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, 2007

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.)

One Hartford Plaza, Hartford, Connecticut 06155
(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 19, 2007, there were outstanding 313,844,818 shares of Common Stock, $0.01 par value per share, of the registrant.

 

 

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

TABLE OF CONTENTS

Item		Description		Page
		Part I. FINANCIAL INFORMATION
1.		Financial Statements
		Report of Independent Registered Public Accounting Firm			3
		Condensed Consolidated Statements of Operations-- For the Three and Nine Months Ended September 30, 2007 and 2006			4
		Condensed Consolidated Balance Sheets -- As of September 30, 2007 and December 31, 2006			5
		Condensed Consolidated Statements of Changes in Stockholders’ Equity--For the Nine Months Ended September 30, 2007 and 2006			6
		Condensed Consolidated Statements of Comprehensive Income--For the Three and Nine months ended September 30, 2007 and 2006			6
		Condensed Consolidated Statements of Cash Flows--For the Nine Months ended September 30, 2007 and 2006			7
		Notes to Condensed Consolidated Financial Statements			8
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
3.		Quantitative and Qualitative Disclosures About Market Risk			105
4.		Controls and Procedures			105
		Part II. OTHER INFORMATION
1.		Legal Proceedings			105
1A.		Risk Factors			107
2.		Unregistered Sales of Equity Securities and Use of Proceeds			108
6.		Exhibits			108
		Signature			109
		Exhibits Index			110
EX-15.01: DELOITTE & TOUCHE LLP 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, 2007, and the related condensed consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2007 and 2006, and changes in stockholders’ equity, and cash flows for the nine-month periods ended September 30, 2007 and 2006. 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, 2006, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2007 (which report includes an explanatory paragraph relating to the Company’s change in its method of accounting and reporting for defined benefit pension and other postretirement plans in 2006, and 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, 2006 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 23, 2007

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions, except for per share data)		2007				2006				2007				2006
		(Unaudited)								(Unaudited)
Revenues
Earned premiums		$	4,062			$	3,761			$	11,760			$	11,288
Fee income			1,398				1,152				4,026				3,432
Net investment income
Securities available-for-sale and other			1,298				1,164				3,907				3,449
Equity securities held for trading			(698	)			1,185				746				669
Total net investment income			600				2,349				4,653				4,118
Other revenues			126				118				368				356
Net realized capital gains (losses)			(363	)			27				(565	)			(273	)
Total revenues			5,823				7,407				20,242				18,921
Benefits, losses and expenses
Benefits, losses and loss adjustment expenses			2,968				4,491				11,289				10,741
Amortization of deferred policy acquisition costs and present value of future profits			476				839				2,185				2,485
Insurance operating costs and expenses			973				832				2,826				2,358
Interest expense			67				70				196				207
Other expenses			164				164				522				530
Total benefits, losses and expenses			4,648				6,396				17,018				16,321
Income before income taxes			1,175				1,011				3,224				2,600
Income tax expense			324				253				870				638
Net income		$	851			$	758			$	2,354			$	1,962
Earnings per share
Basic		$	2.70			$	2.45			$	7.42			$	6.41
Diluted		$	2.68			$	2.39			$	7.35			$	6.25
Weighted average common shares outstanding			315.4				310.0				317.3				306.0
Weighted average common shares outstanding and dilutive potential common shares			318.0				316.7				320.1				314.1
Cash dividends declared per share		$	0.50			$	0.40			$	1.50			$	1.20

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		September 30,				December 31,
(In millions, except for per share data)		2007				2006
		(Unaudited)
Assets
Investments
Fixed maturities, available-for-sale, at fair value (amortized cost of $81,953 and $79,289)		$	81,818			$	80,755
Equity securities, held for trading, at fair value (cost of $28,774 and $23,668)			34,901				29,393
Equity securities, available-for-sale, at fair value (cost of $2,308 and $1,535)			2,449				1,739
Policy loans, at outstanding balance			2,050				2,051
Mortgage loans on real estate			5,236				3,318
Other investments			2,738				1,917
Total investments			129,192				119,173
Cash			1,952				1,424
Premiums receivable and agents’ balances			3,766				3,675
Reinsurance recoverables			5,163				5,571
Deferred policy acquisition costs and present value of future profits			11,499				10,268
Deferred income taxes			279				284
Goodwill			1,726				1,717
Property and equipment, net			941				791
Other assets			4,060				3,323
Separate account assets			197,877				180,484
Total assets		$	356,455			$	326,710
Liabilities
Reserve for future policy benefits and unpaid losses and loss adjustment expenses
Property and casualty		$	22,197			$	21,991
Life			15,007				14,016
Other policyholder funds and benefits payable			78,925				71,311
Unearned premiums			5,677				5,620
Short-term debt			822				599
Long-term debt			3,670				3,504
Consumer notes			723				258
Other liabilities			12,607				10,051
Separate account liabilities			197,877				180,484
Total liabilities			337,505				307,834
Commitments and Contingencies (Note 7)
Stockholders’ Equity
Common stock, $0.01 par value — 750,000,000 shares authorized, 329,586,365 and 326,401,820 shares issued			3				3
Additional paid-in capital			6,585				6,321
Retained earnings			14,260				12,421
Treasury stock, at cost — 15,864,102 and 3,086,429 shares			(1,232	)			(47	)
Accumulated other comprehensive income (loss), net of tax			(666	)			178
Total stockholders’ equity			18,950				18,876
Total liabilities and stockholders’ equity		$	356,455			$	326,710

