreements

The Company enters into repurchase agreements and dollar roll transactions to earn incremental spread income. A repurchase agreement is a transaction in which one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous agreement to repurchase the same securities at a specified price at a later date. A dollar roll is a type of repurchase transaction where a mortgage backed security is sold with an agreement to repurchase substantially the same security at a specified time in the future. These transactions are generally short-term in nature, and therefore, the carrying amounts of these instruments approximate fair value.

As part of repurchase agreements and dollar roll transactions, the Company transfers U.S. government and government agency securities and receives cash. For the repurchase agreements, the Company obtains collateral in an amount equal to at least 95% of the fair value of the securities transferred, and the agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary. The cash received from the repurchase program is typically invested in short-term investments or fixed maturities. The Company accounts for the repurchase agreements and dollar roll transactions as collateralized borrowings. The securities transferred under repurchase agreements and dollar roll transactions are included in fixed maturity, available-for-sale securities with the obligation to repurchase those securities recorded in Other Liabilities on the Company's Condensed Consolidated Balance Sheets. The fair value of the securities transferred was $1.6 billion as of September 30, 2012. The obligation for securities sold under agreement to repurchase was $(1.6) billion as of September 30, 2012.

Derivative Instruments

The Company utilizes a variety of over-the-counter and exchange traded derivative instruments as a part of its overall risk management strategy, as well as to enter into replication transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, credit spread, issuer default, price, and currency exchange rate risk or volatility. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that would be permissible investments under the Company’s investment policies. The Company also purchases and issues financial instruments and products that either are accounted for as free-standing derivatives, such as certain reinsurance contracts, or may contain features that are deemed to be embedded derivative instruments, such as the GMWB rider included with certain variable annuity products.

Cash flow hedges

Interest rate swaps

Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed maturity securities. 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 related to the purchase of fixed-rate securities. These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)

Foreign currency swaps

Foreign currency swaps are used to convert foreign currency-denominated cash flows related to certain investment receipts and liability payments to U.S. dollars in order to reduce cash flow fluctuations due to changes in currency rates.

Fair value hedges

Interest rate swaps

Interest rate swaps are used to hedge the changes in fair value of certain fixed rate liabilities and fixed maturity securities due to fluctuations in interest rates.

Foreign currency swaps

Foreign currency swaps are used to hedge the changes in fair value of certain foreign currency-denominated fixed rate liabilities due to changes in foreign currency rates by swapping the fixed foreign payments to floating rate U.S. dollar denominated payments.

Non-qualifying strategies

Interest rate swaps, swaptions, caps, floors, and futures

The Company uses interest rate swaps, swaptions, caps, floors, and futures to manage duration between assets and liabilities in certain investment portfolios. In addition, during the three months ended September 30, 2012, the Company entered into interest rate swaptions to hedge the interest rate risk of the securities being transferred related to the sale of the Retirement Plan business segment.

The Company also enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap. As of September 30, 2012 and December 31, 2011, the notional amount of interest rate swaps in offsetting relationships was $7.6 billion and $7.8 billion, respectively.

Foreign currency swaps and forwards

The Company enters into foreign currency swaps and forwards to convert the foreign currency exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars.

Japan 3Win foreign currency swaps

Prior to the second quarter of 2009, The Company offered certain variable annuity products with a guaranteed minimum income benefit (“GMIB”) rider through a wholly-owned Japanese subsidiary. The GMIB rider is reinsured to a wholly-owned U.S. subsidiary, which invests in U.S. dollar denominated assets to support the liability. The U.S. subsidiary entered into pay U.S. dollar, receive yen swap contracts to hedge the currency and interest rate exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments.

Japanese fixed annuity hedging instruments

Prior to the second quarter of 2009, The Company offered a yen denominated fixed annuity product through a wholly-owned Japanese subsidiary and reinsured to a wholly-owned U.S. subsidiary. The U.S. subsidiary invests in U.S. dollar denominated securities to support the yen denominated fixed liability payments and entered into currency rate swaps to hedge the foreign currency exchange rate and yen interest rate exposures that exist as a result of U.S. dollar assets backing the yen denominated liability.

Credit derivatives that purchase credit protection

Credit default swaps are used to purchase credit protection on an individual entity or referenced index to economically hedge against default risk and credit-related changes in value on fixed maturity securities. These contracts require the Company to pay a periodic fee in exchange for compensation from the counterparty should the referenced security issuers experience a credit event, as defined in the contract.

Credit derivatives that assume credit risk

Credit default swaps are used to assume credit risk related to an individual entity, referenced index, or asset pool, as a part of replication transactions. These contracts entitle the Company to receive a periodic fee in exchange for an obligation to compensate the derivative counterparty should the referenced security issuers experience a credit event, as defined in the contract. The Company is also exposed to credit risk due to credit derivatives embedded within certain fixed maturity securities. These securities are primarily comprised of structured securities that contain credit derivatives that reference a standard index of corporate securities.

Credit derivatives in offsetting positions

The Company enters into credit default swaps to terminate existing credit default swaps, thereby offsetting the changes in value of the original swap going forward.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)

Equity index swaps and options

The Company offers certain equity indexed products, which may contain an embedded derivative that requires bifurcation. The Company enters into S&P index swaps and options to economically hedge the equity volatility risk associated with these embedded derivatives. In addition, during the third quarter of 2011, the Company entered into equity index options and futures with the purpose of hedging the impact of an adverse equity market environment on the investment portfolio.

U.S. GMWB product derivatives

The Company currently offers certain variable annuity products with a GMWB rider in the U.S. Effective May 1, 2012, all new U.S. annuity policies, including the GMWB rider, sold by the Company are reinsured to a third party. The GMWB is a bifurcated 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. Certain contract provisions can increase the GRB at contractholder election or after the passage of time. The notional value of the embedded derivative is the GRB.

U.S. GMWB reinsurance contracts

The Company has entered into reinsurance arrangements to offset a portion of its risk exposure to the GMWB for the remaining lives of covered variable annuity contracts. Reinsurance contracts covering GMWB are accounted for as free-standing derivatives. The notional amount of the reinsurance contracts is the GRB amount.

U.S. GMWB hedging instruments

The Company enters into derivative contracts to partially hedge exposure associated with a portion of the GMWB liabilities that are not reinsured. These derivative contracts include customized swaps, interest rate swaps and futures, and equity swaps, options, and futures, on certain indices including the S&P 500 index, EAFE index, and NASDAQ index.

The following table represents notional and fair value for U.S. GMWB hedging instruments.



	Notional Amount				Fair Value
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
Customized swaps	$	8,153	$	8,389	$	269	$	385
Equity swaps, options, and futures	6,330		5,320		308		498
Interest rate swaps and futures	5,330		2,697		97		11
Total	$	19,813	$	16,406	$	674	$	894

U.S. macro hedge program

The Company utilizes equity options and futures contracts to partially hedge against a decline in the equity markets and the resulting statutory surplus and capital impact primarily arising from guaranteed minimum death benefit (“GMDB”), GMIB and GMWB obligations.

The following table represents notional and fair value for the U.S. macro hedge program.



	Notional Amount				Fair Value
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
Equity futures	$	—	$	59	$	—	$	—
Equity options	5,583		6,760		82		357
Total	$	5,583	$	6,819	$	82	$	357

International program product derivatives

The Company formerly offered certain variable annuity products with GMWB or GMAB riders in the U.K. and Japan. The GMWB and GMAB are bifurcated embedded derivatives. The GMWB provides the policyholder with a 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. Certain contract provisions can increase the GRB at contractholder election or after the passage of time. The GMAB provides the policyholder with their initial deposit in a lump sum after a specified waiting period. The notional amount of the embedded derivatives are the foreign currency denominated GRBs converted to U.S. dollars at the current foreign spot exchange rate as of the reporting period date.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)

International program hedging instruments

The Company utilizes equity futures, options and swaps, and currency forwards and options to partially hedge against a decline in the debt and equity markets or changes in foreign currency exchange rates and the resulting statutory surplus and capital impact primarily arising from GMDB, GMIB and GMWB obligations issued in the U.K. and Japan. The Company also enters into foreign currency denominated interest rate swaps and swaptions to hedge the interest rate exposure related to the potential annuitization of certain benefit obligations.

The following table represents notional and fair value for the international program hedging instruments.



	Notional Amount				Fair Value
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
Credit derivatives	$	50	$	—	$	6	$	—
Currency forwards [1]	10,148		8,622		14		446
Currency options	9,708		7,357		166		127
Equity futures	4,323		3,835		—		—
Equity options	4,751		1,565		51		74
Equity swaps [2]	2,588		392		34		(8		)
Interest rate futures	727		739		—		—
Interest rate swaps and swaptions	34,999		11,216		291		111
Total	$	67,294	$	33,726	$	562	$	750


[1]	As of September 30, 2012 and December 31, 2011 net notional amounts are $1.9 billion and $7.2 billion, respectively, which include $6.0 billion and $7.9 billion, respectively, related to long positions and $4.1 billion and $0.7 billion, respectively, related to short positions.


[2]	As of September 30, 2012 the net notional amount is $0.8 billion, which includes $1.7 billion related to long positions and $0.9 billion related to short positions. As of December 31, 2011 the net notional amount of $0.4 billion related to long positions only.

Contingent capital facility put option

The Company entered into a put option agreement that provides the Company the right to require a third-party trust to purchase, at any time, The Hartford’s junior subordinated notes in a maximum aggregate principal amount of $500. Under the put option agreement, The Hartford will pay premiums on a periodic basis and will reimburse the trust for certain fees and ordinary expenses.

Derivative Balance Sheet Classification

The table below summarizes the balance sheet classification of the Company’s derivative related fair value amounts, as well as the gross asset and liability fair value amounts. For reporting purposes, the Company offsets the fair value amounts, income accruals, and cash collateral held related to derivative instruments executed in a legal entity and with the same counterparty under a master netting agreement, which provides the Company with the legal right of offset. The fair value amounts presented below do not include income accruals or cash collateral held amounts, which are netted with derivative fair value amounts to determine balance sheet presentation. Derivative fair value reported as liabilities after taking into account the master netting agreements, is $1.7 billion and $3.2 billion as of September 30, 2012, and December 31, 2011, respectively. Derivatives in the Company’s separate accounts are not included because the associated gains and losses accrue directly to policyholders. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the table below. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of the Company’s derivative activity. Notional amounts are not necessarily reflective of credit risk.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)



	Net Derivatives										Asset Derivatives				Liability Derivatives
	Notional Amount				Fair Value						Fair Value				Fair Value
Hedge Designation/ Derivative Type	Sep 30, 2012		Dec 31, 2011		Sep 30, 2012			Dec 31, 2011			Sep 30, 2012		Dec 31, 2011		Sep 30, 2012			Dec 31, 2011
Cash flow hedges
Interest rate swaps	$	7,914	$	8,652	$	359		$	329		$	359	$	329	$	—		$	—
Foreign currency swaps	180		291		(18		)	6			4		30		(22		)	(24		)
Total cash flow hedges	8,094		8,943		341			335			363		359		(22		)	(24		)
Fair value hedges
Interest rate swaps	776		1,007		(61		)	(78		)	—		—		(61		)	(78		)
Foreign currency swaps	40		677		15			(39		)	15		63		—			(102		)
Total fair value hedges	816		1,684		(46		)	(117		)	15		63		(61		)	(180		)
Non-qualifying strategies
Interest rate contracts
Interest rate swaps, caps, floors, and futures	13,179		10,144		(553		)	(583		)	578		531		(1,131		)	(1,114		)
Foreign exchange contracts
Foreign currency swaps and forwards	397		380		(14		)	(12		)	7		6		(21		)	(18		)
Japan 3Win foreign currency swaps	2,054		2,054		78			184			78		184		—			—
Japanese fixed annuity hedging instruments	1,648		1,945		371			514			392		540		(21		)	(26		)
Credit contracts
Credit derivatives that purchase credit protection	1,041		1,721		(4		)	36			15		56		(19		)	(20		)
Credit derivatives that assume credit risk [1]	3,669		2,952		(339		)	(648		)	13		2		(352		)	(650		)
Credit derivatives in offsetting positions	9,428		8,189		(39		)	(57		)	110		164		(149		)	(221		)
Equity contracts
Equity index swaps and options	924		1,501		55			27			68		40		(13		)	(13		)
Variable annuity hedge program
U.S. GMWB product derivatives [2]	30,213		34,569		(1,413		)	(2,538		)	—		—		(1,413		)	(2,538		)
U.S. GMWB reinsurance contracts	6,116		7,193		199			443			199		443		—			—
U.S. GMWB hedging instruments	19,813		16,406		674			894			842		1,022		(168		)	(128		)
U.S. macro hedge program	5,583		6,819		82			357			82		357		—			—
International program product derivatives [2]	2,607		2,710		(36		)	(71		)	—		—		(36		)	(71		)
International program hedging instruments	67,294		33,726		562			750			1,150		887		(588		)	(137		)
Other
Contingent capital facility put option	500		500		24			28			24		28		—			—
Total non-qualifying strategies	164,466		130,809		(353		)	(676		)	3,558		4,260		(3,911		)	(4,936		)
Total cash flow hedges, fair value hedges, and non-qualifying strategies	$	173,376	$	141,436	$	(58	)	$	(458	)	$	3,936	$	4,682	$	(3,994	)	$	(5,140	)
Balance Sheet Location
Fixed maturities, available-for-sale	$	703	$	703	$	(40	)	$	(72	)	$	—	$	—	$	(40	)	$	(72	)
Other investments	74,605		60,227		1,473			2,331			2,322		3,165		(849		)	(834		)
Other liabilities	59,051		35,944		(229		)	(538		)	1,415		1,074		(1,644		)	(1,612		)
Consumer notes	27		35		(2		)	(4		)	—		—		(2		)	(4		)
Reinsurance recoverables	6,116		7,193		199			443			199		443		—			—
Other policyholder funds and benefits payable	32,874		37,334		(1,459		)	(2,618		)	—		—		(1,459		)	(2,618		)
Total derivatives	$	173,376	$	141,436	$	(58	)	$	(458	)	$	3,936	$	4,682	$	(3,994	)	$	(5,140	)


[1]	The derivative instruments related to this strategy are held for other investment purposes.


[2]	These derivatives are embedded within liabilities and are not held for risk management purposes.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)

Change in Notional Amount

The net increase in notional amount of derivatives since December 31, 2011, was primarily due to the following:

•

The $67.3 billion notional amount related to the international program hedging instruments as of September 30, 2012, consisted of $62.3 billion of long positions and $5.0 billion of offsetting short positions, resulting in a net notional amount of $57.3 billion. The $33.7 billion notional amount as of December 31, 2011, consisted of $33.0 billion of long positions and $0.7 billion of offsetting short positions, resulting in a net notional amount of $32.3 billion. The increase in net notional of $25.0 billion primarily resulted from The Company increasing its hedging of interest rate exposure.

Change in Fair Value

The net increase in the total fair value of derivative instruments since December 31, 2011, was primarily related to the following:


•	The increase in fair value related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily due to a liability model assumption update, favorable policyholder behavior, and lower equity market volatility.


•	The increase in fair value related to credit derivatives that assume credit risk was primarily due to credit spread tightening.


•	The fair value related to the international program hedging instruments decreased as a result of an improvement in global and domestic equity markets and depreciation of the Japanese yen in relation to the euro and the U.S. dollar.


•	The fair value related to the U.S. macro hedge program decreased due to an improvement in domestic equity markets, passage of time, and lower equity volatility.


•	The fair value related to the Japanese fixed annuity hedging instruments and Japan 3Win foreign currency swaps decreased primarily due to a decline in U.S. interest rates, depreciation of the Japanese yen in relation to the U.S. dollar and strengthening of the currency basis swap spread between U.S. dollar and Japanese yen.

Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current period earnings. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.

The following table presents the components of the gain or loss on derivatives that qualify as cash flow hedges:

Derivatives in Cash Flow Hedging Relationships



	Gain (Loss) Recognized in OCI on Derivative (Effective Portion)										Net Realized Capital Gains(Losses) Recognized in Income on Derivative (Ineffective Portion)
	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011		2012		2011			2012		2011
Interest rate swaps	$	42		$	263	$	185		$	345	$	—	$	(3	)	$	—	$	(5	)
Foreign currency swaps	(2		)	—		(31		)	—		—		—			—		—
Total	$	40		$	263	$	154		$	345	$	—	$	(3	)	$	—	$	(5	)

Derivatives in Cash Flow Hedging Relationships



		Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
		Three Months Ended September 30,					Nine Months Ended September 30,
	Location	2012		2011			2012			2011
Interest rate swaps	Net realized capital gain/(loss)	$	4	$	4		$	10		$	8
Interest rate swaps	Net investment income	36		33			110			96
Foreign currency swaps	Net realized capital gain/(loss)	1		(9		)	(7		)	(1		)
Total		$	41	$	28		$	113		$	103

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)

As of September 30, 2012, the before-tax deferred net gains on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are $119. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains (losses) as an adjustment to interest income over the term of the investment cash flows. The maximum term over which the Company is hedging its exposure to the variability of future cash flows (for forecasted transactions, excluding interest payments on existing variable-rate financial instruments) is approximately three years.

During the three months months ended September 30, 2012, the Company had no net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring. During the nine months ended September 30, 2012 the Company had $15 of net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring. During the three months and nine months ended September 30, 2011, the Company had no net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring.

Fair Value Hedges

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The Company includes the gain or loss on the derivative in the same line item as the offsetting loss or gain on the hedged item. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.

The Company recognized in income gains (losses) representing the ineffective portion of fair value hedges as follows:

Derivatives in Fair-Value Hedging Relationships



	Gain or (Loss) Recognized in Income [1]
	Three Months Ended September 30,										Nine Months Ended September 30,
	2012					2011					2012					2011
	Derivative			Hedge Item		Derivative			Hedge Item		Derivative			Hedge Item		Derivative			Hedge Item
Interest rate swaps
Net realized capital gain/(loss)	$	(2	)	$	1	$	(54	)	$	54	$	(7	)	$	4	$	(71	)	$	71
Foreign currency swaps
Net realized capital gain/(loss)	(6		)	6		(28		)	28		(8		)	8		8			(8		)
Benefits, losses and loss adjustment expenses	—			—		(5		)	5		(6		)	6		(14		)	14
Total	$	(8	)	$	7	$	(87	)	$	87	$	(21	)	$	18	$	(77	)	$	77


[1]	The amounts presented do not include the periodic net coupon settlements of the derivative or the coupon income (expense) related to the hedged item. The net of the amounts presented represents the ineffective portion of the hedge.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)

Non-qualifying Strategies

For non-qualifying strategies, including embedded derivatives that are required to be bifurcated from their host contracts and accounted for as derivatives, the gain or loss on the derivative is recognized currently in earnings within net realized capital gains (losses). The following table presents the gain or loss recognized in income on non-qualifying strategies:

Derivatives Used in Non-Qualifying Strategies

Gain or (Loss) Recognized within Net Realized Capital Gains and Losses



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Interest rate contracts
Interest rate swaps, caps, floors, and forwards	$	3		$	(25	)	$	(12	)	$	(24	)
Foreign exchange contracts
Foreign currency swaps and forwards	(4		)	19			23			7
Japan 3Win foreign currency swaps [1]	15			39			(106		)	14
Japanese fixed annuity hedging instruments [2]	24			103			(46		)	98
Credit contracts
Credit derivatives that purchase credit protection	(18		)	31			(49		)	11
Credit derivatives that assume credit risk	99			(183		)	272			(178		)
Equity contracts
Equity index swaps and options	(13		)	(56		)	(29		)	(54		)
Variable annuity hedge program
U.S. GMWB product derivatives	823			(1,315		)	1,235			(1,047		)
U.S. GMWB reinsurance contracts	(184		)	241			(265		)	180
U.S. GMWB hedging instruments	(258		)	751			(519		)	567
U.S. macro hedge program	(109		)	107			(292		)	6
International program product derivatives	26			(54		)	45			(44		)
International program hedging instruments	(193		)	1,186			(678		)	909
Other
Contingent capital facility put option	(2		)	(1		)	(5		)	(4		)
Total	$	209		$	843		$	(426	)	$	441


[1]	The associated liability is adjusted for changes in spot rates through realized capital gains and was $(46) and $(93) for the three months ended September 30, 2012 and 2011, respectively, and $19 and $(100) for the nine months ended September 30, 2012 and 2011, respectively.


[2]	The associated liability is adjusted for changes in spot rates through realized capital gains and was $(54) and $(115) for the three months ended September 30, 2012 and 2011, respectively, and $33 and $(125) for the nine months ended September 30, 2012 and 2011, respectively.

For the three and nine months ended September 30, 2012, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:

•

The net loss for the three months ended September 30, 2012, associated with the international program hedging instruments was primarily driven by an improvement in global and domestic equity markets, partially offset by appreciation of the Japanese yen in relation to the euro and the U.S. dollar. The net loss for the nine months ended September 30, 2012, was primarily driven by an improvement in global and domestic equity markets and depreciation of the Japanese yen in relation to the euro and the U.S. dollar, partially offset by a decrease in interest rates.

•

For the three and nine months ended September 30, 2012 the net gain related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily a result of a liability model assumption update related to lower benefit utilization by policyholders, a decrease in equity volatility, and outperformance of the underlying actively managed funds as compared to their respective indices.


•	For the three and nine months ended September 30, 2012 the net gain related to credit derivatives that assume credit risk was primarily due to the credit spread tightening.


•	For the nine months ended September 30, 2012 the net loss related to the Japan 3Win foreign currency swaps was primarily due to a decline in U.S. interest rates, depreciation of the Japanese yen in relation to the U.S. dollar and strengthening of the currency basis swap spread between U.S. dollar and Japanese yen.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)

For the three and nine months ended September 30, 2011, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:


•	The net gain associated with the international program hedging instruments was primarily due to a decrease in equity markets and foreign currency movements, primarily the Japanese yen strengthening in comparison to the euro.


•	The loss related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily a result of a general decrease in long-term interest rates and higher interest rate volatility.


•	The loss on credit derivatives that assume credit risk was primarily due to credit spread widening.


•	The net gain related to the Japanese fixed annuity hedging instruments was primarily due to the U.S. dollar weakening in comparison to the Japanese yen.

Refer to Note 9 for additional disclosures regarding contingent credit related features in derivative agreements.

Credit Risk Assumed through Credit Derivatives

The Company enters into credit default swaps that assume credit risk of a single entity, referenced index, or asset pool in order to synthetically replicate investment transactions. The Company will receive periodic payments based on an agreed upon rate and notional amount and will only make a payment if there is a credit event. A credit event payment will typically be equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation after the occurrence of the credit event. A credit event is generally defined as a default on contractually obligated interest or principal payments or bankruptcy of the referenced entity. The credit default swaps in which the Company assumes credit risk primarily reference investment grade single corporate issuers and baskets, which include standard and customized diversified portfolios of corporate issuers. The diversified portfolios of corporate issuers are established within sector concentration limits and may be divided into tranches that possess different credit ratings.

The following tables present the notional amount, fair value, weighted average years to maturity, underlying referenced credit obligation type and average credit ratings, and offsetting notional amounts and fair value for credit derivatives in which the Company is assuming credit risk as of September 30, 2012 and December 31, 2011.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Investments and Derivative Instruments (continued)

As of September 30, 2012



							Underlying Referenced Credit Obligation(s) [1]
Credit Derivative type by derivative risk exposure	Notional Amount [2]		Fair Value			Weighted Average Years to Maturity	Type	Average Credit Rating	Offsetting Notional Amount [3]		Offsetting Fair Value [3]
Single name credit default swaps
Investment grade risk exposure	$	2,402	$	(7	)	3 years	Corporate Credit/ Foreign Gov.	A	$	1,368	$	(30	)
Below investment grade risk exposure	144		(1		)	1 year	Corporate Credit	BB-	144		(4		)
Basket credit default swaps [4]
Investment grade risk exposure	4,434		(10		)	4 years	Corporate Credit	BBB+	2,677		(4		)
Investment grade risk exposure	330		(24		)	4 years	CMBS Credit	A	330		24
Below investment grade risk exposure	353		(282		)	3 years	Corporate Credit	BB	—		—
Below investment grade risk exposure	195		(54		)	4 years	CMBS Credit	B+	195		54
Embedded credit derivatives
Investment grade risk exposure	225		205			4 years	Corporate Credit	BBB-	—		—
Below investment grade risk exposure	300		264			4 years	Corporate Credit	BB+	—		—
Total	$	8,383	$	91					$	4,714	$	40

As of December 31, 2011



							Underlying Referenced Credit Obligation(s) [1]
Credit Derivative type by derivative risk exposure	Notional Amount [2]		Fair Value			Weighted Average Years to Maturity	Type	Average Credit Rating	Offsetting Notional Amount [3]		Offsetting Fair Value [3]
Single name credit default swaps
Investment grade risk exposure	$	1,628	$	(34	)	3 years	Corporate Credit/ Foreign Gov.	A+	$	1,424	$	(15	)
Below investment grade risk exposure	170		(7		)	2 years	Corporate Credit	BB-	144		(5		)
Basket credit default swaps [4]
Investment grade risk exposure	3,645		(92		)	3 years	Corporate Credit	BBB+	2,001		29
Investment grade risk exposure	525		(98		)	5 years	CMBS Credit	BBB+	525		98
Below investment grade risk exposure	553		(509		)	3 years	Corporate Credit	BBB+	—		—
Embedded credit derivatives
Investment grade risk exposure	25		24			3 years	Corporate Credit	BBB-	—		—
Below investment grade risk exposure	500		411			5 years	Corporate Credit	BB+	—		—
Total	$	7,046	$	(305	)				$	4,094	$	107


[1]	The average credit ratings are based on availability and the midpoint of the applicable ratings among Moody’s, S&P, and Fitch. If no rating is available from a rating agency, then an internally developed rating is used.


[2]	Notional amount is equal to the maximum potential future loss amount. There is no specific collateral related to these contracts or recourse provisions included in the contracts to offset losses.


[3]	The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid related to, the original swap.

[4]

Includes $5.0 billion and $4.2 billion as of September 30, 2012 and December 31, 2011, respectively, of standard market indices of diversified portfolios of corporate issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index. Also includes $353 and $533 as of September 30, 2012 and December 31, 2011, respectively, of customized diversified portfolios of corporate issuers referenced through credit default swaps.

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. Deferred Policy Acquisition Costs and Present Value of Future Profits

The Company capitalizes policy acquisition costs that are directly related to the successful acquisition of new and renewal insurance contracts in accordance with ASU No. 2010-26. On January 1, 2012, the Company adopted ASU No. 2010-26 as further discussed in Note 1 of the Notes to Condensed Consolidated Financial Statements. As a result of this change in accounting policy, deferred policy acquisition costs and present value of future profits as of January 1, 2011 decreased by approximately $2.4 billion from $9.9 billion, as previously reported.



Changes in the DAC balance are as follows:	Nine Months Ended September 30,
	2012			2011
Balance, beginning of period, as currently reported	$	6,556		$	7,473
Deferred Costs	1,251			1,271
Amortization – DAC	(1,397		)	(1,660		)
Amortization – Unlock charge, pre-tax	(44		)	(387		)
Adjustments to unrealized gains and losses on securities available-for-sale and other [1]	(408		)	(223		)
Effect of currency translation	(11		)	73
Balance, end of period	$	5,947		$	6,547

[1] Other includes a $16 reduction of the DAC asset as a result of the sale of assets used to administer the Company's PPLI business in 2012. The reduction is directly attributable to this transaction as it results in lower future estimated gross profits than originally estimated on these products. For further information regarding this transaction see Note 17 of the Notes to Condensed Consolidated Financial Statements.

7. Separate Accounts, Death Benefits and Other Insurance Benefit Features

U.S. GMDB, International GMDB/GMIB, and UL Secondary Guarantee Benefits

Changes in the gross U.S. GMDB, International GMDB/GMIB, and UL secondary guarantee benefits are as follows:



	U.S. GMDB			International GMDB/GMIB			UL Secondary Guarantees
Liability balance as of January 1, 2012	$	1,104		$	975		$	228
Incurred	159			100			84
Paid	(141		)	(146		)	—
Unlock	(198		)	13			21
Currency translation adjustment	—			(17		)	—
Liability balance as of September 30, 2012	$	924		$	925		$	333
Reinsurance recoverable asset, as of January 1, 2012	$	724		$	40		$	22
Incurred	90			8			(2		)
Paid	(90		)	(21		)	—
Unlock	(108		)	18			—
Currency translation adjustment	—			—			—
Reinsurance recoverable asset, as of September 30, 2012	$	616		$	45		$	20



	U.S. GMDB			International GMDB/GMIB			UL Secondary Guarantees
Liability balance as of January 1, 2011	$	1,053		$	696		$	113
Incurred	171			91			29
Paid	(156		)	(116		)	—
Unlock	171			250			66
Currency translation adjustment	—			33			—
Liability balance as of September 30, 2011	$	1,239		$	954		$	208
Reinsurance recoverable asset, as of January 1, 2011	$	686		$	36		$	30
Incurred	99			14			(10		)
Paid	(101		)	(21		)	—
Unlock	113			11			—
Currency translation adjustment	—			2			—
Reinsurance recoverable asset, as of September 30, 2011	$	797		$	42		$	20

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Separate Accounts, Death Benefits and Other Insurance Benefit Features (continued)

The following table provides details concerning GMDB and GMIB exposure as of September 30, 2012:



Individual Variable and Group Annuity Account Value by GMDB/GMIB Type
Maximum anniversary value (“MAV”) [1]	Account Value (“AV”) [8]		Net Amount at Risk (“NAR”) [10]		Retained Net Amount at Risk (“RNAR”) [10]		Weighted Average Attained Age of Annuitant
MAV only	$	20,175	$	4,204	$	851	69
With 5% rollup [2]	1,484		392		121		69
With Earnings Protection Benefit Rider (“EPB”) [3]	5,159		619		83		66
With 5% rollup & EPB	576		131		28		69
Total MAV	27,394		5,346		1,083
Asset Protection Benefit (“APB”) [4]	20,816		1,282		836		67
Lifetime Income Benefit (“LIB”) – Death Benefit [5]	1,085		42		42		65
Reset [6] (5-7 years)	3,165		158		157		69
Return of Premium (“ROP”) [7]/Other	22,147		381		362		66
Subtotal U.S. GMDB	74,607		7,209		2,480		67
Less: General Account Value with U.S. GMDB	7,380
Subtotal Separate Account Liabilities with U.S. GMDB	67,227
Separate Account Liabilities without U.S. GMDB	81,142
Total Separate Account Liabilities	$	148,369
Japan GMDB [9], [11]	$	28,725	$	9,107	$	7,882	70
Japan GMIB [9], [11]	$	26,917	$	6,092	$	6,092	70


[1]	MAV GMDB is the greatest of current AV, net premiums paid and the highest AV on any anniversary before age 80 years (adjusted for withdrawals).


[2]	Rollup GMDB is the greatest of the MAV, current AV, net premium paid and premiums (adjusted for withdrawals) accumulated at generally 5% simple interest up to the earlier of age 80 years or 100% of adjusted premiums.


[3]	EPB GMDB is the greatest of the MAV, current AV, or contract value plus a percentage of the contract’s growth. The contract’s growth is AV less premiums net of withdrawals, subject to a cap of 200% of premiums net of withdrawals.


[4]	APB GMDB is the greater of current AV or MAV, not to exceed current AV plus 25% times the greater of net premiums and MAV (each adjusted for premiums in the past 12 months).


[5]	LIB GMDB is the greatest of current AV, net premiums paid, or for certain contracts a benefit amount that ratchets over time, generally based on market performance.


[6]	Reset GMDB is the greatest of current AV, net premiums paid and the most recent five to seven year anniversary AV before age 80 years (adjusted for withdrawals).


[7]	ROP GMDB is the greater of current AV or net premiums paid.


[8]	AV includes the contract holder’s investment in the separate account and the general account.

[9]

GMDB includes a ROP and MAV (before age 80 years) paid in a single lump sum. GMIB is a guarantee to return initial investment, adjusted for earnings liquidity which allows for free withdrawal of earnings, paid through a fixed payout annuity, after a minimum deferral period of 10 years, 15 years or 20 years . The GRB related to the Japan GMIB was $32.3 billion and $34.1 billion as of September 30, 2012 and December 31, 2011, respectively. The GRB related to the Japan GMAB and GMWB was $657 as of September 30, 2012 and $701 as of December 31, 2011. These liabilities are not included in the Separate Account as they are not legally insulated from the general account liabilities of the insurance enterprise. As of September 30, 2012, 54% of the GMDB RNAR and 64% of the GMIB NAR is reinsured to a Hartford affiliate, as a result, the effects of the reinsurance are not reflected in this disclosure.


