HIG 09.30.2014 - 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________ 
FORM 10-Q
 ____________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
¨
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
 
13-3317783
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
One Hartford Plaza, Hartford, Connecticut 06155
(Address of principal executive offices) (Zip Code)
(860) 547-5000
(Registrant’s telephone number, including area code)
Indicate by check mark:
Yes
 
No
 
 
 
 
•     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.
ý
 
¨
 
 
 
 
•     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).
ý
 
¨
 
 
 
 
•     whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
 
Large accelerated filer x
 
Accelerated filer  ¨
 
Non-accelerated filer  ¨
 
Smaller reporting company  ¨
•     whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
¨
 
ý
As of October 22, 2014, there were outstanding 431,481,274 shares of Common Stock, $0.01 par value per share, of the registrant.

1


THE HARTFORD FINANCIAL SERVICES GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014
TABLE OF CONTENTS
 
Item
 
Description
Page
 
 
 
 
 
 
 
 
 
1.      
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.      
 
 
 
 
3.      
 
 
 
 
4.      
 
 
 
 
 
 
 
 
 
 
1.      
 
 
 
 
1A.   
 
 
 
 
2.      
 
 
 
 
6.      
 
 
 
 
 
 
 
 



2


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 2013 Form 10-K Annual Report and Part II, IA, Risk Factors in The Hartford's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014. These important risks and uncertainties include:
•
challenges related to the Company’s current operating environment, including global political, economic and market conditions, and the effect of financial market disruptions, economic downturns or other potentially adverse macroeconomic developments on the attractiveness of our products, the returns in our investment portfolios and the hedging costs associated with our variable annuities business;
•
the risks, challenges and uncertainties associated with the realignment of our business to focus on our property and casualty, group benefits and mutual fund businesses;
•
the risks, challenges and uncertainties associated with our capital management plan, expense reduction initiatives and other actions, which may include acquisitions, divestitures or restructurings;
•
execution risk related to the continued reinvestment of our investment portfolios and refinement of our hedge program for our run-off annuity block;
•
market risks associated with our business, including changes in interest rates, credit spreads, equity prices, market volatility and foreign exchange rates, and implied volatility levels, as well as continuing uncertainty in key sectors such as the global real estate market;
•
the possibility of unfavorable loss development including with respect to long-tailed exposures;
•
the possibility of a pandemic, earthquake, or other natural or man-made disaster that may adversely affect our businesses;
•
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;
•
risk associated with the use of analytical models in making decisions in key areas such as underwriting, capital, hedging, reserving, and catastrophe risk management;
•
the uncertain effects of emerging claim and coverage issues;
•
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 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 impact on our investment portfolio if our investment portfolio is concentrated in any particular segment of the economy;
•
volatility in our statutory and United States ("U.S.") GAAP earnings and potential material changes to our results resulting from our adjustment of our risk management program to emphasize protection of economic value;
•
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, including reinsurers, sourcing partners, derivative counterparties and other third parties;
•
the potential for further acceleration of deferred policy acquisition cost amortization;

3


•
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 response of reinsurance companies under reinsurance contracts and the availability, pricing and adequacy of reinsurance to protect the Company against losses;
•
actions by our competitors, many of which are larger or have greater financial resources than we do;
•
the Company’s ability to distribute its products through distribution channels, both current and future;
•
the cost and other effects of increased regulation as a result of the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and 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;
•
unfavorable judicial or legislative developments;
•
regulatory limitations on the ability of the Company and certain of its subsidiaries to declare and pay dividends;
•
the Company’s ability to maintain the availability of its systems and safeguard the security of its data in the event of a disaster, cyber or other information security incident or other unanticipated event;
•
the risk that our framework for managing operational risks may not be effective in mitigating material risk and loss to the Company;
•
the potential for difficulties arising from outsourcing and similar third-party relationships;
•
the impact of changes in federal or state tax laws;
•
regulatory requirements that could delay, deter or prevent a takeover attempt that shareholders might consider in their best interests;
•
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; 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.

4


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut

We have reviewed the accompanying condensed consolidated balance sheet of The Hartford Financial Services Group, Inc. and subsidiaries (the "Company") as of September 30, 2014, and the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2014 and 2013 and statements of changes in stockholders’ equity, and cash flows for the nine-month periods ended September 30, 2014 and 2013. 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, 2013, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2014, 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, 2013 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

DELOITTE & TOUCHE LLP
Hartford, Connecticut
October 27, 2014



5
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Operations


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions, except for per share data)
2014
2013
 
2014
2013
 
(Unaudited)
Revenues
 
 
 
 
 
Earned premiums
$
3,337

$
3,338

 
$
9,958

$
9,885

Fee income
524

538

 
1,522

1,561

Net investment income
810

787

 
2,402

2,453

Net realized capital gains (losses):
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
(15
)
(28
)
 
(46
)
(78
)
OTTI losses recognized in other comprehensive income (“OCI”)
1

2

 
3

19

Net OTTI losses recognized in earnings
(14
)
(26
)
 
(43
)
(59
)
Net realized capital gains on business dispositions
—

—

 
—

1,575

Other net realized capital gains
83

157

 
73

280

Total net realized capital gains
69

131

 
30

1,796

Other revenues
29

68

 
85

201

Total revenues
4,769

4,862

 
13,997

15,896

Benefits, losses and expenses
 
 
 
 
 
Benefits, losses and loss adjustment expenses
2,624

2,764

 
8,223

8,345

Amortization of deferred policy acquisition costs and present value of future profits
580

594

 
1,348

1,414

Insurance operating costs and other expenses
976

964

 
2,889

3,060

Loss on extinguishment of debt
—

—

 
—

213

Reinsurance loss on dispositions, including reduction in goodwill of $156
—

—

 
—

1,574

Interest expense
93

94

 
282

301

Total benefits, losses and expenses
4,273

4,416

 
12,742

14,907

Income from continuing operations before income taxes
496

446

 
1,255

989

Income tax expense
108

81

 
251

148

Income from continuing operations, net of tax
388

365

 
1,004

841

Loss from discontinued operations, net of tax
—

(72
)
 
(588
)
(979
)
Net income (loss)
$
388

$
293

 
$
416

$
(138
)
Preferred stock dividends
—

—

 
—

10

Net income (loss) available to common shareholders
$
388

$
293

 
$
416

$
(148
)
Income from continuing operations, net of tax, available to common shareholders per common share
 
 
 
 
 
Basic
$
0.89

$
0.81

 
$
2.25

$
1.86

Diluted
$
0.86

$
0.74

 
$
2.15

$
1.71

Net income (loss) available to common shareholders per common share
 
 
 
 
 
Basic
$
0.89

$
0.65

 
$
0.93

$
(0.33
)
Diluted
$
0.86

$
0.60

 
$
0.89

$
(0.28
)
Cash dividends declared per common share
$
0.18

$
0.15

 
$
0.48

$
0.35

See Notes to Condensed Consolidated Financial Statements.

6
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)


    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2014
2013
 
2014
2013
 
(Unaudited)
Comprehensive Income
 
 
 
 
 
Net income (loss)
$
388

$
293

 
$
416

$
(138
)
Other comprehensive income (loss):
 
 
 
 
 
Change in net unrealized gain (loss) on securities
(62
)
(174
)
 
1,206

(2,430
)
Change in OTTI losses recognized in other comprehensive income
2

3

 
7

27

Change in net gain (loss) on cash-flow hedging instruments
(21
)
(21
)
 
12

(261
)
Change in foreign currency translation adjustments
(13
)
92

 
(91
)
(222
)
Change in pension and other postretirement plan adjustments
9

9

 
22

26

Total other comprehensive income (loss)
(85
)
(91
)
 
1,156

(2,860
)
Total comprehensive income (loss)
$
303

$
202

 
$
1,572

$
(2,998
)
See Notes to Condensed Consolidated Financial Statements.


7
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Balance Sheets

 
(In millions, except for share and per share data)
September 30,
2014
December 31, 2013
 
(Unaudited)
Assets
 
Investments:
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost of $55,898 and $60,641) (includes variable interest entity assets, at fair value, of $0 and $31)
$
59,586

$
62,357

Fixed maturities, at fair value using the fair value option (includes variable interest entity assets of $178 and $161)
464

844

Equity securities, trading, at fair value (cost of $11 and $14,504)
12

19,745

Equity securities, available-for-sale, at fair value (cost of $612 and $850)
648

868

Mortgage loans (net of allowances for loan losses of $19 and $67)
5,730

5,598

Policy loans, at outstanding balance
1,425

1,420

Limited partnerships and other alternative investments (includes variable interest entity assets of $3 and $4)
3,027

3,040

Other investments
326

521

Short-term investments (includes variable interest entity assets, at fair value, of $14 and $3)
5,013

4,008

Total investments
76,231

98,401

Cash (includes variable interest entity assets, at fair value, of $8 and $0)
440

1,428

Premiums receivable and agents’ balances, net
3,540

3,465

Reinsurance recoverables, net
22,814

23,330

Deferred policy acquisition costs and present value of future profits
1,868

2,161

Deferred income taxes, net
2,890

3,840

Goodwill
498

498

Property and equipment, net
816

877

Other assets
1,684

2,998

Separate account assets
136,319

140,886

Total assets
$
247,100

$
277,884

Liabilities
 
 
Reserve for future policy benefits and unpaid losses and loss adjustment expenses
$
41,442

$
41,373

Other policyholder funds and benefits payable
32,748

39,029

Other policyholder funds and benefits payable – international variable annuities
—

19,734

Unearned premiums
5,389

5,225

Short-term debt
289

438

Long-term debt
5,819

6,106

Other liabilities (includes variable interest entity liabilities of $8 and $33)
6,259

6,188

Separate account liabilities
136,319

140,886

Total liabilities
228,265

258,979

Commitments and Contingencies (Note 14)
 
 
Stockholders’ Equity
 
 
Common stock, $0.01 par value — 1,500,000,000 shares authorized, 490,923,222 and 490,923,222 shares issued
5

5

Additional paid-in capital
9,013

9,894

Retained earnings
10,886

10,683

Treasury stock, at cost — 57,353,664 and 37,632,782 shares
(2,146
)
(1,598
)
Accumulated other comprehensive income (loss), net of tax
1,077

(79
)
Total stockholders’ equity
18,835

18,905

Total liabilities and stockholders’ equity
$
247,100

$
277,884

See Notes to Condensed Consolidated Financial Statements.

8
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity


 
 
Nine Months Ended September 30,
(In millions, except for share data)
2014
2013
 
(Unaudited)
Preferred Stock
 
 
Balance, beginning of period
$
—

$
556

Conversion of shares to common stock
—

(556
)
Balance, end of period
$
—

$
—

Common Stock
5

5

Additional Paid-in Capital, beginning of period
9,894

10,038

Repurchase of warrants
—

(33
)
Forward purchase of shares under accelerated share repurchase agreement
(131
)
—

Issuance of shares under incentive and stock compensation plans
12

(47
)
Tax benefits on employee stock options and awards
4

3

Conversion of mandatory convertible preferred stock
—

556

Issuance of shares for warrant exercise
(766
)
(103
)
Additional Paid-in Capital, end of period
9,013

10,414

Retained Earnings, beginning of period
10,683

10,745

Net income (loss)
416

(138
)
Dividends on preferred stock
—

(10
)
Dividends declared on common stock
(213
)
(158
)
Retained Earnings, end of period
10,886

10,439

Treasury Stock, at Cost, beginning of period
(1,598
)
(1,740
)
Treasury stock acquired
(971
)
(105
)
Repurchase of shares under accelerated share repurchase agreement
(394
)
(270
)
Issuance of shares under incentive and stock compensation plans from treasury stock
65

114

Return of shares under incentive and stock compensation plans and other to treasury stock
(14
)
(15
)
Issuance of shares for warrant exercise
766

103

Treasury Stock, at Cost, end of period
(2,146
)
(1,913
)
Accumulated Other Comprehensive Income (Loss), net of tax, beginning of period
(79
)
2,843

Total other comprehensive income (loss)
1,156

(2,860
)
Accumulated Other Comprehensive Income, net of tax, end of period
1,077

(17
)
Total Stockholders’ Equity
$
18,835

$
18,928

Common Shares Outstanding beginning of period (in thousands)
453,290

436,306

Treasury stock acquired
(39,066
)
(12,680
)
Issuance of shares under incentive and stock compensation plans
1,562

2,101

Return of shares under incentive and stock compensation plans and other to treasury stock
(393
)
(548
)
Conversion of mandatory convertible preferred shares
—

21,178

Issuance of shares for warrant exercise
18,177

2,136

Common Shares Outstanding, at end of period
433,570

448,493

See Notes to Condensed Consolidated Financial Statements.


9
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Cash Flows

 
Nine Months Ended September 30,
(In millions)
2014
2013
Operating Activities
(Unaudited)
Net income (loss)
$
416

$
(138
)
Adjustments to reconcile net income to net cash provided by operating activities
 
 
Amortization of deferred policy acquisition costs and present value of future profits
1,348

2,321

Additions to deferred policy acquisition costs and present value of future profits
(1,032
)
(1,003
)
Change in reserve for future policy benefits and unpaid losses and loss adjustment expenses and unearned premiums
405

(104
)
Change in reinsurance recoverables
(108
)
(405
)
Change in receivables and other assets
(221
)
(664
)
Change in payables and accruals
(840
)
572

Change in accrued and deferred income taxes
43

(536
)
Net realized capital gains
127

(1,117
)
Net disbursements from investment contracts related to policyholder funds—international variable annuities
(3,992
)
(4,858
)
Net decrease in equity securities, trading
3,992

4,858

Depreciation and amortization
152

140

Loss on extinguishment of debt
—

213

Reinsurance loss on dispositions
—

1,574

Loss on sale of business
659

102

Other operating activities, net
(54
)
(52
)
Net cash provided by operating activities
895

903

Investing Activities
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
Fixed maturities, available-for-sale
19,960

22,104

Fixed maturities, fair value option
378

60

Equity securities, available-for-sale
293

196

Mortgage loans
333

349

Partnerships
322

200

Payments for the purchase of:
 
 
Fixed maturities, available-for-sale
(17,247
)
(19,636
)
Fixed maturities, fair value option
(320
)
(95
)
Equity securities, available-for-sale
(210
)
(144
)
Mortgage loans
(466
)
(575
)
Partnerships
(221
)
(192
)
Proceeds from business sold
963

485

Derivatives, net
115

(1,690
)
Change in policy loans, net
8

44

Additions to property and equipment, net
(57
)
—

Change in short-term investments, net
(1,919
)
581

Other investing activities, net
(13
)
1

Net cash provided by investing activities
1,919

1,688

Financing Activities
 
 
Deposits and other additions to investment and universal life-type contracts
5,448

7,186

Withdrawals and other deductions from investment and universal life-type contracts
(18,416
)
(20,179
)
Net transfers from separate accounts related to investment and universal life-type contracts
11,202

12,242

Repayments at maturity or settlement of consumer notes
(13
)
(78
)
Net decrease in securities loaned or sold under agreements to repurchase
—

(1,036
)
Repurchase of warrants
—

(33
)
Repayment of debt
(200
)
(1,338
)
Proceeds from the issuance of debt
—

295

Proceeds from net issuance of shares under incentive and stock compensation plans, excess tax benefit and other
12

17

Treasury stock acquired
(1,496
)
(375
)
Dividends paid on preferred stock
—

(21
)
Dividends paid on common stock
(213
)
(134
)
Net cash used for financing activities
(3,676
)
(3,454
)
Foreign exchange rate effect on cash
(126
)
(21
)
Transfer of cash to held for sale
—

(115
)
Net decrease in cash
(988
)
(999
)
Cash – beginning of period
1,428

2,421

Cash – end of period
$
440

$
1,422

Supplemental Disclosure of Cash Flow Information
 
 
Income taxes paid (received)
$
(78
)
$
140

Interest paid
$
268

$
293

See Notes to Condensed Consolidated Financial Statements

10
Table of Contents
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 Significant Accounting Policies
The Hartford Financial Services Group, Inc. is a holding company for insurance and financial services subsidiaries that provide property and casualty and life insurance as well as investment products to both individual and business customers in the United States (collectively, “The Hartford”, the “Company”, “we” or “our”). Also, the Company continues to manage life and annuity products previously sold.
On June 30, 2014, the Company completed the sale of all of the issued and outstanding equity of Hartford Life Insurance KK, a Japanese company ("HLIKK"), to ORIX Life Insurance Corporation, a subsidiary of ORIX Corporation, a Japanese company.
On December 12, 2013, the Company completed the sale of all of the issued and outstanding equity of Hartford Life International Limited, a U.K. company ("HLIL"), to Columbia Insurance Company, a Berkshire Hathaway company.
On January 1, 2013, the Company completed the sale of its Retirement Plans business to Massachusetts Mutual Life Insurance Company ("MassMutual") and on January 2, 2013 the Company completed the sale of its Individual Life insurance business to The Prudential Insurance Company of America ("Prudential"), a subsidiary of Prudential Financial, Inc.
For further discussion of these transactions, see Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements.
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, which differ materially from the accounting practices prescribed by various insurance regulatory authorities. These Condensed Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2013 Form 10-K Annual Report. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year.
The accompanying Condensed Consolidated Financial Statements and Notes as of September 30, 2014, and for the three and nine months ended September 30, 2014 and 2013 are unaudited. These financial statements reflect all adjustments (generally 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. In 2014, a subsidiary of the Company changed its method of reporting revenues and expenses. Fee income and directly related expenses previously reported as gross amounts are being reported as a net amount in insurance operating costs and other expenses in the Condensed Consolidated Statements of Operations. This change in the method of reporting revenues and expenses did not have a material impact on the Company’s condensed consolidated results of operations, financial position or liquidity. The Condensed Consolidated Financial Statements have been retrospectively adjusted to conform to the current year presentation.
The Company's significant accounting policies are summarized in Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements included in the Company's 2013 Form 10-K Annual Report.
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 (“VIEs”) 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. All intercompany transactions and balances between The Hartford and its subsidiaries and affiliates have been eliminated. For further information on VIEs see Note 6 - Investments and Derivative Instruments of Notes to Condensed Consolidated Financial Statements.
Discontinued Operations
The results of operations of a component of the Company that either has been disposed of or is classified as held-for-sale are reported in discontinued operations if the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the Company as a result of the disposal transaction and the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction. The Company presents the operations of businesses that meet these criteria as discontinued operations in the Condensed Consolidated Financial Statements. Accordingly, results of operations for prior periods are retrospectively reclassified. For information on the specific businesses and related impacts, see Note 17 - Discontinued Operations of Notes to Condensed Consolidated Financial Statements.

11
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Significant Accounting Policies (continued)

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; 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.
Mutual Funds
The Company maintains a mutual fund operation whereby the Company provides investment management, administrative and distribution services to The Hartford-sponsored mutual funds (collectively, “mutual funds”). These mutual funds are registered with the Securities and Exchange Commission (“SEC”) under the Investment Company Act of 1940. The mutual funds are owned by the shareholders of those funds and not by the Company. As such, the mutual fund assets and liabilities and related investment returns are not reflected in the Company’s Condensed Consolidated Financial Statements since they are not assets, liabilities and operations of the Company.
Reclassifications
Certain reclassifications have been made to prior period financial information to conform to the current year presentation.
Future Adoption of New Accounting Standard
Revenue Recognition
In May 2014, the FASB issued updated guidance for recognizing revenue. The guidance excludes insurance contracts and financial instruments. Revenue is to be recognized when, or as, goods or services are transferred to customers in an amount that reflects the consideration that an entity is expected to be entitled in exchange for those goods or services, and this accounting guidance is similar to current accounting for many transactions. This guidance is effective retrospectively for years beginning after December 15, 2016, with a choice of restating prior periods or recognizing a cumulative effect for contracts in place as of the adoption. Early adoption is not permitted. The Company has not yet determined its method for adoption or estimated the effect of the adoption on the Company’s Consolidated Financial Statements.
Reporting Discontinued Operations
In April 2014, the FASB issued updated guidance on reporting discontinued operations. Under this updated guidance, a discontinued operation will include a disposal of a major part of an entity’s operations and financial results such as a separate major line of business or a separate major geographical area of operations. The guidance raises the threshold to be a major operation but no longer precludes discontinued operations presentation where there is significant continuing involvement or cash flows with a disposed component of an entity. The guidance expands disclosures to include cash flows where there is significant continuing involvement with a discontinued operation and the pre-tax profit or loss of disposal transactions not reported as discontinued operations. The updated guidance is effective prospectively for years beginning on or after December 15, 2014, with early application permitted. The Company will apply the guidance to new disposals and operations newly classified as held for sale beginning first quarter of 2015, with no effect on existing reported discontinued operations. The effect on the Company’s future results of operations or financial condition will depend on the nature of future disposal transactions.

