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

For the quarterly period ended September 30, 2006

OR

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

For the transition period from                      to                     

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.)

Hartford Plaza, Hartford, Connecticut 06115-1900
(Address of principal executive offices)

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

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

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

Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o

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 October 20, 2006, there were outstanding 316,938,097 shares of Common Stock, $0.01 par value per share, of the registrant.

 

 

INDEX

				Page
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements			3
Report of Independent Registered Public Accounting Firm					3
Condensed Consolidated Statements of Operations — For the Three and Nine Months Ended September 30, 2006 and 2005					4
Condensed Consolidated Balance Sheets — As of September 30, 2006 and December 31, 2005					5
Condensed Consolidated Statements of Changes in Stockholders’ Equity — For the Nine Months Ended September 30, 2006 and 2005					6
Condensed Consolidated Statements of Comprehensive Income (Loss) — For the Three and Nine Months Ended September 30, 2006 and 2005					6
Condensed Consolidated Statements of Cash Flows — For the Nine Months Ended September 30, 2006 and 2005					7
Notes to Condensed Consolidated Financial Statements					8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			95
Item 4.		Controls and Procedures			95
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			95
Item 1A.		Risk Factors			98
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			105
Item 6.		Exhibits			105
Signature					106
Exhibits Index					107
EX-15.01: LETTER OF AWARENESS
EX-31.01: CERTIFICATION
EX-31.02: CERTIFICATION
EX-32.01: CERTIFICATION
EX-32.02: CERTIFICATION

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, 2006, and the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2006 and 2005, and changes in stockholders’ equity, and cash flows for the nine-month periods ended September 30, 2006 and 2005. 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, 2005, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income (loss), and cash flows for the year then ended (not presented herein), and in our report dated February 22, 2006 (which report includes an explanatory paragraph relating to the Company’s change in its method of accounting and reporting for certain nontraditional long-duration contracts and for separate accounts in 2004), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005 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
October 26, 2006

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions, except for per share data)		2006				2005				2006				2005
		(Unaudited)								(Unaudited)
Revenues
Earned premiums		$	3,761			$	3,562			$	11,288			$	10,693
Fee income			1,152				1,029				3,432				2,944
Net investment income
Securities available-for-sale and other			1,164				1,124				3,449				3,263
Equity securities held for trading			1,185				1,500				669				2,024
Total net investment income			2,349				2,624				4,118				5,287
Other revenues			118				116				356				344
Net realized capital gains (losses)			27				(24	)			(273	)			105
Total revenues			7,407				7,307				18,921				19,373
Benefits, claims and expenses
Benefits, claims and claim adjustment expenses			4,491				4,769				10,741				11,570
Amortization of deferred policy acquisition costs and present value of future profits			839				821				2,485				2,377
Insurance operating costs and expenses			832				786				2,358				2,301
Interest expense			70				62				207				189
Other expenses			164				173				530				499
Total benefits, claims and expenses			6,396				6,611				16,321				16,936
Income before income taxes			1,011				696				2,600				2,437
Income tax expense			253				157				638				630
Net income		$	758			$	539			$	1,962			$	1,807
Basic earnings per share
Net income		$	2.45			$	1.80			$	6.41			$	6.08
Diluted earnings per share
Net income		$	2.39			$	1.76			$	6.25			$	5.94
Weighted average common shares outstanding			310.0				299.2				306.0				297.1
Weighted average common shares outstanding and dilutive potential common shares			316.7				307.0				314.1				304.1
Cash dividends declared per share		$	0.40			$	0.29			$	1.20			$	0.87

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		September 30,				December 31,
(In millions, except for share data)		2006				2005
		(Unaudited)
Assets
Investments
Fixed maturities, available-for-sale, at fair value (amortized cost of $77,296 and $74,766)		$	78,705			$	76,440
Equity securities, held for trading, at fair value (cost of $23,071 and $19,570)			27,863				24,034
Equity securities, available-for-sale, at fair value (cost of $1,454 and $1,330)			1,594				1,461
Policy loans, at outstanding balance			2,057				2,016
Mortgage loans on real estate			2,742				1,731
Other investments			1,763				1,253
Total investments			114,724				106,935
Cash			1,355				1,273
Premiums receivable and agents’ balances			3,686				3,734
Reinsurance recoverables			5,037				6,360
Deferred policy acquisition costs and present value of future profits			10,328				9,702
Deferred income taxes			472				675
Goodwill			1,720				1,720
Property and equipment, net			753				683
Other assets			3,818				3,600
Separate account assets			162,901				150,875
Total assets		$	304,794			$	285,557
Liabilities
Reserve for future policy benefits and unpaid claims and claim adjustment expenses
Property and casualty		$	21,849			$	22,266
Life			13,662				12,987
Other policyholder funds and benefits payable			69,296				64,452
Unearned premiums			5,670				5,566
Short-term debt			995				719
Long-term debt			3,081				4,048
Other liabilities			9,607				9,319
Separate account liabilities			162,901				150,875
Total liabilities			287,061				270,232
Commitments and Contingencies (Note 7)
Stockholders’ Equity
Common stock - 750,000,000 shares authorized, 319,686,997 and 305,188,238 shares issued, $0.01 par value			3				3
Additional paid-in capital			5,912				5,067
Retained earnings			11,800				10,207
Treasury stock, at cost, 3,084,597 and 3,035,916 shares			(46	)			(42	)
Accumulated other comprehensive income, net of tax			64				90
Total stockholders’ equity			17,733				15,325
Total liabilities and stockholders’ equity		$	304,794			$	285,557

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		Nine Months Ended
		September 30,
(In millions, except for share data)		2006				2005
		(Unaudited)
Common Stock and Additional Paid-in Capital
Balance at beginning of period		$	5,070			$	4,570
Issuance of shares from equity unit contracts			690				—
Issuance of shares under incentive and stock compensation plans and other			124				318
Tax benefit on employee stock options and awards			31				40
Balance at end of period			5,915				4,928
Retained Earnings
Balance at beginning of period			10,207				8,283
Net income			1,962				1,807
Dividends declared on common stock			(369	)			(259	)
Balance at end of period			11,800				9,831
Treasury Stock, at Cost
Balance at beginning of period			(42	)			(40	)
Return of shares to treasury stock under incentive and stock compensation plans			(4	)			(2	)
Balance at end of period			(46	)			(42	)
Accumulated Other Comprehensive Income, Net of Tax
Balance at beginning of period			90				1,425
Change in net unrealized gain/loss on securities			14				(862	)
Change in net gain/loss on cash-flow hedging instruments			(85	)			97
Change in foreign currency translation adjustments			45				(67	)
Total other comprehensive loss			(26	)			(832	)
Balance at end of period			64				593
Total stockholders’ equity		$	17,733			$	15,310
Outstanding Shares (in thousands)
Balance at beginning of period			302,152				294,208
Issuance of shares from equity unit contracts			12,132				—
Issuance of shares under incentive and stock compensation plans and other			2,367				5,972
Return of shares to treasury stock under incentive and stock compensation plans			(49	)			(41	)
Balance at end of period			316,602				300,139

Condensed Consolidated Statements of Comprehensive Income (Loss)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions)		2006				2005				2006				2005
		(Unaudited)								(Unaudited)
Comprehensive Income (Loss)
Net income		$	758			$	539			$	1,962			$	1,807
Other Comprehensive Income (Loss)
Change in net unrealized gain/loss on securities			898				(728	)			14				(862	)
Change in net gain/loss on cash-flow hedging instruments			114				(98	)			(85	)			97
Change in foreign currency translation adjustments			(24	)			—				45				(67	)
Total other comprehensive income (loss)			988				(826	)			(26	)			(832	)
Total comprehensive income (loss)		$	1,746			$	(287	)		$	1,936			$	975