[10]	NAR is defined as the guaranteed benefit in excess of the current AV. RNAR represents NAR reduced for reinsurance. NAR and RNAR are highly sensitive to equity markets movements and increase when equity markets decline. Additionally Japan’s NAR and RNAR are highly sensitive to currency movements and increase when the Yen strengthens.


[11]	Policies with a guaranteed living benefit (GMIB in Japan) also have a guaranteed death benefit. The NAR for each benefit is shown in the table above, however these benefits are not additive. When a policy terminates due to death, any NAR related to GMWB or GMIB is released. Similarly, when a policy goes into benefit status on a GMWB or GMIB, its GMDB NAR is released.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Separate Accounts, Death Benefits and Other Insurance Benefit Features (continued)

In the U.S., account balances of contracts with guarantees were invested in variable separate accounts as follows:



Asset type	As of September 30, 2012		As of December 31, 2011
Equity securities (including mutual funds)	$	60,631	$	61,472
Cash and cash equivalents	6,596		7,516
Total	$	67,227	$	68,988

As of September 30, 2012 and December 31, 2011, approximately 17% and 17%, respectively, of the equity securities above were invested in fixed income securities through these funds and approximately 83% and 83%, respectively, were invested in equity securities through these funds.

See Note 4 for further information on guaranteed living benefits that are accounted for at fair value, such as GMWB.

8. Sales Inducements



Changes in sales inducement activity are as follows:	Nine Months Ended September 30,
	2012			2011
Balance, beginning of period	$	434		$	459
Sales inducements deferred	10			15
Amortization—Unlock	(68		)	(19		)
Amortization charged to income	(26		)	(31		)
Balance, end of period	$	350		$	424

9. Commitments and Contingencies

Litigation

The Hartford is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending or providing indemnity for third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The Hartford accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. Subject to the uncertainties discussed below under the caption “Asbestos and Environmental Claims,” management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition, results of operations or cash flows of The Hartford.

The Hartford is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. These actions include, among others, and in addition to the matters described below, putative state and federal class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, underpayment of claims or improper underwriting practices in connection with various kinds of insurance policies, such as personal and commercial automobile, property, disability, life and inland marine. 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 or other allegedly unfair or improper business practices. Like many other insurers, The Hartford also has been joined in actions by asbestos plaintiffs asserting, among other things, that insurers had a duty to protect the public from the dangers of asbestos and that insurers committed unfair trade practices by asserting defenses on behalf of their policyholders in the underlying asbestos cases. 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 Hartford. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, the outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.

Apart from the inherent difficulty of predicting litigation outcomes, the Mutual Funds Litigation identified below purports to seek substantial damages for unsubstantiated conduct spanning a multi-year period based on novel and complex legal theories. The alleged damages are not quantified or factually supported in the complaint, and, in any event, the Company’s experience shows that demands for damages often bear little relation to a reasonable estimate of potential loss. The matter is in the earliest stages of litigation, with no substantive legal decisions by the court defining the scope of the claims or the potentially available damages. The Company has not yet answered the complaint or asserted its defenses, and fact discovery has not yet begun. Accordingly, management cannot reasonably estimate the possible loss or range of loss, if any, or predict the timing of the eventual resolution of this matter.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

9. Commitments and Contingencies (continued)

Mutual Funds Litigation — In February 2011, a derivative action was brought on behalf of six Hartford retail mutual funds in the United States District Court for the District of New Jersey, alleging that Hartford Investment Financial Services, LLC (“HIFSCO”), an indirect subsidiary of the Company, received excessive advisory and distribution fees in violation of its statutory fiduciary duty under Section 36(b) of the Investment Company Act of 1940. HIFSCO moved to dismiss and, in September 2011, the motion was granted in part and denied in part, with leave to amend the complaint. In November 2011, plaintiffs filed an amended complaint on behalf of The Hartford Global Health Fund, The Hartford Conservative Allocation Fund, The Hartford Growth Opportunities Fund, The Hartford Inflation Plus Fund, The Hartford Advisors Fund, and The Hartford Capital Appreciation Fund. Plaintiffs seek to rescind the investment management agreements and distribution plans between HIFSCO and these funds and to recover the total fees charged thereunder or, in the alternative, to recover any improper compensation HIFSCO received, in addition to lost earnings. HIFSCO disputes the allegations and has filed a partial motion to dismiss.

Asbestos and Environmental Claims – As discussed in Note 12, Commitments and Contingencies, of the Notes to Consolidated Financial Statements under the caption “Asbestos and Environmental Claims”, included in the Company’s 2011 Form 10-K Annual Report, The Hartford continues to receive asbestos and environmental claims that involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels and reinsurance coverages, as well as the methodologies it uses to estimate its exposures. Because of the significant uncertainties that limit the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses, particularly those related to asbestos, the ultimate liabilities may exceed the currently recorded reserves. Any such additional liability cannot be reasonably estimated now but could be material to The Hartford’s consolidated operating results, financial condition and liquidity.

Derivative Commitments

Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings of the individual legal entity that entered into the derivative agreement as set by nationally recognized statistical rating agencies. If the legal entity’s financial strength were to fall below certain ratings, the counterparties to the derivative agreements could demand immediate and ongoing full collateralization and in certain instances demand immediate settlement of all outstanding derivative positions traded under each impacted bilateral agreement. The settlement amount is determined by netting the derivative positions transacted under each agreement. If the termination rights were to be exercised by the counterparties, it could impact the legal entity’s ability to conduct hedging activities by increasing the associated costs and decreasing the willingness of counterparties to transact with the legal entity. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position as of September 30, 2012, is $566. Of this $566 the legal entities have posted collateral of $589 in the normal course of business. Based on derivative market values as of September 30, 2012, a downgrade of one level below the current financial strength ratings by either Moody’s or S&P could require approximately an additional $22 to be posted as collateral. Based on derivative market values as of September 30, 2012, a downgrade by either Moody’s or S&P of two levels below the legal entities’ current financial strength ratings could require approximately an additional $41 of assets to be posted as collateral. These collateral amounts could change as derivative market values change, as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the collateral that we would post, if required, would be primarily in the form of U.S. Treasury bills and U.S. Treasury notes.

On March 21, 2012, Standard & Poor’s (“S&P”) Rating Services lowered its counterparty credit and insurer financial strength ratings on Hartford Life and Annuity Insurance Company to BBB+. Given this downgrade action, termination rating triggers in three derivative counterparty relationships were impacted. The Company has re-negotiated the rating triggers with two of the counterparties and is in the process of re-negotiating the rating triggers with the remaining counterparty. As of September 30, 2012, the notional amount and fair value related to the one counterparty in which the rating trigger is still in process of re-negotiation is $1.0 billion and $35, respectively. This counterparty has the right to terminate this relationship and would have to settle the outstanding derivatives prior to exercising their termination right. Accordingly, as of September 30, 2012 this counterparty would owe the Company the derivatives fair value of $35. The counterparty has not exercised this termination right.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. Employee Benefit Plans

On April 23, 2012, the Company, approved changes to The Hartford Retirement Plan for U.S. Employees ("The Plan") its non-contributory, tax qualified defined benefit pension plan, to freeze participation and benefit accruals. As a result, employees will not accrue further benefits under the cash balance formula of the plan, although interest will continue to accrue to existing account balances. The freeze will be effective December 31, 2012. Compensation earned by employees up to December 31, 2012 shall be used for purposes of calculating benefits under the Plan but there will be no future benefit accruals after this date. Participants as of December 31, 2012 will continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work. The freeze also applies to The Hartford Excess Pension Plan II, the Company's non-qualified excess benefit plan for certain highly compensated employees, effective December 31, 2012. The Company announced these changes in April 2012.

As a result of these actions, the Company remeasured the pension benefit obligations of the affected plans effective April 30, 2012, causing an increase in the pension benefit obligation of $117 pre-tax with a decrease in accumulated other comprehensive income of $76 after-tax in the second quarter of 2012. The increase primarily reflects a decrease in the discount rates used to remeasure the pension plan obligation from 4.75% at December 31, 2011 to 4.50% at April 30, 2012, reflecting the change in market interest rates. The expected long-term rate of return of 7.3% remains unchanged from December 31, 2011. A curtailment of benefits occurs as a result of this action because it eliminates all future service for active employees in the domestic pension plans. Accordingly, the Company recognized an after-tax curtailment gain of $7 during the second quarter of 2012, which is the remaining unamortized prior service cost at April 30, 2012.

Effective January 1, 2013, the Company will increase benefits under The Hartford’s Investment and Savings Plan, its defined contribution 401(k) savings plan, and The Hartford Excess Savings Plan. The Company's contributions will be increased to include a non-elective contribution of 2% of eligible compensation and a dollar-for-dollar matching contribution of up to 6.00% of eligible compensation contributed by the employee each pay period. Eligible compensation will be expanded to include overtime and bonuses. The plan will qualify for a “safe harbor” from annual discrimination testing. Currently, employee contributions of up to 6.00% of base pay are matched at a 50% rate, by the Company. Additionally, in 2012, employees who had earnings of less than $110,000 in the preceding year receive a floor contribution of 1.5% of base pay and employees who had earnings of $110,000 or more in the preceding year receive a floor contribution of 0.5% of base pay.

Also, in April 2012 changes to the Company's other postretirement medical, dental and life insurance coverage plans ("other postretirement plans") were approved to no longer provide subsidized coverage for current employees who retire on or after January 1, 2014. The Company announced these changes in April 2012.

As a result of these actions, the Company remeasured the other postretirement benefit obligations effective April 30, 2012, causing a decrease in the other postretirement plans benefit liability of $111 pre-tax with an increase in accumulated other comprehensive income of $72 after-tax in the second quarter of 2012. The decrease is primarily a result of the plan change which eliminates benefits and service costs for all employees eligible to retire as of January 1, 2014 offset by a decrease in the discount rates used to remeasure the other postretirement plans obligations from 4.50% at December 31, 2011 to 4.00% at April 30, 2012 reflecting the change in market interest rates. A curtailment of benefits occurs as a result of this action because it eliminates all future service for active employees in the domestic other postretirement plans. Accordingly, the Company recognized an after-tax curtailment gain of less than less than $1, during the second quarter of 2012, which is the remaining unamortized prior service cost at April 30, 2012.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. Employee Benefit Plans (continued)

Components of Net Periodic Benefit Cost

Net periodic benefit cost includes the following components:



	Pension Benefits						Other Postretirement Benefits
	Three Months Ended September 30,						Three Months Ended September 30,
	2012			2011			2012			2011
Service cost	$	20		$	24		$	—		$	2
Interest cost	64			64			3			5
Expected return on plan assets	(78		)	(74		)	(4		)	(3		)
Amortization of prior service credit	(2		)	(2		)	(2		)	(1		)
Amortization of actuarial loss	52			40			—			—
Curtailment gain due to plan freeze	—			—			—			—
Net periodic benefit cost	$	56		$	52		$	(3	)	$	3



	Pension Benefits						Other Postretirement Benefits
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Service cost	$	70		$	76		$	2		$	4
Interest cost	188			194			11			15
Expected return on plan assets	(234		)	(223		)	(11		)	(10		)
Amortization of prior service credit	(7		)	(7		)	(3		)	(1		)
Amortization of actuarial loss	171			119			—			—
Curtailment gain due to plan freeze	(11		)	—			—			—
Net periodic benefit cost	$	177		$	159		$	(1	)	$	8

11. Stock Compensation Plans

The Company’s stock-based compensation plans include The Hartford 2010 Incentive Stock Plan, The Hartford Employee Stock Purchase Plan and The Hartford Deferred Stock Unit Plan. For a description of these plans, see Note 18 of the Notes to Consolidated Financial Statements included in The Hartford’s 2011 Form 10-K Annual Report.

Shares issued in satisfaction of stock-based compensation may be made available from authorized but unissued shares, shares held by the Company in treasury or from shares purchased in the open market. The Company typically issues shares from treasury in satisfaction of stock-based compensation.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Stock-based compensation plans (benefit)/expense	$	20		$	(16	)	$	73		$	30
Income tax (benefit)/expense	(7		)	6			(25		)	(11		)
Total stock-based compensation plans (benefit)/expense, net of tax	$	13		$	(10	)	$	48		$	19

In 2010 and 2009, the Company issued awards that will ultimately be settled in cash. As a result, these awards are re-measured at the end of each reporting period until settlement.

The Company did not capitalize any cost of stock-based compensation. As of September 30, 2012, the total compensation cost related to non-vested awards not yet recognized was $95, which is expected to be recognized over a weighted average period of 1.9 years.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

12. Discontinued Operations

The following table presents the combined amounts related to the operations of Federal Trust Corporation and Specialty Risk Services, which have been reflected as discontinued operations in the Condensed Consolidated Statements of Operations. For further explanation of the Company’s discontinued operations refer to Note 20 of the Notes to Consolidated Financial Statements in The Hartford’s 2011 Form 10-K Annual Report.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues
Fee income	$	—		$	(1	)	$	—		$	—
Net investment income	—			5			—			16
Net realized capital losses	—			—			—			(5		)
Other revenues	—			—			—			47
Total revenues	—			4			—			58
Benefits, losses and expenses
Insurance operating costs and other expenses	2			5			5			51
Total benefits, losses and expenses	2			5			5			51
Income (loss) before income taxes	(2		)	(1		)	(5		)	7
Income tax expense (benefit)	(1		)	—			(2		)	2
Income (loss) from operations of discontinued operations, net of tax	(1		)	(1		)	(3		)	5
Net realized capital gain (loss) on disposal, net of tax	(1		)	4			(1		)	80
Income (loss) from discontinued operations, net of tax	$	(2	)	$	3		$	(4	)	$	85

13. Goodwill

The carrying value of goodwill allocated to reporting units is as follows:



	September 30, 2012									December 31, 2011
	Gross		Accumulated Impairments			Discontinued Operations		Carrying Value		Gross		Accumulated Impairments			Discontinued Operations [1]			Carrying Value
Commercial Markets
Property and Casualty Commercial	$	30	$	(30	)	$	—	$	—	$	30	$	(30	)	$	—		$	—
Consumer Markets	119		—			—		119		119		—			—			119
Wealth Management
Individual Life	224		—			—		224		224		—			—			224
Retirement Plans	87		—			—		87		87		—			—			87
Mutual Funds	159		—			—		159		159		—			—			159
Total Wealth Management	470		—			—		470		470		—			—			470
Corporate	772		(355		)	—		417		787		(355		)	(15		)	417
Total Goodwill	$	1,391	$	(385	)	$	—	$	1,006	$	1,406	$	(385	)	$	(15	)	$	1,006


[1]	Represents goodwill written off related to Federal Trust Corporation which is currently recorded in discontinued operations.

During the first quarter of 2012, the Company determined that a triggering event requiring an impairment assessment had occurred as a result of its decision to pursue sales or other strategic alternatives for the Individual Life and Retirement Plans reporting units. The Company completed interim impairment tests during each of the first three quarters of 2012 for these two reporting units which resulted in no impairment of goodwill.

Retirement Plans and Individual Life passed step one of the interim goodwill impairment test with a margin of less than 10% between fair value and book value of the reporting unit as of September 30, 2012. The fair value of the Retirement Plans and Individual Life reporting units is based on a negotiated transaction price. There could be a positive or negative impact on the result of step one in future periods based on ultimate transaction prices, market conditions and business operations.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14. Debt

Senior Notes

On April 5, 2012, the Company issued $1.55 billion aggregate principal amount of senior notes. The issuance consisted of $325 of 4% senior notes due 2017, $800 of 5.125% senior notes due 2022 and $425 of 6.625% senior notes due 2042 (collectively, the “Senior Notes”) for net proceeds of approximately $1.5 billion, after deducting underwriting discounts and offering expenses. The Senior Notes bear interest at their respective rate, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2012.

Junior Subordinated Debentures

On April 17, 2012, the Company (i) repurchased all outstanding 10% fixed-to-floating rate junior subordinated debentures due 2068 with a $1.75 billion aggregate principal amount held by Allianz SE (“Allianz”) (the “10% Debentures”) for $2.125 billion (plus a payment by the Company of unpaid interest on the 10% Debentures) and (ii) settled the repurchase of the Series B and Series C warrants held by Allianz to purchase shares of the Company’s common stock, see Note 15. In addition, the 10% Debentures replacement capital covenant (the “10% Debentures RCC”) was terminated on April 12, 2012 with the consent of the holders of a majority in aggregate principal amount of the Company’s outstanding 6.1% senior notes due 2041. Upon closing, the Company recognized a loss on extinguishment in the second quarter of 2012 of $587, after-tax, representing the premium associated with repurchasing the 10% Debentures at an amount greater than the face amount, the write-off of the unamortized discount and debt issuance costs related to the 10% Debentures and other costs related to the repurchase transaction. On April 5, 2012, the Company issued $600 aggregate principal amount of 7.875% fixed-to-floating rate junior subordinated debentures due 2042 (the “Debentures”) for net proceeds of approximately $586, after deducting underwriting discounts and offering expenses. The Company financed the repurchase of the 10% Debentures through the issuance of the Senior Notes and the Debentures.

The Debentures bear interest from the date of issuance to but excluding April 15, 2022 at an annual rate of 7.875%, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing on July 15, 2012, to and including April 15, 2022. Commencing on April 15, 2022 the Debentures bear interest at an annual rate equal to three-month LIBOR, reset quarterly, plus 5.596%, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing on July 15, 2022. The Company has the right, on one or more occasions, to defer the payment of interest on the Debentures. The Company may defer interest for up to ten consecutive years without giving rise to an event of default. Deferred interest will accumulate additional interest at an annual rate equal to the annual interest rate then applicable to the Debentures. If the Company defers interest payments on the Debentures, the Company generally may not make payments on or redeem or purchase any shares of its capital stock or any of its debt securities or guarantees that rank upon liquidation, dissolution or winding up equally with or junior to the Debentures, subject to certain limited exceptions.

The Company may elect to redeem the Debentures in whole at any time or in part from time to time on or after April 15, 2022, at a redemption price equal to the principal amount of the Debentures being redeemed plus accrued and unpaid interest to but excluding the date of redemption. If the Debentures are not redeemed in whole, at least $25 aggregate principal amount of the Debentures must remain outstanding after giving effect to such redemption. The Debentures may be redeemed in whole at any time prior to April 15, 2022, within 90 days of the occurrence of a tax event or rating agency event, at a redemption price equal to the greater of (i) the principal amount of the Debentures being redeemed, or (ii) the present value of the (a) outstanding principal and (b) remaining scheduled payments of interest that would have been payable from the redemption date to and including April 15, 2022 on the Debentures to be redeemed (not including any portion of such payments of interest accrued and unpaid to but excluding the redemption date), discounted from their respective interest payment dates to but excluding the redemption date at a discount rate equal to the Treasury Rate plus a spread of 0.7%, in each case, plus accrued and unpaid interest to but excluding the redemption date.

The Debentures are unsecured, subordinated and junior in right of payment and upon liquidation to all of the Company’s existing and future senior indebtedness. In addition, the Debentures are effectively subordinated to all of the Company’s subsidiaries’ existing and future indebtedness and other liabilities, including obligations to policyholders. The Debentures do not limit the Company’s or the Company’s subsidiaries’ ability to incur additional debt, including debt that ranks senior in right of payment and upon liquidation to the Debentures.

The Debentures rank equally in right of payment and upon liquidation with (i) any indebtedness the terms of which provide that such indebtedness ranks equally with the Debentures, including guarantees of such indebtedness, (ii) the Company’s existing 8.125% fixed-to-floating rate junior subordinated debentures due 2068 (the “8.125% Debentures”), (iii) the Company’s Income Capital Obligation Notes due 2067, issuable pursuant to the Junior Subordinated Indenture, dated as of February 12, 2007, between us and Wilmington Trust Company (the “ICON securities”), (iv) our trade accounts payable, and (v) any of our indebtedness owed to a person who is our subsidiary or employee.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14. Debt (continued)

Revolving Credit Facility

In January 2012, the Company entered into a senior unsecured revolving credit facility (the “Credit Facility”) that provides for borrowing capacity up to $1.75 billion (which is available in U.S. dollars, and in Euro, Sterling, Canadian dollars and Japanese Yen) through January 6, 2016. Of the total availability under the Credit Facility, up to $250 is available to support letters of credit issued on behalf of the Company or subsidiaries of the Company. Under the Credit Facility, the Company must maintain a minimum level of consolidated net worth of $14.9 billion. The definition of consolidated net worth under the terms of the Credit Facility, excludes AOCI and includes the Company’s outstanding junior subordinated debentures and perpetual preferred securities, net of discount. In addition, the Company’s maximum ratio of consolidated total debt to consolidated total capitalization is 35%, and the ratio of consolidated total debt of subsidiaries to consolidated total capitalization is limited to 10%. As of September 30, 2012, the Company was in compliance with all financial covenants under the Credit Facility.

15. Equity

During the nine months ended September 30, 2012, the Company completed a $500 equity repurchase program authorized on July 27, 2011 by the Board of Directors that permitted for purchases of common stock, as well as warrants and other derivative securities. In addition to repurchases that occurred in 2011, the repurchases in 2012 included 8.0 million common shares for $149, and the repurchase of all outstanding Series B and Series C warrants held by Allianz for $300.

On March 30, 2012 the Company repurchased all of the outstanding Series B and Series C warrants (collectively, the “warrants”) held by Allianz for $300. These warrants authorized Allianz to purchase 69,351,806 shares of the Company’s common stock at an exercise price of $25.23 per share. The repurchase was settled on April 17, 2012.

16. Restructuring and Other Costs

As a result of a strategic business evaluation, the Company is currently focusing on its Property and Casualty, Group Benefits and Mutual Fund businesses. In the third quarter of 2012, the Company entered into definitive agreements to sell its Individual Life and Retirement Plans businesses and Woodbury Financial Services. In addition, the Company's existing Individual Annuity business has been placed into runoff. For further discussion of the Company's strategic business evaluation and these transactions, see Note 1 of the Notes to Condensed Consolidated Financial Statements.

These actions, in addition to previously disclosed restructuring activities aimed at reducing overall expense levels, will result in termination benefits to current employees not transitioned to the buyers whose roles are impacted by the Company's continued alignment with its current business plans, costs to terminate leases and other contracts and asset impairment charges. The Company intends to complete much of these restructuring activities over the next 12-18 months.

Termination benefits related to workforce reductions and lease and other contract terminations have been accrued through September 30, 2012. Additional costs are expected to be incurred in subsequent quarters and such costs will be accrued when appropriate. Asset impairment charges were recorded in the nine months ended September 30, 2012 and will be recorded in subsequent quarters, as appropriate.

The total costs associated with restructuring and other are currently expected to be approximately $250, pre-tax, with the additional costs attributable mainly to severance and other related costs and professional fees. Actual costs associated with restructuring may differ from these estimates as the Company executes on its operational and strategic initiatives.

Restructuring and other costs, pre-tax incurred in connection with these activities are as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Severance benefits and related costs	$	38	$	11	$	76	$	11
Professional fees	15		—		28		—
Asset impairment charges	—		—		5		—
Other contract termination charges	—		3		1		3
Total restructuring and other costs	$	53	$	14	$	110	$	14

Table of Contents

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

16. Restructuring and Other Costs (continued)

The following table presents restructuring costs, included in insurance operating costs and other expenses in the Condensed Consolidated Statements of Operations for each reporting segment, as well as the Corporate category.



	Three Months Ended September 30,				Nine Months Ended September 30,				Total Estimated Costs
	2012		2011		2012		2011
Property & Casualty Commercial	$	1	$	—	$	5	$	—	$	7
Group Benefits	1		—		1		—		1
Consumer Markets	—		—		1		—		3
Individual Life	18		—		25		—		30
Retirement Plans	10		—		14		—		16
Mutual Funds	1		—		2		—		4
Life Other Operations	5		—		8		—		12
Corporate	17		14		54		14		177
Total restructuring and other costs	$	53	$	14	$	110	$	14	$	250

Changes in the accrued restructuring liability balance included in other liabilities in the Condensed Consolidated Balance Sheets are as follows:



	Nine Months Ended September 30, 2012
	Severance Benefits and Related Costs			Professional Fees			Asset impairment charges			Other Contract Termination Charges			Total Restructuring and Other Costs
Balance, beginning of period	$	12		$	—		$	—		$	5		$	17
Accruals/provisions	76			28			5			1			110
Payments/write-offs	(67		)	(19		)	(5		)	(5		)	(96		)
Balance, end of period	$	21		$	9		$	—		$	1		$	31

17. Sale of Assets

Servicing Agreement of Hartford Life Private Placement LLC

On July 13, 2012, the Company closed a sale transaction with Philadelphia Financial Group, Inc. (“Philadelphia Financial”) whereby Philadelphia Financial acquired certain assets used to administer the Company's private placement life insurance (“PPLI”) businesses and will service the PPLI businesses. The Company retained certain corporate functions associated with this business as well as the mortality risk on the insurance policies. Upon closing, the Company recorded a deferred gain of $61 after-tax, which will be amortized over the estimated life of the underlying insurance policies. The PPLI business is included in the Life Other Operations reporting segment.

Table of Contents

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

(Dollar amounts in millions except share data unless otherwise stated)

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of The Hartford Financial Services Group, Inc. and its subsidiaries (collectively, “The Hartford” or the “Company”) as of September 30, 2012, compared with December 31, 2011, and its results of operations for the three months ended September 30, 2012, compared to the equivalent 2011 period. This discussion should be read in conjunction with the MD&A in The Hartford’s 2011 Form 10-K Annual Report. Certain reclassifications have been made to prior period financial information to conform to the current period classifications. Also, prior period amounts have been retrospectively reclassified to reflect discontinued operations, see Note 12 of the Notes to Condensed Consolidated Financial Statements for further information on discontinued operations.

On January 1, 2012, the Company retrospectively adopted Accounting Standards Update (“ASU”) No. 2010-26, Financial Services – Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts which clarifies the definition of policy acquisition costs that are eligible for deferral. Previously reported financial information has been revised to reflect the effect of the Company’s adoption of this accounting standard. For further information regarding the effect of adoption of this accounting standard, see Note 1 and Note 6 of the Notes to Condensed Consolidated Financial Statements.

The Hartford defines increases or decreases greater than or equal to 200%, or changes from a net gain to a net loss position, or vice versa, as “NM” or not meaningful.

INDEX



Description	Page
Consolidated Results of Operations	70
Outlooks	74
Critical Accounting Estimates	75
The Hartford’s Operations Overview	86
Key Performance Measures and Ratios	86
Property & Casualty Commercial	94
Group Benefits	96
Consumer Markets	97
Individual Life	99
Retirement Plans	100
Mutual Funds	101
Life Other Operations	102
Property & Casualty Other Operations	104
Corporate	105
Enterprise Risk Management	106
Capital Resources and Liquidity	127
Impact of New Accounting Standards	134

Table of Contents

CONSOLIDATED RESULTS OF OPERATIONS



Operating Summary	Three Months Ended September 30,								Nine Months Ended September 30,
	2012			2011			Change		2012			2011			Change
Earned premiums	$	3,401		$	3,518		(3	%)	$	10,243		$	10,582		(3	%)
Fee income	1,118			1,192			(6	%)	3,366			3,620			(7	%)
Net investment income (loss):
Securities available-for-sale and other	1,030			1,062			(3	%)	3,197			3,274			(2	%)
Equity securities, trading [1]	710			(1,890		)	NM		1,889			(1,684		)	NM
Total net investment income (loss)	1,740			(828		)	NM		5,086			1,590			NM
Net realized capital gains (losses)	119			575			(79	%)	(202		)	241			NM
Other revenues	64			63			2	%	184			188			(2	%)
Total revenues	6,442			4,520			43	%	18,677			16,221			15	%
Benefits, losses and loss adjustment expenses	3,271			4,006			(18	%)	9,930			11,160			(11	%)
Benefits, losses and loss adjustment expenses – returns credited on international variable annuities [1]	710			(1,889		)	NM		1,888			(1,683		)	NM
Amortization of deferred policy acquisition costs and present value of future profits (“DAC”)	566			1,005			(44	%)	1,441			2,047			(30	%)
Insurance operating costs and other expenses	1,275			1,287			(1	%)	3,896			4,093			(5	%)
Loss on extinguishment of debt	—			—			—	%	910			—			—	%
Interest expense	109			128			(15	%)	348			384			(9	%)
Total benefits, losses and expenses	5,931			4,537			31	%	18,413			16,001			15	%
Income (loss) from continuing operations before income taxes	511			(17		)	NM		264			220			20	%
Income tax expense (benefit)	108			(74		)	NM		(136		)	(289		)	53	%
Income from continuing operations, net of tax	403			57			NM		400			509			(21	%)
Income (loss) from discontinued operations, net of tax	(2		)	3			NM		(4		)	85			NM
Net income	$	401		$	60		NM		$	396		$	594		(33	%)
Supplemental Operating Data
Income from continuing operations, net of tax, available to common shareholders per diluted common share	$	0.83		$	0.10		NM		$	0.79		$	0.99		(20	%)
Net income available to common shareholders per diluted common share	0.83			0.11			NM		0.78			1.17			(33	%)
Total revenues, excluding net investment income on equity securities, trading	5,732			6,410			(11	%)	16,788			17,905			(6	%)



	September 30,		December 31,
Summary of Financial Condition	2012		2011
Total assets	$	308,918	$	302,609
Total investments, excluding equity securities, trading	107,188		104,449
Total stockholders’ equity	23,370		21,486


[1]	Includes investment income and mark-to-market effects of equity securities, trading, supporting the international variable annuity business, which are classified in net investment income with corresponding amounts credited to policyholders within benefits, losses and loss adjustment expenses.

Table of Contents



	Three Months Ended September 30,									Nine Months Ended September 30,
Net income (loss) by segment	2012			2011			Increase (Decrease) From 2012 to 2011			2012			2011			Increase (Decrease) From 2012 to 2011
Property & Casualty Commercial	$	164		$	53		$	111		$	502		$	494		$	8
Group Benefits	30			25			5			83			77			6
Commercial Markets	194			78			116			585			571			14
Consumer Markets	94			(16		)	110			152			(80		)	232
Individual Life	11			(9		)	20			66			55			11
Retirement Plans	(7		)	(23		)	16			9			9			—
Mutual Funds	18			24			(6		)	56			79			(23		)
Wealth Management	22			(8		)	30			131			143			(12		)
Life Other Operations	145			105			40			344			439			(95		)
Property & Casualty Other Operations	24			8			16			36			(135		)	171
Corporate	(78		)	(107		)	29			(852		)	(344		)	(508		)
Total net income	$	401		$	60		$	341		$	396		$	594		$	(198	)

Three months ended September 30, 2012 compared to the three months ended September 30, 2011

The increase in net income from 2011 to 2012 was primarily due to the following items:

•

A decrease in the Unlock charge to $79, after-tax, in 2012 from $469, after-tax, in 2011. The Unlock charge in 2012 was primarily due to the annual policyholder assumption update, partially offset by actual separate account returns being above our aggregated estimated returns during the period. The Unlock charge in 2011 was driven by assumption changes, including the impact of changes to the international variable annuity hedge program and declines in equity markets. For further discussion see Unlocks within the Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and Other Universal Life-Type Contracts section in Critical Accounting Estimates.


•	Current accident year catastrophe losses of $7, after-tax, in 2012, compared to $134, after-tax in 2011. Losses in 2011 were primarily due to Hurricane Irene in the Northeast and thunderstorms in the Midwest.

Partially offsetting the increase in net income were the following items:

•

Net realized capital gains decreased primarily due to losses on the international variable annuity hedge program. The losses resulted from rising equity markets, partially offset by strengthening of the yen. Certain hedge assets generated realized capital losses on rising equity markets and are used to hedge liabilities that are not carried at fair value. For further discussion of the results, see Net Realized Capital Gains (Losses) within Investment Results of Key Performance Measures and Ratios. For information on the related sensitivities of the variable annuity hedging program, see Variable Product Guarantee Risks and Risk Management within Enterprise Risk Management.

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Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

The decrease in net income from 2011 to 2012 was primarily due to the following items:

•

A loss on extinguishment of debt of $587, after-tax, recognized in the second quarter of 2012 related to the repurchase of all outstanding 10% fixed-to-floating rate junior subordinated debentures due 2068 with a $1.75 billion aggregate principal amount held by Allianz. The loss consisted of the premium associated with repurchasing the 10% Debentures at an amount greater than the face amount, the write-off of the unamortized discount and debt issuance costs related to the 10% Debentures and other costs related to the repurchase transaction.

•

Net realized capital gains decreased primarily due to losses on the international variable annuity hedge program. The losses resulted from rising equity markets and weakening of the yen. Certain hedge assets generated realized capital losses on rising equity markets and are used to hedge liabilities that are not carried at fair value. For further discussion of the results, see Net Realized Capital Gains (Losses) within Investment Results of Key Performance Measures and Ratios. For information on the related sensitivities of the variable annuity hedging program, see Variable Product Guarantee Risks and Risk Management within Enterprise Risk Management.