12
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Business Dispositions
Sale of Hartford Life Insurance KK
On June 30, 2014, the Company completed the sale of all of the issued and outstanding equity of HLIKK to ORIX Life Insurance Corporation ("Buyer"), a subsidiary of ORIX Corporation, a Japanese company for cash proceeds of $963, subject to certain purchase price adjustments pending final valuation of HLIKK in accordance with the purchase and sale agreement. The purchase price adjustment is expected to be finalized in fourth quarter 2014 and the impact on the Company’s results of operations, financial position and liquidity is expected to be immaterial. HLIKK sold variable and fixed annuity policies in Japan from 2001 to 2009 and has been in runoff since 2009. The sale transaction resulted in an after-tax loss upon disposition of $659 in the nine months ended September 30, 2014. The operations of the Company's Japan business meet the criteria for reporting as discontinued operations. For further information regarding discontinued operations, see Note 17 - Discontinued Operations of Notes to Condensed Consolidated Financial Statements. The Company's Japan business is included in the Talcott Resolution reporting segment.
Concurrently with the sale, HLIKK recaptured certain risks that had been reinsured to the Company’s U.S. subsidiaries, Hartford Life and Annuity Insurance Company ("HLAI") and Hartford Life Insurance Company ("HLIC") by terminating intercompany agreements. Upon closing, the Buyer is responsible for all liabilities for the recaptured business. The Company has, however, continued to provide reinsurance for approximately $1.1 billion of Japan fixed payout annuities.
The major classes of assets and liabilities transferred by the Company in connection with the sale of HLIKK are as follows:
 
Carrying Value
 
As of Closing
Assets
 
Cash and investments
$
18,733

Reinsurance recoverables
$
46

Property and equipment, net
$
18

Other assets
$
988

Liabilities
 
Reserve for future policy benefits and unpaid loss and loss adjustment expenses
$
320

Other policyholder funds and benefits payable
$
2,265

Other policyholder funds and benefits payable - international variable annuities
$
16,465

Short-term debt
$
247

Other liabilities
$
102

Sale of Hartford Life International Limited
On December 12, 2013, the Company completed the sale of all of the issued and outstanding equity of HLIL in a cash transaction to Columbia Insurance Company, a Berkshire Hathaway company, for approximately $285. At closing, HLIL’s sole asset was its subsidiary, Hartford Life Limited, a Dublin-based company that sold variable annuities in the U.K. from 2005 to 2009. The sale transaction resulted in an after-tax loss of $102 upon disposition for the nine months ended September 30, 2013. The operations of the Company's U.K. variable annuity business meet the criteria for reporting as discontinued operations. For further information regarding discontinued operations, see Note 17 - Discontinued Operations of Notes to Condensed Consolidated Financial Statements. The Company's U.K. variable annuities business is included in the Talcott Resolution reporting segment.
Sale of Retirement Plans
On January 1, 2013, the Company completed the sale of its Retirement Plans business to MassMutual for a ceding commission of $355. The business sold included products and services provided to corporations pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), and products and services provided to municipalities and not-for-profit organizations under Sections 457 and 403(b) of the Code, collectively referred to as government plans. The sale was structured as a reinsurance transaction and resulted in an after-tax loss of $25 for the nine months ended September 30, 2013. The after-tax loss is primarily driven by the reduction in goodwill that is non-deductible for income tax purposes. The Company recognized $634 in reinsurance loss on disposition offset by $634 in net realized capital gains for the nine months ended September 30, 2013.
Upon closing, the Company reinsured $9.2 billion of policyholder liabilities and $26.3 billion of separate account liabilities under an indemnity reinsurance arrangement. The reinsurance transaction does not extinguish the Company's primary liability on the insurance policies issued under the Retirement Plans business. The company continued to sell retirement plans during the transition period which ended on June 30, 2014. MassMutual has assumed all expenses and risks for these sales through the reinsurance agreement.

13
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Business Dispositions (continued)

Sale of Individual Life
On January 2, 2013, the Company completed the sale of its Individual Life insurance business to Prudential for consideration of $615 consisting primarily of a ceding commission. The business sold included variable universal life, universal life, and term life insurance. The sale was structured as a reinsurance transaction and resulted in a loss on business disposition consisting of a reinsurance loss partially offset by realized capital gains. The Company recognized a reinsurance loss on business disposition of $533, pre-tax, in 2012.
Upon closing the Company recognized an additional $940 in reinsurance loss on disposition offset by $940 in realized capital gains for a $0 impact on income, pre-tax, for the nine months ended September 30, 2013. In addition, the Company reinsured $8.7 billion of policyholder liabilities and $5.3 billion of separate account liabilities under indemnity reinsurance arrangements. The reinsurance transaction does not extinguish the Company's primary liability on the insurance policies issued under the Individual Life business. The Company continued to sell life insurance products and riders during the transition period which ended on June 30, 2014. Prudential has assumed all expenses and risk for these sales through the reinsurance agreement.
For additional information regarding business dispositions, see Note 2 - Business Dispositions and Note 9 - Goodwill and Other Intangible Assets in The Hartford's 2013 Annual Report on Form 10-K.
Sale of Catalyst 360
On December 31, 2013 the Company completed the sale of its member contact center for health insurance products offered through the AARP Health Program ("Catalyst 360") to Optum, Inc., a division of UnitedHealth Group. The impact of this transaction was not material to the Company's results of operations, financial position or liquidity. The Company will provide limited transition services for 18-24 months following the sale. Catalyst 360 is included in the Consumer Markets reporting segment.


14
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. 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. Diluted potential common shares are included in the calculation of all diluted per share amounts provided there is income from continuing operations, net of tax, available to common shareholders.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions, except for per share data)
2014
2013
 
2014
2013
Earnings
 
 
 
 
 
Income from continuing operations
 
 
 
 
 
Income from continuing operations, net of tax
$
388

$
365

 
$
1,004

$
841

Less: Preferred stock dividends
—

—

 
—

10

Income from continuing operations, net of tax, available to common shareholders
$
388

$
365

 
$
1,004

$
831

Add: Dilutive effect of preferred stock dividends
—

—

 
—

10

Income from continuing operations, net of tax, available to common shareholders and assumed conversion of preferred shares
$
388

$
365

 
$
1,004

$
841

Loss from discontinued operations, net of tax
$
—

$
(72
)
 
$
(588
)
$
(979
)
Net income (loss)
 
 
 
 
 
Net income (loss)
$
388

$
293

 
$
416

$
(138
)
Less: Preferred stock dividends
—

—

 
—

10

Net income (loss) available to common shareholders
$
388

$
293

 
$
416

$
(148
)
Add: Dilutive effect of preferred stock dividends
—

—

 
—

10

Net income (loss) available to common shareholders and assumed conversion of preferred shares
$
388

$
293

 
$
416

$
(138
)
Shares
 
 
 
 
 
Weighted average common shares outstanding, basic
437.2

452.1

 
445.9

446.6

Dilutive effect of warrants
7.7

33.9

 
13.9

33.0

Dilutive effect of stock compensation plans
5.9

4.6

 
6.1

4.2

Dilutive effect of mandatory convertible preferred shares
—

—

 
—

8.3

Weighted average shares outstanding and dilutive potential common shares [1]
450.8

490.6

 
465.9

492.1

Earnings (loss) per common share
 
 
 
 
 
Basic
 
 
 
 
 
Income from continuing operations, net of tax, available to common shareholders
$
0.89

$
0.81

 
$
2.25

$
1.86

Loss from discontinued operations, net of tax
—

(0.16
)
 
(1.32
)
(2.19
)
Net income (loss) available to common shareholders
$
0.89

$
0.65

 
$
0.93

$
(0.33
)
Diluted
 
 
 
 
 
Income from continuing operations, net of tax, available to common shareholders
$
0.86

$
0.74

 
$
2.15

$
1.71

Loss from discontinued operations, net of tax
—

(0.14
)
 
(1.26
)
(1.99
)
Net income (loss) available to common shareholders
$
0.86

$
0.60

 
$
0.89

$
(0.28
)
[1] For additional information, see Note 13 - Equity of Notes to Condensed Consolidated Financial Statements.
 


15
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Segment Information

The Company currently conducts business principally in six reporting segments, as well as a Corporate category. The Company’s reporting segments, as well as the Corporate category, are as follows:
Property & Casualty Commercial
Property & Casualty Commercial provides workers’ compensation, property, automobile, marine, livestock, liability and umbrella coverages primarily throughout the U.S., along with a variety of customized insurance products and risk management services including professional liability, fidelity, surety, and specialty casualty coverages.
Consumer Markets
Consumer Markets provides standard automobile, homeowners and personal umbrella coverages to individuals across the U.S., including a special program designed exclusively for members of AARP. Consumer Markets previously operated a member contact center for health insurance products offered through the AARP Health program ("Catalyst 360"). For further information regarding the sale of Catalyst 360 in 2013, see Note 2 -Business Dispositions of Notes to Condensed Consolidated Financial Statements.
Property & Casualty Other Operations
Property & Casualty Other Operations includes certain property and casualty operations, managed by the Company, that have discontinued writing new business and substantially all of the Company’s asbestos and environmental exposures.
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.
Mutual Funds
Mutual Funds offers mutual funds for retail and retirement accounts and provides investment-management and administrative services such as product design, implementation and oversight. This business also includes the runoff of the mutual funds supporting the Company's variable annuity products.
Talcott Resolution
Talcott Resolution is comprised of runoff business from the Company's individual annuity, the retained Japan fixed payout annuity liabilities, institutional and private-placement life insurance businesses. The Company's individual annuity business consists of U.S. annuity products for individuals, which include variable, fixed, and payout annuity products. In addition, Talcott Resolution includes the Retirement Plans and Individual Life businesses sold in January 2013 and the Company's discontinued Japan and U.K. annuity businesses. For further, information regarding the sale of these businesses, see Note 2 - Business Dispositions and Note 17 - Discontinued Operations of Notes to Condensed Consolidated Financial Statements.
Corporate
The Company includes in the Corporate category the Company’s debt financing and related interest expense, as well as other capital raising activities, certain purchase accounting adjustments and other charges not allocated to the segments.
Financial Measures and Other Segment Information
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. 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 that relate to interest income on allocated surplus. Consolidated net investment income is unaffected by such transactions.
The following table presents net income (loss) for each reporting segment, as well as the Corporate category.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Net income (loss)
2014
2013
 
2014
2013
Property & Casualty Commercial
$
280

$
174

 
$
721

$
619

Consumer Markets
73

68

 
142

160

Property & Casualty Other Operations
14

22

 
(108
)
(28
)
Group Benefits
37

31

 
143

134

Mutual Funds
22

19

 
64

57

Talcott Resolution
28

7

 
(331
)
(619
)
Corporate
(66
)
(28
)
 
(215
)
(461
)
Net income (loss)
$
388

$
293

 
$
416

$
(138
)

16
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Segment Information (continued)


The following table presents revenues by product line for each reporting segment, as well as the Corporate category.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Revenues
2014
2013
 
2014
2013
Earned premiums and fee income
 
 
 
 
 
Property & Casualty Commercial
 
 
 
 
 
Workers’ compensation
$
738

$
751

 
$
2,204

$
2,225

Property
142

132

 
415

384

Automobile
149

146

 
438

434

Package business
294

285

 
866

851

Liability
144

142

 
435

421

Fidelity and surety
55

51

 
158

152

Professional liability
56

56

 
162

170

Total Property & Casualty Commercial
1,578

1,563

 
4,678

4,637

Consumer Markets
 
 
 
 
 
Automobile
662

637

 
1,948

1,882

Homeowners
302

288

 
890

847

Total Consumer Markets [1]
964

925

 
2,838

2,729

Group Benefits
 
 
 
 
 
Group disability
357

357

 
1,091

1,086

Group life
354

435

 
1,113

1,289

Other
42

39

 
125

120

Total Group Benefits
753

831

 
2,329

2,495

Mutual Funds
 
 
 
 
 
Retail and Retirement
150

131

 
436

383

Annuity
35

37

 
106

110

Total Mutual Funds
185

168

 
542

493

Talcott Resolution
379

387

 
1,084

1,085

Corporate
2

2

 
9

7

Total earned premiums and fee income
3,861

3,876

 
11,480

11,446

Net investment income
810

787

 
2,402

2,453

Net realized capital gains
69

131

 
30

1,796

Other revenues
29

68

 
85

201

Total revenues
$
4,769

$
4,862

 
$
13,997

$
15,896

[1]
For the three months ended September 30, 2014 and 2013, AARP members accounted for earned premiums of $772 and $729, respectively. For the nine months ended September 30, 2014 and 2013, AARP members accounted for earned premiums of $2.3 billion and $2.1 billion , respectively.

17
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements

The following section applies to 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 exchange-traded derivative instruments.
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 are limited partnerships and other alternative assets measured at fair value where an investment can be redeemed, or substantially redeemed, at the NAV at the measurement date or in the near-term, not to exceed 90 days. Derivative instruments classified within Level 2 are priced using observable market inputs such as swap yield curves and credit default swap curves.
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, guaranteed product embedded and reinsurance derivatives and other complex derivative instruments, as well as limited partnerships and other alternative investments carried at fair value that cannot be redeemed in the near-term at the NAV. 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. The amount of transfers from Level 1 to Level 2 was $278 and $1.9 billion, for the three and nine months ended September 30, 2014, respectively, and $443 and $909 for the three and nine months ended September 30, 2013, respectively, which represented previously on-the-run U.S. Treasury securities that are now off-the-run. For the three and nine months ended September 30, 2014 and 2013, there were no transfers from Level 2 to Level 1. 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 because these securities are primarily priced by independent brokers and/or within illiquid markets.
The following tables present assets and liabilities carried at fair value by hierarchy level. 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.

18
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

 
September 30, 2014
 
Total
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets accounted for at fair value on a recurring basis
 
 
 
 
Fixed maturities, AFS
 
 
 
 
Asset-backed-securities ("ABS")
$
2,439

$
—

$
2,298

$
141

Collateralized debt obligations ("CDOs")
2,445

—

1,855

590

Commercial mortgage-backed securities ("CMBS")
4,482

—

4,151

331

Corporate
27,714

—

26,571

1,143

Foreign government/government agencies
1,672

—

1,623

49

Municipal
12,761

—

12,697

64

Residential mortgage-backed securities ("RMBS")
3,995

—

2,737

1,258

U.S. Treasuries
4,078

575

3,503

—

Total fixed maturities
59,586

575

55,435

3,576

Fixed maturities, FVO
464

—

366

98

Equity securities, trading
12

12

—

—

Equity securities, AFS
648

386

174

88

Derivative assets
 
 
 
 
Credit derivatives
28

—

13

15

Foreign exchange derivatives
(73
)
—

(73
)
—

Interest rate derivatives
5

—

(12
)
17

Guaranteed minimum withdrawal benefit ("GMWB") hedging instruments
96

—

9

87

Macro hedge program
81

—

—

81

Other derivative contracts
13

—

—

13

Total derivative assets [1]
150

—

(63
)
213

Short-term investments
5,013

697

4,316

—

Limited partnerships and other alternative investments [2]
791

—

704

87

Reinsurance recoverable for GMWB
36

—

—

36

Modified coinsurance reinsurance contracts
41

—

41

—

Separate account assets [3]
133,490

93,002

39,697

791

Total assets accounted for at fair value on a recurring basis
$
200,231

$
94,672

$
100,670

$
4,889

Liabilities accounted for at fair value on a recurring basis
 
 
 
 
Other policyholder funds and benefits payable
 
 
 
 
Guaranteed withdrawal benefits
$
(56
)
$
—

$
—

$
(56
)
Equity linked notes
(23
)
—

—

(23
)
Total other policyholder funds and benefits payable
(79
)
—

—

(79
)
Derivative liabilities
 
 
 
 
Credit derivatives
(38
)
—

(21
)
(17
)
Equity derivatives
23

—

21

2

Foreign exchange derivatives
(357
)
—

(357
)
—

Interest rate derivatives
(560
)
—

(533
)
(27
)
GMWB hedging instruments
28

—

(22
)
50

Macro hedge program
53

—

—

53

Total derivative liabilities [4]
(851
)
—

(912
)
61

Consumer notes [5]
(2
)
—

—

(2
)
Total liabilities accounted for at fair value on a recurring basis
$
(932
)
$
—

$
(912
)
$
(20
)

19
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

 
December 31, 2013
 
Total
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets accounted for at fair value on a recurring basis
 
 
 
 
Fixed maturities, AFS
 
 
 
 
ABS
$
2,365

$
—

$
2,218

$
147

CDOs
2,387

—

1,723

664

CMBS
4,446

—

3,783

663

Corporate
28,490

—

27,216

1,274

Foreign government/government agencies
4,104

—

4,039

65

Municipal
12,173

—

12,104

69

RMBS
4,647

—

3,375

1,272

U.S. Treasuries
3,745

1,311

2,434

—

Total fixed maturities
62,357

1,311

56,892

4,154

Fixed maturities, FVO
844

—

651

193

Equity securities, trading
19,745

12

19,733

—

Equity securities, AFS
868

454

337

77

Derivative assets
 
 
 
 
Credit derivatives
25

—

20

5

Foreign exchange derivatives
14

—

14

—

Interest rate derivatives
(21
)
—

(63
)
42

GMWB hedging instruments
26

—

(42
)
68

Macro hedge program
109

—

—

109

International program hedging instruments
272

—

241

31

Other derivative contracts
17

—

—

17

Total derivative assets [1]
442

—

170

272

Short-term investments
4,008

427

3,581

—

Limited partnerships and other alternative investments [2]
921

—

813

108

Reinsurance recoverable for GMWB
29

—

—

29

Modified coinsurance reinsurance contracts
67

—

67

—

Separate account assets [3]
138,495

99,930

37,828

737

Total assets accounted for at fair value on a recurring basis
$
227,776

$
102,134

$
120,072

$
5,570



20
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

 
December 31, 2013
 
Total
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Liabilities accounted for at fair value on a recurring basis
 
 
 
 
Other policyholder funds and benefits payable
 
 
 
 
Guaranteed withdrawal benefits
$
(36
)
$
—

$
—

$
(36
)
International guaranteed withdrawal benefits
3

—

—

3

International other guaranteed living benefits
3

—

—

3

Equity linked notes
(18
)
—

—

(18
)
Total other policyholder funds and benefits payable
(48
)
—

—

(48
)
Derivative liabilities
 
 
 
 
Credit derivatives
(12
)
—

(9
)
(3
)
Equity derivatives
19

—

16

3

Foreign exchange derivatives
(388
)
—

(388
)
—

Interest rate derivatives
(582
)
—

(558
)
(24
)
GMWB hedging instruments
15

—

(63
)
78

Macro hedge program
30

—

—

30

International program hedging instruments
(305
)
—

(245
)
(60
)
Total derivative liabilities [4]
(1,223
)
—

(1,247
)
24

Consumer notes [5]
(2
)
—

—

(2
)
Total liabilities accounted for at fair value on a recurring basis
$
(1,273
)
$
—

$
(1,247
)
$
(26
)
[1]
Includes over-the-counter ("OTC") and OTC-cleared derivative instruments in a net asset value position after consideration of the impact of collateral posting requirements which may be imposed by agreements, clearing house rules and applicable law. As of September 30, 2014 and December 31, 2013, $157 and $128, respectively, 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 4 below for derivative liabilities.
[2]
Represents hedge funds where investment company accounting has been applied to a wholly-owned fund of funds measured at fair value.
[3]
Approximately $2.8 billion and $2.4 billion of investment sales receivable that are not subject to fair value accounting are excluded as of September 30, 2014 and December 31, 2013, respectively.
[4]
Includes OTC and OTC-cleared derivative instruments in a net negative market value position (derivative liability) after consideration of the impact of collateral posting requirements which may be imposed by agreements, clearing house rules and applicable law. In the Level 3 roll-forward table included below in this Note 5, the derivative assets and liabilities are referred to as “freestanding derivatives” and are presented on a net basis.
[5]
Represents embedded derivatives associated with non-funding agreement-backed consumer equity linked notes.
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 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.
The fair value process is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company that meets at least quarterly. The Valuation Committee is co-chaired by the Heads of Investment Operations and Accounting, and has representation from various investment sector professionals, accounting, operations, legal, compliance, and risk management. The purpose of the committee is to oversee the pricing policy and procedures by ensuring objective and reliable valuation practices and pricing of financial instruments, as well as addressing valuation issues and approving changes to valuation methodologies and pricing sources. There are also two working groups under the Valuation Committee, a Securities Fair Value Working Group (“Securities Working Group”) and a Derivatives Fair Value Working Group ("Derivatives Working Group"), which include various investment, operations, accounting and risk management professionals that meet monthly to review market data trends, pricing and trading statistics and results, and any proposed pricing methodology changes described in more detail in the following paragraphs.


21
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

The Company also has an enterprise-wide Operational Risk Management function, led by the Chief Operational Risk Officer, which is responsible for establishing, maintaining and communicating the framework, principles and guidelines of the Company's operational risk management program. This includes model risk management which provides an independent review of the suitability, characteristics and reliability of model inputs, as well as an analysis of significant changes to current models.

