UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number: 001-13958

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)

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

One Hartford Plaza, Hartford, Connecticut (Address of principal executive offices)		06155 (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of April 26, 2011 there were outstanding 445,273,635 shares of Common Stock, $0.01 par value per share, of the registrant.

 

 

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

TABLE OF CONTENTS

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 Months Ended March 31, 2011 and 2010			6
		Condensed Consolidated Balance Sheets — As of March 31, 2011 and December 31, 2010			7
		Condensed Consolidated Statements of Changes in Stockholders’ Equity — For the Three Months Ended March 31, 2011 and 2010			8
		Condensed Consolidated Statements of Comprehensive Income — For the Three Months Ended March 31, 2011 and 2010			9
		Condensed Consolidated Statements of Cash Flows — For the Three Months Ended March 31, 2011 and 2010			10
		Notes to Condensed Consolidated Financial Statements			11
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			52
3.		Quantitative and Qualitative Disclosures About Market Risk			104
4.		Controls and Procedures			104
		Part II. OTHER INFORMATION
1.		Legal Proceedings			105
1A.		Risk Factors			107
2.		Unregistered Sales of Equity Securities and Use of Proceeds			107
6.		Exhibits			107
		Signature			108
		Exhibits Index			109
Exhibit 15.01
Exhibit 31.01
Exhibit 31.02
Exhibit 32.01
Exhibit 32.02
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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 2010 Form 10-K Annual Report. 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 and other developments on financial, commodity and credit markets and consumer spending and investment;

•

the success of our initiatives relating to the realignment of our business in 2010 and plans to improve the profitability and long-term growth prospects of our key divisions, including through opportunistic acquisitions or divestitures, 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, foreign exchange rates, and implied volatility levels, as well as continuing uncertainty in key sectors such as the global real estate market;

•

volatility in our earnings 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;

•

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;

•

the possibility of unfavorable loss development;

•

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

•

the restrictions, oversight, costs and other consequences of being a savings and loan holding company, including from the supervision, regulation and examination by the Office of Thrift Supervision (the “OTS”), and in the future, as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), The Federal Reserve as the Company’s regulator and the Office of the Controller of the Currency as regulator of Federal Trust Bank;

•

the cost and other effects of increased regulation as a result of the enactment of the Dodd-Frank Act, which will, among other effects, vest a newly created Financial Services Oversight Council with the power to designate “systemically important” institutions, require central clearing of, and/or impose new margin and capital requirements on, derivatives transactions, and may affect our ability as a savings and loan holding company to manage our general account by limiting or eliminating investments in certain private equity and hedge funds;

•

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;

•

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

•

the uncertain effects of emerging claim and coverage issues;

•

regulatory limitations on the ability of the Company and certain of its subsidiaries to declare and pay dividends;

•

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 or other unanticipated events;

•

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

•

the potential for difficulties arising from outsourcing relationships;

•

the impact of potential changes in federal or state tax laws, including changes affecting the availability of the separate account dividend received deduction;

•

the impact of potential changes in accounting principles and related financial reporting requirements;

•

the Company’s ability to protect its intellectual property and defend against claims of infringement;

•

unfavorable judicial or legislative developments; 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.

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 March 31, 2011, and the related condensed consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for the three-month periods ended March 31, 2011 and 2010. 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, 2010, and the related consolidated statements of operations, changes in equity, comprehensive income (loss), and cash flows for the year then ended (not presented herein); and in our report dated February 25, 2011 (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, for other-than-temporary impairments as required by accounting guidance adopted in 2009, and for the fair value measurement of financial instruments as required by accounting guidance adopted in 2008), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

