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 June 30, 2008

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

For the transition period from                      to                     

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 July 18, 2008, there were outstanding 301,294,177 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 JUNE 30, 2008

TABLE OF CONTENTS

Item		Description		Page
		Part I. FINANCIAL INFORMATION
1.		Financial Statements
		Report of Independent Registered Public Accounting Firm			3
		Condensed Consolidated Statements of Operations — For the Three and Six Months Ended June 30, 2008 and 2007			4
		Condensed Consolidated Balance Sheets — As of June 30, 2008 and December 31, 2007			5
		Condensed Consolidated Statements of Changes in Stockholders’ Equity — For the Six Months Ended June 30, 2008 and 2007			6
		Condensed Consolidated Statements of Comprehensive Income (Loss) — For the Three and Six Months Ended June 30, 2008 and 2007			6
		Condensed Consolidated Statements of Cash Flows — For the Six Months Ended June 30, 2008 and 2007			7
		Notes to Condensed Consolidated Financial Statements			8
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			37
3.		Quantitative and Qualitative Disclosures About Market Risk			139
4.		Controls and Procedures			140
		Part II. OTHER INFORMATION
1.		Legal Proceedings			140
1A.		Risk Factors			141
2.		Unregistered Sales of Equity Securities and Use of Proceeds			141
4.		Submission of Matters to a Vote of Security Holders			142
6.		Exhibits			142
		Signature			143
		Exhibits Index			144
Exhibit 10.01
Exhibit 15.01
Exhibit 31.01
Exhibit 31.02
Exhibit 32.01
Exhibit 32.02

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 June 30, 2008, and the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and six-month periods ended June 30, 2008 and 2007, and changes in stockholders’ equity, and cash flows for the six-month periods ended June 30, 2008 and 2007. 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, 2007, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 20, 2008 (which report includes an explanatory paragraph relating to the Company’s change in its method of accounting and reporting for defined benefit pension and other postretirement plans in 2006), 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, 2007 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
July 24, 2008

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In millions, except for per share data)		2008				2007				2008				2007
		(Unaudited)								(Unaudited)
Revenues
Earned premiums		$	3,891			$	3,867			$	7,734			$	7,698
Fee income			1,386				1,346				2,723				2,628
Net investment income (loss)
Securities available-for-sale and other			1,230				1,336				2,423				2,609
Equity securities held for trading			1,153				1,234				(2,425	)			1,444
Total net investment income (loss)			2,383				2,570				(2	)			4,053
Other revenues			125				125				245				242
Net realized capital losses			(282	)			(248	)			(1,653	)			(202	)
Total revenues			7,503				7,660				9,047				14,419
Benefits, losses and expenses
Benefits, losses and loss adjustment expenses			3,586				3,544				6,943				6,877
Benefits, losses and loss adjustment expenses — returns credited on International variable annuities			1,153				1,234				(2,425	)			1,444
Amortization of deferred policy acquisition costs and present value of future profits			806				837				1,274				1,709
Insurance operating costs and expenses			1,047				965				1,997				1,853
Interest expense			77				66				144				129
Other expenses			182				177				371				358
Total benefits, losses and expenses			6,851				6,823				8,304				12,370
Income before income taxes			652				837				743				2,049
Income tax expense			109				210				55				546
Net income		$	543			$	627			$	688			$	1,503
Earnings per share
Basic		$	1.74			$	1.98			$	2.20			$	4.72
Diluted		$	1.73			$	1.96			$	2.19			$	4.68
Weighted average common shares outstanding			311.7				316.8				312.7				318.2
Weighted average common shares outstanding and dilutive potential common shares			313.1				319.6				314.4				321.2
Cash dividends declared per share		$	0.53			$	0.50			$	1.06			$	1.00

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		June 30,				December 31,
(In millions, except for per share data)		2008				2007
		(Unaudited)
Assets
Investments
Fixed maturities, available-for-sale, at fair value (amortized cost of $79,097 and $80,724)		$	75,068			$	80,055
Equity securities, held for trading, at fair value (cost of $33,646 and $30,489)			36,853				36,182
Equity securities, available-for-sale, at fair value (cost of $2,890 and $2,611)			2,619				2,595
Policy loans, at outstanding balance			2,146				2,061
Mortgage loans on real estate			5,882				5,410
Other investments			3,798				3,181
Short-term investments			5,127				1,602
Total investments			131,493				131,086
Cash			2,084				2,011
Premiums receivable and agents’ balances			3,625				3,681
Reinsurance recoverables			5,148				5,150
Deferred policy acquisition costs and present value of future profits			12,952				11,742
Deferred income taxes			1,259				308
Goodwill			1,788				1,726
Property and equipment, net			1,022				972
Other assets			3,628				3,739
Separate account assets			170,841				199,946
Total assets		$	333,840			$	360,361
Liabilities
Reserve for future policy benefits and unpaid losses and loss adjustment expenses
Property and casualty		$	22,315			$	22,153
Life			15,772				15,331
Other policyholder funds and benefits payable			46,563				44,190
Other policyholder funds and benefits payable — International variable annuities			36,822				36,152
Unearned premiums			5,530				5,545
Short-term debt			1,353				1,365
Long-term debt			4,618				3,142
Consumer notes			1,113				809
Other liabilities			12,089				12,524
Separate account liabilities			170,841				199,946
Total liabilities			317,016				341,157
Commitments and Contingencies (Note 8)
Stockholders’ Equity
Common stock, $0.01 par value — 750,000,000 shares authorized, 329,938,043 and 329,951,138 shares issued			3				3
Additional paid-in capital			6,591				6,627
Retained earnings			15,039				14,686
Treasury stock, at cost — 26,795,003 and 16,108,895 shares			(2,029	)			(1,254	)
Accumulated other comprehensive loss, net of tax			(2,780	)			(858	)
Total stockholders’ equity			16,824				19,204
Total liabilities and stockholders’ equity		$	333,840			$	360,361