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		Nine Months Ended
		September 30,
(In millions, except for share data)		2007				2006
		(Unaudited)
Common Stock and Additional Paid-in Capital
Balance at beginning of period		$	6,324			$	5,070
Issuance of shares from equity unit contracts			—				690
Issuance of shares under incentive and stock compensation plans and other			219				124
Tax benefit on employee stock options and awards			45				31
Balance at end of period			6,588				5,915
Retained Earnings
Balance at beginning of period, before cumulative effect of accounting changes, net of tax			12,421				10,207
Cumulative effect of accounting changes, net of tax			(41	)			—
Balance at beginning of period, as adjusted			12,380				10,207
Net income			2,354				1,962
Dividends declared on common stock			(474	)			(369	)
Balance at end of period			14,260				11,800
Treasury Stock, at Cost
Balance at beginning of period			(47	)			(42	)
Treasury stock acquired			(1,172	)			—
Return of shares under incentive and stock compensation plans to treasury stock			(13	)			(4	)
Balance at end of period			(1,232	)			(46	)
Accumulated Other Comprehensive Income (Loss), Net of Tax
Balance at beginning of period			178				90
Total other comprehensive loss			(844	)			(26	)
Balance at end of period			(666	)			64
Total stockholders’ equity		$	18,950			$	17,733
Outstanding Shares (in thousands)
Balance at beginning of period			323,315				302,152
Issuance of shares from equity unit contracts			—				12,132
Issuance of shares under incentive and stock compensation plans and other			3,185				2,367
Treasury stock acquired			(12,643	)			—
Return of shares under incentive and stock compensation plans to treasury stock			(135	)			(49	)
Balance at end of period			313,722				316,602

Condensed Consolidated Statements of Comprehensive Income

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in millions)		2007				2006				2007				2006
		(Unaudited)								(Unaudited)
Comprehensive Income
Net income		$	851			$	758			$	2,354			$	1,962
Other comprehensive income (loss)
Change in net unrealized gain/loss on securities			(224	)			898				(970	)			14
Change in net gain/loss on cash-flow hedging instruments			48				114				(20	)			(85	)
Change in foreign currency translation adjustments			100				(24	)			111				45
Amortization of prior service cost and actuarial net losses included in net periodic benefit costs			11				—				35				—
Total other comprehensive income (loss)			(65	)			988				(844	)			(26	)
Total comprehensive income		$	786			$	1,746			$	1,510			$	1,936

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		Nine Months Ended
		September 30,
(In millions)		2007				2006
		(Unaudited)
Operating Activities
Net income		$	2,354			$	1,962
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of deferred policy acquisition costs and present value of future profits			2,185				2,485
Additions to deferred policy acquisition costs and present value of future profits			(3,177	)			(3,060	)
Change in:
Reserve for future policy benefits and unpaid losses and loss adjustment expenses and unearned premiums			1,216				400
Reinsurance recoverables			417				1,320
Receivables and other assets			(234	)			38
Payables and accruals			437				(682	)
Accrued and deferred income taxes			538				572
Net realized capital losses			565				273
Net receipts from investment contracts credited to policyholder accounts associated with equity securities, held for trading			4,446				3,871
Net increase in equity securities, held for trading			(4,288	)			(3,875	)
Depreciation and amortization			484				387
Other, net			(376	)			95
Net cash provided by operating activities			4,567				3,786
Investing Activities
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale			26,816				26,766
Equity securities, available-for-sale			450				285
Mortgage loans			1,245				249
Partnerships			250				117
Payments for the purchase of:
Fixed maturities, available-for-sale			(30,127	)			(29,709	)
Equity securities, available-for-sale			(865	)			(482	)
Mortgage loans			(3,161	)			(1,257	)
Partnerships			(929	)			(645	)
Change in policy loans, net			1				(42	)
Change in payables for collateral under securities lending, net			2,046				420
Change in all other securities, net			(379	)			(416	)
Additions to property and equipment, net			(251	)			(116	)
Net cash used for investing activities			(4,904	)			(4,830	)
Financing Activities
Deposits and other additions to investment and universal life-type contracts			26,315				19,507
Withdrawals and other deductions from investment and universal life-type contracts			(22,678	)			(19,854	)
Net transfers from (to) separate accounts related to investment and universal life-type contracts			(2,226	)			1,621
Issuance of long-term debt			495				—
Repayment/maturity of long-term debt			(300	)			(715	)
Change in short-term debt			75				25
Proceeds from issuance of consumer notes			465				41
Issuance of shares from equity unit contracts			—				690
Proceeds from issuance of shares under incentive and stock compensation plans, net			166				100
Excess tax benefits on stock-based compensation			29				31
Treasury stock acquired			(1,172	)			—
Return of shares under incentive and stock compensation plans to treasury stock			(13	)			(4	)
Dividends paid			(481	)			(335	)
Net cash provided by financing activities			675				1,107
Foreign exchange rate effect on cash			190				19
Net increase in cash			528				82
Cash — beginning of period			1,424				1,273
Cash — end of period		$	1,952			$	1,355
Supplemental Disclosure of Cash Flow Information
Net Cash Paid During the Period For:
Income taxes		$	366			$	25
Interest		$	172			$	204

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 provide 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 practices prescribed by various insurance regulatory authorities.

