Quarterly Report

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 March 31, 2011


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

For the transition period from to

Commission File Number: 001-13958

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)


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


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

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

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

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

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


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

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

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

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

TABLE OF CONTENTS


Item	Description	Page

	Part I. FINANCIAL INFORMATION

1.	Financial Statements

	Report of Independent Registered Public Accounting Firm		5

	Condensed Consolidated Statements of Operations — For the Three Months Ended March 31, 2011 and 2010		6

	Condensed Consolidated Balance Sheets — As of March 31, 2011 and December 31, 2010		7

	Condensed Consolidated Statements of Changes in Stockholders’ Equity — For the Three Months Ended March 31, 2011 and 2010		8

	Condensed Consolidated Statements of Comprehensive Income — For the Three Months Ended March 31, 2011 and 2010		9

	Condensed Consolidated Statements of Cash Flows — For the Three Months Ended March 31, 2011 and 2010		10

	Notes to Condensed Consolidated Financial Statements		11

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		52

3.	Quantitative and Qualitative Disclosures About Market Risk		104

4.	Controls and Procedures		104

	Part II. OTHER INFORMATION

1.	Legal Proceedings		105

1A.	Risk Factors		107

2.	Unregistered Sales of Equity Securities and Use of Proceeds		107

6.	Exhibits		107

	Signature		108

	Exhibits Index		109

Exhibit 15.01
Exhibit 31.01
Exhibit 31.02
Exhibit 32.01
Exhibit 32.02
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Forward-Looking Statements

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

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

•

challenges related to the Company’s current operating environment, including continuing uncertainty about the strength and speed of the recovery in the United States and other key economies and the impact of governmental stimulus and austerity initiatives, sovereign credit concerns and other developments on financial, commodity and credit markets and consumer spending and investment;

•

the success of our initiatives relating to the realignment of our business in 2010 and plans to improve the profitability and long-term growth prospects of our key divisions, including through opportunistic acquisitions or divestitures, and the impact of regulatory or other constraints on our ability to complete these initiatives and deploy capital among our businesses as and when planned;

•

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

•

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

•

the impact on our statutory capital of various factors, including many that are outside the Company’s control, which can in turn affect our credit and financial strength ratings, cost of capital, regulatory compliance and other aspects of our business and results;

•

risks to our business, financial position, prospects and results associated with negative rating actions or downgrades in the Company’s financial strength and credit ratings or negative rating actions or downgrades relating to our investments;

•

the potential for differing interpretations of the methodologies, estimations and assumptions that underlie the valuation of the Company’s financial instruments that could result in changes to investment valuations;

•

the subjective determinations that underlie the Company’s evaluation of other-than-temporary impairments on available-for-sale securities;

•

losses due to nonperformance or defaults by others;

•

the potential for further acceleration of deferred policy acquisition cost amortization;

•

the potential for further impairments of our goodwill or the potential for changes in valuation allowances against deferred tax assets;

•

the possible occurrence of terrorist attacks and the Company’s ability to contain its exposure, including the effect of the absence or insufficiency of applicable terrorism legislation on coverage;

•

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

•

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

•

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

•

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

•

the possibility of unfavorable loss development;

•

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

•

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

•

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

•

the potential effect of other domestic and foreign regulatory developments, including those that could adversely impact the demand for the Company’s products, operating costs and required capital levels, including changes to statutory reserves and/or risk-based capital requirements related to secondary guarantees under universal life and variable annuity products or changes in U.S. federal or other tax laws that affect the relative attractiveness of our investment products;

•

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

•

the uncertain effects of emerging claim and coverage issues;

•

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

•

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

•

the Company’s ability to maintain the availability of its systems and safeguard the security of its data in the event of a disaster or other unanticipated events;

•

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

•

the potential for difficulties arising from outsourcing relationships;

•

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

•

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

•

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

•

unfavorable judicial or legislative developments; and

•

other factors described in such forward-looking statements.

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

Part I. FINANCIAL INFORMATION


Item 1.		Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.

Hartford, Connecticut

We have reviewed the accompanying condensed consolidated balance sheet of The Hartford Financial Services Group, Inc. and subsidiaries (the “Company”) as of March 31, 2011, and the related condensed consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for the three-month periods ended March 31, 2011 and 2010. These interim financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2010, and the related consolidated statements of operations, changes in equity, comprehensive income (loss), and cash flows for the year then ended (not presented herein); and in our report dated February 25, 2011 (which report includes an explanatory paragraph relating to the Company’s change in its method of accounting and reporting for variable interest entities and embedded credit derivatives as required by accounting guidance adopted in 2010, for other-than-temporary impairments as required by accounting guidance adopted in 2009, and for the fair value measurement of financial instruments as required by accounting guidance adopted in 2008), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

DELOITTE & TOUCHE LLP
Hartford, Connecticut
May 2, 2011

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

Condensed Consolidated Statements of Operations


	Three Months Ended
	March 31,
(In millions, except for per share data)	2011			2010
	(Unaudited)

Revenues
Earned premiums	$	3,519		$	3,527
Fee income		1,209			1,180
Net investment income:
Securities available-for-sale and other		1,116			1,059
Equity securities, trading		803			701

Total net investment income		1,919			1,760
Net realized capital losses:
Total other-than-temporary impairment (“OTTI”) losses		(119	)		(340	)
OTTI losses recognized in other comprehensive income		64			188

Net OTTI losses recognized in earnings		(55	)		(152	)
Net realized capital losses, excluding net OTTI losses recognized in earnings		(348	)		(122	)

Total net realized capital losses		(403	)		(274	)
Other revenues		64			64

Total revenues		6,308			6,257

Benefits, losses and expenses
Benefits, losses and loss adjustment expenses		3,178			3,133
Benefits, losses and loss adjustment expenses — returns credited on international variable annuities		803			701
Amortization of deferred policy acquisition costs and present value of future profits		664			647
Insurance operating costs and other expenses		1,125			1,121
Interest expense		128			120

Total benefits, losses and expenses		5,898			5,722
Income from continuing operations before income taxes		410			535
Income tax expense		59			216

Income from continuing operations, net of tax		351			319
Income from discontinued operations, net of tax		160			—

Net income	$	511		$	319

Preferred stock dividends and accretion of discount		10			483

Net income (loss) available to common shareholders	$	501		$	(164	)

*Income (loss) from continuing operations, net of tax, available to common shareholders per common share*
Basic	$	0.77		$	(0.42	)
Diluted	$	0.69		$	(0.42	)

*Net income (loss) available to common shareholders per common share*
Basic	$	1.13		$	(0.42	)
Diluted	$	1.01		$	(0.42	)

Cash dividends declared per common share	$	0.10		$	0.05

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

Condensed Consolidated Balance Sheets


	March 31,			December 31,
(In millions, except for share and per share data)	2011			2010
	(Unaudited)
*Assets*
Investments
Fixed maturities, available-for-sale, at fair value (amortized cost of $78,512 and $78,419) (includes variable interest entity assets, at fair value, of $334 and $406)	$	78,268		$	77,820
Fixed maturities, at fair value using the fair value option (includes variable interest entity assets of $329 and $323)		1,230			649
Equity securities, trading, at fair value (cost of $32,615 and $33,899)		32,339			32,820
Equity securities, available-for-sale, at fair value (cost of $951 and $1,013)		993			973
Mortgage loans (net of allowances for loan losses of $153 and $155)		4,736			4,489
Policy loans, at outstanding balance		2,181			2,181
Limited partnerships and other alternative investments (includes variable interest entity assets of $9 and $14)		1,972			1,918
Other investments		640			1,617
Short-term investments		7,330			8,528

Total investments		129,689			130,995
Cash		2,317			2,062
Premiums receivable and agents’ balances, net		3,396			3,273
Reinsurance recoverables, net		4,981			4,862
Deferred policy acquisition costs and present value of future profits		9,843			9,857
Deferred income taxes, net		3,401			3,725
Goodwill		1,051			1,051
Property and equipment, net		1,132			1,150
Other assets		2,685			1,629
Separate account assets		164,043			159,742

Total assets	$	322,538		$	318,346


*Liabilities*
Reserve for future policy benefits and unpaid losses and loss adjustment expenses	$	39,420		$	39,598
Other policyholder funds and benefits payable		43,891			44,550
Other policyholder funds and benefits payable — international variable annuities		32,297			32,793
Unearned premiums		5,314			5,176
Short-term debt		400			400
Long-term debt		6,210			6,207
Consumer notes		382			382
Other liabilities (includes variable interest entity liabilities of $429 and $394)		9,582			9,187
Separate account liabilities		164,043			159,742

Total liabilities		301,539			298,035
Commitments and Contingencies (Note 9)
*Stockholders’ Equity*
Preferred stock, $0.01 par value — 50,000,000 shares authorized, 575,000 shares issued, liquidation preference $1,000 per share		556			556
Common stock, $0.01 par value — 1,500,000,000 shares authorized, 469,754,771 shares issued		5			5
Additional paid-in capital		10,391			10,448
Retained earnings		12,533			12,077
Treasury stock, at cost — 24,646,651 and 25,205,283 shares		(1,722	)		(1,774	)
Accumulated other comprehensive loss, net of tax		(764	)		(1,001	)

Total stockholders’ equity		20,999			20,311

Total liabilities and stockholders’ equity	$	322,538		$	318,346

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity


	Three Months Ended
	March 31,
(In millions, except for share data)	2011			2010
	(Unaudited)
Preferred Stock, at beginning of period	$	556		$	2,960
Issuance of mandatory convertible preferred stock		—			556
Accelerated accretion of discount from redemption of preferred stock issued to U.S. Treasury		—			440
Redemption of preferred stock to the U.S. Treasury		—			(3,400	)

Preferred Stock, at end of period		556			556

Common Stock		5			5

Additional Paid-in Capital, at beginning of period		10,448			8,985
Issuance of shares under public offering		—			1,599
Issuance of shares under incentive and stock compensation plans		(47	)		(103	)
Tax expense on employee stock options and awards		(10	)		(6	)

Additional Paid-in Capital, at end of period		10,391			10,475

Retained Earnings, at beginning of period, before cumulative effect of accounting change, net of tax		12,077			11,164
Cumulative effect of accounting change, net of tax		—			26

Retained Earnings, at beginning of period, as adjusted		12,077			11,190
Net income (loss)		511			319
Accelerated accretion of discount from redemption of preferred stock issued to U.S. Treasury		—			(440	)
Dividends on preferred stock		(10	)		(43	)
Dividends declared on common stock		(45	)		(20	)

Retained Earnings, at end of period		12,533			11,006

Treasury Stock, at Cost, at beginning of period		(1,774	)		(1,936	)
Issuance of shares under incentive and stock compensation plans from treasury stock		57			114
Return of shares under incentive and stock compensation plans to treasury stock		(5	)		(3	)

Treasury Stock, at Cost, at end of period		(1,722	)		(1,825	)

Accumulated Other Comprehensive Loss, Net of Tax, at beginning of period		(1,001	)		(3,312	)
Total other comprehensive income		237			935

Accumulated Other Comprehensive Loss, Net of Tax, at end of period		(764	)		(2,377	)

Noncontrolling Interest, at beginning of period		—			29
Recognition of noncontrolling interest in other liabilities		—			(29	)

Noncontrolling Interest, at end of period		—			—

Total Stockholders’ Equity	$	20,999		$	17,840


Preferred Shares Outstanding, at beginning of period (in thousands)		575			3,400
Redemption of shares issued to the U.S. Treasury		—			(3,400	)
Issuance of mandatory convertible preferred shares		—			575

Preferred Shares Outstanding, at end of period		575			575

Common Shares Outstanding, at beginning of period (in thousands)		444,549			383,007
Issuance of shares under public offering		—			59,590
Issuance of shares under incentive and stock compensation plans		727			1,455
Return of shares under incentive and stock compensation plans and other to treasury stock		(168	)		(125	)

Common Shares Outstanding, at end of period		445,108			443,927

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

Condensed Consolidated Statements of Comprehensive Income


	Three Months Ended
	March 31,
(In millions)	2011			2010
	(Unaudited)
Comprehensive Income
Net income	$	511		$	319

Other comprehensive income (loss)
Change in net unrealized gain / loss on securities		310			859
Change in OTTI losses recognized in other comprehensive income		5			32
Change in net gain (loss) on cash-flow hedging instruments		(68	)		66
Change in foreign currency translation adjustments		(32	)		(36	)
Amortization of prior service cost and actuarial net losses included in net periodic benefit costs		22			14

Total other comprehensive income		237			935

Total comprehensive income	$	748		$	1,254

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

Condensed Consolidated Statements of Cash Flows


	Three Months Ended
	March 31,
(In millions)	2011			2010
	(Unaudited)
*Operating Activities*
Net income	$	511		$	319
*Adjustments to reconcile net income to net cash provided by operating activities*
Amortization of deferred policy acquisition costs and present value of future profits		664			651
Additions to deferred policy acquisition costs and present value of future profits		(653	)		(680	)
Change in reserve for future policy benefits and unpaid losses and loss adjustment expenses and unearned premiums		(39	)		33
Change in reinsurance recoverables		59			45
Change in receivables and other assets		(49	)		(180	)
Change in payables and accruals		(23	)		(109	)
Change in accrued and deferred income taxes		67			128
Net realized capital losses		176			276
Net disbursements from investment contracts related to policyholder funds — international variable annuities		(496	)		(257	)
Net decrease in equity securities, trading		481			268
Depreciation and amortization		128			144
Other operating activities, net		(352	)		(150	)