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

		Six Months Ended
		June 30,
(In millions, except for share data)		2008				2007
		(Unaudited)
Common Stock and Additional Paid-in Capital
Balance at beginning of period		$	6,630			$	6,324
Issuance of shares under incentive and stock compensation plans			(43	)			180
Tax benefit on employee stock options and awards			7				40
Balance at end of period			6,594				6,544
Retained Earnings
Balance at beginning of period, before cumulative effect of accounting changes, net of tax			14,686				12,421
Cumulative effect of accounting changes, net of tax			(3	)			(41	)
Balance at beginning of period, as adjusted			14,683				12,380
Net income			688				1,503
Dividends declared on common stock			(332	)			(319	)
Balance at end of period			15,039				13,564
Treasury Stock, at Cost
Balance at beginning of period			(1,254	)			(47	)
Treasury stock acquired			(871	)			(800	)
Issuance of shares under incentive and stock compensation plans from treasury stock			113				—
Return of shares under incentive and stock compensation plans to treasury stock			(17	)			(12	)
Balance at end of period			(2,029	)			(859	)
Accumulated Other Comprehensive Loss, Net of Tax
Balance at beginning of period			(858	)			178
Total other comprehensive loss			(1,922	)			(779	)
Balance at end of period			(2,780	)			(601	)
Total stockholders’ equity		$	16,824			$	18,648
Outstanding Shares (in thousands)
Balance at beginning of period			313,842				323,315
Treasury stock acquired			(11,675	)			(8,439	)
Issuance of shares under incentive and stock compensation plans			1,220				2,831
Return of shares under incentive and stock compensation plans to treasury stock			(244	)			(130	)
Balance at end of period			303,143				317,577

Condensed Consolidated Statements of Comprehensive Income (Loss)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In millions)		2008				2007				2008				2007
		(Unaudited)								(Unaudited)
Comprehensive Income (Loss)
Net income		$	543			$	627			$	688			$	1,503
Other comprehensive income (loss)
Change in net unrealized gain/loss on securities			(420	)			(700	)			(2,026	)			(746	)
Change in net gain/loss on cash-flow hedging instruments			(76	)			(95	)			14				(68	)
Change in foreign currency translation adjustments			(68	)			2				74				11
Amortization of prior service cost and actuarial net losses included in net periodic benefit costs			9				15				16				24
Total other comprehensive loss			(555	)			(778	)			(1,922	)			(779	)
Total comprehensive income (loss)		$	(12	)		$	(151	)		$	(1,234	)		$	724

See Notes to Condensed Consolidated Financial Statements.

THE HARTFORD FINANCIAL SERVICES GROUP, INC.

		Six Months Ended
		June 30,
(In millions)		2008				2007
		(Unaudited)
Operating Activities
Net income		$	688			$	1,503
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of deferred policy acquisition costs and present value of future profits			1,274				1,709
Additions to deferred policy acquisition costs and present value of future profits			(1,903	)			(2,117	)
Change in:
Reserve for future policy benefits and unpaid losses and loss adjustment expenses and unearned premiums			576				677
Reinsurance recoverables			78				425
Receivables and other assets			399				(408	)
Payables and accruals			(690	)			465
Accrued and deferred income taxes			(68	)			285
Net realized capital losses			1,653				202
Net receipts (to) from investment contracts related to policyholder funds — International variable annuities			(1,290	)			3,790
Net (increase) decrease in equity securities, held for trading			1,235				(3,532	)
Depreciation and amortization			476				282
Other, net			(167	)			(334	)
Net cash provided by operating activities			2,261				2,947
Investing Activities
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale			12,595				18,897
Equity securities, available-for-sale			144				381
Mortgage loans			214				913
Partnerships			107				178
Payments for the purchase of:
Fixed maturities, available-for-sale			(14,455	)			(21,022	)
Equity securities, available-for-sale			(496	)			(651	)
Mortgage loans			(686	)			(2,485	)
Partnerships			(402	)			(653	)
Purchase price of businesses acquired			(94	)			—
Change in policy loans, net			(85	)			—
Change in payables for collateral under securities lending, net			(199	)			1,729
Change in all other securities, net			(775	)			(355	)
Additions to property and equipment, net			(185	)			(90	)
Net cash used for investing activities			(4,317	)			(3,158	)
Financing Activities
Deposits and other additions to investment and universal life-type contracts			11,345				16,618
Withdrawals and other deductions from investment and universal life-type contracts			(13,694	)			(15,101	)
Net transfers from (to) separate accounts related to investment and universal life-type contracts			3,725				(683	)
Issuance of long-term debt			1,487				495
Payments on capital lease obligations			(37	)			—
Change in short-term debt			—				(200	)
Proceeds from issuance of consumer notes			304				330
Proceeds from issuance of shares under incentive and stock compensation plans			34				144
Excess tax benefits on stock-based compensation			2				14
Treasury stock acquired			(811	)			(800	)
Return of shares under incentive and stock compensation plans to treasury stock			(17	)			(12	)
Dividends paid			(336	)			(323	)
Net cash provided by financing activities			2,002				482
Foreign exchange rate effect on cash			127				(71	)
Net increase in cash			73				200
Cash — beginning of period			2,011				1,424
Cash — end of period		$	2,084			$	1,624
Supplemental Disclosure of Cash Flow Information
Net Cash Paid During the Period For:
Income taxes		$	65			$	277
Interest		$	128			$	120

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

The condensed consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (“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 June 30, 2008, and for the three and six months ended June 30, 2008 and 2007 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 2007 Form 10-K Annual Report. The results of operations for the interim periods should not be considered indicative of the results to be expected for the full year.

Consolidation

The condensed consolidated financial statements include the accounts of The Hartford Financial Services Group, Inc., companies in which the Company directly or indirectly has a controlling financial interest and those variable interest entities in which the Company is the primary beneficiary. The Company determines if it is the primary beneficiary using both qualitative and quantitative analyses. Entities in which The Hartford does not have a controlling financial interest but in which the Company has significant influence over the operating and financing decisions are reported using the equity method. All material intercompany transactions and balances between The Hartford and its subsidiaries and affiliates have been eliminated.

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 reserves, net of reinsurance; life estimated gross profits used in the valuation and amortization of assets and liabilities associated with variable annuity and other universal life-type contracts; living benefits required to be fair valued; valuation of investments and derivative instruments; evaluation of other-than-temporary impairments on available-for-sale securities; pension and other postretirement benefit obligations; and contingencies relating to corporate litigation and regulatory matters.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of Notes to Consolidated Financial Statements included in The Hartford’s 2007 Form 10-K Annual Report.

Adoption of New Accounting Standards

Fair Value Measurements

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), which was issued by the Financial Accounting Standards Board (“FASB”) in September 2006. The Company also adopted on January 1, 2008 the SFAS 157 related FASB Staff Positions (“FSPs”) described below. For financial statement elements currently required to be measured at fair value, SFAS 157 redefines fair value, establishes a framework for measuring fair value under U.S. GAAP and enhances disclosures about fair value measurements. The new definition of fair value focuses on the price that would be received to sell the asset or paid to transfer the liability regardless of whether an observable liquid market price existed (an exit price). An exit price valuation will include margins for risk even if they are not observable. As the Company is released from risk, the margins for risk will also be released through net realized capital gains (losses) in net income. SFAS 157 provides guidance on how to measure fair value, when required, under existing accounting standards. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (“Level 1, 2, and 3”).