AFS 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 active and orderly markets (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, and then the remaining unpriced securities are submitted to independent brokers for prices, or priced using a pricing matrix. Typical inputs used by these pricing methods include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flows, prepayment speeds, and default rates. 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 Securities Working Group performs ongoing analysis of 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. As a part of this analysis, the Company considers trading volume, new issuance activity and other factors to determine whether the market activity is significantly different than 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. 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 and approved by the Valuation Committee. 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 Company conducts other specific monitoring controls around pricing. Daily analyses identify price changes over 3% for fixed maturities and 5% for equity securities, sale trade prices that differ over 3% from the prior day’s price, and purchase trade prices that differ more than 3% from the current day’s price. Weekly analyses identify prices that differ more than 5% from published bond prices of a corporate bond index. Monthly analyses identify price changes over 3%, prices that have not changed, and missing prices. Also on a monthly basis, a second source validation is performed on most sectors. Analyses are conducted by a dedicated pricing unit that follows up with trading and investment sector professionals and challenges prices with vendors when the estimated assumptions used differ from what the Company feels a market participant would use. Any changes from the identified pricing source are verified by further confirmation of assumptions used. Examples of other 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, and back testing recent trades.

22
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (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 for OTC derivatives that utilize independent market data inputs, quoted market prices for exchange-traded and OTC-cleared derivatives, or independent broker quotations. Excluding embedded and reinsurance related derivatives, as of September 30, 2014 and December 31, 2013, 96% 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 Derivatives Working Group performs ongoing analysis of the valuations, assumptions and methodologies used to ensure that the prices represent a reasonable estimate of the fair value. The Company performs various controls on derivative valuations which include both quantitative and qualitative analysis. Analyses are conducted by a dedicated derivative pricing team that works directly with investment sector professionals to analyze impacts of changes in the market environment and investigate variances. There is a monthly analysis to identify market value changes greater than pre-defined thresholds, stale prices, missing prices and zero prices. Also on a monthly basis, a second source validation, typically to broker quotations, is performed for certain of the more complex derivatives, as well as for any existing deals with a market value greater than $10 and all new deals during the month. In addition, on a daily basis, market valuations are compared to counterparty valuations for OTC derivatives. A model validation review is performed on any new models, which typically includes detailed documentation and validation to a second source. The model validation documentation and results of validation are presented to the Valuation Committee for approval. There is a monthly control to review changes in pricing sources to ensure that new models are not moved to production until formally approved.
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.
Limited partnerships and other alternative investments
Limited partnerships and other alternative investments include hedge funds where investment company accounting has been applied to a wholly-owned fund of funds measured at fair value. These funds are fair valued using the net asset value per share or equivalent (“NAV”), as a practical expedient, calculated on a monthly basis, and is the amount at which a unit or shareholder may redeem their investment, if redemption is allowed. Certain impediments to redemption include, but are not limited to the following: 1) redemption notice periods vary and may be as long as 90 days, 2) redemption may be restricted (e.g. only be allowed on a quarter-end), 3) a holding period referred to as a lock-up may be imposed whereby an investor must hold their investment for a specified period of time before they can make a notice for redemption, 4) gating provisions may limit all redemptions in a given period to a percentage of the entities' equity interests, or may only allow an investor to redeem a portion of their investment at one time and 5) early redemption penalties may be imposed that are expressed as a percentage of the amount redeemed. The Company will assess impediments to redemption and current market conditions that will restrict the redemption at the end of the notice period. Any funds that are subject to significant liquidity restrictions are reported in Level 3; all others are classified as Level 2.

23
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

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. Certain limited partnerships and other alternative investments are measured at fair value using a NAV as a practical expedient. 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, as well as certain limited partnerships and other alternative investments and derivative instruments.
•
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, including investment grade private placements – 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 market economies.
•
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 – Primary inputs include the swap yield curve and credit default swap curves.
•
Foreign exchange derivatives – Primary inputs include the swap yield curve, currency spot and forward rates, and cross currency basis curves.
•
Interest rate derivatives – Primary input is the swap yield curve.
•
Limited partnerships and other alternative investments — Primary inputs include a NAV for investment companies with no redemption restrictions as reported on their U.S. GAAP financial statements.
Level 3
Most of the Company’s securities classified as Level 3 include less liquid securities such as lower quality ABS, CMBS, commercial real estate (“CRE”) CDOs and RMBS primarily backed by sub-prime loans. Securities included in level 3 are primarily valued based on broker prices or broker spreads, without adjustments. Primary inputs for non-broker priced investments, including structured securities, are consistent with the typical inputs used in Level 2 measurements noted above, but are Level 3 due to their less liquid markets. Additionally, certain long-dated securities are priced based on third party pricing services, including municipal securities, foreign government/government agencies, 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. Level 3 investments also include certain limited partnerships and other alternative investments measured at fair value where the Company does not have the ability to redeem the investment in the near-term at the NAV. 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 include equity and interest rate volatility and swap yield curves beyond observable limits.

24
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

Significant Unobservable Inputs for Level 3 Assets Measured at Fair Value
The following table presents information about significant unobservable inputs used in Level 3 assets measured at fair value.
Securities
Unobservable Inputs

As of September 30, 2014
Assets accounted for at fair value on a recurring basis
Fair
Value
Predominant
Valuation
Method
Significant
Unobservable Input
Minimum
Maximum
Weighted Average [1]
Impact of
Increase in Input
on Fair Value [2]
CMBS
$
331

Discounted
cash flows
Spread (encompasses prepayment, default risk and loss severity)
48
 bps
2,457
 bps
302
 bps
Decrease
Corporate [3]
578

Discounted
cash flows
Spread
75
 bps
697
 bps
254
 bps
Decrease
Municipal [3]
31

Discounted
cash flows
Spread
193
 bps
193
 bps
193
 bps
Decrease
RMBS
1,258

Discounted
cash flows
Spread
44
 bps
1,475
 bps
140
 bps
Decrease
 
 
 
Constant prepayment rate
—
%
7.0
%
2.0
%
 Decrease [4]
 
 
 
Constant default rate
1.0
%
15.0
%
8.0
%
Decrease
 
 
 
Loss severity
—
%
100.0
%
78.0
%
Decrease
 
As of December 31, 2013
CMBS
$
663

Discounted
cash flows
Spread (encompasses prepayment, default risk and loss severity)
99
 bps
3,000
 bps
527
 bps
Decrease
Corporate [3]
665

Discounted
cash flows
Spread
119
 bps
5,594
 bps
344
 bps
Decrease
Municipal [3]
29

Discounted
cash flows
Spread
184
 bps
184
 bps
184
 bps
Decrease
RMBS
1,272

Discounted
cash flows
Spread
62
 bps
1,748
 bps
232
 bps
Decrease
 
 
 
Constant prepayment rate
—
%
10.0
%
3.0
%
Decrease [4]
 
 
 
Constant default rate
1.0
%
22.0
%
8.0
%
Decrease
 
 
 
Loss severity
—
%
100.0
%
80.0
%
Decrease
[1]
The weighted average is determined based on the fair value of the securities.
[2]
Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table above.
[3]
Level 3 corporate and municipal securities excludes those for which the Company bases fair value on broker quotations as discussed below.
[4]
Decrease for above market rate coupons and increase for below market rate coupons.

25
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

Freestanding Derivatives
Unobservable Inputs

As of September 30, 2014
 
Fair
Value
Predominant
Valuation 
Method
Significant Unobservable Input
Minimum
Maximum
Impact of 
Increase in Input on 
Fair Value [1]
Interest rate derivative
 
 
 
 
 
 
Interest rate swaps
(27
)
Discounted cash flows
Swap curve beyond 30 years
3
%
3
%
Increase
Interest rate swaptions
17

Option model
Interest rate volatility
3
%
4
%
Increase
GMWB hedging instruments
 
 
 
 
 
 
Equity options
44

Option model
Equity volatility
20
%
32
%
Increase
Customized swaps
93

Discounted
cash flows
Equity volatility
10
%
50
%
Increase
Macro hedge program [2]
 
 
 
 
 
 
Equity options
169

Option model
Equity volatility
23
%
24
%
Increase
 
As of December 31, 2013
Interest rate derivative
 
 
 
 
 
 
Interest rate swaps
(24
)
Discounted
cash flows
Swap curve beyond 30 years
4
%
4
%
Increase
Long interest rate swaptions
42

Option model
Interest rate volatility
1
%
1
%
Increase
GMWB hedging instruments
 
 
 
 
 
 
Equity options
72

Option model
Equity volatility
21
%
29
%
Increase
Customized swaps
74

Discounted
cash flows
Equity volatility
10
%
50
%
Increase
Macro hedge program
 
 
 
 
 
 
Equity options
139

Option model
Equity volatility
24
%
31
%
Increase
International program hedging [2]
 
 
 
 
 
 
Equity options
(35
)
Option model
Equity volatility
24
%
37
%
Increase
Short interest rate swaptions
(13
)
Option model
Interest rate volatility
—
%
1
%
Decrease
Long interest rate swaptions
50

Option model
Interest rate volatility
1
%
1
%
Increase
[1]
Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table. Changes are based on long positions, unless otherwise noted. Changes in fair value will be inversely impacted for short positions.
[2]
Excludes derivatives for which the Company based fair value on broker quotations.
Securities and derivatives for which the Company bases fair value on broker quotations predominately include ABS, CDOs, corporate, fixed maturities and FVO. Due to the lack of transparency in the process brokers use to develop prices for these investments, the Company does not have access to the significant unobservable inputs brokers use to price these securities and derivatives. However, the Company believes the types of inputs brokers may use would likely be similar to those used to price securities and derivatives for which inputs are available to the Company, and therefore may include but not be limited to, loss severity rates, constant prepayment rates, constant default rates and counterparty credit spreads. Therefore, similar to non broker priced securities and derivatives, generally, increases in these inputs would cause fair values to decrease. For the three and nine months ended September 30, 2014, no significant adjustments were made by the Company to broker prices received.
As of September 30, 2014 and December 31, 2013, excluded from the tables above are limited partnerships and other alternative investments which total $87 and $108, respectively, of level 3 assets measured at fair value. The predominant valuation method uses a NAV calculated on a monthly basis and represents funds where the Company does not have the ability to redeem the investment in the near-term at that NAV, including an assessment of the investee's liquidity.

26
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

Product Derivatives
The Company formerly offered certain variable annuity products with GMWB riders. The GMWB provides the policyholder with a guaranteed remaining balance (“GRB”) which is generally equal to premiums less withdrawals.  If the policyholder’s account value is reduced to the specified level through a combination of market declines and withdrawals but the GRB still has value, the Company is obligated to continue to make annuity payments to the policyholder until the GRB is exhausted. Certain contract provisions can increase the GRB at contractholder election or after the passage of time. 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 Condensed Consolidated Balance Sheets. The notional value of the embedded derivative is the GRB.
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.
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 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)
Living benefits required to be fair valued include GMWB contracts. Fair values for GMWB 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 are 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 requires judgment by the Company in determining its value. Oversight of the Company's valuation policies and processes for product and GMWB reinsurance derivatives is performed by a multidisciplinary group comprised of finance, actuarial and risk management professionals. This multidisciplinary group reviews and approves changes and enhancements to the Company's valuation model as well as associated controls.

27
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

Best Estimate
Claim Payments
The Best Estimate Claim Payments are 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.
On a daily basis, the Company updates capital market assumptions used in the GMWB liability model such as interest rates, equity indices and the blend of implied equity index volatilities. The Company 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. The Company continually monitors policyholder behavior assumptions in response to initiatives intended to reduce the size of the variable annuity business. 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 (commonly referred to as "nonperformance risk”). The Company incorporates 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, resulted in pre-tax realized gains (losses) of $2 and $0, for the three months ended September 30, 2014 and 2013, respectively, and $2 and $13 for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014 and December 31, 2013 the credit standing adjustment was $1 and $(1), 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 total pre-tax realized gains of $31, for the three and nine months ended September 30, 2014 and $75, for the three and nine months ended September 30, 2013. As of September 30, 2014 and December 31, 2013 the behavior risk margin was $77 and $108, respectively.
In addition to the non-market-based updates described above, the Company recognized non-market-based updates driven by the relative outperformance (underperformance) of the underlying actively managed funds as compared to their respective indices resulting in pre-tax realized gains (losses) of approximately $(8) and $22, for the three months ended September 30, 2014 and 2013, respectively and $12 and $29 for the nine months ended September 30, 2014 and 2013.

28
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

Significant unobservable inputs used in the fair value measurement of living benefits required to be fair valued and the GMWB reinsurance derivative are withdrawal utilization and withdrawal rates, lapse rates, reset elections and equity volatility. The following table provides quantitative information about the significant unobservable inputs and is applicable to all of the Living Benefits Required to be Fair Valued and the GMWB Reinsurance Derivative. Significant increases in any of the significant unobservable inputs, in isolation, will generally have an increase or decrease correlation with the fair value measurement, as shown in the table.
Significant Unobservable Input
Unobservable Inputs (Minimum)
Unobservable Inputs (Maximum)
Impact of Increase in Input
on Fair Value Measurement [1]
Withdrawal Utilization [2]
20%
100%
Increase
Withdrawal Rates [2]
—%
8%
Increase
Lapse Rates [3]
—%
75%
Decrease
Reset Elections [4]
20%
75%
Increase
Equity Volatility [5]
10%
50%
Increase
[1]
Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
[2]
Ranges represent assumed cumulative percentages of policyholders taking withdrawals and the annual amounts withdrawn.
[3]
Range represents assumed annual percentages of full surrender of the underlying variable annuity contracts across all policy durations for in force business.
[4]
Range represents assumed cumulative percentages of policyholders that would elect to reset their guaranteed benefit base.
[5]
Range represents implied market volatilities for equity indices based on multiple pricing sources.
Generally, a change in withdrawal utilization assumptions would be accompanied by a directionally opposite change in lapse rate assumptions, as the behavior of policyholders that utilize GMWB riders is typically different from policyholders that do not utilize these riders.
Separate Account Assets
Separate account assets are primarily invested in mutual funds. Other separate account assets include fixed maturities, limited partnerships, equity securities, short-term investments and derivatives that are valued in the same manner, and using the same pricing sources and inputs, as those investments held by the Company. Separate account assets classified as Level 3 primarily include limited partnerships in which fair value represents the separate account’s share of the fair value of the equity in the investment (“net asset value”) and are classified in Level 3, based on the Company’s ability to redeem its investment.

29
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (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 and nine months ended September 30, 2014 and 2013, for the financial instruments classified as Level 3.
For the three months ended September 30, 2014  
 
Fixed Maturities, AFS
 
Assets
ABS
CDOs
CMBS
Corporate
Foreign
govt./govt.
agencies
Municipal
RMBS
Total  Fixed
Maturities,
AFS
Fixed
Maturities,
FVO
Fair value as of June 30, 2014
$
73

$
612

$
471

$
1,205

$
55

$
63

$
1,295

$
3,774

$
139

Total realized/unrealized gains (losses)
 
 
 
 
 
 
 
 
 
Included in net income [1], [2], [6]
—

12

(1
)
(2
)
—

—

3

12

1

Included in OCI [3]
—

(5
)
2

(7
)
—

1

3

(6
)
—

Purchases
35

—

25

21

—

—

120

201

4

Settlements
—

(17
)
(155
)
(16
)
(1
)
—

(47
)
(236
)
(46
)
Sales
—

(12
)
—

(18
)
(5
)
—

(116
)
(151
)
—

Transfers into Level 3 [4]
75

—

11

25

—

—

—

111

—

Transfers out of Level 3 [4]
(42
)
—

(22
)
(65
)
—

—

—

(129
)
—

Fair value as of September 30, 2014
$
141

$
590

$
331

$
1,143

$
49

$
64

$
1,258

$
3,576

$
98

Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2014 [2] [7]
$
—

$
—

$
(1
)
$
(2
)
$
—

$
—

$
—

$
(3
)
$
1

 
 
 
Freestanding Derivatives [5]
Assets (Liabilities)
Equity
Securities,
AFS
Credit
Equity
Interest
Rate
GMWB
Hedging
Macro
Hedge
Program
Other
Contracts
Total Free-
Standing
Derivatives [5]
Fair value as of June 30, 2014
$
80

$
(1
)
$
2

$
21

$
97

$
120

$
15

$
254

Total realized/unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in net income [1], [2], [6]
—

(4
)
—

(5
)
40

11

(2
)
40

Included in OCI [3]
(1
)
—

—

—

—

—

—

—

Purchases
9

(3
)
—

—

—

3

—

—

Transfers into Level 3 [4]
—

—

—

(26
)
—

—

—

(26
)
Transfers out of Level 3 [4]
—

6

—

—

—

—

—

6

Fair value as of September 30, 2014
$
88

$
(2
)
$
2

$
(10
)
$
137

$
134

$
13

$
274

Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2014 [2] [7]
$
—

$
(4
)
$
—

$
(4
)
$
41

$
11

$
(1
)
$
43


30
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

Assets
Limited Partnerships and Other Alternative Investments
Reinsurance 
Recoverable
for GMWB
Separate Accounts
Fair value as of June 30, 2014
$
67

$
31

$
813

Total realized/unrealized gains (losses)
 
 
 
Included in net income [1], [2], [6]
—

2

4

Purchases
20

—

33

Settlements
—

3

(1
)
Sales
—

—

(56
)
Transfers into Level 3 [4]
—

—

1

Transfers out of Level 3 [4]
—

—

(3
)
Fair value as of September 30, 2014
$
87

$
36

$
791

Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2014 [2] [7]
$
—

$
2

$
—

 
 
Other Policyholder Funds and Benefits Payable
 
Liabilities
Guaranteed
Withdrawal
Benefits
Equity
Linked
Notes
Total Other
Policyholder
Funds and
Benefits
Payable
Consumer
Notes
Fair value as of June 30, 2014
$
2

$
(22
)
$
(20
)
$
(2
)
Total realized/unrealized gains (losses)
 
 
 
 
Included in net income [1], [2], [6]
(37
)
(1
)
(38
)
—

Settlements
(21
)
—

(21
)
—

Fair value as of September 30, 2014
$
(56
)
$
(23
)
$
(79
)
$
(2
)
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2014 [2] [7]
$
(37
)
$
(1
)
$
(38
)
$
—


31
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

For the nine months ended September 30, 2014
 
Fixed Maturities, AFS
 
Assets
ABS
CDOs
CMBS
Corporate
Foreign
govt./govt.
agencies
Municipal
RMBS
Total  Fixed
Maturities,
AFS
Fixed
Maturities,
FVO
Fair value as of January 1, 2014
$
147

$
664

$
663

$
1,274

$
65

$
69

$
1,272

$
4,154

$
193

Total realized/unrealized gains (losses)
 
 
 
 
 
 
 
 
 
Included in net income [1], [2], [6]
—

12

29

(20
)
(2
)
—

11

30

16

Included in OCI [3]
3

3

(22
)
21

7

5

13

30

—

Purchases
72

—

115

112

3

16

383

701

14

Settlements
(2
)
(52
)
(235
)
(41
)
(3
)
—

(143
)
(476
)
(121
)
Sales
(18
)
(12
)
(103
)
(129
)
(21
)
(1
)
(223
)
(507
)
(4
)
Transfers into Level 3 [4]
75

72

16

225

—

—

—

388

1

Transfers out of Level 3 [4]
(136
)
(97
)
(132
)
(299
)
—

(25
)
(55
)
(744
)
(1
)
Fair value as of September 30, 2014
$
141

$
590

$
331

$
1,143

$
49

$
64

$
1,258

$
3,576

$
98

Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2014 [2] [7]
$
—

$
—

$
(1
)
$
(23
)
$
(2
)
$
—

$
(1
)
$
(27
)
$
20

 
 
Freestanding Derivatives [5]
Assets (Liabilities)
Equity
Securities,
AFS
Credit
Equity
Interest
Rate
GMWB
Hedging
Macro
Hedge
Program
Intl.
Program
Hedging
Other
Contracts
Total Free-
Standing
Derivatives [5]
Fair value as of January 1, 2014
$
77

$
2

$
3

$
18

$
146

$
139

$
(29
)
$
17

$
296

Total realized/unrealized gains (losses)
 
 
 
 
 
 
 
 
 
Included in net income [1], [2], [6]
(2
)
(7
)
(1
)
(28
)
(20
)
(14
)
28

(4
)
(46
)
Included in OCI [3]
4

—

—

—

—

—

—

—

—

Purchases
9

(3
)
—

—

4

9

9

—

19

Settlements
—

—

—

—

7

—

(41
)
—

(34
)
Transfers out of Level 3 [4]
—

6

—

—

—

—

33

—

39

Fair value as of September 30, 2014
$
88

$
(2
)
$
2

$
(10
)
$
137

$
134

$
—

$
13

$
274

Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2014 [2] [7]
$
(2
)
$
(4
)
$
—

$
(27
)
$
(35
)
$
(14
)
$
(18
)
$
(2
)
$
(100
)