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		Nine Months Ended
		September 30,
(In millions)		2006				2005
		(Unaudited)
Operating Activities
Net income		$	1,962			$	1,807
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of deferred policy acquisition costs and present value of future profits			2,485				2,377
Additions to deferred policy acquisition costs and present value of future profits			(3,060	)			(3,096	)
Change in:
Reserve for future policy benefits and unpaid claims and claim adjustment expenses and unearned premiums			400				1,093
Reinsurance recoverables			1,320				(70	)
Receivables			38				(20	)
Payables and accruals			(682	)			(86	)
Accrued and deferred income taxes			572				238
Net realized capital (gains) losses			273				(105	)
Net increase in equity securities, held for trading			(3,875	)			(9,297	)
Net receipts from investment contracts credited to policyholder accounts associated with equity securities, held for trading			3,871				9,477
Depreciation and amortization			387				368
Other, net			95				261
Net cash provided by operating activities			3,786				2,947
Investing Activities
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale			26,766				29,264
Equity securities, available-for-sale			285				19
Mortgage loans			249				415
Partnerships			117				100
Payments for the purchase of:
Fixed maturities, available-for-sale			(29,709	)			(32,473	)
Equity securities, available-for-sale			(482	)			(492	)
Mortgage loans			(1,257	)			(593	)
Partnerships			(645	)			(232	)
Change in policy loans, net			(42	)			653
Change in payables for collateral under securities lending, net			420				(268	)
Change in all other securities, net			(416	)			109
Purchase price adjustment of business acquired			—				(8	)
Additions to property and equipment, net			(116	)			(169	)
Net cash used for investing activities			(4,830	)			(3,675	)
Financing Activities
Issuance of shares from equity unit contracts			690				—
Repayment/maturity of long-term debt			(715	)			(250	)
Issuance of short-term debt, net of repayments			25				—
Net receipts from investment and universal life-type contracts			1,274				1,301
Excess tax benefits on stock-based compensation			31				—
Dividends paid			(335	)			(258	)
Return of shares under incentive and stock compensation plans			(4	)			(2	)
Proceeds from issuance of shares under incentive and stock compensation plans, net			100				284
Proceeds from issuance of consumer notes			41				—
Net cash provided by financing activities			1,107				1,075
Foreign exchange rate effect on cash			19				(14	)
Net increase in cash			82				333
Cash — beginning of period			1,273				1,148
Cash — end of period		$	1,355			$	1,481
Supplemental Disclosure of Cash Flow Information:
Net Cash Paid During the Period For:
Income taxes		$	25			$	358
Interest		$	204			$	180

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 financial holding company for a group of subsidiaries that provides investment products and life and property and casualty insurance to both individual and business customers in the United States and internationally (collectively, “The Hartford” or the “Company”).

The condensed consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America, which differ materially from the accounting prescribed by various insurance regulatory authorities.

The accompanying condensed consolidated financial statements and notes as of September 30, 2006, and for the three and nine months ended September 30, 2006 and 2005 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 2005 Form 10-K Annual Report. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

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 (“VIE”) in which the Company is the primary beneficiary. Entities in which The Hartford does not have a controlling financial interest but in which the Company has significant influence over the operating and financing decisions are reported using the equity method. All material intercompany transactions and balances between The Hartford and its subsidiaries and affiliates have been eliminated.

Reclassifications

Certain reclassifications have been made to prior period financial information, including segment disclosures, to conform to the current period presentation.

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The most significant estimates include those used in determining property and casualty reserves for unpaid claims and claim adjustment expenses, net of reinsurance; Life deferred policy acquisition costs and present value of future profits associated with variable annuity and other universal life-type contracts; the evaluation of other-than-temporary impairments on investments in available-for-sale securities; the valuation of guaranteed minimum withdrawal benefit derivatives; pension and other postretirement benefit obligations; and contingencies relating to corporate litigation and regulatory matters.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of Notes to Consolidated Financial Statements included in The Hartford’s 2005 Form 10-K Annual Report.

Income Taxes

The effective tax rate for the three months ended September 30, 2006 and 2005 was 25% and 23%, respectively. The effective tax rate for the nine months ended September 30, 2006 and 2005 was 25% and 26%, respectively. The principal causes of the difference between the effective rates and the U.S. statutory rate of 35% were tax-exempt interest earned on invested assets and the separate account dividends-received deduction (“DRD”).

The separate account DRD is estimated for the current year using information from the most recent year-end, adjusted for equity market performance. The current estimated DRD will be appropriately adjusted as underlying factors change, including known actual 2006 mutual fund distributions and fee income from the Company’s variable insurance products. The actual current year DRD can vary from the estimates based on, but not limited to, changes in eligible dividends received by the mutual funds, amounts of distributions from

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

these mutual funds, appropriate levels of taxable income as well as the utilization of capital loss carry forwards at the mutual fund level. The Company’s DRD increased $5 and $27 for the three and nine months ended September 30, 2006 over the respective prior year

1. Basis of Presentation and Accounting Policies (continued)

periods including a tax benefit of $6 for the three and nine months ended September 30, 2006 and $3 in the three and nine months ended September 30, 2005, resulting from true-ups related to prior years’ tax returns. For the three months ended September 30, 2005, the Company’s DRD included an additional tax benefit of $6 related to the 2005 year.

The Company receives a credit against its U.S. tax liability for foreign taxes paid by the Company from its separate account assets. The increased allocation of separate account investments to the international equity markets during 2005 and 2006 has increased the amount of these foreign tax credits (“FTC”). In the three and nine months ended September 30, 2006, the Company reported a net benefit of $13 for the separate account FTC, comprised of a $7 true up related to a prior year tax return and $6 related to the 2006 year.

Based on current projections, it is management’s intent that the undistributed earnings of Hartford Life Insurance, K.K. will be repatriated to the U.S. in the future. Therefore, the Company no longer meets the indefinite reversal criteria of Accounting Principles Board (“APB”) Opinion No. 23, “Accounting for Income Taxes – Special Areas”, with respect to Hartford Life Insurance, K.K. As a result of this change, the Company has recorded a tax benefit of $4 and $6 for the three and nine months ended September 30, 2006 respectively, due to the expected utilization of foreign tax credits from Hartford Life Insurance, K.K.

Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax Act of 1959 permitted the deferral from taxation of a portion of statutory income under certain circumstances. In these situations, the deferred income was accumulated in a “Policyholders’ Surplus Account” and would be taxable only under conditions which management considered to be remote; therefore, no federal income taxes have been provided on the balance in this account, which for tax return purposes was $88 as of December 31, 2005. The American Jobs Creation Act of 2004, which was enacted in October 2004, allows distributions to be made from the Policyholders’ Surplus Account free of tax in 2005 and 2006. The Company has distributed the entire balance in the second quarter of 2006, thereby permanently eliminating the potential tax of $31.

Adoption of New Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaced SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and superseded APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123R requires all companies to recognize compensation costs for share-based payments to employees based on the grant-date fair value of the award. In January 2003, the Company began expensing all stock-based compensation awards granted or modified after January 1, 2003 under the fair value recognition provisions of SFAS 123 and therefore the adoption of SFAS 123R did not have a material effect on the Company’s financial position or results of operations and is not expected to have a material effect on future operations. The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective method and therefore prior period amounts have not been restated. The Company recognized an immaterial effect of adoption as of January 1, 2006 to reverse expense previously recognized on awards expected to be forfeited, as required under SFAS 123R.

Future Adoption of New Accounting Standards

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). This statement requires an entity to: (a) recognize an asset for the funded status of defined benefit postretirement plans that are overfunded and a liability for plans that are underfunded, measured as of the employer’s fiscal year end; and (b) recognize changes in the funded status of defined benefit postretirement plans, other than for the net periodic benefit cost included in net income, in accumulated other comprehensive income. For pension plans the funded status must be based on the projected benefit obligation which includes an assumption for future salary increases. SFAS 158 is effective for public entities with years ending after December 15, 2006, with certain exceptions not applicable to The Hartford, through an adjustment to the ending balance of accumulated other comprehensive income, net of tax. The Company expects to record an increase in its benefit liability and a corresponding after-tax decrease in the accumulated other comprehensive income component of equity. Based upon actual asset returns and assuming an increase in the discount rate to 5.75%, the increase in the Company’s liability as of December 31, 2006 is estimated to result in an after-tax decrease to equity of less than $20. The actual effect will depend on the discount rate, other valuation assumptions and the actual value of plan assets as of December 31, 2006.

In September 2006, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance for how errors should be evaluated to assess materiality from a quantitative perspective. SAB 108 permits companies to initially apply its provisions by either restating prior financial statements or recording the cumulative effect of initially applying the approach as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment to retained earnings. SAB 108 is required to be adopted by December 31, 2006 and is not expected to have an effect on the Company’s financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Basis of Presentation and Accounting Policies (continued)

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements. SFAS 157 provides guidance on how to measure fair value when required under existing accounting standards. The statement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (“Level 1, 2 and 3”). Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets the Company has the ability to access at the measurement date. Level 2 inputs are observable inputs, other than quoted prices included in Level 1, for the asset or liability. Level 3 inputs are unobservable inputs reflecting the reporting entity’s estimates of the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). Quantitative and qualitative disclosures will focus on the inputs used to measure fair value for both recurring and non-recurring fair value measurements and the effects of the measurements in the financial statements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged only in the initial quarter of an entity’s fiscal year. Adoption of this statement is expected to have an impact on the Company’s consolidated financial statements; however, the timing for adoption and impact has not yet been determined.

The FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), dated June 2006. The interpretation requires public companies to recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. The amount recognized would be the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. A liability would be recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalty (if applicable) on the excess. FIN 48 will require a tabular reconciliation of the change in the aggregate unrecognized tax benefits claimed, or expected to be claimed, in tax returns and disclosure relating to accrued interest and penalties for unrecognized tax benefits. Discussion will also be required for those uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next 12 months. FIN 48 is effective for fiscal years beginning after December 15, 2006. Adoption of FIN 48 is not expected to have a material impact on the Company’s consolidated financial statements.