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

1. Basis of Presentation and Accounting Policies (continued)

The Company applied the provisions of SFAS 157 prospectively to financial assets and financial liabilities that are required to be measured at fair value under existing U.S. GAAP. The Company also recorded in opening retained earnings the cumulative effect of applying SFAS 157 to certain customized derivatives measured at fair value in accordance with Emerging Issues Task Force (“EITF”) Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Involved in Energy Trading and Risk Management Activities” (“EITF 02-3”). See Note 4 for additional information regarding SFAS 157. Specifically, see the SFAS 157 Transition discussion within Note 4 for information regarding the effects of applying SFAS 157 on the Company’s condensed consolidated financial statements in the first quarter of 2008.

In February 2008, the FASB issued FSP No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS 157-1”). FSP FAS 157-1 provides a scope exception from SFAS 157 for the evaluation criteria on lease classification and capital lease measurement under SFAS No. 13, “Accounting for Leases” and other related accounting pronouncements. Accordingly, the Company did not apply the provisions of SFAS 157 in determining the classification of and accounting for leases and the adoption of FSP FAS 157-1 did not have an impact on the Company’s condensed consolidated financial statements.

In February 2008, the FASB issued FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”) which delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for certain nonfinancial assets and nonfinancial liabilities. Examples of applicable nonfinancial assets and nonfinancial liabilities to which FSP FAS 157-2 applies include, but are not limited to:

•		Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination that are not subsequently remeasured at fair value;
•		Reporting units measured at fair value in the goodwill impairment test as described in SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), and nonfinancial assets and nonfinancial liabilities measured at fair value in the SFAS 142 goodwill impairment test, if applicable; and
•		Nonfinancial long-lived assets measured at fair value for impairment assessment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

As a result of the issuance of FSP FAS 157-2, the Company did not apply the provisions of SFAS 157 to the nonfinancial assets and nonfinancial liabilities within the scope of FSP FAS 157-2.

Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115” (“SFAS 159”). The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported net income caused by measuring related assets and liabilities differently. This statement permits entities to choose, at specified election dates, to measure eligible items at fair value (i.e., the fair value option). Items eligible for the fair value option include certain recognized financial assets and liabilities, rights and obligations under certain insurance contracts that are not financial instruments, host financial instruments resulting from the separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument, and certain commitments. Business entities shall report unrealized gains and losses on items for which the fair value option has been elected in net income. The fair value option: (a) may be applied instrument by instrument, with certain exceptions; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Companies shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. On January 1, 2008, the Company did not elect to apply the provisions of SFAS 159 to financial assets and liabilities.

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

1. Basis of Presentation and Accounting Policies (continued)

Future Adoption of New Accounting Standards

Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities

In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method described in SFAS No. 128, “Earnings Per Share” (“SFAS 128”). The FSP requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this FSP. Early application is not permitted. The Company expects to adopt FSP EITF 03-6-1 on January 1, 2009, and does not expect the adoption to have a material effect on the Company’s earnings per share.

Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock

In June 2008, the FASB issued Emerging Issues Task Force (“EITF”) No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock for the purposes of determining whether an instrument is a derivative. To the extent a derivative instrument or embedded derivative feature is deemed indexed to an entity’s own stock, it may be exempt from the requirements of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”. EITF 07-5 concluded that an entity should determine whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock first by evaluating the instrument’s contingent exercise provisions, if any, and then by evaluating the instrument’s settlement provisions. EITF 07-5 will be effective for instruments issued in fiscal years beginning after December 15, 2008. The Company expects to adopt EITF 07-5 on January 1, 2009, and the adoption is not expected to have a material effect on the Company’s consolidated financial condition and results of operations.

Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60” (“SFAS 163”). The scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance) contracts issued by enterprises that are included within the scope of SFAS 60 and that are not accounted for as derivative instruments. SFAS 163 excludes from its scope insurance contracts that are similar to financial guarantee insurance such as mortgage guaranty insurance and credit insurance on trade receivables. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for certain disclosures about the insurance enterprise’s risk-management activities, which are effective for the first period (including interim periods) beginning after May 2008. Except for certain disclosures, earlier application is not permitted. The Company does not have financial guarantee insurance products, and, accordingly does not expect the issuance of SFAS 163 to have an effect on the Company’s consolidated financial condition and results of operations.

Accounting for Convertible Debt Instruments That May Be Settled In Cash upon Conversion (Including Partial Cash Settlement)

In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled In Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. FSP APB 14-1 shall be applied retrospectively to all periods presented unless instruments were not outstanding during any period included in the financial statements. The Company expects to adopt FSP APB 14-1 on January 1, 2009. The Company does not have any instruments outstanding that are within the scope of FSP APB 14-1, and, accordingly, does not expect the issuance of FSP APB 14-1 to have any effect on the Company’s consolidated financial condition and results of operations.

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

1. Basis of Presentation and Accounting Policies (continued)

Determination of the Useful Life of Intangible Assets

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). FSP FAS 142-3 amends paragraph 11(d) of SFAS 142 to require an entity to use its own assumptions about renewal or extension of an arrangement, adjusted for the entity-specific factors in paragraph 11 of SFAS 142, even when there is likely to be substantial cost or material modifications. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, with early adoption prohibited. The provisions of FSP FAS 142-3 are to be applied prospectively to intangible assets acquired after January 1, 2009 for the Company, although the disclosure provisions are required for all intangible assets recognized as of or subsequent to January 1, 2009. The Company expects to adopt FSP FAS 142-3 on January 1, 2009, and does not expect the adoption to have a material effect on the Company’s consolidated financial condition and results of operations.

Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”), an amendment of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS 161 amends and expands disclosures about an entity’s derivative and hedging activities with the intent of providing users of financial statements with an enhanced understanding of (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures. The Company expects to adopt SFAS 161 on January 1, 2009.

Income Taxes

The effective tax rate for the three months ended June 30, 2008 and 2007 was 17% and 25%, respectively. The effective tax rate for the six months ended June 30, 2008 and 2007 was 7% and 27%, respectively. The principal causes of the difference between the effective rate and the U.S. statutory rate of 35% were tax-exempt interest earned on invested assets and the separate account dividends received deduction (“DRD”).

The separate account DRD is estimated for the current year using information from the prior year-end, adjusted for current year equity market performance. The 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 recorded benefits related to the separate account DRD of $67 and $44 in the three months ended June 30, 2008 and 2007, and $108 and $88 in the six months ended June 30, 2008 and 2007, respectively. The benefit recorded in the three months ended June 30, 2008 included prior period adjustments of $9 related to the 2007 tax return and $8 related to the three months ended March 31, 2008.