•	Income tax benefit in 2011 includes a release of $86, or 100%, of the valuation allowance associated with realized capital losses, as well as a tax benefit of $52 as a result of a resolution of a tax matter with the IRS for the computation of DRD for years 1998, 2000 and 2001.


•	Income (loss) from discontinued operations, net of tax, decreased, primarily due to the realized capital gain on the sale of Specialty Risk Services of $150, after-tax, in the first quarter of 2011, which was partially offset by a loss of $74, after-tax, from the disposition of Federal Trust Corporation in the second quarter of 2011.

Partially offsetting the decrease in net income were the following items:


•	Current accident year catastrophe losses of $241, after-tax, in 2012, primarily due to severe thunderstorms, hail events, and tornadoes in the South, Midwest and Mid-Atlantic states, compared to $475, after-tax in 2011, primarily due to Hurricane Irene in the Northeast, thunderstorms in the Midwest and tornadoes and windstorms in the Midwest, Plains States and Southwest.

•

An Unlock charge of $11, after-tax, in 2012, compared to an Unlock charge of $478, after-tax, in 2011. The Unlock charge in 2012 was primarily due to the annual policyholder assumption update, partially offset by actual separate account returns being above our aggregated estimated returns during the period. The Unlock charge in 2011 was primarily due to the impact of changes to the international variable annuity hedge program. For further discussion of Unlocks see the Critical Accounting Estimates within the MD&A.


•	Net asbestos reserve strengthening of $31, after-tax, in 2012, compared to $189, after tax, in 2011 resulting from the Company's annual review of its asbestos liabilities. For further information, see Property & Casualty Other Operations Claims with the Property and Casualty Insurance Product Reserves, Net of Reinsurance section in Critical Accounting Estimates.

See the segment sections of the MD&A for a discussion on their respective performances.

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OUTLOOKS

The Hartford provides projections and other forward-looking information in the following discussions, which contain many forward-looking statements, particularly relating to the Company’s future financial performance. These forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to the precautionary statements set forth on pages 3-4 of this Form 10-Q. Actual results are likely to differ, and in the past have differed, materially from those forecast by the Company, depending on the outcome of various factors, including, but not limited to, those set forth in each discussion below and in Part I, Item 1A, Risk Factors in The Hartford’s 2011 Form 10-K Annual Report; Part II, Item 1A, Risk Factors in The Hartford's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012; and Part II, Item IA, Risk Factors of this Form 10-Q.

Overview

In the first quarter of 2012, The Hartford concluded an evaluation of its strategy and business portfolio deciding to focus on its property and casualty and group benefits businesses of the Commercial Markets and Consumer Markets divisions, and the mutual funds business of the Wealth Management division. This focus is expected to position the organization for higher returns on equity, reduced sensitivity to capital markets, a lower cost of capital and increased financial flexibility. As a result, the Company is pursuing sales or other strategic alternatives for the Individual Life and Retirement Plans businesses and Woodbury Financial Services, an indirect wholly-owned subsidiary.

In the second quarter of 2012, the Company entered into a purchase and sale agreement for the Company's U.S. individual annuity new business capabilities with Forethought Financial Group and placed its Individual Annuity business into runoff. The anticipated closing date for the Forethought transaction is in the fourth quarter of 2012 or the first quarter of 2013. Effective May 1, 2012, all new U.S. annuity policies sold by the Company are reinsured to Forethought Life Insurance Company. The Company will cease the sale of such annuity policies and the reinsurance agreement will terminate as to new business in the second quarter of 2013. The reinsurance agreement has no impact on in-force policies issued on or before April 27, 2012.

In the third quarter of 2012, the Company announced it had entered into definitive agreements to sell its Retirement Plans business, its Individual Life insurance business and Woodbury Financial Services. The Woodbury Financial Services transaction is expected to close in the fourth quarter of 2012, pending regulatory approval and is not expected to have a material impact on the Company's financial results.

As part of the agreement to sell the Retirement Plans business to MassMutual, the Company will continue to sell retirement plans during a transition period, and MassMutual will assume all expenses and risk for these sales through a reinsurance agreement. The sale, which is structured as a reinsurance transaction, is expected to close in the fourth quarter of 2012 or the first quarter of 2013, subject to regulatory approvals and customary closing conditions. Based on current financial information the Company does not expect to record a material gain or loss in net income on the closing of the transaction. The estimated financial impacts will be affected by business operations and other changes affecting recorded balances until closing.

The sale of the Individual Life insurance business to Prudential, which is structured as a reinsurance transaction, is expected to close in the first quarter of 2013, subject to regulatory approvals and customary closing conditions. As part of the agreement, the Company will continue to sell life insurance products and riders during a transition period, and Prudential will assume all expenses and risk for these sales through a reinsurance agreement. Based on current financial information the Company does not expect to record a material gain or loss in net income on the closing of the transaction. The estimated financial impacts will be affected by business operations and other changes affecting recorded balances until closing.

The performance of The Hartford’s insurance protection and asset accumulation businesses may be adversely impacted due to slow economic and employment expansion where customers may change their levels of insurance and/or savings based on anticipated economic conditions. In addition, the performance of The Hartford’s divisions is subject to uncertainty due to capital market conditions, which impact the earnings of its asset management businesses and valuations and earnings in its investment portfolio. The current and future interest rate environment also affects the performance of the Company’s divisions. A sustained low interest rate environment would result in lower net investment income, lower estimated gross profits on certain products, lower margins and increased pension expense.

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Commercial Markets

Commercial Markets focuses on growth through market-differentiated products and services while maintaining a disciplined underwriting approach. In Property & Casualty Commercial, improving market conditions are expected to continue, which should enable the Company to achieve price increases, while a slowly recovering economy is anticipated to drive an increase in insurance exposures. The Company expects low single-digit written premium growth for the full year, as compared to 2011, driven by small commercial, with programs aimed at growing total policy counts, the rollout of new product enhancements, a leveraging of the payroll model, and the continued expansion of ease of doing business technology, while middle market growth is tempered as a result of pricing actions taken to restore returns to adequate levels. The Property & Casualty Commercial combined ratio before catastrophes and prior accident year development is expected to remain in the mid to upper 90s for full year 2012 as compared to the 97.3% achieved in 2011. Earned pricing increases are outpacing loss costs. In Group Benefits, premiums are expected to decline for the full year, as compared to 2011, reflecting the competitive environment coupled with pricing actions implemented with the goal of improving profitability. The Company expects Group Benefits' loss ratio to remain elevated for full year 2012 given the expectation of persistent heightened incidence, lower claim terminations and higher severity in group long term disability.

Consumer Markets

The Company expects written premium to decline for full year 2012, as compared to 2011, including a decrease in AARP direct and in business sold through independent agents other than to AARP members. Despite an improvement in policy retention in the first nine months of 2012 and an increase in new business in 2012, management expects an overall decline in written premium in 2012 due to lower renewal premium. For the remainder of 2012, management expects it will sustain its improvement in policy retention but that retention will continue to be affected by the impact of renewal written pricing increases in a price sensitive market. Within the Agency channel, policy retention will also be affected by continued pricing and underwriting actions to improve profitability, including efforts to reposition the book into more mature, preferred market business. The Company expects continued new business growth for the remainder of 2012, primarily driven by AARP member business, both direct and through independent agents, as well as new business from affinities other than AARP and other targeted consumer direct marketing. New business is expected to benefit from the recent rollouts of the Open Road Advantage and the Hartford Home Advantage products. Management expects that the combined ratio before catastrophes and prior accident year development will be flat to slightly lower for full year 2012, as compared to the 91.9% achieved in 2011, as an improvement in the current accident year loss and loss adjustment expense ratio before catastrophes will be largely offset by an expected increase in the underwriting expense ratio. For home, the current accident year loss and loss adjustment expense ratio before catastrophes is expected to improve during 2012, driven by earned pricing increases and lower non-cat weather claim frequency. For auto, the current accident year loss and loss adjustment expense ratio is expected to increase slightly for full year 2012 as an expected increase in average claim severity for physical damage and property damage claims will largely be offset by the effect of earned pricing increases.

Wealth Management

In the third quarter of 2012, the Company announced it had entered into a definitive agreement to sell its Retirement Plans business to MassMutual and its Individual Life insurance business to Prudential. In light of The Hartford’s strategic review and the announcement of these agreements, Wealth Management currently focuses primarily on growing the Mutual Funds business. Wealth Management's Mutual Funds business has been offering new funds to improve participation in asset classes where the Company sees potential growth opportunities. In addition, the Company has partnered with Wellington Management Company, LLP (“Wellington Management”) to serve as the sole sub-advisor for The Hartford’s non-proprietary mutual funds and certain proprietary fixed income funds.

Runoff Operations

The Runoff Operations division consists of Life Other Operations and Property & Casualty Other Operations. The objective of the Runoff Operations division is to focus on managing profitability, improving capital efficiency and effectiveness, and limiting and managing risk associated with the businesses residing in the division with the ultimate objective of isolating or separating these risks from the ongoing businesses of the Company. The focus of Life Other Operations is on mitigating and isolating the risks of the U.S. and International in-force variable annuities. In addition, Life Other operations includes the Company's U.S. and international fixed annuity business, and institutional annuities business. The international variable annuity business within Life Other Operations will continue to be a significant driver of earnings variability due to hedge programs which generate mark to market gains and losses while the underlying international liabilities being hedged are not marked to marked. This can result in unpredictable earnings volatility period to period. Property & Casualty Other Operations is focused on managing the Company's asbestos, environmental and other legacy liabilities. The results of the annual ground up studies of asbestos and environmental reserves, performed in the second quarter of each year, will be the primary driver impacting the results for this segment.

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CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America (“U.S. 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 as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ, and in the past have differed, 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:


•	property and casualty insurance product reserves, net of reinsurance;


•	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 (in other policyholder funds and benefits payable);


•	goodwill impairment;


•	valuation of investments and derivative instruments;


•	pension and other postretirement benefit obligations;


•	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. 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.

Property and Casualty Insurance Product Reserves, Net of Reinsurance

Based on the results of the quarterly reserve review process, the Company determines the appropriate reserve adjustments, if any, to record. Recorded reserve estimates are changed after consideration of numerous factors, including but not limited to, the magnitude of the difference between the actuarial indication and the recorded reserves, improvement or deterioration of actuarial indications in the period, the maturity of the accident year, trends observed over the recent past and the level of volatility within a particular line of business. In general, adjustments are made more quickly to more mature accident years and less volatile lines of business. Such adjustments of reserves are referred to as “reserve development”. Reserve development that increases previous estimates of ultimate cost is called “reserve strengthening”. Reserve development that decreases previous estimates of ultimate cost is called “reserve releases”. Reserve development can influence the comparability of year over year underwriting results and is set forth in the paragraphs and tables that follow.

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Reserve Roll Forwards and Development

A roll-forward follows of property and casualty insurance product liabilities for unpaid losses and loss adjustment expenses for the nine months ended September 30, 2012:



Nine Months Ended September 30, 2012
	Property & Casualty Commercial		Consumer Markets			Property & Casualty Other Operations		Total Property and Casualty Insurance
Beginning liabilities for unpaid losses and loss adjustment expenses, gross	$	15,437	$	2,061		$	4,052	$	21,550
Reinsurance and other recoverables	2,343		9			681		3,033
Beginning liabilities for unpaid losses and loss adjustment expenses, net	13,094		2,052			3,371		18,517
Provision for unpaid losses and loss adjustment expenses
Current accident year before catastrophes	3,111		1,797			—		4,908
Current accident year catastrophes	116		255			—		371
Prior accident years	54		(127		)	60		(13		)
Total provision for unpaid losses and loss adjustment expenses	3,281		1,925			60		5,266
Less: Payments	3,001		2,049			234		5,284
Ending liabilities for unpaid losses and loss adjustment expenses, net	13,374		1,928			3,197		18,499
Reinsurance and other recoverables	2,345		10			678		3,033
Ending liabilities for unpaid losses and loss adjustment expenses, gross	$	15,719	$	1,938		$	3,875	$	21,532
Earned premiums	$	4,691	$	2,725
Loss and loss expense paid ratio [1]	64.0		75.2
Loss and loss expense incurred ratio	69.9		70.6
Prior accident years development (pts) [2]	1.2		(4.7		)


[1]	The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums.


[2]	“Prior accident years development (pts)” represents the ratio of prior accident years development to earned premiums.

Prior accident years development recorded in 2012

Included within prior accident years development for the three and nine months ended September 30, 2012 were the following reserve strengthenings (releases):



Three Months Ended September 30, 2012
	Property & Casualty Commercial			Consumer Markets			Property & Casualty Other Operations		Total Property and Casualty Insurance
Auto liability	$	14		$	(38	)	$	—	$	(24	)
Homeowners	—			(4		)	—		(4		)
Professional liability	22			—			—		22
Package business	(2		)	—			—		(2		)
Workers’ compensation	18			—			—		18
General liability	(36		)	—			—		(36		)
Fidelity and surety	(8		)	—			—		(8		)
Commercial property	1			—			—		1
Change in workers’ compensation discount, including accretion	8			—			—		8
Catastrophes	(2		)	(6		)	—		(8		)
Other reserve re-estimates, net	—			(1		)	1		—
Total prior accident years development	$	15		$	(49	)	$	1	$	(33	)

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Nine Months Ended September 30, 2012
	Property & Casualty Commercial			Consumer Markets			Property & Casualty Other Operations		Total Property and Casualty Insurance
Auto liability	$	45		$	(79	)	$	—	$	(34	)
Homeowners	—			(10		)	—		(10		)
Professional liability	40			—			—		40
Package business	(34		)	—			—		(34		)
Workers’ compensation	69			—			—		69
General liability	(76		)	—			—		(76		)
Fidelity and surety	3			—			—		3
Commercial property	(5		)	—			—		(5		)
Net asbestos reserves	—			—			48		48
Net environmental reserves	—			—			8		8
Change in workers’ compensation discount, including accretion	45			—			—		45
Catastrophes	(38		)	(29		)	—		(67		)
Other reserve re-estimates, net	5			(9		)	4		—
Total prior accident years development	$	54		$	(127	)	$	60	$	(13	)

During the three and nine months ended September 30, 2012, the Company’s re-estimates of prior accident years reserves included the following significant reserve changes:


•	Released reserves for personal auto liability claims, primarily for accident years 2008 through 2011. As these accident years matured, favorable bodily injury severity trends were observed and management has placed more weight on the emerged experience.


•	Strengthened reserves for commercial auto liability claims, primarily for accident year 2010 and 2011. Higher than expected bodily injury severity, driven by large loss activity, has been observed for these accident years.


•	Strengthened reserves for professional liability directors and officers claims for accident years 2011 and prior as a result of higher severity, primarily for mid- and large-sized accounts.


•	Released reserves in package business liability coverages and general liability, primarily for accident years 2006 through 2011. Claim severity emergence for these years was lower than expected and management has placed more weight on the emerged experience. In addition, older years have improved due to favorable emergence of larger claims.


•	Strengthened reserves in workers' compensation primarily due to the emergence of lost time claims from 2011.


•	The change in workers’ compensation discount, including accretion, primarily reflects a decrease in the number of tabular claims, and to a lesser extent, the decrease in interest rates.


•	Reserve releases on certain prior year catastrophes, primarily related to 2001 World Trade Center worker's compensation claims.


•	Refer to the Property & Casualty Other Operations Claims section for further discussion on net asbestos and net environmental reserves.

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A roll forward follows of property and casualty insurance product liabilities for unpaid losses and loss adjustment expenses for the nine months ended September 30, 2011:



Nine Months Ended September 30, 2011
	Property & Casualty Commercial		Consumer Markets			Property & Casualty Other Operations		Total Property and Casualty Insurance
Beginning liabilities for unpaid losses and loss adjustment expenses, gross	$	14,727	$	2,177		$	4,121	$	21,025
Reinsurance and other recoverables	2,361		17			699		3,077
Beginning liabilities for unpaid losses and loss adjustment expenses, net	12,366		2,160			3,422		17,948
Provision for unpaid losses and loss adjustment expenses
Current accident year before catastrophes	2,997		1,902			—		4,899
Current accident year catastrophes	305		426			—		731
Prior accident years	16		(58		)	311		269
Total provision for unpaid losses and loss adjustment expenses	3,318		2,270			311		5,899
Less: Payments	2,826		2,287			284		5,397
Ending liabilities for unpaid losses and loss adjustment expenses, net	12,858		2,143			3,449		18,450
Reinsurance and other recoverables	2,428		9			730		3,167
Ending liabilities for unpaid losses and loss adjustment expenses, gross	$	15,286	$	2,152		$	4,179	$	21,617
Earned premiums	$	4,568	$	2,825
Loss and loss expense paid ratio [1]	61.9		81.0
Loss and loss expense incurred ratio	72.6		80.4
Prior accident years development (pts) [2]	0.4		(2.1		)


[1]	The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums.


[2]	“Prior accident years development (pts)” represents the ratio of prior accident years development to earned premiums.

Prior accident years development recorded in 2011

Included within prior accident years development for the three and nine months ended September 30, 2011 were the following reserve strengthenings (releases):



Three Months Ended September 30, 2011
	Property & Casualty Commercial			Consumer Markets			Property & Casualty Other Operations		Total Property and Casualty Insurance
Auto liability	$	(4	)	$	(19	)	$	—	$	(23	)
Homeowners	—			14			—		14
Professional liability	29			—			—		29
Package business	(42		)	—			—		(42		)
Workers’ compensation	7			—			—		7
General liability	(8		)	—			—		(8		)
Fidelity and surety	(7		)	—			—		(7		)
Commercial property	1			—			—		1
Net environmental reserves	—			—			19		19
Change in workers’ compensation discount, including accretion	15			—			—		15
Catastrophes	2			—			—		2
Other reserve re-estimates, net	(2		)	(4		)	2		(4		)
Total prior accident years development	$	(9	)	$	(9	)	$	21	$	3

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Nine Months Ended September 30, 2011
	Property & Casualty Commercial			Consumer Markets			Property & Casualty Other Operations		Total Property and Casualty Insurance
Auto liability	$	(5	)	$	(83	)	$	—	$	(88	)
Homeowners	—			1			—		1
Professional liability	22			—			—		22
Package business	(46		)	—			—		(46		)
Workers’ compensation	10			—			—		10
General liability	4			—			—		4
Fidelity and surety	(9		)	—			—		(9		)
Commercial property	(4		)	—			—		(4		)
Net asbestos reserves	—			—			290		290
Net environmental reserves	—			—			21		21
Change in workers’ compensation discount, including accretion	32			—			—		32
Catastrophes	7			28			—		35
Other reserve re-estimates, net	5			(4		)	—		1
Total prior accident years development	$	16		$	(58	)	$	311	$	269

During the three and nine months ended September 30, 2011, the Company’s re-estimates of prior accident years reserves included the following significant reserve changes:


•	Released reserves for personal auto liability claims for both the three month and nine month periods, primarily for accident years 2006 through 2010. Favorable trends in reported severity had persisted or improved over this time period. As these accident years develop, the uncertainty around the ultimate losses is reduced and management places more weight on the emerged experience.


•	Strengthened homeowners' reserves for the three months ended September 30, 2011, for accident years 2008 through 2010, primarily due to increased frequency of sinkhole claims in Florida and increased severity on slower reporting homeowner casualty claims.


•	Strengthened reserves in professional liability for accident years 2007 through 2009, primarily in the directors and officers (“D&O”) line of business. Detailed reviews of claims involving the sub-prime mortgage market collapse, and shareholder class action lawsuits, resulted in a higher estimate of future case development.


•	Released reserves in package business liability coverages and general liability in accident years 2005 through 2009 as a result of lower than expected claim severity emergence.


•	Strengthened reserves in workers’ compensation for the 2010 accident year as a result of higher than expected claim frequency emergence. This is offset by releases in accident years 2007 and prior. Reserve indications in these years had been stable, giving greater confidence in the adequacy of estimates.


•	Prior year catastrophe strengthening, for the three and nine month period, primarily related to a severe wind and hail storm event in Arizona during the fourth quarter of 2010.


•	Refer to the Property & Casualty Other Operations Claims section for further discussion on net asbestos and net environmental reserves.

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Property & Casualty Other Operations Claims

Reserve Activity

Reserves and reserve activity in Property & Casualty Other Operations are categorized and reported as asbestos, environmental, or “all other”. The “all other” category of reserves covers a wide range of insurance and assumed reinsurance coverages, including, but not limited to, potential liability for construction defects, lead paint, silica, pharmaceutical products, molestation and other long-tail liabilities.

The following table presents reserve activity, inclusive of estimates for both reported and incurred but not reported claims, net of reinsurance, categorized by asbestos, environmental and all other claims, for the three and nine months ended September 30, 2012.

Property & Casualty Other Operations Losses and Loss Adjustment Expenses



For the Three Months Ended September 30, 2012	Asbestos			Environmental		All Other [1]		Total
Beginning liability—net [2][3]	$	1,857		$	304	$	1,094	$	3,255
Losses and loss adjustment expenses incurred	—			—		1		1
Less : losses and loss adjustment expenses paid	32			7		20		59
Ending liability – net [2][3]	$	1,825	[4]	$	297	$	1,075	$	3,197

For the Nine Months Ended September 30, 2012	Asbestos			Environmental		All Other [1]		Total
Beginning liability—net [2][3]	$	1,892		$	320	$	1,159	$	3,371
Losses and loss adjustment expenses incurred	48			8		4		60
Less : losses and loss adjustment expenses paid	115			31		88		234
Ending liability – net [2][3]	$	1,825	[4]	$	297	$	1,075	$	3,197

[1]

“All Other” includes unallocated loss adjustment expense reserves. “All Other” also includes The Company's allowance for uncollectible reinsurance. When the Company commutes a ceded reinsurance contract or settles a ceded reinsurance dispute, the portion of the allowance for uncollectible reinsurance attributable to that commutation or settlement, if any, is reclassified to the appropriate cause of loss.

[2]

Excludes amounts reported in Property & Casualty Commercial and Consumer Markets reporting segments (collectively “Ongoing Operations”) for asbestos and environmental net liabilities of $15 and $7, respectively, as of September 30, 2012, $14 and $8, respectively, as of June 30, 2012 and $15 and $8, respectively, as of December 31, 2011; total net losses and loss adjustment expenses incurred for the three and nine months ended September 30, 2012 includes $3 and $10, respectively, related to asbestos and environmental claims; and total net losses and loss adjustment expenses paid for the three and nine months ended September 30, 2012 includes $3 and $12, respectively, related to asbestos and environmental claims.


[3]	Gross of reinsurance, asbestos and environmental reserves, including liabilities in Ongoing Operations, were $2,380 and $341, respectively, as of September 30, 2012, $2,421 and $350, respectively, as of June 30, 2012 and $2,442 and $367, respectively, as of December 31, 2011.

[4]

The one year and average three year net paid amounts for asbestos claims, including Ongoing Operations, are $172 and $224, respectively, resulting in a one year net survival ratio of 10.7 and a three year net survival ratio of 8.2. Net survival ratio is the quotient of the net carried reserves divided by the average annual payment amount and is an indication of the number of years that the net carried reserve would last (i.e. survive) if the future annual claim payments were consistent with the calculated historical average.

For paid and incurred losses and loss adjustment expenses reporting, the Company classifies its asbestos and environmental reserves into three categories: Direct, Assumed Reinsurance and London Market. Direct insurance includes primary and excess coverage. Assumed reinsurance includes both “treaty” reinsurance (covering broad categories of claims or blocks of business) and “facultative” reinsurance (covering specific risks or individual policies of primary or excess insurance companies). London Market business includes the business written by one or more of the Company’s subsidiaries in the United Kingdom, which are no longer active in the insurance or reinsurance business. Such business includes both direct insurance and assumed reinsurance.

Of the three categories of claims (Direct, Assumed Reinsurance and London Market), direct policies tend to have the greatest factual development from which to estimate the Company’s exposures.

Assumed reinsurance exposures are inherently less predictable than direct insurance exposures because the Company may not receive notice of a reinsurance claim until the underlying direct insurance claim is mature. This causes a delay in the receipt of information at the reinsurer level and adds to the uncertainty of estimating related reserves.

London Market exposures are the most uncertain of the three categories of claims. As a participant in the London Market (comprised of both Lloyd's of London and London Market companies), certain subsidiaries of the Company wrote business on a subscription basis, with those subsidiaries' involvement being limited to a relatively small percentage of a total contract placement. Claims are reported, via a broker, to the “lead” underwriter and, once agreed to, are presented to the following markets for concurrence. This reporting and claim agreement process makes estimating liabilities for this business the most uncertain of the three categories of claims.

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The following table sets forth, for the three and nine months ended September 30, 2012, paid and incurred loss activity by the three categories of claims for asbestos and environmental.

Paid and Incurred Losses and Loss Adjustment Expenses (“LAE”) Development – Asbestos and Environmental



	Asbestos [1]						Environmental [1]
Three Months Ended September 30, 2012	Paid Losses & LAE			Incurred Losses & LAE			Paid Losses & LAE			Incurred Losses & LAE
Gross
Direct	$	31		$	—		$	7		$	—
Assumed Reinsurance	7			—			—			—
London Market	3			—			2			—
Total	41			—			9			—
Ceded	(9		)	—			(2		)	—
Net	$	32		$	—		$	7		$	—

Nine Months Ended September 30, 2012	Paid Losses & LAE			Incurred Losses & LAE			Paid Losses & LAE			Incurred Losses & LAE
Gross
Direct	$	96		$	55		$	26		$	7
Assumed Reinsurance	28			14			6			—
London Market	11			5			3			3
Total	135			74			35			10
Ceded	(20		)	(26		)	(4		)	(2		)
Net	$	115		$	48		$	31		$	8

[1]

Excludes asbestos and environmental paid and incurred loss and LAE reported in Ongoing Operations. Total gross losses and LAE incurred in Ongoing Operations for the three and nine months ended September 30, 2012 includes $3 and $10, respectively, related to asbestos and environmental claims. Total gross losses and LAE paid in Ongoing Operations for the three and nine months ended September 30, 2012 includes $3 and $12, respectively, related to asbestos and environmental claims.

During the second quarter of 2012, the Company completed its annual ground-up asbestos reserve evaluation. As part of this evaluation, the Company reviewed all of its open direct domestic insurance accounts exposed to asbestos liability, as well as assumed reinsurance accounts and its London Market exposures for both direct insurance and assumed reinsurance. Based on this evaluation, the Company increased its net asbestos reserves by $48. The Company found estimates for individual cases changed based upon the particular circumstances of such accounts. These changes were case specific and not as a result of any underlying change in the current environment. The Company experienced moderate increases in claim severity, expense and costs associated with litigating asbestos coverage matters, particularly against certain smaller, more peripheral insureds. The Company also experienced unfavorable development on certain of its assumed reinsurance accounts driven largely by the same factors experienced by the direct policyholders. The Company currently expects to continue to perform an evaluation of its asbestos liabilities annually.

During the second quarter of 2012, the Company completed its annual ground-up environmental reserve evaluation. As part of this evaluation, the Company reviewed all of its open direct domestic insurance accounts exposed to environmental liability, as well as assumed reinsurance accounts and its London Market exposures for both direct and assumed reinsurance. Based on this evaluation, the Company found estimates for certain individual account exposures increased based upon unfavorable litigation results and increased clean-up or expense costs. The Company currently expects to continue to perform a ground-up evaluation of its environmental liabilities annually and regularly evaluate the Company's historical direct net loss and expense paid and reported experience, and net loss and expense paid and reported experience by calendar and/or report year, to assess any emerging trends, fluctuations or characteristics suggested by the aggregate paid and reported activity.

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Uncertainties Regarding Adequacy of Asbestos and Environmental Reserves

A number of factors affect the variability of estimates for asbestos and environmental reserves including assumptions with respect to the frequency of claims, the average severity of those claims settled with payment, the dismissal rate of claims with no payment and the expense to indemnity ratio. The uncertainty with respect to the underlying reserve assumptions for asbestos and environmental adds a greater degree of variability to these reserve estimates than reserve estimates for more traditional exposures. While this variability is reflected in part in the size of the range of reserves developed by the Company, that range may still not be indicative of the potential variance between the ultimate outcome and the recorded reserves. The recorded net reserves as of September 30, 2012 of $2.14 billion ($1.84 billion and $303 for asbestos and environmental, respectively) is within an estimated range, unadjusted for covariance, of $1.7 billion to $2.5 billion. The process of estimating asbestos and environmental reserves remains subject to a wide variety of uncertainties, which are detailed in the Company's 2011 Form 10-K Annual Report. The Company believes that its current asbestos and environmental reserves are appropriate. However, analyses of future developments could cause the Company to change its estimates and ranges of its asbestos and environmental reserves, and the effect of these changes could be material to the Company's consolidated operating results, financial condition and liquidity.

Consistent with the Company's long-standing reserve practices, the Company will continue to review and monitor its reserves in Property & Casualty Other Operations regularly, including its annual reviews of asbestos liabilities, reinsurance recoverables and the allowance for uncollectible reinsurance, and environmental liabilities, and where future developments indicate, make appropriate adjustments to the reserves. For a discussion of the Company's reserving practices, see the Critical Accounting Estimates - Property and Casualty Insurance Product Reserves, Net of Reinsurance section of the MD&A included in the Company's 2011 Form 10-K Annual Report.

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Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and Other Universal Life-Type Contracts

Estimated gross profits (“EGPs”) are used in the amortization of the DAC asset, which includes the present value of future profits; sales inducement assets (“SIA”); and unearned revenue reserves (“URR”). See Note 1 and Note 6 of the Notes to Condensed Consolidated Financial Statements for additional information on DAC. See Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information on SIA. Portions of EGPs are also used in the valuation of reserves for death and other insurance benefit features on variable annuity and universal life-type contracts. See Note 7 of the Notes to Condensed Consolidated Financial Statements for additional information on death and other insurance benefit reserves.

In the third quarter of 2012, the Company completed its annual comprehensive non-market related policyholder behavior assumption study and incorporated the results of the study into its projections of future gross profits. All assumptions changes are considered an Unlock in the period of revision. The Company will continue to evaluate our assumptions related to policyholder behavior as we begin to implement initiatives to reduce the size of the variable annuity business.

The most significant EGP based asset and liability balances are as follows:



	Individual Life				Retirement Plans				Life Other Operations
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
DAC	$	1,976	$	2,002	$	218	$	304	$	3,123	$	3,625
SIA	$	48	$	47	$	22	$	22	$	280	$	365
URR	$	1,740	$	1,570	$	—	$	—	$	84	$	128
Death and Other Insurance Benefit Reserves	$	333	$	228	$	—	$	1	$	1,849	$	2,079

Unlocks

The after-tax (charge) benefit to net income by asset and liability as a result of the Unlocks for the three months ended September 30, 2012 and 2011 are as follows:



	Individual Life						Retirement Plans						Life Other Operations						Total
	2012			2011			2012			2011			2012			2011			2012			2011
DAC	$	11		$	(26	)	$	(9	)	$	(26	)	$	(53	)	$	(166	)	$	(51	)	$	(218	)
SIA	—			—			—			(1		)	(44		)	(6		)	(44		)	(7		)
URR	(8		)	11			—			—			17			3			9			14
Death and Other Insurance Benefit Reserves	(8		)	(43		)	—			—			15			(215		)	7			(258		)
Total	$	(5	)	$	(58	)	$	(9	)	$	(27	)	$	(65	)	$	(384	)	$	(79	)	$	(469	)

The Unlock charge, after-tax for the three months ended September 30, 2012 was primarily due to the annual policyholder assumption update, partially offset by actual separate account returns being above our aggregated estimated returns during the period. The Unlock charge for the three months ended September 30, 2011 was driven by assumption changes, including the impact of changes to the international hedge program and declines in equity markets.

The after-tax (charge) benefit related to the annual policyholder assumption update and market performance for the three months ended September 30, 2012 is as follows:



	Policyholder Assumption Update		Market Performance		Total
U.S. Annuity	(120	)	46		(74	)
Japan Annuity	21		(18	)	3
All Other	(4	)	(4	)	(8	)
Total	(103	)	24		(79	)

U.S. Annuity's Unlock charge related to the annual policyholder assumption update was driven by lower EGPs due to increased unit costs and changes to benefit utilization assumptions.

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The after-tax (charge) benefit to net income by asset and liability as a result of the Unlocks for the nine months ended September 30, 2012 and 2011 are as follows:



	Individual Life						Retirement Plans						Life Other Operations						Total
	2012			2011			2012			2011			2012			2011			2012			2011
DAC	$	7		$	(29	)	$	(5	)	$	(27	)	$	(30	)	$	(195	)	$	(28	)	$	(251	)
SIA	—			—			—			(1		)	(44		)	(11		)	(44		)	(12		)
URR	(6		)	12			—			—			19			4			13			16
Death and Other Insurance Benefit Reserves	(14		)	(43		)	—			—			62			(188		)	48			(231		)
Total	$	(13	)	$	(60	)	$	(5	)	$	(28	)	$	7		$	(390	)	$	(11	)	$	(478	)

The Unlock charge, after-tax for the nine months ended September 30, 2012 was primarily due to the annual policyholder assumption update, partially offset by actual separate account returns being above our aggregated estimated returns during the period. The Unlock charge for the nine months ended September 30, 2011 was primarily due to the impact of changes to the international hedge program.