2. Earnings Per Share

The following tables present a reconciliation of net income and shares used in calculating basic earnings per share to those used in calculating diluted earnings per share.

		Three Months Ended												Nine Months Ended
		September 30, 2006												September 30, 2006
		Net								Per Share				Net								Per Share
		Income				Shares				Amount				Income				Shares				Amount
Basic Earnings per Share
Net income available to common shareholders		$	758				310.0			$	2.45			$	1,962				306.0			$	6.41
Diluted Earnings per Share
Stock compensation plans			—				2.9				—				—				2.9				—
Equity units			—				3.8				—				—				5.2				—
Net income available to common shareholders plus assumed conversions		$	758				316.7			$	2.39			$	1,962				314.1			$	6.25

		Three Months Ended												Nine Months Ended
		September 30, 2005												September 30, 2005
		Net								Per Share				Net								Per Share
		Income				Shares				Amount				Income				Shares				Amount
Basic Earnings per Share
Net income available to common shareholders		$	539				299.2			$	1.80			$	1,807				297.1			$	6.08
Diluted Earnings per Share
Stock compensation plans			—				3.2				—				—				3.2				—
Equity units			—				4.6				—				—				3.8				—
Net income available to common shareholders plus assumed conversions		$	539				307.0			$	1.76			$	1,807				304.1			$	5.94

Basic earnings per share is computed based on the weighted average number of shares outstanding during the year. Diluted earnings per share includes the dilutive effect of stock compensation plans and the Company’s equity units, if any, using the treasury stock method. Under the treasury stock method for stock compensation plans, shares are assumed to be issued and then reduced for the number of shares repurchaseable with theoretical proceeds at the average market price for the period. Contingently issuable shares are included for the number of shares issuable assuming the end of the reporting period was the end of the contingency period, if dilutive. Theoretical proceeds include option exercise price payments, unamortized stock compensation expense and tax benefits realized in excess of the tax benefit recognized in net income. The difference between the number of shares assumed issued and number of shares purchased represents the dilutive shares. Under the treasury stock method for the equity units, the number of shares of common stock used in

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Earnings Per Share (continued)

calculating diluted earnings per share is increased by the excess, if any, of the number of shares issuable upon settlement of the purchase contracts, over the number of shares that could be purchased by The Hartford in the market using the proceeds received upon settlement. The number of issuable shares is based on the average market price for the last 20 trading days of the period. The number of shares purchased is based on the average market price during the entire period.

Upon exercise of outstanding options or vesting of other stock compensation plan awards, the additional shares issued and outstanding are included in the calculation of the Company’s weighted average shares from the date of exercise or vesting. Similarly, upon settlement of the purchase contracts associated with the Company’s equity units, the associated common shares are added to the Company’s issued and outstanding shares. During the 20 trading day period ending on the third trading day prior to August 16, 2006, The Hartford’s common stock price exceeded $56.875 per share. As a result, on August 16, 2006, the 7% equity unit purchase contracts issued in 2003 were settled, resulting in the issuance of approximately 12.1 million common shares that were added to the Company’s issued and outstanding shares and included in the calculation of the Company’s weighted average shares for the period the shares were outstanding. Additionally, in connection with the settlement on November 16, 2006 of the 6% equity units issued in 2002, assuming The Hartford’s common stock price exceeds $57.645 per share during the 20 trading day period ending on the third trading day period prior to November 16, 2006, and assuming operation of the equity unit purchase contracts in the ordinary course, approximately 5.7 million common shares will be added to the Company’s issued and outstanding shares and will be included in the calculation of the Company’s weighted average shares for the period the shares are outstanding. For further discussion of the Company’s equity units offerings, see Note 14 of Notes to Consolidated Financial Statements included in The Hartford’s 2005 Annual Report on Form 10-K.

3. Segment Information

The Hartford is organized into two major operations: Life and Property & Casualty, each containing reporting segments. Within the Life and Property & Casualty operations, The Hartford conducts business principally in ten operating segments. Additionally, Corporate primarily includes the Company’s debt financing and related interest expense, as well as certain capital raising and purchase accounting adjustment activities.

Life

Life is organized into six reportable operating segments: Retail Products Group (“Retail”), Retirement Plans, Institutional Solutions Group (“Institutional”), Individual Life, Group Benefits and International.

The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies in Note 1. Life evaluates performance of its segments based on revenues, net income and the segment’s return on allocated capital. The Company charges direct operating expenses to the appropriate segment and allocates the majority of indirect expenses to the segments based on an intercompany expense arrangement. Intersegment revenues primarily occur between Life’s Other category and the operating segments. These amounts primarily include interest income on allocated surplus, interest charges on excess separate account surplus, the allocation of certain net realized capital gains and losses and the allocation of credit risk charges. For a discussion of segment allocations, see Note 3 of Notes to the Consolidated Financial Statements included in The Hartford’s 2005 Form 10-K Annual Report.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Segment Information (continued)

The positive (negative) impact, on realized gains and losses in the segments, for allocated realized gains and losses and credit-risk charges were as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Retail
Realized gains (losses)		$	7			$	9			$	24			$	27
Credit risk charge			(6	)			(6	)			(19	)			(19	)
Retirement Plans
Realized gains (losses)			2				1				7				4
Credit risk charge			(3	)			(2	)			(7	)			(6	)
Institutional
Realized gains (losses)			4				4				12				10
Credit risk charge			(6	)			(5	)			(17	)			(14	)
Individual Life
Realized gains (losses)			3				2				8				8
Credit risk charge			(2	)			(2	)			(5	)			(5	)
Group Benefits
Realized gains (losses)			—				2				2				7
Credit risk charge			(2	)			(2	)			(7	)			(7	)
International
Realized gains (losses)			1				—				1				—
Credit risk charge			(1	)			—				(2	)			—
Other
Realized gains (losses)			(17	)			(18	)			(54	)			(56	)
Credit risk charge			20				17				57				51
Total		$	—			$	—			$	—			$	—

Property & Casualty

Property & Casualty is organized into four reportable operating segments: the underwriting segments of Business Insurance, Personal Lines, and Specialty Commercial (collectively “Ongoing Operations”); and the Other Operations segment. For the three months ended September 30, 2006 and 2005, AARP accounted for earned premiums of $624 and $568, respectively, in Personal Lines. For the nine months ended September 30, 2006 and 2005, AARP accounted for earned premiums of $1.8 billion and $1.7 billion, respectively, in Personal Lines.

Through inter-segment arrangements, Specialty Commercial reimburses Business Insurance and Personal Lines for certain losses, including, among other coverages, losses incurred from uncollectible reinsurance. In addition, through a co-participation, the Company retains a portion of the risks ceded under the Company’s principal catastrophe reinsurance program and other reinsurance programs. The financial results of this co-participation are recorded in the Specialty Commercial segment. In addition to the co-participation, the amount of premiums ceded to third party reinsurers under these programs are allocated to the operating segments based on the risks written by each operating segment that are subject to the programs.

Earned premiums assumed (ceded) under the inter-segment arrangements and co-participations were as follows:

		Three Months Ended								Nine Months Ended
Net assumed (ceded) earned premiums under inter-segment		September 30,								September 30,
arrangements and co-participations		2006				2005				2006				2005
Business Insurance		$	(14	)		$	(19	)		$	(54	)		$	(57	)
Personal Lines			(4	)			(6	)			(16	)			(18	)
Specialty Commercial			18				25				70				75
Total		$	—			$	—			$	—			$	—

Financial Measures and Other Segment Information

For further discussion of the types of products offered by each segment, see Note 3 of Notes to Consolidated Financial Statements included in The Hartford’s 2005 Form 10-K Annual Report.

The measure of profit or loss used by The Hartford’s management in evaluating the performance of its Life segments is net income. Within Property & Casualty, net income is the measure of profit or loss used in evaluating the performance of Ongoing Operations and the Other Operations segment. Within Ongoing Operations, the underwriting segments of Business Insurance, Personal Lines and Specialty Commercial are evaluated by The Hartford’s management primarily based upon underwriting results. Underwriting results

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Segment Information (continued)

represent premiums earned less incurred claims, claim adjustment expenses and underwriting expenses. The sum of underwriting results, net investment income, net servicing and other income, net realized capital gains and losses, other expenses, and related income taxes is net income (loss).