The accompanying condensed consolidated financial statements and notes as of September 30, 2007, and for the three and nine months ended September 30, 2007 and 2006 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 2006 Form 10-K Annual Report. The results of operations for the interim periods should not be considered indicative of the results to be expected for the full year.

Consolidation

The condensed consolidated financial statements include the accounts of The Hartford Financial Services Group, Inc., companies in which the Company directly or indirectly has a controlling financial interest and those variable interest entities in which the Company is the primary beneficiary. The Company determines if it is the primary beneficiary using both qualitative and quantitative analyses. 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 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 losses and loss adjustment expenses, net of reinsurance; life estimated gross profits used in the valuation and amortization of assets and liabilities associated with variable annuity and other universal life-type contracts; the evaluation of other-than-temporary impairments on investments in available-for-sale securities; living benefits required to be fair valued; 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 2006 Form 10-K Annual Report.

Adoption of New Accounting Standards

Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109

The Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), dated June 2006. FIN 48 requires companies to recognize the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained assuming examination by tax authorities. The amount recognized represents the largest amount of tax benefit that is greater than 50% likely of being realized. A liability is 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.

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

1. Basis of Presentation and Accounting Policies (continued)

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the adoption, the Company recognized a $12 decrease in the liability for unrecognized tax benefits and a corresponding increase in the January 1, 2007 balance of retained earnings. The total amount of unrecognized tax benefits as of January 1, 2007 was $8 including an immaterial amount for interest. If these unrecognized tax benefits were recognized, they would have an immaterial effect on the Company’s effective tax rate. The Company does not believe it would be subject to any penalties in any open tax years and, therefore, has not booked any such amounts. The Company classifies interest and penalties (if applicable) as income tax expense in the financial statements.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. During 2005, the Internal Revenue Service (“IRS”) commenced an examination of the Company’s U.S. income tax returns for 2002 through 2003 that is anticipated to be completed by the end of 2007. The 2004 through 2005 examination is expected to begin by the end of 2007. The Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next 12 months.

Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). This statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” and resolves issues addressed in SFAS 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets”. SFAS 155: (a) permits fair value remeasurement for any hybrid financial instrument (asset or liability) that contains an embedded derivative that otherwise would require bifurcation; (b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133; (c) establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (e) eliminates restrictions on a qualifying special purpose entity’s ability to hold passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial instrument. SFAS 155 also requires presentation within the financial statements that identifies those hybrid financial instruments for which the fair value election has been applied and information on the income statement impact of the changes in fair value of those instruments. The Company began applying SFAS 155 to all financial instruments acquired, issued or subject to a remeasurement event beginning January 1, 2007. SFAS 155 did not have an effect on the Company’s consolidated financial condition and results of operations upon adoption on January 1, 2007.

Accounting by Insurance Enterprises for Deferred Acquisition Costs (“DAC”) in Connection with Modifications or Exchanges of Insurance Contracts

In September 2005, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs (“DAC”) in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for DAC on internal replacements of insurance and investment contracts. An internal replacement is a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Modifications that result in a replacement contract that is substantially changed from the replaced contract should be accounted for as an extinguishment of the replaced contract. Unamortized DAC, unearned revenue liabilities and deferred sales inducements from the replaced contract must be written-off. Modifications that result in a contract that is substantially unchanged from the replaced contract should be accounted for as a continuation of the replaced contract. The Company adopted SOP 05-1 on January 1, 2007 and recognized the cumulative effect of the adoption of SOP 05-1 as a reduction in retained earnings of $53, after-tax.

Future Adoption of New Accounting Standards

Clarification of the Scope of the Audit and Accounting Guide “Investment Companies” and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies

In June 2007, the AICPA issued Statement of Position 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide Investment Companies (“the Guide”). This statement also addresses whether the specialized industry accounting principles of the Guide should be retained by a parent company in consolidation or by an investor that has the ability to exercise significant influence over the investment company and applies the equity method of accounting to its investment in the entity. In addition, SOP 07-1 includes certain disclosure requirements for parent companies and equity method investors in investment companies that retain investment company accounting in the parent company’s consolidated financial statements or the financial statements of an equity method investor. SOP 07-1 is effective for fiscal years beginning on or after December 15, 2007, with earlier application encouraged; however, on October 17,

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

1. Basis of Presentation and Accounting Policies (continued)

2007, the FASB agreed to propose a delay of the effective date of SOP 07-1. This SOP is not expected to have a material impact on the Company’s consolidated financial condition and results of operations.