An Unlock revises EGPs, on a quarterly basis, to reflect market updates of policyholder account value and the Company’s current best estimate assumptions. Modifications to the Company’s hedging programs may impact EGPs, and correspondingly impact DAC recoverability. After each quarterly Unlock, the Company also tests the aggregate recoverability of DAC by comparing the DAC balance to the present value of future EGPs. The margin between the DAC balance and the present value of future EGPs for U.S. and Japan individual variable annuities was 36% and 43%, respectively, as of September 30, 2012. If the margin between the DAC asset and the present value of future EGPs is exhausted, then further reductions in EGPs would cause portions of DAC to be unrecoverable and the DAC asset would be written down to equal future EGPs.

Goodwill Impairment

The carrying value of goodwill allocated to reporting units as of September 30, 2012 and December 31, 2011 is as follows:



	Segment Goodwill		Goodwill in Corporate		Total
Group Benefits	$	—	$	138	$	138
Consumer Markets	119		—		119
Individual Life	224		118		342
Retirement Plans	87		69		156
Mutual Funds	159		92		251
Total	$	589	$	417	$	1,006

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Pension and Other Postretirement Benefit Obligations

The Company maintains The Hartford Retirement Plan for U.S. Employees, a U.S. qualified defined benefit pension plan (the “Plan”) that covers substantially all employees, as well as unfunded excess plans to provide benefits in excess of amounts permitted to be paid to participants of the Plan under the provisions of the Internal Revenue Code. The Company has also entered into individual retirement agreements with certain retired directors providing for unfunded supplemental pension benefits. In addition, the Company provides certain health care and life insurance benefits for eligible retired employees. The Company maintains international plans which represent an immaterial percentage of total pension assets, liabilities and expense and, for reporting purposes, are combined with domestic plans.

Pursuant to accounting principles related to the Company's pension and other postretirement obligations to employees under its various benefit plans, the Company is required to make a significant number of assumptions in order to calculate the related liabilities and expenses each period. The two economic assumptions that have the most impact on pension and other postretirement expense are the discount rate and the expected long-term rate of return on plan assets. In determining the discount rate assumption, the Company utilizes a discounted cash flow analysis of the Company's pension and other postretirement obligations and currently available market and industry data. The yield curve utilized in the cash flow analysis is comprised of bonds rated Aa or higher with maturities primarily between zero and thirty years. Based on all available information, it was determined that 4.75% and 4.50% were the appropriate discount rates as of December 31, 2011 to calculate the Company's pension and other postretirement obligations and to calculate the 2012 pension and other postretirement expense, respectively. As of December 31, 2011, a 25 basis point increase/decrease in the discount rate would decrease/increase the pension and other postretirement obligations by $157 and $10, respectively.

The Company determines the expected long-term rate of return assumption based on an analysis of the Plan portfolio's historical compound rates of return since 1979 (the earliest date for which comparable portfolio data is available) and over 5 year and 10 year periods. The Company selected these periods, as well as shorter durations, to assess the portfolio's volatility, duration and total returns as they relate to pension obligation characteristics, which are influenced by the Company's workforce demographics. In addition, the Company also applies long-term market return assumptions to an investment mix that generally anticipates 60% fixed income securities, 20% equity securities and 20% alternative assets to derive an expected long-term rate of return. Based upon these analyses, management maintained the long-term rate of return assumption at 7.30% as of December 31, 2011. This assumption was used to determine the Company's 2012 expense.

On April 23, 2012, the Company, approved the freezing of participation and benefit accruals effective December 31, 2012. Compensation earned by employees up to December 31, 2012 shall be used for purposes of calculating benefits under the Plan but there will be no future benefit accruals after this date. Participants as of December 31, 2012 will continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work. The Company announced these changes in April 2012.

As a result of these changes, the Company remeasured the Plan's benefit obligations effective April 30, 2012. The remeasurement resulted in an increase in the pension benefit obligation of $117 pre-tax ($76 after-tax) primarily due to a decrease in the discount rates used to remeasure the Plan obligation from 4.75% at December 31, 2011 to 4.50% at April 30, 2012, reflecting the change in market interest rates. In addition, the Company recorded a curtailment gain of $7 during the second quarter of 2012, which was the remaining unamortized prior service cost at April 30, 2012. No other assumptions changed as a result of the remeasurement.

Pension expense reflected in the Company's results was $56 and $177 for the three and nine months ended September 30, 2012 and $52 and $159 for the three and nine months ended September 30, 2011. The Company estimates its 2012 pension expense will be approximately $241 based on the updated assumptions. The savings from these changes will be partially offset by increased cost related to the enhanced benefits within The Hartford’s Investment and Savings Plan, its defined contribution 401(k) savings plan, and The Hartford Excess Savings Plan ("collectively "defined contribution plans"), resulting in a net decline in benefit plan costs of approximately $120, pre-tax annually on a go-forward basis. For further information regarding the changes to the defined contribution plans, see Note 10 of the Notes to Condensed Consolidated Financial Statements.

The Company remeasured the other postretirement plans benefit obligations effective April 30, 2012. The remeasurement resulted in a decrease in the other postretirement plans benefit liability of $111 pre-tax ($72 after-tax) primarily due to the elimination of service costs for all employees not eligible to retire as of January 1, 2014 offset by a decrease in the discount rates used to remeasure the pension plan obligations from 4.50% at December 31, 2011 to 4.00% at April 30, 2012 reflecting the change in market interest rates. In addition, the Company recorded an after-tax curtailment gain of less than $1, during the second quarter of 2012, which was the remaining unamortized prior service cost at April 30, 2012.

Other postretirement plans expense reflected in the Company's results was $(3) and $(1) for the three and nine months ended September 30, 2012 and $3 and $8 for the three and nine months ended September 30, 2011. The Company estimates its 2012 other postretirement plans expense will be approximately $(3) based on the updated assumptions. As a result of the freezing of the plan, the Company expects the run rate of the other postretirement expense to decline by approximately $5 annually on a go-forward basis.

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THE HARTFORD’S OPERATIONS OVERVIEW

The Hartford is a financial holding company for a group of subsidiaries that provide property and casualty and life insurance and investment products to both individual and business customers in the United States and continues to administer business previously sold in Japan and the U.K.

The Company conducts business in four divisions, Commercial Markets, Consumer Markets, Wealth Management and Runoff Operations, each containing reporting segments. The Commercial Markets division consists of the reporting segments of Property & Casualty Commercial and Group Benefits. The Consumer Markets division is also the reporting segment. The Wealth Management division consists of the following reporting segments: Individual Life, Retirement Plans and Mutual Funds. The Runoff Operations division consists of Life Other Operations and Property & Casualty Other Operations. For additional discussion regarding The Hartford’s reporting segments, see Note 3 of the Notes to Condensed Consolidated Financial Statements.

KEY PERFORMANCE MEASURES AND RATIOS

The Company considers several measures and ratios to be the key performance indicators for its businesses. The following discussions include the more significant ratios and measures of profitability for the three and nine months ended September 30, 2012 and 2011. Management believes that these ratios and measures are useful in understanding the underlying trends in The Hartford’s businesses. However, these key performance indicators should only be used in conjunction with, and not in lieu of, the results presented in the segment discussions that follow in this MD&A. These ratios and measures may not be comparable to other performance measures used by the Company’s competitors. For additional information on key performance measures and ratios, see Definitions of Non-GAAP and other measures and ratios within MD&A of The Hartford’s 2011 Form 10-K Annual Report.

Definitions of Non-GAAP and other measures and ratios

Account Value

Account value includes policyholders’ balances for investment contracts and reserves for future policy benefits for insurance contracts.

After-tax Margin, Core Earnings excluding Unlock

After-tax margin, core earnings excluding Unlock, is a non-GAAP financial measure that the Company uses to evaluate, and believes is an important measure of, certain of the segment’s operating performance. After-tax margin, core earnings excluding Unlock is calculated by dividing core earnings excluding Unlocks by total core revenues excluding Unlocks. After-tax margin is the most directly comparable U.S. GAAP measure. A reconciliation of after-tax margin to after-tax margin, core earnings excluding Unlock, for the three and nine months ended September 30, 2012 and 2011 is set forth in the After-tax Margin section within Key Performance Measures and Ratios.

Assets Under Management

Assets under management (“AUM”) include account values and mutual fund assets.

Catastrophe ratio

The catastrophe ratio (a component of the loss and loss adjustment expense ratio) represents the ratio of catastrophe losses incurred in the current calendar year (net of reinsurance) to earned premiums and includes catastrophe losses incurred for both the current and prior accident years. A catastrophe is an event that causes $25 or more in industry insured property losses and affects a significant number of property and casualty policyholders and insurers. The catastrophe ratio includes the effect of catastrophe losses, but does not include the effect of reinstatement premiums.

Combined ratio

The combined ratio is the sum of the loss and loss adjustment expense ratio, the expense ratio and the policyholder dividend ratio. This ratio is a relative measurement that describes the related cost of losses and expenses for every $100 of earned premiums. A combined ratio below 100.0 demonstrates underwriting profit; a combined ratio above 100.0 demonstrates underwriting losses.

Combined ratio before catastrophes and prior accident year development

The combined ratio before catastrophes and prior accident year development, a non-GAAP financial measure, represents the combined ratio for the current accident year, excluding the impact of catastrophes. Combined ratio is the most directly comparable U.S.GAAP measure. A reconciliation of combined ratio to combined ratio before prior accident year reserve development for the three and nine months ended September 30, 2012 and 2011 is set forth in the Combined ratio before catastrophes and prior year development section within Key Performance Measures and Ratios.

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Core Earnings

Core earnings, a non-GAAP measure is an important measure of the Company’s operating performance. Core earnings excludes the effect of realized gains and losses (net of tax and the effects of deferred policy acquisition costs (“DAC”)) and discontinued operations. The Hartford believes, however, that some realized capital gains and losses are integrally related to the insurance operations, so core earnings includes net realized gains and losses such as net periodic settlements on credit derivatives and net periodic settlements on the Japan fixed annuity cross-currency swap. These net realized gains and losses are directly related to an offsetting item included in the income statement such as net investment income. Net income is the most directly comparable U.S. GAAP measure. A reconciliation of net income to core earnings for the three and nine months ended September 30, 2012 and 2011 is set forth below.



	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011
Net income (loss)	$	401		$	60	$	396		$	594
Less: Income from discontinued operations, net of tax	(2		)	3		(4		)	85
Less: Net realized capital gains (losses), net of tax and DAC, excluded from core earnings	25			7		(122		)	(129		)
Less: Loss on extinguishment of debt, net of tax	—			—		(587		)	—
Core earnings	$	378		$	50	$	1,109		$	638

DAC amortization ratio, Core Earnings excluding Unlock

DAC amortization ratio, core earnings excluding Unlock, is a non-GAAP financial measure that the Company uses to evaluate, and believes is an important measure of, certain of the segment’s operating performance. DAC amortization ratio, core earnings excluding Unlock is calculated by dividing core DAC amortization costs by pre-tax core earnings before DAC amortization costs. DAC amortization ratio is the most directly comparable U.S. GAAP measure. A reconciliation of DAC amortization ratio to DAC amortization ratio, core earnings excluding Unlock for the three and nine months ended September 30, 2012 and 2011 is set forth in the Life Other Operations operating summary within MD&A.

Mutual Fund Assets

Mutual fund assets include retail, investment-only and college savings plan assets under Section 529 of the Code, collectively referred to as non-proprietary, and proprietary mutual funds. Non-proprietary mutual fund assets are owned by the shareholders of those funds and not by the Company. Proprietary mutual funds include mutual funds sponsored by the Company which are owned by the separate accounts of the Company to support insurance and investment products sold by the Company. The non-proprietary mutual fund assets are not reflected in the Company’s consolidated financial statements.

Net Investment Spread

Management evaluates performance of certain products based on net investment spread. These products include those that have insignificant mortality risk, such as fixed annuities, certain general account universal life contracts and certain institutional contracts. Net investment spread is determined by taking the difference between the annualized earned rate, (excluding the effects of realized capital gains and losses, including those related to the Company’s GMWB product and related reinsurance and hedging programs), and the related annualized crediting rates on average general account assets under management. Some realized capital gains and losses are primarily driven by investment decisions and external economic developments, the nature and timing of which are unrelated to insurance aspects of our businesses. Accordingly, net investment spread excludes the effect of all realized gains and losses that tend to be highly variable from period to period based on capital market conditions. The Hartford believes, however, that some realized capital gains and losses are integrally related to our insurance operations and they are included in the net investment spread calculation.

Return on Assets (“ROA”), Core Earnings excluding Unlock

ROA, core earnings excluding Unlock, is a non-GAAP financial measure that the Company uses to evaluate, and believes is an important measure of, certain of the segment’s operating performance. ROA, core earnings excluding Unlock is calculated by dividing core earnings excluding Unlocks by a two-point average of AUM. ROA is the most directly comparable U.S. GAAP measure. A reconciliation of ROA to ROA, core earnings excluding Unlock for the three and nine months ended September 30, 2012 and 2011 is set forth in the ROA section within Key Performance Measures and Ratios.

Underwriting results

Underwriting results is a before-tax measure that represents earned premiums less incurred losses, loss adjustment expenses, underwriting expenses and policyholder dividends. Net Income is the most directly comparable U.S. GAAP measure. A reconciliation of underwriting results to net income for Property & Casualty Commercial and Consumer Markets is set forth in their respective operating summaries within MD&A.

Written and earned premiums

Written premium is a statutory accounting financial measure which represents the amount of premiums charged for policies issued, net of reinsurance, during a fiscal period. Earned premium is a U.S. GAAP and statutory measure. The difference between written and earned premium is the change in unearned premium reserve.

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Combined ratio before catastrophes and prior year development

Combined ratio before catastrophes and prior accident year development is a key indicator of overall profitability for the property and casualty underwriting segments of Property & Casualty Commercial and Consumer Markets since it removes the impact of volatile and unpredictable catastrophe losses and prior accident year reserve development.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Property & Casualty Commercial
Combined ratio	99.1		104.8		99.8		103.0
Catastrophe ratio	0.5		6.1		1.7		6.8
Non-catastrophe prior year development	1.1		(0.7	)	2.0		0.2
Combined ratio before catastrophes and prior year development	97.5		99.4		96.1		96.0
Consumer Markets
Combined ratio	87.9		106.7		95.8		104.8
Catastrophe ratio	(0.7	)	12.2		8.3		16.1
Non-catastrophe prior year development	(4.7	)	(1.0	)	(3.6	)	(3.0	)
Combined ratio before catastrophes and prior year development	93.3		95.5		91.1		91.8

Property & Casualty Commercial

Three months ended September 30, 2012 compared to the three months ended September 30, 2011

•

Property & Casualty Commercial's combined ratio before catastrophes and prior year development improved primarily due to a decrease in the current accident year loss and loss adjustment expense ratio before catastrophes primarily as a result of lower non-catastrophe property losses, partially offset by a higher current accident year loss and loss adjustment expense ratio before catastrophes for workers' compensation. In addition, both periods included current accident year reserve strengthening related to prior quarters, which, in 2012, added 2.5 points primarily related to workers' compensation business and commercial auto liability claims, and in 2011, added 3.0 points primarily related to workers' compensation business.

Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

•

Property & Casualty Commercial's combined ratio before catastrophes and prior year development deteriorated slightly primarily due to an increase in the current accident year loss and loss adjustment expense ratio before catastrophes in workers' compensation substantially offset by lower non-catastrophe property losses. Workers' compensation frequency has been improving since recognizing the increase in the latter six months of 2011, while severity has moderated and earned pricing has increased.

Consumer Markets

Three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011


•	Consumer Markets combined ratio before catastrophes and prior year development improved primarily due to a lower ratio of current accident year loss and loss adjustment expenses before catastrophes for home, driven by earned pricing increases and a decrease in the frequency of non-catastrophe weather claims, partially offset by an increase in the expense ratio.

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Return on Assets

Return on assets is a key indicator of overall profitability for the Retirement Plans, Mutual Funds and Life Other Operations reporting segments as a significant portion of their earnings is based on average assets under management.



	Three Months Ended September 30,						Nine Months Ended September 30,
Ratios	2012			2011			2012			2011
Retirement Plans
ROA	(5.1	)	bps	(17.5	)	bps	2.2		bps	2.3		bps
Effect of Unlock on ROA	(4.4	)	bps	(18.2	)	bps	(0.2	)	bps	(6.2	)	bps
Effect of net realized gains (losses), net of tax and DAC on ROA	(4.3	)	bps	(2.3	)	bps	(1.8	)	bps	1.7		bps
ROA, core earnings excluding Unlock	3.6		bps	3.0		bps	4.2		bps	6.8		bps
Mutual Funds
ROA	8.3		bps	10.5		bps	8.6		bps	11.5		bps
Effect of net realized gains /(losses), net of tax and DAC on ROA	—		bps	—		bps	—		bps	0.2		bps
ROA, core earnings excluding Unlock	8.3		bps	10.5		bps	8.6		bps	11.3		bps
Life Other Operations
ROA	34.8		bps	23.8		bps	27.2		bps	32.8		bps
Effect of Unlock on ROA	(2.6	)	bps	(28.6	)	bps	4.4		bps	(6.3	)	bps
Effect of net realized gains (losses), net of tax and DAC on ROA	2.1		bps	14.0		bps	(15.9	)	bps	(6.7	)	bps
ROA, core earnings excluding Unlock	35.3		bps	38.4		bps	38.7		bps	45.8		bps

Three months ended September 30, 2012 compared to three months ended September 30, 2011


•	Retirement Plans ROA, core earnings excluding Unlock, was relatively unchanged in 2012 as core earnings were flat during the period.


•	Mutual Funds ROA, core earnings excluding Unlock, decreased in 2012 primarily due to lower fee income and other driven by lower average AUM during the third quarter of 2012.


•	Life Other Operations ROA, core earnings excluding Unlock, decreased in 2012 primarily due to increased total benefits, losses and expenses, including higher restructuring costs.

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011


•	Retirement Plans ROA, core earnings excluding Unlock, decreased in 2012 primarily due to increased total benefits, losses and expenses, including higher restructuring costs.


•	Mutual Funds ROA, core earnings excluding Unlock, decreased in 2012 primarily due to lower fee income and other driven by lower average AUM during the nine months ended September 30, 2012.


•	Life Other Operations ROA, core earnings excluding Unlock, decreased in 2012 primarily due to lower fee income and higher restructuring costs. In addition, ROA, core earnings excluding Unlock for 2011 reflects the favorable impact of the release of a deficiency reserve related to a product line in Japan.

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After-tax margin

After-tax margin is a key indicator of overall profitability for the Individual Life and Group Benefits reporting segments as a significant portion of their earnings are a result of the net margin from losses incurred on earned premiums, fees and other considerations.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Individual Life
After-tax margin	3.4	%	(2.3	)%	6.4	%	5.4	%
Less: Effect of Unlock	(1.6	)%	(16.6	)%	(1.2	)%	(6.2	)%
Less: Effect of net realized gains/losses, net of tax and DAC	(1.1	)%	3.3	%	(0.1	)%	(0.3	)%
After-tax margin, core earnings excluding Unlock	6.1	%	11.0	%	7.7	%	11.9	%
Group Benefits
After-tax margin, excluding buyouts	2.9	%	2.2	%	2.6	%	2.3	%
Less: Effect of net realized gains, net of tax	0.7	%	0.4	%	0.6	%	0.3	%
After-tax margin, excluding buyouts and realized gains	2.2	%	1.8	%	2.0	%	2.0	%

Three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011

•

Individual Life's after-tax margin, core earnings excluding Unlock, decreased for the three and nine months ended September 30, 2012 as compared to the prior year periods primarily due to increased operating costs, including restructuring costs and increased benefits, losses and loss adjustment expenses, including death benefits, for the nine months ended September 30, 2012 and a higher effective income tax rate in 2012.

•

Group Benefits' after-tax margin increased for the three months ended September 30, 2012 and remained flat for the nine months ended September 30, 2012, as compared to prior year. For both periods, there is a decrease in fully insured ongoing premiums due to the Company's pricing actions and a challenging economic environment, partially offset by lower commissions and operating expense. For the nine months, group disability loss ratio was higher than prior year while for the three months, the loss ratio was lower due to slightly favorable long term disability terminations.

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Investment Results

Composition of Invested Assets



	September 30, 2012				December 31, 2011
	Amount		Percent		Amount		Percent
Fixed maturities, AFS, at fair value	$	86,726	80.9	%	$	81,809	78.3	%
Fixed maturities, at fair value using the fair value option	1,355		1.3	%	1,328		1.3	%
Equity securities, AFS, at fair value	878		0.8	%	921		0.9	%
Mortgage loans	6,863		6.4	%	5,728		5.5	%
Policy loans, at outstanding balance	2,000		1.9	%	2,001		1.9	%
Limited partnerships and other alternative investments	3,039		2.8	%	2,532		2.4	%
Other investments [1]	1,540		1.4	%	2,394		2.3	%
Short-term investments	4,787		4.5	%	7,736		7.4	%
Total investments excluding equity securities, trading	107,188		100	%	104,449		100	%
Equity securities, trading, at fair value [2]	29,980				30,499
Total investments	$	137,168			$	134,948


[1]	Primarily relates to derivative instruments.

[2]

As of September 30, 2012 and December 31, 2011, approximately $28.0 billion and $28.5 billion, respectively, of equity securities, trading, support Japan variable annuities. Those equity securities, trading, were invested in mutual funds, which, in turn, invested in the following asset classes as of September 30, 2012 and December 31, 2011, respectively, Japan equity 19% and 21%, Japan fixed income (primarily government securities) 15% and 15%, global equity 22% and 20%, global government bonds 43% and 43%, and cash and other 1% and 1%.

Total investments increased since December 31, 2011 driven by fixed maturities, AFS, and mortgage loans, partially offset by declines in short-term investments. The increase in fixed maturities, AFS, was largely the result of improved valuations as a result of credit spread tightening and declining interest rates, and mortgage loans increased due to the continued funding of commercial whole loans. The decline in short-term investments primarily relates to a decline in derivative collateral due to decreases in derivative market values, as well as increased allocations to mortgage loans and limited partnerships and other alternative investments.

Net Investment Income (Loss)



	Three Months Ended September 30,										Nine Months Ended September 30,
	2012					2011					2012					2011
(Before-tax)	Amount			Yield [1]		Amount			Yield [1]		Amount			Yield [1]		Amount			Yield [1]
Fixed maturities [2]	$	830		4.1	%	$	836		4.1	%	$	2,536		4.2	%	$	2,552		4.2	%
Equity securities, AFS	5			2.3	%	8			3.0	%	23			3.2	%	27			3.5	%
Mortgage loans	88			5.1	%	75			5.6	%	253			5.2	%	205			5.4	%
Policy loans	30			6.1	%	32			5.9	%	90			6.1	%	99			6.1	%
Limited partnerships and other alternative investments	28			3.8	%	67			12.8	%	152			7.8	%	245			16.8	%
Other [3]	75					73					225					231
Investment expense	(26		)			(29		)			(82		)			(85		)
Total securities AFS and other	1,030			4.2	%	1,062			4.3	%	3,197			4.3	%	3,274			4.5	%
Equity securities, trading	710					(1,890		)			1,889					(1,684		)
Total net investment income (loss)	$	1,740				$	(828	)			5,086					1,590
Total securities, AFS and other excluding limited partnerships and other alternative investments	$	1,002		4.2	%	$	995		4.1	%	$	3,045		4.2	%	$	3,029		4.2	%

[1]

Yields calculated using annualized investment income before investment expenses divided by the monthly average invested assets at cost, amortized cost, or adjusted carrying value, as applicable, excluding consolidated variable interest entity noncontrolling interests. Included in the fixed maturity yield is other, which primarily relates to derivatives (see footnote [3] below). Included in the total net investment income yield is investment expense.


[2]	Includes net investment income on short-term investments.


[3]	Includes income from derivatives that qualify for hedge accounting and hedge fixed maturities.

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Three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011

Total net investment income improved largely due to equity securities, trading, resulting from improvements in market performance of the underlying investment funds supporting the Japanese variable annuity product. Total net investment income, excluding equity securities, trading, declined due to lower income on limited partnerships and other alternative investments as a result the stabilizing equity market. Also included was lower income on fixed maturities largely due to lower reinvestment rates and a slight increase in U.S. Treasuries and MBS. These declines were partially offset by increased mortgage loan income due to additional investments in commercial whole loans. Based on the current interest rate and credit environment, the Company expects the 2012 portfolio yield, excluding limited partnerships, to decline slightly throughout the remainder of 2012.

Net Realized Capital Gains (Losses)



	Three Months Ended September 30,						Nine Months Ended September 30,
(Before-tax)	2012			2011			2012			2011
Gross gains on sales	$	205		$	197		$	710		$	519
Gross losses on sales	(131		)	(63		)	(387		)	(294		)
Net OTTI losses recognized in earnings	(37		)	(60		)	(164		)	(138		)
Valuation allowances on mortgage loans	—			—			1			23
Japanese fixed annuity contract hedges, net [1]	(24		)	9			(42		)	(2		)
Periodic net coupon settlements on credit derivatives/Japan	2			1			1			(8		)
Results of variable annuity hedge program
GMWB derivatives, net	381			(323		)	451			(300		)
U.S. macro hedge program	(109		)	107			(292		)	6
Total U.S. program	272			(216		)	159			(294		)
International program	(167		)	1,132			(633		)	865
Total results of variable annuity hedge program	105			916			(474		)	571
Other, net [2]	(1		)	(425		)	153			(430		)
Net realized capital gains (losses)	$	119		$	575		$	(202	)	$	241


[1]	Relates to the Japanese fixed annuity product (adjustment of product liability for changes in spot currency exchange rates, related derivative hedging instruments, excluding net period coupon settlements, and Japan FVO securities).


[2]	Primarily consists of gains and losses on non-qualifying derivatives and fixed maturities, FVO, Japan 3Win related foreign currency swaps, and other investment gains and losses.

Details on the Company’s net realized capital gains and losses are as follows:

Gross gains and losses on sales

• Gross gains and losses on sales for the three and nine months ended September 30, 2012 were predominately from sales of investment grade corporate securities, U.S. Treasuries and municipals bonds due to tactical repositioning of the portfolio.

• Gross gains and losses on sales for the three and nine months ended September 30, 2011 were predominately from investment grade corporate securities, U.S. Treasuries and commercial real estate related securities.

Net OTTI losses

• For further information, see Other-Than-Temporary Impairments within the Investment Portfolio Risks and Risk Management section of the MD&A.

Variable annuity hedge program

• For the three and nine months ended September 30, 2012, the gain on U.S. GMWB related derivatives, net, was primarily due to liability model assumption updates of $301 related to lower benefit utilization by policyholders, decreased domestic equity volatility gains of $42 and $73, respectively, and outperformance of the underlying actively managed funds as compared to their respective indices of $25 and $34, respectively.


•	For the three and nine months ended September 30, 2012, the loss on the U.S. macro hedge program was primarily due to losses of $47 and $124, respectively, related to an increase in domestic equity markets, losses of $49 and $121, respectively, related to the passage of time, and losses of $16 and $56, respectively, related to a decrease in equity volatility.

•

For the three months ended September 30, 2012, the loss associated with the international program was primarily driven by losses of approximately $240 due to an improvement in global and domestic equity markets, partially offset by gains of approximately $91 due to an appreciation of the Japanese yen in relation to the euro and the U.S. dollar. For the nine months ended September 30, 2012, the loss associated with the international program was primarily driven by losses of approximately $574 due to an improvement in global and domestic equity markets, and losses of approximately $202 due to depreciation of the Japanese yen in relation to the euro and the U.S. dollar, partially offset by gains of approximately $79 due to a decline in interest rates.

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• The loss on U.S. GMWB related derivatives, net, for the three and nine months ended September 30, 2011 was primarily due to a decrease in long-term interest rates that resulted in a charge of $247 and $261, respectively, and a higher interest rate volatility that resulted in a charge of $72 and $76, respectively. The gain on the U.S. macro hedge program for the three months ended September 30, 2011 was primarily due to a decrease in domestic equity markets. The gain on the international program for the three and nine months ended September 30, 2011 was primarily the result of a decrease in global and domestic equity markets, and the appreciation of the Japanese yen in relation to the euro.

Other, net

• Other, net loss for the three months ended September 30, 2012, was primarily due to losses of $72 on transactional foreign currency re-valuation associated with the internal reinsurance of the Japan variable annuity business, which is offset in AOCI, due to appreciation of the Japanese yen versus the U.S. dollar. Additional loss of $31 on Japan 3Win foreign currency swaps was primarily due to the strengthening of the currency basis swap spread between U.S. dollar and Japanese yen and the decline in U.S. interest rates. These losses were primarily offset by gains of $91 on credit derivatives driven by credit spread tightening.


•	Other, net gain for the nine months ended September 30, 2012, was primarily due to gains of $242 on credit derivatives driven by credit spread tightening, partially offset by losses of $87 related to Japan 3Win foreign currency swaps primarily driven by the strengthening of the currency basis swap spread between U.S. dollar and Japanese yen and the decline in U.S. interest rates.

• Other, net loss for the three and nine months ended September 30, 2011 was primarily due to losses of $178 and $148, respectively, on credit derivatives driven by credit spread widening and losses of $135 and $126, respectively, on transactional foreign currency re-valuation associated with the internal reinsurance of the Japan variable annuity business, which is offset in AOCI, due to an appreciation of the Japanese yen versus the U.S. dollar. Also included were losses of $54 and $86, respectively, on Japan 3Win foreign currency swaps primarily driven by a decrease in U.S. interest rates. In addition, losses of $58 for the three and nine months ended September 30, 2011 resulted from equity futures and options used to hedge equity market risk in the investment portfolio due to an increase in the equity market during the hedged period.

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PROPERTY & CASUALTY COMMERCIAL



	Three Months Ended September 30,								Nine Months Ended September 30,
Underwriting Summary	2012			2011			Change		2012			2011			Change
Written premiums	$	1,552		$	1,551		—	%	$	4,755		$	4,694		1	%
Change in unearned premium reserve	(30		)	(2		)	NM		64			126			(49	%)
Earned premiums	1,582			1,553			2	%	4,691			4,568			3	%
Losses and loss adjustment expenses
Current accident year before catastrophes	1,089			1,085			—	%	3,111			2,997			4	%
Current accident year catastrophes	10			93			(89	%)	116			305			(62	%)
Prior accident years	15			(9		)	NM		54			16			NM
Total losses and loss adjustment expenses	1,114			1,169			(5	%)	3,281			3,318			(1	%)
Amortization of deferred policy acquisition costs	231			229			1	%	693			687			1	%
Underwriting expenses	218			224			(3	%)	698			688			1	%
Dividends to policyholders	5			5			—	%	8			13			(38	%)
Underwriting results	14			(74		)	NM		11			(138		)	NM
Net servicing income	5			2			150	%	13			6			117	%
Net investment income	222			217			2	%	696			698			—	%
Net realized capital gains (losses)	10			(51		)	NM		37			(61		)	NM
Other expenses	(31		)	(38		)	18	%	(83		)	(116		)	28	%
Income from continuing operations before income taxes	220			56			NM		674			389			73	%
Income tax expense	54			1			NM		168			50			NM
Income from continuing operations, net of tax	166			55			NM		506			339			49	%
Income (loss) from discontinued operations, net of tax [1]	(2		)	(2		)	—	%	(4		)	155			NM
Net income	$	164		$	53		NM		$	502		$	494		2	%


[1]	Represents the income from operations and sale of Specialty Risk Services (“SRS”). For additional information, see Note 12 of the Notes to Condensed Consolidated Financial Statements.



	Three Months Ended September 30,						Nine Months Ended September 30,
Premium Measures [1]	2012			2011			2012			2011
New business premium	$	230		$	271		$	747		$	860
Standard commercial lines policy count retention	84		%	82		%	83		%	82		%
Standard commercial lines renewal written pricing increase	8		%	4		%	7		%	3		%
Standard commercial lines renewal earned pricing increase	6		%	2		%	5		%	2		%
Standard commercial lines policies in-force as of end of period							1,268,823			1,257,012


[1]	Standard commercial lines represents the Company’s small commercial and middle market property and casualty lines.