The following tables present revenues and net income (loss). Underwriting results are presented for the Business Insurance, Personal Lines and Specialty Commercial segments, while net income is presented for each of Life’s reportable segments, total Property & Casualty, Ongoing Operations, Other Operations, and Corporate. Segment information for the previous periods have been adjusted to reflect the change in composition of reportable operating segments.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Revenues
Life
Retail		$	849			$	810			$	2,566			$	2,399
Retirement Plans			131				118				399				348
Institutional			429				358				1,314				997
Individual Life			271				278				817				799
Group Benefits			1,137				1,049				3,398				3,143
International			194				141				558				356
Other			80				62				(52	)			275
Total Life segment revenues			3,091				2,816				9,000				8,317
Net investment income on equity securities held for trading [1]			1,185				1,500				669				2,024
Total Life			4,276				4,316				9,669				10,341
Property & Casualty
Ongoing Operations
Earned premiums
Business Insurance			1,292				1,194				3,823				3,541
Personal Lines			952				890				2,810				2,693
Specialty Commercial			388				431				1,170				1,364
Total Ongoing Operations earned premiums			2,632				2,515				7,803				7,598
Other Operations earned premiums			—				2				2				4
Other revenues [2]			118				115				355				342
Net investment income			359				349				1,081				1,014
Net realized capital gains (losses)			16				2				(8	)			50
Total Property & Casualty			3,125				2,983				9,233				9,008
Corporate			6				8				19				24
Total revenues		$	7,407			$	7,307			$	18,921			$	19,373

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Segment Information (continued)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Net Income (Loss)
Life
Retail		$	184			$	172			$	526			$	447
Retirement Plans			21				20				64				54
Institutional			24				24				75				66
Individual Life			46				45				139				123
Group Benefits			74				68				216				191
International			47				28				145				63
Other			32				(11	)			(83	)			(31	)
Total Life			428				346				1,082				913
Property & Casualty
Ongoing Operations
Underwriting results
Business Insurance			123				125				454				384
Personal Lines			89				71				321				386
Specialty Commercial			41				(143	)			45				(98	)
Total Ongoing Operations underwriting results			253				53				820				672
Net servicing and other income [1]			15				12				45				40
Net investment income			299				279				886				797
Other expenses			(40	)			(50	)			(168	)			(146	)
Net realized capital gains (losses)			11				2				(15	)			24
Income tax expense			(163	)			(78	)			(464	)			(413	)
Ongoing Operations			375				218				1,104				974
Other Operations			6				15				(83	)			45
Total Property & Casualty			381				233				1,021				1,019
Corporate			(51	)			(40	)			(141	)			(125	)
Net income		$	758			$	539			$	1,962			$	1,807

4. Investments and Derivative Instruments

		September 30, 2006																December 31, 2005
						Gross				Gross												Gross				Gross
		Amortized				Unrealized				Unrealized				Fair				Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
Bonds and Notes
Asset-backed securities (“ABS”)		$	7,627			$	59			$	(66	)		$	7,620			$	7,907			$	60			$	(89	)		$	7,878
Collateralized mortgage obligations (“CMOs”)
Agency backed			1,162				18				(7	)			1,173				860				3				(6	)			857
Non-agency backed			123				—				(1	)			122				133				—				—				133
Commercial mortgage-backed securities (“CMBS”)
Agency backed			579				12				(1	)			590				70				1				—				71
Non-agency backed			14,337				241				(141	)			14,437				12,860				233				(162	)			12,931
Corporate			34,360				1,169				(406	)			35,123				33,019				1,395				(396	)			34,018
Government/Government agencies
Foreign			1,077				64				(8	)			1,133				1,378				96				(7	)			1,467
United States			1,345				16				(9	)			1,352				877				27				(6	)			898
Mortgage-backed securities (“MBS”)			2,766				6				(55	)			2,717				3,914				7				(60	)			3,861
States, municipalities and political subdivisions			11,838				540				(24	)			12,354				11,641				601				(24	)			12,218
Redeemable preferred stock			38				2				—				40				44				1				—				45
Short-term			2,044				—				—				2,044				2,063				—				—				2,063
Total fixed maturities		$	77,296			$	2,127			$	(718	)		$	78,705			$	74,766			$	2,424			$	(750	)		$	76,440

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Investments and Derivative Instruments (continued)

Variable Interest Entities

In September 2006, the Company invested $3 in a newly established ABS collateralized debt obligation (“CDO”) for which Hartford Investment Management Company (“HIMCO”), a wholly-owned subsidiary of The Hartford, serves as collateral manager. The CDO issued approximately $1.2 billion of senior and subordinated notes to third party investors and invested the proceeds in ABS and CMBS with an average credit quality of Aa3/A1. The notes are collateralized by the underlying securities held by the CDO. The Company’s maximum exposure to loss is limited to its $3 direct investment in the CDO. Investors in the CDO have recourse only to the CDO’s assets and not to the general credit of the Company.

Pursuant to the requirements of FASB Interpretation No. 46 (revised), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46R”), the Company has concluded that the CDO is a VIE. However, the Company is not the primary beneficiary and, accordingly, is not required to consolidate the VIE. The Company utilized qualitative and quantitative analyses to assess whether it was the primary beneficiary of the VIE.

Derivative Instruments

The Company utilizes a variety of derivative instruments, including swaps, caps, floors, forwards, futures and options through one of four Company-approved objectives: to hedge risk arising from interest rate, equity market, price or currency exchange rate risk or volatility; to manage liquidity; to control transaction costs; or to enter into replication transactions.

On the date the derivative contract is entered into, the Company designates the derivative as (1) a hedge of the fair value of a recognized asset or liability (“fair value” hedge), (2) a hedge of the variability of cash flows of a forecasted transaction or of amounts to be received or paid related to a recognized asset or liability (“cash flow” hedge), (3) a foreign-currency fair value or cash flow hedge (“foreign-currency” hedge), (4) a hedge of a net investment in a foreign operation (“net investment” hedge) or (5) held for other investment and risk management purposes, which primarily involve managing asset or liability related risks which do not qualify for hedge accounting.

The Company’s derivative transactions are used in strategies permitted under the derivatives use plans filed and/or approved, as applicable, by the State of Connecticut, the State of Illinois and the State of New York insurance departments. The Company does not make a market or trade in these instruments for the express purpose of earning short-term trading profits.

For a detailed discussion of the Company’s use of derivative instruments, see Notes 1 and 4 of Notes to Consolidated Financial Statements included in The Hartford’s 2005 Form 10-K Annual Report.

Derivative instruments are recorded in the condensed consolidated balance sheets at fair value. Asset and liability values are determined by calculating the net position for each derivative counterparty by legal entity and are presented as follows:

		September 30, 2006								December 31, 2005
						Liability								Liability
		Asset Values				Values				Asset Values				Values
Other investments		$	272			$	—			$	181			$	—
Reinsurance recoverables			—				26				—				17
Other policyholder funds and benefits payable			35				—				8				—
Other liabilities			—				562				—				450
Total		$	307			$	588			$	189			$	467

The following table summarizes the notional amount and fair value of derivatives by hedge designation as of September 30, 2006, and December 31, 2005. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and are not necessarily reflective of credit risk. The fair value amounts of derivative assets and liabilities are presented on a net basis in the following table.

		September 30, 2006								December 31, 2005
		Notional								Notional
		Amount				Fair Value				Amount				Fair Value
Cash flow hedge		$	7,310			$	(331	)		$	7,511			$	(260	)
Fair value hedge			3,131				4				2,476				(12	)
Other investment and risk management activities			67,202				46				55,741				(6	)
Total		$	77,643			$	(281	)		$	65,728			$	(278	)

The increase in notional amount since December 31, 2005, is primarily due to an increase in derivatives associated with guaranteed minimum withdrawal benefit (“GMWB”) product sales and additional options purchased to hedge the GMWB, as well as an increase in interest rate swap derivatives used to assist in the matching of duration between certain assets and liabilities. The decrease in net fair value of derivative instruments since December 31, 2005, was primarily related to declines in fair value of derivatives hedging foreign bonds, the Japanese fixed annuity hedging instruments, and derivatives hedging changes in interest rates, partially offset by additional

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Investments and Derivative Instruments (continued)

options purchased to hedge GMWB. Derivatives hedging foreign bonds declined in value primarily as a result of the weakening of the U.S. dollar in comparison to certain foreign currencies while the Japanese fixed annuity hedging instruments and derivatives hedging changes in interest rates declined in value primarily due to rising interest rates. For further discussion on the GMWB product, which is accounted for as an embedded derivative, refer to Note 6 of Notes to Condensed Consolidated Financial Statements.

During the three months ended March 31, 2006, the Company terminated an interest rate swap and an interest rate cap that were used to hedge the Company’s $500 fixed rate debt which was callable in October 2006. The positions were terminated due to expected near term interest rate increases. Additionally, during the three months ended June 30, 2006, interest rate swaps and the respective hedged fixed rate debt of $250 matured. The notional and fair value of the contracts terminated during the nine months ended September 30, 2006, were $1.3 billion and $(11), respectively.