Net cash provided by operating activities		474			488
*Investing Activities*
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale		8,860			11,534
Equity securities, available-for-sale		24			108
Mortgage loans		70			726
Partnerships		58			145
Payments for the purchase of:
Fixed maturities, available-for-sale		(7,588	)		(11,973	)
Fixed maturities, fair value option		(531	)		—
Equity securities, available-for-sale		(25	)		(15	)
Mortgage loans		(326	)		(18	)
Partnerships		(55	)		(72	)
Proceeds from business sold		278			—
Derivatives, net		(465	)		(252	)
Change in policy loans, net		—			(3	)
Change in payables for collateral under securities lending, net		—			(23	)
Other investing activities, net		(46	)		(58	)

Net cash provided by investing activities		254			99
*Financing Activities*
Deposits and other additions to investment and universal life-type contracts		3,338			5,468
Withdrawals and other deductions from investment and universal life-type contracts		(6,174	)		(5,614	)
Net transfers from separate accounts related to investment and universal life-type contracts		2,418			124
Proceeds from issuance of long-term debt		—			1,090
Payments on capital lease obligations		—			(68	)
Repayments at maturity or settlement of consumer notes		—			(302	)
Net proceeds from issuance of mandatory convertible preferred stock		—			556
Net proceeds from issuance of common shares under public offering		—			1,600
Redemption of preferred stock issued to the U.S. Treasury		—			(3,400	)
Proceeds from net issuance of shares under incentive and stock compensation plans and excess tax benefit		(2	)		8
Dividends paid on preferred stock		(11	)		(64	)
Dividends paid on common stock		(19	)		(20	)
Changes in bank deposits and payments on bank advances		(1	)		(30	)

Net cash used for financing activities		(451	)		(652	)
Foreign exchange rate effect on cash		(22	)		2
Net increase (decrease) in cash		255			(63	)
Cash — beginning of period		2,062			2,142

Cash — end of period	$	2,317		$	2,079

*Supplemental Disclosure of Cash Flow Information*
Income taxes paid	$	26		$	87
Interest paid	$	89		$	61

See Notes to Condensed Consolidated Financial Statements

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

1. Basis of Presentation and Accounting Policies

Basis of Presentation

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

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

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

Consolidation

The Condensed Consolidated Financial Statements include the accounts of The Hartford Financial Services Group, Inc., companies in which the Company directly or indirectly has a controlling financial interest and those variable interest entities in which the Company is required to consolidate. Entities in which the Company has significant influence over the operating and financing decisions but are not required to consolidate are reported using the equity method. Material intercompany transactions and balances between The Hartford and its subsidiaries and affiliates have been eliminated. For further discussions on variable interest entities see Note 5 of the Notes to Condensed Consolidated Financial Statements.

Discontinued Operations

For first quarter 2011 reporting, the Company is presenting the operations of certain subsidiaries that meet the criteria for reporting as discontinued operations. Income statement amounts for prior periods have been retrospectively reclassified. See Note 12 of the Notes to Condensed Consolidated Financial Statements for information on the specific subsidiaries and related impacts.

Use of Estimates

The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The most significant estimates include those used in determining property and casualty insurance product reserves, net of reinsurance; estimated gross profits used in the valuation and amortization of assets and liabilities associated with variable annuity and other universal life-type contracts; evaluation of other-than-temporary impairments on available-for-sale securities and valuation allowances on investments; living benefits required to be fair valued; goodwill impairment; valuation of investments and derivative instruments; pension and other postretirement benefit obligations; valuation allowance on deferred tax assets; and contingencies relating to corporate litigation and regulatory matters. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the Condensed Consolidated Financial Statements.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in The Hartford’s 2010 Form 10-K Annual Report, which should be read in conjunction with these accompanying Condensed Consolidated Financial Statements.

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

1. Basis of Presentation and Accounting Policies (continued)

Income Taxes

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


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

Income tax expense	$	59		$	216

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

The Company’s unrecognized tax benefits were unchanged during the three months ended March 31, 2011, remaining at $48 as of March 31, 2011. This entire amount, if it were recognized, would affect the effective tax rate for the applicable periods.

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

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

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

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

2. Earnings (Loss) Per Common Share

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


	Three Months Ended
	March 31,
(In millions, except for per share data)	2011		2010
*Earnings*
Income from continuing operations
Income from continuing operations, net of tax	$	351	$	319
Less: Preferred stock dividends and accretion of discount		10		483

Income (loss) from continuing operations, net of tax, available to common shareholders		341		(164	)
Add: Dilutive effect of preferred stock dividends		10		—

Income (loss) from continuing operations, net of tax, available to common shareholders and assumed conversion of preferred shares	$	351	$	(164	)


Income (loss) from discontinued operations, net of tax	$	160	$	—

Net income (loss)
Net income	$	511	$	319
Less: Preferred stock dividends and accretion of discount		10		483

Net income (loss) available to common shareholders		501		(164	)
Add: Dilutive effect of preferred stock dividends		10		—

Net income (loss) available to common shareholders and assumed conversion of preferred shares	$	511	$	(164	)


*Shares*
Weighted average common shares outstanding, basic		444.6		393.7

Dilutive effect of warrants		41.1		—
Dilutive effect of stock compensation plans		1.8		—
Dilutive effect of mandatory convertible preferred shares		20.7		—

Weighted average shares outstanding and dilutive potential common shares		508.2		393.7


*Earnings (loss) per common share*
Basic
Income (loss) from continuing operations, net of tax, available to common shareholders	$	0.77	$	(0.42	)
Income (loss) from discontinued operations, net of tax		0.36		—

Net income (loss) available to common shareholders	$	1.13	$	(0.42	)


Diluted
Income (loss) from continuing operations, net of tax, available to common shareholders	$	0.69	$	(0.42	)
Income (loss) from discontinued operations, net of tax		0.32		—

Net income (loss) available to common shareholders	$	1.01	$	(0.42	)

The declaration of a quarterly common stock dividend of $0.10 during the first quarter of 2011 triggered a provision in The Hartford’s Warrant Agreement with The Bank of New York Mellon, relating to warrants to purchase common stock issued in connection with the Company’s participation in the Capital Purchase Program, resulting in an adjustment to the warrant exercise price to $9.773 from $9.790.

As a result of the net loss available to common shareholders for the three months ended March 31, 2010, the Company is required to use basic weighted average common shares outstanding in the calculation of the three months ended March 31, 2010 diluted loss per share, since the inclusion of 33.6 million shares for warrants, 1.2 million shares for stock compensation plans and 3.4 million shares for mandatory convertible preferred shares, along with the related dividend adjustment, would have been antidilutive to the earnings per share calculation. In the absence of the net loss available to common shareholders and assuming the impact of the mandatory convertible preferred shares was not antidilutive, weighted average common shares outstanding and dilutive potential common shares would have totaled 431.9 million.

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

3. Segment Information

The Hartford is organized into three customer-oriented divisions, Commercial Markets, Consumer Markets and Wealth Management, conducting business principally in seven reporting segments. The Company’s seven reporting segments, as well as the Corporate and Other category, are as follows:

Commercial Markets

Property & Casualty Commercial

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

Group Benefits

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

Consumer Markets

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

Wealth Management

Global Annuity

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

Life Insurance

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

Retirement Plans

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

Mutual Funds

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

Corporate and Other

The Hartford includes in Corporate and Other the Company’s debt financing and related interest expense, as well as other capital raising activities; banking operations; certain fee income and commission expenses associated with sales of non-proprietary products by broker-dealer subsidiaries; and certain purchase accounting adjustments and other charges not allocated to the segments. Also included in Corporate and Other is the Company’s management of certain property and casualty operations that have discontinued writing new business and substantially all of the Company’s asbestos and environmental exposures, collectively referred to as Other Operations.

Financial Measures and Other Segment Information

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


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

Net income	$	511		$	319

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

3. Segment Information (continued)

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


	Three Months Ended
	March 31,
	2011			2010
Earned premiums, fees, and other considerations
Property & Casualty Commercial
Workers’ compensation	$	665		$	575
Property		135			140
Automobile		146			152
Package business		283			279
Liability		135			139
Fidelity and surety		55			56
Professional liability		79			83

Total Property & Casualty Commercial		1,498			1,424
Group Benefits
Group disability		477			531
Group life and accident		517			512
Other		50			59

Total Group Benefits		1,044			1,102
Consumer Markets
Automobile		672			713
Homeowners		284			283

Total Consumer Markets [1]		956			996
Global Annuity
Variable annuity		639			600
Fixed / MVA and other annuity		10			12
Institutional investment products		1			13

Total Global Annuity		650			625
Life Insurance
Variable life		90			102
Universal life		106			105
Term / other life		13			13
PPLI		44			40

Total Life Insurance		253			260
Retirement Plans
401(k)		84			76
Government plans		13			11

Total Retirement Plans		97			87
Mutual Funds
Non-proprietary		162			151
Proprietary		16			16

Total Mutual Funds		178			167
Corporate and Other		52			46

Total earned premiums, fees, and other considerations		4,728			4,707
Net investment income:
Securities available-for-sale and other		1,116			1,059
Equity securities, trading		803			701

Total net investment income		1,919			1,760
Net realized capital losses		(403	)		(274	)
Other revenues		64			64

Total revenues	$	6,308		$	6,257


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

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

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

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

The following section and Note 4a apply the fair value hierarchy and disclosure requirements for the Company’s financial instruments that are carried at fair value. The fair value hierarchy prioritizes the inputs in the valuation techniques used to measure fair value into three broad Levels (Level 1, 2 or 3).


Level 1		Observable inputs that reflect quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. Level 1 securities include highly liquid U.S. Treasuries, money market funds and exchange traded equity securities, open-ended mutual funds reported in separate account assets and derivative securities, including futures and certain option contracts.

Level 2		Observable inputs, other than quoted prices included in Level 1, for the asset or liability or prices for similar assets and liabilities. Most fixed maturities and preferred stocks, including those reported in separate account assets, are model priced by vendors using observable inputs and are classified within Level 2. Also included in the Level 2 category are exchange traded equity securities, investment grade private placement securities and derivative instruments that are priced using models with significant observable market inputs, including interest rate, foreign currency and certain credit default swap contracts and have no significant unobservable market inputs.

Level 3		Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). Level 3 securities include less liquid securities such as lower quality asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”), commercial real estate (“CRE”) collateralized debt obligations (“CDOs”), residential mortgage-backed securities (“RMBS”) primarily backed by below-prime loans and below investment grade private placement securities. Also included in Level 3 are guaranteed product embedded and reinsurance derivatives and other complex derivative securities, including customized guaranteed minimum withdrawal benefit (“GMWB”) hedging derivatives (see Note 4a for further information on GMWB product related financial instruments), equity derivatives, long dated derivatives, swaps with optionality, certain complex credit derivatives and certain other liabilities. Because Level 3 fair values, by their nature, contain one or more significant unobservable inputs as there is little or no observable market for these assets and liabilities, considerable judgment is used to determine the Level 3 fair values. Level 3 fair values represent the Company’s best estimate of an amount that could be realized in a current market exchange absent actual market exchanges.

In many situations, inputs used to measure the fair value of an asset or liability position may fall into different levels of the fair value hierarchy. In these situations, the Company will determine the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value. Transfers of securities among the levels occur at the beginning of the reporting period. Transfers between Level 1 and Level 2 were not material for the three months ended March 31, 2011. In most cases, both observable (e.g., changes in interest rates) and unobservable (e.g., changes in risk assumptions) inputs are used in the determination of fair values that the Company has classified within Level 3. Consequently, these values and the related gains and losses are based upon both observable and unobservable inputs. The Company’s fixed maturities included in Level 3 are classified as such as they are primarily priced by independent brokers and/or within illiquid markets.

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

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

These disclosures provide information as to the extent to which the Company uses fair value to measure financial instruments and information about the inputs used to value those financial instruments to allow users to assess the relative reliability of the measurements. The following tables present assets and (liabilities) carried at fair value by hierarchy level, excluding those related to the Company’s living benefits and associated hedging programs, which are reported in Note 4a.