In Revenue Ruling 2007-61, issued on September 25, 2007, the Internal Revenue Service (“IRS”) announced its intention to issue regulations with respect to certain computational aspects of DRD on separate account assets held in connection with variable annuity contracts. Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54, issued in August 2007, that had purported to change accepted industry and IRS interpretations of the statutes governing these computational questions. Any regulations that the IRS ultimately proposes for issuance in this area will be subject to public notice and comment, at which time insurance companies and other members of the public will have the opportunity to raise legal and practical questions about the content, scope and application of such regulations. As a result, the ultimate timing and substance of any such regulations are unknown, but they could result in the elimination of some or all of the separate account DRD tax benefit that the Company receives. Management believes that it is highly likely that any such regulations would apply prospectively only.

The Company receives a foreign tax credit (“FTC”) against its U.S. tax liability for foreign taxes paid by the Company including payments from its separate account assets. The separate account FTC is estimated for the current year using information from the most recent filed return, adjusted for the change in the allocation of separate account investments to the international equity markets during the current year. The actual current year FTC can vary from the estimates due to actual FTCs passed through by the mutual funds. During the second quarter 2008 the Company booked a tax benefit of $4 related to the 2007 provision to filed return adjustments. The Company recorded benefits related to separate account FTC of $8 and $3 in the three months ended June 30, 2008 and 2007, and $11 and $5 in the six months ended June 30, 2008 and 2007, respectively.

The Company’s unrecognized tax benefits increased by $12 for the six months ended June 30, 2008 as a result of tax positions expected to be taken on its 2008 tax return, bringing the total unrecognized tax benefits to $88 as of June 30, 2008. This entire amount, if it were recognized, would lower the effective tax rate for the applicable periods.

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

1. Basis of Presentation and Accounting Policies (continued)

The Company’s federal income tax returns are routinely audited by the IRS. The examination of the Company’s tax returns for 2002 through 2003 is anticipated to be completed during 2008. The 2004 through 2006 examination began during the current quarter, and is expected to close by the end of 2010. 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 booking of tax benefits during late 2008 or early 2009. Such benefits are not expected to be material to the statement of operations.

2. Earnings Per Share

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

		Three Months Ended												Six Months Ended
		June 30, 2008												June 30, 2008
		Net								Per Share				Net								Per Share
		Income				Shares				Amount				Income				Shares				Amount
Basic Earnings per Share
Net income available to common shareholders		$	543				311.7			$	1.74			$	688				312.7			$	2.20
Diluted Earnings per Share
Stock compensation plans			—				1.4								—				1.7
Net income available to common shareholders plus assumed conversions		$	543				313.1			$	1.73			$	688				314.4			$	2.19

		Three Months Ended												Six Months Ended
		June 30, 2007												June 30, 2007
		Net								Per Share				Net								Per Share
		Income				Shares				Amount				Income				Shares				Amount
Basic Earnings per Share
Net income available to common shareholders		$	627				316.8			$	1.98			$	1,503				318.2			$	4.72
Diluted Earnings per Share
Stock compensation plans			—				2.8								—				3.0
Net income available to common shareholders plus assumed conversions		$	627				319.6			$	1.96			$	1,503				321.2			$	4.68

3. Segment Information

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

Life

Life is organized into four groups which are comprised of six reporting segments: The Retail Products Group (“Retail”) and Individual Life segments make up the Individual Markets Group. The Retirement Plans and Group Benefits segments make up the Employer Markets Group. The Institutional Solutions Group (“Institutional”) and International segments each make up their own group.

The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies in Note 1. Life evaluates performance of its segments based on revenues, net income and the segment’s return on allocated capital. Each reporting segment is allocated corporate surplus as needed to support its business. The Company charges direct operating expenses to the appropriate segment and allocates the majority of indirect expenses to the segments based on an intercompany expense arrangement. Inter-segment revenues primarily occur between Life’s Other category and the reporting segments. These amounts primarily include interest income on allocated surplus and interest charges on excess separate account surplus.

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

3. Segment Information (continued)

Property & Casualty

Property & Casualty is organized into five reporting segments: the underwriting segments of Personal Lines, Small Commercial, Middle Market and Specialty Commercial (collectively, “Ongoing Operations”); and the Other Operations segment. For the three months ended June 30, 2008 and 2007, AARP accounted for earned premiums of $691 and $663, respectively, in Personal Lines. For the six months ended June 30, 2008 and 2007, AARP accounted for earned premiums of $1.4 billion and $1.3 billion, respectively, in Personal Lines.

Through inter-segment arrangements, Specialty Commercial reimburses Personal Lines, Small Commercial and Middle Market for losses incurred from uncollectible reinsurance and losses incurred under certain liability claims. Earned premiums assumed (ceded) under the inter-segment arrangements were as follows:

		Three Months Ended								Six Months Ended
Net assumed (ceded) earned premiums under		June 30,								June 30,
inter-segment arrangements		2008				2007				2008				2007
Personal Lines		$	(2	)		$	(1	)		$	(3	)		$	(3	)
Small Commercial			(7	)			(7	)			(15	)			(15	)
Middle Market			(8	)			(9	)			(16	)			(17	)
Specialty Commercial			17				17				34				35
Total		$	—			$	—			$	—			$	—

Financial Measures and Other Segment Information

For further discussion of the types of products offered by each segment, see Note 3 of Notes to Consolidated Financial Statements included in The Hartford’s 2007 Form 10-K Annual Report.

One of the measures of profit or loss used by The Hartford’s management in evaluating the performance of its Life segments is net income. Within Property & Casualty, net income is a measure of profit or loss used in evaluating the performance of Ongoing Operations and the Other Operations segment. Within Ongoing Operations, the underwriting segments of Personal Lines, Small Commercial, Middle Market and Specialty Commercial are evaluated by The Hartford’s management primarily based upon underwriting results. Underwriting results represent premiums earned less incurred losses, loss adjustment expenses and underwriting expenses. The sum of underwriting results, net investment income, net realized capital gains and losses, net servicing and other income, other expenses, and related income taxes is net income.

Certain transactions between segments occur during the year that primarily relate to tax settlements, insurance coverage, expense reimbursements, services provided, security transfers and capital contributions. In addition, certain reinsurance stop loss arrangements exist between the segments which specify that one segment will reimburse another for losses incurred in excess of a predetermined limit. Also, one segment may purchase group annuity contracts from another to fund pension costs and annuities to settle casualty claims. In addition, certain inter-segment transactions occur in Life. These transactions include interest income on allocated surplus and interest charges on excess separate account surplus. Consolidated Life net investment income is unaffected by such transactions.