For the three and nine months ended September 30, 2006, after-tax net gains (losses) representing the total ineffectiveness of cash flow hedges were $(3) and $(13), respectively. For the three and nine months ended September 30, 2005, after-tax net gains (losses) representing the total ineffectiveness of cash flow hedges were $(5) and $(9), respectively. For the three and nine months ended September 30, 2006, after-tax net gains (losses) representing the total ineffectiveness of fair value hedges were $(1). For the three and nine months ended September 30, 2005, after-tax net gains (losses) representing the total ineffectiveness of fair value hedges were $3.

The total change in value for derivative-based strategies that do not qualify for hedge accounting treatment, including periodic net coupon settlements, are reported in net realized capital gains and losses. For the three and nine months ended September 30, 2006, these strategies resulted in the recognition of after-tax net gains (losses) of $9 and $(73), respectively. Net realized capital gains for the three months ended September 30, 2006, were primarily comprised of gains on derivatives hedging changes in interest rates and, net gains on GMWB related derivatives, partially offset by net losses on the Japanese fixed annuity hedging instruments. The net gains on GWMB related derivatives were primarily driven by net changes in policyholder behavior assumptions made in the third quarter. The net losses on the Japanese fixed annuity hedging instruments were primarily driven by losses due to the weakening of the Yen in comparison to the U.S. dollar, partially offset by gains due to a decline in Japanese interest rates. For the nine months ended September 30, 2006, net realized capital losses were primarily driven by losses on the Japanese fixed annuity hedging instruments due to an increase in Japanese interest rates, GMWB related derivatives primarily driven by liability model refinements and assumption updates reflecting in-force demographics, and derivatives hedging changes in interest rates primarily due to rising interest rates. For the three and nine months ended September 30, 2005, these derivative based strategies resulted in the recognition of after-tax net gains (losses) of $(39) and $(84), respectively, which were predominantly comprised of net losses on the Japanese fixed annuity hedging instruments primarily due to the weakening of the Yen in comparison to the U.S. dollar as well as an increase in interest rates.

As of September 30, 2006, the after-tax deferred net gains (losses) on derivative instruments recorded in accumulated other comprehensive income (loss) (“AOCI”) that are expected to be reclassified to earnings during the next twelve months are $(7). This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains (losses) as an adjustment to interest income over the term of the investment cash flows. The maximum term over which the Company is hedging its exposure to the variability of future cash flows (for all forecasted transactions, excluding interest payments on variable-rate debt) is twenty-four months. For the three and nine months ended September 30, 2006, and 2005, the Company had less than $1 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.

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

Life

Changes in deferred policy acquisition costs and present value of future profits were as follows:

		2006				2005
Balance, January 1		$	8,568			$	7,438
Capitalization			1,420				1,564
Amortization – Deferred policy acquisition costs and present value of future profits			(913	)			(887	)
Adjustments to unrealized gains and losses on securities available-for-sale and other			54				239
Effect of currency translation adjustment			(3	)			(103	)
Balance, September 30		$	9,126			$	8,251

Property & Casualty

Changes in deferred policy acquisition costs are as follows:

		2006				2005
Balance, January 1		$	1,134			$	1,071
Capitalization			1,640				1,532
Amortization – Deferred Policy Acquisition Costs			(1,572	)			(1,490	)
Balance, September 30		$	1,202			$	1,113

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Many of the variable annuity contracts issued by the Company offer various guaranteed minimum death, withdrawal and income benefits. Guaranteed minimum death and income benefits are offered in various forms as described in the footnotes to the table below. The Company currently reinsures a significant portion of the death benefit guarantees associated with its in-force block of business. Effective April 1, 2006, the Company began reinsuring certain of its death benefit guarantees associated with the inforce block of variable annuity products offered in Japan. Changes in the gross U.S. guaranteed minimum death benefit (“GMDB”) and Japan GMDB/guaranteed minimum income benefits (“GMIB”) liability balance sold with annuity products are as follows:

		U.S. GMDB [1]			Japan GMDB/GMIB [1]
Liability balance as of January 1, 2006		$	158			$	50
Incurred			92				24
Paid			(84	)			(1	)
Currency translation adjustment			—				—
Liability balance as of September 30, 2006		$	166			$	73

		U.S. GMDB [1]				Japan GMDB/GMIB
Liability balance as of January 1, 2005		$	174			$	28
Incurred			96				23
Paid			(111	)			(1	)
Currency translation adjustment			—				(4	)
Liability balance as of September 30, 2005		$	159			$	46

The net GMDB and GMIB liability is established by estimating the expected value of net reinsurance costs and death and income benefits in excess of the projected account balance. The excess death and income benefits and net reinsurance costs are recognized ratably over the accumulation period based on total expected assessments. The GMDB and GMIB liabilities are recorded in Reserve for Future Policy Benefits on the Company’s balance sheet. Changes in the GMDB and GMIB liability are recorded in Benefits, Claims and Claim Adjustment Expenses on the Company’s statements of operations. In a manner consistent with the Company’s accounting policy for deferred acquisition costs, the Company regularly evaluates estimates used and adjusts the additional liability balances, with a related charge or credit to benefit expense if actual experience or other evidence suggests that earlier assumptions should be revised.

The following table provides details concerning GMDB and GMIB exposure as of September 30, 2006:

Breakdown of Individual Variable and Group Annuity Account Value by GMDB/GMIB Type

		Account				Net Amount				Retained Net Amount				Weighted Average Attained
		Value				at Risk				at Risk				Age of Annuitant
Maximum anniversary value (MAV) [1]
MAV only		$	52,640			$	4,271			$	431				64
With 5% rollup [2]			3,763				433				82				63
With Earnings Protection Benefit Rider (EPB) [3]			5,382				374				64				61
With 5% rollup & EPB			1,382				135				25				63
Total MAV			63,167				5,213				602
Asset Protection Benefit (APB) [4]			33,561				59				31				61
Lifetime Income Benefit (LIB) — Death Benefit[5]			2,535				3				3				59
Reset [6] (5-7 years)			6,764				319				319				65
Return of Premium [7]/Other			9,583				32				30				53
Subtotal U.S. Guaranteed Minimum Death Benefits			115,610				5,626				985				62
Japan Guaranteed Minimum Death and Income Benefit [8]			28,265				113				53				66
Total at September 30, 2006		$	143,875			$	5,739			$	1,038

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The Company offers certain variable annuity products with a GMWB rider. The GMWB provides the policyholder with a guaranteed remaining balance (“GRB”) if the account value is reduced to zero through a combination of market declines and withdrawals. The GRB is generally equal to premiums less withdrawals. However, annual withdrawals that exceed a specific percentage of the premiums paid may reduce the GRB by an amount greater than the withdrawals and may also impact the guaranteed annual withdrawal amount that subsequently applies after the excess annual withdrawals occur. For certain of the withdrawal benefit features, the policyholder also has the option, after a specified time period, to reset the GRB to the then-current account value, if greater. In addition, the Company has introduced features for contracts issued beginning in the fourth quarter of 2005, that allows the policyholder to receive the guaranteed annual withdrawal amount for as long as they are alive. In this new feature, in all cases the contract holder or their beneficiary will receive the GRB and the GRB is reset on an annual basis to the maximum anniversary account value subject to a cap.

The GMWB represents an embedded derivative in the variable annuity contracts that is required to be reported separately from the host variable annuity contract. It is carried at fair value and reported in other policyholder funds. The fair value of the GMWB obligation is calculated based on actuarial and capital market assumptions related to the projected cash flows, including benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning policyholder behavior. Because of the dynamic and complex nature of these cash flows, stochastic techniques under a variety of market return scenarios and other best estimate assumptions are used. Estimating these cash flows involves numerous estimates and subjective judgments including those regarding expected market rates of return, market volatility, correlations of market returns and discount rates. At each valuation date, the Company assumes expected returns based on risk-free rates as represented by the current LIBOR forward curve rates; market volatility assumptions for each underlying index based on a blend of observed market “implied volatility” data and annualized standard deviations of monthly returns using the most recent 20 years of observed market performance; correlations of market returns across underlying indices based on actual observed market returns and relationships over the ten years preceding the valuation date; and current risk-free spot rates as represented by the current LIBOR spot curve to determine the present value of expected future cash flows produced in the stochastic projection process. As markets change, mature and evolve and actual policyholder behavior emerges, management continually evaluates the appropriateness of its assumptions. In addition, management regularly evaluates the valuation model, incorporating emerging valuation techniques where appropriate, including drawing on the expertise of market participants and valuation experts.