	March 31, 2011
				Quoted Prices in
				Active Markets			Significant			Significant
				for Identical			Observable			Unobservable
				Assets			Inputs			Inputs
	Total			(Level 1)			(Level 2)			(Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
ABS	$	3,150		$	—		$	2,704		$	446
CDOs		2,674			—			—			2,674
CMBS		7,709			—			6,968			741
Corporate		40,913			—			38,817			2,096
Foreign government/government agencies		1,802			—			1,739			63
States, municipalities and political subdivisions (“Municipal”)		12,327			—			12,051			276
RMBS		5,014			—			3,890			1,124
U.S. Treasuries		4,679			367			4,312			—

Total fixed maturities, AFS		78,268			367			70,481			7,420
Fixed maturities, FVO		1,230			—			651			579
Equity securities, trading		32,339			2,283			30,056			—
Equity securities, AFS		993			318			595			80
Derivative assets
Credit derivatives		(7	)		—			(14	)		7
Equity derivatives		3			—			—			3
Foreign exchange derivatives		324			—			324			—
Interest rate derivatives		(7	)		—			(57	)		50
Other derivative contracts		31			—			—			31

Total derivative assets [1]		344			—			253			91
Short-term investments		7,330			468			6,862			—
Separate account assets [2]		156,193			119,944			35,042			1,207

Total assets accounted for at fair value on a recurring basis	$	276,697		$	123,380		$	143,940		$	9,377

Percentage of level to total		100	%		45	%		52	%		3	%


Liabilities accounted for at fair value on a recurring basis
Other policyholder funds and benefits payable
Equity linked notes	$	(10	)	$	—		$	—		$	(10	)
Derivative liabilities
Credit derivatives		(463	)		—			(74	)		(389	)
Equity derivatives		2			—			—			2
Foreign exchange derivatives		217			—			217			—
Interest rate derivatives		(337	)		—			(296	)		(41	)

Total derivative liabilities [3]		(581	)		—			(153	)		(428	)
Other liabilities		(51	)		—			—			(51	)
Consumer notes [4]		(5	)		—			—			(5	)

Total liabilities accounted for at fair value on a recurring basis	$	(647	)	$	—		$	(153	)	$	(494	)


[1]		Includes over-the-counter derivative instruments in a net asset value position which may require the counterparty to pledge collateral to the Company. As of March 31, 2011, $195 of a cash collateral liability was netted against the derivative asset value in the Condensed Consolidated Balance Sheet and is excluded from the table above. See footnote 3 below for derivative liabilities.

[2]		As of March 31, 2011, excludes approximately $8 billion of investment sales receivable that are not subject to fair value accounting.

[3]		Includes over-the-counter derivative instruments in a net negative market value position (derivative liability). In the Level 3 roll-forward table included below in this Note 4, the derivative asset and liability are referred to as “freestanding derivatives” and are presented on a net basis.

[4]		Represents embedded derivatives associated with non-funding agreement-backed consumer equity linked notes.

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

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


	December 31, 2010
				Quoted Prices in
				Active Markets			Significant			Significant
				for Identical			Observable			Unobservable
				Assets			Inputs			Inputs
	Total			(Level 1)			(Level 2)			(Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
ABS	$	2,889		$	—		$	2,412		$	477
CDOs		2,611			—			30			2,581
CMBS		7,917			—			7,228			689
Corporate		39,884			—			37,755			2,129
Foreign government/government agencies		1,683			—			1,627			56
Municipal		12,124			—			11,852			272
RMBS		5,683			—			4,398			1,285
U.S. Treasuries		5,029			434			4,595			—

Total fixed maturities, AFS		77,820			434			69,897			7,489
Fixed maturities, FVO		649			—			127			522
Equity securities, trading		32,820			2,279			30,541			—
Equity securities, AFS		973			298			521			154
Derivative assets
Credit derivatives		3			—			(18	)		21
Equity derivatives		2			—			—			2
Foreign exchange derivatives		868			—			868			—
Interest rate derivatives		(106	)		—			(70	)		(36	)
Other derivative contracts		32			—			—			32

Total derivative assets [1]		799			—			780			19
Short-term investments		8,528			541			7,987			—
Separate account assets [2]		153,727			116,717			35,763			1,247

Total assets accounted for at fair value on a recurring basis	$	275,316		$	120,269		$	145,616		$	9,431

Percentage of level to total		100	%		44	%		53	%		3	%


Liabilities accounted for at fair value on a recurring basis
Other policyholder funds and benefits payable
Equity linked notes	$	(9	)	$	—		$	—		$	(9	)
Derivative liabilities
Credit derivatives		(482	)		—			(71	)		(411	)
Equity derivatives		2			—			—			2
Foreign exchange derivatives		(34	)		—			(34	)		—
Interest rate derivatives		(266	)		—			(249	)		(17	)

Total derivative liabilities [3]		(780	)		—			(354	)		(426	)
Other liabilities		(37	)		—			—			(37	)
Consumer notes [4]		(5	)		—			—			(5	)

Total liabilities accounted for at fair value on a recurring basis	$	(831	)	$	—		$	(354	)	$	(477	)


[1]		Includes over-the-counter derivative instruments in a net asset value position which may require the counterparty to pledge collateral to the Company. As of December 31, 2010, $968 of cash collateral liability was netted against the derivative asset value in the Condensed Consolidated Balance Sheet and is excluded from the table above. See footnote 3 below for derivative liabilities.

[2]		As of December 31, 2010, excludes approximately $6 billion of investment sales receivable that are not subject to fair value accounting.

[3]		Includes over-the-counter derivative instruments in a net negative market value position (derivative liability). In the Level 3 roll-forward table included below in this Note 4, the derivative asset and liability are referred to as “freestanding derivatives” and are presented on a net basis.

[4]		Represents embedded derivatives associated with non-funding agreement-backed consumer equity linked notes.

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

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

Determination of Fair Values

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

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

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

Prices from third-party pricing services are often unavailable for securities that are rarely traded or are traded only in privately negotiated transactions. As a result, certain securities are priced via independent broker quotations which utilize inputs that may be difficult to corroborate with observable market based data. Additionally, the majority of these independent broker quotations are non-binding.

A pricing matrix is used to price private placement securities for which the Company is unable to obtain a price from a third-party pricing service by discounting the expected future cash flows from the security by a developed market discount rate utilizing current credit spreads. Credit spreads are developed each month using market based data for public securities adjusted for credit spread differentials between public and private securities which are obtained from a survey of multiple private placement brokers. The appropriate credit spreads determined through this survey approach are based upon the issuer’s financial strength and term to maturity, utilizing an independent public security index and trade information and adjusting for the non-public nature of the securities.

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

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

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

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

Derivative Instruments, including embedded derivatives within investments

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

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

Valuation Techniques and Inputs for Investments

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

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

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


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

	•		ABS, CDOs, CMBS and RMBS — Primary inputs also include monthly payment information, collateral performance, which varies by vintage year and includes delinquency rates, collateral valuation loss severity rates, collateral refinancing assumptions, credit default swap indices and, for ABS and RMBS, estimated prepayment rates.

	•		Corporates — Primary inputs also include observations of credit default swap curves related to the issuer.

	•		Foreign government/government agencies - Primary inputs also include observations of credit default swap curves related to the issuer and political events in emerging markets.

	•		Municipals — Primary inputs also include Municipal Securities Rulemaking Board reported trades and material event notices, and issuer financial statements.

	•		Short-term investments — Primary inputs also include material event notices and new issue money market rates.

	•		Equity securities, trading — Consist of investments in mutual funds. Primary inputs include net asset values obtained from third party pricing services.

	•		Credit derivatives — S ignificant inputs primarily include the swap yield curve and credit curves.

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

	•		Interest rate derivatives — Significant input is primarily the swap yield curve.

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

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


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

•

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

•

Equity derivatives — Significant unobservable inputs may include equity volatility.

•

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

Separate Account Assets

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

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

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

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

The tables below provide fair value roll forwards for the three months ending March 31, 2011 and 2010, for the financial instruments classified as Level 3, excluding those related to the Company’s living benefits and associated hedging programs, which are reported in Note 4a.

For the three months ended March 31, 2011


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

Fair value as of March 31, 2011	$	446		$	2,674		$	741		$	2,096		$	63		$	276	$	1,124		$	7,420

Changes in unrealized gains (losses) included in net income related to financial instruments still held at March 31, 2011 [1]	$	(5	)	$	(15	)	$	(1	)	$	(17	)	$	—		$	—	$	(3	)	$	(41	)


							Freestanding Derivatives [4]
	Fixed			Equity								Interest			Other			Total Free-
	Maturities,			Securities,			Credit			Equity		Rate			Derivative			Standing			Separate
Assets	FVO			AFS			Derivatives			Derivatives		Derivatives			Contracts			Derivatives			Accounts
Fair value as of January 1, 2011	$	522		$	154		$	(390	)	$	4	$	(53	)	$	32		$	(407	)	$	1,247
Total realized/unrealized gains (losses)
Included in net income [1]		58			(10	)		11			1		(3	)		(1	)		8			19
Included in OCI [2]		—			(1	)		—			—		—			—			—			—
Purchases		—			13			1			—		64			—			65			128
Settlements		(1	)		—			(4	)		—		1			—			(3	)		—
Sales		—			—			—			—		—			—			—			(147	)
Transfers into Level 3 [3]		—			—			—			—		—			—			—			8
Transfers out of Level 3 [3]		—			(76	)		—			—		—			—			—			(48	)

Fair value as of March 31, 2011	$	579		$	80		$	(382	)	$	5	$	9		$	31		$	(337	)	$	1,207

Changes in unrealized gains (losses) included in net income related to financial instruments still held at March 31, 2011 [1]	$	58		$	(10	)	$	11		$	1	$	(1	)	$	(1	)	$	10		$	(3	)


Liabilities	Equity Linked Notes			Other Liabilities			Consumer Notes
Fair value as of January 1, 2011	$	(9	)	$	(37	)	$	(5	)
Total realized/unrealized gains (losses)
Included in net income [1]		(1	)		(14	)		—
Included in OCI [2]		—			—			—
Purchases		—			—			—
Issuances		—			—			—
Settlements		—			—			—
Sales		—			—			—
Transfers into Level 3 [3]		—			—			—
Transfers out of Level 3 [3]		—			—			—

Fair value as of March 31, 2011	$	(10	)	$	(51	)	$	(5	)

Changes in unrealized gains (losses) included in net income related to financial instruments still held at March 31, 2011 [1]	$	(1	)	$	(14	)	$	—

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

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

For the three months ended March 31, 2010


	Fixed Maturities, AFS
													Foreign									Total Fixed
													govt./ govt.									Maturities,
Assets	ABS			CDOs			CMBS			Corporate			agencies			Municipal			RMBS			AFS
Fair value as of January 1, 2010	$	580		$	2,835		$	307		$	8,027		$	93		$	262		$	1,153		$	13,257
Total realized/unrealized gains (losses)
Included in net income [1]		—			(63	)		(72	)		2			—			—			(13	)		(146	)
Included in OCI [2]		28			215			86			129			2			18			89			567
Purchases, issuances, and settlements		(10	)		(19	)		(6	)		216			(6	)		46			(32	)		189
Transfers into Level 3 [3]		—			16			127			336			6			—			—			485
Transfers out of Level 3 [3]		(65	)		(235	)		—			(98	)		(36	)		(4	)		(23	)		(461	)

Fair value as of March 31, 2010	$	533		$	2,749		$	442		$	8,612		$	59		$	322		$	1,174		$	13,891

Changes in unrealized gains (losses) included in net income related to financial instruments still held at March 31, 2010 [1]	$	—		$	(63	)	$	(71	)	$	—		$	—		$	—		$	(13	)	$	(147	)


				Freestanding Derivatives [4]
	Equity									Interest			Other			Total Free-
	Securities,			Credit			Equity			Rate			Derivative			Standing			Separate
Assets	AFS			Derivatives			Derivatives			Derivatives			Contracts			Derivatives			Accounts
Fair value as of January 1, 2010	$	58		$	(228	)	$	(2	)	$	5		$	36		$	(189	)	$	962
Total realized/unrealized gains (losses)
Included in net income [1]		(1	)		27			1			—			(1	)		27			18
Included in OCI [2]		7			—			—			—			—			—			—
Purchases, issuances, and settlements		1			—			—			—			—			—			77
Transfers into Level 3 [3]		—			(290	)		—			—			—			(290	)		6
Transfers out of Level 3 [3]		—			—			—			(11	)		—			(11	)		(108	)

Fair value as of March 31, 2010	$	65		$	(491	)	$	(1	)	$	(6	)	$	35		$	(463	)	$	955

Changes in unrealized gains (losses) included in net income related to financial instruments still held at March 31, 2010 [1]	$	(1	)	$	27		$	1		$	—		$	(1	)	$	27		$	3


	Other Policyholder Funds and Benefits Payable
							Total Other
	Institutional			Equity Linked			Policyholder Funds
Liabilities	Notes			Notes			and Benefits Payable			Other Liabilities			Consumer Notes
Fair value as of January 1, 2010	$	(2	)	$	(10	)	$	(12	)	$	—		$	(5	)
Total realized/unrealized gains (losses)
Included in net income [1]		(5	)		1			(4	)		—			—
Included in OCI [2]		—			—			—			—			—
Purchases, issuances, and settlements		—			—			—			—			—
Transfers into Level 3 [3]		—			—			—			(22	)		—
Transfers out of Level 3 [3]		—			—			—			—			—

Fair Value as of March 31, 2010	$	(7	)	$	(9	)	$	(16	)	$	(22	)	$	(5	)

Changes in unrealized gains (losses) included in net income related to financial instruments still held at March 31, 2010 [1]	$	(5	)	$	1		$	(4	)	$	—		$	—


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

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

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

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

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

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

Fair Value Option

The Company elected the fair value option for its investments containing an embedded credit derivative which were not bifurcated as a result of new accounting guidance effective July 1, 2010. The underlying credit risk of these securities is primarily corporate bonds and commercial real estate. The Company elected the fair value option given the complexity of bifurcating the economic components associated with the embedded credit derivative. Additionally, the Company elected the fair value option for purchases of foreign government securities to align with the accounting for yen-based fixed annuity liabilities, which are adjusted for changes in spot rates through realized gains and losses. Similar to other fixed maturities, income earned from these securities is recorded in net investment income. Changes in the fair value of these securities are recorded in net realized capital gains and losses.