32
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

Assets
Limited Partnerships and Other Alternative Investments
Reinsurance  Recoverable
for GMWB
Separate Accounts
Fair value as of January 1, 2014
$
108

$
29

$
737

Total realized/unrealized gains (losses)
 
 
 
Included in net income [1], [2], [6]
(5
)
(9
)
8

Purchases
50

—

298

Settlements
—

16

(2
)
Sales
(24
)
—

(219
)
Transfers into Level 3 [4]
—

—

5

Transfers out of Level 3 [4]
(42
)
—

(36
)
Fair value as of September 30, 2014
$
87

$
36

$
791

Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2014 [2] [7]
$
(5
)
$
(9
)
$
6

 
Other Policyholder Funds and Benefits Payable
 
Liabilities
Guaranteed
Withdrawal
Benefits
International
Guaranteed
Living
Benefits
International
Other Living
Benefits
Equity
Linked
Notes
Total Other
Policyholder
Funds and
Benefits
Payable
Consumer
Notes
Fair value as of January 1, 2014
$
(36
)
$
3

$
3

$
(18
)
$
(48
)
$
(2
)
Total realized/unrealized gains (losses)
 
 
 
 
 
 
Included in net income [1], [2], [6]
54

—

—

(5
)
49

—

Settlements
(74
)
(3
)
(3
)
—

(80
)
—

Fair value as of September 30, 2014
$
(56
)
$
—

$
—

$
(23
)
$
(79
)
$
(2
)
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2014 [2] [7]
$
54

$
—

$
—

$
(5
)
$
49

$
—

For the three months ended September 30, 2013
 
Fixed Maturities, AFS
 
Assets
ABS
CDOs
CMBS
Corporate
Foreign
govt./govt.
agencies
Municipal
RMBS
Total  Fixed
Maturities,
AFS
Fixed
Maturities,
FVO
Fair value as of June 30, 2013
$
232

$
912

$
818

$
1,251

$
69

$
127

$
1,352

$
4,761

$
211

Total realized/unrealized gains (losses)
 
 
 
 
 
 
 
 
 
Included in net income [1], [2], [6]
—

—

(11
)
(2
)
—

—

(3
)
(16
)
(3
)
Included in OCI [3]
1

2

42

6

—

(1
)
(4
)
46

—

Purchases
11

8

20

39

5

7

100

190

6

Settlements
(1
)
(51
)
(31
)
(14
)
(1
)
—

(51
)
(149
)
—

Sales
—

—

(39
)
(8
)
—

—

(48
)
(95
)
(1
)
Transfers into Level 3 [4]
—

—

5

41

—

—

—

46

—

Transfers out of Level 3 [4]
(37
)
(73
)
(13
)
(33
)
—

—

—

(156
)
(2
)
Fair value as of September 30, 2013
$
206

$
798

$
791

$
1,280

$
73

$
133

$
1,346

$
4,627

$
211

Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7]
$
—

$
—

$
(8
)
$
(2
)
$
—

$
—

$
(5
)
$
(15
)
$
(3
)

33
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

 
 
Freestanding Derivatives [5]
Assets (Liabilities)
Equity
Securities,
AFS
Credit
Equity
Interest
Rate
GMWB
Hedging
Macro
Hedge
Program
Intl.
Program
Hedging
Other
Contracts
Total Free-
Standing
Derivatives [5]
Fair value as of June 30, 2013
$
95

$
2

$
29

$
(15
)
$
329

$
209

$
(43
)
$
—

$
511

Total realized/unrealized gains (losses)
 
 
 
 
 
 
 
 
 
Included in net income [1], [2], [6]
(6
)
1

(6
)
3

(109
)
(39
)
(72
)
(1
)
(223
)
Purchases
—

—

—

—

—

11

(4
)
—

7

Settlements
—

—

—

—

(1
)
—

46

—

45

Transfers out of Level 3 [4]
—

—

—

24

—

—

(28
)
20

16

Fair value as of September 30, 2013
$
89

$
3

$
23

$
12

$
219

$
181

$
(101
)
$
19

$
356

Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7]
$
(6
)
$
—

$
(5
)
$
1

$
(111
)
$
(39
)
$
(138
)
$
(4
)
$
(296
)
 
Assets
Limited Partnerships and Other Alternative Investments
Reinsurance  Recoverable
for GMWB
Separate Accounts
Fair value as of June 30, 2013
$
363

$
113

$
820

Total realized/unrealized gains (losses)
 
 
 
Included in net income [1], [2], [6]
(20
)
(74
)
(9
)
Purchases
35

—

(19
)
Settlements
—

7

—

Sales
—

—

(35
)
Transfers into Level 3 [4]
—

—

35

Transfers out of Level 3 [4]
(42
)
—

(57
)
Fair value as of September 30, 2013
$
336

$
46

$
735

Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7]
$
(20
)
$
(74
)
$
3

 
 
Other Policyholder Funds and Benefits Payable
 
 
Liabilities
Guaranteed
Withdrawal
Benefits
International Guaranteed
Living
Benefits
International Other Living
Benefits
Equity
Linked
Notes
Total Other
Policyholder
Funds and
Benefits
Payable
Liabilities held for sale
Consumer
Notes
Fair value as of June 30, 2013
$
(632
)
$
1

$
3

$
(12
)
$
(640
)
$
(28
)
$
(1
)
Total realized/unrealized gains (losses)
 
 
 
 
 
 
 
Included in net income [1], [2], [6]
451

—

1

(1
)
451

(2
)
—

Settlements
(29
)
—

(1
)
—

(30
)
(1
)
—

Fair value as of September 30, 2013
$
(210
)
$
1

$
3

$
(13
)
$
(219
)
$
(31
)
$
(1
)
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7]
$
451

$
—

$
1

$
(1
)
$
451

$
(2
)
$
—



34
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

For the nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturities, AFS
 
Assets
ABS
CDOs
CMBS
Corporate
Foreign
govt./govt.
agencies
Municipal
RMBS
Total  Fixed
Maturities,
AFS
Fixed
Maturities,
FVO
Fair value as of January 1, 2013
$
278

$
944

$
859

$
2,001

$
56

$
227

$
1,373

$
5,738

$
214

Total realized/unrealized gains (losses)
 
 
 
 
 
 
 
 
 
Included in net income [1], [2], [6]
3

(11
)
(22
)
11

—

1

26

8

6

Included in OCI [3]
15

120

122

(29
)
(10
)
(11
)
39

246

—

Purchases
71

82

33

132

44

13

289

664

16

Settlements
(8
)
(96
)
(102
)
(83
)
(3
)
—

(141
)
(433
)
(2
)
Sales
(94
)
(200
)
(115
)
(356
)
(8
)
(53
)
(240
)
(1,066
)
(22
)
Transfers into Level 3 [4]
—

32

39

117

—

—

—

188

2

Transfers out of Level 3 [4]
(59
)
(73
)
(23
)
(513
)
(6
)
(44
)
—

(718
)
(3
)
Fair value as of September 30, 2013
$
206

$
798

$
791

$
1,280

$
73

$
133

$
1,346

$
4,627

$
211

Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7]
$
(4
)
$
(2
)
$
(16
)
$
(6
)
$
—

$
—

$
(5
)
$
(33
)
$
27

 
 
Freestanding Derivatives [5]
Assets (Liabilities)
Equity
Securities,
AFS
Credit
Equity
Interest
Rate
GMWB
Hedging
Macro
Hedge
Program
Intl.
Program
Hedging
Other
Contracts
Total Free-
Standing
Derivatives [5]
Fair value as of January 1, 2013
$
84

$
4

$
57

$
(32
)
$
519

$
286

$
68

$
23

$
925

Total realized/unrealized gains (losses)
 
 
 
 
 
 
 
 
 
Included in net income [1], [2], [6]
(12
)
1

(31
)
18

(299
)
(139
)
(247
)
(4
)
(701
)
Included in OCI [3]
7

—

—

—

—

—

—

—

—

Purchases
13

—

—

(3
)
—

34

(42
)
—

(11
)
Settlements
—

(2
)
(3
)
3

(1
)
—

63

—

60

Sales
(3
)
—

—

—

—

—

—

—

—

Transfers out of Level 3 [4]
—

—

—

26

—

—

57

—

83

Fair value as of September 30, 2013
$
89

$
3

$
23

$
12

$
219

$
181

$
(101
)
$
19

$
356

Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7]
$
(13
)
$
—

$
(27
)
$
4

$
(296
)
$
(136
)
$
(292
)
$
(8
)
$
(755
)

35
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

Assets
Limited Partnerships and Other Alternative Investments
Reinsurance  Recoverable
for GMWB
Separate Accounts
Fair value as of January 1, 2013
$
314

$
191

$
583

Total realized/unrealized gains (losses)
 
 
 
Included in net income [1], [2], [6]
(16
)
(166
)
7

Purchases
125

—

240

Settlements
—

21

(1
)
Sales
(22
)
—

(66
)
Transfers into Level 3 [4]
—

—

39

Transfers out of Level 3 [4]
(65
)
—

(67
)
Fair value as of September 30, 2013
$
336

$
46

$
735

Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7]
$
(16
)
$
(166
)
$
15

 
Other Policyholder Funds and Benefits Payable
 
 
Liabilities
Guaranteed
Withdrawal
Benefits
International
Guaranteed
Living
Benefits
International
Other Living
Benefits
Equity
Linked
Notes
Total Other
Policyholder
Funds and
Benefits
Payable
Liabilities held for sale
Consumer
Notes
Fair value as of January 1, 2013
$
(1,249
)
$
(50
)
$
2

$
(7
)
$
(1,304
)
$
—

$
(2
)
Transfers to liabilities held for sale
—

43

—

—

43

(43
)
—

Total realized/unrealized gains (losses)
 
 
 
 
 
 
 
Included in net income [1], [2], [6]
1,099

8

4

(6
)
1,105

14

1

Included in OCI [3]
—

—

—

—

—

1

—

Settlements
(60
)
—

(3
)
—

(63
)
(3
)
—

Fair value as of September 30, 2013
$
(210
)
$
1

$
3

$
(13
)
$
(219
)
$
(31
)
$
(1
)
Changes in unrealized gains (losses) included in net income related to financial instruments still held at September 30, 2013 [2] [7]
$
1,099

$
8

$
4

$
(6
)
$
1,105

$
14

$
1

[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 in these rows are reported in net realized capital gains/(losses), with the exception of International Guaranteed Living Benefits and International Other Living Benefits, which are reported in loss from discontinued operations, net of tax. 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 within net realized capital gains/(losses) are before income taxes and DAC amortization, and all amounts within loss from discontinued operations, net of tax, are after income taxes and DAC amortization.
[3]
All amounts are before income taxes and amortization of DAC.
[4]
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.
[5]
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.
[6]
Includes both market and non-market impacts in deriving realized and unrealized gains (losses).
[7]
Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein.


36
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

Fair Value Option
The Company elected the fair value option for certain investments held within consolidated investment funds. The Company elected the fair value option in order to report investments of consolidated investment companies at fair value with changes in the fair value of these securities recognized in net realized capital gains and losses, which is consistent with accounting requirements for investment companies. The investment funds hold fixed income securities in multiple sectors and the Company has management and control of the funds as well as a significant ownership interest.
FVO investments also include certain securities that contain embedded credit derivatives with underlying credit risk primarily related to residential and commercial real estate. Income earned from FVO securities is recorded in net investment income and changes in fair value are recorded in net realized capital gains and losses.
The decline in fixed maturities, FVO is primarily due to the sale of the Japan variable and fixed annuity business. For further discussion on the sale, see the Sale of Hartford Life Insurance KK section in Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements.

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 September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
Assets
 
 
 
 
 
Fixed maturities, FVO
 
 
 
 
 
Corporate
$
(5
)
$
—

 
$
(1
)
$
(14
)
CDOs
—

—

 
14

—

Foreign government
(1
)
1

 
1

(4
)
RMBS
(1
)
—

 
—

—

Total realized capital gains (losses)
$
(7
)
$
1

 
$
14

$
(18
)
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.
 
As of
 
September 30, 2014
December 31, 2013
Assets
 
 
Fixed maturities, FVO
 
 
ABS
$
18

$
3

CDOs
78

183

CMBS
22

8

Corporate
139

92

Foreign government
31

518

U.S government
2

24

Municipals
2

1

RMBS
172

15

Total fixed maturities, FVO
$
464

$
844


37
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Fair Value Measurements (continued)

Financial Instruments Not Carried at Fair Value
The following table presents carrying amounts and fair values of the Company’s financial instruments not carried at fair value and not included in the above fair value discussion.
 
 
September 30, 2014
December 31, 2013
 
Fair Value
Hierarchy
Level
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Assets
 
 
 
 
 
Policy loans
Level 3
$
1,425

$
1,425

$
1,420

$
1,480

Mortgage loans
Level 3
5,730

5,895

5,598

5,641

Liabilities
 
 
 
 
 
Other policyholder funds and benefits payable [1]
Level 3
$
7,335

$
7,515

$
9,152

$
9,352

Senior notes [2]
Level 2
5,008

5,792

5,206

5,845

Junior subordinated debentures [2]
Level 2
1,100

1,296

1,100

1,271

Revolving Credit Facility
Level 2
—

—

238

238

Consumer notes [3]
Level 3
68

68

82

82

[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.
Fair values for policy loans were determined using current loan coupon rates, which reflect the current rates available under the contracts. As a result, the fair value approximates the carrying value of the policy loans. During the second quarter of 2014, the Company changed the valuation technique used to estimate the fair value of policy loans, which previously was estimated by utilizing discounted cash flow calculations, using U.S. Treasury interest rates, based on the loan durations.
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 values for other policyholder funds and benefits payable, not carried at fair value, are estimated based on the cash surrender values of the underlying policies or by estimating future cash flows discounted at current interest rates adjusted for credit risk.
Fair values for senior notes and junior subordinated debentures are determined using the market approach based on reported trades, benchmark interest rates and issuer spread for the Company which may consider credit default swaps.
Fair values for consumer notes were estimated using discounted cash flow calculations using current interest rates adjusted for estimated loan durations.

38
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments

Net Realized Capital Gains (Losses)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Before tax)
2014
2013
 
2014
2013
Gross gains on sales [1]
$
116

$
105

 
$
421

$
2,021

Gross losses on sales
(29
)
(137
)
 
(191
)
(326
)
Net OTTI losses recognized in earnings
(14
)
(26
)
 
(43
)
(59
)
Valuation allowances on mortgage loans
—

—

 
(3
)
—

Periodic net coupon settlements on credit derivatives
—

(1
)
 
1

(5
)
Results of variable annuity hedge program


 



GMWB derivatives, net
6

203

 
15

219

Macro hedge program
12

(50
)
 
(13
)
(182
)
Total results of variable annuity hedge program
18

153

 
2

37

Other, net [2]
(22
)
37

 
(157
)
128

Net realized capital gains
$
69

$
131

 
$
30

$
1,796

[1]
Includes $1.5 billion of gains relating to the sales of the Retirement Plans and Individual Life businesses for the nine months ended September 30, 2013.
[2]
Primarily consists of changes in the value of non-qualifying derivatives, including interest rate derivatives used to manage duration, transactional foreign currency revaluation gains (losses) on the Japan fixed payout annuity liabilities assumed from HLIKK and gains (losses) on non-qualifying derivatives used to hedge the foreign currency exposure of the liabilities.   Gains (losses) from transactional foreign currency revaluation of the liabilities were $83 and $38, respectively, for the three and nine months ended September 30, 2014, and $(16) and $173, respectively, for the three and nine months ended September 30, 2013.  Gains (losses) on instruments used to hedge the foreign currency exposure on the fixed payout annuities were $(86) and $(58), respectively, for the three and nine months ended September 30, 2014, and $0 and $(184), respectively, for the three and nine months ended September 30, 2013. Also includes $71 of gains relating to the sales of the Retirement Plans and Individual Life businesses for the nine months ended September 30, 2013.
Net realized capital gains and losses from investment sales are reported as a component of revenues and are determined on a specific identification basis. Before tax, net gains and losses on sales and impairments previously reported in net unrealized gains or losses in AOCI were $61 and $186, respectively, for the three and nine months ended September 30, 2014, and $(58) and $1.6 billion for the three and nine months ended September 30, 2013, respectively. Proceeds from sales of AFS securities totaled $5.2 billion and $19.6 billion, respectively, for the three and nine months ended September 30, 2014, and $6.1 billion and $25.5 billion for the three and nine months ended September 30, 2013, respectively.
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 September 30,
 
Nine Months Ended September 30,
(Before-tax)
2014
2013
 
2014
2013
Balance as of beginning of period
$
(488
)
$
(902
)
 
$
(552
)
$
(1,013
)
Additions for credit impairments recognized on [1]:


 


Securities not previously impaired
(1
)
(1
)
 
(9
)
(14
)
Securities previously impaired
(3
)
(2
)
 
(17
)
(11
)
Reductions for credit impairments previously recognized on:


 


Securities that matured or were sold during the period
49

58

 
122

184

Securities the Company made the decision to sell or more likely than not will be required to sell
—

2

 
—

2

Securities due to an increase in expected cash flows
6

8

 
19

15

Balance as of end of period
$
(437
)
$
(837
)
 
$
(437
)
$
(837
)
[1]
These additions are included in the net OTTI losses recognized in earnings in the Condensed Consolidated Statements of Operations.

39
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

Available-for-Sale Securities
The following table presents the Company’s AFS securities by type.
 
September 30, 2014
 
December 31, 2013
 
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Non-Credit
OTTI [1]
 
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Non-Credit
OTTI [1]
ABS
$
2,444

$
32

$
(37
)
$
2,439

$
(1
)
 
$
2,404

$
25

$
(64
)
$
2,365

$
(2
)
CDOs [2]
2,368

113

(33
)
2,445

—

 
2,340

108

(59
)
2,387

—

CMBS
4,310

191

(19
)
4,482

(6
)
 
4,288

216

(58
)
4,446

(6
)
Corporate
25,583

2,293

(162
)
27,714

(2
)
 
27,013

1,823

(346
)
28,490

(7
)
Foreign govt./govt. agencies
1,632

67

(27
)
1,672

—

 
4,228

52

(176
)
4,104

—

Municipal
11,744

1,027

(10
)
12,761

—

 
11,932

425

(184
)
12,173

—

RMBS
3,907

111

(23
)
3,995

(1
)
 
4,639

90

(82
)
4,647

(4
)
U.S. Treasuries
3,910

180

(12
)
4,078

—

 
3,797

7

(59
)
3,745

—

Total fixed maturities, AFS
55,898

4,014

(323
)
59,586

(10
)
 
60,641

2,746

(1,028
)
62,357

(19
)
Equity securities, AFS
612

58

(22
)
648

—

 
850

67

(49
)
868

—

Total AFS securities
$
56,510

$
4,072

$
(345
)
$
60,234

$
(10
)
 
$
61,491

$
2,813

$
(1,077
)
$
63,225

$
(19
)
[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 September 30, 2014 and December 31, 2013.
[2]
Gross unrealized gains (losses) exclude the change in fair value of bifurcated embedded derivative features of certain securities. Changes in fair value are recorded in net realized capital gains (losses).
The decline in fixed maturities, AFS is primarily due to the sale of the Japan variable and fixed annuity business. For further discussion on the sale, see the Sale of Hartford Life Insurance KK section in Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements.

The following table presents the Company’s fixed maturities, AFS, by contractual maturity year.
 
September 30, 2014
December 31, 2013
Contractual Maturity
Amortized Cost
Fair Value
Amortized Cost
Fair Value
One year or less
$
1,955

$
1,986

$
2,195

$
2,228

Over one year through five years
11,492

12,130

11,930

12,470

Over five years through ten years
9,496

9,947

10,814

11,183

Over ten years
19,926

22,162

22,031

22,631

Subtotal
42,869

46,225

46,970

48,512

Mortgage-backed and asset-backed securities
13,029

13,361

13,671

13,845

Total fixed maturities, AFS
$
55,898

$
59,586

$
60,641

$
62,357

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.

40
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

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.
 