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	Three Months Ended September 30,								Nine Months Ended September 30,
Ratios	2012			2011			Change		2012			2011		Change
Loss and loss adjustment expense ratio
Current accident year before catastrophes	68.8			69.9			1.1		66.3			65.6		(0.7	)
Current accident year catastrophes	0.6			6.0			5.4		2.5			6.7		4.2
Prior accident years	0.9			(0.6		)	(1.5	)	1.2			0.4		(0.8	)
Total loss and loss adjustment expense ratio	70.4			75.3			4.9		69.9			72.6		2.7
Expense ratio	28.4			29.2			0.8		29.7			30.1		0.4
Policyholder dividend ratio	0.3			0.3			—		0.2			0.3		0.1
Combined ratio	99.1			104.8			5.7		99.8			103.0		3.2
Catastrophe ratio
Current accident year	0.6			6.0			5.4		2.5			6.7		4.2
Prior accident years	(0.1		)	0.1			0.2		(0.8		)	0.2		1.0
Total catastrophe ratio	0.5			6.1			5.6		1.7			6.8		5.1
Combined ratio before catastrophes	98.6			98.6			—		98.1			96.2		(1.9	)
Combined ratio before catastrophes and prior accident year development	97.5			99.4			1.9		96.1			96.0		(0.1	)
Other revenues [1]	$	27		$	28		(4	%)	$	75		$	77	(3	%)


[1]	Represents servicing revenues.

Three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011

Net income, as compared to the prior year periods, increased for the three and nine months ended September 30, 2012 primarily due to improvements in underwriting results driven by less severe catastrophes, and in addition, improvements in net realized capital gains (losses), mainly on derivatives. In the nine-month period this was offset by the gain on sale of SRS which occurred in 2011.

Current accident year catastrophe losses for the three months ended September 30, 2012 of $10, pre-tax, primarily included Hurricane Isaac. For the nine months ended September 30, 2012, pre-tax catastrophes of $116 also included thunderstorms and tornadoes in the Midwest and South. In 2011, catastrophes primarily included Hurricane Irene in the Northeast, thunderstorms in the Midwest and Tropical Storm Lee in the Southeast, and for the nine-month period, winter storms in the Northeast and Midwest and severe thunderstorms and tornadoes in the Midwest and South.

For information regarding prior accident years reserve development, including reserve (releases) strengthenings by reserve line, see the Property and Casualty Insurance Product Reserves, Net of Reinsurance section within Critical Accounting Estimates.

Earned premiums increased for the three and nine months ended September 30, 2012 primarily due to improvements in workers’ compensation, driven by renewal earned pricing increases, improved policy count retention and an increase in policies-in-force. The earned pricing changes were primarily a reflection of written pricing changes over the last year. Renewal written pricing increased across all standard commercial lines driven by improving market conditions.

Current accident year loss and loss adjustment expenses before catastrophes remained flat for the three months ended September 30, 2012 and increased for the nine months ended September 30, 2012. The increase in the nine months was primarily due to increases in earned premiums and the current accident year loss and loss adjustment expense ratio before catastrophes particularly in workers’ compensation. Workers' compensation frequency has been improving since recognizing the increase in the latter six months of 2011, while severity has moderated and earned pricing has increased.

Net realized capital gains (losses) improved primarily due to gains on derivatives as a result of credit spreads tightening. For additional information, see the Investment Results section within Key Performance Measures and Ratios.

The effective tax rate in both periods differs from the U.S. Federal statutory rate primarily due to permanent differences related to investments in tax exempt securities. For further discussion, see Income Taxes within Note 1 of the Notes to Condensed Consolidated Financial Statements.

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GROUP BENEFITS



	Three Months Ended September 30,								Nine Months Ended September 30,
Operating Summary	2012			2011			Change		2012			2011			Change
Premiums and other considerations	$	941		$	1,016		(7	%)	$	2,879		$	3,136		(8	%)
Net investment income	98			102			(4	%)	304			312			(3	%)
Net realized capital gains	11			6			83	%	31			2			NM
Total revenues	1,050			1,124			(7	%)	3,214			3,450			(7	%)
Benefits, losses and loss adjustment expenses	746			814			(8	%)	2,312			2,492			(7	%)
Amortization of deferred policy acquisition costs	9			9			—	%	25			27			(7	%)
Insurance operating costs and other expenses	258			274			(6	%)	777			851			(9	%)
Total benefits, losses and expenses	1,013			1,097			(8	%)	3,114			3,370			(8	%)
Income before income taxes	37			27			37	%	100			80			25	%
Income tax expense	7			2			NM		17			3			NM
Net income	$	30		$	25		20	%	$	83		$	77		8	%
Premiums and other considerations
Fully insured – ongoing premiums	$	926		$	1,000		(7	%)	$	2,830		$	3,041		(7	%)
Buyout premiums	—			—			—	%	3			49			(94	%)
Other	15			16			(6	%)	46			46			—	%
Total premiums and other considerations	$	941		$	1,016		(7	%)	$	2,879		$	3,136		(8	%)
Fully insured ongoing sales, excluding buyouts	$	55		$	91		(40	%)	$	349		$	427		(18	%)
Ratios, excluding buyouts
Loss ratio	79.3		%	80.1		%	0.8		80.3		%	79.1		%	(1.2)
Loss ratio, excluding financial institutions	83.8		%	84.7		%	0.9		84.9		%	84.2		%	(0.7)
Expense ratio	28.4		%	27.9		%	(0.5)		27.9		%	28.4		%	0.5
Expense ratio, excluding financial institutions	24.5		%	23.9		%	(0.6)		24.0		%	23.9		%	(0.1)

Three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011

Net income, as compared to the prior year periods, increased for the three and nine months ended September 30, 2012. While realized capital gains improved in both periods, this was partially offset by a decrease in fully insured ongoing premiums, due to the competitive marketplace, while the Company remains disciplined in meeting pricing expectations.

The loss ratio for the three months was lower, primarily in group disability, due to slightly favorable long-term disability terminations. For the nine months, the loss ratio remains higher than prior year, primarily due to higher severity in group disability. In addition, the Company continues to experience stable but elevated claims incidence and lower than historical terminations in long-term disability.

The change in insurance operating costs and other expenses is due to lower commission payments as a result of lower sales and a one-time payment to a third party administrator in the first quarter of 2011.

The effective tax rate, in both periods, differs from the U.S. Federal statutory rate primarily due to permanent differences related to investments in tax exempt securities. For further discussion, see Income Taxes within Note 1 of the Notes to Condensed Consolidated Financial Statements.

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CONSUMER MARKETS



	Three Months Ended September 30,								Nine Months Ended September 30,
Operating Summary	2012			2011			Change		2012			2011			Change
Written premiums	$	960		$	964		—	%	$	2,771		$	2,817		(2	%)
Change in unearned premium reserve	48			34			41	%	46			(8		)	NM
Earned premiums	912			930			(2	%)	2,725			2,825			(4	%)
Losses and loss adjustment expenses
Current accident year before catastrophes	628			663			(5	%)	1,797			1,902			(6	%)
Current accident year catastrophes	—			113			(100	%)	255			426			(40	%)
Prior accident years	(49		)	(9		)	NM		(127		)	(58		)	(119	%)
Total losses and loss adjustment expenses	579			767			(25	%)	1,925			2,270			(15	%)
Amortization of deferred policy acquisition costs	82			84			(2	%)	249			254			(2	%)
Underwriting expenses	141			141			—	%	437			437			—	%
Underwriting results	110			(62		)	NM		114			(136		)	NM
Net servicing income	2			4			(50	%)	12			13			(8	%)
Net investment income	38			46			(17	%)	122			145			(16	%)
Net realized capital gains (losses)	2			(10		)	NM		7			(12		)	NM
Other expenses	(13		)	(8		)	(63	%)	(39		)	(153		)	75	%
Income (loss) before income taxes	139			(30		)	NM		216			(143		)	NM
Income tax expense (benefit)	45			(14		)	NM		64			(63		)	NM
Net income (loss)	$	94		$	(16	)	NM		$	152		$	(80	)	NM
	Three Months Ended September 30,								Nine Months Ended September 30,
Written Premiums	2012			2011			Change		2012			2011			Change
Product Line
Automobile	$	650		$	657		(1	%)	$	1,919		$	1,963		(2	%)
Homeowners	310			307			1	%	852			854			—	%
Total	$	960		$	964		—	%	$	2,771		$	2,817		(2	%)
Earned Premiums
Product Line
Automobile	$	632		$	649		(3	%)	$	1,894		$	1,978		(4	%)
Homeowners	280			281			—	%	831			847			(2	%)
Total	$	912		$	930		(2	%)	$	2,725		$	2,825		(4	%)



	Three Months Ended September 30,						Nine Months Ended September 30,
Premium Measures	2012			2011			2012			2011
Policies in-force end of period
Automobile							2,029,078			2,106,385
Homeowners							1,321,149			1,358,162
Total policies in-force end of period							3,350,227			3,464,547
New business written premium
Automobile	$	84		$	80		$	255		$	221
Homeowners	$	32		$	26		$	87		$	68
Policy count retention
Automobile	85		%	83		%	85		%	82		%
Homeowners	87		%	84		%	86		%	83		%
Renewal written pricing increase
Automobile	4		%	4		%	4		%	5		%
Homeowners	6		%	8		%	6		%	8		%
Renewal earned pricing increase
Automobile	4		%	6		%	5		%	6		%
Homeowners	6		%	9		%	7		%	9		%

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	Three Months Ended September 30,								Nine Months Ended September 30,
Ratios and Supplemental Data	2012			2011			Change		2012			2011			Change
Loss and loss adjustment expense ratio
Current accident year before catastrophes	68.9			71.3			2.4		65.9			67.3			1.4
Current accident year catastrophes	—			12.2			12.2		9.4			15.1			5.7
Prior accident years	(5.4		)	(1.0		)	4.4		(4.7		)	(2.1		)	2.6
Total loss and loss adjustment expense ratio	63.5			82.5			19.0		70.6			80.4			9.8
Expense ratio	24.5			24.2			(0.3	)	25.2			24.5			(0.7	)
Combined ratio	87.9			106.7			18.8		95.8			104.8			9.0
Catastrophe ratio
Current year	—			12.2			12.2		9.4			15.1			5.7
Prior years	(0.7		)	—			0.7		(1.1		)	1.0			2.1
Total catastrophe ratio	(0.7		)	12.2			12.9		8.3			16.1			7.8
Combined ratio before catastrophes	88.6			94.5			5.9		87.5			88.7			1.2
Combined ratio before catastrophes and prior accident years development	93.3			95.5			2.2		91.1			91.8			0.7
Other revenues [1]	$	37		$	35		6	%	$	109		$	111		(2	%)
Product Line Combined Ratios
Automobile	93.9			99.4			5.5		93.7			94.1			0.4
Homeowners	74.5			124.1			49.6		100.6			130.1			29.5
Total	87.9			106.7			18.8		95.8			104.8			9.0


[1]	Represents servicing revenues.

Three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011

Net income (loss) improved relative to the comparable prior periods, due to lower current accident year catastrophes and more favorable prior accident year reserve development and, for the nine-month period, a $73 after-tax charge in 2011, related to the write off of capitalized costs associated with a policy administration software project that was discontinued.

Current accident year catastrophe losses for the three months ended September 30, 2012 were $0, pre-tax. Losses that resulted from Hurricane Isaac in the Southeast and thunderstorms in the Midwest, were offset by reserve releases for catastrophes from prior quarters of 2012. For the nine months ended September 30, 2012, pre-tax catastrophes of $255 included severe tornadoes and thunderstorms in the Midwest, the South and Colorado, as well as tornadoes and thunderstorms spanning from the Ohio Valley to the Mid-Atlantic. In 2011, catastrophes primarily included Hurricane Irene in the Northeast and thunderstorms in the Midwest, and for the nine-month period, severe tornadoes and wind storms in the Midwest and South, and winter storms in the Northeast and Midwest.

For information regarding prior accident years reserve development, see the Property and Casualty Insurance Product Reserves, Net of Reinsurance section within Critical Accounting Estimates.

Earned premiums decreased in auto and were down modestly for homeowners, as a decline in renewal written premium more than offset an increase in new business written premium. Compared to 2011, the number of policies in-force as of September 30, 2012 decreased for both auto and home, driven by non-renewals. Policy count retention for auto and home increased as moderating renewal written price increases improved the Company's price competitiveness. Changes in underwriting practices and service operations have also contributed to the improvement in retention.

Auto and home new business written premium increased primarily due to more competitive new business pricing in AARP Direct and an increase in the sale of the AARP auto product through independent agents. The lower auto and homeowners renewal earned pricing in the three month and nine months ended September 30, 2012 was primarily due to lower rate increases. For both auto and homeowners, an increase in earned pricing was partially offset by a shift in the mix of business by territory, class plan and pricing tier to policies with lower average earned premium, such that increases in average earned premium were less than the increases in earned pricing.

Current accident year losses and loss adjustment expenses before catastrophes decreased primarily due to lower earned premiums and a decrease in the overall current accident year loss and loss adjustment expense ratio before catastrophes. For the three and nine months ended September 30, 2012 the current accident year loss and loss adjustment expense ratio before catastrophes decreased primarily due to a decrease in home, partially offset by an increase in auto. The decrease for home was primarily due to earned pricing increases and a decrease in the frequency of non-catastrophe weather claims. The increase for auto was primarily due to higher loss cost severity for first party physical damage and third party property damage claims, largely offset by the effect of earned pricing increases.

Net realized capital gains increased primarily due to gains on derivatives as a result of credit spreads tightening. For additional information, see the Investment Results section within Key Performance Measures and Ratios.

Table of Contents

INDIVIDUAL LIFE



	Three Months Ended September 30,									Nine Months Ended September 30,
Operating Summary	2012			2011			Change			2012			2011			Change
Fee income and other	$	235		$	269		(13		)%	$	738		$	739		—		%
Earned premiums	(28		)	(25		)	(12		)%	(84		)	(74		)	(14		)%
Net investment income	124			115			8		%	372			341			9		%
Net realized capital gains (losses)	(6		)	28			NM			13			4			NM
Total revenues	325			387			(16		)%	1,039			1,010			3		%
Benefits, losses and loss adjustment expenses	230			260			(12		)%	657			622			6		%
Amortization of DAC	10			87			(89		)%	77			146			(47		)%
Insurance operating costs and other expenses	74			63			17		%	222			191			16		%
Total benefits, losses and expenses	314			410			(23		)%	956			959			—		%
Income (loss) before income taxes	11			(23		)	NM			83			51			63		%
Income tax expense (benefit)	—			(14		)	100		%	17			(4		)	NM
Net income (loss)	$	11		$	(9	)	NM			$	66		$	55		20		%
Account Values
Individual variable universal life insurance										$	5,873		$	5,259		12		%
Universal life, interest sensitive whole life, modified guaranteed life insurance and other										7,184			6,549			10		%
Total account values										$	13,057		$	11,808		11		%
Individual Life Insurance In-force
Variable universal life insurance										$	66,310		$	70,926		(7		)%
Universal life, interest sensitive whole life, modified guaranteed life insurance										67,525			62,052			9		%
Term life										83,185			80,249			4		%
Total life insurance in-force										$	217,020		$	213,227		2		%
Net Investment Spread	146 bps			157 bps			(11) bps			151 bps			159 bps			(8) bps
Death Benefits	$	113		$	108		$	5		$	331		$	315		$	16

Three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011

Net income, as compared to prior year periods, increased for the three and nine months ended September 30, 2012 primarily due to increased net investment income and lower Unlock charges in both periods, offset by unfavorable mortality and increases in operating costs and other expenses. For further discussion of Unlocks, see MD&A – Critical Accounting Estimates.

The announced sale of this business has had a negative impact on sales of individual life products. Insurance operating costs and other expenses, as compared to prior periods, increased for the three and nine months ended September 30, 2012 primarily due to restructuring and other costs of $18 and $25, respectively, associated with the Company's plan to pursue the sale of the Individual Life business. For further discussion of the Company's March 2012 announcement regarding its business and strategy evaluation, see MD&A – Outlooks.

While net investment income, as compared to prior year periods, increased modestly due to higher invested assets for the three and nine months ended September 30, 2012, income on limited partnerships and other alternative investments was lower in 2012 compared to 2011 as a result of greater price appreciation experienced in the underlying funds in 2011.

Net investment spread decreased by 11 bps for the three months ended September 30, 2012, as compared to the prior year period, driven by lower yields of 17 bps, partially offset by lower crediting rates of 6 bps. Net investment spread decreased by 8 bps for the nine months ended September 30, 2012, as compared to the prior year period, driven by lower yields of 16 bps, partially offset by lower crediting rates of 8 bps.

Individual Life’s effective tax rate for 2012 and 2011 differs from the statutory rate of 35% primarily due to permanent differences for separate account DRD and the 2011 release of the investment valuation allowance. See Note 1 of the Notes to Condensed Consolidated Financial Statements for a reconciliation of the consolidated tax provision at the U.S. federal statutory rate to the consolidated provision for income taxes.

Table of Contents

RETIREMENT PLANS



	Three Months Ended Three Months Ended September 30,								Nine Months Ended September 30,
Operating Summary	2012			2011			Change		2012			2011			Change
Fee income and other	$	89		$	92		(3	)%	$	276		$	285		(3	)%
Earned premiums	2			1			100	%	5			6			(17	)%
Net investment income	105			100			5	%	312			299			4	%
Net realized capital losses	(3		)	(2		)	(50	)%	(1		)	—			—	%
Total revenues	193			191			1	%	592			590			—	%
Benefits, losses and loss adjustment expenses	87			81			7	%	251			228			10	%
Amortization of DAC	21			50			(58	)%	31			74			(58	)%
Insurance operating costs and other expenses	106			106			—	%	323			321			10	%
Total benefits, losses and expenses	214			237			(10	)%	605			623			(3	)%
Loss before income tax benefit	(21		)	(46		)	54	%	(13		)	(33		)	61	%
Income tax benefit	(14		)	(23		)	39	%	(22		)	(42		)	48	%
Net income (loss)	$	(7	)	$	(23	)	70	%	$	9		$	9		—	%
Assets Under Management
401(k) account values									$	23,238		$	19,769		18	%
403(b)/457 account values									13,754			12,072			14	%
401(k)/403(b)/457 mutual funds									18,268			17,844			2	%
Total assets under management									$	55,260		$	49,685		11	%
Assets Under Management Roll Forward
Assets under management, beginning of period									$	52,302		$	52,518		—	%
Net flows									(2,065		)	1,247			NM
Transfers in and reclassifications									—			267			(100	)%
Change in market value and other									5,023			(4,347		)	NM
Assets under management, end of period									$	55,260		$	49,685		11	%
Net Investment Spread	76 bps			84 bps			(8) bps		86 bps			110 bps			(24) bps

Three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011

Net loss, as compared to the prior period, decreased for the three months ended September 30, 2012 primarily due to a lower Unlock charge in 2012. Net income, as compared to the prior period, remained flat for the nine months ended September 30, 2012. For further discussion of Unlocks see MD&A – Critical Accounting Estimates.

The announced sale of this business has had a negative impact on sales of retirement plan products and surrender rates. In addition, insurance operating costs and other expenses includes restructuring costs for the three and nine months ended September 30, 2012 of $10 and $14, respectively, related to the Company's plan to pursue the sale of the Retirement Plans business. For further discussion of the Company's March 2012 announcement regarding its business and strategy evaluation, see MD&A – Outlooks.

Net investment income, as compared to prior year periods, increased modestly for the three and nine months ended September 30, 2012 although portfolio yields, particularly on limited partnership investments, were lower in 2012. Net investment spread decreased by 8 bps for the three months ended September 30, 2012, as compared to the prior year period, driven by lower yields of 20 bps, partially offset by lower crediting rates of 12 bps. Net investment spread decreased by 24 bps for the nine months ended September 30, 2012, as compared to the prior year period, driven by lower yields of 30 bps, partially offset by lower crediting rates of 6 bps.

Retirement Plans’ effective tax rate for 2012 and 2011 differs from the statutory rate of 35% primarily due to permanent differences for separate account DRD and the 2011 release of the investment valuation allowance. See Note 1 of the Notes to Condensed Consolidated Financial Statements for a reconciliation of the consolidated tax provision at the U.S. federal statutory rate to the consolidated provision for income taxes.

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MUTUAL FUNDS



	Three Months Ended September 30,							Nine Months Ended September 30,
Operating Summary	2012			2011		Change		2012			2011			Change
Fee income and other	$	148		$	153	(3	)%	$	447		$	506		(12	)%
Net investment loss	(1		)	—		NM		(2		)	(2		)	—	%
Net realized capital gains	1			—		NM		—			1			(100	)%
Total revenues	148			153		(3	)%	445			505			(12	)%
Amortization of DAC	8			12		(33	)%	26			36			(28	)%
Insurance operating costs and other expenses	113			105		8	%	333			348			(4	)%
Total benefits, losses and expenses	121			117		3	%	359			384			(7	)%
Income before income taxes	27			36		(25	)%	86			121			(29	)%
Income tax expense	9			12		(25	)%	30			42			(29	)%
Net income	$	18		$	24	(25	)%	$	56		$	79		(29	)%
Assets Under Management
Retail mutual fund assets								$	42,475		$	39,258		8	%
Investment Only mutual fund assets								7,533			6,625			14	%
529 College Savings Plan assets								1,792			1,424			26	%
Total non-proprietary assets								51,800			47,307			9	%
Proprietary mutual fund assets								36,321			35,494			2	%
Total mutual fund assets under management								$	88,121		$	82,801		6	%
Non-Proprietary AUM Roll Forward
Non-Proprietary Mutual Fund AUM, beginning of period								$	48,768		$	56,884		(14	)%
Net flows								(2,652		)	(2,584		)	(3	)%
Change in market value and other								5,684			(6,993		)	NM
Non-Proprietary Mutual Fund AUM, end of period								$	51,800		$	47,307		9	%
Proprietary Mutual Fund AUM Roll Forward
Proprietary Mutual Fund AUM, beginning of period								$	36,770		$	43,602		(16	)%
Net flows								(4,584		)	(4,355		)	(5	)%
Change in market value								4,135			(3,753		)	NM
Proprietary Mutual Fund AUM, end of period								$	36,321		$	35,494		2	%

Three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011

Net income, as compared to prior year periods, decreased for the three and nine months ended September 30, 2012 primarily due to lower fee income and other driven by lower average AUM in 2012 compared to 2011. During the three and nine months ended September 30, 2012 AUM increased modestly compared to December 31, 2011 and June 30, 2012 reflecting a significant improvement in equity market performance and lower redemption rates although new business deposit activity continued to trend lower.

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LIFE OTHER OPERATIONS



	Three Months Ended September 30,								Nine Months Ended September 30,
Operating Summary	2012			2011			Change		2012			2011			Change
Fee income and other	$	586		$	607		(3	)%	$	1,717		$	1,883		(9	)%
Earned premiums	7			59			(88	)%	75			167			(55	)%
Net investment income (loss):
Securities available-for-sale and other	401			443			(9	)%	1,276			1,337			(5	)%
Equity securities trading [1]	710			(1,889		)	NM		1,888			(1,683		)	NM
Total net investment income (loss)	1,111			(1,446		)	NM		3,164			(346		)	NM
Net realized capital gains (losses)	91			660			(86	)%	(342		)	367			NM
Total revenues	1,795			(120		)	NM		4,614			2,071			123	%
Benefits, losses and loss adjustment expenses	513			900			(43	)%	1,444			1,923			(25	)%
Benefits, losses and loss adjustment expenses – returns credited on international variable annuities [1]	710			(1,889		)	NM		1,888			(1,683		)	NM
Amortization of DAC	205			534			(62	)%	340			823			(59	)%
Insurance operating costs and other expenses	178			204			(13	)%	548			606			(10	)%
Total benefits, losses and expenses	1,606			(251		)	NM		4,220			1,669			153	%
Income before income taxes	189			131			44	%	394			402			(2	)%
Income tax expense (benefit)	44			26			69	%	50			(37		)	NM
Net income	$	145		$	105		38	%	$	344		$	439		(22	)%
Assets Under Management [2]
Variable annuity account values									$	97,330		$	98,154		(1	)%
Fixed MVA annuity and other account values [3]									15,541			16,740			(7	)%
Institutional annuity account values [4]									18,204			19,477			(7	)%
Private Placement Life Insurance (“PPLI”)									37,277			35,989			4	%
Account Value Roll Forward
Variable Annuities
Account value, beginning of period									$	99,922		$	116,520		(14	%)
Net flows									(10,191		)	(10,564		)	4	%
Change in market value and other									7,903			(9,397		)	NM
Effect of currency translation									(304		)	1,595			NM
Account value, end of period									$	97,330		$	98,154		(1	%)
Net Investment Spread	30 bps			27 bps			3 bps		39 bps			29 bps			10 bps
Expense Ratios
General insurance expense ratio	2.2 bps			2.3 bps					7.5 bps			7.1 bps
DAC amortization ratio	52.0		%	80.3		%			46.3		%	67.2		%
Less: Effect of realized capital gains (losses) on DAC amortization	8.6		%	72.0		%			12.9		%	34.3		%
Less: Effect of Unlocks on DAC amortization	3.8		%	(32.7		)%			(4.0		%)	(5.7		%)
DAC amortization ratio, core earnings, excluding Unlock	39.6		%	41.0		%			37.4		%	38.6		%


[1]	Includes investment income and mark-to-market effects of equity securities, trading, supporting the international variable annuity business, which are classified in net investment income with corresponding amounts credited to policyholders within benefits, losses and loss adjustment expenses.


[2]	International and institutional annuities were transferred retrospectively from Individual Annuity; PPLI was transferred retrospectively from Individual Life.


[3]	Includes approximately $2.0 billion and $2.7 billion related to the triggering of the guaranteed minimum income benefit for the 3 Win product as of September 30, 2012 and 2011, respectively. This account value is not expected to generate material future profit or loss to the Company.


[4]	Included in the balance is approximately $1.3 billion as of September 30, 2012 and $1.5 billion as of September 30, 2011 related to an intra-segment funding agreement which is eliminated in consolidation.

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Three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011

Net income, as compared to the prior year period, increased for the three months ended September 30, 2012 primarily due to a lower Unlock charge in 2012. In addition, benefits, losses and loss adjustment expenses, as compared to the prior year period, decreased for the three months ended September 30, 2012 reflecting an improvement in equity market performance. Net income, as compared to the prior year period, decreased for the nine months ended September 30, 2012 primarily due to higher net realized capital losses, offset by an Unlock benefit in 2012. In addition, benefits, losses and loss adjustment expenses, as compared to the prior year period, decreased for the nine months ended September 30, 2012 reflecting an improvement in equity market performance. For further discussion of the Unlock see MD&A – Critical Accounting Estimates.

The net decrease in realized capital gains for the three months ended September 30, 2012, as compared to the prior year period, was primarily due to losses in the international variable annuity hedge program. International variable annuity hedge program losses for the three months ended September 30, 2012 were $167 compared to gains of $1,132 for the three months ended September 30, 2011. The net increase in realized capital losses for the nine months ended September 30, 2012, as compared to the prior year period, was primarily due to losses in the variable annuity hedge program. Variable annuity hedge program losses for the nine months ended September 30, 2012 were $474 compared to gains of $571 for the nine months ended September 30, 2011. For further discussion of the results of the variable annuity hedge program, see MD&A – Investment Results, Net Realized Capital Gains (Losses) within Key Performance Measures and Ratios.

Life Other Operations effective tax rate for 2012 and 2011 differs from the statutory rate of 35% primarily due to permanent differences for separate account DRD, the 2011 release of the investment valuation allowance, changes in the foreign valuation allowance and varying country tax rates.

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PROPERTY & CASUALTY OTHER OPERATIONS



	Three Months Ended September 30,							Nine Months Ended September 30,
Operating Summary	2012		2011			Change		2012			2011			Change
Earned Premium	$	—	$	—		—	%	$	(2	)	$	—		NM
Net investment income	35		37			(5	%)	113			113			—	%
Net realized capital gains (losses)	4		(5		)	NM		12			(4		)	NM
Total revenues	39		32			22	%	123			109			13	%
Benefits, losses and loss adjustment expenses	1		21			(95	%)	60			311			(81	%)
Insurance operating costs and other expenses	7		5			40	%	19			18			6	%
Total benefits, losses and expenses	8		26			(69	%)	79			329			(76	%)
Income (loss) before income taxes	31		6			NM		44			(220		)	NM
Income tax expense (benefit)	7		(2		)	NM		8			(85		)	NM
Net income (loss)	$	24	$	8		NM		$	36		$	(135	)	NM

Three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011

The net income (loss) in Property & Casualty Other Operations improved for the three and nine months ended September 30, 2012, as compared to the prior year periods. For the three months ended September 30, 2012, benefits, losses and loss adjustment expenses decreased, due to the strengthening of net environmental reserves by $19, pre-tax in the prior year period. For the nine months ended September 30, 2012, the Company strengthened its net asbestos reserves by $48, pre-tax, and environmental reserves by $8, pre-tax, as compared to $290, pre-tax, and $21, pre-tax, respectively, in the prior year period.

For information on net asbestos and environmental reserves, see Property & Casualty Other Operations Claims within the Property and Casualty Insurance Product Reserves, Net of Reinsurance section in Critical Accounting Estimates.

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CORPORATE



	Three Months Ended September 30,								Nine Months Ended September 30,
Operating Summary	2012			2011			Change		2012			2011			Change
Fee income [1]	$	45		$	55		(18	%)	$	142		$	161		(12	%)
Net investment income	8			1			NM		5			30			(83	%)
Net realized capital gains (losses)	9			(51		)	NM		41			(56		)	NM
Total revenues	62			5			NM		188			135			39	%
Benefits, losses and loss adjustment expenses	1			(6		)	NM		—			(4		)	100	%
Insurance operating costs and other expenses	74			57			30	%	250			182			37	%
Loss on extinguishment of debt	—			—			—	%	910			—			NM
Interest expense	109			128			(15	%)	348			384			(9	%)
Total benefits, losses and expenses	184			179			3	%	1,508			562			168	%
Loss from continuing operations before income taxes	(122		)	(174		)	30	%	(1,320		)	(427		)	NM
Income tax benefit	(44		)	(62		)	29	%	(468		)	(153		)	NM
Loss from continuing operations, net of tax	(78		)	(112		)	30	%	(852		)	(274		)	NM
Income (loss) from discontinued operations, net of tax [2]	—			5			(100	%)	—			(70		)	100	%
Net loss	$	(78	)	$	(107	)	27	%	$	(852	)	$	(344	)	(148	%)


[1]	Fee income includes the income associated with the sales of non-proprietary insurance products in the Company’s broker-dealer subsidiaries that has an offsetting commission expense in insurance operating costs and other expenses.


[2]	Represents the income (loss) from operations and sale of Federal Trust Corporation. For additional information, see Note 12 of the Notes to Condensed Consolidated Financial Statements.

Three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011

The net loss in Corporate improved for the three months ended September 30, 2012 and deteriorated for the nine months ended September 30, 2012, as compared to the prior year. In both periods, net realized capital gains (losses) increased, primarily due to gains on derivatives as a result of credit spreads tightening. For additional information on net realized capital gains, see the Investment Results section within Key Performance Measures and Ratios. This was partially offset by an increase in insurance operating costs and other expenses, as a result of restructuring and other costs related to the Company’s implementation of its strategic initiatives. See Note 16 of the Notes to Condensed Consolidated Financial Statements for additional information on restructuring and other costs.

In addition, for the nine months ended September 30, 2012, the net loss in Corporate increased primarily due to a loss on extinguishment of debt recognized in the second quarter of 2012 related to the repurchase of all outstanding 10% fixed-to-floating rate junior subordinated debentures due 2068 with a $1.75 billion aggregate principal amount held by Allianz. The loss consisted of the premium associated with repurchasing the 10% Debentures at an amount greater than the face amount, the write-off of the unamortized discount and debt issuance costs related to the 10% Debentures and other costs related to the repurchase transaction.

See Note 1 of the Notes to Condensed Consolidated Financial Statements for a reconciliation of the tax provision at the U.S. Federal statutory rate to the provision (benefit) for income taxes.

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ENTERPRISE RISK MANAGEMENT

The Company has an enterprise risk management function (“ERM”) that is charged with providing analysis of the Company’s risks on an individual and aggregated basis and with ensuring that the Company’s risks remain within its risk appetite and tolerances. The Company has established the Enterprise Risk and Capital Committee (“ERCC”) that includes the Company’s CEO, Chief Financial Officer (“CFO”), Chief Investment Officer (“CIO”), Chief Risk Officer, the divisional Presidents and the General Counsel. The ERCC is responsible for managing the Company’s risks and overseeing the enterprise risk management program.

The Company categorizes its main risks as follows:


•	Insurance Risk


•	Operational Risk


•	Financial Risk

Refer to the MD&A in The Hartford’s 2011 Form 10-K Annual Report for an explanation of the Company’s Operational Risk.