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

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


	Three Months Ended
	March 31, 2011
Assets
Fixed maturities, FVO
Corporate	$	12
CRE CDOs		46
Foreign government		(6	)
Other liabilities
Credit-linked notes		(14	)

Total realized capital gains	$	38

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


	March 31, 2011		December 31, 2010
Assets
Fixed maturities, FVO
ABS	$	64	$	65
CRE CDOs		316		270
Corporate		262		250
Foreign government		588		64

Total fixed maturities, FVO	$	1,230	$	649

Other liabilities
Credit-linked notes [1]	$	51	$	37


[1]		As of March 31, 2011 and December 31, 2010, the outstanding principal balance of the notes was $243.

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

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

Financial Instruments Not Carried at Fair Value

The following table presents carrying amounts and fair values of The Hartford’s financial instruments not carried at fair value and not included in the above fair value discussion as of March 31, 2011 and December 31, 2010.


	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets
Mortgage loans	$	4,736	$	4,725	$	4,489	$	4,524
Policy loans		2,181		2,287		2,181		2,294

Liabilities
Other policyholder funds and benefits payable [1]	$	10,941	$	10,914	$	11,155	$	11,383
Senior notes [2]		4,880		5,122		4,880		5,072
Junior subordinated debentures [2]		1,730		2,672		1,727		2,596
Consumer notes [3]		377		390		377		392


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

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

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

As of March 31, 2011 and December 31, 2010, included in other liabilities in the Condensed Consolidated Balance Sheets are carrying amounts of $232 and $233 for deposits, respectively, and $25 for Federal Home Loan Bank advances, related to Federal Trust Corporation. These carrying amounts approximate fair value.

The Company has not made any changes in its valuation methodologies for the following assets and liabilities since December 31, 2010.

•

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

•

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

•

Fair values for other policyholder funds and benefits payable, not carried at fair value, are determined by estimating future cash flows, discounted at the current market rate.

•

Fair values for senior notes and junior subordinated debentures are based primarily on market quotations from independent third-party pricing services.

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

4a. Fair Value Measurements — Guaranteed Living Benefits

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


	March 31, 2011
				Quoted Prices
				in Active		Significant			Significant
				Markets for		Observable			Unobservable
				Identical Assets		Inputs			Inputs
	Total			(Level 1)		(Level 2)			(Level 3)
Assets accounted for at fair value on a recurring basis
Variable annuity hedging derivatives	$	120		$	—	$	(5	)	$	125
Macro hedge program		74			—		7			67
Reinsurance recoverable for U.S. GMWB		224			—		—			224

Total assets accounted for at fair value on a recurring basis	$	418		$	—	$	2		$	416

Liabilities accounted for at fair value on a recurring basis
Other policyholder funds and benefits payable
U.S. guaranteed withdrawal benefits	$	(1,301	)	$	—	$	—		$	(1,301	)
International guaranteed withdrawal benefits		(23	)		—		—			(23	)
International other guaranteed living benefits		3			—		—			3
Variable annuity hedging derivatives		226			—		(137	)		363
Macro hedge program		(41	)		—		(99	)		58

Total liabilities accounted for at fair value on a recurring basis	$	(1,136	)	$	—	$	(236	)	$	(900	)


	December 31, 2010
				Quoted Prices
				in Active			Significant			Significant
				Markets for			Observable			Unobservable
				Identical Assets			Inputs			Inputs
	Total			(Level 1)			(Level 2)			(Level 3)
Assets accounted for at fair value on a recurring basis
Variable annuity hedging derivatives	$	339		$	—		$	(122	)	$	461
Macro hedge program		386			2			176			208
Reinsurance recoverable for U.S. GMWB		280			—			—			280

Total assets accounted for at fair value on a recurring basis	$	1,005		$	2		$	54		$	949


Liabilities accounted for at fair value on a recurring basis
Other policyholder funds and benefits payable
U.S. guaranteed withdrawal benefits	$	(1,611	)	$	—		$	—		$	(1,611	)
International guaranteed withdrawal benefits		(36	)		—			—			(36	)
International other guaranteed living benefits		3			—			—			3
Variable annuity hedging derivatives		128			—			(11	)		139
Macro hedge program		(2	)		(2	)		—			—

Total liabilities accounted for at fair value on a recurring basis	$	(1,518	)	$	(2	)	$	(11	)	$	(1,505	)

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

4a. Fair Value Measurements — Guaranteed Living Benefits (continued)

Product Derivatives

The Company currently offers certain variable annuity products with GMWB riders in the U.S., and formerly offered such products in the U.K. and Japan. The GMWB represents an embedded derivative in the variable annuity contract. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host for measurement purposes. The embedded derivative is carried at fair value, with changes in fair value reported in net realized capital gains and losses. The Company’s GMWB liability is reported in other policyholder funds and benefits payable in the Consolidated Balance Sheets.

In valuing the embedded derivative, the Company attributes to the derivative a portion of the expected fees to be collected over the expected life of the contract from the contract holder equal to the present value of future GMWB claims (the “Attributed Fees”). The excess of fees collected from the contract holder in the current period over the current period’s Attributed Fees are associated with the host variable annuity contract and reported in fee income.

U.S. GMWB Reinsurance Derivative

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

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

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

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

Best Estimate

Claim Payments

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

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

•

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

•

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

•

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

•

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

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

4a. Fair Value Measurements — Guaranteed Living Benefits (continued)

As many guaranteed benefit obligations are relatively new in the marketplace, actual policyholder behavior experience is limited. As a result, estimates of future policyholder behavior are subjective and based on analogous internal and external data. As markets change, mature and evolve and actual policyholder behavior emerges, management continually evaluates the appropriateness of its assumptions for this component of the fair value model.

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

Credit Standing Adjustment

This assumption makes an adjustment that market participants would make, in determining fair value, to reflect the risk that guaranteed benefit obligations or the GMWB reinsurance recoverables will not be fulfilled (“nonperformance risk”). As a result of sustained volatility in the Company’s credit default spreads, during 2009 the Company changed its estimate of the Credit Standing Adjustment to incorporate a blend of observable Company and reinsurer credit default spreads from capital markets, adjusted for market recoverability. The credit standing adjustment assumption, net of reinsurance, and exclusive of the impact of the credit standing adjustment on other market inputs, resulted in pre-tax realized gains/(losses) of $(1) and $1 for the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011 and December 31, 2010 the credit standing adjustment was $25 and $26, respectively.

Margins

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

Assumption updates, including policyholder behavior assumptions, affected best estimates and margins for a total pre-tax realized gain (loss) of $0 for the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011 and December 31, 2010 the behavior risk margin was $542 and $565, respectively.

In addition to the non-market-based updates described above, the Company recognized non-market-based updates driven by the relative outperformance of the underlying actively managed funds as compared to their respective indices resulting in pre-tax realized gains of approximately $25 and $27, for the three months ended March 31, 2011 and 2010, respectively.

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

4a. Fair Value Measurements — Guaranteed Living Benefits (continued)

The tables below provide fair value roll forwards for the three months ended March 31, 2011 and 2010, for the financial instruments related to the Guaranteed Living Benefits Program classified as Levels 1, 2 and 3.

For the three months ended March 31, 2011


	Variable Annuity Hedging Derivatives [5]
							Total Variable Annuity
Asset/(liability)	Levels 1 and 2			Level 3			Hedging Derivatives
Fair value as of January 1, 2011	$	(133	)	$	600		$	467
Total realized/unrealized gains (losses)
Included in net income [1],[2],[6]		(108	)		(119	)		(227	)
Included in OCI [2]		—			—			—
Purchases [3]		—			23			23
Issuances [3]		—			—			—
Settlements[3]		99			(16	)		83
Sales [3]		—			—			—
Transfers into Level 3		—			—			—
Transfers out of Level 3		—			—			—

Fair value as of March 31, 2011	$	(142	)	$	488		$	346

Changes in unrealized gains (losses) included in net income related to financial instruments still held at March 31, 2011 [1], [2], [4]				$	(113	)


										Total Guaranteed
							International			Withdrawal Benefits
	Reinsurance			U.S. Guaranteed			Guaranteed			Net of Reinsurance
	Recoverable			Withdrawal			Withdrawal			and Hedging
Asset/(liability)	for GMWB			Benefits–Level 3			Benefits–Level 3			Derivatives
Fair value as of January 1, 2011	$	280		$	(1,611	)	$	(36	)	$	(900	)
Total realized/unrealized gains (losses)
Included in net income [1],[2],[6]		(65	)		348			15			71
Included in OCI [2]		—			—			—			—
Purchases [3]		—			—			—			23
Issuances [3]		—			—			—			—
Settlements[3]		9			(38	)		(2	)		52
Sales [3]		—			—			—			—
Transfers into Level 3		—			—			—			—
Transfers out of Level 3		—			—			—			—

Fair value as of March 31, 2011	$	224		$	(1,301	)	$	(23	)	$	(754	)

Changes in unrealized gains (losses) included in net income related to financial instruments still held at March 31, 2011 [1], [2], [4]	$	(65	)	$	348		$	15


	Macro Hedge Program [5]									International Other
							Total Macro			Guaranteed Living
Asset/(liability)	Levels 1 and 2			Level 3			Hedge Program			Benefits–Level 3
Fair value as of January 1, 2011	$	176		$	208		$	384		$	3
Total realized/unrealized gains (losses)
Included in net income [1],[2],[6]		(274	)		(83	)		(357	)		1
Included in OCI [2]		—			—			—			—
Purchases [3]		—			—			—			—
Issuances [3]		—			—			—			—
Settlements[3]		6			—			6			(1	)
Sales [3]		—			—			—			—
Transfers into Level 3		—			—			—			—
Transfers out of Level 3		—			—			—			—

Fair value as of March 31, 2011	$	(92	)	$	125		$	33		$	3

Changes in unrealized gains (losses) included in net income related to financial instruments still held at March 31, 2011 [1], [2], [4]				$	(82	)				$	1

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

4a. Fair Value Measurements — Guaranteed Living Benefits Program (continued)

For the three months ended March 31, 2010


	Variable Annuity Hedging Derivatives [5]
							Total Variable Annuity
Asset/(liability)	Levels 1 and 2			Level 3			Hedging Derivatives
Fair value as of January 1, 2010	$	(184	)	$	236		$	52
Total realized/unrealized gains (losses)
Included in net income [1],[2],[6]		(744	)		581			(163	)
Included in OCI [2]		—			—			—
Purchases, issuances, and settlements [3]		762			(506	)		256
Transfers into Level 3		—			—			—
Transfers out of Level 3		—			—			—

Fair value as of March 31, 2010	$	(166	)	$	311		$	145

Changes in unrealized gains (losses) included in net income related to financial instruments still held at March 31, 2010 [1], [2],[4]				$	(115	)


										Total Guaranteed
							International			Withdrawal Benefits
	Reinsurance			U.S. Guaranteed			Guaranteed			Net of Reinsurance
	Recoverable			Withdrawal			Withdrawal			and Hedging
Asset/(liability)	for GMWB			Benefits–Level 3			Benefits–Level 3			Derivatives
Fair value as of January 1, 2010	$	347		$	(1,957	)	$	(45	)	$	(1,603	)
Total realized/unrealized gains (losses)
Included in net income [1],[2],[6]		(61	)		338			15			129
Included in OCI [2]		—			—			1			1
Purchases, issuances, and settlements [3]		9			(36	)		(2	)		227
Transfers into Level 3		—			—			—			—
Transfers out of Level 3		—			—			—			—

Fair value as of March 31, 2010	$	295		$	(1,655	)	$	(31	)	$	(1,246	)

Changes in unrealized gains (losses) included in net income related to financial instruments still held at March 31, 2010 [1], [2], [4]	$	(61	)	$	338		$	15


	Macro Hedge Program [5]									International Other
							Total Macro			Guaranteed Living
Asset/(liability)	Levels 1 and 2			Level 3			Hedge Program			Benefits–Level 3
Fair Value as of January 1, 2010	$	28		$	290		$	318		$	2
Total realized/unrealized gains (losses)
Included in net income [1],[2],[6]		(25	)		(139	)		(164	)		3
Included in OCI [2]		—			—			—			—
Purchases, issuances, and settlements [3]		51			—			51			(1	)
Transfers into Level 3		—			—			—			—
Transfers out of Level 3		—			—			—			—

Fair value as of March 31, 2010	$	54		$	151		$	205		$	4

Changes in unrealized gains (losses) included in net income related to financial instruments still held at March 31, 2010 [1], [2],[4]				$	(139	)				$	3


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

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

[3]		The ‘Purchases, issuances, and settlements’ primarily relates to the receipt of cash on futures and option contracts classified as Level 1 and interest rate, currency and credit default swaps classified as Level 2. As of January 1, 2011, for GMWB reinsurance and guaranteed withdrawal benefits, purchases, issuances and settlements represent the reinsurance premium paid and the attributed fees collected, respectively.