September 30, 2014
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Amortized Cost
Fair Value
Unrealized Losses
 
Amortized Cost
Fair Value
Unrealized Losses
 
Amortized Cost
Fair Value
Unrealized Losses
ABS
$
678

$
676

$
(2
)
 
$
496

$
461

$
(35
)
 
$
1,174

$
1,137

$
(37
)
CDOs [1]
355

353

(2
)
 
1,552

1,518

(31
)
 
1,907

1,871

(33
)
CMBS
376

373

(3
)
 
365

349

(16
)
 
741

722

(19
)
Corporate
2,933

2,875

(58
)
 
1,366

1,262

(104
)
 
4,299

4,137

(162
)
Foreign govt./govt. agencies
330

323

(7
)
 
268

248

(20
)
 
598

571

(27
)
Municipal
195

193

(2
)
 
217

209

(8
)
 
412

402

(10
)
RMBS
307

306

(1
)
 
531

509

(22
)
 
838

815

(23
)
U.S. Treasuries
1,314

1,312

(2
)
 
449

439

(10
)
 
1,763

1,751

(12
)
Total fixed maturities, AFS
6,488

6,411

(77
)
 
5,244

4,995

(246
)
 
11,732

11,406

(323
)
Equity securities, AFS
133

125

(8
)
 
124

110

(14
)
 
257

235

(22
)
Total securities in an unrealized loss position
$
6,621

$
6,536

$
(85
)
 
$
5,368

$
5,105

$
(260
)
 
$
11,989

$
11,641

$
(345
)
 
December 31, 2013
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Amortized Cost
Fair Value
Unrealized Losses
 
Amortized Cost
Fair Value
Unrealized Losses
 
Amortized Cost
Fair Value
Unrealized Losses
ABS
$
893

$
888

$
(5
)
 
$
477

$
418

$
(59
)
 
$
1,370

$
1,306

$
(64
)
CDOs [1]
137

135

(2
)
 
1,933

1,874

(57
)
 
2,070

2,009

(59
)
CMBS
812

788

(24
)
 
610

576

(34
)
 
1,422

1,364

(58
)
Corporate
4,922

4,737

(185
)
 
1,225

1,064

(161
)
 
6,147

5,801

(346
)
Foreign govt./govt. agencies
2,961

2,868

(93
)
 
343

260

(83
)
 
3,304

3,128

(176
)
Municipal
3,150

2,994

(156
)
 
190

162

(28
)
 
3,340

3,156

(184
)
RMBS
2,046

2,008

(38
)
 
591

547

(44
)
 
2,637

2,555

(82
)
U.S. Treasuries
2,914

2,862

(52
)
 
33

26

(7
)
 
2,947

2,888

(59
)
Total fixed maturities, AFS
17,835

17,280

(555
)
 
5,402

4,927

(473
)
 
23,237

22,207

(1,028
)
Equity securities, AFS
196

188

(8
)
 
223

182

(41
)
 
419

370

(49
)
Total securities in an unrealized loss position
$
18,031

$
17,468

$
(563
)
 
$
5,625

$
5,109

$
(514
)
 
$
23,656

$
22,577

$
(1,077
)
[1]
Unrealized losses exclude the change in fair value of bifurcated embedded derivative features of certain securities, for which changes in fair value are recorded in net realized capital gains (losses).
As of September 30, 2014, AFS securities in an unrealized loss position, consisted of 3,007 securities, primarily in the corporate sector and securities backed by commercial and residential real estate, which are depressed primarily due to an increase in interest rates and wider credit spreads since the securities were purchased. As of September 30, 2014, 94% of these securities were depressed less than 20% of cost or amortized cost. The decrease in unrealized losses during 2014 was primarily attributable to a decrease in long term interest rates and tighter credit spreads.

41
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

Most of the securities depressed for twelve months or more relate to certain floating rate corporate securities with greater than 10 years to maturity concentrated in the financial services sector and structured securities with exposure to commercial and residential real estate. Corporate securities are primarily depressed because the securities have floating-rate coupons and have long-dated maturities or are perpetual. For certain commercial and residential real estate securities’ current market spreads continue to be wider than spreads at the securities' respective purchase dates, even though credit spreads have continued to tighten over the past five years. The Company neither has an intention to sell nor does it expect to be required to sell the securities outlined above.
Mortgage Loans
 
September 30, 2014
 
December 31, 2013
 
Amortized Cost [1]
Valuation Allowance
Carrying Value
 
Amortized Cost [1]
Valuation Allowance
Carrying Value
Total commercial mortgage loans
$
5,749

$
(19
)
$
5,730

 
$
5,665

$
(67
)
$
5,598

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

As of September 30, 2014 and December 31, 2013, the carrying value of mortgage loans associated with the valuation allowance was $141 and $191, respectively. Included in the table above are mortgage loans held-for-sale with a carrying value and valuation allowance of $61 and $3, respectively, as of December 31, 2013. The carrying value of these loans is included in mortgage loans in the Company’s Condensed Consolidated Balance Sheets. There were no mortgage loans held-for-sale as of September 30, 2014. As of September 30, 2014, loans within the Company’s mortgage loan portfolio that have had extensions or restructurings other than what is allowable under the original terms of the contract are immaterial.
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.
 
2014
2013
Balance, as of January 1
$
(67
)
$
(68
)
(Additions)/Reversals
(3
)
(1
)
Deductions
51

2

Balance, as of September 30
$
(19
)
$
(67
)
The decline in the valuation allowance as compared to December 31, 2013 resulted from the sale of the underlying collateral supporting one commercial mortgage loan. The loan was fully reserved for and the Company did not recover any proceeds as a result of the sale.
The weighted-average LTV ratio of the Company’s commercial mortgage loan portfolio was 57% as of September 30, 2014, while the weighted-average LTV ratio at origination of these loans was 62%. 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. DSCR compares a property’s net operating income to the borrower’s principal and interest payments. The weighted average DSCR of the Company’s commercial mortgage loan portfolio was 2.47x as of September 30, 2014. The Company held no delinquent commercial mortgage loans as of September 30, 2014.
The following table presents the carrying value of the Company’s commercial mortgage loans by LTV and DSCR.
Commercial Mortgage Loans Credit Quality
 
September 30, 2014
 
December 31, 2013
Loan-to-value
Carrying Value
Avg. Debt-Service Coverage Ratio
 
Carrying Value
Avg. Debt-Service Coverage Ratio
Greater than 80%
$
71

0.99x
 
$
101

0.99x
65% - 80%
891

1.78x
 
1,195

1.82x
Less than 65%
4,768

2.63x
 
4,302

2.53x
Total commercial mortgage loans
$
5,730

2.47x
 
$
5,598

2.34x
 

42
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

The following tables present the carrying value of the Company’s mortgage loans by region and property type.
Mortgage Loans by Region
 
September 30, 2014
 
December 31, 2013
 
Carrying Value
Percent of Total
 
Carrying Value
Percent of Total
East North Central
$
197

3.4
%
 
$
187

3.3
%
Middle Atlantic
452

7.9
%
 
409

7.3
%
Mountain
92

1.6
%
 
104

1.9
%
New England
381

6.6
%
 
353

6.3
%
Pacific
1,557

27.2
%
 
1,587

28.3
%
South Atlantic
1,046

18.3
%
 
899

16.1
%
West North Central
44

0.8
%
 
47

0.8
%
West South Central
304

5.3
%
 
338

6.0
%
Other [1]
1,657

28.9
%
 
1,674

30.0
%
Total mortgage loans
$
5,730

100.0
%
 
$
5,598

100.0
%
[1]
Primarily represents loans collateralized by multiple properties in various regions.
Mortgage Loans by Property Type
 
September 30, 2014
 
December 31, 2013
 
Carrying Value
Percent of Total
 
Carrying
Value
Percent of Total
Commercial
 
 
 
 
 
Agricultural
$
61

1.1
%
 
$
125

2.2
%
Industrial
1,679

29.2
%
 
1,718

30.7
%
Lodging
26

0.5
%
 
27

0.5
%
Multifamily
1,160

20.2
%
 
1,155

20.6
%
Office
1,499

26.2
%
 
1,278

22.8
%
Retail
1,151

20.1
%
 
1,140

20.4
%
Other
154

2.7
%
 
155

2.8
%
Total mortgage loans
$
5,730

100.0
%
 
$
5,598

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 or investment manager and as an investor through normal investment activities, as well as a means of accessing capital through a contingent capital facility.
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.

43
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

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 deemed to be 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 collateral or investment management services and original investment.
 
September 30, 2014
 
December 31, 2013
 
Total Assets
Total Liabilities [1]
Maximum Exposure to Loss [2]
 
Total Assets
Total Liabilities [1]
Maximum Exposure to Loss [2]
CDOs [3]
$
8

$
8

$
—

 
$
31

$
33

$
—

Investment funds [4]
192

—

195

 
164

—

173

Limited partnerships and other alternative investments
3

—

3

 
4

—

4

Total
$
203

$
8

$
198

 
$
199

$
33

$
177

[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 short-term investments, or cash in the Company’s Condensed Consolidated Balance Sheets.
[4]
Total assets included in fixed maturities, FVO, short-term investments, and equity, AFS 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. Investment funds represent wholly-owned fixed income funds for which the Company has management and control of the investments which is the activity that most significantly impacts its economic performance. Limited partnerships represent one hedge fund of funds for which the Company holds a majority interest in the fund as an investment.
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 that has been held by the Company since February 2007 and for which the Company has no implied or unfunded commitments. Assets and liabilities recorded for the contingent capital facility were $13 and $13, respectively as of September 30, 2014 and $17 and $19, respectively, as of December 31, 2013. Additionally, the Company has a maximum exposure to loss of $3 and $3, respectively, as of September 30, 2014 and December 31, 2013, 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 15 - Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements included in The Hartford’s 2013 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 and are included in ABS, CDOs, CMBS and RMBS in fixed maturities, AFS or fixed maturities, FVO on 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.

44
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

Repurchase Agreements, Dollar Roll Transactions and Other Collateral Transactions
From time to time, the Company enters into repurchase agreements and dollar roll transactions to manage liquidity or to earn incremental spread income. A repurchase agreement is a transaction in which one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous agreement to repurchase the same securities at a specified price at a later date. A dollar roll is a type of repurchase agreement where a mortgage backed security is sold with an agreement to repurchase substantially the same security at a specified time in the future. These transactions generally have a contractual maturity of ninety days or less and the carrying amounts of these instruments approximates fair value.
As part of repurchase agreements and dollar roll transactions, the Company transfers collateral of U.S. government and government agency securities and receives cash. For the repurchase agreements, the Company obtains cash in an amount equal to at least 95% of the fair value of the securities transferred. The agreements contain contractual provisions that require additional collateral to be transferred when necessary and provide the counterparty the right to sell or re-pledge the securities transferred. The cash received from the repurchase program is typically invested in short-term investments or fixed maturities. Repurchase agreements include master netting provisions that provide the counterparties the right to offset claims and apply securities held by them with respect to their obligations in the event of a default. Although the Company has the contractual right to offset claims, fixed maturities do not meet the specific conditions for net presentation under U.S. GAAP. The Company accounts for the repurchase agreements and dollar roll transactions as collateralized borrowings. The securities transferred under repurchase agreements and dollar roll transactions are included in fixed maturities, AFS with the obligation to repurchase those securities recorded in other liabilities on the Company's Condensed Consolidated Balance Sheets.
The Company had no outstanding repurchase agreements or dollar roll transactions as of September 30, 2014 or December 31, 2013.
The Company is required by law to deposit securities with government agencies in certain states in which it conducts business. As of September 30, 2014 and December 31, 2013, the fair value of securities on deposit was approximately $2.4 billion and $1.9 billion, respectively.
As of December 31, 2013, the Company pledged $272 as collateral in Japan government bonds reported in fixed maturities, AFS, associated with short-term debt of $238. The collateral and short-term debt were related to the Japan variable and fixed annuity business and were transferred to the Buyer as of June 30, 2014.
As of September 30, 2014 and December 31, 2013, the Company has pledged as collateral $34 and $34, respectively, of U.S. government securities and government agency securities or cash for letters of credit.
Refer to Derivative Collateral Arrangements section of this note for disclosure of collateral in support of derivative transactions.
Derivative Instruments
The Company utilizes a variety of OTC, OTC-cleared 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 be permissible investments under the Company’s investment policies. The Company also may enter into and has previously issued 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.
Strategies that qualify for hedge accounting
Certain derivatives that the Company enters into satisfy the hedge accounting requirements as outlined in Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements, included in The Hartford’s 2013 Form 10-K Annual Report. Typically, these hedge relationships include interest rate and foreign currency swaps where the terms or expected cash flows of the hedged item closely match the terms of the swap. The swaps are typically used to manage interest rate duration of certain fixed maturity securities or liability contracts. The hedge strategies by hedge accounting designation include:
Cash flow hedges
Interest rate swaps are predominantly used to manage portfolio duration and better match cash receipts from assets with cash disbursements required to fund liabilities. These derivatives primarily convert interest receipts on floating-rate fixed maturity securities to fixed rates. The Company also enters into forward starting swap agreements to hedge the interest rate exposure related to the purchase of fixed-rate securities, primarily to hedge interest rate risk inherent in the assumptions used to price certain liabilities.

45
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

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 reduce cash flow fluctuations due to changes in currency rates.
Fair value hedges
Interest rate swaps are used to hedge the changes in fair value of fixed maturity securities due to fluctuations in interest rates.
Non-qualifying strategies
Derivative relationships that do not qualify for hedge accounting (“non-qualifying strategies”) primarily include the hedge program for
the Company's variable annuity products as well as the hedging and replication strategies that utilize credit default swaps. In addition, hedges of interest rate and foreign currency risk of certain fixed maturities and liabilities do not qualify for hedge accounting.
The non-qualifying strategies include:
Interest rate swaps, swaptions and futures
The Company uses interest rate swaps, swaptions 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 September 30, 2014 and December 31, 2013 the notional amount of interest rate swaps in offsetting relationships was $13.2 billion and $6.9 billion, respectively.
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.
Japan fixed payout annuity hedge
The Company formerly offered certain variable annuity products with a guaranteed minimum income benefit ("GMIB") rider through HLIKK, a former indirect wholly-owned subsidiary that was sold on June 30, 2014. For further discussion on the sale, see the Sale of Hartford Life Insurance KK section in Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements. The Company will continue to reinsure from HLIKK the Japan fixed payout annuities. The Company invests in U.S. dollar denominated assets to support the reinsurance liability. The Company entered into pay U.S. dollar, receive yen swap contracts to hedge the currency and yen interest rate exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments.
Credit contracts
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. Credit default swaps are also used to assume credit risk related to an individual entity or referenced index as a part of replication transactions. These contracts require the Company to pay or receive a periodic fee in exchange for compensation from the counterparty should the referenced security issuers experience a credit event, as defined in the contract. The Company is also exposed to credit risk related to credit derivatives embedded within certain fixed maturity securities which are comprised of structured securities that contain credit derivatives that reference a standard index of corporate securities. In addition, 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 enters into equity index options with the purpose of hedging the impact of an adverse equity market environment on the investment portfolio. In addition, the Company formerly offered certain equity indexed products, a portion of which contain embedded derivatives that require bifurcation. The Company uses equity index swaps to economically hedge the equity volatility risk associated with the equity indexed products.
GMWB derivatives, net
The Company formerly offered certain variable annuity products with GMWB riders. The GMWB product is a bifurcated embedded derivative (“GMWB product derivatives”) that has a notional value equal to the guaranteed remaining balance ("GRB"). The Company uses reinsurance contracts to transfer a portion of its risk of loss due to GMWB. The reinsurance contracts covering GMWB (“GMWB reinsurance contracts”) are accounted for as free-standing derivatives with a notional amount equal to the GRB amount.
The Company utilizes derivatives (“GMWB hedging instruments”) as part of an actively managed program designed to hedge a portion of the capital market risk exposures of the non-reinsured GMWB riders due to changes in interest rates, equity market levels, and equity volatility. These derivatives 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 presents notional and fair value for GMWB hedging instruments.

46
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

 
Notional Amount
 
Fair Value
 
September 30,
2014
December 31, 2013
 
September 30,
2014
December 31, 2013
Customized swaps
$
7,181

$
7,839

 
$
93

$
74

Equity swaps, options, and futures
4,027

4,237

 
34

44

Interest rate swaps and futures
3,815

6,615

 
(3
)
(77
)
Total
$
15,023

$
18,691

 
$
124

$
41

Macro hedge program
The Company utilizes equity options, swaps and foreign currency options to partially hedge against a decline in the equity markets and the resulting statutory surplus and capital impact primarily arising from the guaranteed minimum death benefit ("GMDB") and GMWB obligations. The following table presents notional and fair value for the macro hedge program.
 
Notional Amount
 
Fair Value
 
September 30,
2014
December 31, 2013
 
September 30,
2014
December 31, 2013
Equity options and swaps
6,028

9,934

 
134

139

Foreign currency options
400

—

 
—

—

Total
$
6,428

$
9,934

 
$
134

$
139

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.
Modified coinsurance reinsurance contracts
As of September 30, 2014 and December 31, 2013, the Company had approximately $1.0 billion and 1.3 billion, respectively, of invested assets supporting other policyholder funds and benefits payable reinsured under a modified coinsurance arrangement in connection with the sale of the Individual Life business which was structured as a reinsurance transaction. The assets are primarily held in a trust established by the Company. The Company pays or receives cash quarterly to settle the results of the reinsured business, including the investment results. As a result of this modified coinsurance arrangement, the Company has an embedded derivative that transfers to the reinsurer certain unrealized changes in fair value due to interest rate and credit risks of these assets. The notional amounts of the embedded derivative reinsurance contracts are the invested assets that are carried at fair value supporting the reinsured reserves.
Derivative Balance Sheet Classification
The following table 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. For reporting purposes, the Company has elected to offset the fair value amounts, income accruals, and related cash collateral receivables and payables of OTC derivative instruments executed in a legal entity and with the same counterparty under a master netting agreement, which provides the Company with the legal right of offset. The Company has also elected to offset the fair value amounts, income accruals and related cash collateral receivables and payables of OTC-cleared derivative instruments based on clearing house agreements. The fair value amounts presented below do not include income accruals or related cash collateral receivables and payables, which are netted with derivative fair value amounts to determine balance sheet presentation. Derivative fair value reported as liabilities after taking into account the master netting agreements, is $935 and $1.3 billion as of September 30, 2014, and December 31, 2013, respectively. Derivatives in the Company’s separate accounts, where the associated gains and losses accrue directly to policyholders, are not included. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the following table. 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. The tables below exclude investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 5 - Fair Value Measurements of Notes to Condensed Consolidated Financial Statements.

47
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

 
Net Derivatives
 
Asset Derivatives
 
Liability Derivatives
 
Notional Amount
 
Fair Value
 
Fair Value
 
Fair Value
Hedge Designation/ Derivative Type
Sep. 30, 2014
Dec. 31, 2013
 
Sep. 30, 2014
Dec. 31, 2013
 
Sep. 30, 2014
Dec. 31, 2013
 
Sep. 30, 2014
Dec. 31, 2013
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
4,505

$
5,026

 
$
(23
)
$
(92
)
 
$
28

$
50

 
$
(51
)
$
(142
)
Foreign currency swaps
143

143

 
(14
)
(5
)
 
3

2

 
(17
)
(7
)
Total cash flow hedges
4,648

5,169

 
(37
)
(97
)
 
31

52

 
(68
)
(149
)
Fair value hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
226

1,799

 
1

(24
)
 
1

3

 
—

(27
)
Total fair value hedges
226

1,799

 
1

(24
)
 
1

3

 
—

(27
)
Non-qualifying strategies
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps and futures
14,664

8,453

 
(532
)
(487
)
 
300

171

 
(832
)
(658
)
Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
Foreign currency swaps and forwards
217

258

 
(5
)
(9
)
 
1

6

 
(6
)
(15
)
Japan fixed payout annuity hedge
1,571

1,571

 
(411
)
(354
)
 
—

—

 
(411
)
(354
)
Japanese fixed annuity hedging instruments [1]
—

1,436

 
—

(6
)
 
—

88

 
—

(94
)
Credit contracts
 
 
 
 
 
 
 
 
 
 
 
Credit derivatives that purchase credit protection
571

938

 
(12
)
(15
)
 
—

1

 
(12
)
(16
)
Credit derivatives that assume credit risk [2]
1,530

1,886

 
2

33

 
15

36

 
(13
)
(3
)
Credit derivatives in offsetting positions
5,404

7,764

 
(4
)
(7
)
 
55

76

 
(59
)
(83
)
Equity contracts
 
 
 
 
 
 
 
 
 
 
 
Equity index swaps and options
279

358

 
(2
)
(1
)
 
23

19

 
(25
)
(20
)
Variable annuity hedge program
 
 
 
 
 
 
 
 
 
 
 
GMWB product derivatives [3]
18,792

21,512

 
(56
)
(36
)
 
—

—

 
(56
)
(36
)
GMWB reinsurance contracts
3,844

4,508

 
36

29

 
36

29

 
—

—

GMWB hedging instruments
15,023

18,691

 
124

41

 
257

333

 
(133
)
(292
)
Macro hedge program
6,428

9,934

 
134

139

 
170

178

 
(36
)
(39
)
International program product derivatives [1]
—

366

 
—

6

 
—

6

 
—

—

International program hedging instruments [1]
—

73,048

 
—

(33
)
 
—

866

 
—

(899
)
Other
 
 
 
 
 
 
 
 
 
 
 
Contingent capital facility put option
500

500

 
13

17

 
13

17

 
—

—

Modified coinsurance reinsurance contracts
964

1,250

 
41

67

 
41

67

 
—

—

Total non-qualifying strategies
69,787

152,473

 
(672
)
(616
)
 
911

1,893

 
(1,583
)
(2,509
)
Total cash flow hedges, fair value hedges, and non-qualifying strategies
$
74,661

$
159,441

 
$
(708
)
$
(737
)
 
$
943

$
1,948

 
$
(1,651
)
$
(2,685
)
Balance Sheet Location
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities, available-for-sale
$
476

$
473

 
$
(3
)
$
(2
)
 
$
—

$
1

 
$
(3
)
$
(3
)
Other investments
20,013

53,219

 
150

442

 
376

909

 
(226
)
(467
)
Other liabilities
30,522

78,064

 
(853
)
(1,225
)
 
490

936

 
(1,343
)
(2,161
)
Reinsurance recoverables
4,808

5,758

 
77

96

 
77

96

 
—

—

Other policyholder funds and benefits payable
18,842

21,927

 
(79
)
(48
)
 
—

6

 
(79
)
(54
)
Total derivatives
$
74,661

$
159,441

 
$
(708
)
$
(737
)
 
$
943

$
1,948

 
$
(1,651
)
$
(2,685
)
[1]
Represents hedge programs formerly associated with the Japan variable and fixed annuity products which were terminated due to the sale of HLIKK during 2014. For further information on the sale, see Note 2 - Business Dispositions of Notes to the Condensed Consolidated Financial Statements. For further information on the associated hedge programs, see Note 6 - Investments and Derivative Instruments of Notes to the Consolidated Financial Statements included in The Hartford's 2013 Form 10-K Annual Report.
[2]
The derivative instruments related to this strategy are held for other investment purposes.
[3]
These derivatives are embedded within liabilities and are not held for risk management purposes.