DELOITTE & TOUCHE LLP
Hartford, Connecticut
May 2, 2011

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		Three Months Ended
		March 31,
(In millions, except for per share data)		2011				2010
		(Unaudited)
Revenues
Earned premiums		$	3,519			$	3,527
Fee income			1,209				1,180
Net investment income:
Securities available-for-sale and other			1,116				1,059
Equity securities, trading			803				701
Total net investment income			1,919				1,760
Net realized capital losses:
Total other-than-temporary impairment (“OTTI”) losses			(119	)			(340	)
OTTI losses recognized in other comprehensive income			64				188
Net OTTI losses recognized in earnings			(55	)			(152	)
Net realized capital losses, excluding net OTTI losses recognized in earnings			(348	)			(122	)
Total net realized capital losses			(403	)			(274	)
Other revenues			64				64
Total revenues			6,308				6,257
Benefits, losses and expenses
Benefits, losses and loss adjustment expenses			3,178				3,133
Benefits, losses and loss adjustment expenses — returns credited on international variable annuities			803				701
Amortization of deferred policy acquisition costs and present value of future profits			664				647
Insurance operating costs and other expenses			1,125				1,121
Interest expense			128				120
Total benefits, losses and expenses			5,898				5,722
Income from continuing operations before income taxes			410				535
Income tax expense			59				216
Income from continuing operations, net of tax			351				319
Income from discontinued operations, net of tax			160				—
Net income		$	511			$	319
Preferred stock dividends and accretion of discount			10				483
Net income (loss) available to common shareholders		$	501			$	(164	)
Income (loss) from continuing operations, net of tax, available to common shareholders per common share
Basic		$	0.77			$	(0.42	)
Diluted		$	0.69			$	(0.42	)
Net income (loss) available to common shareholders per common share
Basic		$	1.13			$	(0.42	)
Diluted		$	1.01			$	(0.42	)
Cash dividends declared per common share		$	0.10			$	0.05

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

Condensed Consolidated Balance Sheets

		March 31,				December 31,
(In millions, except for share and per share data)		2011				2010
		(Unaudited)
Assets
Investments
Fixed maturities, available-for-sale, at fair value (amortized cost of $78,512 and $78,419) (includes variable interest entity assets, at fair value, of $334 and $406)		$	78,268			$	77,820
Fixed maturities, at fair value using the fair value option (includes variable interest entity assets of $329 and $323)			1,230				649
Equity securities, trading, at fair value (cost of $32,615 and $33,899)			32,339				32,820
Equity securities, available-for-sale, at fair value (cost of $951 and $1,013)			993				973
Mortgage loans (net of allowances for loan losses of $153 and $155)			4,736				4,489
Policy loans, at outstanding balance			2,181				2,181
Limited partnerships and other alternative investments (includes variable interest entity assets of $9 and $14)			1,972				1,918
Other investments			640				1,617
Short-term investments			7,330				8,528
Total investments			129,689				130,995
Cash			2,317				2,062
Premiums receivable and agents’ balances, net			3,396				3,273
Reinsurance recoverables, net			4,981				4,862
Deferred policy acquisition costs and present value of future profits			9,843				9,857
Deferred income taxes, net			3,401				3,725
Goodwill			1,051				1,051
Property and equipment, net			1,132				1,150
Other assets			2,685				1,629
Separate account assets			164,043				159,742
Total assets		$	322,538			$	318,346
Liabilities
Reserve for future policy benefits and unpaid losses and loss adjustment expenses		$	39,420			$	39,598
Other policyholder funds and benefits payable			43,891				44,550
Other policyholder funds and benefits payable — international variable annuities			32,297				32,793
Unearned premiums			5,314				5,176
Short-term debt			400				400
Long-term debt			6,210				6,207
Consumer notes			382				382
Other liabilities (includes variable interest entity liabilities of $429 and $394)			9,582				9,187
Separate account liabilities			164,043				159,742
Total liabilities			301,539				298,035
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, 469,754,771 shares issued			5				5
Additional paid-in capital			10,391				10,448
Retained earnings			12,533				12,077
Treasury stock, at cost — 24,646,651 and 25,205,283 shares			(1,722	)			(1,774	)
Accumulated other comprehensive loss, net of tax			(764	)			(1,001	)
Total stockholders’ equity			20,999				20,311
Total liabilities and stockholders’ equity		$	322,538			$	318,346