[4]		Disclosure of changes in unrealized gains (losses) is not required for Levels 1 and 2. Information presented is for Level 3 only.

[5]		The variable annuity hedging derivatives and the macro hedge program derivatives are reported in this table on a net basis for asset/(liability) positions and reported in the Condensed Consolidated Balance Sheet in other investments and other liabilities.

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

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

5. Investments and Derivative Instruments

Significant Investment Accounting Policies

Recognition and Presentation of Other-Than-Temporary Impairments

The Company deems debt securities and certain equity securities with debt-like characteristics (collectively “debt securities”) to be other-than-temporarily impaired (“impaired”) if a security meets the following conditions: a) the Company intends to sell or it is more likely than not the Company will be required to sell the security before a recovery in value, or b) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell or it is more likely than not the Company will be required to sell the security before a recovery in value, a charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security. For those impaired debt securities which do not meet the first condition and for which the Company does not expect to recover the entire amortized cost basis, the difference between the security’s amortized cost basis and the fair value is separated into the portion representing a credit other-than-temporary impairment (“impairment”), which is recorded in net realized capital losses, and the remaining impairment, which is recorded in OCI. Generally, the Company determines a security’s credit impairment as the difference between its amortized cost basis and its best estimate of expected future cash flows discounted at the security’s effective yield prior to impairment. The remaining non-credit impairment, which is recorded in OCI, is the difference between the security’s fair value and the Company’s best estimate of expected future cash flows discounted at the security’s effective yield prior to the impairment, which typically represents current market liquidity and risk premiums. The previous amortized cost basis less the impairment recognized in net realized capital losses becomes the security’s new cost basis. The Company accretes the new cost basis to the estimated future cash flows over the expected remaining life of the security by prospectively adjusting the security’s yield, if necessary. The following table presents the change in non-credit impairments recognized in OCI as disclosed in the Company’s Condensed Consolidated Statements of Comprehensive Income (Loss) for the three ended March 31, 2011 and 2010, respectively.


	Three Months Ended
	March 31,
	2011			2010
OTTI losses recognized in OCI	$	(64	)	$	(188	)
Changes in fair value and/or sales		64			254
Tax and deferred acquisition costs		5			(34	)

Change in non-credit impairments recognized in OCI	$	5		$	32

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

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

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

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

5. Investments and Derivative Instruments (continued)

Mortgage Loan Valuation Allowances

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

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

Net Realized Capital Gains (Losses)


	Three Months Ended
	March 31,
*(Before-tax)*	2011			2010
Gross gains on sales	$	61		$	132
Gross losses on sales		(133	)		(111	)
Net OTTI losses recognized in earnings		(55	)		(152	)
Valuation allowances on mortgage loans		(3	)		(112	)
Japanese fixed annuity contract hedges, net [1]		(17	)		(16	)
Periodic net coupon settlements on credit derivatives/Japan		(7	)		(7	)
Results of variable annuity hedge program
GMWB derivatives, net		71			129
Macro hedge program		(357	)		(164	)

Total results of variable annuity hedge program		(286	)		(35	)
Other, net		37			27

Net realized capital losses, before-tax	$	(403	)	$	(274	)


[1]		Relates to derivative hedging instruments, excluding periodic net coupon settlements, and is net of the Japanese fixed annuity product liability adjustment for changes in the dollar/yen exchange spot rate, as well as Japan FVO securities.

Net realized capital gains and losses from investment sales, after deducting the life and pension policyholders’ share for certain products, are reported as a component of revenues and are determined on a specific identification basis. Gross gains and losses on sales and impairments previously reported as unrealized losses in AOCI were $(127) and $(131), respectively, for the three months ended March 31, 2011 and 2010. Proceeds from sales of AFS securities totaled $7.5 billion and $6.2 billion, respectively, for the three months ended March 31, 2011 and 2010.

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

5. Investments and Derivative Instruments (continued)

Other-Than-Temporary Impairment Losses

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


	Three Months Ended
	March 31,
*(Before-tax)*	2011			2010
Balance as of beginning of period	$	(2,072	)	$	(2,200	)
Additions for credit impairments recognized on [1]:
Securities not previously impaired		(28	)		(112	)
Securities previously impaired		(17	)		(39	)
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period		109			3
Securities due to an increase in expected cash flows		5			7

Balance as of end of period	$	(2,003	)	$	(2,341	)


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

Available-for-Sale Securities

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


	March 31, 2011												December 31, 2010
	Cost or		Gross		Gross					Non-			Cost or		Gross		Gross					Non-
	Amortized		Unrealized		Unrealized			Fair		Credit			Amortized		Unrealized		Unrealized			Fair		Credit
	Cost		Gains		Losses			Value		OTTI [1]			Cost		Gains		Losses			Value		OTTI [1]
ABS	$	3,450	$	46	$	(346	)	$	3,150	$	(6	)	$	3,247	$	38	$	(396	)	$	2,889	$	(2	)
CDOs		3,037		1		(364	)		2,674		(65	)		3,088		1		(478	)		2,611		(82	)
CMBS		7,831		234		(356	)		7,709		(32	)		8,297		235		(615	)		7,917		(9	)
Corporate [2]		39,628		2,023		(697	)		40,913		(4	)		38,496		2,174		(747	)		39,884		7
Foreign govt./govt. agencies		1,736		76		(10	)		1,802		—			1,627		73		(17	)		1,683		—
Municipal		12,687		146		(506	)		12,327		—			12,469		150		(495	)		12,124		—
RMBS		5,328		99		(413	)		5,014		(103	)		6,036		109		(462	)		5,683		(124	)
U.S. Treasuries		4,815		14		(150	)		4,679		—			5,159		24		(154	)		5,029		—

Total fixed maturities, AFS		78,512		2,639		(2,842	)		78,268		(210	)		78,419		2,804		(3,364	)		77,820		(210	)
Equity securities, AFS		951		150		(108	)		993		—			1,013		92		(132	)		973		—

Total AFS securities	$	79,463	$	2,789	$	(2,950	)	$	79,261	$	(210	)	$	79,432	$	2,896	$	(3,496	)	$	78,793	$	(210	)


[1]		Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses as of March 31, 2011 and December 31, 2010.

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

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


	March 31, 2011
Contractual Maturity	Amortized Cost		Fair Value
One year or less	$	2,042	$	2,072
Over one year through five years		17,557		18,213
Over five years through ten years		14,738		15,289
Over ten years		24,529		24,147

Subtotal		58,866		59,721
Mortgage-backed and asset-backed securities		19,646		18,547

Total fixed maturities, AFS	$	78,512	$	78,268

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

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

5. Investments and Derivative Instruments (continued)

Securities Unrealized Loss Aging

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


	March 31, 2011
	Less Than 12 Months							12 Months or More							Total
	Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized
	Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses
ABS	$	272	$	262	$	(10	)	$	1,392	$	1,056	$	(336	)	$	1,664	$	1,318	$	(346	)
CDOs		319		295		(24	)		2,651		2,311		(340	)		2,970		2,606		(364	)
CMBS		1,029		994		(35	)		2,965		2,644		(321	)		3,994		3,638		(356	)
Corporate [1]		7,207		6,938		(264	)		3,810		3,341		(433	)		11,017		10,279		(697	)
Foreign govt./govt. agencies		351		347		(4	)		61		55		(6	)		412		402		(10	)
Municipal		7,418		7,096		(322	)		1,028		844		(184	)		8,446		7,940		(506	)
RMBS		1,264		1,229		(35	)		1,474		1,096		(378	)		2,738		2,325		(413	)
U.S. Treasuries		2,544		2,437		(107	)		159		116		(43	)		2,703		2,553		(150	)

Total fixed maturities		20,404		19,598		(801	)		13,540		11,463		(2,041	)		33,944		31,061		(2,842	)
Equity securities		65		55		(10	)		593		495		(98	)		658		550		(108	)

Total securities in an unrealized loss	$	20,469	$	19,653	$	(811	)	$	14,133	$	11,958	$	(2,139	)	$	34,602	$	31,611	$	(2,950	)


	December 31, 2010
	Less Than 12 Months							12 Months or More							Total
	Amortized		Fair		Unrealized			Amortized		Fair		Unrealized			Amortized		Fair		Unrealized
	Cost		Value		Losses			Cost		Value		Losses			Cost		Value		Losses
ABS	$	302	$	290	$	(12	)	$	1,410	$	1,026	$	(384	)	$	1,712	$	1,316	$	(396	)
CDOs		321		293		(28	)		2,724		2,274		(450	)		3,045		2,567		(478	)
CMBS		556		530		(26	)		3,962		3,373		(589	)		4,518		3,903		(615	)
Corporate [1]		5,533		5,329		(199	)		4,017		3,435		(548	)		9,550		8,764		(747	)
Foreign govt./govt. agencies		356		349		(7	)		78		68		(10	)		434		417		(17	)
Municipal		7,485		7,173		(312	)		1,046		863		(183	)		8,531		8,036		(495	)
RMBS		1,744		1,702		(42	)		1,567		1,147		(420	)		3,311		2,849		(462	)
U.S. Treasuries		2,436		2,321		(115	)		158		119		(39	)		2,594		2,440		(154	)

Total fixed maturities		18,733		17,987		(741	)		14,962		12,305		(2,623	)		33,695		30,292		(3,364	)
Equity securities		53		52		(1	)		637		506		(131	)		690		558		(132	)

Total securities in an unrealized loss	$	18,786	$	18,039	$	(742	)	$	15,599	$	12,811	$	(2,754	)	$	34,385	$	30,850	$	(3,496	)


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

As of March 31, 2011, AFS securities in an unrealized loss position, comprised of 3,052 securities, largely related to corporate securities primarily within the financial services sector, municipal securities and RMBS which have experienced price deterioration. As of March 31, 2011, 59% of gross unrealized losses were depressed less than 20% of cost or amortized cost. The improvement in unrealized losses during 2011 was primarily attributable to credit spread tightening, partially offset by rising interest rates.

Most of the securities depressed for twelve months or more relate to structured securities primarily within commercial and residential real estate, including structured securities that have a floating-rate coupon referenced to a market index such as LIBOR. Also included are financial services securities that have a floating-rate coupon or long-dated maturities. Current market spreads continue to be significantly wider for these securities as compared to spreads at the security’s respective purchase date, largely due to the economic and market uncertainties regarding future performance of commercial and residential real estate. Deteriorations in valuation are also the result of substantial declines in certain market indexes. The Company reviewed these securities as part of its impairment analysis and where a credit impairment has not been recorded, the Company’s best estimate is that expected future cash flows are sufficient to recover the amortized cost basis of the security. Furthermore, the Company neither has an intention to sell nor does it expect to be required to sell these securities.

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

5. Investments and Derivative Instruments (continued)

Mortgage Loans


	March 31, 2011							December 31, 2010
	Amortized		Valuation			Carrying		Amortized		Valuation			Carrying
	Cost [1]		Allowance			Value		Cost [1]		Allowance			Value
Commercial	$	4,734	$	(150	)	$	4,584	$	4,492	$	(152	)	$	4,340
Residential		155		(3	)		152		152		(3	)		149

Total mortgage loans	$	4,889	$	(153	)	$	4,736	$	4,644	$	(155	)	$	4,489


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

As of March 31, 2011, the carrying value of mortgage loans associated with the valuation allowance was $975. Included in the table above, are mortgage loans held-for-sale with a carrying value and valuation allowance of $144 and $8, respectively, as of March 31, 2011, and $87 and $7, respectively, as of December 31, 2010. The carrying value of these loans is included in mortgage loans in the Company’s Condensed Consolidated Balance Sheets.

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


	2011			2010
Balance as of January 1	$	(155	)	$	(366	)
Additions		(3	)		(112	)
Deductions		5			93

Balance as of March 31	$	(153	)	$	(385	)

The current weighted-average LTV ratio of the Company’s commercial mortgage loan portfolio was 76% as of March 31, 2011, while the weighted-average LTV ratio at origination of these loans was 65%. LTV ratios compare the loan amount to the value of the underlying property collateralizing the loan. The loan values are updated no less than annually through property level reviews of the portfolio. Factors considered in the property valuation include, but are not limited to, actual and expected property cash flows, geographic market data and capitalization rates. DSCRs compare a property’s net operating income to the borrower’s principal and interest payments. The current weighted average DSCR of the Company’s commercial mortgage loan portfolio was 1.81x as of March 31, 2011. The Company held only five delinquent commercial mortgage loans past due by 90 days or more. The total carrying value and valuation allowance of these loans totaled $37 and $64, respectively, as of March 31, 2011, and are not accruing income.