48
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

Change in Notional Amount
The net decrease in notional amount of derivatives since December 31, 2013 was primarily due to the following:
•
The decrease in notional amount related to the international program hedging instruments resulted from the termination of the hedging program associated with the Japan variable annuity product due to the sale of HLIKK. For further discussion on the sale, see the Sale of Hartford Life Insurance KK section in Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements.
•
The decrease in notional amount related to the GMWB hedging instruments primarily resulted from portfolio re-balancing, including the termination of offsetting positions.
•
The decrease in notional amount associated with the macro hedge program was primarily driven by the expiration of certain out-of-the-money options.
•
These declines in notional amount were partially offset by an increase in notional amount related to non-qualifying interest rate swaps and futures related to duration shortening positions of $2.6 billion, which were subsequently offset by $3.8 billion of long positions.
Change in Fair Value
The net improvement in the total fair value of derivative instruments since December 31, 2013 was primarily related to the following:
•
The increase in the fair value related to the combined GMWB hedging program, which includes the GMWB product, reinsurance, and hedging derivatives, was primarily driven by liability model assumption updates and increased volatility, partially offset by losses resulting from policyholder behavior primarily related to increased surrenders.
•
The increase in the fair value associated with the international program hedging instruments resulted from the termination of the hedging program associated with the Japan variable annuity product due to the sale of HLIKK. For further discussion on the sale, see the Sale of Hartford Life Insurance KK section in Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements.
•
These improvements in fair value were partially offset by a decrease in fair value associated with the fixed payout annuity hedges primarily driven by a depreciation of the Japanese yen in relation to the U.S. dollar.
•
Additional declines in fair value related to modified coinsurance reinsurance contracts, which are accounted for as embedded derivatives and transfer to the reinsurer the investment experience related to the assets supporting the reinsured policies, were driven by a decline in interest rates.
Offsetting of Derivative Assets/Liabilities
The following tables present the gross fair value amounts, the amounts offset, and net position of derivative instruments eligible for offset in the Company's Condensed Consolidated Balance Sheets. Amounts offset include fair value amounts, income accruals and related cash collateral receivables and payables associated with derivative instruments that are traded under a common master netting agreement, as described above. Also included in the tables are financial collateral receivables and payables, which are contractually permitted to be offset upon an event of default, although are disallowed for offsetting under U.S. GAAP.


49
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

As of September 30, 2014
 
(i)
 
(ii)
 
(iii) = (i) - (ii)
(iv)
 
(v) = (iii) - (iv)
 
 
 
 
 
Net Amounts Presented in the Statement of Financial Position
 
Collateral Disallowed for Offset in the Statement of Financial Position
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Derivative Assets [1]
 
Accrued Interest and Cash Collateral Received [2]
 
Financial Collateral Received [4]
 
Net Amount
Description
 
 
 
 
 
 
 
 
 
 
 
Other investments
$
866

 
$
681

 
$
150

 
$
35

 
$
98

 
$
87

 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Derivative Liabilities [3]
 
Accrued Interest and Cash Collateral Pledged [3]
 
Financial Collateral Pledged [4]
 
Net Amount
Description
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
$
(1,567
)
 
$
(647
)
 
$
(851
)
 
$
(69
)
 
$
(1,029
)
 
$
109


As of December 31, 2013
 
(i)
 
(ii)
 
(iii) = (i) - (ii)
(iv)
 
(v) = (iii) - (iv)
 
 
 
 
 
Net Amounts Presented in the Statement of Financial Position
 
Collateral Disallowed for Offset in the Statement of Financial Position
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Derivative Assets [1]
 
Accrued Interest and Cash Collateral Received [2]
 
Financial Collateral Received [4]
 
Net Amount
Description
 
 
 
 
 
 
 
 
 
 
 
Other investments
$
1,845

 
$
1,463

 
$
442

 
$
(60
)
 
$
242

 
$
140

 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Derivative Liabilities [3]
 
Accrued Interest and Cash Collateral Pledged [3]
 
Financial Collateral Pledged [4]
 
Net Amount
Description
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
$
(2,626
)
 
$
(1,496
)
 
$
(1,223
)
 
$
93

 
$
(1,204
)
 
$
74

[1]
Included in other invested assets in the Company's Condensed Consolidated Balance Sheets.
[2]
Included in other assets in the Company's Condensed Consolidated Balance Sheets and is limited to the net derivative receivable associated with each counterparty.
[3]
Included in other liabilities in the Company's Condensed Consolidated Balance Sheets and is limited to the net derivative payable associated with each counterparty. Not included in this amount are embedded derivatives associated with consumer notes of $(2) as of September 30, 2014 and December 31, 2013, which were not eligible for offset in the Company's Condensed Consolidated Balance Sheets.
[4]
Excludes collateral associated with exchange-traded derivative instruments.

50
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

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
 
Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Net Realized Capital Gains(Losses) Recognized in Income on Derivative (Ineffective Portion)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
 
2014
2013
 
2014
2013
Interest rate swaps
$
(19
)
$
(5
)
 
$
82

$
(254
)
 
$
4

$
(1
)
 
$
3

$
(3
)
Foreign currency swaps
(2
)
3

 
(5
)
9

 
—

—

 
—

—

Total
$
(21
)
$
(2
)
 
$
77

$
(245
)
 
$
4

$
(1
)
 
$
3

$
(3
)
Derivatives in Cash Flow Hedging Relationships
 
 
Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Location
2014
2013
 
2014
2013
Interest rate swaps
Net realized capital gain/(loss)
$
(4
)
$
4

 
$
(2
)
$
84

Interest rate swaps
Net investment income
22

24

 
67

73

Foreign currency swaps
Net realized capital gain/(loss)
(9
)
4

 
(9
)
3

Total
 
$
9

$
32

 
$
56

$
160

As of September 30, 2014 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 $67. 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 two years.
During the three and nine months ended September 30, 2014 and September 30, 2013 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.
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 period 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.

51
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

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]
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
Derivative
Hedge Item
 
Derivative
Hedge Item
 
Derivative
Hedge Item
 
Derivative
Hedge Item
Interest rate swaps
 
 
 
 
 
 
 
 
 
 
 
Net realized capital gain/(loss)
$
2

$
(2
)
 
$
(4
)
$
6

 
$
—

$
(1
)
 
$
7

$
(10
)
Foreign currency swaps
 
 
 
 
 
 
 
 
 
 
 
Net realized capital gain/(loss)
—

—

 
2

(2
)
 
—

—

 
—

—

Benefits, losses and loss adjustment expenses
—

—

 
(1
)
1

 
—

—

 
(2
)
2

Total
$
2

$
(2
)
 
$
(3
)
$
5

 
$
—

$
(1
)
 
$
5

$
(8
)
[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 (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 September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
Interest rate contracts
 
 
 
 
 
Interest rate swaps and forwards
$
(8
)
$
14

 
$
(153
)
$
19

Foreign exchange contracts
 
 
 
 
 
Foreign currency swaps and forwards
6

(6
)
 
2

2

Japan fixed payout annuity hedge [1]
(86
)
—

 
(58
)
(184
)
Credit contracts
 
 
 
 
 
Credit derivatives that purchase credit protection
1

(10
)
 
(9
)
(22
)
Credit derivatives that assume credit risk
(11
)
49

 
8

51

Equity contracts
 
 
 
 
 
Equity index swaps and options
—

(6
)
 
(1
)
(30
)
Variable annuity hedge program
 
 
 
 
 
GMWB product derivatives
(37
)
451

 
54

1,099

GMWB reinsurance contracts
2

(74
)
 
(9
)
(166
)
GMWB hedging instruments
41

(174
)
 
(30
)
(714
)
Macro hedge program
12

(50
)
 
(13
)
(182
)
Other
 
 
 
 
 
Contingent capital facility put option
(2
)
(1
)
 
(5
)
(5
)
Modified coinsurance reinsurance contracts
9

7

 
(26
)
61

Derivative instruments formerly associated with Japan [3]
(2
)
—

 
(2
)
—

Total [2]
$
(75
)
$
200

 
$
(242
)
$
(71
)
[1]
Not included in this amount is the associated liability adjustment for changes in foreign exchange spot rates through realized capital gains of $83 and $(16) for the three months ended September 30, 2014 and 2013, respectively and $38 and $173, for the nine months ended September 30, 2014 and 2013, respectively.
[2]
Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 5 - Fair Value Measurements.

52
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

[3]
These amounts relate to the termination of the hedging program associated with the Japan variable annuity product due to the sale of HLIKK. For further information, see Note 6 - Investments and Derivative Instruments of Notes to the Condensed Consolidated Financial Statements included in The Hartford's Form 10-Q for the period ended June 30, 2014.
For the three and nine months ended September 30, 2014 the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:
•
The net losses related to interest derivatives, primarily used to manage duration, were due to a decline in U.S. interest rates.
•
The net losses related to the Japan fixed annuity payout hedge was driven by a depreciation of the Japanese yen in relation to the U.S. dollar.
•
For the nine months ended September 30, 2014, the loss associated with modified coinsurance reinsurance contracts, which are accounted for as embedded derivatives and transfer to the reinsurer the investment experience related to the assets supporting the reinsured policies, was primarily driven by a decline in long-term interest rates during the period. The assets remain on the Company's books and the Company recorded an offsetting gain in AOCI as a result of the increase in market value of the bonds.
•
The net gains related to the combined GMWB hedging program, which includes the GMWB product, reinsurance, and hedging derivatives, were primarily driven by liability/model assumption updates and increased volatility, partially offset by losses resulting from policyholder behavior primarily related to increased surrenders.
In addition, for the three and nine months ended September 30, 2014, the Company recognized gains of $0 and $11, respectively, due to cash recovered on derivative receivables that were previously written-off related to the bankruptcy of Lehman Brothers Inc. The derivative receivables were the result of the contractual collateral threshold amounts and open collateral calls prior to the bankruptcy filing as well as interest rate and credit spread movements from the date of the last collateral call to the date of the bankruptcy filing.
For the three and nine months ended September 30, 2013 the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:
•
For the nine months ended September 30, 2013 the net loss related to the Japan fixed payout annuity hedge was primarily due to a depreciation of the Japanese yen in relation to the U.S. dollar.
•
For the three and nine months ended September 30, 2013 the net gain related to the combined GMWB hedging program, which includes the GMWB product, reinsurance, and hedging derivatives, was primarily a result of favorable policyholder behavior, liability model changes and the passage of time.
•
For the three and nine months ended September 30, 2013 the net loss on the macro hedge program was primarily due to an improvement in domestic equity markets, passage of time, and an increase in long term interest rates.
For additional disclosures regarding contingent credit related features in derivative agreements, see Note 14 - Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements.
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk of a single entity or referenced index 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 standard and customized diversified portfolios of corporate issuers. The diversified portfolios of corporate issuers are established within sector concentration limits and may be divided into tranches that possess different credit ratings.
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 September 30, 2014 and December 31, 2013.

53
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

As of September 30, 2014
 
 
 
 
Underlying Referenced Credit
Obligation(s) [1]
 
 
Credit Derivative type by derivative risk exposure
Notional
Amount
[2]
Fair
Value
Weighted
Average
Years to
Maturity
Type
Average
Credit
Rating
Offsetting
Notional
Amount [3]
Offsetting
Fair
Value [3]
Single name credit default swaps
 
 
 
 
 
 
 
Investment grade risk exposure
$
375

$
6

3 years
Corporate Credit/
Foreign Gov.
BBB+
$
271

$
(6
)
Below investment grade risk exposure
32

—

3 years
Corporate Credit
BB
4

—

Basket credit default swaps [4]
 
 
 
 
 
 
 
Investment grade risk exposure
2,563

35

3 years
Corporate Credit
BBB
2,003

(27
)
Below investment grade risk exposure
42

3

5 years
Corporate Credit
BB-
—

—

Investment grade risk exposure
716

(14
)
6 years
CMBS Credit
AA+
270

4

Below investment grade risk exposure
154

(22
)
2 years
CMBS Credit
CCC+
154

22

Embedded credit derivatives
 
 
 
 
 
 
 
Investment grade risk exposure
350

341

3 years
Corporate Credit
A
—

—

Total [5]
$
4,232

$
349

 
 
 
$
2,702

$
(7
)
As of December 31, 2013
 
 
 
 
Underlying Referenced
Credit Obligation(s) [1]
 
 
Credit Derivative type by derivative risk exposure
Notional
Amount [2]
Fair
Value
Weighted
Average
Years to
Maturity
Type
Average
Credit
Rating
Offsetting
Notional
Amount [3]
Offsetting
Fair
Value [3]
Single name credit default swaps
 
 
 
 
 
 
 
Investment grade risk exposure
$
1,259

$
8

1 year
Corporate Credit/
Foreign Gov.
A-
$
1,066

$
(9
)
Below investment grade risk exposure
24

—

1 year
Corporate Credit
CCC
24

(1
)
Basket credit default swaps [4]
 
 
 
 
 
 
 
Investment grade risk exposure
3,447

50

3 years
Corporate Credit
BBB
2,270

(35
)
Below investment grade risk exposure
166

15

5 years
Corporate Credit
BB-
—

—

Investment grade risk exposure
327

(7
)
3 years
CMBS Credit
A
327

7

Below investment grade risk exposure
195

(31
)
3 years
CMBS Credit
B-
195

31

Embedded credit derivatives
 
 
 
 
 
 
 
Investment grade risk exposure
350

339

3 years
Corporate Credit
BBB+
—

—

Total [5]
$
5,768

$
374

 
 
 
$
3,882

$
(7
)
[1]
The average credit ratings are based on availability and the midpoint of the applicable ratings among Moody’s, S&P, Fitch and Morningstar. 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. These derivatives are governed by agreements, clearing house rules and applicable law which include collateral posting requirements. There is no additional 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 $3.5 billion and $4.1 billion as of September 30, 2014 and December 31, 2013, respectively, of standard market indices of diversified portfolios of corporate and CMBS issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index.
[5]
Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 5 - Fair Value Measurements.


54
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)

Derivative Collateral Arrangements
The Company enters into various collateral arrangements in connection with its derivative instruments, which require both the pledging and accepting of collateral. As of September 30, 2014 and December 31, 2013, the Company pledged cash collateral associated with derivative instruments with a fair value of $125 and $347 as of September 30, 2014 and December 31, 2013, respectively, for which the collateral receivable has been primarily included within other assets on the Company's Condensed Consolidated Balance Sheets. The Company also pledged securities collateral associated with derivative instruments with a fair value of $1.0 billion and $1.3 billion, respectively, which have been included in fixed maturities on the Consolidated Balance Sheets. The counterparties have the right to sell or re-pledge these securities.
As of September 30, 2014 and December 31, 2013, the Company accepted cash collateral associated with derivative instruments of $189 and $180, respectively, which was invested and recorded in the Consolidated Balance Sheets in fixed maturities and short-term investments with corresponding amounts recorded in other liabilities. The Company also accepted securities collateral as of September 30, 2014 and December 31, 2013 with a fair value of $98 and $243, respectively, of which the Company has the ability to sell or repledge $83 and $191, respectively. As of September 30, 2014 and December 31, 2013 the fair value of repledged securities totaled $0 and $39, respectively, and the Company did not sell any securities. In addition, as of September 30, 2014 and December 31, 2013 non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Consolidated Balance Sheets.
7. Reinsurance
The Company cedes insurance to affiliated and unaffiliated insurers to enable the Company to manage capital and risk exposure. Such arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company's procedures include careful initial selection of its reinsurers, structuring agreements to provide collateral funds where necessary, and regularly monitoring the financial condition and ratings of its reinsurers. The Company entered into two reinsurance transactions in connection with the sales of its Retirement Plans and Individual Life businesses in January 2013. For further discussion of these transactions, see Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements.
Reinsurance Recoverables
Reinsurance recoverables include balances due from reinsurance companies and are presented net of an allowance for uncollectible reinsurance. Reinsurance recoverables include an estimate of the amount of gross losses and loss adjustment expense reserves that may be ceded under the terms of the reinsurance agreements, including incurred but not reported unpaid losses. The Company’s estimate of losses and loss adjustment expense reserves ceded to reinsurers is based on assumptions that are consistent with those used in establishing the gross reserves for business ceded to the reinsurance contracts. The Company calculates its ceded reinsurance projection based on the terms of any applicable facultative and treaty reinsurance, including an estimate of how incurred but not reported losses will ultimately be ceded by reinsurance agreements. Accordingly, the Company’s estimate of reinsurance recoverables is subject to similar risks and uncertainties as the estimate of the gross reserve for unpaid losses and loss adjustment expenses.
The Company's reinsurance recoverables are summarized as follows:
 
September 30,
December 31,
 
2014
2013
Property and Casualty Insurance Products:
 
 
Paid loss and loss adjustment expenses
$
123

$
138

Unpaid loss and loss adjustment expenses
2,915

2,841

Gross reinsurance recoverable
3,038

2,979

Allowance for uncollectible reinsurance
(247
)
(244
)
Net reinsurance recoverables
$
2,791

$
2,735

Life Insurance Products:
 
 
Future policy benefits and unpaid loss and loss adjustment expenses and other policyholder funds and benefits payable
 
 
Sold businesses (MassMutual and Prudential)
$
18,822

$
19,374

Other reinsurers
1,201

1,221

Net reinsurance recoverables
$
20,023

$
20,595

Reinsurance recoverables, net
$
22,814

$
23,330

As of September 30, 2014, the Company has reinsurance recoverables from MassMutual and Prudential of $8.6 billion and $10.2 billion, respectively. These reinsurance recoverables are secured by invested assets held in trust for the benefit of the Company in the event of a default by the reinsurers. As of September 30, 2014, the fair value of assets held in trust securing the reinsurance recoverables from MassMutual and Prudential were $9.5 billion and $8.7 billion, respectively. As of September 30, 2014, the Company has no reinsurance-related concentrations of credit risk greater than 10% of the Company’s consolidated stockholders’ equity.