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). For financial statement elements currently required to be measured at fair value, 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. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). 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 that 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 or prices for similar assets and liabilities. 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. The Company will adopt SFAS 157 on January 1, 2008, but has not yet quantified the impact. However, the Company has certain significant product riders, including the guaranteed minimum withdrawal benefit (“GMWB”), that are recorded using fair value. Under SFAS 133 and the related accounting literature on fair value that currently exists, prior to SFAS 157, when an estimate of fair value is made for liabilities where no market observable transactions exist for that liability or a similar liability, market risk margins are only included in the valuation if the margin is identifiable, measurable and significant. If a reliable estimate of market risk margins is not obtainable, the present value of expected cash flows, discounted at the risk free rate of interest, may be the best available estimate of fair value in the circumstances. Under SFAS 157, market risk margins will be required to be included in a fair value measurement even if they are not observable in the market. For example, under SFAS 157, fair value for GMWB in the Company’s U.S. variable annuity products will use significant Level 3 inputs including significant unobservable risk margins. As a result of applying the unobservable market inputs for risk margins, under SFAS 157, to our block of unreinsured GMWB business of $46.2 billion, as of September 30, 2007, the one time realized capital loss that could be recorded upon the adoption of SFAS 157 could materially reduce the Company’s 2008 net income. The Company has not quantified the actual increase in risk margins that will be required upon adoption of SFAS 157. However, the Company has quantified the effect on the valuation of GMWB arising from assumed risk margin changes. For example, if risk margins, including those estimated to represent unobservable market risk margins, included in the valuation of GMWB increased by 15 basis points, the Company would expect to record, on the date of adoption, a realized capital loss of approximately $170-$210, after the effect of DAC amortization and income taxes. If risk margins increased by 20 basis points the Company would record a realized capital loss of approximately $230-$280, after DAC amortization and taxes, and if risk margins increased by 30 basis points the Company would record a realized capital loss of approximately $365-$450, after DAC amortization and taxes. The amount of market risk margins that the Company will ultimately include in its valuation of GMWB under SFAS 157 is highly dependent upon market conditions at the date of adoption as well as in future periods. Realized gains and losses that will be recorded in future years are also likely to be more volatile than amounts recorded in prior years. In addition, adoption of SFAS 157 will result in a future reduction in new business variable annuity fee income as fees attributed to the embedded derivative will increase consistent with incorporating additional risk margins and other indicia of “exit value” in the valuation of the embedded derivative.

Amendment of FASB Interpretation No. 39

In April 2007, the FASB issued FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39” (“FSP FIN 39-1”). FSP FIN 39-1 amends FIN 39, “Offsetting of Amounts Related to Certain Contacts”, by permitting a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in the statement of financial position in accordance with FIN 39. FSP FIN 39-1 also amends FIN 39 by modifying certain terms. FSP FIN 39-1 is effective for reporting periods beginning after November 15, 2007, with early application permitted. The Company will early adopt on December 31, 2007, by electing to offset cash collateral against amounts recognized for derivative instruments under master netting arrangements. The effects of applying FSP FIN 39-1 will be recorded as a change in accounting principle through retrospective application. The adoption of FSP FIN 39-1 is not expected to have a material impact on the Company’s results of operations or financial position.

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

1. Basis of Presentation and Accounting Policies (continued)

Income Taxes

The effective tax rate for the three months ended September 30, 2007 and 2006 was 28% and 25%, respectively. The effective tax rate for the nine months ended September 30, 2007 and 2006 was 27% and 25%, respectively. The principal causes of the difference between the effective rate 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 prior year-end, adjusted for current year equity market performance. The estimated DRD is generally updated in the third quarter for the provision-to-filed-return adjustments, and in the fourth quarter based on current year ultimate mutual fund distributions and fee income from the Company’s variable insurance products. The actual current year DRD can vary from estimates based on, but not limited to, changes in eligible dividends received by the mutual funds, amounts of distributions from these mutual funds, amounts of short-term capital gains at the mutual fund level and the Company’s taxable income before the DRD. The 2006 provision-to-filed-return adjustment resulted in additional tax expense of $1. Additionally, during the third quarter, the Company decreased its estimated full year DRD benefit based on unusually high year-to-date short-term gains at the mutual fund level. The decrease in the full year estimate of the DRD benefit resulted in an $11 decrease in the third quarter DRD benefit related to a true-up of the first two quarters, which combined with the provision-to-filed return adjustment, resulted in a $12 decrease in the third quarter DRD benefit related to prior periods. The three months ended September 30, 2006 included a tax benefit of $6 resulting from true-ups related to prior years’ tax returns.

In its Revenue Ruling 2007-61, issued on September 25, 2007, the IRS announced its intention to issue regulations with respect to certain computational aspects of the dividends-received deduction (“DRD”) on separate account assets held in connection with variable annuity contracts. Revenue Ruling 2007-61 suspended a revenue ruling issued in August 2007 that purported to change accepted industry and IRS interpretations of the statutes governing these computational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are unknown, but they could result in the elimination of some or all of the separate account DRD tax benefit that the Company receives. Management believes that it is highly likely that any such regulations would apply prospectively only. For the nine months ended September 30, 2007, the Company recorded a benefit of $115 related to the separate account DRD.

The Company receives a foreign tax credit (“FTC”) against its U.S. tax liability for foreign taxes paid by the Company including payments from its separate account assets. The separate account FTC is estimated for the current year using information from the most recent filed return, adjusted for the change in the allocation of separate account investments to the international equity markets during the current year. The actual current year FTC can vary from the estimates due to actual FTCs passed through by the mutual funds. The three months ended September 30, 2007 included $0 true-up related to prior years. The three months ended September 30, 2006 included a tax benefit of $11 related to a prior period true-ups, comprised of $4 related to the first two quarters of 2006 and $7 related to a prior year.

The Company’s unrecognized tax benefits increased by $35 as a result of tax positions taken on the Company’s 2006 tax returns filed during the current period, bringing the total unrecognized tax benefits to $43. This entire amount, if it were recognized, would affect the effective tax rate.