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

Commercial Mortgage Loans Credit Quality

March 31, 2011

December 31, 2010

Carrying

Avg. Debt-Service

Carrying

Avg. Debt-Service

Loan-to-value

Value

Coverage Ratio

Value

Coverage Ratio

Greater than 80%

1,351

1.50x

1,358

1.49x

65% - 80%

1,957

1.66x

1,829

1.93x

Less than 65%

1,276

2.31x

1,153

2.26x

Total commercial mortgage loans

4,584

1.81x

4,340

1.87x

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

Mortgage Loans by Region


	March 31, 2011					December 31, 2010
	Carrying		Percent of			Carrying		Percent of
	Value		Total			Value		Total
East North Central	$	76		1.6	%	$	77		1.7	%
Middle Atlantic		473		10.0	%		428		9.5	%
Mountain		104		2.2	%		109		2.4	%
New England		296		6.2	%		259		5.8	%
Pacific		1,226		25.9	%		1,147		25.6	%
South Atlantic		1,163		24.6	%		1,177		26.3	%
West North Central		35		0.7	%		36		0.8	%
West South Central		230		4.9	%		231		5.1	%
Other [1]		1,133		23.9	%		1,025		22.8	%

Total mortgage loans	$	4,736		100.0	%	$	4,489		100.0	%


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

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

5. Investments and Derivative Instruments (continued)

Mortgage Loans by Property Type


	March 31, 2011					December 31, 2010
	Carrying		Percent of			Carrying		Percent of
	Value		Total			Value		Total
Commercial
Agricultural	$	304		6.4	%	$	315		7.0	%
Industrial		1,377		29.1	%		1,141		25.4	%
Lodging		97		2.0	%		132		2.9	%
Multifamily		757		16.0	%		713		15.9	%
Office		1,013		21.4	%		986		22.1	%
Retail		667		14.1	%		669		14.9	%
Other		369		7.8	%		384		8.5	%
Residential		152		3.2	%		149		3.3	%

Total mortgage loans	$	4,736		100.0	%	$	4,489		100.0	%

Variable Interest Entities

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

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

Consolidated VIEs

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


	March 31, 2011						December 31, 2010
					Maximum						Maximum
	Total		Total		Exposure		Total		Total		Exposure
	Assets		Liabilities [1]		to Loss [2]		Assets		Liabilities [1]		to Loss [2]
CDOs [3]	$	663	$	429	$	196	$	729	$	393	$	289
Limited partnerships		9		—		9		14		1		13

Total	$	672	$	429	$	205	$	743	$	394	$	302


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

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

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

CDOs represent structured investment vehicles for which the Company has a controlling financial interest as it provides collateral management services, earns a fee for those services and also holds investments in the securities issued by these vehicles. Limited partnerships represent a hedge fund for which the Company holds a majority interest in the fund as an investment.

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

5. Investments and Derivative Instruments (continued)

Non-Consolidated VIEs

The Company holds a significant variable interest for one VIE for which it is not the primary beneficiary and, therefore, was not consolidated on the Company’s Condensed Consolidated Balance Sheets. This VIE represents a contingent capital facility (“facility”) that has been held by the Company for five years for which the Company has no implied or unfunded commitments. Assets and liabilities recorded for the facility were $31 and $29, respectively as of March 31, 2011 and $32 and $32, respectively as of December 31, 2010. Additionally, the Company has a maximum exposure to loss of $4 as of March 31, 2011 and December 31, 2010, which represents the issuance costs that were incurred to establish the facility. The Company does not have a controlling financial interest as it does not manage the assets of the facility nor does it have the obligation to absorb losses or the right to receive benefits that could potentially be significant to the facility, as the asset manager has significant variable interest in the vehicle. The Company’s financial or other support provided to the facility is limited to providing ongoing support to cover the facility’s operating expenses. For further information on the facility, see Note 14 of the Notes to Consolidated Financial Statements included in The Hartford’s 2010 Form 10-K Annual Report.

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

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

5. Investments and Derivative Instruments (continued)

Derivative Instruments

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

Cash flow hedges

Interest rate swaps

Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed maturity securities or interest payments on floating-rate guaranteed investment contracts to fixed rates. These derivatives are predominantly used to better match cash receipts from assets with cash disbursements required to fund liabilities.

The Company also enters into forward starting swap agreements to hedge the interest rate exposure related to the purchase of fixed-rate securities. These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.

Foreign currency swaps

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

Fair value hedges

Interest rate swaps

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

Foreign currency swaps

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

Non-qualifying strategies

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

The Company uses interest rate swaps, swaptions, caps, floors, and futures to manage duration between assets and liabilities in certain investment portfolios. In addition, the Company enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap. As of March 31, 2011 and December 31, 2010, the notional amount of interest rate swaps in offsetting relationships was $7.1 billion.

Foreign currency swaps and forwards

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

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

5. Investments and Derivative Instruments (continued)

Japan 3Win foreign currency swaps

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

Japanese fixed annuity hedging instruments

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

Japanese variable annuity hedging instruments

The Company enters into foreign currency forward and option contracts to hedge the foreign currency risk associated with certain Japanese variable annuity liabilities reinsured from a wholly-owned Japanese subsidiary. Foreign currency risk may arise for some segments of the business where assets backing the liabilities are denominated in U.S. dollars while the liabilities are denominated in yen. Foreign currency risk may also arise when certain variable annuity policyholder accounts are invested in various currencies while the related guaranteed minimum death benefit (“GMDB”) and GMIB guarantees are effectively yen-denominated.

The following table represents notional and fair value for Japanese variable annuity hedging instruments.


	Notional Amount				Fair Value
	March 31,		December 31,		March 31,		December 31,
	2011		2010		2011		2010
Long foreign currency forwards	$	2,116	$	1,720	$	3	$	73
Short foreign currency forwards		597		—		—		—

Total	$	2,713	$	1,720	$	3	$	73

The Company’s net notional amount as of March 31, 2011 is $1.5 billion, which consists of $2.1 billion notional of long positions offset by $597 notional of short positions.

Credit derivatives that purchase credit protection

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

Credit derivatives that assume credit risk

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

Credit derivatives in offsetting positions

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

Equity index swaps and options

The Company offers certain equity indexed products, which may contain an embedded derivative that requires bifurcation. The Company enters into S&P index swaps and options to economically hedge the equity volatility risk associated with these embedded derivatives.

GMWB product derivatives

The Company offers certain variable annuity products with a GMWB rider in the U.S. and formerly in the U.K. and Japan. The GMWB is a bifurcated embedded derivative that provides the policyholder with a guaranteed remaining balance (“GRB”) if the account value is reduced to zero through a combination of market declines and withdrawals. The GRB is generally equal to premiums less withdrawals. Certain contract provisions can increase the GRB at contractholder election or after the passage of time. The notional value of the embedded derivative is the GRB.

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

5. Investments and Derivative Instruments (continued)

GMWB reinsurance contracts

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

GMWB hedging instruments

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

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


	Notional Amount				Fair Value
	March 31,		December 31,		March 31,			December 31,
	2011		2010		2011			2010
Customized swaps	$	10,058	$	10,113	$	144		$	209
Equity swaps, options, and futures		5,210		4,943		344			391
Interest rate swaps and futures		3,058		2,800		(142	)		(133	)

Total	$	18,326	$	17,856	$	346		$	467

Macro hedge program

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

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


	Notional Amount				Fair Value
	March 31,		December 31,		March 31,			December 31,
	2011		2010		2011			2010
Equity options, swaps and futures	$	10,153	$	14,500	$	126		$	205
Currency forward contracts		5,559		3,232		(77	)		93
Foreign interest rate swaps		2,136		2,182		(22	)		21
Cross-currency equity options		—		1,000		—			3
Long currency options		581		3,075		9			67
Short currency options		175		2,221		(3	)		(5	)

Total	$	18,604	$	26,210	$	33		$	384

GMAB product derivatives

The GMAB rider associated with certain of the Company’s Japanese variable annuity products is accounted for as a bifurcated embedded derivative. The GMAB provides the policyholder with their initial deposit in a lump sum after a specified waiting period. The notional amount of the embedded derivative is the yen denominated GRB converted to U.S. dollars at the current foreign spot exchange rate as of the reporting period date.

Contingent capital facility put option

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

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

5. Investments and Derivative Instruments (continued)

Derivative Balance Sheet Classification

The table below summarizes the balance sheet classification of the Company’s derivative related fair value amounts, as well as the gross asset and liability fair value amounts. The fair value amounts presented do not include income accruals or cash collateral held amounts, which are netted with derivative fair value amounts to determine balance sheet presentation. Derivatives in the Company’s separate accounts are not included because the associated gains and losses accrue directly to policyholders. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the table below. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of the Company’s derivative activity. Notional amounts are not necessarily reflective of credit risk.


	Net Derivatives										Asset Derivatives				Liability Derivatives
	Notional Amount				Fair Value						Fair Value				Fair Value
	Mar. 31,		Dec. 31,		Mar. 31,			Dec. 31,			Mar. 31,		Dec. 31,		Mar. 31,			Dec. 31,
Hedge Designation/ Derivative Type	2011		2010		2011			2010			2011		2010		2011			2010
Cash flow hedges
Interest rate swaps	$	10,225	$	10,290	$	53		$	115		$	149	$	188	$	(96	)	$	(73	)
Foreign currency swaps		302		335		7			6			25		29		(18	)		(23	)

Total cash flow hedges		10,527		10,625		60			121			174		217		(114	)		(96	)

Fair value hedges
Interest rate swaps		1,265		1,120		(37	)		(46	)		6		5		(43	)		(51	)
Foreign currency swaps		677		677		(6	)		(12	)		72		71		(78	)		(83	)

Total fair value hedges		1,942		1,797		(43	)		(58	)		78		76		(121	)		(134	)

Non-qualifying strategies
Interest rate contracts
Interest rate swaps, swaptions, caps, floors, and futures		9,104		7,938		(361	)		(441	)		155		126		(516	)		(567	)
Foreign exchange contracts
Foreign currency swaps and forwards		368		368		(23	)		(18	)		—		1		(23	)		(19	)
Japan 3Win foreign currency swaps		2,285		2,285		120			177			120		177		—			—
Japanese fixed annuity hedging instruments		2,134		2,119		441			608			443		608		(2	)		—
Japanese variable annuity hedging instruments		2,713		1,720		3			73			35		74		(32	)		(1	)
Credit contracts
Credit derivatives that purchase credit protection		2,452		2,559		(15	)		(9	)		24		29		(39	)		(38	)
Credit derivatives that assume credit risk [1]		2,580		2,569		(424	)		(434	)		5		8		(429	)		(442	)
Credit derivatives in offsetting positions		8,517		8,367		(72	)		(75	)		94		98		(166	)		(173	)
Equity contracts
Equity index swaps and options		189		189		(10	)		(10	)		5		5		(15	)		(15	)
Variable annuity hedge program
GMWB product derivatives [2]		41,262		42,739		(1,324	)		(1,647	)		—		—		(1,324	)		(1,647	)
GMWB reinsurance contracts		8,364		8,767		224			280			224		280		—			—
GMWB hedging instruments		18,326		17,856		346			467			514		647		(168	)		(180	)
Macro hedge program		18,604		26,210		33			384			181		394		(148	)		(10	)
Other
GMAB product derivatives [2]		234		246		3			3			3		3		—			—
Contingent capital facility put option		500		500		31			32			31		32		—			—

Total non-qualifying strategies		117,632		124,432		(1,028	)		(610	)		1,834		2,482		(2,862	)		(3,092	)

Total cash flow hedges, fair value hedges, and non-qualifying strategies	$	130,101	$	136,854	$	(1,011	)	$	(547	)	$	2,086	$	2,775	$	(3,097	)	$	(3,322	)

Balance Sheet Location
Fixed maturities, available-for-sale	$	728	$	728	$	(41	)	$	(39	)	$	—	$	—	$	(41	)	$	(39	)
Other investments		22,168		55,948		538			1,524			827		2,105		(289	)		(581	)
Other liabilities		57,251		28,333		(396	)		(654	)		1,032		387		(1,428	)		(1,041	)
Consumer notes		39		39		(5	)		(5	)		—		—		(5	)		(5	)
Reinsurance recoverables		8,364		8,767		224			280			224		280		—			—
Other policyholder funds and benefits payable		41,551		43,039		(1,331	)		(1,653	)		3		3		(1,334	)		(1,656	)

Total derivatives	$	130,101	$	136,854	$	(1,011	)	$	(547	)	$	2,086	$	2,775	$	(3,097	)	$	(3,322	)


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

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

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

5. Investments and Derivative Instruments (continued)

Change in Notional Amount

The net decrease in notional amount of derivatives since December 31, 2010, was primarily due to the following:

•

The notional amount related to the macro hedge program declined $7.6 billion primarily due to the expiration of certain currency and equity index options. The notional amount was not replaced given the Company had appropriate levels of market risk coverage for both equity and foreign exchange rate risk.

•

The GMWB product derivative notional declined $1.5 billion primarily as a result of policyholder lapses and withdrawals.

•

The notional amount related to non-qualifying interest rate contracts increased by $1.2 billion primarily as a result of the Company adding LIBOR swaptions to manage duration between assets and liabilities.

Change in Fair Value

The change in the total fair value of derivative instruments since December 31, 2010, was primarily related to the following:

•

The decrease in fair value related to the macro hedge program was primarily due to weakening of the Japanese yen, higher equity market valuation and lower implied market volatility.

•

The increase in the combined GMWB hedging program, which includes the GMWB product, reinsurance, and hedging derivatives, was primarily a result of lower implied market volatility and a general increase in long-term interest rates.

•

The decrease in fair value related to the Japanese fixed annuity hedging instruments and Japan 3Win foreign currency swaps was primarily due to the U.S. dollar strengthening in comparison to the Japanese yen, partially offset by an increase in long-term U.S. interest rates.