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		Three Months Ended
		March 31,
(In millions, except for share data)		2011				2010
		(Unaudited)
Preferred Stock, at beginning of period		$	556			$	2,960
Issuance of mandatory convertible preferred stock			—				556
Accelerated accretion of discount from redemption of preferred stock issued to U.S. Treasury			—				440
Redemption of preferred stock to the U.S. Treasury			—				(3,400	)
Preferred Stock, at end of period			556				556
Common Stock			5				5
Additional Paid-in Capital, at beginning of period			10,448				8,985
Issuance of shares under public offering			—				1,599
Issuance of shares under incentive and stock compensation plans			(47	)			(103	)
Tax expense on employee stock options and awards			(10	)			(6	)
Additional Paid-in Capital, at end of period			10,391				10,475
Retained Earnings, at beginning of period, before cumulative effect of accounting change, net of tax			12,077				11,164
Cumulative effect of accounting change, net of tax			—				26
Retained Earnings, at beginning of period, as adjusted			12,077				11,190
Net income (loss)			511				319
Accelerated accretion of discount from redemption of preferred stock issued to U.S. Treasury			—				(440	)
Dividends on preferred stock			(10	)			(43	)
Dividends declared on common stock			(45	)			(20	)
Retained Earnings, at end of period			12,533				11,006
Treasury Stock, at Cost, at beginning of period			(1,774	)			(1,936	)
Issuance of shares under incentive and stock compensation plans from treasury stock			57				114
Return of shares under incentive and stock compensation plans to treasury stock			(5	)			(3	)
Treasury Stock, at Cost, at end of period			(1,722	)			(1,825	)
Accumulated Other Comprehensive Loss, Net of Tax, at beginning of period			(1,001	)			(3,312	)
Total other comprehensive income			237				935
Accumulated Other Comprehensive Loss, Net of Tax, at end of period			(764	)			(2,377	)
Noncontrolling Interest, at beginning of period			—				29
Recognition of noncontrolling interest in other liabilities			—				(29	)
Noncontrolling Interest, at end of period			—				—
Total Stockholders’ Equity		$	20,999			$	17,840
Preferred Shares Outstanding, at beginning of period (in thousands)			575				3,400
Redemption of shares issued to the U.S. Treasury			—				(3,400	)
Issuance of mandatory convertible preferred shares			—				575
Preferred Shares Outstanding, at end of period			575				575
Common Shares Outstanding, at beginning of period (in thousands)			444,549				383,007
Issuance of shares under public offering			—				59,590
Issuance of shares under incentive and stock compensation plans			727				1,455
Return of shares under incentive and stock compensation plans and other to treasury stock			(168	)			(125	)
Common Shares Outstanding, at end of period			445,108				443,927

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		Three Months Ended
		March 31,
(In millions)		2011				2010
		(Unaudited)
Comprehensive Income
Net income		$	511			$	319
Other comprehensive income (loss)
Change in net unrealized gain / loss on securities			310				859
Change in OTTI losses recognized in other comprehensive income			5				32
Change in net gain (loss) on cash-flow hedging instruments			(68	)			66
Change in foreign currency translation adjustments			(32	)			(36	)
Amortization of prior service cost and actuarial net losses included in net periodic benefit costs			22				14
Total other comprehensive income			237				935
Total comprehensive income		$	748			$	1,254