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

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, 2007												September 30, 2007
		Net								Per Share				Net								Per Share
		Income				Shares				Amount				Income				Shares				Amount
Basic Earnings per Share
Net income available to common shareholders		$	851				315.4			$	2.70			$	2,354				317.3			$	7.42
Diluted Earnings per Share
Stock compensation plans			—				2.6				—				—				2.8				—
Net income available to common shareholders plus assumed conversions		$	851				318.0			$	2.68			$	2,354				320.1			$	7.35

		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

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

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 reportable 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. Each operating segment is allocated corporate surplus as needed to support its business. 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 2006 Form 10-K Annual Report.

The positive (negative) impact on realized gains and losses of the segments for allocated interest rate related realized gains and losses and the allocation of credit risk charges were as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Retail
Realized gains (losses)		$	5			$	7			$	13			$	24
Credit risk fees			(5	)			(6	)			(18	)			(19	)
Retirement Plans
Realized gains (losses)			2				2				5				7
Credit risk fees			(2	)			(3	)			(6	)			(7	)
Institutional
Realized gains (losses)			6				4				15				12
Credit risk fees			(6	)			(6	)			(22	)			(17	)
Individual Life
Realized gains (losses)			—				3				1				8
Credit risk fees			(2	)			(2	)			(7	)			(5	)
Group Benefits
Realized gains (losses)			1				—				4				2
Credit risk fees			(3	)			(2	)			(9	)			(7	)
International
Realized gains (losses)			—				1				—				1
Credit risk fees			(1	)			(1	)			(2	)			(2	)
Other
Realized gains (losses)			(14	)			(17	)			(38	)			(54	)
Credit risk fees			19				20				64				57
Total		$	—			$	—			$	—			$	—

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

3. Segment Information (continued)

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, 2007 and 2006, AARP accounted for earned premiums of $680 and $624, respectively, in Personal Lines. For the nine months ended September 30, 2007 and 2006, AARP accounted for earned premiums of $2.0 and $1.8 billion, respectively, in Personal Lines.

Through intersegment arrangements, Specialty Commercial reimburses Business Insurance and Personal Lines for certain losses, including, among other coverages, losses incurred from uncollectible reinsurance. In addition, prior to 2007, the Company retained a portion of the risks ceded under the Company’s principal catastrophe reinsurance program and the financial results of the Company’s retention were recorded in the Specialty Commercial segment. The amount of premiums ceded to third party reinsurers under the principal catastrophe reinsurance program and other reinsurance programs is 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 intersegment arrangements and retention were as follows:

		Three Months Ended								Nine Months Ended
Net assumed (ceded) earned premiums under		September 30,								September 30,
intersegment arrangements and retention		2007				2006				2007				2006
Business Insurance		$	(14	)		$	(14	)		$	(42	)		$	(54	)
Personal Lines			(2	)			(4	)			(5	)			(16	)
Specialty Commercial			16				18				47				70
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 2006 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 represent premiums earned less incurred losses, loss adjustment expenses and underwriting expenses. The sum of underwriting results, net investment income, net realized capital gains and losses, net servicing and other income, other expenses, and related income taxes is net income.

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

3. Segment Information (continued)

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.

Revenues

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Life
Retail		$	980			$	849			$	2,849			$	2,566
Retirement Plans			151				131				444				399
Institutional			829				429				1,894				1,314
Individual Life			282				271				856				817
Group Benefits			1,178				1,137				3,586				3,398
International			229				194				651				558
Other			(226	)			80				(247	)			(52	)
Total Life segment revenues			3,423				3,091				10,033				9,000
Net investment income (loss) on equity securities held for trading [1]			(698	)			1,185				746				669
Total Life			2,725				4,276				10,779				9,669
Property & Casualty
Ongoing Operations
Earned premiums
Business Insurance			1,271				1,292				3,844				3,823
Personal Lines			984				952				2,904				2,810
Specialty Commercial			371				388				1,122				1,170
Total Ongoing Operations earned premiums			2,626				2,632				7,870				7,803
Other Operations earned premiums			2				—				3				2
Net investment income			407				359				1,266				1,081
Other revenues [2]			126				118				368				355
Net realized capital gains (losses)			(75	)			16				(76	)			(8	)
Total Property & Casualty			3,086				3,125				9,431				9,233
Corporate			12				6				32				19
Total		$	5,823			$	7,407			$	20,242			$	18,921

[1]		Management does not include net investment income and the mark-to-market effects of equity securities held for trading supporting the international variable annuity business in its International segment revenues since corresponding amounts credited to policyholders are included within benefits, losses and loss adjustment expenses.
[2]		Represents servicing revenue.

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

3. Segment Information (continued)

Net Income (Loss)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Life
Retail		$	382			$	184			$	770			$	526
Retirement Plans			19				21				68				64
Institutional			39				24				101				75
Individual Life			63				46				153				139
Group Benefits			90				74				243				216
International			79				47				192				145
Other			(147	)			32				(246	)			(83	)
Total Life			525				428				1,281				1,082
Property & Casualty
Ongoing Operations
Underwriting results
Business Insurance			130				123				388				454
Personal Lines			78				89				292				321
Specialty Commercial			17				41				55				45
Total Ongoing Operations underwriting results		225					253				735				820
Net servicing income [1]			16				15				41				45
Net investment income			346				299				1,082				886
Net realized capital gains (losses)			(72	)			11				(73	)			(15	)
Other expenses			(63	)			(40	)			(179	)			(168	)
Income tax expense			(111	)			(163	)			(452	)			(464	)
Ongoing Operations			341				375				1,154				1,104
Other Operations			12				6				4				(83	)
Total Property & Casualty			353				381				1,158				1,021
Corporate			(27	)			(51	)			(85	)			(141	)
Net income		$	851			$	758			$	2,354			$	1,962

[1]		Net of expenses related to service business.