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

3. Segment Information (continued)

The following tables present revenues and net income (loss) by segment. Underwriting results are presented for the Personal Lines, Small Commercial, Middle Market and Specialty Commercial segments, while net income is presented for each of Life’s reporting segments, total Property & Casualty, Ongoing Operations, Other Operations, and Corporate.

Revenues

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Life
Retail [1]		$	872			$	821			$	1,048			$	1,744
Individual Life			285				290				541				586
Total Individual Markets Group			1,157				1,111				1,589				2,330
Retirement Plans			170				155				292				296
Group Benefits			1,176				1,202				2,320				2,407
Total Employer Markets Group			1,346				1,357				2,612				2,703
International [1]			266				191				413				396
Institutional			472				532				776				1,049
Other			46				58				57				132
Total Life segment revenues [1]			3,287				3,249				5,447				6,610
Net investment income (loss) on equity securities, held for trading [2]			1,153				1,234				(2,425	)			1,444
Total Life [1]			4,440				4,483				3,022				8,054
Property & Casualty
Ongoing Operations
Earned premiums
Personal Lines			980				967				1,963				1,920
Small Commercial			683				684				1,370				1,365
Middle Market			559				592				1,135				1,197
Specialty Commercial			362				378				729				762
Total Ongoing Operations earned premiums			2,584				2,621				5,197				5,244
Other Operations earned premiums			2				1				3				1
Other revenues [3]			125				124				245				242
Net investment income			391				446				756				859
Net realized capital losses			(51	)			(24	)			(203	)			(1	)
Total Property & Casualty			3,051				3,168				5,998				6,345
Corporate			12				9				27				20
Total revenues [1]		$	7,503			$	7,660			$	9,047			$	14,419

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

3. Segment Information (continued)

Net Income (Loss)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Life
Retail [1]		$	170			$	122			$	93			$	322
Individual Life			30				44				50				96
Total Individual Markets Group			200				166				143				418
Retirement Plans			31				28				26				50
Group Benefits			62				83				108				152
Total Employer Markets Group			93				111				134				202
International [1]			72				41				80				95
Institutional			(30	)			19				(150	)			52
Other			(1	)			(19	)			(28	)			(11	)
Total Life [1]			334				318				179				756
Property & Casualty
Ongoing Operations
Underwriting results
Personal Lines			18				84				123				214
Small Commercial			69				101				188				185
Middle Market			1				34				52				67
Specialty Commercial			20				(2	)			63				44
Total Ongoing Operations underwriting results			108				217				426				510
Net servicing income [2]			8				14				7				25
Net investment income			334				385				644				736
Net realized capital losses			(53	)			(18	)			(187	)			(1	)
Other expenses			(65	)			(56	)			(122	)			(116	)
Income tax expense			(86	)			(158	)			(210	)			(341	)
Ongoing Operations			246				384				558				813
Other Operations			3				(40	)			17				(8	)
Total Property & Casualty			249				344				575				805
Corporate			(40	)			(35	)			(66	)			(58	)
Net income [1]		$	543			$	627			$	688			$	1,503

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

4. Fair Value Measurements

The following financial instruments are carried at fair value in the Company’s condensed consolidated financial statements: fixed maturities, equity securities, short-term investments, freestanding and embedded derivatives, and separate account assets. These fair value disclosures include information regarding the valuation of the Company’s guaranteed benefits products and the impact of the adoption of SFAS 157, followed by the fair value measurement and disclosure requirements of SFAS 157.

Accounting for Guaranteed Benefits Offered With Variable Annuities

Many of the variable annuity contracts issued by the Company offer various guaranteed minimum death, withdrawal, income and accumulation benefits. Those benefits are accounted for under SFAS 133 or AICPA Statement of Position No. 03-1 “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”). Guaranteed minimum benefits often meet the definition of an embedded derivative under SFAS 133 as they have notional amounts (the guaranteed balance) and underlyings (the investment fund options), they require no initial net investment and they may have terms that require or permit net settlement. However, certain guaranteed minimum benefits settle only upon a single insurable event, such as death (guaranteed minimum death benefits or “GMDB”) or living (life contingent portion of guaranteed minimum withdrawal benefits or “GMWB”), and as such are scoped out of SFAS 133 under the “insurance contract exception”. Other guaranteed minimum benefits require settlement in the form of a long-term financing transaction, such as is typical with guaranteed minimum income benefits (“GMIB”), and as such do not meet the net settlement requirement in SFAS 133. Guaranteed minimum benefits that do not meet the requirements of SFAS 133 are accounted for as insurance benefits under SOP 03-1.

Guaranteed Benefits Accounted for at Fair Value Prior to SFAS 157

The non-life-contingent portion of the Company’s GMWBs and guaranteed minimum accumulation benefits (“GMAB”) meet the definition of an embedded derivative under SFAS 133, and as such are recorded at fair value with changes in fair value recorded in net realized capital gains (losses) in net income. In bifurcating the embedded derivative, the Company attributes to the derivative a portion of total fees collected from the contract holder (the “Attributed Fees”). Attributed Fees are set equal to the present value of future claims (excluding margins for risk) expected to be paid for the guaranteed living benefit embedded derivative at the inception of the contract. The excess of total fees collected from the contract holder over the Attributed Fees are associated with the host variable annuity contract and recorded in fee income. In subsequent valuations, both the present value of future claims expected to be paid and the present value of attributed fees expected to be collected are revalued based on current market conditions and policyholder behavior assumptions. The difference between each of the two components represents the fair value of the embedded derivative.

GMWBs provide the policyholder with a guaranteed remaining balance (“GRB”) if the account value is reduced to a contractually specified minimum level, through a combination of market declines and withdrawals. The GRB is generally equal to premiums less withdrawals. For most of the Company’s GMWB “for life riders”, the GRB is reset on an annual basis to the maximum anniversary account value, subject to a cap. If the GRB exceeds the account value for any policy, the contract is “in-the-money” by the difference between the GRB and the account value.

During the first quarter of 2007, the Company launched a GMAB rider attached to certain Japanese variable annuity contracts. The GMAB provides the policyholder with the GRB if the account value is less than premiums after an accumulation period, generally 10 years, and if the account value has not dropped below 80% of the initial deposit at which point a GMIB can be exercised. The GRB is generally equal to premiums less surrenders.

Derivatives That Hedge Capital Markets Risk for Guaranteed Minimum Benefits Accounted for as Derivatives

Changes in capital markets or policyholder behavior may increase or decrease the Company’s exposure to benefits under the guarantees. The Company uses derivative transactions, including GMWB reinsurance (described below) which meets the definition of a derivative under SFAS 133 and customized derivative transactions, to mitigate some of that exposure. Derivatives are recorded at fair value with changes in fair value recorded in net realized capital gains (losses) in net income.