Cash Flow Hedges

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

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

Derivatives in Cash Flow Hedging Relationships


						Net Realized Capital Gains
	Gain (Loss) Recognized in					(Losses) Recognized in
	OCI on Derivative					Income on Derivative
	(Effective Portion)					(Ineffective Portion)
	2011			2010		2011			2010
Interest rate swaps	$	(66	)	$	100	$	(2	)	$	(1	)
Foreign currency swaps		—			9		—			—

Total	$	(66	)	$	109	$	(2	)	$	(1	)

Derivatives in Cash Flow Hedging Relationships For The Three Months Ended March 31,


	Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
	Location	2011		2010
Interest rate swaps	Net realized capital gain/(loss)	$	2	$	—
Interest rate swaps	Net investment income		32		12
Foreign currency swaps	Net realized capital gain/(loss)		5		(5	)
Foreign currency swaps	Net investment income		—		—

Total		$	39	$	7

As of March 31, 2011, the before-tax deferred net gains on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are $116. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains (losses) as an adjustment to interest income over the term of the investment cash flows. The maximum term over which the Company is hedging its exposure to the variability of future cash flows (for forecasted transactions, excluding interest payments on existing variable-rate financial instruments) is approximately three years.

During the three months ended March 31, 2011, the Company had no net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring. For the three months ended March 31, 2010, 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.

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

5. Investments and Derivative Instruments (continued)

Fair Value Hedges

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

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

Derivatives in Fair-Value Hedging Relationships


	Gain or (Loss) Recognized in Income [1]
	Derivative						Hedge Item
	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2011			2010			2011			2010
Interest rate swaps
Net realized capital gain/(loss)	$	10		$	(12	)	$	(9	)	$	10
Benefits, losses and loss adjustment expenses		—			5			—			(5	)
Foreign currency swaps
Net realized capital gain/(loss)		14			(29	)		(14	)		29
Benefits, losses and loss adjustment expenses		(8	)		(1	)		8			1

Total	$	16		$	(37	)	$	(15	)	$	35


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

Non-qualifying Strategies

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

Derivatives Used in Non-Qualifying Strategies
Gain or (Loss) Recognized within Net Realized Capital Gains and Losses


	Three Months Ended
	March 31,
	2011			2010
Interest rate contracts
Interest rate swaps, swaptions, caps, floors, and forwards	$	5		$	—
Foreign exchange contracts
Foreign currency swaps and forwards		(5	)		6
Japan 3Win related foreign currency swaps [1]		(58	)		(56	)
Japanese fixed annuity hedging instruments [2]		(62	)		(19	)
Japanese variable annuity hedging instruments		(62	)		13
Credit contracts
Credit derivatives that purchase credit protection		(17	)		—
Credit derivatives that assume credit risk		19			37
Equity contracts
Equity index swaps, options, and futures		—			1
Variable annuity hedge program
GMWB product derivatives		363			353
GMWB reinsurance contracts		(65	)		(61	)
GMWB hedging instruments		(227	)		(163	)
Macro hedge program		(357	)		(164	)
Other
GMAB product derivatives		1			3
Contingent capital facility put option		(2	)		(1	)

Total	$	(467	)	$	(51	)


[1]		The associated liability is adjusted for changes in spot rates through realized capital gains and was $42 and $7 for the three months ended March 31, 2011 and 2010, respectively.

[2]		The associated liability is adjusted for changes in spot rates through realized capital gains and was $53 and $7 for the three months ended March 31, 2011 and 2010, respectively.

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

5. Investments and Derivative Instruments (continued)

For the three months ended March 31, 2011, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:

•

The net loss associated with the macro hedge program is primarily due to weakening of the Japanese yen, higher equity market valuation and lower implied market volatility.

•

The net loss related to the Japanese fixed annuity hedging instruments and Japan 3Win foreign currency swaps was primarily due to the U.S. dollar strengthening in comparison to the Japanese yen, partially offset by an increase in long-term U.S. interest rates.

•

The net loss associated with the Japan variable annuity hedging instruments is primarily due to the weakening of the Japanese yen in comparison to the euro and the U.S. dollar.

•

The gain related to the combined GMWB hedging program, which includes the GMWB product, reinsurance, and hedging derivatives, was primarily a result of lower implied market volatility and a general increase in long-term interest rates.

For the three months ended March 31, 2010, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:

•

The net loss associated with the macro hedge program is primarily due to higher equity market valuation, lower implied market volatility, and time decay.

•

The net loss related to the Japan 3Win hedging derivatives is primarily due to a decrease in U.S. interest rates as well as the Japanese Yen weakening in comparison to the U.S. dollar.

•

The net gain on all GMWB related derivatives is primarily driven by lower implied market volatility and the relative outperformance of the underlying actively managed funds as compared to their respective indices, partially offset by trading costs given actual volatility in equity markets.

•

The net gain related to credit derivatives that assume credit risk is primarily a result of corporate credit spreads tightening.

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

Credit Risk Assumed through Credit Derivatives

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

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

5. Investments and Derivative Instruments (continued)

The following tables present the notional amount, fair value, weighted average years to maturity, underlying referenced credit obligation type and average credit ratings, and offsetting notional amounts and fair value for credit derivatives in which the Company is assuming credit risk as of March 31, 2011 and December 31, 2010.

As of March 31, 2011


							Underlying Referenced Credit
						Weighted	Obligation(s) [1]
						Average		Average	Offsetting
Credit Derivative type by derivative	Notional		Fair			Years to		Credit	Notional		Offsetting
risk exposure	Amount [2]		Value			Maturity	Type	Rating	Amount [3]		Fair Value [3]
Single name credit default swaps

Investment grade risk exposure	$	1,562	$	2		3 years	Corporate Credit/ Foreign Gov.	A+	$	1,447	$	(56	)
Below investment grade risk exposure		201		(3	)	3 years	Corporate Credit	BB-		165		(13	)
Basket credit default swaps [4]
Investment grade risk exposure		3,423		6		4 years	Corporate Credit	BBB+		2,097		(21	)
Investment grade risk exposure		525		(43	)	6 years	CMBS Credit	BBB+		525		43
Below investment grade risk exposure		578		(370	)	4 years	Corporate Credit	BBB+		25		—
Embedded credit derivatives
Investment grade risk exposure		25		24		4 years	Corporate Credit	BBB-		—		—
Below investment grade risk exposure		525		463		6 years	Corporate Credit	BB+		—		—

Total	$	6,839	$	79					$	4,259	$	(47	)

As of December 31, 2010


							Underlying Referenced Credit
						Weighted	Obligation(s) [1]
						Average		Average	Offsetting
Credit Derivative type by derivative	Notional		Fair			Years to		Credit	Notional		Offsetting
risk exposure	Amount [2]		Value			Maturity	Type	Rating	Amount [3]		Fair Value [3]
Single name credit default swaps

Investment grade risk exposure	$	1,562	$	(14	)	3 years	Corporate Credit/ Foreign Gov.	A+	$	1,447	$	(41	)
Below investment grade risk exposure		204		(6	)	3 years	Corporate Credit	BB-		168		(13	)
Basket credit default swaps [4]
Investment grade risk exposure		3,145		(1	)	4 years	Corporate Credit	BBB+		2,019		(14	)
Investment grade risk exposure		525		(50	)	6 years	CMBS Credit	BBB+		525		50
Below investment grade risk exposure		767		(381	)	4 years	Corporate Credit	BBB+		25		—
Embedded credit derivatives
Investment grade risk exposure		25		25		4 years	Corporate Credit	BBB-		—		—
Below investment grade risk exposure		525		463		6 years	Corporate Credit	BB+		—		—

Total	$	6,753	$	36					$	4,184	$	(18	)


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

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

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

[4]		Includes $4.0 billion and $3.9 billion as of March 31, 2011 and December 31, 2010, respectively, of standard market indices of diversified portfolios of corporate issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index. Also includes $553 and $542 as of March 31, 2011 and December 31, 2010, respectively, of customized diversified portfolios of corporate issuers referenced through credit default swaps.

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

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

Changes in DAC balance are as follows:


	2011			2010
Balance, January 1	$	9,857		$	10,686
Deferred Costs		653			680
Amortization — DAC		(710	)		(726	)
Amortization — DAC from discontinued operations		—			(4	)
Amortization — Unlock benefit, pre-tax		46			79
Adjustments to unrealized gains and losses on securities available-for-sale and other		30			(441	)
Effect of currency translation		(33	)		(4	)

Balance, March 31	$	9,843		$	10,270

The most significant contributor to the Unlock benefit recorded during the first quarter of 2011 and 2010 was actual separate account returns being above our aggregated estimated return.

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

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

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


				International			UL Secondary
	U.S. GMDB			GMDB/GMIB			Guarantees
Liability balance as of January 1, 2011	$	1,053		$	696		$	113
Incurred		57			31			13
Paid		(51	)		(40	)		—
Unlock		(55	)		(17	)		—
Currency translation adjustment		—			(14	)		—

Liability balance as of March 31, 2011	$	1,004		$	656		$	126

Reinsurance recoverable asset, as of January 1, 2011	$	686		$	36		$	30
Incurred		34			1			2
Paid		(35	)		—			—
Unlock		(29	)		4			—
Currency translation adjustment		—			(1	)		—

Reinsurance recoverable asset, as of March 31, 2011	$	656		$	40		$	32


				International			UL Secondary
	U.S. GMDB			GMDB/GMIB			Guarantees
Liability balance as of January 1, 2010	$	1,233		$	599		$	76
Incurred		63			(2	)		9
Paid		(78	)		(30	)		—
Unlock		(58	)		(1	)		—
Currency translation adjustment		—			(2	)		—

Liability balance as of March 31, 2010	$	1,160		$	564		$	85

Reinsurance recoverable asset, as of January 1, 2010	$	787		$	51		$	22
Incurred		38			(13	)		2
Paid		(47	)		(1	)		—
Unlock		(30	)		—			—
Currency translation adjustment		—			—			—

Reinsurance recoverable asset, as of March 31, 2010	$	748		$	37		$	24

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

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

The following table provides details concerning GMDB and GMIB exposure as of March 31, 2011:

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


					Retained Net
			Net Amount		Amount		Weighted Average
	Account		at Risk		at Risk		Attained Age of
Maximum anniversary value (“MAV”) [1]	Value (“AV”)		(“NAR”) [10]		(“RNAR”) [10]		Annuitant
MAV only	$	25,373	$	4,726	$	1,030		68
With 5% rollup [2]		1,733		412		130		68
With Earnings Protection Benefit Rider (“EPB”) [3]		6,507		778		94		64
With 5% rollup & EPB		718		144		30		67

Total MAV		34,331		6,060		1,284
Asset Protection Benefit (“APB”) [4]		27,657		1,858		1,195		65
Lifetime Income Benefit (“LIB”) — Death Benefit [5]		1,313		54		54		63
Reset [6] (5-7 years)		3,727		184		182		68
Return of Premium (“ROP”) [7]/Other		23,940		460		437		65

Subtotal U.S. GMDB [8]		90,968		8,616		3,152		66
Less: General Account Value with U.S. GMDB		6,942

Subtotal Separate Account Liabilities with GMDB		84,026
Separate Account Liabilities without U.S. GMDB		80,017

Total Separate Account Liabilities	$	164,043

Japan GMDB [9], [11]	$	30,778	$	7,962	$	6,750		69
Japan GMIB [9], [11]	$	28,495	$	4,991	$	4,991		69


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

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

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

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

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

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

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

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

[9]		GMDB includes a ROP and MAV (before age 80) paid in a single lump sum. GMIB is a guarantee to return initial investment, adjusted for earnings liquidity which allows for free withdrawal of earnings, paid through a fixed payout annuity, after a minimum deferral period of 10, 15 or 20 years. The GRB related to the Japan GMIB was $32.8 billion and $33.9 billion as of March 31, 2011 and December 31, 2010, respectively. The GRB related to the Japan GMAB and GMWB was $679 and $707 as of March 31, 2011 and December 31, 2010, respectively. These liabilities are not included in the Separate Account as they are not legally insulated from the general account liabilities of the insurance enterprise. As of March 31, 2011, 55% of RNAR is reinsured to a Hartford affiliate.

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

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

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


Asset type	As of March 31, 2011		As of December 31, 2010
Equity securities (including mutual funds)	$	75,814	$	75,601
Cash and cash equivalents		8,212		8,365

Total	$	84,026	$	83,966

As of March 31, 2011 and December 31, 2010, approximately 15%, respectively, of the equity securities above were invested in fixed income securities through these funds and approximately 85%, respectively, were invested in equity securities.

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

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

8. Sales Inducements

Changes in deferred sales inducement activity were as follows for the three months ended March 31:


	2011			2010
Balance, January 1	$	459		$	438
Sales inducements deferred		4			8
Amortization		(9	)		(8	)
Amortization — Unlock		3			4

Balance, March 31	$	457		$	442

9. Commitments and Contingencies

Litigation

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

The Hartford is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. These actions include, among others, 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 investment products. 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, among other things, that insurers had a duty to protect the public from the dangers of asbestos and that insurers committed unfair trade practices by asserting defenses on behalf of their policyholders in the underlying asbestos cases. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to the consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, 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.