As of September 30, 2006 and December 31, 2005, the embedded derivative asset recorded for GMWB, before reinsurance or hedging, was $35 and $8, respectively. For the three and nine months ended September 30, 2006, the change in value of the GMWB, before reinsurance and hedging, reported as a realized gain (loss) was $(12) and $83, respectively. Included in the realized gain (loss) were liability model refinements and changes in policyholder behavior assumptions for the three and nine months ended September 30, 2006 of a net $14 and $(4), respectively. For the three and nine months ended September 30, 2005, the change in value of the GMWB, before reinsurance and hedging, reported as a realized gain (loss) was $55 and $11, respectively. There were no benefit payments made for the GMWB during 2006 or 2005.

As of September 30, 2006 and December 31, 2005, $33.4 billion, or 76%, and $26.4 billion, or 69%, respectively, of account value representing substantially all of the contracts written after July 2003, with the GMWB feature, were unreinsured. In order to minimize the volatility associated with the unreinsured GMWB liabilities, the Company has established an alternative risk management strategy. In 2003, the Company began hedging its unreinsured GMWB exposure using interest rate futures and swaps, and Standard and Poor’s (“S&P”) 500 and NASDAQ index options and futures contracts. During 2004, the Company began using Europe, Australasia and Far East (“EAFE”) Index swaps to hedge GMWB exposure to international equity markets. The total (reinsured and unreinsured) GRB as of September 30, 2006 and December 31, 2005 was $35.8 billion and $31.8 billion, respectively.

A contract is ‘in the money’ if the contract holder’s GRB is greater than the account value. For contracts that were ‘in the money’ the Company’s exposure, as of September 30, 2006 and December 31, 2005, was $12 and $8, respectively. However, the only ways the contract holder can monetize the excess of the GRB over the account value of the contract is upon death or if their account value is reduced to zero through a combination of a series of withdrawals that do not exceed a specific percentage of the premiums paid per year and market declines. If the account value is reduced to zero, the contract holder will receive a period certain annuity equal to the remaining GRB or a period certain plus life contingent annuity. As the amount of the excess of the GRB over the account value can fluctuate with equity market returns on a daily basis the ultimate amount to be paid by the Company, if any, is uncertain and could be significantly more or less than $12.

7. Commitments and Contingencies

Litigation

The Hartford is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending 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 claim and claim 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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Commitments and Contingencies (continued)

The Hartford is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative state and federal class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, underpayment of claims or improper underwriting practices in connection with various kinds of insurance policies, such as personal and commercial automobile, property, life and inland marine; improper sales practices in connection with the sale of life insurance and other investment products; and improper fee arrangements in connection with mutual funds and structured settlements. 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. Like many other insurers, The Hartford also has been joined in actions by asbestos plaintiffs asserting that insurers had a duty to protect the public from the dangers of asbestos and in a putative class action filed in West Virginia state court by asbestos plaintiffs alleging 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, an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s consolidated results of operations or cash flows in particular quarterly or annual periods.

Broker Compensation Litigation — On October 14, 2004, the New York Attorney General’s Office filed a civil complaint (the “NYAG Complaint”) against Marsh Inc. and Marsh & McLennan Companies, Inc. (collectively, “Marsh”) alleging, among other things, that certain insurance companies, including The Hartford, participated with Marsh in arrangements to submit inflated bids for business insurance and paid contingent commissions to ensure that Marsh would direct business to them. The Hartford was not joined as a defendant in the action, which has since settled. Since the filing of the NYAG Complaint, several private actions have been filed against the Company asserting claims arising from the allegations of the NYAG Complaint.

Two securities class actions, now consolidated, have been filed in the United States District Court for the District of Connecticut alleging claims against the Company and certain of its executive officers under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. The consolidated amended complaint alleges on behalf of a putative class of shareholders that the Company and the four named individual defendants, as control persons of the Company, failed to disclose to the investing public that The Hartford’s business and growth was predicated on the unlawful activity alleged in the NYAG Complaint. The class period alleged is August 6, 2003 through October 13, 2004, the day before the NYAG Complaint was filed. The complaint seeks damages and attorneys’ fees. Defendants filed a motion to dismiss in June 2005, and, on July 13, 2006, the district court granted the motion. The plaintiffs have noticed an appeal of the dismissal.

Two corporate derivative actions, now consolidated, also have been filed in the same court. The consolidated amended complaint, brought by a shareholder on behalf of the Company against its directors and an executive officer, alleges that the defendants knew adverse non-public information about the activities alleged in the NYAG Complaint and concealed and misappropriated that information to make profitable stock trades, thereby breaching their fiduciary duties, abusing their control, committing gross mismanagement, wasting corporate assets, and unjustly enriching themselves. The complaint seeks damages, injunctive relief, disgorgement, and attorneys’ fees. Defendants filed a motion to dismiss in May 2005, and the plaintiffs thereafter agreed to stay further proceedings pending resolution of the motion to dismiss the securities class action. All defendants dispute the allegations and intend to defend these actions vigorously.

The Company is also a defendant in a multidistrict litigation in federal district court in New Jersey. There are two consolidated amended complaints filed in the multidistrict litigation, one related to alleged conduct in connection with the sale of property-casualty insurance and the other related to alleged conduct in connection with the sale of group benefits products. The Company and various of its subsidiaries are named in both complaints. The actions assert, on behalf of a class of persons who purchased insurance through the broker defendants, claims under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act (“RICO”), state law, and in the case of the group benefits complaint, claims under ERISA arising from conduct similar to that alleged in the NYAG Complaint. The class period alleged is 1994 through the date of class certification, which has not yet occurred. The complaints seek treble damages, injunctive and declaratory relief, and attorneys’ fees. On October 3, 2006, the court denied in part the defendants’ motions to dismiss the two consolidated amended complaints but found the complaints deficient in other respects and ordered the plaintiffs to file supplemental pleadings. The plaintiffs’ motions for class certification are pending. The Company also has been named in two similar actions filed in state courts, which the defendants have removed to federal court. Those actions currently are transferred to the court presiding over the multidistrict litigation. In addition, the Company was joined as a defendant in an action by the California Commissioner of Insurance alleging similar conduct by various insurers in connection with the sale of group benefits products. The Commissioner’s action asserts claims under California insurance law and seeks injunctive relief only. The Company disputes the allegations in all of these actions and intends to defend the actions vigorously.

Additional complaints may be filed against the Company in various courts alleging claims under federal or state law arising from the conduct alleged in the NYAG Complaint. The Company’s ultimate liability, if any, in the pending and possible future suits is highly uncertain and subject to contingencies that are not yet known, such as how many suits will be filed, in which courts they will be lodged, what claims they will assert, what the outcome of investigations by the New York Attorney General’s Office and other regulatory

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Commitments and Contingencies (continued)

agencies will be, the success of defenses that the Company may assert, and the amount of recoverable damages if liability is established. In the opinion of management, it is possible that an adverse outcome in one or more of these suits could have a material adverse effect on the Company’s consolidated results of operations or cash flows in particular quarterly or annual periods.

Fair Credit Reporting Act Putative Class Action — In October 2001, a complaint was filed in the United States District Court for the District of Oregon, on behalf of a putative class of homeowners and automobile policyholders from 1999 to the present, alleging that the Company willfully violated the Fair Credit Reporting Act (“FCRA”) by failing to send appropriate notices to new customers whose initial rates were higher than they would have been had the customer had a more favorable credit report. In July 2003, the district court granted summary judgment for the Company, holding that FCRA’s adverse action notice requirement did not apply to the rate first charged for an initial policy of insurance.

The plaintiff appealed and, in August 2005, a panel of the United States Court of Appeals for the Ninth Circuit reversed the district court, holding that the adverse action notice requirement applies to new business and that the Company’s notices, even when sent, contained inadequate information. Although no court previously had decided the notice requirements applicable to insurers under FCRA, and the district court had not addressed whether the Company’s alleged violations of FCRA were willful because it had agreed with the Company’s interpretation of FCRA and found no violation, the Court of Appeals further held, over a dissent by one of the judges, that the Company’s failure to send notices conforming to the Court’s opinion constituted a willful violation of FCRA as a matter of law. FCRA provides for a statutory penalty of $100 to $1,000 per willful violation. Simultaneously, the Court of Appeals issued decisions in related cases against four other insurers, reversing the district court and holding that those insurers also had violated FCRA in similar ways. On October 3, 2005, the Court of Appeals withdrew its opinion in the Hartford case and issued a revised opinion, which changed certain language of the opinion but not the outcome.

On October 31, 2005, the Company timely filed a petition for rehearing and for rehearing en banc in the Ninth Circuit. While that petition was pending, on January 25, 2006, the Court of Appeals again withdrew its opinion in the Hartford case and issued a second revised opinion. The new opinion vacated the Court’s earlier ruling that the Company had willfully violated FCRA as a matter of law and remanded the case to the district court for further proceedings. On February 15, 2006, the Company filed a new petition for rehearing and rehearing en banc, and on April 20, 2006, the Court of Appeals denied the petition. On July 19, 2006, the Company filed a petition for a writ of certiorari in the United States Supreme Court. On September 26, 2006, the Supreme Court granted petitions filed by insurers in two of the related cases, but it has not yet acted on the Company’s petition.