GMWB Reinsurance

For all U.S. GMWB contracts in effect through July 2003, the Company entered into a reinsurance arrangement to offset its exposure to the GMWB for the remaining lives of those contracts. Substantially all of the Company’s reinsurance capacity was utilized as of the third quarter of 2003. Substantially all U.S. GMWB riders sold since July 2003 are not covered by reinsurance.

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

4. Fair Value Measurements (continued)

Customized Derivatives

In June and July of 2007 and again in April of 2008, the Company entered into customized swap contracts to hedge certain risk components for the remaining term of certain blocks of non-reinsured GMWB riders. These customized derivative contracts provide protection from capital markets risks based on policyholder behavior assumptions specified by the Company at the inception of the derivative transactions. Due to the significance of the non-observable inputs associated with pricing the swap contracts entered into in 2007, the initial difference between the transaction price and modeled value of $51 was deferred in accordance with EITF 02-3 and included in other assets in the condensed consolidated balance sheets.

Other Derivative Instruments

The Company uses other hedging instruments to hedge its unreinsured GMWB exposure. These instruments include interest rate futures and swaps, variance swaps, S&P 500 and NASDAQ index put options and futures contracts. The Company also uses EAFE Index swaps to hedge GMWB exposure to international equity markets.

Adoption of SFAS 157 for Guaranteed Benefits Offered With Variable Annuities That are Required to be Fair Valued

Fair values for GMWB and GMAB contracts and the related reinsurance and customized derivatives that hedge certain equity markets exposure for GMWB contracts are calculated based upon internally developed models because active, observable markets do not exist for those items. Below is a description of the Company’s fair value methodologies for guaranteed benefit liabilities, the related reinsurance and customized derivatives, all accounted for under SFAS 133, prior to the adoption of SFAS 157 and subsequent to adoption of SFAS 157.

Pre-SFAS 157 Fair Value

Prior to January 1, 2008, the Company used the guidance prescribed in SFAS 133 and other related accounting literature on fair value which represented the amount for which a financial instrument could be exchanged in a current transaction between knowledgeable, unrelated willing parties. However, under that accounting literature, when an estimate of fair value was made for liabilities where no market observable transactions exist for that liability or similar liabilities, market risk margins were only included in the valuation if the margin was identifiable, measurable and significant. If a reliable estimate of market risk margins was not obtainable, the present value of expected future cash flows under a risk neutral framework, discounted at the risk free rate of interest, was the best available estimate of fair value in the circumstances (“Pre-SFAS 157 Fair Value”).

The Pre-SFAS 157 Fair Value was calculated based on actuarial and capital market assumptions related to projected cash flows, including 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 involving the generation of thousands of scenarios that assume risk neutral returns consistent with swap rates and a blend of observable implied index volatility levels were used. Estimating these cash flows involved numerous estimates and subjective judgments including those regarding expected markets rates of return, market volatility, correlations of market index returns to funds, fund performance, discount rates and policyholder behavior. At each valuation date, the Company assumed expected returns based on:

•		risk-free rates as represented by the current LIBOR forward curve rates;
•		forward market volatility assumptions for each underlying index based primarily on a blend of observed market “implied volatility” data;
•		correlations of market returns across underlying indices based on actual observed market returns and relationships over the ten years preceding the valuation date;
•		three years of history for fund regression; and
•		current risk-free spot rates as represented by the current LIBOR spot curve to determine the present value of expected future cash flows produced in the stochastic projection process.

As GMWB 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.

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

4. Fair Value Measurements (continued)

Fair Value Under SFAS 157

The Company’s SFAS 157 fair value is calculated as an aggregation of the following components: Pre-SFAS 157 Fair Value; Actively-Managed Volatility Adjustment; Credit Standing Adjustment; Market Illiquidity Premium; and Behavior Risk Margin. 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 each 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 for a liability, or receive for an asset, to 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 required to be fair valued. The SFAS 157 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 GMWB liability to a third party, the release of risk margins is likely to be reflected as realized gains in future periods’ net income. Each of the components described below are unobservable in the marketplace and require subjectivity by the Company in determining their value.

•		Actively-Managed Volatility Adjustment. This component incorporates the basis differential between the observable index implied volatilities used to calculate the Pre-SFAS 157 component and the actively-managed funds underlying the variable annuity product. The Actively-Managed Volatility Adjustment is calculated using historical fund and weighted index volatilities.
•		Credit Standing Adjustment. This component makes an adjustment that market participants would make to reflect the risk that GMWB obligations or the GMWB reinsurance recoverables will not be fulfilled (“nonperformance risk”). SFAS 157 explicitly requires nonperformance risk to be reflected in fair value. The Company calculates the Credit Standing Adjustment by using default rates provided by rating agencies, adjusted for market recoverability, reflecting the long-term nature of living benefit obligations and the priority of payment on these obligations versus long-term debt.
•		Market Illiquidity Premium. This component makes an adjustment that market participants would require to reflect that GMWB obligations are illiquid and have no market observable exit prices in the capital markets. The Market Illiquidity Premium was determined using inputs that were identified in customized derivative transactions that the Company entered into to hedge GMWB related risks.
•		Behavior Risk Margin. This component adds a margin that market participants would require for the risk that the Company’s assumptions about policyholder behavior used in the Pre-SFAS 157 model could differ from actual experience. The Behavior Risk Margin is calculated by taking the difference between adverse policyholder behavior assumptions and the best estimate assumptions used in the Pre-SFAS 157 model using interest rate and volatility assumptions that the Company believes market participants would use in developing risk margins. The adverse assumptions incorporate adverse dynamic lapse behavior, greater utilization of the withdrawal features, and the potential for contract holders to shift their investment funds into more aggressive investments when allowed.

SFAS 157 Transition

The Company applied the provisions of SFAS 157 prospectively to financial instruments that are recorded at fair value including guaranteed living benefits that are required to be fair valued. The Company also applied the provisions of SFAS 157 using limited retrospective application (i.e., cumulative effect adjustment through opening retained earnings) to certain customized derivatives historically measured at fair value in accordance with EITF 02-3.

The impact on January 1, 2008 of adopting SFAS 157 for guaranteed benefits accounted for under SFAS 133 and the related reinsurance was a reduction to net income of $220, after the effects of DAC amortization and income taxes. In addition, net realized capital gains and losses that will be recorded in 2008 and future years are also likely to be more volatile than amounts recorded in prior years.