Insurance Risk Management

Reinsurance for Catastrophes

The Company has several catastrophe reinsurance programs, including reinsurance treaties that cover property and workers' compensation losses aggregating from single catastrophe events. The following table summarizes the primary catastrophe treaty reinsurance coverage's that the Company has in place as of October 1, 2012:



Coverage	Treaty term	% of layer(s) reinsured	Per occurrence limit				Retention
Principal property catastrophe program covering property catastrophe losses from a single event	1/1/2012 to 1/1/2013	90%	$	750		$		350
Reinsurance with the FHCF covering Florida Personal Lines property catastrophe losses from a single event	6/1/2012 to 6/1/2013	90%		145	[1]			55
Workers compensation losses arising from a single catastrophe event [2]	7/1/2012 to 7/1/2013	95%		350				100


[1]	The per occurrence limit on the FHCF treaty is $145 for the 6/1/2012 to 6/1/2013 treaty year based on the Company's election to purchase the required coverage from FHCF. Coverage is estimated based on the best available information until FHCF releases updated figures in October 2012.


[2]	In addition, to the limit shown above, the workers compensation reinsurance includes a non-catastrophe, industrial accident layer, 80% of $30 excess a $20 retention.

Refer to the MD&A in The Hartford's 2011 Form 10-K Annual Report for further explanation of the Company's Insurance Risk Management strategy.

Financial Risk Management

The Company identifies the following categories of financial risk:


•	Liquidity Risk


•	Interest Rate Risk


•	Equity Risk


•	Foreign Currency Exchange Risk


•	Credit Risk

Financial risks include direct, and indirect risks to the Company’s financial objectives coming from events that impact market conditions or prices. Financial risk also includes exposure to events that may cause correlated movement in multiple risk factors. The primary source of financial risks are the Company’s general account assets and the liabilities which those assets back, together with the guarantees which the company has written over various liability products, particularly its portfolio of variable annuities. The Company assesses its financial risk on a U.S. GAAP, statutory and economic basis. The Hartford has developed a disciplined approach to financial risk management that is well integrated into the Company’s underwriting, pricing, hedging, claims, asset and liability management, new product, and capital management processes. Consistent with its risk appetite, the Company establishes financial risk limits to control potential loss. Exposures are actively monitored, and mitigated where appropriate. The Company uses various risk management strategies, including reinsurance and over-the-counter and exchange traded derivatives to transfer risk to well-established and financially secure counterparties. The Company’s Chief Market Risk Officer has enterprise responsibility for establishing and maintaining the framework, principles, and guidelines of The Hartford’s financial risk management program.

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Liquidity Risk

Liquidity risk is the risk to current or prospective earnings or capital arising from the Company’s inability or perceived inability to meet its contractual cash obligations at the legal entity level when they come due over given horizons without incurring unacceptable costs and without relying on uncommitted funding sources. Liquidity risk includes the inability to manage unplanned increases or accelerations in cash outflows, decreases or changes in funding sources, and changes in market conditions that affect the ability to liquidate assets quickly to meet obligations with minimal loss in value. Components of liquidity risk include funding risk, transaction risk and market liquidity risk. Funding risk is the gap between sources and uses of cash under normal and stressed conditions taking into consideration structural, regulatory and legal entity constraints. Changes in institution-specific conditions that affect the Company’s ability to sell assets or otherwise transact business without incurring a significant loss in value is transaction risk. Changes in general market conditions that affect the institution’s ability to sell assets or otherwise transact business without incurring a significant loss in value is market liquidity risk.

The Company has defined ongoing monitoring and reporting requirements to assess liquidity across the enterprise. The Company measures and manages liquidity risk exposures and funding needs within prescribed limits and across legal entities, business lines and currencies, taking into account legal, regulatory and operational limitations to the transferability of liquidity. The Company also monitors internal and external conditions, identifies material risk changes and emerging risks that may impact liquidity. The Company’s CFO has primary responsibility for liquidity risk.

For further discussion on liquidity see the section on Capital Resources and Liquidity.

Interest Rate Risk

Interest rate risk is the risk of financial loss due to adverse changes in the value of assets and liabilities arising from movements in interest rates. Interest rate risk encompasses exposures with respect to changes in the level of interest rates, the shape of the term structure of rates and the volatility of interest rates. Interest rate risk does not include exposure to changes in credit spreads. The Company has exposure to interest rates arising from its fixed securities, interest sensitive liabilities and discount rate assumptions associated with the Company’s pension and other post retirement benefit obligations.

An increase in interest rates from current levels is generally a favorable development for the Company. Rate increases are expected to provide additional net investment income, reduce the cost of the variable annuity hedging program, limit the potential risk of margin erosion due to minimum guaranteed crediting rates in certain Wealth Management and Life Other Operations products and, if sustained, could reduce the Company’s prospective pension expense. Conversely, a rise in interest rates will reduce the fair value 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 Wealth Management and Life Other Operations 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, certain of Life Other Operation’s fixed income products have market value adjustment provisions at contract surrender. An increase in interest rates may also impact the Company’s tax planning strategies and in particular its ability to utilize tax benefits associated with certain previously recognized realized capital losses.

A decline in interest rates results in certain mortgage-backed securities being more susceptible to paydowns and prepayments. During such periods, the Company generally will not be able to reinvest the proceeds at comparable yields. Lower interest rates will also likely result in lower net investment income, increased hedging cost associated with variable annuities and, if declines are sustained for a long period of time, it may subject the Company to reinvestment risks, higher pension costs expense and possibly reduced profit margins associated with guaranteed crediting rates on certain Wealth Management and Life Other Operations products. Conversely, the fair value of the investment portfolio will increase when interest rates decline and the Company’s interest expense will be lower on its variable rate debt obligations.

The Company manages its exposure to interest rate risk by constructing investment portfolios that maintain asset allocation limits and asset/liability duration matching targets which may include the use of derivatives. The Company analyzes interest rate risk using various models including parametric models and cash flow simulation under various market scenarios of the liabilities and their supporting investment portfolios, which may include derivative instruments. Measures the Company uses to quantify its exposure to interest rate risk inherent in its invested assets and interest rate sensitive liabilities include duration, convexity and key rate duration. Duration is the price sensitivity of a financial instrument or series of cash flows to a parallel change in the underlying yield curve used to value the financial instrument or series of cash flows. For example, a duration of 5 means the price of the security will change by approximately 5% for a 100 basis point change in interest rates. Convexity is used to approximate how the duration of a security changes as interest rates change in a parallel manner. Key rate duration analysis measures the price sensitivity of a security or series of cash flows to each point along the yield curve and enables the Company to estimate the price change of a security assuming non-parallel interest rate movements.

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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 obligations. The discount rate assumption is based upon an interest rate yield curve comprised of bonds rated Aa with maturities primarily between zero and thirty years. For further discussion of interest rate risk associated with the benefit obligations, see the Critical Accounting Estimates Section of the MD&A under Pension and Other Postretirement Benefit Obligations and Note 17 of the Notes to Consolidated Financial Statements in The Hartford’s 2011 Form 10-K Annual Report. In addition, management evaluates performance of certain Wealth Management and Life Other Operations products based on net investment spread which is, in part, influenced by changes in interest rates. For further discussion, see the Individual Life, Retirement Plans, and Life Other Operations sections of the MD&A.

Equity Risk

Variable Product Guarantee Risks and Risk Management

The Company’s variable products are significantly influenced by the U.S., Japanese, and other equity markets. Increases or declines in equity markets impact certain assets and liabilities related to the Company’s variable products and the Company’s earnings derived from those products. The Company’s variable products include variable annuity contracts, mutual funds, and variable life insurance.

Generally, declines in equity markets will:


•	reduce the value of assets under management and the amount of fee income generated from those assets;


•	reduce the value of equity securities trading supporting the international variable annuities, the related policyholder funds and benefits payable, and the amount of fee income generated from those variable annuities;


•	increase the liability for GMWB benefits resulting in realized capital losses;


•	increase the value of derivative assets used to hedge product guarantees resulting in realized capital gains;


•	increase the costs of the hedging instruments we use in our hedging program;


•	increase the Company’s net amount at risk for GMDB and GMIB benefits;


•	decrease the Company’s actual gross profits, resulting in increased DAC amortization;


•	increase the amount of required assets to be held backing variable annuity guarantees to maintain required regulatory reserve levels and targeted risk based capital ratios; and


•	decrease the Company’s estimated future gross profits. See Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and Other Universal Life-Type Contracts within the Critical Accounting Estimates section of the MD&A for further information.

Generally, increases in equity markets will reduce the value of the dynamic hedge program and macro hedge derivative assets, resulting in realized capital losses, and will generally have the inverse impact of those listed above. See section on Variable Annuity Hedging Program for more information.

Variable Annuity Guaranteed Benefits

The majority of the Company’s U.S., Japan, and U.K. variable annuities include optional living benefit and guaranteed minimum death benefit features. The net amount at risk (“NAR”) is generally defined as the guaranteed minimum benefit amount in excess of the contractholder’s current account value. Variable annuity account values with guarantee features were $97.3 billion and $99.8 billion as of September 30, 2012 and December 31, 2011, respectively.

The following table summarizes the account values of the Company’s U.S., Japan and U.K. variable annuities with guarantee features and the NAR split between various guarantee features (retained net amount at risk does not take into consideration the effects of the variable annuity hedge programs currently in place):



Total Variable Annuity Guarantees
As of September 30, 2012
($ in billions)	Account Value		Gross Net Amount at Risk		Retained Net Amount at Risk		% of Contracts In the Money [4]		% In the Money[5]
U. S. Variable Annuity [1]
GMDB [2]	$	66.7	$	7.2	$	2.5	53	%	12	%
GMWB	34.8		0.8		0.6		26	%	9	%
Japan Variable Annuity [1]
GMDB	28.7		9.1		7.9		99	%	24	%
GMIB [3]	26.9		6.1		6.1		98	%	19	%
U.K. Variable Annuity [1]
GMDB	1.9		—		—		100	%	2	%
GMWB	1.7		—		—		29	%	7	%

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Total Variable Annuity Guarantees
As of December 31, 2011
($ in billions)	Account Value		Gross Net Amount at Risk		Retained Net Amount at Risk		% of Contracts In the Money [4]		% In the Money[5]
U. S. Variable Annuity [1]
GMDB [2]	$	68.7	$	12.0	$	5.1	77	%	15	%
GMWB	36.6		1.9		1.6		45	%	12	%
Japan Variable Annuity [1]
GMDB	29.2		10.9		9.4		99	%	27	%
GMIB [3]	27.3		7.5		7.5		99	%	22	%
UK Variable Annuity [1]
GMDB	1.9		0.08		0.08		100	%	4	%
GMWB	1.8		0.07		0.07		57	%	3	%

[1]

Policies with a guaranteed living benefits (a GMWB in the US or UK, or a GMIB in Japan) also have a guaranteed death benefit. The net amount at risk (“NAR”) for each benefit is shown; however these benefits are not additive. When a policy terminates due to death, any NAR related to GMWB or GMIB is released. Similarly, when a policy goes into benefit status on a GMWB or, by contract, the GMDB NAR is reduced to $0. When a policy goes into benefit status on a GMIB, its GMDB NAR is released


[2]	Excludes group annuity contracts with GMDB benefits.


[3]	Includes small amount of GMWB and GMAB


[4]	Excludes contracts that fully reinsured.


[5]	For all contracts that are “in the money”, this represents the percentage by which the average contract was in the money.

Many policyholders with a GMDB also have a GMWB in the U.S. or GMIB in Japan. Policyholders that have a product that offer both guarantees can only receive the GMDB or the GMIB benefit in Japan or the GMDB or GMWB in the U.S. The GMDB NAR disclosed in the above tables is a point in time measurement and assumes that all participants utilize the GMDB benefit on that measurement date. The GMIB NAR calculation disclosed in the above tables, represents a series of payments over the annuitization period and is not discounted to present value. For additional information on the Company’s GMDB liability, see Note 7 of the Notes to Condensed Consolidated Financial Statements.

The Company expects to incur these payments in the future only if the policyholder has an “in the money” GMWB at their death or their account value is reduced to a specified level, through contractually permitted withdrawals and/or market declines. If the account value is reduced to the specified level, the contract holder will receive an annuity equal to the guaranteed remaining benefit (“GRB”) . For the Company’s “life-time” GMWB products, this annuity can continue beyond the GRB. As the account value fluctuates with equity market returns on a daily basis and the “life-time” GMWB payments can exceed the GRB, the ultimate amount to be paid by the Company, if any, is uncertain and could be significantly more or less than the Company’s current carried liability. For additional information on the Company’s GMWB liability, see Note 4 of the Notes to Condensed Consolidated Financial Statements.

For GMIB contracts, in general, the policyholder has the right to elect to annuitize benefits, beginning (for certain products) on the tenth or fifteenth anniversary year of contract commencement, receive lump sum payment of the then current account value, or remain in the variable sub-account. For GMIB contracts, if the policyholder makes the election, the policyholder is entitled to receive the original investment value over a 10- to 15- year annuitization period. A small percentage of the contracts will first become eligible to elect annuitization beginning in 2013. The remainder of the contracts will first become eligible to elect annuitization from 2014 to 2022. Because policyholders have various contractual rights to defer their annuitization election, the period over which annuitization election can take place is subject to policyholder behavior and therefore indeterminate. In addition, upon annuitization the contractholder surrenders access to the account value and the account value is transferred to the Company’s general account where it is invested and the additional investment proceeds are used towards payment of the original investment value. If the original investment value exceeds the account value upon annuitization then the contract is “in the money”. As of September 30, 2012, 65% of retained NAR is reinsured to an affiliate of The Hartford. For additional information on the Company’s GMIB liability, see Note 7 of the Notes to Condensed Consolidated Financial Statements.

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The following table represents the timing of account values eligible for annuitization under the Japan GMIB as of September 30, 2012, as well as the NAR. The account values reflect 100% annuitization at the earliest point allowed by the contract and no adjustments for future market returns and policyholder behaviors. Future market returns, changes in the value of the Japanese yen and policyholder behaviors will impact account values eligible for annuitization in the years presented.



	GMIB [1]
($ in billions)	Account Value		Net Amount at Risk
2013	$	0.3	$	—
2014	4.4		0.7
2015	7.2		1.7
2016	2.4		0.6
2017	2.8		0.8
2018 & beyond [2]	6.9		1.5
Total	$	24.0	$	5.3


[1]	Excludes certain non-GMIB living benefits of $2.9 billion of account value and $0.8 billion of NAR.


[2]	In 2018 & beyond, $2.7 billion of the $6.9 billion is primarily associated with account value that is eligible in 2021.

Variable Annuity Market Risk Exposures

The following table summarizes the broad Variable Annuity Guarantees offered by the Company and the market risks to which the guarantee is most exposed from a U.S. GAAP accounting perspective.



Variable Annuity Guarantees [1]	U.S. GAAP Treatment [1]	Primary Market Risk Exposures [1]
U.S. Variable Guarantees
GMDB	Accumulation of the portion of fees required to cover expected claims, less accumulation of actual claims paid	Equity Market Levels
GMWB	Fair Value	Equity Market Levels / Implied Volatility / Interest Rates
For Life Component of GMWB	Accumulation of the portion of fees required to cover expected claims, less accumulation of actual claims paid	Equity Market Levels
International Variable Guarantees
GMDB & GMIB	Accumulation of the portion of fees required to cover expected claims, less accumulation of actual claims paid	Equity Market Levels / Interest Rates / Foreign Currency
GMWB	Fair Value	Equity Market Levels / Implied Volatility / Interest Rates / Foreign Currency
GMAB	Fair Value	Equity Market Levels / Implied Volatility / Interest Rates / Foreign Currency


[1]	Each of these guarantees and the related U.S. GAAP accounting volatility will also be influenced by actual and estimated policyholder behavior.

Risk Hedging

Variable Annuity Hedging Program

The Company’s variable annuity hedging is primarily focused on reducing the economic exposure to market risks associated with guaranteed benefits that are embedded in our global VA contracts through the use of reinsurance and capital market derivative instruments. The variable annuity hedging also considers the potential impacts on Statutory accounting results.

Reinsurance

The Company uses reinsurance for a portion of contracts with GMWB riders issued prior to the third quarter of 2003 and GMWB risks associated with a block of business sold between the third quarter of 2003 and the second quarter of 2006. The Company also uses reinsurance for a majority of the GMDB issued in the U.S. and a portion of the GMDB issued in Japan.

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Capital Market Derivatives

GMWB Hedge Program

The Company enters into derivative contracts to hedge market risk exposures associated with the GMWB liabilities that are not reinsured. These derivative contracts include customized swaps, interest rate swaps and futures, and equity swaps, options, and futures, on certain indices including the S&P 500 index, EAFE index, and NASDAQ index.

Additionally, the Company holds customized derivative contracts to provide protection from certain capital market risks for the remaining term of specified blocks of non-reinsured GMWB riders. These customized derivative contracts are based on policyholder behavior assumptions specified at the inception of the derivative contracts. The Company retains the risk for differences between assumed and actual policyholder behavior and between the performance of the actively managed funds underlying the separate accounts and their respective indices.

While the Company actively manages this dynamic hedging program, increased U.S. GAAP earnings volatility may result from factors including, but not limited to: policyholder behavior, capital markets, divergence between the performance of the underlying funds and the hedging indices, changes in hedging positions and the relative emphasis placed on various risk management objectives.

Macro Hedge Program

The Company’s macro hedging program uses derivative instruments such as options and futures on equities and interest rates to provide protection against the statutory tail scenario risk arising from U.S., GMWB and GMDB liabilities, on the Company’s statutory surplus. These macro hedges cover some of the residual risks not otherwise covered by specific dynamic hedging programs. Management assesses this residual risk under various scenarios in designing and executing the macro hedge program. The macro hedge program will result in additional U.S. GAAP earnings volatility as changes in the value of the macro hedge derivatives, which are designed to reduce statutory reserve and capital volatility, may not be closely aligned to changes in U.S. GAAP liabilities.

International Hedge Programs

The Company enters into derivative contracts to hedge market risk exposures associated with the guaranteed benefits which are embedded in the international variable annuity contracts. These derivative contracts include foreign currency forwards and options, interest rate swaps and futures, and equity swaps, options, and futures on certain broadly traded global equity indices including the S&P500 index, Nikkei 225 index, Topix index, FTSE 100 index, Euro Stoxx 50 and DAX 30 index.

While the Company actively manages these dynamic hedging programs, increased U.S. GAAP earnings volatility may result from factors including, but not limited to: focus on reducing the economic exposure to market risks associated with guaranteed benefits, capital markets, changes in hedging positions and the relative emphasis placed on various risk management objectives.

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Variable Annuity Hedging Program Sensitivities

The following table presents the accounting treatment of the underlying guaranteed living benefits and the related hedge assets by hedge program.



U.S. Programs				International Programs
GMWB		Macro		Japan/UK
Hedge Assets	Liabilities	Hedge Assets	Liabilities	Hedge Assets	Liabilities [1]
Fair Value	Fair Value	Fair Value	Not Fair Value	Fair Value	Not Fair Value


[1]	The liabilities for international variable annuity are primarily not measured on a fair value basis. However there is an immaterial portion of the international variable annuity with a GMWB or GMAB which is measured on a fair value basis.

The following table presents our estimates of the potential instantaneous impacts from sudden market stresses related to equity market prices, interest rates, implied market volatilities, and foreign currency exchange rates. The sensitivities below represent: (1) the net estimated difference between the change in the fair value of GMWB liabilities and the underlying hedge instruments and (2) the estimated change in fair value of the hedge instruments for the macro and international hedge programs, before the impacts of amortization of DAC, and taxes. As noted in the table above, certain hedge assets are used to hedge liabilities that are not carried at fair value and will not have a liability offset in the U.S. GAAP sensitivity analysis. All sensitivities are measured as of September 30, 2012, and are related to the fair value of liabilities and hedge instruments in place as of that date for the Company’s variable annuity hedge programs. The impacts presented in the table below are estimated individually as of September 30, 2012, and performed without consideration of any correlation among market risk factors.



U.S. GAAP Sensitivity Analysis (pre Tax/DAC) [1]	U.S. Programs																		International Programs
	GMWB									Macro									Japan/UK
Equity Market Return	-20		%	-10		%	+10		%	-20		%	-10		%	+10		%	-20		%	-10		%	+10		%
Potential Net Fair Value Impact	$	(130	)	$	(58	)	$	38		$	301		$	70		$	(28	)	$	974		$	488		$	(435	)
Interest Rates	-50 bps			-25 bps			+25 bps			-50 bps			-25 bps			+25 bps			-50 bps			-25 bps			+25 bps
Potential Net Fair Value Impact	$	(48	)	$	(24	)	$	27		$	2		$	1		$	(1	)	$	256		$	131		$	(196	)
Implied Volatilities	+10		%	+2		%	-10		%	+10		%	+2		%	-10		%	+10		%	+2		%	-10		%
Potential Net Fair Value Impact	$	(399	)	$	(78	)	$	364		$	83		$	16		$	(64	)	$	122		$	23		$	(107	)
Yen Strengthens +/ Weakens -	+20		%	+10		%	-10		%	+20		%	+10		%	-10		%	+20		%	+10		%	-10		%
Potential Net Fair Value Impact	N/A			N/A			N/A			N/A			N/A			N/A			$	1,933		$	778		$	(412	)


[1]	These sensitivities are based on the following key market levels as of September 30, 2012: 1) S&P of 1,441.0; 2) 10yr US swap rate of 1.76%; 3) S&P 10yr volatility of 26.65% and 4) FX rates of USDJPY @77.96 and EURJPY @ 100.21.

The above sensitivity analysis is an estimate and should not be used to predict the future financial performance of the Company’s variable annuity hedge programs. The actual net changes in the fair value liability and the hedging assets illustrated in the above table may vary materially depending on a variety of factors which include but are not limited to:


•	The sensitivity analysis is only valid as of the measurement date and assumes instantaneous changes in the capital market factors and no ability to rebalance hedge positions prior to the market changes;


•	Changes to the underlying hedging program, policyholder behavior, and variation in underlying fund performance relative to the hedged index, which could materially impact the liability; and


•	The impact of elapsed time on liabilities or hedge assets, any non-parallel shifts in capital market factors, or correlated moves across the sensitivities.

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Foreign Currency Exchange Risk

Foreign currency exchange risk is defined as the risk of financial loss due to changes in the relative value between currencies. The Company’s foreign currency exchange risk is related to non-U.S. dollar denominated liability contracts, including its GMDB, GMAB, GMWB and GMIB benefits associated with its Japanese and U.K. variable annuities, the investment in and net income of the Japanese and U.K. operations, non-U.S. dollar denominated investments, which primarily consist of fixed maturity investments, and a yen denominated individual fixed annuity product. In addition, the Company’s Life Other Operations issued non-U.S. dollar denominated funding agreement liability contracts. A portion of the Company’s foreign currency exposure is mitigated through the use of derivatives.

Liabilities

The Company manages the market risk, including foreign currency exchange risk, associated with the guaranteed benefits related to the Japanese and U.K. variable annuities through its comprehensive International Hedge Program. For more information on the International Hedge Program, including the foreign currency exchange risk sensitivity analysis, see the Variable Product Guarantee Risks and Risk Management section.

The yen denominated individual fixed annuity product was written by Hartford Life Insurance K.K. (“HLIKK”), a wholly-owned Japanese subsidiary of Hartford Life, Inc. (“HLI”), and subsequently reinsured to Hartford Life Insurance Company, a U.S. dollar based wholly-owned indirect subsidiary of HLI. During 2009, the Company suspended new sales of the Japan business and has subsequently confirmed that it is closed to new business. The underlying investment involves investing in U.S. securities markets, which offer favorable credit spreads. The yen denominated fixed annuity product (“yen fixed annuities”) is recorded in the consolidated balance sheets with invested assets denominated in dollars while policyholder liabilities are denominated in yen and converted to U.S. dollars based upon the December 31 yen to U.S. dollar spot rate. The difference between U.S. dollar denominated investments and yen denominated liabilities exposes the Company to currency risk. The Company manages this currency risk associated with the yen fixed annuities primarily with pay variable U.S. dollar and receive fixed yen currency swaps.

The Company’s Wealth Management operations issued non-U.S. dollar denominated funding agreement liability contracts. The Company hedges the foreign currency risk associated with these liability contracts with currency rate swaps.

Fixed Maturity Investments

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. In order to manage currency exposures, the Company enters into foreign currency swaps to hedge the variability in cash flows as the fair value associated with certain foreign denominated fixed maturities decline. These foreign currency swaps are structured to match the foreign currency cash flows of the hedged foreign denominated securities.

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Financial Risk on Statutory Capital

Statutory surplus amounts and risk-based capital (“RBC”) ratios may increase or decrease in any period depending upon a variety of factors and may be compounded in extreme scenarios or if multiple factors occur at the same time. At times the impact of changes in certain market factors or a combination of multiple factors on RBC ratios can be counterintuitive. Factors include:

•

In general, as equity market levels and interest rates decline, the amount and volatility of both our actual potential obligation, as well as the related statutory surplus and capital margin for death and living benefit guarantees associated with U.S. variable annuity contracts can be materially negatively affected, sometimes at a greater than linear rate. Other market factors that can impact statutory surplus, reserve levels and capital margin include differences in performance of variable subaccounts relative to indices and/or realized equity and interest rate volatilities. In addition, as equity market levels increase, generally surplus levels will increase. RBC ratios will also tend to increase when equity markets increase. However, as a result of a number of factors and market conditions, including the level of hedging costs and other risk transfer activities, reserve requirements for death and living benefit guarantees and RBC requirements could increase with rising equity markets, resulting in lower RBC ratios. Non-market factors, which can also impact the amount and volatility of both our actual potential obligation, as well as the related statutory surplus and capital margin, include actual and estimated policyholder behavior experience as it pertains to lapsation, partial withdrawals, and mortality.

•

Similarly, for guaranteed benefits (GMDB, GMIB, and GMWB) reinsured from our international operations to our U.S. insurance subsidiaries, the amount and volatility of both our actual potential obligation, as well as the related statutory surplus and capital margin can be materially affected by a variety of factors, both market and non-market. Market factors include declines in various equity market indices and interest rates, changes in value of the yen versus other global currencies, difference in the performance of variable subaccounts relative to indices, and increases in realized equity, interest rate, and currency volatilities. Non-market factors include actual and estimated policyholder behavior experience as it pertains to lapsation, withdrawals, mortality, and annuitization. Risk mitigation activities, such as hedging, may also result in material and sometimes counterintuitive impacts on statutory surplus and capital margin. Notably, as changes in these market and non-market factors occur, both our potential obligation and the related statutory reserves and/or required capital can increase or decrease at a greater than linear rate.


•	As the value of certain fixed-income and equity securities in our investment portfolio decreases, due in part to credit spread widening, statutory surplus and RBC ratios may decrease.


•	As the value of certain derivative instruments that do not get hedge accounting decreases, statutory surplus and RBC ratios may decrease.

•

The life insurance subsidiaries’ exposure to foreign currency exchange risk exists with respect to non-U.S. dollar denominated assets and liabilities. Assets and liabilities denominated in foreign currencies are accounted for at their U.S. dollar equivalent values using exchange rates at the balance sheet date. As foreign currency exchange rates vary in comparison to the U.S. dollar, the remeasured value of those non-dollar denominated assets or liabilities will also vary, causing an increase or decrease to statutory surplus.

•

Our statutory surplus is also impacted by widening credit spreads as a result of the accounting for the assets and liabilities in our fixed market value adjusted (“MVA”) annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded at fair value. In determining the statutory reserve for the fixed MVA annuities, we are required to use current crediting rates in the U.S. and Japanese LIBOR in Japan. In many capital market scenarios, current crediting rates in the U.S. are highly correlated with market rates implicit in the fair value of statutory separate account assets. As a result, the change in statutory reserve from period to period will likely substantially offset the change in the fair value of the statutory separate account assets. However, in periods of volatile credit markets, such as we have experienced, actual credit spreads on investment assets may increase sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value losses. As actual credit spreads are not fully reflected in the current crediting rates in the U.S. or Japanese LIBOR in Japan, the calculation of statutory reserves will not substantially offset the change in fair value of the statutory separate account assets resulting in reductions in statutory surplus. This has resulted and may continue to result in the need to devote significant additional capital to support the product.


•	With respect to our fixed annuity business, sustained low interest rates may result in a reduction in statutory surplus and an increase in National Association of Insurance Commissioners (“NAIC”) required capital.

Most of these factors are outside of the Company’s control. The Company’s financial strength and credit ratings are significantly influenced by the statutory surplus amounts and RBC ratios of our insurance company subsidiaries. In addition, rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of statutory capital we must hold in order to maintain our current ratings.

The Company has reinsured approximately 16% of its risk associated with U.S. GMWB and 66% of its risk associated with the aggregate U.S. GMDB exposure. These reinsurance agreements serve to reduce the Company’s exposure to changes in the statutory reserves and the related capital and RBC ratios associated with changes in the capital markets. The Company also continues to explore other solutions for mitigating the capital market risk effect on surplus, such as internal and external reinsurance solutions, modifications to our hedging program, changes in product design, increasing pricing and expense management.

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Credit Risk

Credit risk is defined as the risk of financial loss due to uncertainty of obligor’s or counterparty’s ability or willingness to meet its obligations in accordance with agreed upon terms. The majority of the Company’s credit risk is concentrated in its investment holdings but is also present in reinsurance and insurance portfolios. Credit risk is comprised of three major factors: the risk of change in credit quality, or credit migration risk; the risk of default; and the risk of a change in value of a financial instrument due to changes in credit spread that are unrelated to changes in obligor credit quality. A decline in creditworthiness is typically associated with an increase in an investment’s credit spread, potentially resulting in an increase in other-than-temporary impairments and an increased probability of a realized loss upon sale.

The objective of the Company’s enterprise credit risk management strategy is to identify, quantify, and manage credit risk on an aggregate portfolio basis and to limit potential losses in accordance with an established credit risk appetite. The Company manages to its risk appetite by primarily holding a diversified mix of investment grade issuers and counterparties across its investment, reinsurance, and insurance portfolios. Potential losses are also limited within portfolios by diversifying across geographic regions, asset types, and sectors.

The Company manages a credit exposure from its inception to its maturity or sale. Both the investment and reinsurance areas have formulated procedures for counterparty approvals and authorizations. Although approval processes may vary by area and type of credit risk, approval processes establish minimum levels of creditworthiness and financial stability. Eligible credits are subjected to prudent and conservative underwriting reviews. Within the investment portfolio, private securities, such as commercial mortgages, and private placements, must be presented to their respective review committees for approval.

Credit risks are managed on an on-going basis through the use of various processes and analyses. At the investment, reinsurance, and insurance product levels, fundamental credit analyses are performed at the issuer/counterparty level on a regular basis. To provide a holistic review within the investment portfolio, fundamental analyses are supported by credit ratings, assigned by nationally recognized rating agencies or internally assigned, and by quantitative credit analyses. The Company utilizes an economic credit VaR to measure default and migration risk on a monthly basis. Issuer and security level risk measures are also utilized. In the event of deterioration in credit quality, the Company maintains watch lists of problem counterparties within the investment and reinsurance portfolios. The watch lists are updated based on regular credit examinations and management reviews. The Company also performs quarterly assessments of probable expected losses in the investment portfolio. The process is conducted on a sector basis and is intended to promptly assess and identify potential problems in the portfolio and to recognize necessary impairments.

Credit risk policies at the enterprise and operation level ensure comprehensive and consistent approaches to quantifying, evaluating, and managing credit risk under expected and stressed conditions. These policies define the scope of the risk, authorities, accountabilities, terms, and limits, and are regularly reviewed and approved by senior management and ERM. Aggregate counterparty credit quality and exposure is monitored on a daily basis utilizing an enterprise-wide credit exposure information system that contains data on issuers, ratings, exposures, and credit limits. Exposures are tracked on a current and potential basis. Credit exposures are reported regularly to the ERCC and to the Finance, Investment and Risk Management Committee (“FIRMCo”). Exposures are aggregated by ultimate parent across investments, reinsurance receivables, insurance products with credit risk, and derivative counterparties. The credit database and reporting system are available to all key credit practitioners in the enterprise.

The Company exercises various and differing methods to mitigate its credit risk exposure within its investment and reinsurance portfolios. Some of the reasons for mitigating credit risk include financial instability or poor credit, avoidance of arbitration or litigation, future uncertainty, and exposure in excess of risk tolerances. Credit risk within the investment portfolio is most commonly mitigated through the use of derivative instruments or asset sales. Counterparty credit risk is mitigated through the practice of entering into contracts only with highly creditworthy institutions and through the practice of holding and posting of collateral. Systemic credit risk is mitigated through the construction of high-quality, diverse portfolios that are subject to regular underwriting of credit risks. For further discussion of the Company’s investment and derivative instruments, see the Investment Management section and Note 5 of the Notes to Condensed Consolidated Financial Statements. Further discussion on managing and mitigating credit risk from the use of reinsurance via an enterprise security review process, see the Reinsurance section.