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

Condensed Consolidated Statements of Cash Flows

		Three Months Ended
		March 31,
(In millions)		2011				2010
		(Unaudited)
Operating Activities
Net income		$	511			$	319
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of deferred policy acquisition costs and present value of future profits			664				651
Additions to deferred policy acquisition costs and present value of future profits			(653	)			(680	)
Change in reserve for future policy benefits and unpaid losses and loss adjustment expenses and unearned premiums			(39	)			33
Change in reinsurance recoverables			59				45
Change in receivables and other assets			(49	)			(180	)
Change in payables and accruals			(23	)			(109	)
Change in accrued and deferred income taxes			67				128
Net realized capital losses			176				276
Net disbursements from investment contracts related to policyholder funds — international variable annuities			(496	)			(257	)
Net decrease in equity securities, trading			481				268
Depreciation and amortization			128				144
Other operating activities, net			(352	)			(150	)
Net cash provided by operating activities			474				488
Investing Activities
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale			8,860				11,534
Equity securities, available-for-sale			24				108
Mortgage loans			70				726
Partnerships			58				145
Payments for the purchase of:
Fixed maturities, available-for-sale			(7,588	)			(11,973	)
Fixed maturities, fair value option			(531	)			—
Equity securities, available-for-sale			(25	)			(15	)
Mortgage loans			(326	)			(18	)
Partnerships			(55	)			(72	)
Proceeds from business sold			278				—
Derivatives, net			(465	)			(252	)
Change in policy loans, net			—				(3	)
Change in payables for collateral under securities lending, net			—				(23	)
Other investing activities, net			(46	)			(58	)
Net cash provided by investing activities			254				99
Financing Activities
Deposits and other additions to investment and universal life-type contracts			3,338				5,468
Withdrawals and other deductions from investment and universal life-type contracts			(6,174	)			(5,614	)
Net transfers from separate accounts related to investment and universal life-type contracts			2,418				124
Proceeds from issuance of long-term debt			—				1,090
Payments on capital lease obligations			—				(68	)
Repayments at maturity or settlement of consumer notes			—				(302	)
Net proceeds from issuance of mandatory convertible preferred stock			—				556
Net proceeds from issuance of common shares under public offering			—				1,600
Redemption of preferred stock issued to the U.S. Treasury			—				(3,400	)
Proceeds from net issuance of shares under incentive and stock compensation plans and excess tax benefit			(2	)			8
Dividends paid on preferred stock			(11	)			(64	)
Dividends paid on common stock			(19	)			(20	)
Changes in bank deposits and payments on bank advances			(1	)			(30	)
Net cash used for financing activities			(451	)			(652	)
Foreign exchange rate effect on cash			(22	)			2
Net increase (decrease) in cash			255				(63	)
Cash — beginning of period			2,062				2,142
Cash — end of period		$	2,317			$	2,079
Supplemental Disclosure of Cash Flow Information
Income taxes paid		$	26			$	87
Interest paid		$	89			$	61

See Notes to Condensed Consolidated Financial Statements

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

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” or the “Company”). Also, The Hartford continues to administer business previously sold in Japan and the U.K.

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.

The accompanying Condensed Consolidated Financial Statements and Notes as of March 31, 2011, and for the three months ended March 31, 2011 and 2010 are unaudited. These financial statements reflect all adjustments (consisting only of normal accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. These Condensed Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in The Hartford’s 2010 Form 10-K Annual Report. The results of operations for the interim periods should not be considered indicative of the results to be expected for the full year.

Consolidation

The Condensed Consolidated Financial Statements include the accounts of The Hartford Financial Services Group, Inc., companies in which the Company directly or indirectly has a controlling financial interest and those variable interest entities 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 variable interest entities see Note 5 of the Notes to Condensed Consolidated Financial Statements.

Discontinued Operations

For first quarter 2011 reporting, the Company is presenting the operations of certain subsidiaries that meet the criteria for reporting as discontinued operations. Income statement 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.

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 2010 Form 10-K Annual Report, which should be read in conjunction with these accompanying Condensed Consolidated Financial Statements.

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
		March 31,
		2011				2010
Tax expense at U.S. Federal statutory rate		$	144			$	187
Tax-exempt interest			(37	)			(39	)
Dividends received deduction			(37	)			(41	)
Valuation allowance			(2	)			86
Other			(9	)			23
Income tax expense		$	59			$	216

The separate account dividends received deduction (“DRD”) is estimated for the current year using information from the prior year-end, adjusted for current year equity market performance and other appropriate factors, including estimated levels of corporate dividend payments 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 months ended March 31, 2011, remaining at $48 as of March 31, 2011. This entire amount, if it were recognized, would affect the effective tax rate for the applicable periods.

The Company’s federal income tax returns are routinely audited by the Internal Revenue Service (“IRS”). Audits have been concluded for all years through 2006. The audit of the years 2007 - 2009 commenced during 2010 and is expected to conclude by the end of 2012. In addition, the Company is working with the IRS on a possible settlement of a DRD issue related to prior periods which, if settled, may result in the booking of tax benefits. Such benefits are not expected to be material to the Condensed Consolidated Statement of Operations.