Moreover, the adoption of SFAS 157 has resulted in lower variable annuity fee income for new business issued in 2008 as attributed fees to the embedded derivative have increased consistent with incorporating additional risk margins and other indicia of “exit value” in the valuation of the embedded derivative. The level of attributed fees to the embedded derivatives for new business each quarter also depends on the level of equity index volatility, as well as other factors, including interest rates. As equity index volatility has risen, interest rates have declined, and the Company adopted SFAS 157, the fees ascribed to the new business cohorts issued in the first and second quarters of 2008 have risen to levels above the rider fee for most products. The extent of any excess of ascribed fee over rider fee will vary by product. The Company does not believe it is likely that today’s level of ascribed fees will persist over the long-term.

The Company also recognized a decrease in opening retained earnings of $51 in relation to the loss deferred in accordance with EITF 02-3 on customized derivatives purchased in 2007, and used to hedge a portion of the GMWB risk. In addition, the change in value of the customized derivatives due to the initial adoption of SFAS 157 of $41 was recorded as an increase in opening retained earnings with subsequent changes in fair value recorded in net realized capital gains (losses) in net income. After amortization of DAC and the effect of income taxes, the impact on opening retained earnings is a decrease of $3.

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

4. Fair Value Measurements (continued)

The Company’s adoption of SFAS 157 did not materially impact the fair values of other financial instruments, including, but not limited to, other derivative instruments used to hedge guaranteed minimum benefits.

The SFAS 157 transition amounts, before the effects of DAC amortization and income taxes, as of January 1, 2008 are shown below by type of guaranteed benefit liability and derivative asset.

SFAS 157 Transition Adjustment for Guaranteed Benefit Liabilities and Derivative Assets
As of January 1, 2008

										Transition
										Adjustment
		SFAS 157				Pre-SFAS 157				Gain (Loss)
		Fair Value				Fair Value				[Before tax and
		Asset (Liability)				Asset (Liability)				DAC amortization]
Guaranteed Benefits
U.S. Guaranteed Minimum Withdrawal Benefits		$	(1,114	)		$	(553	)		$	(561	)
Non-Life Contingent Portion of “for Life” Guaranteed Minimum Withdrawal Benefits
U.S. Riders			(319	)			(154	)			(165	)
International Riders			(17	)			(7	)			(10	)
Total			(336	)			(161	)			(175	)
International Guaranteed Minimum Accumulation Benefits			(22	)			2				(24	)
Total Guaranteed Benefits			(1,472	)			(712	)			(760	)
GMWB Reinsurance			238				128				110
Total		$	(1,234	)		$	(584	)		$	(650	)

The transition adjustment as of January 1, 2008 was comprised of the following amounts by transition component:

		Transition
		Adjustment
		Gain (Loss)
		[Before tax and
		DAC amortization]
Actively-Managed Volatility Adjustment		$	(100	)
Credit Standing Adjustment			4
Market Illiquidity Premium			(194	)
Behavior Risk Margin			(360	)
Total SFAS 157 Transition Adjustment before tax and DAC amortization		$	(650	)

Fair Value Disclosures

The following section applies the SFAS 157 fair value hierarchy and disclosure requirements to the Company’s financial instruments that are carried at fair value. SFAS 157 establishes a fair value hierarchy that 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. Treasury securities, certain mortgage backed securities, and exchange traded equity and derivative securities.
Level 2		Observable inputs, other than quoted prices included in Level 1, for the asset or liability or prices for similar assets and liabilities. Most debt securities and some preferred stocks are model priced by vendors using observable inputs and are classified within Level 2. Also included in the Level 2 category are derivative instruments that are priced using models with observable market inputs, including interest rate, foreign currency and certain credit swap contracts.
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 highly structured and/or lower quality asset-backed securities (“ABS”) and commercial mortgage-backed securities (“CMBS”), including ABS backed by sub-prime loans, and private placement debt and equity securities. Embedded derivatives and complex derivatives securities, including equity derivatives, longer dated interest rate swaps and certain complex credit derivatives are also included in Level 3. Because Level 3 fair values, by their nature, contain unobservable market inputs as there is no observable market for these assets and liabilities, considerable judgment is used to determine the SFAS 157 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.

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

4. Fair Value Measurements (continued)

The following table presents the Company’s assets and liabilities that are carried at fair value, by SFAS 157 hierarchy level, as of June 30, 2008:

						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
Fixed maturities, available-for-sale		$	75,068			$	633			$	57,923			$	16,512
Equity securities, held for trading			36,853				1,730				35,123				—
Equity securities, available-for-sale			2,619				285				967				1,367
Other investments [1]			869				—				103				766
Short-term investments			5,127				220				4,907				—
Reinsurance recoverables [2]			250				—				—				250
Separate account assets [3] [7]			166,938				134,978				31,295				665
Total assets accounted for at fair value on a recurring basis		$	287,724			$	137,846			$	130,318			$	19,560
Liabilities accounted for at fair value on a recurring basis
Other policyholder funds and benefits payable [4]		$	(1,739	)		$	—			$	—			$	(1,739	)
Other liabilities [5]			(733	)			—				(356	)			(377	)
Consumer notes [6]			(3	)			—				—				(3	)
Total liabilities accounted for at fair value on a recurring basis		$	(2,475	)		$	—			$	(356	)		$	(2,119	)

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. 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.

Determination of fair values

The valuation methodologies used to determine the fair values of assets and liabilities under the “exit price” notion of SFAS 157 reflect market-participant objectives and are based on the application of the fair value hierarchy that prioritizes 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. 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 credit standing, 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 table.

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

4. Fair Value Measurements (continued)

Fixed Maturity, Short-Term, and Equity Securities, Available- for-Sale

The fair value of fixed maturity, short term, and equity securities, available for sale, is 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. Typical inputs used by these three pricing methods include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flows and prepayments speeds. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services normally derive the security prices through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information outlined above. If there are no recent reported trades, the third party pricing services and 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, collateralized mortgage obligations (“CMOs”), and mortgage-backed securities (“MBS”) 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.

Prices from third party pricing services are often unavailable for securities that are rarely traded or 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. A pricing matrix is used to price securities for which the Company is unable to obtain either a price from a third party pricing service or an independent broker quotation. The pricing matrix begins with current spread levels to determine the market price for the security. The credit spreads, as assigned by a knowledgeable private placement broker, incorporate the issuer’s credit rating and a risk premium, if warranted, due to the issuer’s industry and the security’s time to maturity. The issuer-specific yield adjustments, which can be positive or negative, are updated twice per year, as of June 30 and December 31, by an independent third party source and are intended to adjust security prices for issuer-specific factors. The Company assigns a credit rating to these securities based upon an internal analysis of the issuer’s financial strength.