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

4. Investments and Derivative Instruments

		September 30, 2007																December 31, 2006
						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”)		$	9,700			$	26			$	(378	)		$	9,348			$	7,924			$	54			$	(53	)		$	7,925
Collateralized mortgage obligations (“CMOs”)
Agency backed			1,246				20				(7	)			1,259				1,184				17				(8	)			1,193
Non-agency backed			517				4				(2	)			519				116				—				(1	)			115
Commercial mortgage-backed securities (“CMBS”)
Agency backed			458				3				—				461				756				12				(1	)			767
Non-agency backed			17,914				198				(494	)			17,618				15,823				220				(144	)			15,899
Corporate			33,989				945				(781	)			34,153				35,069				1,193				(371	)			35,891
Government/Government agencies
Foreign			979				67				(7	)			1,039				1,213				87				(6	)			1,294
United States			936				15				(1	)			950				848				5				(7	)			846
Mortgage-backed securities (“MBS”)
Agency backed			2,811				12				(47	)			2,776				2,742				5				(45	)			2,702
States, municipalities and political subdivisions			12,538				382				(90	)			12,830				11,897				536				(27	)			12,406
Redeemable preferred stock			7				—				—				7				36				—				—				36
Short-term			858				—				—				858				1,681				—				—				1,681
Total fixed maturities		$	81,953			$	1,672			$	(1,807	)		$	81,818			$	79,289			$	2,129			$	(663	)		$	80,755

As of September 30, 2007 and December 31, 2006, under terms of securities lending programs, the fair value of loaned securities was approximately $4.2 billion and $2.2 billion, respectively, and was included in fixed maturities in the condensed consolidated balance sheet.

Variable Interest Entities (“VIEs”)

During the nine months ended September 30, 2007, the Company invested $120 in two newly established collateralized debt obligations (“CDOs”) where the Company is not the primary beneficiary and therefore is not required to consolidate these variable interest entities. Hartford Investment Management Company (“HIMCO”), a wholly-owned subsidiary of The Hartford, serves as collateral manager to the CDOs, which coupled with the Company’s investment, constitutes a significant involvement in the VIEs. The Company’s maximum exposure to loss is limited to its direct investment in those structures. Creditors have recourse only to the assets of the CDOs and not to the general credit of the Company. The Company’s maximum exposure to loss from consolidated and non-consolidated CDO VIEs managed by HIMCO was $409 as of September 30, 2007.

Derivative Instruments

The Company utilizes a variety of derivative instruments, including swaps, caps, floors, forwards, futures and options to achieve one of four Company approved objectives: to hedge risk arising from interest rate, equity market, credit spreads including issuer defaults, 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/or risk management purposes, which primarily involve managing asset or liability related risks that do not qualify for hedge accounting.

The Company’s derivative transactions are used in strategies permitted under the derivatives use plans required by the State of Connecticut, the State of Illinois and the State of New York insurance departments.

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 2006 Form 10-K Annual Report.

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

4. Investments and Derivative Instruments (continued)

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, 2007								December 31, 2006
		Asset				Liability				Asset				Liability
		Values				Values				Values				Values
Other investments		$	368			$	—			$	287			$	—
Reinsurance recoverables			80				—				—				22
Other policyholder funds and benefits payable			1				409				53				—
Consumer notes			—				26				—				1
Other liabilities			—				837				—				772
Total		$	449			$	1,272			$	340			$	795

The following table summarizes the notional amount and fair value of derivatives by hedge designation as of September 30, 2007 and December 31, 2006. 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, 2007								December 31, 2006
		Notional				Fair				Notional				Fair
		Amount				Value				Amount				Value
Cash-flow hedge		$	6,456			$	(389	)		$	7,964			$	(392	)
Fair-value hedge			5,145				24				4,338				1
Other investment and risk management activities			107,412				(458	)			73,542				(64	)
Total		$	119,013			$	(823	)		$	85,844			$	(455	)

The increase in notional amount since December 31, 2006, is primarily due to an increase in derivatives associated with the GMWB rider as a result of additional product sales as well as the related hedging derivatives. The Company offers certain variable annuity products with a GMWB rider, which is accounted for as an embedded derivative. For further discussion on the GMWB rider, refer to Note 6 of Notes to Condensed Consolidated Financial Statements.

The decrease in net fair value of derivative instruments since December 31, 2006 was primarily related to decreases in fair value of the GMWB rider embedded derivative and related hedging derivatives and credit derivatives, partially offset by the Japanese fixed annuity hedging instruments. The GMWB rider embedded derivative decreased in value primarily due to liability model assumption updates and modeling refinements made during both the second and third quarters, including those for dynamic lapse behavior and correlations of market returns across underlying indices, as well as other assumption updates made during the second quarter to reflect newly reliable market inputs for volatility. Credit derivatives, including credit default swaps and CMBS index swaps, declined in value due to credit spreads widening. Deterioration in the U.S. housing sector, illiquidity in global commercial paper markets, and weakness in the broad bank and finance industries, all contributed to substantial spread widening in credit derivatives and structured credit products during the quarter. The Japanese fixed annuity contract hedging instruments increased in value primarily due to appreciation of the Japanese yen in comparison to the U.S. dollar.