The Company has recorded a deferred tax asset valuation allowance that is adequate to reduce the total deferred tax asset to an amount that will more likely than not be realized. The deferred tax asset valuation allowance was $171 as of March 31, 2011 and was $173 as of December 31, 2010. In assessing the need for a valuation allowance, management considered future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and taxable income in prior carry back years, as well as tax planning strategies that include holding a portion of debt securities with market value losses until recovery, selling appreciated securities to offset capital losses, business considerations such as asset-liability matching, and sales of certain corporate assets. Such tax planning strategies are viewed by management as prudent and feasible and will be implemented if necessary to realize the deferred tax asset. Future economic conditions and debt market volatility, including increases in interest rates, can adversely impact the Company’s tax planning strategies and in particular the Company’s ability to utilize tax benefits on previously recognized realized capital losses.

Also, for the three months ended March 31, 2010, the Company incurred a charge of $19 related to a decrease in deferred tax assets as a result of federal legislation that will reduce the tax deduction available to the Company related to retiree health care costs beginning in 2013.

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 (loss) 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
		March 31,
(In millions, except for per share data)		2011				2010
Earnings
Income from continuing operations
Income from continuing operations, net of tax		$	351			$	319
Less: Preferred stock dividends and accretion of discount			10				483
Income (loss) from continuing operations, net of tax, available to common shareholders			341				(164	)
Add: Dilutive effect of preferred stock dividends			10				—
Income (loss) from continuing operations, net of tax, available to common shareholders and assumed conversion of preferred shares		$	351			$	(164	)
Income (loss) from discontinued operations, net of tax		$	160			$	—
Net income (loss)
Net income		$	511			$	319
Less: Preferred stock dividends and accretion of discount			10				483
Net income (loss) available to common shareholders			501				(164	)
Add: Dilutive effect of preferred stock dividends			10				—
Net income (loss) available to common shareholders and assumed conversion of preferred shares		$	511			$	(164	)
Shares
Weighted average common shares outstanding, basic			444.6				393.7
Dilutive effect of warrants			41.1				—
Dilutive effect of stock compensation plans			1.8				—
Dilutive effect of mandatory convertible preferred shares			20.7				—
Weighted average shares outstanding and dilutive potential common shares			508.2				393.7
Earnings (loss) per common share
Basic
Income (loss) from continuing operations, net of tax, available to common shareholders		$	0.77			$	(0.42	)
Income (loss) from discontinued operations, net of tax			0.36				—
Net income (loss) available to common shareholders		$	1.13			$	(0.42	)
Diluted
Income (loss) from continuing operations, net of tax, available to common shareholders		$	0.69			$	(0.42	)
Income (loss) from discontinued operations, net of tax			0.32				—
Net income (loss) available to common shareholders		$	1.01			$	(0.42	)

The declaration of a quarterly common stock dividend of $0.10 during the first quarter of 2011 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 to $9.773 from $9.790.

As a result of the net loss available to common shareholders for the three months ended March 31, 2010, the Company is required to use basic weighted average common shares outstanding in the calculation of the three months ended March 31, 2010 diluted loss per share, since the inclusion of 33.6 million shares for warrants, 1.2 million shares for stock compensation plans and 3.4 million shares for mandatory convertible preferred shares, along with the related dividend adjustment, would have been antidilutive to the earnings per share calculation. In the absence of the net loss available to common shareholders and 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 431.9 million.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Segment Information

The Hartford is organized into three customer-oriented divisions, Commercial Markets, Consumer Markets and Wealth Management, conducting business principally in seven reporting segments. The Company’s seven reporting segments, as well as the Corporate and Other category, 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, specialty casualty coverages and third-party administrator services.

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

Global Annuity

Global Annuity offers individual variable, fixed market value adjusted (“fixed MVA”) and single premium immediate annuities in the U.S., a range of products to institutional investors, including but not limited to, stable value contracts, and administers investments, retirement savings and other insurance and savings products to individuals and groups outside the U.S., primarily in Japan and Europe.