As of September 30, 2012, the Company’s only exposure to any credit concentration risk of a single issuer greater than 10% of the Company’s stockholders’ equity, other than the U.S. government and certain U.S. government securities, was the Government of Japan, which represented $2.9 billion, or 12% of stockholders’ equity, and 2% of total invested assets. For further discussion of concentration of credit risk, see the Concentration of Credit Risk section in Note 5 of the Notes to Consolidated Financial Statements in The Hartford’s 2011 Form 10-K Annual Report.

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Derivative Instruments

The Company utilizes a variety of over-the-counter and exchange traded derivative instruments as a part of its overall risk management strategy, as well as to enter into replication transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, credit spread, issuer default, price, and currency exchange rate risk or volatility. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that would otherwise be permissible investments under the Company’s investment policies. For further information on the Company’s use of derivatives, see Note 5 of the Notes to Condensed Consolidated Financial Statements.

Derivative activities are monitored and evaluated by the Company’s compliance and risk management teams and reviewed by senior management. In addition, the Company monitors counterparty credit exposure on a monthly basis to ensure compliance with Company policies and statutory limitations. The notional amounts of derivative contracts represent the basis upon which pay or receive amounts are calculated and are not reflective of credit risk. Downgrades to the credit ratings of The Hartford’s insurance operating companies may have adverse implications for its use of derivatives including those used to hedge benefit guarantees of variable annuities. In some cases, downgrades may give derivative counterparties the unilateral contractual right to cancel and settle outstanding derivative trades or require additional collateral to be posted. In addition, downgrades may result in counterparties becoming unwilling to engage in additional over-the-counter (“OTC”) derivatives or may require collateralization before entering into any new trades. This will restrict the supply of derivative instruments commonly used to hedge variable annuity guarantees, particularly long-dated equity derivatives and interest rate swaps. Under these circumstances, the Company’s operating subsidiaries could conduct hedging activity using a combination of cash and exchange-traded instruments, in addition to using the available OTC derivatives.

The Company uses various derivative counterparties in executing its derivative transactions. The use of counterparties creates credit risk that the counterparty may not perform in accordance with the terms of the derivative transaction. The Company has derivative counterparty exposure policies which limit the Company’s exposure to credit risk. The Company’s policies with respect to derivative counterparty exposure establishes market-based credit limits, favors long-term financial stability and creditworthiness of the counterparty and typically requires credit enhancement/credit risk reducing agreements. The Company minimizes the credit risk of derivative instruments by entering into transactions with high quality counterparties primarily rated A or better, which are monitored and evaluated by the Company’s risk management team and reviewed by senior management. The Company also generally requires that derivative contracts, other than exchange traded contracts, certain forward contracts, and certain embedded and reinsurance derivatives, be governed by an International Swaps and Derivatives Association ("ISDA") Master Agreement, which is structured by legal entity and by counterparty and permits right of offset.

The Company has developed credit exposure thresholds which are based upon counterparty ratings. Credit exposures are measured using the market value of the derivatives, resulting in amounts owed to the Company by its counterparties or potential payment obligations from the Company to its counterparties. For purposes of daily derivative collateral maintenance, credit exposures are generally quantified based on the prior business day’s market value and collateral is pledged to and held by, or on behalf of, the Company to the extent the current value of the derivatives exceed the contractual thresholds. In accordance with industry standard and the contractual agreements, collateral is typically settled on the next business day. The Company has exposure to credit risk for amounts below the exposure thresholds which are uncollateralized, as well as for market fluctuations that may occur between contractual settlement periods of collateral movements.

For the Company’s domestic derivative programs, the maximum uncollateralized threshold for a derivative counterparty governed by an ISDA Master Agreement for a single legal entity is $10. The Company currently transacts OTC derivatives in five legal entities and therefore the maximum combined threshold for a single counterparty across all legal entities that use derivatives is $50. In addition, the Company may have exposure to multiple counterparties in a single corporate family due to a common credit support provider. As of September 30, 2012, for the company’s domestic derivative programs, the maximum combined threshold for all counterparties under a single credit support provider across all legal entities that use derivatives is $100. Based on the contractual terms of the collateral agreements, these thresholds may be immediately reduced due to a downgrade in either party’s credit rating. Beginning in the fourth quarter of 2011, the Company began hedging its Japan exposures within the legal entity HLIKK. The counterparty credit exposures at HLIKK generally follow the maximum uncollateralized threshold of the domestic program, however, for three counterparties, maximum uncollateralized exposures are higher. These three counterparties maintain credit ratings of A3 or better, and the Company actively monitors their credit standing. For further discussion, see the Derivative Commitments section of Note 9 of the Notes to Condensed Consolidated Financial Statements.

For the three and nine months ended September 30, 2012, the Company has incurred no losses on derivative instruments due to counterparty default.

In addition to counterparty credit risk, the Company may also introduce credit risk through the use of credit default swaps that are entered into to manage credit exposure. Credit default swaps involve a transfer of credit risk of one or many referenced entities from one party to another in exchange for periodic payments. The party that purchases credit protection will make periodic payments based on an agreed upon rate and notional amount, and for certain transactions there will also be an upfront premium payment. The second party, who assumes credit risk, will typically only make a payment if there is a credit event as defined in the contract and such payment will be typically equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation. A credit event is generally defined as default on contractually obligated interest or principal payments or bankruptcy of the referenced entity.

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The Company uses credit derivatives to purchase credit protection and to assume credit risk with respect to a single entity, referenced index, or asset pool. The Company purchases credit protection through credit default swaps to economically hedge and manage credit risk of certain fixed maturity investments across multiple sectors of the investment portfolio. The Company also enters into credit default swaps that assume credit risk as part of replication transactions. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that would be permissible investments under the Company’s investment policies. These swaps reference investment grade single corporate issuers and baskets, which include customized diversified portfolios of corporate issuers, which are established within sector concentration limits and may be divided into tranches which possess different credit ratings.

Investment Portfolio Risks and Risk Management

Investment Portfolio Composition

The following table presents the Company’s fixed maturities, AFS, by credit quality. 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.



Fixed Maturities by Credit Quality
	September 30, 2012						December 31, 2011
	Amortized Cost		Fair Value		Percent of Total Fair Value		Amortized Cost		Fair Value		Percent of Total Fair Value
United States Government/Government agencies	$	11,869	$	12,458	14.4	%	$	8,901	$	9,364	11.4	%
AAA	8,534		9,128		10.5	%	9,631		10,113		12.4	%
AA	15,118		16,305		18.8	%	15,471		15,844		19.4	%
A	19,602		21,923		25.3	%	19,501		21,053		25.7	%
BBB	20,899		22,665		26.1	%	20,972		21,760		26.6	%
BB & below	4,668		4,247		4.9	%	4,502		3,675		4.5	%
Total fixed maturities	$	80,690	$	86,726	100	%	$	78,978	$	81,809	100	%

The movement in the overall credit quality of the Company’s portfolio was primarily attributable to an increase in U.S. Government/Government agencies, which included the Company entering into certain repurchase and dollar roll transactions. For further information on repurchase and dollar roll agreements, see Note 5 of the Notes to the Condensed Consolidated Financial Statements. Fixed maturities, FVO, are not included in the above table. For further discussion on fair value option securities, see Note 4 of the Notes to Condensed Consolidated Financial Statements.

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The following table presents the Company’s AFS securities by type, as well as fixed maturities, FVO.



Securities by Type
	September 30, 2012											December 31, 2011
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Percent of Total Fair Value		Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Percent of Total Fair Value
Asset-backed securities (“ABS”)
Consumer loans	$	2,259	$	36	$	(138	)	$	2,157	2.5	%	$	2,688	$	34	$	(208	)	$	2,514	3.1	%
Small business	365		5		(89		)	281		0.3	%	418		1		(123		)	296		0.4	%
Other	292		28		—			320		0.4	%	324		20		(1		)	343		0.4	%
CDOs
Collateralized loan obligations (“CLOs”)	2,274		—		(99		)	2,175		2.5	%	2,334		—		(181		)	2,153		2.6	%
CREs	448		34		(103		)	379		0.4	%	485		16		(167		)	334		0.4	%
Other [1]	557		16		(15		)	518		0.6	%	—		—		—			—		—	%
CMBS
Agency backed [2]	933		81		—			1,014		1.2	%	637		40		—			677		0.8	%
Bonds	4,625		268		(225		)	4,668		5.4	%	5,992		182		(487		)	5,687		7.0	%
Interest only (“IOs”)	556		54		(19		)	591		0.7	%	563		49		(25		)	587		0.7	%
Corporate
Basic industry [1]	3,746		395		(25		)	4,116		4.7	%	3,690		309		(19		)	3,979		4.9	%
Capital goods	2,986		400		(5		)	3,381		3.9	%	3,327		331		(33		)	3,625		4.4	%
Consumer cyclical	2,277		284		(6		)	2,555		2.9	%	2,277		206		(8		)	2,475		3.0	%
Consumer non-cyclical	5,520		789		(13		)	6,296		7.3	%	5,985		644		(13		)	6,616		8.1	%
Energy	3,682		503		(4		)	4,181		4.8	%	3,338		381		(15		)	3,704		4.5	%
Financial services	7,115		566		(285		)	7,396		8.5	%	7,763		334		(526		)	7,571		9.3	%
Tech./comm.	3,931		561		(18		)	4,474		5.2	%	4,357		443		(61		)	4,739		5.8	%
Transportation	1,383		167		(2		)	1,548		1.8	%	1,285		123		(6		)	1,402		1.7	%
Utilities	8,092		1,082		(32		)	9,142		10.5	%	8,236		857		(38		)	9,055		11.2	%
Other [1]	300		47		(3		)	344		0.4	%	903		33		(20		)	845		1.0	%
Foreign govt./govt. agencies	4,019		202		(5		)	4,216		4.9	%	2,030		141		(10		)	2,161		2.6	%
Municipal Taxable	2,191		226		(18		)	2,399		2.8	%	1,688		120		(51		)	1,757		2.1	%
Tax-exempt	10,748		1,146		(2		)	11,892		13.7	%	10,869		655		(21		)	11,503		14.1	%
RMBS
Agency	5,927		311		—			6,238		7.2	%	4,436		222		—			4,658		5.7	%
Non-agency	2		—		—			2		—	%	62		—		(2		)	60		0.1	%
Alt-A	45		—		(6		)	39		—	%	115		5		(21		)	99		0.1	%
Sub-prime	1,408		26		(236		)	1,198		1.4	%	1,348		25		(433		)	940		1.1	%
U.S. Treasuries	5,009		213		(16		)	5,206		6.0	%	3,828		203		(2		)	4,029		4.9	%
Fixed maturities, AFS	80,690		7,440		(1,364		)	86,726		100	%	78,978		5,374		(2,471		)	81,809		100	%
Equity securities
Financial services	352		13		(50		)	315				479		10		(187		)	302
Other	513		64		(14		)	563				577		58		(16		)	619
Equity securities, AFS	865		77		(64		)	878				1,056		68		(203		)	921
Total AFS securities	$	81,555	$	7,517	$	(1,428	)	$	87,604			$	80,034	$	5,442	$	(2,674	)	$	82,730
Fixed maturities, FVO								$	1,355										$	1,328


[1]	Gross unrealized gains (losses) exclude the fair value of bifurcated embedded derivative features of certain securities. Changes in value are recorded in net realized capital gains (losses).


[2]	Includes securities with pools of loans issued by the Small Business Administration which are backed by the full faith and credit of the U.S. government.

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The Company continues to invest in a diversified portfolio with purchases focused on investment grade corporate and additional investments into agency RMBS and U.S. Treasuries as a part of certain repurchase and dollar roll transactions. The Company also reinvested short-term investments into foreign government securities to generate an additional return in support of Japan-related liabilities. In addition, the Company continued to prudently manage exposure to riskier assets through selective sales of CMBS and European exposures. The Company’s AFS net unrealized position improved primarily as a result of improved security valuations largely due to credit spread tightening and declining interest rates. Fixed maturities, FVO, represents Japan government securities supporting the Japan fixed annuity product, as well as securities containing an embedded credit derivative for which the Company elected the fair value option. The underlying credit risk of the securities containing credit derivatives are primarily CRE CDOs and a subordinated position on a basket of corporate bonds. For further discussion on fair value option securities, see Note 4 of the Notes to Condensed Consolidated Financial Statements.

European Exposure

Many economies within Europe continue to experience significant adverse economic conditions which have been precipitated in part by high unemployment rates and government debt levels. As a result, issuers in several European countries have experienced credit deterioration and rating downgrades and a reduced ability to access capital markets and/or higher borrowing costs. The concerns regarding the European countries have impacted the capital markets which, in turn, has made it more difficult to contain the European financial crisis. Austerity measures aimed at reducing sovereign debt levels, along with steps taken by the European Central Bank to provide liquidity and credit support to certain countries issuing debt, have helped to stabilize markets recently. However, risks remain elevated.

The Company manages the credit risk associated with the European securities within the investment portfolio on an on-going basis using several processes which are supported by macroeconomic analysis and issuer credit analysis. For additional details regarding the Company’s management of credit risk, see the Credit Risk section of this MD&A. The Company considers alternate scenarios, including a base-case and both a positive and negative “tail” scenario that includes a partial or full break-up of the Eurozone. The outlook for key factors is evaluated, including the economic prospects for key countries, the potential of greater contagion effect, and the likelihood that policymakers and politicians pursue sufficient fiscal discipline and introduce appropriate backstops. Given the inherent uncertainty in the outcome of developments in the Eurozone, however, the Company has been focused on controlling both absolute levels of exposure and the composition of that exposure through both bond and derivative transactions.

The Company has limited direct European exposure, totaling only 5% of total invested assets as of September 30, 2012. The following tables present the Company’s European securities included in the Securities by Type table above. The Company identifies exposures with the issuers’ ultimate parent country of domicile, which may not be the country of the security issuer. Certain European countries were separately listed below, Greece, Italy, Ireland, Portugal and Spain (“GIIPS”), because of the current significant economic strains persisting in these countries. The criteria used for identifying the countries separately listed includes credit default spreads that exceed the iTraxx SovX index level, an S&P credit quality rating lower than BBB+ and a gross domestic product ("GDP") greater than $200 billion.

The following tables present the Company’s European securities included in the Securities by Type table above.



September 30, 2012
	Corporate & Equity, AFS Non-Finan. [1]				Corporate & Equity, AFS Financials				Foreign Govt./ Govt. Agencies				Total
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Italy	$	10	$	10	$	—	$	—	$	—	$	—	$	10	$	10
Spain [3]	53		50		20		20		—		—		73		70
Ireland	163		167		—		—		—		—		163		167
Portugal	15		15		—		—		—		—		15		15
Greece	—		—		—		—		—		—		—		—
Higher risk	241		242		20		20		—		—		261		262
Europe excluding higher risk	3,966		4,487		1,160		1,156		757		827		5,883		6,470
Total Europe	$	4,207	$	4,729	$	1,180	1,176		$	757	827		$	6,144	$	6,732
Europe exposure net of credit default swap protection [2]													$	5,613	$	6,731

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December 31, 2011
	Corporate & Equity, AFS Non-Finan. [1]				Corporate & Equity, AFS Financials				Foreign Govt./ Govt. Agencies				Total
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Italy	$	314	$	255	$	—	$	—	$	—	$	—	$	314	$	255
Spain [3]	191		189		20		19		—		—		211		208
Ireland	163		162		—		—		—		—		163		162
Portugal	15		15		—		—		—		—		15		15
Greece			—		—		—		—		—		—		—
Higher risk	683		621		20		19		—		—		703		640
Europe excluding higher risk	4,277		4,695		1,255		1,135		901		970		6,433		6,800
Total Europe	$	4,960	$	5,316	$	1,275	$	1,154	$	901	$	970	$	7,136	$	7,440
Europe exposure net of credit default swap protection [2]													$	6,439	$	7,467


[1]	Includes amortized cost and fair value of $71 as of September 30, 2012 and $67 as of December 31, 2011 related to limited partnerships and other alternative investments, the majority of which is domiciled in the United Kingdom.


[2]	Includes a notional amount and fair value of $531 and $(1), respectively, as of September 30, 2012 and $697 and $27, respectively, as of December 31, 2011 related to credit default swap protection. This includes a notional amount of $74 and $89 as of September 30, 2012 and December 31, 2011, respectively, related to single name corporate issuers in the financial services sector.


[3]	The Company has credit default swap protection with a notional amount of $20 related to the corporate and Equity, AFS Financial Services.

The Company’s European investment exposure largely relates to corporate entities which are domiciled in or generated a significant portion of its revenue within the United Kingdom, Germany, the Netherlands and Switzerland. As of September 30, 2012 and December 31, 2011, exposure to the United Kingdom totaled approximately 2% of total invested assets. The majority of investments are U.S. dollar-denominated, and those securities that are pound and euro-denominated are hedged to U.S. dollars or support foreign-denominated liabilities. For a discussion of foreign currency risks, see the Foreign Currency Exchange Risk section of this MD&A. The Company does not hold any sovereign exposure to the higher risk countries and does not hold any exposure to issuers in Greece. As of September 30, 2012 and December 31, 2011, the Company’s unfunded commitments associated with its investment portfolio was immaterial, and the weighted average credit quality of European investments was A- and A, respectively.

As of September 30, 2012 and December 31, 2011, the Company’s total credit default swaps that provide credit protection had a notional amount of $531 and $697, respectively, and a fair value of $(1) and $27, respectively. Included in those notional amounts as of September 30, 2012 and December 31, 2011 were $531 and $407, respectively, on credit default swaps that reference single name corporate and financial European issuers, of which $109 and $125, respectively, related to the higher risk countries. The maturity dates of credit defaults swaps are primarily consistent with the hedged bonds. In addition, as of December 31, 2011, credit default swaps had a notional amount of $290 that referenced a standard basket of European corporate and financial issuers. For further information on the use of the Company’s credit derivatives and counterparty credit quality, see Derivative Instruments within the Credit Risk section of this MD&A.

Included in the Company’s equity securities, trading, portfolio are investments in World Government Bond Index Funds (“WGBI funds”). The fair value of the WGBI funds at September 30, 2012 and December 31, 2011 was $12.1 billion and $12.5 billion, respectively. Because several of these funds are managed by third party asset managers, the Company does not have access to detailed holdings; however, the WGBI funds' investment mandate follows the Citigroup non-Japan World Government Fund Index (“the index”) and includes allocations to certain European sovereign debt. The estimated fair value of the European allocation based upon the index benchmark allocation was $5.1 billion and $5.4 billion as of September 30, 2012 and December 31, 2011, respectively. Included in this estimated European exposure were investments in Ireland, Italy, Portugal and Spain with an estimated fair value of $1.6 billion and $1.7 billion as of September 30, 2012 and December 31, 2011, respectively. The index guidelines allow investment in issuers rated BBB- or higher by Standard and Poors or Baa3 or higher by Moodys. Should an issuer’s credit rating fall below both of these rating levels they will be removed from the Index and the holdings will be liquidated. Because these assets support the international variable annuity business, changes in the value of these investments are reflected in the corresponding policyholder liabilities. The Company’s indirect exposure to these holdings is through any guarantees issued on the underlying variable annuity policies. For a discussion of the Company’s reinsurance arrangements, see Note 6 of the Notes to Consolidated Financial Statements included in The Hartford’s 2011 Form 10-K Annual Report.

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Financial Services

The Company’s exposure to the financial services sector is predominantly through banking and insurance institutions. The following table presents the Company’s exposure to the financial services sector included in the Securities by Type table above.



	September 30, 2012							December 31, 2011
	Amortized Cost		Fair Value		Net Unrealized			Amortized Cost		Fair Value		Net Unrealized
AAA	$	48	$	50	$	2		$	240	$	245	$	5
AA	1,050		1,138		88			1,698		1,675		(23		)
A	3,461		3,639		178			3,664		3,685		21
BBB	2,482		2,445		(37		)	2,335		1,998		(337		)
BB & below	426		439		13			305		270		(35		)
Total	$	7,467	$	7,711	$	244		$	8,242	$	7,873	$	(369	)

Domestic financial companies continued to stabilize in 2012 due to improved earnings performance, strengthening asset quality and capital generation. However, spread volatility remains high due to concerns around European sovereign risks and potential contagion effects, as well as regulatory pressures. Financial institutions remain vulnerable to these concerns, as well as ongoing stress in the real estate markets which could adversely impact the Company’s net unrealized position.

Commercial Real Estate

The commercial real estate market continued to show signs of improving fundamentals during the first nine months of 2012, such as increases in transaction activities, more readily available financing and new issuances. While delinquencies still remain at historically high levels, they are expected to move lower.

The following table presents the Company’s exposure to commercial mortgage backed-securities (“CMBS”) bonds by current credit quality and vintage year, included in the Securities by Type table above. Credit protection represents the current weighted average percentage of the outstanding capital structure subordinated to the Company’s investment holding that is available to absorb losses before the security incurs the first dollar loss of principal and excludes any equity interest or property value in excess of outstanding debt.

CMBS – Bonds [1]



September 30, 2012
	AAA				AA				A				BBB				BB and Below				Total
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
2003 & Prior	$	233	$	238	$	106	$	107	$	65	$	63	$	5	$	5	$	43	$	40	$	452	$	453
2004	181		190		73		82		36		35		24		23		26		21		340		351
2005	451		491		77		79		136		136		175		154		84		65		923		925
2006	701		778		239		251		94		93		238		217		338		264		1,610		1,603
2007	298		324		387		404		99		97		31		29		190		155		1,005		1,009
2008	55		65		—		—		—		—		—		—		—		—		55		65
2009	28		30		—		—		—		—		—		—		—		—		28		30
2010	18		21		—		—		—		—		—		—		—		—		18		21
2011	121		134		—		—		—		—		—		—		—		—		121		134
2012	73		77		—		—		—		—		—		—		—		—		73		77
Total	$	2,159	$	2,348	$	882	$	923	$	430	$	424	$	473	$	428	$	681	$	545	$	4,625	$	4,668
Credit protection	30.0%				25.1%				23.3%				15.9%				8.2%				23.8%

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December 31, 2011
	AAA				AA				A				BBB				BB and Below				Total
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
2003 & Prior	$	408	$	415	$	148	$	144	$	83	$	81	$	16	$	13	$	33	$	30	$	688	$	683
2004	333		349		68		75		45		41		30		28		26		21		502		514
2005	520		556		101		96		178		151		177		138		71		57		1,047		998
2006	713		762		516		493		180		159		362		298		430		302		2,201		2,014
2007	245		267		296		275		123		97		166		130		195		149		1,025		918
2008	55		60		—		—		—		—		—		—		—		—		55		60
2009	28		29		—		—		—		—		—		—		—		—		28		29
2010	29		31		—		—		—		—		—		—		—		—		29		31
2011	417		440		—		—		—		—		—		—		—		—		417		440
Total	$	2,748	$	2,909	$	1,129	$	1,083	$	609	$	529	$	751	$	607	$	755	$	559	$	5,992	$	5,687
Credit protection	27.3%				22.7%				19.7%				13.8%				8.2%				21.6%


[1]	The vintage year represents the year the pool of loans was originated.

The Company also has AFS exposure to commercial real estate (“CRE”) collateralized debt obligations (“CDOs”) with an amortized cost and fair value of $448 and $379, respectively, as of September 30, 2012 and $485 and $334 respectively, as of December 31, 2011. These securities are comprised of diversified pools of commercial mortgage loans or equity positions of other CMBS securitizations. Although the Company does not plan to invest in this asset class going forward, we continue to monitor these investments as economic and market uncertainties regarding future performance impact market liquidity and security premiums.

In addition to CMBS bonds and CRE CDOs, the Company has exposure to commercial mortgage loans as presented in the following table. These loans are collateralized by a variety of commercial properties and are diversified both geographically throughout the United States and by property type. These loans may be either in the form of a whole loan, where the Company is the sole lender, or a loan participation. Loan participations are loans where the Company has purchased or retained a portion of an outstanding loan or package of loans and participates on a pro-rata basis in collecting interest and principal pursuant to the terms of the participation agreement. In general, A-Note participations have senior payment priority, followed by B-Note participations and then mezzanine loan participations. As of September 30, 2012, loans within the Company’s mortgage loan portfolio that have had extensions or restructurings other than what is allowable under the original terms of the contract are immaterial.

Commercial Mortgage Loans



	September 30, 2012							December 31, 2011
	Amortized Cost [1]		Valuation Allowance			Carrying Value		Amortized Cost [1]		Valuation Allowance			Carrying Value
Agricultural	$	162	$	(7	)	$	155	$	268	$	(19	)	$	249
Whole loans	6,140		(11		)	6,129		4,892		(17		)	4,875
A-Note participations	265		—			265		265		—			265
B-Note participations	271		(65		)	206		296		(66		)	230
Mezzanine loans	108		—			108		109		—			109
Total	$	6,946	$	(83	)	$	6,863	$	5,830	$	(102	)	$	5,728


[1]	Amortized cost represents carrying value prior to valuation allowances, if any.

Since December 31, 2011, the Company funded $1.4 billion of commercial whole loans with a weighted average loan-to-value (“LTV”) ratio of 62% and a weighted average yield of 3.8%. The Company continues to originate commercial whole loans within primary markets, office, industrial and multi-family, focusing on loans with strong LTV ratios and high quality property collateral. As of September 30, 2012, the Company had mortgage loans held-for-sale with a carrying value and valuation allowance of $57 and $4, respectively, and $74 and $4, respectively, as of December 31, 2011.

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Municipal Bonds

The Company holds investments in securities backed by states, municipalities and political subdivisions (“municipal”) with an amortized cost and fair value of $12.9 billion and $14.3 billion, respectively, as of September 30, 2012 and $12.6 billion and $13.3 billion, respectively, as of December 31, 2011. The Company’s municipal bond portfolio primarily consists of high quality essential service revenue and general obligation bonds. As of September 30, 2012, the largest issuer concentrations were the states of California, Illinois and Massachusetts, which each comprised less than 4% of the municipal bond portfolio and were primarily comprised of general obligation bonds. As of December 31, 2011, the largest issuer concentrations were the states of California, Massachusetts and Illinois, which each comprised less than 3% of the municipal bond portfolio and were primarily comprised of general obligation bonds.

Limited Partnerships and Other Alternative Investments

The following table presents the Company’s investments in limited partnerships and other alternative investments which include hedge funds, mortgage and real estate funds, mezzanine debt funds, and private equity and other funds. Hedge funds include investments in funds of funds and direct funds. These hedge funds invest in a variety of strategies including global macro and long/short credit and equity. Mortgage and real estate funds consist of investments in funds whose assets consist of mortgage loans, mortgage loan participations, mezzanine loans or other notes which may be below investment grade, as well as equity real estate and real estate joint ventures. Mezzanine debt funds include investments in funds whose assets consist of subordinated debt that often incorporates equity-based options such as warrants and a limited amount of direct equity investments. Private equity and other funds primarily consist of investments in funds whose assets typically consist of a diversified pool of investments in small to mid-sized non-public businesses with high growth potential.



	September 30, 2012				December 31, 2011
	Amount		Percent		Amount		Percent
Hedge funds	$	1,303	42.9	%	$	896	35.4	%
Mortgage and real estate funds	514		16.9	%	479		18.9	%
Mezzanine debt funds	113		3.7	%	118		4.7	%
Private equity and other funds	1,109		36.5	%	1,039		41	%
Total	$	3,039	100	%	$	2,532	100	%

Since December 31, 2011, the increase in hedge funds relates to additional investments in the type of fund strategies that the Company expects to generate attractive risk-adjusted returns over time, and are less correlated to long credit and equity returns.

Available-for-Sale Securities — Unrealized Loss Aging

The total gross unrealized losses were $1.4 billion as of September 30, 2012, which have improved $1.2 billion, or 47%, from December 31, 2011 due to credit spread tightening and lower interest rates. As of September 30, 2012, $620 of the gross unrealized losses were associated with securities depressed less than 20% of cost or amortized cost.

The remaining $808 of gross unrealized losses were associated with securities depressed greater than 20%, which includes $150 associated with securities depressed over 50% for twelve months or more. These securities are backed primarily by commercial and residential real estate that have market spreads that continue to be wider than the spreads at the security’s respective purchase date. The unrealized losses remain largely due to the continued market and economic uncertainties surrounding residential and certain commercial real estate and less liquidity. Based upon the Company’s cash flow modeling and current market and collateral performance assumptions, these securities have sufficient credit protection levels to receive contractually obligated principal and interest payments. Also included in the gross unrealized losses depressed greater than 20% are financial services securities that have a floating-rate coupon and/or long-dated maturities.

As part of the Company’s ongoing security monitoring process, the Company has reviewed its AFS securities in an unrealized loss position and concluded that there were no additional impairments as of September 30, 2012 and that these securities are temporarily depressed and are expected to recover in value as the securities approach maturity or as real estate related market spreads continue to improve. For these securities in an unrealized loss position where a credit impairment has not been recorded, the Company’s best estimate of expected future cash flows are sufficient to recover the amortized cost basis of the security. Furthermore, the Company neither has an intention to sell nor does it expect to be required to sell these securities. For further information regarding the Company’s impairment analysis, see Other-Than-Temporary Impairments in the Investment Portfolio Risks and Risk Management section of this MD&A.

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The following table presents the Company’s unrealized loss aging for AFS securities by length of time the security was in a continuous unrealized loss position.



	September 30, 2012								December 31, 2011
Consecutive Months	Items	Cost or Amortized Cost		Fair Value		Unrealized Loss [1]			Items	Cost or Amortized Cost		Fair Value		Unrealized Loss [1]
Three months or less	876	$	2,834	$	2,735	$	(99	)	855	$	3,933	$	3,672	$	(261	)
Greater than three to six months	326	285		266		(19		)	485	2,617		2,517		(100		)
Greater than six to nine months	120	235		222		(13		)	224	1,181		1,097		(84		)
Greater than nine to eleven months	39	64		62		(2		)	42	106		95		(11		)
Twelve months or more	830	9,731		8,397		(1,295		)	943	11,613		9,324		(2,218		)
Total	2,191	$	13,149	$	11,682	$	(1,428	)	2,549	$	19,450	$	16,705	$	(2,674	)


[1]	Unrealized losses exclude the fair value of bifurcated embedded derivative features of certain securities as changes in value are recorded in net realized capital gains (losses).

The following tables present the Company’s unrealized loss aging for AFS securities continuously depressed over 20% by length of time (included in the table above).



	September 30, 2012								December 31, 2011
Consecutive Months	Items	Cost or Amortized Cost		Fair Value		Unrealized Loss [1]			Items	Cost or Amortized Cost		Fair Value		Unrealized Loss [1]
Three months or less	100	$	146	$	107	$	(39	)	206	$	1,823	$	1,289	$	(500	)
Greater than three to six months	61	146		111		(35		)	134	1,749		1,205		(544		)
Greater than six to nine months	20	36		27		(9		)	42	406		269		(137		)
Greater than nine to eleven months	10	25		16		(9		)	9	1		—		(1		)
Twelve months or more	222	2,065		1,349		(716		)	239	1,806		1,057		(749		)
Total	413	$	2,418	$	1,610	$	(808	)	630	$	5,785	$	3,820	$	(1,931	)

The following tables present the Company’s unrealized loss aging for AFS securities continuously depressed over 50% by length of time (included in the tables above).



	September 30, 2012								December 31, 2011
Consecutive Months	Items	Cost or Amortized Cost		Fair Value		Unrealized Loss [1]			Items	Cost or Amortized Cost		Fair Value		Unrealized Loss [1]
Three months or less	22	$	56	$	27	$	(29	)	50	$	152	$	55	$	(97	)
Greater than three to six months	13	18		7		(11		)	26	110		46		(64		)
Greater than six to nine months	11	2		—		(2		)	7	33		11		(22		)
Greater than nine to eleven months	5	11		5		(6		)	5	5		1		(4		)
Twelve months or more	37	240		90		(150		)	54	227		71		(156		)
Total	88	$	327	$	129	$	(198	)	142	$	527	$	184	$	(343	)

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Other-Than-Temporary Impairments

The following table presents the Company’s impairments recognized in earnings by security type.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
ABS	$	—	$	13	$	25	$	23
CRE CDOs	7		26		10		41
CMBS
Bonds	19		2		24		16
IOs	1		—		1		3
Corporate	4		19		28		40
Equity	4		—		65		10
RMBS sub-prime	2		—		10		3
Other	—		—		—		2
Total	$	37	$	60	$	164	$	138

Three and nine months ended September 30, 2012

For the three and nine months ended September 30, 2012, impairments recognized in earnings were comprised of credit impairments of $14 and $40, respectively, impairments on equity securities of $4 and $63, respectively, and securities that the Company intends to sell of $19 and $61, respectively.