Apart from the inherent difficulty of predicting litigation outcomes, particularly those that will be decided by a jury, many of the matters specifically identified below purport to seek substantial damages for unsubstantiated conduct spanning a multi-year period based on novel and complex legal theories and damages models. The alleged damages typically are not quantified or factually supported in the complaint, and, in any event, the Company’s experience shows that demands for damages often bear little relation to a reasonable estimate of potential loss. Most are in the earliest stages of litigation, with few or no substantive legal decisions by the court defining the scope of the claims, the class (if any), or the potentially available damages. In many, the Company has not yet answered the complaint or asserted its defenses, and fact discovery is still in progress or has not yet begun. Accordingly, unless otherwise specified below, management cannot reasonably estimate the possible loss or range of loss, if any, or predict the timing of the eventual resolution of these matters.

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

9. Commitments and Contingencies (continued)

Broker Compensation Litigation — Following the New York Attorney General’s filing of a civil complaint against Marsh & McLennan Companies, Inc., and Marsh, Inc. (collectively, “Marsh”) in October 2004 alleging 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, private plaintiffs brought several lawsuits against the Company predicated on the allegations in the Marsh complaint, to which the Company was not party. Among these is a multidistrict litigation in the United States District Court for the District of New Jersey. Two consolidated amended complaints were filed in the multidistrict litigation, one related to 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 complaints assert, on behalf of a putative class of persons who purchased insurance through 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 the Employee Retirement Income Security Act of 1974 (“ERISA”). The claims are predicated upon allegedly undisclosed or otherwise improper payments of contingent commissions to the broker defendants to steer business to the insurance company defendants. The district court dismissed the Sherman Act and RICO claims in both complaints for failure to state a claim and has granted the defendants’ motions for summary judgment on the ERISA claims in the group-benefits products complaint. The district court further declined to exercise supplemental jurisdiction over the state law claims and dismissed those claims without prejudice. The plaintiffs appealed the dismissal of the claims in both consolidated amended complaints, except the ERISA claims. In August 2010, the United States Court of Appeals for the Third Circuit affirmed the dismissal of the Sherman Act and RICO claims against the Company. The Third Circuit vacated the dismissal of the Sherman Act and RICO claims against some defendants in the property casualty insurance case and vacated the dismissal of the state-law claims as to all defendants in light of the reinstatement of the federal claims. In September 2010, the district court entered final judgment for the defendants in the group benefits case. In March 2011, the Company reached an agreement in principle to settle on a class basis the property casualty insurance case for an immaterial amount. The settlement is contingent upon the execution of a final settlement agreement and preliminary and final court approval.

Investment and Savings Plan ERISA and Shareholder Securities Class Action Litigation — In November and December 2008, following a decline in the share price of the Company’s common stock, seven putative class action lawsuits were filed in the United States District Court for the District of Connecticut on behalf of certain participants in the Company’s Investment and Savings Plan (the “Plan”), which offers the Company’s common stock as one of many investment options. These lawsuits have been consolidated, and a consolidated amended class-action complaint was filed on March 23, 2009, alleging that the Company and certain of its officers and employees violated ERISA by allowing the Plan’s participants to invest in the Company’s common stock and by failing to disclose to the Plan’s participants information about the Company’s financial condition. The lawsuit seeks restitution or damages for losses arising from the investment of the Plan’s assets in the Company’s common stock during the period from December 10, 2007 to the present. In January 2010, the district court denied the Company’s motion to dismiss the consolidated amended complaint. In February 2011, the parties reached an agreement in principle to settle on a class basis for an immaterial amount. The settlement is contingent upon the execution of a final settlement agreement and preliminary and final court approval.

The Company and certain of its present or former officers are defendants in a putative securities class action lawsuit filed in the United States District Court for the Southern District of New York in March 2010. The operative complaint, filed in October 2010, is brought on behalf of persons who acquired Hartford common stock during the period of July 28, 2008 through February 5, 2009, and alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, by making false or misleading statements during the alleged class period about the Company’s valuation of certain asset-backed securities and its effect on the Company’s capital position. The Company disputes the allegations and has moved to dismiss the complaint.

Fair Credit Reporting Act Class Action — In February 2007, the United States District Court for the District of Oregon gave final approval of the Company’s settlement of a lawsuit brought on behalf of a class of homeowners and automobile policy holders alleging that the Company willfully violated the Fair Credit Reporting Act 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. The Company paid approximately $84.3 to eligible claimants and their counsel in connection with the settlement, and sought reimbursement from the Company’s Excess Professional Liability Insurance Program for the portion of the settlement in excess of the Company’s $10 self-insured retention. Certain insurance carriers participating in that program disputed coverage for the settlement, and one of the excess insurers commenced an arbitration that resulted in an award in the Company’s favor and payments to the Company of approximately $30.1, thereby exhausting the primary and first-layer excess policies. In June 2009, the second-layer excess carriers commenced an arbitration to resolve the dispute over coverage for the remainder of the amounts paid by the Company. The arbitration hearing is scheduled for May 2011. Management believes it is probable that the Company’s coverage position ultimately will be sustained.

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

9. Commitments and Contingencies (continued)

Mutual Funds Litigation — In October 2010, a derivative action was brought on behalf of six Hartford retail mutual funds in the United States District Court for the District of Delaware, alleging that Hartford Investment Financial Services, LLC received excessive advisory and distribution fees in violation of its statutory fiduciary duty under Section 36(b) of the Investment Company Act of 1940. In February 2011, a nearly identical derivative action was brought against Hartford Investment Financial Services, LLC in the United States District Court for the District of New Jersey on behalf of six additional Hartford retail mutual funds. Both actions are assigned to the Honorable Renee Marie Bumb, a judge in the District of New Jersey who is sitting by designation with respect to the Delaware action. Plaintiffs in each action seek to rescind the investment management agreements and distribution plans between the Company and the mutual funds and to recover the total fees charged thereunder or, in the alternative, to recover any improper compensation the Company received. In addition, plaintiff in the New Jersey action seeks recovery of lost earnings. The Company disputes the allegations and, has moved to dismiss the Delaware action, and intends to move to dismiss the New Jersey action.

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 2010 Form 10-K Annual Report, The Hartford continues to receive asbestos and environmental claims that involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels and reinsurance coverages, as well as the methodologies it uses to estimate its exposures. Because of the significant uncertainties that limit the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses, particularly those related to asbestos, the ultimate liabilities may exceed the currently recorded reserves. Any such additional liability cannot be reasonably estimated now but could be material to The Hartford’s consolidated operating results, financial condition and liquidity.

Derivative Commitments

Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings of the individual legal entity that entered into the derivative agreement as set by nationally recognized statistical rating agencies. If the legal entity’s financial strength were to fall below certain ratings, the counterparties to the derivative agreements could demand immediate and ongoing full collateralization and in certain instances demand immediate settlement of all outstanding derivative positions traded under each impacted bilateral agreement. The settlement amount is determined by netting the derivative positions transacted under each agreement. If the termination rights were to be exercised by the counterparties, it could impact the legal entity’s ability to conduct hedging activities by increasing the associated costs and decreasing the willingness of counterparties to transact with the legal entity. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position as of March 31, 2011, is $584. Of this $584 the legal entities have posted collateral of $499 in the normal course of business. Based on derivative market values as of March 31, 2011, a downgrade of one level below the current financial strength ratings by either Moody’s or S&P could require approximately an additional $40 to be posted as collateral. Based on derivative market values as of March 31, 2011, a downgrade by either Moody’s or S&P of two levels below the legal entities’ current financial strength ratings could require approximately an additional $71 of assets to be posted as collateral. These collateral amounts could change as derivative market values change, as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the collateral that we may be required to post is primarily in the form of U.S. Treasury bills and U.S. Treasury notes.

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

Components of Net Periodic Benefit Cost

Total net periodic benefit cost for the three months ended March 31, 2011 and 2010 includes the following components:


	Pension Benefits						Other Postretirement Benefits
	2011			2010			2011			2010
Service cost	$	28		$	27		$	1		$	1
Interest cost		64			62			5			6
Expected return on plan assets		(74	)		(71	)		(3	)		(3	)
Amortization of prior service credit		(2	)		(2	)		—			—
Amortization of actuarial loss		37			26			—			—

Net periodic benefit cost	$	53		$	42		$	3		$	4

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

11. Stock Compensation Plans

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

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


	Three Months Ended
	March 31,
	2011			2010
Stock-based compensation plans expense	$	22		$	22
Income tax benefit		(8	)		(8	)

Total stock-based compensation plans expense, after-tax	$	14		$	14

The Company did not capitalize any cost of stock-based compensation. As of March 31, 2011, the total compensation cost related to non-vested awards not yet recognized was $141, which is expected to be recognized over a weighted average period of 1.7 years.

12. Discontinued Operations

In the first quarter of 2011, the Company completed the sale of its wholly-owned subsidiary Specialty Risk Services (“SRS”). SRS is a third-party claims administration business that provides self-insured, insured, and alternative market clients with customized claims services. The Company will continue to provide certain transition services to SRS for up to 24 months. For the three months ended March 31, 2011, the Company recorded a net realized capital gain of $150, after-tax. SRS was previously included in the Property & Casualty Commercial reporting segment. In addition, during the fourth quarter of 2010, the Company completed the sales of its indirect wholly-owned subsidiaries Hartford Investments Canada Corporation (“HICC”) and Hartford Advantage Investment, Ltd. (“HAIL”). HICC was previously included in the Mutual Funds reporting segment and HAIL was included in the Global Annuity reporting segment.

The following table summarizes the amounts related to discontinued operations in the Condensed Consolidated Statements of Operations.


	Three Months Ended
	March 31,
	2011			2010
*Revenues*
Fee income	$	—		$	9
Net investment income		—			1
Net realized capital losses		(4	)		(2	)
Other revenues		47			54

Total revenues		43			62

*Benefits, losses and expenses*
Amortization of deferred policy acquisition costs and present value of future profits		—			4
Insurance operating costs and other expenses		27			58
Total benefits, losses and expenses		27			62
Income before income taxes		16			—
Income tax expense		6			—

Income from operations of discontinued operations, net of tax		10			—
Net realized capital gain on disposal, net of tax		150			—

Income from discontinued operations, net of tax	$	160		$	—

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in millions except share data unless otherwise stated)

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of The Hartford Financial Services Group, Inc. and its subsidiaries (collectively, “The Hartford” or the “Company”) as of March 31, 2011, compared with December 31, 2010, and its results of operations for the three months ended March 31, 2011, compared to the equivalent 2010 period. This discussion should be read in conjunction with the MD&A in The Hartford’s 2010 Form 10-K Annual Report. Certain reclassifications have been made to prior period financial information to conform to the current period classifications. Also, prior period income statement amounts have been restated to reflect discontinued operations, see Note 12 of the Notes to Condensed Consolidated Financial Statements for further information on discontinued operations. The Hartford defines increases or decreases greater than or equal to 200%, or changes from a net gain to a net loss position, or vice versa, as “NM” or not meaningful.

INDEX


Description	Page

Consolidated Results of Operations		53

Outlooks		55

Critical Accounting Estimates		56

The Hartford’s Operations Overview		62

Key Performance Measures and Ratios		62

Property & Casualty Commercial		70

Group Benefits		72

Consumer Markets		73

Global Annuity		76

Life Insurance		78

Retirement Plans		79

Mutual Funds		80

Corporate and Other		81

Insurance Risk Management		82

Investment Credit Risk Management		82

Capital Markets Risk Management		90

Capital Resources and Liquidity		98

Impact of New Accounting Standards		104

CONSOLIDATED RESULTS OF OPERATIONS

Operating Summary


	Three Months Ended
	March 31,
	2011			2010			Change
Earned premiums	$	3,519		$	3,527			—
Fee income		1,209			1,180			2	%
Net investment income:
Securities available-for-sale and other		1,116			1,059			5	%
Equity securities, trading [1]		803			701			15	%

Total net investment income		1,919			1,760			9	%
Net realized capital losses		(403	)		(274	)		(47	%)
Other revenues		64			64			—

Total revenues		6,308			6,257			1	%
Benefits, losses and loss adjustment expenses		3,178			3,133			1	%
Benefits, losses and loss adjustment expenses — returns credited on international variable annuities [1]		803			701			15	%
Amortization of deferred policy acquisition costs and present value of future profits (“DAC”)		664			647			3	%
Insurance operating costs and other expenses		1,125			1,121			—
Interest expense		128			120			7	%

Total benefits, losses and expenses		5,898			5,722			3	%
Income from continuing operations before income taxes		410			535			(23	%)
Income tax expense		59			216			(73	%)

Income from continuing operations, net of tax		351			319			10	%
Income from discontinued operations, net of tax		160			—			—

Net income	$	511		$	319			60	%


Supplemental Operating Data
Income (loss) from continuing operations, net of tax, available to common shareholders per diluted common share	$	0.69		$	(0.42	)
Net income (loss) available to common shareholders per diluted common share		1.01			(0.42	)
Total revenues, excluding net investment income on equity securities, trading		5,505			5,556


	March 31,	December 31,
Summary of Financial Condition