During the nine months ended September 30, 2007, the Company entered into two customized swap contracts to hedge certain risk components for the remaining term of certain blocks of non-reinsured GMWB riders. These customized derivative contracts provide protection from capital markets risks based on policyholder behavior assumptions as specified by the Company. As of September 30, 2007, these swaps had a notional value of $13.4 billion and a market value of $8. Due to the significance of the non-observable inputs associated with pricing these derivatives, the initial difference between the transaction price and modeled value was deferred in accordance with EITF No. 02-3 “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” and included in Other Assets in the Condensed Consolidated Balance Sheets. The deferred loss of $51 will be recognized in retained earnings upon adoption of SFAS 157 or in net income if the non-observable inputs in the derivative prices become observable prior to the adoption of SFAS 157. In addition, any change in value of the swaps due to the initial adoption of SFAS 157 will also be recorded in retained earnings with subsequent changes in fair value recorded in net income.

During the first quarter of 2007, the Company launched a new rider that is attached to certain Japanese variable annuity contracts that provides the contract holder a guaranteed minimum accumulation benefit (“GMAB”), which is accounted for as an embedded derivative. As of September 30, 2007, the notional related to the GMAB embedded derivatives was $2.3 billion with an asset value of $1, respectively.

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

4. Investments and Derivative Instruments (continued)

For the three and nine months ended September 30, 2007, after-tax net gains (losses) representing the total ineffectiveness of all cash-flow hedges were $1. For the three and nine months ended September 30, 2006, after-tax net losses representing the total ineffectiveness of all cash-flow hedges were $(3) and $(13), respectively. For the three and nine months ended September 30, 2007, after-tax net losses representing the total ineffectiveness of all fair-value hedges were $1 and $(2), respectively. For the three and nine months ended September 30, 2006, after-tax net losses representing the total ineffectiveness of all fair-value hedges were $(1).

The total change in value for derivative-based strategies that do not qualify for hedge accounting treatment (“non-qualifying strategies”), including periodic derivative net coupon settlements, are reported in net realized capital gains (losses). These non-qualifying strategies resulted in after-tax net losses of $(81) and $(239), respectively, for the three and nine months ended September 30, 2007. For the three and nine months ended September 30, 2007, net losses were primarily comprised of net losses on GMWB rider embedded derivatives and net losses on credit derivatives. The net losses on GMWB rider embedded derivatives were primarily due to liability model assumption updates and modeling refinements made during both the second and third quarters, including those for dynamic lapse behavior and correlations of market returns across underlying indices, as well as other assumption updates made during the second quarter to reflect newly reliable market inputs for volatility. The net losses on credit derivatives, including credit default swaps, CMBS index swaps, and bank loan total return swaps, were due to credit spreads widening. For the three months ended September 30, 2007, the net losses were partially offset by net gains on the Japanese fixed annuity hedging instruments primarily due to the Japanese yen appreciating against the U.S. dollar.

For the three and nine months ended September 30, 2006, non-qualifying 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 GMWB 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 Japanese 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.

As of September 30, 2007, the after-tax deferred net 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 $(18). 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, 2007 and 2006, the Company had no net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring.

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

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

Changes in deferred policy acquisition costs and present value of future profits by Life and Property & Casualty were as follows:

Life

Unlock Results

During the third quarter of 2007, the Company completed a comprehensive study of assumptions underlying estimated gross profits (“EGPs”), resulting in an “unlock”. The study covered all assumptions, including mortality, lapses, expenses, and separate account returns, in substantially all product lines. The new best estimate assumptions were applied to the current in-force to project future gross profits. The after-tax impact on the Company’s assets and liabilities as a result of the unlock during the third quarter was as follows:

										Death and
						Unearned				Income				Sales
Segment		DAC and				Revenue				Benefit				Inducement
After-tax (charge) benefit		PVFP				Reserves				Reserves [1]				Assets				Total
Retail		$	197			$	(5	)		$	(4	)		$	9			$	197
Retirement Plans			(9	)			—				—				—				(9	)
Institutional			1				—				—				—				1
Individual Life			24				(8	)			—				—				16
International - Japan			16				—				6				—				22
Life - Other			(17	)			—				—				—				(17	)
Corporate			3				—				—				—				3
Total		$	215			$	(13	)		$	2			$	9			$	213

[1]		As a result of the unlock, death benefit reserves, in Retail, decreased $4, pre-tax, offset by a decrease of $10, pre-tax, in reinsurance recoverables.

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

		2007				2006
Balance, January 1, before cumulative effect of accounting change, pre-tax		$	9,071			$	8,568
Cumulative effect of accounting change, pre-tax (SOP 05-1) [1]			(79	)			—
Balance, January 1, as adjusted			8,992				8,568
Deferred costs			1,570				1,420
Amortization - Deferred policy acquisition costs and present value of future profits			(931	)			(913	)
Amortization - Unlock, pre-tax			327				—
Adjustments to unrealized gains and losses on securities available-for-sale and other			257				54
Effect of currency translation adjustment			61				(3	)
Balance, September 30		$	10,276			$	9,126

[1] The Company’s cumulative effect of accounting change includes an additional $(1), pre-tax, related to sales inducements.