On July 25, 2006, the parties entered into a memorandum of understanding setting forth the essential terms of a class settlement in this action, and, on September 8, 2006, the parties executed and filed with the district court a Stipulation of Settlement. On September 11, 2006, the district court preliminarily approved the settlement and scheduled a hearing for final approval of the settlement for February 26, 2007. The settlement is subject to certain contingencies, including final approval by the district court. If the settlement is completed, management expects that the Company’s ultimate obligations under the settlement agreement, after consideration of provisions made for this matter, will not have a material adverse effect on the Company’s consolidated results of operations or cash flows in any particular quarterly or annual period.

Blanket Casualty Treaty Litigation — The Company is engaged in pending litigation in Connecticut Superior Court against certain of its upper-layer reinsurers under its Blanket Casualty Treaty (“BCT”). The BCT is a multi-layered reinsurance program providing excess-of-loss coverage in various amounts from the 1930s through the 1980s. The upper layers were first placed in 1950, predominantly with London Market reinsurers, including Lloyd’s syndicates reinsured by Equitas. The action seeks, among other relief, damages for the reinsurer defendants’ failure to pay certain billings for asbestos and pollution claims.

In December 2003, the Company entered into a global settlement with MacArthur Company, an asbestos insulation distributor and installer then in bankruptcy, for $1.15 billion. The Company then billed the reinsurer defendants under the BCT for $117 of the settlement amount. After the reinsurers refused to pay the MacArthur billing, the Company amended its complaint to add, among other things, claims related to that billing. Most of the reinsurer defendants counterclaimed, seeking a declaration that they did not owe reinsurance for the MacArthur settlement.

The litigation concerns under what circumstances losses arising from multiple claims against a single insured may be combined and ceded as a single “accident” under the BCT so as to reach the upper layers of the program. The BCT contains a unique definition of “accident.” The application of this definition to the ceded losses is the crux of the dispute.

In April 2005, the Superior Court phased the proceedings, providing for a trial of the MacArthur billing first, in April 2006, with other billings to follow in subsequent trial settings. In September 2005, the London Market reinsurer defendants moved for summary judgment on the MacArthur-related claims. After briefing and oral argument, the Superior Court issued a decision on December 13, 2005, granting the defendants’ motion. The Company noticed an appeal to the Connecticut Appellate Court; the appeal has since been transferred to the Connecticut Supreme Court. The Company intends to prosecute its appeal vigorously.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Commitments and Contingencies (continued)

On June 15, 2006, the Company announced an agreement with Equitas and all Lloyd’s syndicates reinsured by Equitas (collectively, “Equitas”) that resolved, with minor exception, all of the Company’s ceded and assumed domestic reinsurance exposures with Equitas, including the Company’s reinsurance recoveries from Equitas under the BCT. Those recoveries consist predominantly of asbestos and pollution losses, including the billing for the MacArthur settlement. The pending litigation and appeal continue with other upper-layer reinsurers under the BCT.

The outcome of the appeal is uncertain. If the decision of the Superior Court is affirmed on appeal, the Company may be unable to collect from the nonsettling reinsurers not only its billing for the MacArthur settlement but also other current and future billings to which the same relevant facts and legal analysis would apply. The Company has considered the risk of non-collection of these recoveries in its allowance for all uncollectible reinsurance recoverables associated with older, long-term casualty liabilities reported in the Other Operations segment. After consideration of this allowance, management expects that a negative outcome in the BCT litigation would not have a material adverse effect on the Company’s consolidated results of operations or cash flows in any particular quarterly or annual period.

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 2005 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.

Regulatory Developments

In June 2004, the Company received a subpoena from the New York Attorney General’s Office in connection with its inquiry into compensation arrangements between brokers and carriers. In mid-September 2004 and subsequently, the Company has received additional subpoenas from the New York Attorney General’s Office, which relate more specifically to possible anti-competitive activity among brokers and insurers. Since the beginning of October 2004, the Company has received subpoenas or other information requests from Attorneys General and regulatory agencies in more than a dozen jurisdictions regarding broker compensation and possible anti-competitive activity. The Company may receive additional subpoenas and other information requests from Attorneys General or other regulatory agencies regarding similar issues. In addition, the Company has received a request for information from the New York Attorney General’s Office concerning the Company’s compensation arrangements in connection with the administration of workers compensation plans. The Company intends to continue cooperating fully with these investigations, and is conducting an internal review, with the assistance of outside counsel, regarding broker compensation issues in its Property & Casualty and Group Benefits operations.

On October 14, 2004, the New York Attorney General’s Office filed a civil complaint against Marsh & McLennan Companies, Inc., and Marsh, Inc. (collectively, “Marsh”). The complaint alleges, among other things, that certain insurance companies, including the Company, participated with Marsh in arrangements to submit inflated bids for business insurance and paid contingent commissions to ensure that Marsh would direct business to them. The Company was not joined as a defendant in the action, which has since settled. Although no regulatory action has been initiated against the Company in connection with the allegations described in the civil complaint, it is possible that the New York Attorney General’s Office or one or more other regulatory agencies may pursue action against the Company or one or more of its employees in the future. The potential timing of any such action is difficult to predict. If such an action is brought, it could have a material adverse effect on the Company.

On October 29, 2004, the New York Attorney General’s Office informed the Company that the Attorney General is conducting an investigation with respect to the timing of the previously disclosed sale by Thomas Marra, a director and executive officer of the Company, of 217,074 shares of the Company’s common stock on September 21, 2004. The sale occurred shortly after the issuance of two additional subpoenas dated September 17, 2004 by the New York Attorney General’s Office. The Company has engaged outside counsel to review the circumstances related to the transaction and is fully cooperating with the New York Attorney General’s Office. On the basis of the review, the Company has determined that Mr. Marra complied with the Company’s applicable internal trading procedures and has found no indication that Mr. Marra was aware of the additional subpoenas at the time of the sale.

There continues to be significant federal and state regulatory activity relating to financial services companies, particularly mutual funds companies. These regulatory inquiries have focused on a number of mutual fund issues, including market timing and late trading, revenue sharing and directed brokerage, fees, transfer agents and other fund service providers, and other mutual-fund related issues. The Company has received requests for information and subpoenas from the SEC, subpoenas from the New York Attorney General’s Office, a subpoena from the Connecticut Attorney General’s Office, requests for information from the Connecticut Securities and Investments Division of the Department of Banking, and requests for information from the New York Department of Insurance, in each case requesting documentation and other information regarding various mutual fund regulatory issues. The Company continues to cooperate fully with these regulators in these matters.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Commitments and Contingencies (continued)

The SEC’s Division of Enforcement and the New York Attorney General’s Office are investigating aspects of the Company’s variable annuity and mutual fund operations related to market timing. The Company continues to cooperate fully with the SEC and the New York Attorney General’s Office in these matters.

The Company’s mutual funds are available for purchase by the separate accounts of different variable universal life insurance policies, variable annuity products, and funding agreements, and they are offered directly to certain qualified retirement plans. Although existing products contain transfer restrictions between subaccounts, some products, particularly older variable annuity products, do not contain restrictions on the frequency of transfers. In addition, as a result of the settlement of litigation against the Company with respect to certain owners of older variable annuity contracts, the Company’s ability to restrict transfers by these owners has, until recently, been limited. The Company has executed an agreement with the parties to the previously settled litigation which, together with separate agreements between these contract owners and their broker, has resulted in the exchange or surrender of all of the variable annuity contracts that were the subject of the previously settled litigation.

The SEC’s Division of Enforcement also is investigating aspects of the Company’s variable annuity and mutual fund operations related to directed brokerage and revenue sharing. The Company discontinued the use of directed brokerage in recognition of mutual fund sales in late 2003. The Company continues to cooperate fully with the SEC in these matters.

The Company has received subpoenas from the New York Attorney General’s Office and the Connecticut Attorney General’s Office requesting information relating to the Company’s group annuity products, including single premium group annuities used in terminal and maturity funding programs. These subpoenas seek information about how various group annuity products are sold, how the Company selects mutual funds offered as investment options in certain group annuity products, and how brokers selling the Company’s group annuity products are compensated. The Company continues to cooperate fully with these regulators in these matters.

On May 10, 2006, the Company entered into an agreement (the “Agreement”) with the New York Attorney General’s Office and the Connecticut Attorney General’s Office to resolve the outstanding investigations by these parties regarding the Company’s use of expense reimbursement agreements in its terminal and maturity funding group annuity line of business. Under the terms of the Agreement, the Company will pay $20, of which $16.1 will be paid to certain plan sponsors that purchased terminal or maturity funding annuities between January 1, 1998 and December 31, 2004, with the balance of $3.9 to be divided equally between the states of New York and Connecticut. Also pursuant to the terms of the Agreement, the Company will accept a three-year prohibition on the use of contingent compensation in its terminal and maturity funding group annuity line of business. The costs associated with the settlement had already been accounted for in reserves established by the Company as of March 31, 2006.