The Company performs a monthly analysis on the prices and credit spreads received from third parties to ensure that the prices represent a reasonable estimate of the fair value. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. 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. In addition, the Company ensures whether 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 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 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 SFAS 157 fair value hierarchy level based upon trading activity and the observability of market inputs. Based on this evaluation and investment class analysis, each price was classified into Level 1, 2 or 3. 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 the 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. Internal matrix-priced securities, primarily consisting of certain private placement debt, are also classified as Level 3. The matrix pricing of certain private placement debt includes significant non-observable inputs, the internally determined credit rating of the security and an externally provided credit spread.

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

4. Fair Value Measurements (continued)

The following table presents the fair value of the significant asset sectors within the SFAS 157 Level 3 securities classification as of June 30, 2008.

						% of Total
		Fair Value				Fair Value
ABS
Below Prime		$	2,136				11.9	%
Collateralized Loan Obligations (CLOs)			2,677				15.0	%
Other			996				5.6	%
Corporate
Matrix priced			5,245				29.3	%
Other			3,267				18.3	%
CMBS			1,834				10.3	%
Preferred stock			1,139				6.3	%
Other			585				3.3	%
Total Level 3 securities		$	17,879				100.0	%

•		ABS below prime primarily represents sub-prime and Alt-A securities which are classified as Level 3 due to the lack of liquidity in the market.
•		ABS CLOs represent senior secured bank loan CLOs which are primarily priced by independent brokers.
•		ABS Other primarily represents broker priced securities.
•		Corporate-matrix priced represents private placement securities that are thinly traded and priced using a pricing matrix which includes significant non-observable inputs.
•		Corporate-other primarily represents broker-priced securities which are thinly traded and privately negotiated transactions.
•		CMBS primarily represents CMBS collateralized debt obligations (“CDOs”) securities classified as Level 3 due to the illiquidity of this sector.
•		Preferred stock primarily represents illiquid perpetual preferred security transactions.

Derivative Instruments, including embedded derivatives within investments

Derivative instruments are reported on the condensed consolidated balance sheets at fair value and are reported in Other Investments and Other Liabilities. Embedded derivatives are reported with the host instruments on the condensed consolidated balance sheet. Derivative instruments are fair valued using pricing valuation models, which utilize market data inputs or independent broker quotations. Excluding embedded derivatives, as of June 30, 2008, 97% of derivatives based upon notional values were priced by valuation models, which utilize independent market data. The remaining derivatives were priced by broker quotations. The derivatives are valued using mid-market inputs that are predominantly observable in the market. Inputs used to value derivatives include, but are not limited to, interest swap rates, foreign currency forward and spot rates, credit spreads and correlations, interest and equity volatility and equity index levels. 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.

Derivative instruments classified as Level 1 include futures and certain option contracts which are traded on active exchange markets.

Derivative instruments classified as Level 2 primarily include interest rate, currency and certain credit default swaps. The derivative valuations are determined using pricing models with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Derivative instruments classified as Level 3 include complex derivatives, such as equity options and swaps, interest rate derivatives which have interest rate optionality, certain credit default swaps, and long-dated interest rate swaps. Also included in Level 3 classification for derivatives are customized equity swaps that hedge the GMWB liabilities. Additional information on the customized transactions is provided under the “Accounting for Guaranteed Benefits Offered With Variable Annuities” section of this Note 4. These derivative instruments are valued using pricing models which utilize both observable and unobservable inputs and, to a lesser extent, broker quotations. A derivative instrument containing Level 1 or Level 2 inputs will be classified as a Level 3 financial instrument in its entirety if it has as least one significant Level 3 input.

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.

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

4. Fair Value Measurements (continued)

GMWB Reinsurance Derivative

The fair value of the GMWB reinsurance derivative is calculated as an aggregation of the components described in the SFAS 157 Transition section of this Note. The fair value of the GMWB reinsurance derivative is modeled using significant unobservable policyholder behavior inputs, such as lapses, fund selection, resets and withdrawal utilization, and risk margins. As a result, the GMWB reinsurance derivative is categorized as Level 3.

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. Open-ended mutual funds are included in Level 1. Most debt securities and short-term investments are included in Level 2. Level 3 assets include less liquid securities, such as highly structured and/or lower quality ABS and CMBS, ABS backed by sub-prime loans, and any investment priced solely by broker quotes.

GMWB and GMAB Embedded Derivatives (in Other Policyholder Funds and Benefits Payable)

The fair value of GMWB and GMAB embedded derivatives, reported in Other Policyholder Funds and Benefits Payable on the Company’s condensed consolidated balance sheet, are calculated as an aggregation of the components described in the SFAS 157 Transition section of this Note. The fair value of GMWB and GMAB embedded derivatives are modeled using significant unobservable policyholder behavior inputs, such as lapses, fund selection, resets and withdrawal utilization, and risk margins. As a result, the GMWB and GMAB embedded derivatives are categorized as Level 3.

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

The tables below provide a fair value roll forward for the three and six months ending June 30, 2008 for the financial instruments for which significant unobservable inputs (Level 3) are used in the fair value measurement on a recurring basis. The Company classifies the fair values of financial instruments within Level 3 if there are no observable markets for the instruments or, in the absence of active markets, the majority of the inputs used to determine fair value are based on the Company’s own assumptions about market participant assumptions. However, the Company prioritizes the use of market-based inputs over entity-based assumptions in determining Level 3 fair values in accordance with SFAS 157. Therefore, the gains and losses in the tables below include changes in fair value due partly to observable and unobservable factors.

Roll-forward of Financial Instruments Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) for the three months from April 1, 2008 to June 30, 2008

																										Changes in
																										unrealized
																										gains (losses)
																										included in net
							Total																			income related
						Realized/unrealized																				to financial
						gains (losses)								Purchases,				Transfers				SFAS 157				instruments
		SFAS 157 Fair				included in:								issuances,				in and/or				Fair value				still held at
		value as of				Net income				AOCI				and				(out) of				as of June				June 30,
		April 1, 2008				[3], [4]				[6]				settlements				Level 3 [8]				30, 2008				2008 [4]
Assets
Fixed maturities		$	16,447			$	(74	)		$	(286	)		$	305			$	120			$	16,512			$	(75	)
Equity securities, available-for-sale			1,285				4				(10	)			236				(148	)			1,367				(4	)
Freestanding derivatives [5]			664				(282	)			(1	)			14				(6	)			389				(238	)
Reinsurance recoverable [3]			291				(46	)			—				5				—				250				(46	)
Separate accounts [7]			580				23				—				(58	)			120				665				18
Liabilities
Embedded derivatives reported in other policyholder funds and benefits payable [3]		$	(2,058	)		$	351			$	—			$	(32	)		$	—			$	(1,739	)		$	351
Consumer notes			(4	)			1				—				—				—				(3	)			1