Property & Casualty

		2007				2006
Balance, January 1		$	1,197			$	1,134
Deferred costs			1,607				1,640
Amortization - Deferred policy acquisition costs			(1,581	)			(1,572	)
Balance, September 30		$	1,223			$	1,202

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

6. Separate Accounts, Death Benefits and Living Benefit Features

The Company records the variable portion of individual variable annuities, 401(k), institutional, 403(b)/457, private placement life and variable life insurance products within separate account assets and liabilities, which are reported at fair value. Separate account assets are segregated from other investments. Investment income and gains and losses from those separate account assets, which accrue directly to, and whereby investment risk is borne by the policyholder, are offset by the related liability changes within the same line item in the condensed consolidated statements of operations. The fees earned for administrative and contract holder maintenance services performed for these separate accounts are included in fee income. For the three and nine months ended September 30, 2007 and 2006, there were no gains or losses on transfers of assets from the general account to the separate account.

Many of the variable annuity contracts issued by the Company offer various guaranteed minimum death, withdrawal, income and accumulation benefits. Guaranteed minimum death and income benefits are offered in various forms as described in further detail throughout this Note. 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 in-force 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 December 31, 2006		$	475			$	35
Incurred			108				12
Paid			(67	)			(1	)
Unlock			(4	)			(9	)
Currency translation adjustment			—				1
Liability balance as of September 30, 2007		$	512			$	38

[1]		The reinsurance recoverable asset related to the U.S. GMDB was $320 as of September 30, 2007. The reinsurance recoverable asset related to the Japan GMDB was $8 as of September 30, 2007.

		U.S. GMDB [1]			Japan GMDB/GMIB [1]
Liability balance as of December 31, 2005		$	158			$	50
Incurred			92				24
Paid			(84	)			(1	)
Currency translation adjustment			—				—
Liability balance as September 30, 2006		$	166			$	73

[1]		The reinsurance recoverable asset related to the U.S. GMDB was $32 as of September 30, 2006. The reinsurance recoverable asset related to the Japan GMDB was $3 as of September 30, 2006.

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 in the Company’s condensed consolidated balance sheets. Changes in the GMDB and GMIB liability are recorded in benefits, losses and loss adjustment expenses in the Company’s condensed consolidated 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. As described under Unlock Results in Note 5, the Company unlocked its assumptions related to death and income benefit (e.g., GMDB/GMIB) reserves during the third quarter of 2007.

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

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

The following table provides details concerning GMDB and GMIB exposure as of September 30, 2007:

Breakdown of Variable Annuity Account Value by GMDB/GMIB Type
										Retained Net				Weighted Average
		Account				Net Amount				Amount				Attained Age of
Maximum anniversary value (“MAV”) [1]		Value				at Risk				at Risk				Annuitant
MAV only		$	50,944			$	3,138			$	280				65
With 5% rollup [2]			3,626				249				51				64
With Earnings Protection Benefit Rider (“EPB”) [3]			5,765				603				95				62
With 5% rollup & EPB			1,408				170				33				64
Total MAV			61,743				4,160				459
Asset Protection Benefit (“APB”) [4]			43,053				135				70				62
Lifetime Income Benefit (“LIB”) — Death Benefit [5]			9,034				27				27				62
Reset [6] (5-7 years)			6,541				87				87				66
Return of Premium [7]/Other			10,572				28				27				55
Subtotal U.S. Guaranteed Minimum Death Benefits			130,943				4,437				670				63
Japan Guaranteed Minimum Death and Income Benefit [8]			34,888				207				130				66
Total at September 30, 2007		$	165,831			$	4,644			$	800

[1]		MAV: the death benefit is the greatest of current account value, net premiums paid and the highest account value on any anniversary before age 80 (adjusted for withdrawals).
[2]		Rollup: the death benefit is the greatest of the MAV, current account value, net premium paid and premiums (adjusted for withdrawals) accumulated at generally 5% simple interest up to the earlier of age 80 or 100% of adjusted premiums.
[3]		EPB: the death benefit is the greatest of the MAV, current account value, or contract value plus a percentage of the contract’s growth. The contract’s growth is account value less premiums net of withdrawals, subject to a cap of 200% of premiums net of withdrawals.
[4]		APB: the death benefit is the greater of current account value or MAV, not to exceed current account value plus 25% times the greater of net premiums and MAV (each adjusted for premiums in the past 12 months).
[5]		LIB: the death benefit is the greatest of current account value or MAV, net premiums paid, or a benefit amount that ratchets over time, generally based on market performance.
[6]		Reset: the death benefit is the greatest of current account value, net premiums paid and the most recent five to seven year anniversary account value before age 80 (adjusted for withdrawals).
[7]		Return of premium: the death benefit is the greater of current account value and net premiums paid.
[8]		Death benefits include a Return of Premium and MAV (before age 80) paid in a single lump sum. The income benefit is a guarantee to return initial investment, adjusted for earnings liquidity, paid through a fixed annuity, after a minimum deferral period of 10, 15 or 20 years. The guaranteed remaining balance related to the Japan GMIB was $25.2 billion and $22.6 billion as of September 30, 2007 and December 31, 2006, respectively.