Life Insurance

Life Insurance sells a variety of life insurance products, including variable universal life, universal life, and term life, as well as private placement life insurance (“PPLI”) owned by corporations and high net worth individuals.

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 fund supporting insurance products issued by The Hartford.

Corporate and Other

The Hartford includes in Corporate and Other 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. Also included in Corporate and Other is 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, collectively referred to as Other Operations.

Financial Measures and Other Segment Information

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

		Three Months Ended
		March 31,
		2011				2010
Property & Casualty Commercial		$	327			$	206
Group Benefits			11				51
Consumer Markets			110				56
Global Annuity			50				80
Life Insurance			35				24
Retirement Plans			15				(6	)
Mutual Funds			28				26
Corporate and Other			(65	)			(118	)
Net income		$	511			$	319

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 and Other category.

		Three Months Ended
		March 31,
		2011				2010
Earned premiums, fees, and other considerations
Property & Casualty Commercial
Workers’ compensation		$	665			$	575
Property			135				140
Automobile			146				152
Package business			283				279
Liability			135				139
Fidelity and surety			55				56
Professional liability			79				83
Total Property & Casualty Commercial			1,498				1,424
Group Benefits
Group disability			477				531
Group life and accident			517				512
Other			50				59
Total Group Benefits			1,044				1,102
Consumer Markets
Automobile			672				713
Homeowners			284				283
Total Consumer Markets [1]			956				996
Global Annuity
Variable annuity			639				600
Fixed / MVA and other annuity			10				12
Institutional investment products			1				13
Total Global Annuity			650				625
Life Insurance
Variable life			90				102
Universal life			106				105
Term / other life			13				13
PPLI			44				40
Total Life Insurance			253				260
Retirement Plans
401(k)			84				76
Government plans			13				11
Total Retirement Plans			97				87
Mutual Funds
Non-proprietary			162				151
Proprietary			16				16
Total Mutual Funds			178				167
Corporate and Other			52				46
Total earned premiums, fees, and other considerations			4,728				4,707
Net investment income:
Securities available-for-sale and other			1,116				1,059
Equity securities, trading			803				701
Total net investment income			1,919				1,760
Net realized capital losses			(403	)			(274	)
Other revenues			64				64
Total revenues		$	6,308			$	6,257

[1]		For the three months ended March 31, 2011 and 2010, AARP members accounted for earned premiums of $698 and $715, respectively.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits

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 and Note 4a apply 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, including futures and certain option contracts.
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. Also included in the Level 2 category are exchange traded equity securities, investment grade private placement securities and derivative instruments that are priced using models with significant observable market inputs, including interest rate, foreign currency and certain credit default swap contracts and have no significant unobservable market inputs.
Level 3		Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). Level 3 securities include less liquid securities such as lower quality asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”), commercial real estate (“CRE”) collateralized debt obligations (“CDOs”), residential mortgage-backed securities (“RMBS”) primarily backed by below-prime loans and below investment grade private placement securities. Also included in Level 3 are guaranteed product embedded and reinsurance derivatives and other complex derivative securities, including customized guaranteed minimum withdrawal benefit (“GMWB”) hedging derivatives (see Note 4a for further information on GMWB product related financial instruments), equity derivatives, long dated derivatives, swaps with optionality, certain complex credit derivatives and certain other liabilities. Because Level 3 fair values, by their nature, contain 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. Transfers between Level 1 and Level 2 were not material for the three months ended March 31, 2011. In most cases, both observable (e.g., changes in interest rates) and unobservable (e.g., changes in risk assumptions) inputs are used in the determination of fair values that the Company has classified within Level 3. Consequently, these values and the related gains and losses are based upon both observable and unobservable inputs. The Company’s fixed maturities included in Level 3 are classified as such as they are primarily priced by independent brokers and/or within illiquid markets.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits (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, excluding those related to the Company’s living benefits and associated hedging programs, which are reported in Note 4a.