To date, neither the SEC’s and New York Attorney General’s market timing investigation nor the SEC’s directed brokerage investigation has resulted in the initiation of any formal action against the Company by these regulators. However, the Company believes that the SEC and the New York Attorney General’s Office are likely to take some action against the Company at the conclusion of the respective investigations. The Company is engaged in active discussions with the SEC and the New York Attorney General’s Office. The potential timing of any resolution of any of these matters or the initiation of any formal action by any of these regulators in these matters is difficult to predict. As of March 31, 2006, the Company had recorded aggregate charges of $109, after-tax, to establish a reserve for the market timing, directed brokerage and single premium group annuity matters. The after-tax cost of the single premium group annuity matter settlement was $14. The remaining reserve for the market timing and directed brokerage matters is an estimate; in view of the uncertainties regarding the outcome of these regulatory investigations, as well as the tax-deductibility of payments, it is possible that the ultimate cost to the Company of these matters could exceed the reserve by an amount that would have a material adverse effect on the Company’s consolidated results of operations or cash flows in a particular quarterly or annual period.

On May 24, 2005, the Company received a subpoena from the Connecticut Attorney General’s Office seeking information about the Company’s participation in finite reinsurance transactions in which there was no substantial transfer of risk between the parties. The Company is cooperating fully with the Connecticut Attorney General’s Office in this matter.

On June 23, 2005, the Company received a subpoena from the New York Attorney General’s Office requesting information relating to purchases of the Company’s variable annuity products, or exchanges of other products for the Company’s variable annuity products, by New York residents who were 65 or older at the time of the purchase or exchange. On August 25, 2005, the Company received an additional subpoena from the New York Attorney General’s Office requesting information relating to purchases of or exchanges into the Company’s variable annuity products by New York residents during the past five years where the purchase or exchange was funded using funds from a tax-qualified plan or where the variable annuity purchased or exchanged for was a sub-account of a tax-qualified plan or was subsequently put into a tax-qualified plan. The Company is cooperating fully with the New York Attorney General’s Office in these matters.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Commitments and Contingencies (continued)

On July 14, 2005, the Company received an additional subpoena from the Connecticut Attorney General’s Office concerning the Company’s structured settlement business. This subpoena requests information about the Company’s sale of annuity products for structured settlements, and about the ways in which brokers are compensated in connection with the sale of these products. The Company is cooperating fully with the Connecticut Attorney General’s Office in these matters.

The Company has received a request for information from the New York Attorney General’s Office about issues relating to the reporting of workers’ compensation premium. The Company is cooperating fully with the New York Attorney General’s Office in this matter.

8. Pension Plans and Postretirement Health Care and Life Insurance Benefit Plans

Components of Net Periodic Benefit Cost

Total net periodic benefit cost for the nine months ended September 30, 2006 and 2005 includes the following components:

		Pension								Other Postretirement
		Benefits								Benefits
		2006				2005				2006				2005
Service cost		$	95			$	87			$	6			$	9
Interest cost			145				136				15				20
Expected return on plan assets			(181	)			(164	)			(7	)			(6	)
Amortization of prior service cost			(10	)			(10	)			(17	)			(17	)
Amortization of unrecognized net losses			66				54				—				3
Net periodic benefit cost		$	115			$	103			$	(3	)		$	9

Employer Contributions

In 2006, the Company, at its discretion, made $200 in contributions to the U.S. qualified defined benefit plan. For 2006, the Company does not have a required minimum funding contribution for the U.S. qualified defined benefit plan and the funding requirements for all of the pension plans is expected to be immaterial.

9. Stock Compensation Plans

The Company has two primary stock-based compensation plans which are described below. 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 new shares in satisfaction of stock-based compensation. The compensation expense recognized for those plans was $45 and $40 for the nine months ended September 30, 2006 and 2005, respectively. The income tax benefit recognized for stock-based compensation plans was $16 and $14 for the nine months ended September 30, 2006 and 2005, respectively. The Company did not capitalize any cost of stock-based compensation. As of September 30, 2006, the total compensation cost related to non-vested awards not yet recognized was $88, which is expected to be recognized over a weighted average period of 2.1 years.

Stock Plan

In 2005, the shareholders of The Hartford approved The Hartford 2005 Incentive Stock Plan (the “2005 Stock Plan”), which superseded and replaced The Hartford Incentive Stock Plan and The Hartford Restricted Stock Plan for Non-employee Directors. The terms of the 2005 Stock Plan are substantially similar to the terms of these superseded plans.

The 2005 Stock Plan provides for awards to be granted in the form of non-qualified or incentive stock options qualifying under Section 422 of the Internal Revenue Code, stock appreciation rights, restricted stock units, restricted stock, performance shares, or any combination of the foregoing. The aggregate number of shares of stock which may be awarded is subject to a maximum limit of seven million shares applicable to all awards for the ten-year period ending May 18, 2015. To the extent that any awards under The Hartford Incentive Stock Plan and The Hartford Restricted Stock Plan for Non-employee Directors are forfeited, terminated, expire unexercised or are settled for cash in lieu of stock, the shares subject to such awards (or the relevant portion thereof) shall be available for awards under the 2005 Stock Plan and shall be added to the total number of shares available under the 2005 Stock Plan. As of December 31, 2005, there were 6,939,733 shares available for future issuance.

The fair values of awards granted under the 2005 Stock Plan are measured as of the grant date and expensed ratably over the awards’ vesting periods, generally three years. For stock option awards granted or modified in 2006 and later, the Company began expensing awards to retirement-eligible employees hired before January 1, 2002 immediately or over a period shorter than the stated vesting period because the employees receive accelerated vesting upon retirement and therefore the vesting period is considered non-substantive. For the nine months ended September 30, 2005, the Company would have recognized an immaterial increase in net income if it had been

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

9. Stock Compensation Plans (continued)

accelerating expense for all awards to retirement-eligible employees entitled to accelerated vesting. All awards provide for accelerated vesting upon a change in control of the Company as defined in the 2005 Stock Plan.

Stock Option Awards

Under the 2005 Stock Plan, all options granted have an exercise price equal to the market price of the Company’s common stock on the date of grant, and an option’s maximum term is ten years. Certain options become exercisable over a three year period commencing one year from the date of grant, while certain other options become exercisable at the later of the three years from the date of grant or upon specified market appreciation of the Company’s common shares. For any year, no individual employee may receive an award of options for more than 1,000,000 shares. As of December 31, 2005, The Hartford had not issued any incentive stock options under any plans.

For all options granted or modified on or after January 1, 2004, the Company uses a hybrid lattice/Monte-Carlo based option valuation model (the “valuation model”) that incorporates the possibility of early exercise of options into the valuation. The valuation model also incorporates the Company’s historical termination and exercise experience to determine the option value. For these reasons, the Company believes the valuation model provides a fair value that is more representative of actual experience than the value calculated under the Black-Scholes model.

The valuation model incorporates ranges of assumptions for inputs, and therefore, those ranges are disclosed below. The term structure of volatility is constructed utilizing implied volatilities from exchange-traded options on the Company’s stock, historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model, and accommodates variations in employee preference and risk-tolerance by segregating the grantee pool into a series of behavioral cohorts and conducting a fair valuation for each cohort individually. The expected term of options granted is derived from the output of the option valuation model and represents, in a mathematical sense, the period of time that options are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Constant Maturity Treasury yield curve in effect at the time of grant.

		Nine Months Ended
		September 30, 2006		September 30, 2005
Expected dividend yield		1.9%		1.9%
Expected annualized spot volatility		20.2% - 32.3%		19.5% - 33.4%
Weighted average annualized volatility		28.9%		29.4%
Risk-free spot rate		4.4% - 4.6%		2.4% - 4.7%
Expected term		7 years		7 years

A summary of the status of non-qualified stock options included in the Company’s Stock Plan as of September 30, 2006 and changes during the nine months ended September 30, 2006 is presented below:

										Weighted
						Weighted				Average
		Number of				Average				Remaining				Aggregate
		Options (in				Exercise				Contractual				Intrinsic
(Shares in thousands)		thousands)				Price				Term				Value
Outstanding at beginning of year		$	11,471			$	54.16				5.3
Granted			323				83.11
Exercised			(1,951	)			49.98
Forfeited			(63	)			57.58
Expired			(47	)			54.96
Outstanding at end of period			9,733				55.94				4.9			$	299,874
Exercisable at end of period			8,640				53.88				4.5			$	283,977
Weighted average fair value of options granted		$	27.69