For the three and nine months ended September 30, 2012, credit impairments were primarily concentrated in structured securities associated with residential and commercial real estate, as well as ABS small business for the nine months ended September 30, 2012. The structured securities were impaired primarily due to actual performance or property-specific deterioration of the underlying collateral. The Company calculated these impairments utilizing both a top down modeling approach and a security-specific collateral review. The top down modeling approach used discounted cash flow models that considered losses under current and expected future economic conditions. Assumptions used over the current period included macroeconomic factors, such as a high unemployment rate, as well as sector specific factors such as property values, delinquency levels, servicer behavior and severity rates. The macroeconomic assumptions considered by the Company did not materially change for the three and nine months ended September 30, 2012, and, as such, the credit impairments recognized were primarily driven by actual collateral deterioration, largely as a result of the Company’s security-specific collateral review.

The security-specific collateral review is performed to estimate potential future losses. This review incorporates assumptions about expected future collateral cash flows, including projected default rates and severities. The results of the security-specific collateral review allowed the Company to estimate the expected timing of a security’s first loss, if any, and the probability and severity of potential ultimate losses. The Company then discounted these anticipated future cash flows at the security’s book yield prior to impairment.

Impairments on equity securities were largely comprised of downgraded preferred equity securities of financial institutions. Impairments on securities for which the Company has the intent to sell primarily related to European corporate debt where the Company would like the ability to reduce certain exposures, as well as high risk CMBS bonds and ABS collateralized by student loans.

In addition to the credit impairments recognized in earnings, the Company recognized non-credit impairments in other comprehensive income of $22 and $37, respectively, for the three and nine months ended September 30, 2012, predominantly concentrated in corporate financial services and RMBS. These non-credit impairments represent the difference between fair value and the Company’s best estimate of expected future cash flows discounted at the security’s effective yield prior to impairment, rather than at current market implied credit spreads. These non-credit impairments primarily represent increases in market liquidity premiums and credit spread widening that occurred after the securities were purchased, as well as a discount for variable-rate coupons which are paying less than at purchase date. In general, larger liquidity premiums and wider credit spreads are the result of deterioration of the underlying collateral performance of the securities, as well as the risk premium required to reflect future uncertainty in the real estate market.

Future impairments may develop as the result of changes in intent to sell of specific securities or if actual results underperform current modeling assumptions, which may be the result of, but are not limited to, macroeconomic factors and security-specific performance below current expectations. Ultimate loss formation will be a function of macroeconomic factors and idiosyncratic security-specific performance.

Three and nine months ended September 30, 2011

Impairments recognized in earnings were comprised of credit impairments of $42 and $103, respectively, impairments on equity securities of $0 and $10, respectively, and securities that the Company intended to sell of $18 and $25, respectively. Credit impairments primarily related to structured securities as a result of continued property-specific deterioration of the underlying collateral. The remaining credit impairments were primarily direct private equity investments that were impaired due to the likelihood of a disruption in contractual principal and interest payments due to the restructuring of the debtor’s obligation. Impairments on equity securities related to preferred stock associated with these direct private equity investments, and impairments on securities that the Company intended to sell consisted of corporate financial services securities and ABS collateralized by aircraft.

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CAPITAL RESOURCES AND LIQUIDITY

The following section discusses the overall financial strength of The Hartford and its insurance operations including their ability to generate cash flows from each of their business segments, borrow funds at competitive rates and raise new capital to meet operating and growth needs over the next twelve months.

Liquidity Requirements and Sources of Capital

The Hartford Financial Services Group, Inc. (Holding Company)

The liquidity requirements of the holding company of The Hartford Financial Services Group, Inc. (“HFSG Holding Company”) have been and will continue to be met by HFSG Holding Company’s fixed maturities, short-term investments and cash of $1.3 billion at September 30, 2012, dividends from its insurance operations, as well as the issuance of common stock, debt or other capital securities and borrowings from its credit facilities. Expected liquidity requirements of the HFSG Holding Company for the next twelve months include interest on debt of approximately $470, repayment of 5.25% senior notes of $320, common stockholder dividends, subject to the discretion of the Board of Directors, of approximately $180, and preferred stock dividends of approximately $32.

During the nine months ended September 30, 2012, the Company completed a $500 stock repurchase program authorized by the Board of Directors that permitted for purchases of common stock, as well as warrants and other equity derivative securities. In 2011, the Company repurchased 3.2 million common shares for $51, and in 2012, repurchased 8.0 million common shares for $149, as well as all outstanding Series B and Series C warrants held by Allianz for $300. For additional information see Note 15 of the Notes to Condensed Consolidated Financial Statements.

In addition, in 2010 The Hartford entered into an intercompany liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates of up to $2.0 billion for liquidity and other general corporate purposes. The Connecticut Insurance Department granted approval for certain affiliated insurance companies that are parties to the agreement to treat receivables from a parent, including the HFSG Holding Company, as admitted assets for statutory accounting purposes.

Dividends

On October 25, 2012, The Hartford’s Board of Directors declared a quarterly dividend of $0.10 per common share payable on January 2, 2013 to common shareholders of record as of December 3, 2012 and a dividend of $18.125 on each share of Series F preferred stock payable on January 2, 2013 to shareholders of record as of December 17, 2012.

Debt

Senior Notes

On April 5, 2012, the Company issued $1.55 billion aggregate principal amount of senior notes. The issuance consisted of $325 of 4.000% senior notes due 2017, $800 of 5.125% senior notes due 2022 and $425 of 6.625% senior notes due 2042 (collectively, the “Senior Notes”) for net proceeds of approximately $1.5 billion, after deducting underwriting discounts and offering expenses. The Senior Notes bear interest at their respective rate, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2012.

Junior Subordinated Debentures

On April 5, 2012, the Company issued $600 aggregate principal amount of 7.875% fixed-to-floating rate junior subordinated debentures due 2042 (the “Debentures”) for net proceeds of approximately $586, after deducting underwriting discounts and offering expenses. The Company financed the repurchase of the 10% Debentures through the issuance of the Senior Notes and the Debentures. The Debentures bear interest from the date of issuance to but excluding April 15, 2022 at an annual rate of 7.875%, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing on July 15, 2012, to and including April 15, 2022. Commencing on April 15, 2022 the Debentures bear interest at an annual rate equal to three-month LIBOR, reset quarterly, plus 5.596%, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing on July 15, 2022.

For additional information regarding debt, see Note 14 of the Notes to Condensed Consolidated Financial Statements. For additional information regarding the warrants, see Note 15 of the Notes to Condensed Consolidated Financial Statements.

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Pension Plans and Other Postretirement Benefits

While the Company has significant discretion in making voluntary contributions to the Plan, the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006 and further amended by the Worker, Retiree, and Employer Recovery Act of 2008, and Internal Revenue Code regulations mandate minimum contributions in certain circumstances. The Company does not have a required minimum funding contribution for the U.S. qualified defined benefit pension plan for 2012 and the funding requirements for all of the pension plans is expected to be immaterial. The Company contributed approximately $120 to its pension plans in July 2012 , and presently anticipates contributing approximately $80 during the remainder of 2012, based upon certain economic and business assumptions. These assumptions include, but are not limited to, equity market performance, changes in interest rates and the Company’s other capital requirements.

Dividends from Insurance Subsidiaries

Dividends to the HFSG Holding Company from its insurance subsidiaries are limited by state regulation. The payment of dividends by Connecticut-domiciled insurers, including dividends associated with the proceeds from a sale of any of our life businesses, is limited under the insurance holding company laws of Connecticut. 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 principles. 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. Dividends paid to HFSG Holding Company by its life insurance subsidiaries are further dependent on cash requirements of HLI and other factors. The Company’s property-casualty insurance subsidiaries are permitted to pay up to a maximum of approximately $1.4 billion in dividends to HFSG Holding Company in 2012 without prior approval from the applicable insurance commissioner. The Company’s life insurance subsidiaries are permitted to pay up to a maximum of approximately $625 in dividends to HLI in 2012 without prior approval from the applicable insurance commissioner. The aggregate of these amounts is the maximum the insurance subsidiaries could pay to HFSG Holding Company in 2012 without prior approval from the applicable insurance commissioner. In addition to statutory limitations on paying dividends, the Company also takes other items into consideration when determining dividends from subsidiaries. These considerations include, but are not limited to expected earnings and capitalization of the subsidiary, regulatory capital requirements and liquidity requirements of the individual operating company. For the nine months ended September 30, 2012, HFSG Holding Company and HLI received no dividends from the life insurance subsidiaries, and HFSG Holding Company received $722 in dividends from its property-casualty insurance subsidiaries, including dividends of $122 to fund interest payments on an intercompany note between Hartford Holdings, Inc. and Hartford Fire Insurance Company.

Other Sources of Capital for the HFSG Holding Company

The Hartford endeavors to maintain a capital structure that provides financial and operational flexibility to its insurance subsidiaries, ratings that support its competitive position in the financial services marketplace (see the “Ratings” section below for further discussion), and shareholder returns. As a result, the Company may from time to time raise capital from the issuance of equity, equity-related debt or other capital securities and is continuously evaluating strategic opportunities. The issuance of common equity, equity-related debt or other capital securities could result in the dilution of shareholder interests or reduced net income due to additional interest expense.

Shelf Registrations

On August 4, 2010, The Hartford filed with the Securities and Exchange Commission (the “SEC”) an automatic shelf registration statement (Registration No. 333-168532) for the potential offering and sale of debt and equity securities. The registration statement allows for the following types of securities to be offered: debt securities, junior subordinated debt securities, preferred stock, common stock, depositary shares, warrants, stock purchase contracts, and stock purchase units. In that The Hartford is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act of 1933, the registration statement went effective immediately upon filing and The Hartford may offer and sell an unlimited amount of securities under the registration statement during the three-year life of the registration statement.

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Contingent Capital Facility

The Hartford is party to a put option agreement that provides The Hartford with the right to require the Glen Meadow ABC Trust, a Delaware statutory trust, at any time and from time to time, to purchase The Hartford’s junior subordinated notes in a maximum aggregate principal amount not to exceed $500. Under the Put Option Agreement, The Hartford will pay the Glen Meadow ABC Trust premiums on a periodic basis, calculated with respect to the aggregate principal amount of Notes that The Hartford had the right to put to the Glen Meadow ABC Trust for such period. The Hartford has agreed to reimburse the Glen Meadow ABC Trust for certain fees and ordinary expenses. The Company holds a variable interest in the Glen Meadow ABC Trust where the Company is not the primary beneficiary. As a result, the Company did not consolidate the Glen Meadow ABC Trust. As of September 30, 2012, The Hartford has not exercised its right to require Glen Meadow ABC Trust to purchase the Notes. As a result, the Notes remain a source of capital for the HFSG Holding Company.

Commercial Paper and Revolving Credit Facility

The table below details the Company’s short-term debt programs and the applicable balances outstanding.



	Effective	Expiration	Maximum Available as of September 30,				Outstanding as of September 30,
Description	Date	Date	2012		2011		2012		2011
Commercial Paper
The Hartford	11/10/1986	N/A	$	2,000	$	2,000	$	—	$	—
Revolving Credit Facility
4-year revolving credit facility	1/6/2012	1/6/2016	1,750		N/A		—		—
5-year revolving credit facility [1]	8/9/2007	8/9/2012	N/A		1,900		—		—
Total Commercial Paper and Revolving Credit Facility			$	3,750	$	3,900	$	—	$	—


[1]	Terminated in January 2012.

Commercial Paper

While The Hartford’s maximum borrowings available under its commercial paper program are $2.0 billion, the Company is dependent upon market conditions to access short-term financing through the issuance of commercial paper to investors.

Revolving Credit Facilities

The Hartford’s Japan operations also maintain two lines of credit in support of operations. Both lines of credit are in the amount of approximately $63, or ¥5 billion, and individually have expiration dates of January 4, 2013 and September 30, 2013.

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Derivative Commitments

As of September 30, 2012, the aggregate notional amount and fair value of derivative relationships that could be subject to immediate termination in the event of rating agency downgrades to (1) either BBB+ or Baa1 was $6.1 billion and $202, respectively, or (2) both BBB+ and Baa1 was $14.2 billion and $455, respectively, which includes the amounts in scenario (1). The notional and fair value amounts include a customized GMWB derivative with a notional amount of $4.1 billion and a fair value of $149, for which the Company has a contractual right to make a collateral payment in the amount of approximately $41 to prevent its termination. This customized GMWB derivative contains an early termination trigger such that if the unsecured, unsubordinated debt of the counterparty’s related party guarantor is downgraded one or more levels below the current rating by S&P, the counterparty could terminate all transactions under the applicable International Swaps and Derivatives Association Master Agreement. As of September 30, 2012, the gross fair value of all affected derivative contracts is $150, which would approximate the settlement value.

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Insurance Operations

Current and expected patterns of claim frequency and severity or surrenders may change from period to period but continue to be within historical norms and, therefore, the Company’s insurance operations’ current liquidity position is considered to be sufficient to meet anticipated demands over the next twelve months, including any obligations related to the Company’s restructuring activities. For a discussion and tabular presentation of the Company’s current contractual obligations by period, refer to Off-Balance Sheet Arrangements and Aggregate Contractual Obligations within the Capital Resources and Liquidity section of the MD&A included in The Hartford’s 2011 Form 10-K Annual Report.

The principal sources of operating funds are premiums, fees earned from assets under management and investment income, while investing cash flows originate from maturities and sales of invested assets. The primary uses of funds are to pay claims, claim adjustment expenses, commissions and other underwriting expenses, to purchase new investments and to make dividend payments to the HFSG Holding Company.

The Company’s insurance operations consist of property and casualty insurance products (collectively referred to as “Property & Casualty Operations”) and life insurance products (collectively referred to as “Life Operations”).

Property & Casualty Operations

Property & Casualty Operations holds fixed maturity securities including a significant short-term investment position (securities with maturities of one year or less at the time of purchase) to meet liquidity needs.

The following table summarizes Property & Casualty Operations’ fixed maturities, short-term investments, and cash, as of September 30, 2012:



Fixed maturities	$	26,498
Short-term investments	705
Cash	155
Less: Derivative collateral	(209		)
Total	$	27,149

Liquidity requirements that are unable to be funded by Property & Casualty Operation’s short-term investments would be satisfied with current operating funds, including premiums received or through the sale of invested assets. A sale of invested assets could result in significant realized losses.

Life Operations

Life Operations’ total general account contractholder obligations are supported by $78 billion of cash and total general account invested assets, excluding equity securities, trading, which includes a significant short-term investment position to meet liquidity needs.

The following table summarizes Life Operations’ fixed maturities, short-term investments, and cash, as of September 30, 2012:



Fixed maturities	$	60,999
Short-term investments	3,351
Cash	2,550
Less: Derivative collateral	(1,698		)
Cash associated with Japan variable annuities	(677		)
Total	$	64,525

Capital resources available to fund liquidity, upon contract holder surrender, are a function of the legal entity in which the liquidity requirement resides. Generally, obligations of Group Benefits will be funded by Hartford Life and Accident Insurance Company; obligations of Individual Life and individual annuity and private placement life insurance products will be generally funded by both Hartford Life Insurance Company and Hartford Life and Annuity Insurance Company; obligations of Retirement Plans and institutional investment products will be generally funded by Hartford Life Insurance Company; and obligations of the Company’s international annuity subsidiaries will be generally funded by the legal entity in the country in which the obligation was generated.

Hartford Life Insurance Company (“HLIC”), an indirect wholly-owned subsidiary, is a member of the Federal Home Loan Bank of Boston (“FHLBB”). Membership allows HLIC access to collateralized advances, which may be used to support various spread-based businesses or to enhance liquidity management. FHLBB membership requires HLIC to own member stock and borrowings require the purchase of activity-based stock in an amount (generally between 3% and 4.5% of the principal balance) based upon the term of the outstanding advances. FHLBB stock held by HLIC is classified within equity securities, available-for-sale in the Condensed Consolidated Balance Sheets.

State law limits HLIC's ability to pledge, hypothecate or otherwise encumber its assets. The amount of advances that can be taken by HLIC are dependent on the assets pledged by HLIC to secure the advances, and are therefore subject to this legal limit. The pledge limit is recalculated annually based on statutory admitted assets and capital and surplus. For 2012, HLIC's pledge limit is $1.48 billion. HLIC would need to seek prior written approval from the Connecticut Department of Insurance in order to exceed this limit.

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Contractholder Obligations	September 30, 2012
Total Life contractholder obligations	$	241,042
Less: Separate account assets [1]	(148,369		)
International statutory separate accounts [1]	(29,938		)
General account contractholder obligations	$	62,735
Composition of General Account Contractholder Obligations
Contracts without a surrender provision and/or fixed payout dates [2]	$	27,866
Fixed MVA annuities [3]	9,037
International Fixed MVA annuities	2,327
Guaranteed investment contracts (“GIC”) [4]	252
Other [5]	23,253
General account contractholder obligations	$	62,735

[1]

In the event customers elect to surrender separate account assets or international statutory separate accounts, Life Operations will use the proceeds from the sale of the assets to fund the surrender, and Life Operations’ liquidity position will not be impacted. In many instances Life Operations will receive a percentage of the surrender amount as compensation for early surrender (surrender charge), increasing Life Operations’ liquidity position. In addition, a surrender of variable annuity separate account or general account assets (see below) will decrease Life Operations’ obligation for payments on guaranteed living and death benefits.


[2]	Relates to contracts such as payout annuities or institutional notes, other than guaranteed investment products with an MVA feature (discussed below) or surrenders of term life, group benefit contracts or death and living benefit reserves for which surrenders will have no current effect on Life Operations’ liquidity requirements.

[3]

Relates to annuities that are held in a statutory separate account, but under U.S. GAAP are recorded in the general account as Fixed MVA annuity contract holders are subject to the Company’s credit risk. In the statutory separate account, Life Operations is required to maintain invested assets with a fair value equal to the MVA surrender value of the Fixed MVA contract. In the event assets decline in value at a greater rate than the MVA surrender value of the Fixed MVA contract, Life Operations is required to contribute additional capital to the statutory separate account. Life Operations will fund these required contributions with operating cash flows or short-term investments. In the event that operating cash flows or short-term investments are not sufficient to fund required contributions, the Company may have to sell other invested assets at a loss, potentially resulting in a decrease in statutory surplus. As the fair value of invested assets in the statutory separate account are generally equal to the MVA surrender value of the Fixed MVA contract, surrender of Fixed MVA annuities will have an insignificant impact on the liquidity requirements of Life Operations.

[4]

GICs are subject to discontinuance provisions which allow the policyholders to terminate their contracts prior to scheduled maturity at the lesser of the book value or market value. Generally, the market value adjustment reflects changes in interest rates and credit spreads. As a result, the market value adjustment feature in the GIC serves to protect the Company from interest rate risks and limit Life Operations’ liquidity requirements in the event of surrender.

[5]

Surrenders of, or policy loans taken from, as applicable, these general account liabilities, which include the general account option for Individual Annuity’s individual variable annuities and Individual Life variable life contracts, the general account option for Retirement Plans’ annuities and universal life contracts sold by Individual Life may be funded through operating cash flows of Life Operations, available short-term investments, or Life Operations may be required to sell fixed maturity investments to fund the surrender payment. Sales of fixed maturity investments could result in the recognition of significant realized losses and insufficient proceeds to fully fund the surrender amount. In this circumstance, Life Operations may need to take other actions, including enforcing certain contract provisions which could restrict surrenders and/or slow or defer payouts.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements

There have been no material changes to the Company’s off-balance sheet arrangements since the filing of the Company’s 2011 Form 10-K Annual Report.

Aggregate Contractual Obligations

Since December 31, 2011, the Company issued $1.55 billion aggregate principal amount of senior notes and $600 aggregate principal amount of junior subordinated debentures. For additional information, see MD&A – Liquidity Requirements and Sources of Capital – Debt and Note 14 of Notes to Condensed Consolidated Financial Statements.

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Capitalization

The capital structure of The Hartford as of September 30, 2012 and December 31, 2011 consisted of debt and stockholders’ equity, summarized as follows:



	September 30, 2012			December 31, 2011			Change
Short-term debt (includes current maturities of long-term debt)	$	320		$	—		—	%
Long-term debt	6,806			6,216			9	%
Total debt [1]	7,126			6,216			15	%
Stockholders’ equity excluding accumulated other comprehensive income (loss), net of tax (“AOCI”)	20,075			20,235			(1	)%
AOCI, net of tax	3,295			1,251			163	%
Total stockholders’ equity	$	23,370		$	21,486		9	%
Total capitalization including AOCI	$	30,496		$	27,702		10	%
Debt to stockholders’ equity	30		%	29		%
Debt to capitalization	23		%	22		%


[1]	Total debt of the Company excludes $190 and $314 of consumer notes as of September 30, 2012 and December 31, 2011, respectively.

The Hartford’s total capitalization increased $2.8 billion, or 10%, from December 31, 2011 to September 30, 2012 due to increases in total debt and AOCI, net of tax, partially offset by decreases in stockholders' equity, excluding AOCI. The decrease in stockholders’ equity, excluding AOCI, was primarily due the repurchase of outstanding warrants held by Allianz for $300.

Total debt increased primarily due to the issuance of $1.55 billion in senior notes and $600 in junior subordinated debentures in April 2012, partially offset by the repurchase of $1.75 billion in junior subordinated debentures in April 2012.

AOCI, net of tax, improved primarily due to improvements in the Company’s net unrealized position on available-for-sale securities of $1.9 billion primarily as a result of improved security valuations largely due to credit spread tightening and declining interest rates.

For additional information on debt and the repurchase of warrants, see MD&A – Liquidity Requirements and Sources of Capital and Note 14 and Note 15 of the Notes to Condensed Consolidated Financial Statements. For additional information on equity and AOCI, net of tax, see Notes 15 and 16, respectively, of the Notes to Consolidated Financial Statements in The Hartford’s 2011 Form 10-K Annual Report.

Cash Flows



	Nine Months Ended September 30,
	2012			2011
Net cash provided by operating activities	$	2,212		$	1,624
Net cash used for investing activities	$	(1,862	)	$	(896	)
Net cash used for financing activities	$	(217	)	$	(239	)
Cash – end of period	$	2,705		$	2,589

Cash provided by operating activities increased primarily due to income taxes received of $448 in 2012, compared to income taxes paid of $245 in 2011, as well as lower paid losses on property and casualty insurance products, and to a lesser extent, higher net investment income on available-for-sale securities, excluding limited partnerships and other investments.

Cash used for investing activities in 2012 primarily relates to net purchases of derivatives of $1.6 billion, net purchases of mortgage loans of $1.1 billion, and net purchases of partnerships of $604, partially offset by net proceeds of available for sale securities of $1.5 billion. Cash used for investing activities in 2011 primarily relates to net purchases of mortgage loans of $1.1 billion, net purchases of fixed maturities, fair value option of $624 and net purchases of available-for-sale securities of $459, partially offset by net receipts on derivatives of $1.6 billion.

Cash used for financing activities in 2012 consists primarily of net outflows on investment and universal life-type contracts of $1.0 billion, repurchase of warrants of $300, as well as share repurchases and dividends paid on common and preferred stock. These were partially offset by net increases in securities loaned or sold of $1.6 billion. Cash used for financing activities in 2011 consists primarily of net outflows on investment and universal life-type contracts and dividends paid on common and preferred stock.

Operating cash flows for the nine months ended September 30, 2012 and 2011 have been adequate to meet liquidity requirements.

Equity Markets

For a discussion of the potential impact of the equity markets on capital and liquidity, see the Enterprise Risk Management section of the MD&A.

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Ratings

Ratings impact the Company’s cost of borrowing and its ability to access financing and are an important factor in establishing 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 Company’s cost of borrowing and ability to access financing, as well as the level of revenues or the persistency of its business may be adversely impacted.

The following table summarizes The Hartford’s significant member companies’ financial strength ratings from the major independent rating organizations as of October 26, 2012.



Insurance Financial Strength Ratings:	A.M. Best	Fitch	Standard & Poor’s	Moody’s
Hartford Fire Insurance Company	A	A+	A	A2
Hartford Life Insurance Company	A	A-	A-	A3
Hartford Life and Accident Insurance Company	A	A-	A-	A3
Hartford Life and Annuity Insurance Company	A	A-	BBB+	A3
Other Ratings:
The Hartford Financial Services Group, Inc.:
Senior debt	bbb+	BBB	BBB	Baa3
Commercial paper	AMB-2	F2	A-2	P-3

These ratings are not a recommendation to buy or hold any of The Hartford’s securities and they may be revised or revoked at any time at the sole discretion of the rating organization.

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.

Statutory Surplus

The table below sets forth statutory surplus for the Company’s insurance companies. The statutory surplus amount as of December 31, 2011 in the table below is based on actual statutory filings with the applicable regulatory authorities. The statutory surplus amount as of September 30, 2012 is an estimate, as the third quarter 2012 statutory filings have not yet been made.



	September 30, 2012		December 31, 2011
U.S. life insurance subsidiaries, includes domestic captive insurance subsidiaries	$	7,567	$	7,388
Property and casualty insurance subsidiaries	7,746		7,412
Total	$	15,313	$	14,800

Total statutory capital and surplus for the U.S. life insurance subsidiaries, including domestic captive insurance subsidiaries, increased by $179 primarily due to deferred tax impact of $143, capital contributions of $30, and statutory income from non-variable annuity business of $19 partially offset by other surplus changes of $14 and variable annuity surplus impacts of $13.

Total statutory capital and surplus for property and casualty increased by $334, primarily due to net income of $611, unrealized gains of $253, additional deferred tax assets of $36, capital contributions of $9 and an increase of statutory admitted assets of $25, partially offset by dividends to HFSG Holding Company of $600. Both net income and dividends are net of interest payments and dividends, respectively, on an intercompany note between Hartford Holdings, Inc. and Hartford Fire Insurance Company.

The Company also holds regulatory capital and surplus for its operations in Japan. Under the accounting practices and procedures governed by Japanese regulatory authorities, the Company’s statutory capital and surplus was $1.3 billion as of September 30, 2012 and December 31, 2011, respectively. The statutory surplus amount as of September 30, 2012 is an estimate, as the September 30, 2012 statutory filings have not yet been made.

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Contingencies

Legal Proceedings – For a discussion regarding contingencies related to The Hartford’s legal proceedings, please see the information contained under “Litigation” in Note 9 of the Notes to Condensed Consolidated Financial Statements and Part II, Item 1 Legal Proceedings, which are incorporated herein by reference.

Legislative Developments

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was enacted on July 21, 2010, mandating changes to the regulation of the financial services industry. The Dodd-Frank Act may affect our operations and governance in ways that could adversely affect our financial condition and results of operations.

In particular, the Dodd-Frank Act vests a newly created Financial Services Oversight Council ("FSOC") with the power to designate “systemically important” financial institutions, which will be subject to special regulatory supervision and other provisions intended to prevent, or mitigate the impact of, future disruptions in the U.S. financial system. Systemically important institutions are limited to large bank holding companies and nonbank financial companies that are so important that their potential failure could “pose a threat to the financial stability of the United States.” The FSOC finalized its rule for designating systemically important nonbank financial institutions in April 2012, but has not yet indicated when it will begin its consideration of such companies. Based on its most current financial data, The Hartford does not meet the initial quantitative metrics that will be used to determine which nonbank companies merit consideration. The FSOC has indicated it will review on a quarterly basis whether non-bank financial institutions meet the metrics for further review.

If we are designated as a systemically important institution, The Hartford could be subject to higher capital requirements and additional regulatory oversight imposed by The Federal Reserve, as well as to post-event assessments imposed by the Federal Deposit Insurance Corporation (“FDIC”) to recoup the costs associated with the orderly liquidation of other systemically important institutions in the event one or more such institutions fails. Further, the FDIC is authorized to petition a state court to commence an insolvency proceeding to liquidate an insurance company that fails in the event the insurer’s state regulator fails to act. In addition, the Dodd-Frank Act may restrict us from sponsoring and investing in private equity and hedge funds, which would limit our discretion in managing our general account.

Other provisions in the Dodd-Frank Act that may impact us include: the requirement for central clearing of, and/or new margin and capital requirements on, derivatives transactions, which we expect will increase the costs of our hedging program; a new “Federal Insurance Office” within Treasury; discretionary authority for the SEC to impose a harmonized standard of care for investment advisers and broker-dealers who provide personalized advice about securities to retail customers; possible adverse impact on the pricing and liquidity of the securities in which we invest resulting from the proprietary trading and market making limitation of the Volcker Rule; possible prohibition of certain asset-backed securities transactions that could adversely impact our ability to offer insurance-linked securities; and enhancements to corporate governance, especially regarding risk management.

FY 2013, Budget of the United States Government

On February 13, 2012, the Obama Administration released its “FY 2013, Budget of the United States Government” (the “Budget”). Although the Administration has not released proposed statutory language, the Budget includes proposals that if enacted, would affect the taxation of life insurance companies and certain life insurance products. In particular, the proposals would change the method used to determine the amount of dividend income received by a life insurance company on assets held in separate accounts used to support products, including variable life insurance and variable annuity contracts, which are eligible for the dividends received deduction (“DRD”). The DRD reduces the amount of dividend income subject to tax and is a significant component of the difference between the Company’s actual tax expense and expected amount determined using the federal statutory tax rate of 35%. If this proposal were enacted, the Company’s actual tax expense could increase, reducing earnings.

IMPACT OF NEW ACCOUNTING STANDARDS

For a discussion of accounting standards, see Note 1 of the Notes to Consolidated Financial Statements included in The Hartford’s 2011 Form 10-K Annual Report and Note 1 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information contained in the Financial Risk Management section of Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

Item 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

The Company’s principal executive officer and its principal financial officer, based on their evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) have concluded that the Company’s disclosure controls and procedures are effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of September 30, 2012.

Changes in internal control over financial reporting

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s current fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Litigation

Asbestos and Environmental Claims – As discussed in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Property and Casualty Insurance Product Reserves, Net of Reinsurance - Property & Casualty Other Operations Claims, The Hartford continues to receive asbestos and environmental claims that involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels and reinsurance coverages, as well as the methodologies it uses to estimate its exposures. Because of the significant uncertainties that limit the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses, particularly those related to asbestos, the ultimate liabilities may exceed the currently recorded reserves. Any such additional liability cannot be reasonably estimated now but could be material to The Hartford’s consolidated operating results, financial condition and liquidity.

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Item 1A. RISK FACTORS

Investing in The Hartford involves risk. In deciding whether to invest in The Hartford, you should carefully consider the risk factors disclosed in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 and in Item 1A of Part II of the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012 and June 30, 2012, any of which could have a significant or material adverse effect on the business, financial condition, operating results or liquidity of The Hartford. This information should be considered carefully together with the other information contained in this report and the other reports and materials filed by The Hartford with the SEC.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer

The following table summarizes the Company’s repurchases of its common stock for the three months ended September 30, 2012:



Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
						(in millions)
July 1, 2012-July 31, 2012	73	[1]	$	17.82	—	$	—
August 1, 2012-August 31, 2012	2,524	[1]	$	17.01	—	$	—
September 1, 2012-September 30, 2012	203	[1]	$	17.52	—	$	—
Total	2,800		$	17.07	—	N/A


[1]	Primarily represents shares acquired from employees of the Company for tax withholding purposes in connection with the Company’s stock compensation plans.

Item 6. EXHIBITS



See Exhibits Index on page	138.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



		The Hartford Financial Services Group, Inc.
		(Registrant)

Date:	November 1, 2012	/s/ Robert H. Bateman
		Robert H. Bateman
		Senior Vice President and Controller
		(Chief accounting officer and duly authorized signatory)

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.

FOR THE QUARTER ENDED SEPTEMBER 30, 2012

FORM 10-Q

EXHIBITS INDEX



Exhibit No.		Description
2.01		Purchase and Sale Agreement by and among Massachusetts Mutual Life Insurance Company, Hartford Life, Inc. and The Hartford Financial Services Group, Inc. dated as of September 4, 2012.**

2.02		Purchase and Sale Agreement by and among Hartford Life, Inc., Prudential Financial, Inc. and The Hartford Financial Services Group, Inc. dated as of September 27, 2012.**

15.01		Deloitte & Touche LLP Letter of Awareness.**

31.01		Certification of Liam E. McGee pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**

31.02		Certification of Christopher J. Swift pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**

32.01		Certification of Liam E. McGee pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

32.02		Certification of Christopher J. Swift pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

101.INS		XBRL Instance Document.**

101.SCH		XBRL Taxonomy Extension Schema.**

101.CAL		XBRL Taxonomy Extension Calculation Linkbase.**

101.DEF		XBRL Taxonomy Extension Definition Linkbase.**

101.LAB		XBRL Taxonomy Extension Label Linkbase.**

101.PRE		XBRL Taxonomy Extension Presentation Linkbase.**

*		Management contract, compensatory plan or arrangement.

**		Filed with the Securities and Exchange Commission as an exhibit to this report.

138