		March 31, 2011
						Quoted Prices in
						Active Markets				Significant				Significant
						for Identical				Observable				Unobservable
						Assets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
ABS		$	3,150			$	—			$	2,704			$	446
CDOs			2,674				—				—				2,674
CMBS			7,709				—				6,968				741
Corporate			40,913				—				38,817				2,096
Foreign government/government agencies			1,802				—				1,739				63
States, municipalities and political subdivisions (“Municipal”)			12,327				—				12,051				276
RMBS			5,014				—				3,890				1,124
U.S. Treasuries			4,679				367				4,312				—
Total fixed maturities, AFS			78,268				367				70,481				7,420
Fixed maturities, FVO			1,230				—				651				579
Equity securities, trading			32,339				2,283				30,056				—
Equity securities, AFS			993				318				595				80
Derivative assets
Credit derivatives			(7	)			—				(14	)			7
Equity derivatives			3				—				—				3
Foreign exchange derivatives			324				—				324				—
Interest rate derivatives			(7	)			—				(57	)			50
Other derivative contracts			31				—				—				31
Total derivative assets [1]			344				—				253				91
Short-term investments			7,330				468				6,862				—
Separate account assets [2]			156,193				119,944				35,042				1,207
Total assets accounted for at fair value on a recurring basis		$	276,697			$	123,380			$	143,940			$	9,377
Percentage of level to total			100	%			45	%			52	%			3	%
Liabilities accounted for at fair value on a recurring basis
Other policyholder funds and benefits payable
Equity linked notes		$	(10	)		$	—			$	—			$	(10	)
Derivative liabilities
Credit derivatives			(463	)			—				(74	)			(389	)
Equity derivatives			2				—				—				2
Foreign exchange derivatives			217				—				217				—
Interest rate derivatives			(337	)			—				(296	)			(41	)
Total derivative liabilities [3]			(581	)			—				(153	)			(428	)
Other liabilities			(51	)			—				—				(51	)
Consumer notes [4]			(5	)			—				—				(5	)
Total liabilities accounted for at fair value on a recurring basis		$	(647	)		$	—			$	(153	)		$	(494	)

[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 March 31, 2011, $195 of a cash collateral liability was netted against the derivative asset value in the Condensed Consolidated Balance Sheet and is excluded from the table above. See footnote 3 below for derivative liabilities.
[2]		As of March 31, 2011, excludes approximately $8 billion of investment sales receivable that are not subject to fair value accounting.
[3]		Includes over-the-counter derivative instruments in a net negative market value 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.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits (continued)

		December 31, 2010
						Quoted Prices in
						Active Markets				Significant				Significant
						for Identical				Observable				Unobservable
						Assets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
ABS		$	2,889			$	—			$	2,412			$	477
CDOs			2,611				—				30				2,581
CMBS			7,917				—				7,228				689
Corporate			39,884				—				37,755				2,129
Foreign government/government agencies			1,683				—				1,627				56
Municipal			12,124				—				11,852				272
RMBS			5,683				—				4,398				1,285
U.S. Treasuries			5,029				434				4,595				—
Total fixed maturities, AFS			77,820				434				69,897				7,489
Fixed maturities, FVO			649				—				127				522
Equity securities, trading			32,820				2,279				30,541				—
Equity securities, AFS			973				298				521				154
Derivative assets
Credit derivatives			3				—				(18	)			21
Equity derivatives			2				—				—				2
Foreign exchange derivatives			868				—				868				—
Interest rate derivatives			(106	)			—				(70	)			(36	)
Other derivative contracts			32				—				—				32
Total derivative assets [1]			799				—				780				19
Short-term investments			8,528				541				7,987				—
Separate account assets [2]			153,727				116,717				35,763				1,247
Total assets accounted for at fair value on a recurring basis		$	275,316			$	120,269			$	145,616			$	9,431
Percentage of level to total			100	%			44	%			53	%			3	%
Liabilities accounted for at fair value on a recurring basis
Other policyholder funds and benefits payable
Equity linked notes		$	(9	)		$	—			$	—			$	(9	)
Derivative liabilities
Credit derivatives			(482	)			—				(71	)			(411	)
Equity derivatives			2				—				—				2
Foreign exchange derivatives			(34	)			—				(34	)			—
Interest rate derivatives			(266	)			—				(249	)			(17	)
Total derivative liabilities [3]			(780	)			—				(354	)			(426	)
Other liabilities			(37	)			—				—				(37	)
Consumer notes [4]			(5	)			—				—				(5	)
Total liabilities accounted for at fair value on a recurring basis		$	(831	)		$	—			$	(354	)		$	(477	)