55
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Reinsurance (continued)

The allowance for uncollectible reinsurance reflects management’s best estimate of reinsurance cessions that may be uncollectible in the future due to reinsurers’ unwillingness or inability to pay. The Company analyzes recent developments in commutation activity between reinsurers and cedants, recent trends in arbitration and litigation outcomes in disputes between reinsurers and cedants and the overall credit quality of the Company’s reinsurers. Based on this analysis, the Company may adjust the allowance for uncollectible reinsurance or charge off reinsurer balances that are determined to be uncollectible. Where its contracts permit, the Company secures future claim obligations with various forms of collateral, including irrevocable letters of credit, secured trusts, funds held accounts and group-wide offsets.
Due to the inherent uncertainties as to collection and the length of time before reinsurance recoverables become due, it is possible that future adjustments to the Company’s reinsurance recoverables, net of the allowance, could be required, which could have a material adverse effect on the Company’s consolidated results of operations or cash flows in a particular quarter or annual period.
Insurance Revenues
The effect of reinsurance on property and casualty premiums written and earned is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Premiums Written
2014
2013
 
2014
2013
Direct
$
2,655

$
2,790

 
$
8,032

$
8,120

Assumed
75

96

 
206

207

Ceded
(127
)
(330
)
 
(464
)
(747
)
Net
$
2,603

$
2,556

 
$
7,774

$
7,580

Premiums Earned
 
 
 
 

 

Direct
$
2,625

$
2,651

 
$
7,862

$
7,829

Assumed
65

87

 
194

196

Ceded
(148
)
(250
)
 
(540
)
(659
)
Net
$
2,542

$
2,488

 
$
7,516

$
7,366

The reduction in ceded premium for the three and nine months ended September 30, 2014 was driven by the Company's decision to exit unprofitable programs, including captive programs where the Company ceded direct premiums to insured captive insurance companies. Ceded losses, which reduce losses and loss adjustment expenses incurred, were $73 and $409 for the three and nine months ended September 30, 2014, respectively, and $143 and $375 for three and nine months ended September 30, 2013, respectively.
The effect of reinsurance on life insurance earned premiums and fee income is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
Gross earned premiums and fee income
$
1,509

$
1,600

 
$
4,544

$
4,732

Reinsurance assumed
51

49

 
149

147

Reinsurance ceded
(428
)
(431
)
 
(1,280
)
(1,299
)
Net
$
1,132

$
1,218

 
$
3,413

$
3,580

The Company reinsures certain of its risks to other reinsurers under yearly renewable term, coinsurance, and modified coinsurance arrangements, and variations thereto. Yearly renewable term and coinsurance arrangements result in passing all or a portion of the risk to the reinsurer. Generally, the reinsurer receives a proportionate amount of the premiums less an allowance for commissions and expenses and is liable for a corresponding proportionate amount of all benefit payments. Modified coinsurance is similar to coinsurance except that the cash and investments that support the liabilities for contract benefits are not transferred to the assuming company, and settlements are made on a net basis between the companies. Coinsurance with funds withheld is a form of coinsurance except that the investment assets that support the liabilities are withheld by the ceding company.
The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. Insurance recoveries on ceded reinsurance agreements, which reduce death and other benefits, were $197 and $624 for the three and nine months ended September 30, 2014, respectively and $214 and $680 for the three and nine months ended September 30, 2013, respectively.
In addition, the Company has reinsured a portion of the risk associated with variable annuities and the associated GMDB and GMWB riders.

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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Deferred Policy Acquisition Costs and Present Value of Future Profits



Changes in the DAC balance are as follows: 
 
Nine Months Ended September 30,
 
2014
2013
Balance, beginning of period
$
2,161

$
5,725

Deferred costs
1,032

1,003

Amortization — DAC
(1,200
)
(1,230
)
Amortization — Unlock charge, pre-tax [1]
(148
)
(1,091
)
Amortization — DAC related to business dispositions [2] [3]
—

(2,229
)
Adjustments to unrealized gains and losses on securities AFS and other
23

157

Effect of currency translation
—

(86
)
Balance, end of period
$
1,868

$
2,249

[1]
Includes Unlock charge of $887 related to elimination of future estimated gross profits on the Japan variable annuity block in the first quarter of 2013. As a result of the Japan annuity business sale completed in June 2014, this Unlock charge has been reclassified to discontinued operations. For further information regarding this transaction, see Note 2 -Business Dispositions of Notes to Condensed Consolidated Financial Statements.
[2]
Includes accelerated amortization of $352 and $2,374 recognized upon the sale of the Retirement Plans and Individual Life businesses, respectively, in 2013. For further information, see Note 2 -Business Dispositions of Notes to Condensed Consolidated Financial Statements.
[3]
Includes previously unrealized gains on securities AFS of $148 and $349 recognized upon the sale of the Retirement Plans and Individual Life businesses, respectively, in 2013.

9. Sales Inducements
Changes in sales inducement activity are as follows:
 
Nine Months Ended September 30,
 
2014
2013
Balance, beginning of period
$
149

$
325

Sales inducements deferred
—

3

Amortization — Unlock charge [1] [2]
(35
)
(71
)
Amortization charged to income
(21
)
(22
)
Amortization related to business dispositions [3]
—

(71
)
Balance end of period
$
93

$
164

[1]
In 2014 the unlock charge is due to assumption changes in connection with the annual policyholder behavior assumption study.
[2]
In 2013 the unlock charge includes $52 related to elimination of future estimated gross profits on the Japan variable annuity block. As a result of the Japan annuity business sale completed in June 2014, this Unlock charge has been reclassified to discontinued operations. For further information regarding this transaction, see Note 2 -Business Dispositions of Notes to Condensed Consolidated Financial Statements.
[3]
Represents accelerated amortization of $22 and $49 recognized upon the sale of the Retirement Plans and Individual Life businesses, respectively. For further information, see Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements.


57
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Separate Accounts, Death Benefits and Other Insurance Benefit Features

U.S. GMDB/GMWB, International GMDB/GMIB, and UL Secondary Guarantee Benefits
Changes in the gross U.S. GMDB/GMWB, International GMDB/GMIB, and UL secondary guarantee benefits are as follows:
 
U.S.
GMDB/GMWB
International
GMDB/GMIB
UL Secondary
Guarantees
Liability balance as of January 1, 2014
$
849

$
272

$
1,802

Incurred
136

28

174

Paid
(85
)
(15
)
—

Unlock
(90
)
(41
)
5

Impact of Japan business disposition
—

(254
)
—

Currency translation adjustment
—

10

—

Liability balance as of September 30, 2014
$
810

$
—

$
1,981

Reinsurance recoverable asset, as of January 1, 2014
$
533

$
23

$
1,802

Incurred
78

4

179

Paid
(66
)
(4
)
—

Unlock
(62
)
3

—

Impact of Japan business disposition
—

(27
)
—

Currency translation adjustment
—

1

—

Reinsurance recoverable asset, as of September 30, 2014
$
483

$
—

$
1,981

 
 
U.S.
GMDB/GMWB
International
GMDB/GMIB
UL Secondary
Guarantees
Liability balance as of January 1, 2013
$
918

$
661

$
363

Incurred
138

70

238

Paid
(105
)
(58
)
—

Unlock
(112
)
(221
)
—

Impact of reinsurance transactions (MassMutual and Prudential)
—

—

1,145

Currency translation adjustment
—

(77
)
—

Liability balance as of September 30, 2013
$
839

$
375

$
1,746

Reinsurance recoverable asset, as of January 1, 2013
$
608

$
36

$
21

Incurred
79

7

240

Paid
(76
)
(12
)
—

Unlock
(73
)
7

—

Impact of reinsurance transactions (MassMutual and Prudential)
—

—

1,485

Currency translation adjustment
—

(4
)
—

Reinsurance recoverable asset, as of September 30, 2013
$
538

$
34

$
1,746


58
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Separate Accounts, Death Benefits and Other Insurance Benefit Features (continued)



The following table provides details concerning GMDB exposure as of September 30, 2014:
Account Value by GMDB Type
Maximum anniversary value (“MAV”) [1]
Account
Value
(“AV”) [8]
Net Amount
at Risk
(“NAR”) [9]
Retained Net
Amount at Risk
(“RNAR”) [9]
Weighted Average
Attained Age of
Annuitant
MAV only
$
17,749

$
2,684

$
419

70
With 5% rollup [2]
1,481

220

63

70
With Earnings Protection Benefit Rider (“EPB”) [3]
4,444

584

83

68
With 5% rollup & EPB
552

115

25

71
Total MAV
24,226

3,603

590

 
Asset Protection Benefit (“APB”) [4]
15,890

263

175

68
Lifetime Income Benefit (“LIB”) — Death Benefit [5]
646

7

7

67
Reset [6] (5-7 years)
3,054

38

37

69
Return of Premium (“ROP”) [7]/Other
10,533

61

53

68
Subtotal Variable Annuity with GMDB
54,349

3,972

862

69
Less: General Account Value with GMDB
4,083

 
 
 
Subtotal Separate Account Liabilities with GMDB
50,266

 
 
 
Separate Account Liabilities without GMDB
86,053

 
 
 
Total Separate Account Liabilities
$
136,319

 
 
 
[1]
MAV GMDB is the greatest of current AV, net premiums paid and the highest AV on any anniversary before age 80 years (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 years 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 years (adjusted for withdrawals).
[7]
ROP GMDB is the greater of current AV or net premiums paid.
[8]
AV includes the contract holder’s investment in the separate account and the general account.
[9]
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.
In the U.S., account balances of contracts with guarantees were invested in variable separate accounts as follows:
Asset type
As of September 30, 2014
As of December 31, 2013
Equity securities (including mutual funds)
$
45,981

$
52,858

Cash and cash equivalents
4,285

4,605

Total
$
50,266

$
57,463

As of September 30, 2014 and December 31, 2013, approximately 18% and 17%, respectively, of the equity securities above were invested in fixed income securities through these mutual funds and approximately 82% and 83% , respectively, were invested in equity securities through these funds.
For further information on guaranteed living benefits that are accounted for at fair value, such as GMWB, see Note 5 - Fair Value Measurements of Notes to Condensed Consolidated Financial Statements.

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Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Debt

The Company’s long-term debt securities are issued by either HFSG Holding Company or HLI, and are unsecured obligations of HFSG Holding Company or HLI, and rank on a parity with all other unsecured and unsubordinated indebtedness of HFSG Holding Company or HLI.
Debt is carried net of discount. Short-term and long-term debt by issuance are as follows:
 
September 30, 2014
 
December 31, 2013
Revolving Credit Facility
$
—

 
$
238

Senior Notes and Debentures
 
 
 
4.75% Notes, due 2014
—

 
200

4.0% Notes, due 2015
289

 
289

7.3% Notes, due 2015
167

 
167

5.5% Notes, due 2016
275

 
275

5.375% Notes, due 2017
415

 
415

4.0% Notes, due 2017
295

 
295

6.3% Notes, due 2018
320

 
320

6.0% Notes, due 2019
413

 
413

5.5% Notes, due 2020
499

 
499

5.125% Notes, due 2022
796

 
796

7.65% Notes, due 2027
80

 
79

7.375% Notes, due 2031
63

 
63

5.95% Notes, due 2036
298

 
298

6.625% Notes, due 2040
295

 
295

6.1% Notes, due 2041
327

 
326

6.625% Notes, due 2042
178

 
178

4.3% Notes, due 2043
298

 
298

Junior Subordinated Debentures
 
 
 
7.875% Notes, due 2042
600

 
600

8.125% Notes, due 2068
500

 
500

Total Notes and Debentures
$
6,108

 
$
6,306

Less: Current maturities
289

 
200

Long-term Debt
$
5,819

 
$
6,106

Total Debt
$
6,108

 
$
6,544

Revolving Credit Facilities
As of September 30, 2014, the Company had a senior unsecured revolving credit facility (the “Credit Facility”) that provided for borrowing capacity up to $1.75 billion (available in U.S. dollars, Euro, Sterling, Canadian dollars and Japanese Yen) through January 6, 2016. Of the total availability under the Credit Facility, up to $250 is available to support letters of credit issued on behalf of the Company or subsidiaries of the Company. Under the Credit Facility, the Company had to maintain a minimum level of consolidated net worth of $14.9 billion. The definition of consolidated net worth under the terms of the Credit Facility, excludes AOCI and includes the Company’s outstanding junior subordinated debentures and perpetual preferred securities, net of discount. In addition, the Company’s maximum ratio of consolidated total debt to consolidated total capitalization was 35%, and the ratio of consolidated total debt of subsidiaries to consolidated total capitalization was limited to 10%. As of September 30, 2014, the Company was in compliance with all financial covenants under the Credit Facility.
HLIKK previously had four revolving credit facilities in support of operations. These credit facilities were transfered with the sale of HLIKK on June 30, 2014.

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Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Income Taxes


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 September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
Tax provision at U.S. Federal statutory rate
$
173

$
156

 
$
439

$
346

Tax-exempt interest
(35
)
(34
)
 
(104
)
(103
)
Dividends received deduction
(32
)
(36
)
 
(85
)
(101
)
Valuation allowance
1

—

 
4

—

Other [1]
1

(5
)
 
(3
)
6

Income tax expense
$
108

$
81

 
$
251

$
148

[1]
Includes a permanent difference of $25 related to non-deductible goodwill for the nine months ended September 30, 2013.
The separate account dividends-received deduction (“DRD”) is estimated for the current year using information from the most recent return, 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 in 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.
On July 18, 2014, the United States (“U.S.”) Internal Revenue Service issued Internal Revenue Code Section 446 Directive (“the Directive”) regarding the tax treatment of hedging gains and losses related to the hedging of variable annuity guaranteed minimum benefits such as contracts with GMDB and GMWB riders. The Directive accelerated the tax deduction related to previously deferred investment hedging losses. While the acceleration did not have a material effect on the Company’s overall consolidated deferred tax asset, the Directive resulted in a re-characterization of deferred tax assets. The changes were a decrease in temporary differences for investment-related items and an increase in net operating loss carryovers.
As of September 30, 2014 and December 31, 2013, the net deferred tax asset included the expected tax benefit attributable to net operating loss carryovers of $6,080 and $3,123, respectively, consisting of U.S. losses of $6,062 and $3,123, respectively, and foreign losses of $18 and $0. If unutilized, the U.S. losses expire as follows: $11 from 2014-2020, and $6,069 from 2023-2033.
As of September 30, 2014 and December 31, 2013, the net deferred tax asset included the expected tax benefit attributable to foreign tax credit carryovers of $178 and $163 respectively. If unutilized, the foreign tax credit carryovers expire from 2018-2024. Utilization of the foreign tax credit carryovers generally depends on the generation of sufficient taxable income to first utilize all U.S. net operating loss carryovers.
As of September 30, 2014 and December 31, 2013, the net deferred tax asset, before considering any valuation allowance, included the expected tax benefit attributable to capital loss carryovers of $486 and $0 respectively. If unutilized, the capital loss carryovers will expire in 2019. Utilization of the capital loss carryover requires The Company to realize sufficient taxable capital gains.
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 be more likely than not realized. The deferred tax asset valuation allowance was $208 as of September 30, 2014, attributable predominantly to a $200 valuation allowance recorded in discontinued operations in the second quarter of 2014, with respect to the taxable capital loss on the sale of HLIKK. The deferred tax asset valuation allowance was $4 as of December 31, 2013, attributable to certain U.S. net operating losses.
In assessing the need for a valuation allowance, management considered future taxable temporary difference reversals, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in open carry back years, as well as other tax planning strategies. These tax planning strategies include: holding a portion of debt securities with market value losses until recovery; reducing the amount of tax exempt securities; selling appreciated securities to offset capital losses; business considerations such as asset-liability matching; and the sales of certain corporate assets. Management views such tax planning strategies as prudent and feasible, and would implement them, if necessary, to realize the deferred tax asset. Future economic conditions and debt market volatility, including increases in interest rates, could 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.

61
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Income Taxes (continued)


The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions as applicable. The Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years prior to 2007. The 2007-2009 audit, which commenced during 2010, and the 2010-2011 audit, which commenced in the fourth quarter of 2012, are both expected to conclude by the end of 2015, with no material impact on the Company's Consolidated financial condition or results of operations. In addition, the 2012-2013 audit commenced during the third quarter of 2014. Management believes that adequate provision has been made in the Company's Consolidated financial statements for any potential assessments that may result from tax examinations or other tax-related matters for all open tax years.
13. Equity
Equity Repurchases
In July 2014, the Board of Directors approved a $775 increase in the Company's authorized equity repurchase program that provides the Company with the ability to repurchase $2.775 billion in equity during the period commencing on January 1, 2014 and ending on December 31, 2015.
On July 30, 2014, the Company entered into an accelerated share repurchase agreement (“ASR”) with an investment bank to facilitate share repurchases under the Company's equity repurchase program in a timely and economical manner. Under the ASR agreement, the investment bank provided an initial delivery of shares upon execution of the agreement. The ASR agreement includes a forward component for future delivery of additional shares (or a return of a portion of the initially delivered shares) depending on changes in the volume weighted average price ("VWAP") of the Company's stock, less a discount and subject to certain adjustments.
Under this agreement, the Company paid $525 and received an initial delivery of 11.2 million shares of its common stock under the ASR. Of the $525 paid on July 31, 2014, $394 was recorded as treasury stock for the 11.2 million shares delivered and $131 was recorded as additional paid in capital representing the amount paid for additional shares not yet delivered as of September 30, 2014. Any additional shares to be received under the ASR will be reflected in treasury stock in the period they are delivered to the Company. Had the contract settled on September 30, 2014, the Company would have received an additional 3.5 million shares for a total of 14.7 million shares. The additional 3.5 million shares are included in the weighted average common shares outstanding as of September 30, 2014 for the calculation of basic and diluted earnings per share as the effect of excluding these shares would be anti-dilutive. Final maturity of the ASR will occur no later than the end of 2014, and may occur earlier at the financial institution's discretion.
Under the terms of the ASR, the actual per share purchase price and the total number of shares to be repurchased will be based on the VWAP of the Company’s common stock during the term of the ASR, less a discount and subject to certain adjustments. If the total number of shares to be repurchased is less than the initial delivery, the Company may elect to return cash or shares (limited to an established maximum number of shares); and if the total number of shares to be repurchased is greater than the initial delivery, the Company will receive shares in settlement. Increases in the VWAP decrease the total number of shares repurchased and decreases in the VWAP increase the total number of shares repurchased.
During the three months ended September 30, 2014, the Company repurchased 20.1 million common shares for $714 and during the nine months ended September 30, 2014, the Company repurchased 39.1 million common shares for $1,365. These amounts exclude the 3.5 million additional shares the Company would have received under the ASR based on the VWAP through September 30, 2014. Including amounts paid under the ASR for the additional shares, the Company paid a total of $845 in the three month period and $1,496 in the nine month period for share repurchases. In addition, the Company repurchased 2.3 million common shares for $82, from October 1, 2014 to October 22, 2014.
Warrants
At September 30, 2014 the Company had 8.4 million warrants outstanding. The declaration of a quarterly common stock dividend of $0.18 during the third quarter of 2014 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. The warrant exercise price at September 30, 2014 was $9.418.

62
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. 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, and in addition to the matters described below, 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, disability, life and inland marine. 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 or other allegedly unfair or improper business practices. 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, the outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
Apart from the inherent difficulty of predicting litigation outcomes, the Mutual Funds Litigation identified below purports to seek substantial damages for unsubstantiated conduct spanning a multi-year period based on novel applications of complex legal theories. The alleged damages 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. The matter is in the earliest stages of litigation, with no substantive legal decisions by the court defining the scope of the claims or the potentially available damages; fact discovery is also in its early stages. Accordingly, management cannot reasonably estimate the possible loss or range of loss, if any, or predict the timing of the eventual resolution of this matter.
Mutual Funds Litigation — In February 2011, a derivative action was brought on behalf of six Hartford retail mutual funds in the United States District Court for the District of New Jersey, alleging that Hartford Investment Financial Services, LLC (“HIFSCO”), an indirect subsidiary of the Company, received excessive advisory and distribution fees in violation of its statutory fiduciary duty under Section 36(b) of the Investment Company Act of 1940. HIFSCO moved to dismiss and, in September 2011, the motion was granted in part and denied in part, with leave to amend the complaint. In November 2011, plaintiffs filed an amended complaint on behalf of The Hartford Global Health Fund, The Hartford Conservative Allocation Fund, The Hartford Growth Opportunities Fund, The Hartford Inflation Plus Fund, The Hartford Advisors Fund, and The Hartford Capital Appreciation Fund. Plaintiffs seek to rescind the investment management agreements and distribution plans between HIFSCO and these funds and to recover the total fees charged thereunder or, in the alternative, to recover any improper compensation HIFSCO received, in addition to lost earnings. HIFSCO filed a partial motion to dismiss the amended complaint and, in December 2012, the court dismissed without prejudice the claims regarding distribution fees and denied the motion with respect to the advisory fees claims. In March 2014, the plaintiffs filed a new complaint that, among other things, added as new plaintiffs The Hartford Floating Rate Fund and The Hartford Small Company Fund and named as a defendant Hartford Funds Management Company, LLC (“HFMC”), an indirect subsidiary of the Company which assumed the role as advisor to the funds as of January 2013. HFMC and HIFSCO dispute the allegations and intend to defend vigorously.
Asbestos and Environmental Claims – As discussed in Note 12, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements under the caption “Asbestos and Environmental Claims”, included in the Company’s 2013 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 and liquidity.