[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 December 31, 2010, $968 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]		As of December 31, 2010, excludes approximately $6 billion of investment sales receivable that are not subject to fair value accounting.
[3]		Includes over-the-counter derivative instruments in a net negative market value 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.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits (continued)

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.

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

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits (continued)

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.

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 March 31, 2011 and December 31, 2010, 98% and 97%, respectively, of derivatives, based upon notional values, were priced by valuation models or quoted market prices. The remaining derivatives were priced by broker quotations. The Company performs a monthly analysis on derivative valuations which includes both quantitative and qualitative analysis. Examples of procedures performed include, but are not limited to, review of pricing statistics and trends, back testing recent trades, analyzing the impacts of changes in the market environment, and review of changes in market value for each derivative including those derivatives priced by brokers.

The Company utilizes derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instrument may not be classified with the same fair value hierarchy level as the associated assets and liabilities. Therefore the realized and unrealized gains and losses on derivatives reported in Level 3 may not reflect the offsetting impact of the realized and unrealized gains and losses of the associated assets and liabilities.

Valuation Techniques and Inputs for Investments

Generally, the Company determines the estimated fair value of its AFS securities, 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 — 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 — Significant inputs primarily include the swap yield curve and credit curves.
	•		Foreign exchange derivatives — Significant inputs primarily include the swap yield curve, currency spot and forward rates, and cross currency basis curves.
	•		Interest rate derivatives — Significant input is primarily the swap yield curve.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits (continued)

Level 3		Most of the Company’s securities classified as Level 3 are valued based on brokers’ prices. Certain long-dated securities are priced based on third party pricing services, including municipal securities and foreign government/government agencies, as well as bank loans 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 may include the following:

•

Credit derivatives- Significant unobservable inputs may include credit correlation and swap yield curve and credit curve extrapolation beyond observable limits.

•

Equity derivatives — Significant unobservable inputs may include equity volatility.

•

Interest rate contracts — Significant unobservable inputs may include swap yield curve extrapolation beyond observable limits and interest rate volatility.

Separate Account Assets

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

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Fair Value Measurements — Financial Instruments Excluding Guaranteed Living Benefits (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 months ending March 31, 2011 and 2010, for the financial instruments classified as Level 3, excluding those related to the Company’s living benefits and associated hedging programs, which are reported in Note 4a.

For the three months ended March 31, 2011

		Fixed Maturities, AFS
																		Foreign												Total Fixed
																		govt./govt.												Maturities,
Assets		ABS				CDOs				CMBS				Corporate				agencies				Municipal				RMBS				AFS
Fair value as of January 1, 2011		$	477			$	2,581			$	689			$	2,129			$	56			$	272			$	1,285			$	7,489
Total realized/unrealized gains (losses)
Included in net income [1]			(5	)			(15	)			(2	)			(22	)			—				—				(9	)			(53	)
Included in OCI [2]			20				113				113				(8	)			—				—				41				279
Purchases			—				—				—				17				2				—				—				19
Settlements			(11	)			(35	)			(10	)			(31	)			(1	)			—				(34	)			(122	)
Sales			—				—				(122	)			(73	)			(2	)			—				(16	)			(213	)
Transfers into Level 3 [3]			49				30				73				195				11				4				—				362
Transfers out of Level 3 [3]			(84	)			—				—				(111	)			(3	)			—				(143	)			(341	)
Fair value as of March 31, 2011		$	446			$	2,674			$	741			$	2,096			$	63			$	276			$	1,124			$	7,420
Changes in unrealized gains (losses) included in net income related to financial instruments still held at March 31, 2011 [1]		$	(5	)		$	(15	)		$	(1	)		$	(17	)		$	—			$	—			$	(3	)		$	(41	)