63
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Commitments and Contingencies (continued)

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 September 30, 2014 is $1.0 billion. Of this $1.0 billion the legal entities have posted collateral of $1.1 billion in the normal course of business. In addition, the Company has posted collateral of $42 associated with a customized GMWB derivative. Based on derivative market values as of September 30, 2014 a downgrade of one level below the current financial strength ratings by either Moody’s or S&P could require approximately an additional $6 to be posted as collateral. Based on derivative market values as of September 30, 2014 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 $26 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 would post, if required, would be primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities.
15. Employee Benefit Plans
Components of Net Periodic Benefit Cost
Net periodic benefit cost includes the following components:
 
Pension Benefits
 
Other Postretirement Benefits
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2014
2013
 
2014
2013
Service cost
$
1

$
1

 
$
—

$
—

Interest cost
67

59

 
5

3

Expected return on plan assets
(81
)
(80
)
 
(2
)
(4
)
Amortization of prior service credit
—

—

 
(2
)
(2
)
Amortization of actuarial loss
13

15

 
1

1

Net periodic benefit cost
$
—

$
(5
)
 
$
2

$
(2
)

 
Pension Benefits
 
Other Postretirement Benefits
 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
2014
2013
 
2014
2013
Service cost
$
2

$
1

 
$
—

$
—

Interest cost
194

178

 
11

8

Expected return on plan assets
(244
)
(237
)
 
(10
)
(11
)
Amortization of prior service credit
—

—

 
(5
)
(5
)
Amortization of actuarial loss
35

44

 
3

2

Net periodic benefit cost
$
(13
)
$
(14
)
 
$
(1
)
$
(6
)



64
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

16. Stock Compensation Plans
The Company’s stock-based compensation plans are described in Note 19 - Stock Compensation Plans of Notes to Consolidated Financial Statements included in The Hartford’s 2013 Annual Report on Form 10-K.
On May 21, 2014, at the Company’s Annual Meeting of Shareholders, the shareholders approved The Hartford 2014 Incentive Stock Plan (the “2014 Incentive Stock Plan”) which supersedes and replaces The Hartford 2010 Incentive Stock Plan (the “2010 Incentive Stock Plan”). The terms of the 2014 Incentive Stock Plan are substantially similar to the terms of the 2010 Incentive Stock Plan, with changes primarily to ensure alignment with market practices and simplify administration. Changes include, but are not limited to: (1) immediate payout of vested restricted stock units, where applicable, upon termination of employment (e.g., upon retirement or disability), whereas payment under the 2010 Incentive Stock Plan is delayed until the end of the restriction period; and (2) consistent with the October 2013 change to the 2010 Incentive Stock Plan, the 2014 Incentive Stock Plan includes “double trigger” vesting upon a Change of Control if, following a Change of Control, the awards are assumed or replaced with substantially equivalent awards. The maximum number of shares, subject to adjustments set forth in the applicable plan, that may be issued to Company employees and third party service providers during the 10-year duration of the 2014 Incentive Stock Plan, at 12,000,000 shares, is lower than the 18,000,000 shares that could be issued under the 2010 Incentive Stock Plan.
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. In 2013 and 2014, the Company issued shares from treasury in satisfaction of stock-based compensation.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
Stock-based compensation plans expense
$
21

$
19

 
$
74

$
51

Income tax benefit
(7
)
(7
)
 
(26
)
(18
)
Total stock-based compensation plans expense, after-tax
$
14

$
12

 
$
48

$
33

In 2014 the Company modified an executive’s awards to receive retirement treatment under the Company’s 2010 Incentive Stock Plan. The incremental compensation cost resulting from the modifications totaled $16 of which $2 and $13 was recognized in the three and nine months ended September 30, 2014. The remainder will be recognized over the remaining service period.
The Company did not capitalize any cost of stock-based compensation. As of September 30, 2014, the total compensation cost related to non-vested awards not yet recognized was $106, which is expected to be recognized over a weighted average period of 2.0 years. 

65
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Discontinued Operations



On June 30, 2014, the Company completed the sale of HLIKK and on December 12, 2013, the Company completed the sale of HLIL. For further information regarding these transactions, see Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements. There was no discontinued operations activity for the three months ended September 30, 2014.
The following table summarizes the amounts related to discontinued operations in the Condensed Consolidated Statements of Operations.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2014
2013
Revenues
 
 
 
 
Earned premiums
$
1

 
$
(1
)
$
1

Fee income
170

 
239

553

Net investment income:
 
 
 
 
  Securities available-for-sale and other
24

 
18

80

  Equity securities, trading
878

 
134

4,766

     Total net investment income
902

 
152

4,846

Net realized capital losses
(304
)
 
(157
)
(1,053
)
Total revenues
769

 
233

4,347

Benefits, losses and expenses
 
 
 
 
Benefits losses and loss adjustment expenses
(25
)
 
7

(55
)
Benefits, losses and loss adjustment expenses - returns credited on international variable annuities
878

 
134

4,766

Amortization of DAC
—

 
—

907

Insurance operating costs and other expenses
27

 
23

89

Total benefits, losses and expenses
880

 
164

5,707

Income (loss) before income taxes
(111
)
 
69

(1,360
)
Income tax benefit
(39
)
 
(2
)
(483
)
Income (loss) from operations of discontinued operations, net of tax
(72
)
 
71

(877
)
Net realized loss on disposal, net of tax [1]
—

 
(659
)
(102
)
Loss from discontinued operations, net of tax
$
(72
)
 
$
(588
)
$
(979
)
[1] Includes income tax benefits of $241 on the sale of HLIKK and $219 on the sale of HLIL for the nine months ended September 30, 2014 and 2013, respectively.




 

66
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Restructuring and Other Costs

As a result of a strategic business realignment announced in 2012, the Company is currently focusing on its Property & Casualty, Group Benefits and Mutual Fund businesses. In addition, the Company implemented restructuring activities in 2011 across several areas aimed at reducing overall expense levels. The Company intends to substantially complete the related restructuring activities over the next 9 months. For related discussion of the Company's business disposition transactions, see Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements.
Termination benefits related to workforce reductions and lease and other contract terminations have been accrued through September 30, 2014. Additional costs, mainly severance benefits and other related costs and professional fees, expected to be incurred subsequent to September 30, 2014, and asset impairment and related charges, will be expensed as appropriate.
In 2013, the Company initiated a plan to consolidate its real estate operations, including the intention to exit certain facilities and relocate employees. The consolidation of real estate is consistent with the Company's strategic business realignment and follows the completion of sales of the Retirement Plans and Individual Life businesses. Asset related charges will be incurred over the remaining estimated useful life of facilities, and relocation and other maintenance charges will be recognized as incurred. The program costs will be recognized in the Corporate category for segment reporting. The Company intends to substantially complete the real estate consolidation activities over the next 15 months.
Restructuring costs and other costs of approximately $343, pre-tax have been incurred by the Company to date in connection with these activities. As the Company executes on its operational and strategic initiatives, the Company's estimate of and actual costs incurred for restructuring activities may differ from these estimates.
Estimated restructuring and other costs, including costs incurred to date, as of September 30, 2014 are as follows:
Property & Casualty Commercial
$
7

Consumer Markets
3

Group Benefits
1

Mutual Funds
4

Talcott Resolution
70

Corporate
298

Total restructuring and other costs, before tax
$
383

Restructuring and other costs, before tax, incurred in connection with these activities are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
Severance benefits and related costs
$
2

$
2

 
$
8

$
22

Professional fees
—

3

 
1

13

Asset impairment charges
9

10

 
30

17

Other contract termination charges
11

—

 
11

—

Total restructuring and other costs
$
22

$
15

 
$
50

$
52


67
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Restructuring and Other Costs (continued)

Restructuring and other costs, included in insurance operating costs and other expenses in the Condensed Consolidated Statements of Operations for each reporting segment, as well as the Corporate category are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
Property & Casualty Commercial
$
—

$
1

 
$
—

$
1

Consumer Markets
—

—

 
—

—

Group Benefits
—

—

 
—

—

Mutual Funds
$
—

$
(1
)
 
$
—

$
1

Talcott Resolution
—

1

 
—

1

Corporate
22

14

 
50

49

Total restructuring and other costs
$
22

$
15

 
$
50

$
52

Changes in the accrued restructuring liability balance included in other liabilities in the Condensed Consolidated Balance Sheets are as follows:

Nine Months Ended September 30, 2014
 
Severance Benefits and Related Costs
Professional Fees
Asset impairment charges
Other Contract Termination Charges
Total Restructuring and Other Costs
Balance, beginning of period
$
22

$
—

$
—

$
6

$
28

Accruals/provisions
8

1

30

11

50

Payments/write-offs
(24
)
(1
)
(30
)
(10
)
(65
)
Balance, end of period
$
6

$
—

$
—

$
7

$
13

 
Nine Months Ended September 30, 2013
 
Severance Benefits and Related Costs
Professional Fees
Asset impairment charges
Other Contract Termination Charges
Total Restructuring and Other Costs
Balance, beginning of period
$
70

$
—

$
—

$
—

$
70

Accruals/provisions
22

13

17

—

52

Payments/write-offs
(68
)
(13
)
—

—

(81
)
Balance, end of period
$
24

$
—

$
17

$
—

$
41


68
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Changes in and Reclassifications From Accumulated Other Comprehensive Income

Changes in AOCI, net of tax and DAC, by component for the three and nine months ended September 30, 2014 consist of the following:
Three months ended September 30, 2014
 
Net Unrealized Gain on Securities
OTTI Losses in OCI
Net Gain (Loss) on Cash Flow Hedging Instruments
Foreign Currency Translation Adjustments
Pension and Other Postretirement Plan Adjustments
Total AOCI
Beginning balance
$
2,255

$
(7
)
$
141

$
13

$
(1,240
)
$
1,162

OCI before reclassifications
(22
)
1

(15
)
(13
)
1

(48
)
Amounts reclassified from AOCI
(40
)
1

(6
)
—

8

(37
)
Net OCI
(62
)
2

(21
)
(13
)
9

(85
)
Ending balance
$
2,193

$
(5
)
$
120

$
—

$
(1,231
)
$
1,077


Nine months ended September 30, 2014
 
Net Unrealized Gain on Securities
OTTI Losses in OCI
Net Gain (Loss) on Cash Flow Hedging Instruments
Foreign Currency Translation Adjustments
Pension and Other Postretirement Plan Adjustments
Total AOCI
Beginning balance
$
987

$
(12
)
$
108

$
91

$
(1,253
)
$
(79
)
OCI before reclassifications
1,277

4

48

21

1

1,351

Amounts reclassified from AOCI
(71
)
3

(36
)
(112
)
21

(195
)
Net OCI
1,206

7

12

(91
)
22

1,156

Ending balance
$
2,193

$
(5
)
$
120

$
—

$
(1,231
)
$
1,077


69
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Changes in and Reclassifications From Accumulated Other Comprehensive Income (continued)

Reclassifications from AOCI for the three and nine months ended September 30, 2014 consist of the following:
AOCI
Amount Reclassified from AOCI
Affected Line Item in the Condensed Consolidated Statement of Operations
 
Three months ended September 30, 2014
Nine months ended September 30, 2014
 
Net Unrealized Gain on Securities
 
 
 
Available-for-sale securities
61

186

Net realized capital gains (losses)
 
61

186

Total before tax
 
21

65

Income tax expense
 
$
—

$
50

Loss from discontinued operations, net of tax
 
$
40

$
71

Net income (loss)
OTTI Losses in OCI
 
 
 
Other than temporary impairments
$
(2
)
$
(5
)
Net realized capital gains (losses)
 
(2
)
(5
)
Total before tax
 
(1
)
(2
)
Income tax expense (benefit)
 
$
(1
)
$
(3
)
Net income (loss)
Net Gains on Cash Flow Hedging Instruments
 
 
 
Interest rate swaps
$
(4
)
$
(2
)
Net realized capital gains (losses)
Interest rate swaps
22

67

Net investment income
Foreign currency swaps
(9
)
(9
)
Net realized capital gains (losses)
 
9

56

Total before tax
 
3

20

Income tax expense
 
$
6

$
36

Net income (loss)
Foreign Currency Translation Adjustments
 
 
 
Currency translation adjustments [3]
—

172

Net realized capital gains (losses)
 
—

172

Total before tax
 
—

60

Income tax expense
 
$
—

$
112

Net income (loss)
Pension and Other Postretirement Plan Adjustments
 
 
 
Amortization of prior service costs
$
2

$
5

Insurance operating costs and other expenses
Amortization of actuarial gains (losses)
(14
)
(38
)
Insurance operating costs and other expenses
 
(12
)
(33
)
Total before tax
 
(4
)
(12
)
Income tax expense
 
(8
)
(21
)
Net income (loss)
Total amounts reclassified from AOCI
$
37

$
195

Net income (loss)

70
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Changes in and Reclassifications From Accumulated Other Comprehensive Income (continued)

Changes in AOCI, net of tax and DAC, by component for the three and nine months ended September 30, 2013 consist of the following:
Three months ended September 30, 2013
 
Net Unrealized Gain on Securities
OTTI Losses in OCI
Net Gain (Loss) on Cash Flow Hedging Instruments
Foreign Currency Translation Adjustments
Pension and Other Postretirement Plan Adjustments
Total AOCI
Beginning balance
$
1,162

$
(23
)
$
188

$
92

$
(1,345
)
$
74

OCI before reclassifications
(212
)
5

—

92

—

(115
)
Amounts reclassified from AOCI
38

(2
)
(21
)
—

9

24

Net OCI
(174
)
3

(21
)
92

9

(91
)
Ending balance
$
988

$
(20
)
$
167

$
184

$
(1,336
)
$
(17
)

Nine months ended September 30, 2013
 
Net Unrealized Gain on Securities
OTTI Losses in OCI
Net Gain (Loss) on Cash Flow Hedging Instruments
Foreign Currency Translation Adjustments
Pension and Other Postretirement Plan Adjustments
Total AOCI
Beginning balance
$
3,418

$
(47
)
$
428

$
406

$
(1,362
)
$
2,843

OCI before reclassifications
(1,367
)
43

(157
)
(222
)
(1
)
(1,704
)
Amounts reclassified from AOCI
(1,063
)
(16
)
(104
)
—

27

(1,156
)
Net OCI
(2,430
)
27

(261
)
(222
)
26

(2,860
)
Ending balance
$
988

$
(20
)
$
167

$
184

$
(1,336
)
$
(17
)

71
Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Changes in and Reclassifications From Accumulated Other Comprehensive Income (continued)

Reclassifications from AOCI for the three and nine months ended September 30, 2013 consist of the following:
AOCI
Amount Reclassified from AOCI
Affected Line Item in the Condensed Consolidated Statement of Operations
 
Three months ended September 30, 2013
Nine months ended September 30, 2013
 
Net Unrealized Gain on Securities
 
 
 
Available-for-sale securities [1]
(58
)
1,636

Net realized capital gains (losses)
 
(58
)
1,636

Total before tax
 
(19
)
573

Income tax expense
 
(1
)
—

Loss from discontinued operations, net of tax
 
$
(38
)
$
1,063

Net income (loss)
OTTI Losses in OCI
 
 
 
Other than temporary impairments
$
3

$
24

Net realized capital gains (losses)
 
3

24

Total before tax
 
1

8

Income tax expense (benefit)
 
$
2

$
16

Net income (loss)
Net Gains on Cash Flow Hedging Instruments
 
 
 
Interest rate swaps [2]
$
4

$
84

Net realized capital gains (losses)
Interest rate swaps
24

73

Net investment income
Foreign currency swaps
4

3

Net realized capital gains (losses)
 
32

160

Total before tax
 
11

56

Income tax expense
 
$
21

$
104

Net income (loss)
Pension and Other Postretirement Plan Adjustments
 
 
 
Amortization of prior service costs
$
2

$
5

Insurance operating costs and other expenses
Amortization of actuarial gains (losses)
(16
)
(46
)
Insurance operating costs and other expenses
 
(14
)
(41
)
Total before tax
 
(5
)
(14
)
Income tax expense
 
(9
)
(27
)
Net income (loss)
Total amounts reclassified from AOCI
$
(24
)
$
1,156

Net income (loss)
[1]
The nine months ended September 30, 2013 includes $1.5 billion of net unrealized gains on securities relating to the sales of the Retirement Plans and Individual Life businesses.
[2]
The nine months ended September 30, 2013 includes $71 of net gains on cash flow hedging instruments relating to the sales of the Retirement Plans and Individual Life businesses.
[3]
The nine months ended September 30, 2014 amount relates to the sale of the HLIKK variable and fixed annuity business.



72


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in millions except share data unless otherwise stated)
The Hartford provides projections and other forward-looking information in the following discussions, which contain many forward-looking statements, particularly relating to the Company’s future financial performance. These forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to the cautionary statements set forth on pages 3 and 4 of this Form 10-Q. Actual results are likely to differ, and in the past have differed, materially from those forecast by the Company, depending on the outcome of various factors, including, but not limited to, those set forth in each discussion below and in Part I, Item 1A, Risk Factors in The Hartford’s 2013 Form 10-K Annual Report. The Hartford undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise.
INDEX

Description
Page

Certain reclassifications have been made to prior year financial information presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) to conform to the current year presentation. This discussion should be read in conjunction with MD&A in The Hartford's 2013 Form 10-K Annual Report. The Hartford defines increases or decreases greater than or equal to 200% as “NM” or not meaningful.



73


THE HARTFORD’S OPERATIONS
Overview
The Hartford is a financial holding company for a group of subsidiaries that provide property and casualty, group benefits and investment products to both individual and business customers in the United States and continues to administer life and annuity products previously sold.
The Hartford currently conducts business principally in six reporting segments including Property & Casualty Commercial, Consumer Markets, Property & Casualty Other Operations, Group Benefits, Mutual Funds and Talcott Resolution as well as a Corporate category. The Hartford includes in its Corporate category the Company’s debt financing and related interest expense, as well as other capital raising activities; and purchase accounting adjustments related to goodwill and other expenses not allocated to the reporting segments.
On June 30, 2014, the Company completed the sale of all of the issued and outstanding equity of HLIKK to ORIX Life Insurance Corporation, a subsidiary of ORIX Corporation, a Japanese company. HLIKK sold variable and fixed annuity policies in Japan from 2001 to 2009 and has been in runoff since 2009. The Company's Japan business is included in the Talcott Resolution reporting segment.
On December 12, 2013, the Company completed the sale of all of the issued and outstanding equity of HLIL, which comprised the Company's U.K. variable annuity business, to Columbia Insurance Company, a Berkshire Hathaway company. On January 1, 2013, the Company completed the sale of its Retirement Plans business to Massachusetts Mutual Life Insurance Company and on January 2, 2013 the Company completed the sale of its Individual Life insurance business to The Prudential Insurance Company of America, a subsidiary of Prudential Financial, Inc.
For further discussion of these transactions, see Note 2 - Business Dispositions, Note 7 - Reinsurance and Note 17 - Discontinued Operations of Notes to Condensed Consolidated Financial Statements.
The Company derives its revenues principally from: (a) premiums earned for insurance coverages provided to insureds; (b) fee income, including asset management fees, on separate account and mutual fund assets and mortality and expense fees, as well as cost of insurance charges; (c) net investment income; (d) fees earned for services provided to third parties; and (e) net realized capital gains and losses. Premiums charged for insurance coverages are earned principally on a pro rata basis over the terms of the related policies in-force. Asset management fees and mortality and expense fees are primarily generated from separate account assets. Cost of insurance charges are assessed on the net amount at risk for investment-oriented life insurance products.
The profitability of the Company's property and casualty insurance businesses over time is greatly influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance, the size of its in force block, actual mortality and morbidity experience, and its ability to manage its expense ratio which it accomplishes through economies of scale and its management of acquisition costs and other underwriting expenses. Pricing adequacy depends on a number of factors, including the ability to obtain regulatory approval for rate changes, proper evaluation of underwriting risks, the ability to project future loss cost frequency and severity based on historical loss experience adjusted for known trends, the Company’s response to rate actions taken by competitors, and expectations about regulatory and legal developments and expense levels. The Company seeks to price its insurance policies such that insurance premiums and future net investment income earned on premiums received will cover underwriting expenses and the ultimate cost of paying claims reported on the policies and provide for a profit margin. For many of its insurance products, the Company is required to obtain approval for its premium rates from state insurance departments.
The financial results in the Company’s mutual fund and variable annuity businesses depend largely on the amount of the contract holder or shareholder account value or assets under management on which it earns fees and the level of fees charged. Changes in account value or assets under management are driven by two main factors: net flows, and the market return of the funds, which is heavily influenced by the return realized in the equity markets. Net flows are comprised of deposits less surrenders, death benefits, policy charges and annuitizations of investment type contracts, such as variable annuity contracts. In the mutual fund business, net flows are known as net sales. Net sales are comprised of new sales less redemptions by mutual fund customers. The Company uses the average daily value of the S&P 500 Index as an indicator for evaluating market returns of the underlying account portfolios in the United States. Relative financial results of variable products are highly correlated to the growth in account values or assets under management since these products generally earn fee income on a daily basis. Equity market movements could also result in benefits for or charges against deferred acquisition costs.
The profitability of fixed annuities and other “spread-based” products depends largely on the Company’s ability to earn target spreads between earned investment rates on its general account assets and interest credited to policyholders.

74


The investment return, or yield, on invested assets is an important element of the Company’s earnings since insurance products are priced with the assumption that premiums received can be invested for a period of time before benefits, loss and loss adjustment expenses are paid. Due to the need to maintain sufficient liquidity to satisfy claim obligations, the majority of the Company’s invested assets have been held in available-for-sale securities, including, among other asset classes, corporate bonds, municipal bonds, government debt, short-term debt, mortgage-backed securities and asset-backed securities.
The primary investment objective for the Company is to maximize economic value, consistent with acceptable risk parameters, including the management of credit risk and interest rate sensitivity of invested assets, while generating sufficient after-tax income to meet policyholder and corporate obligations. Investment strategies are developed based on a variety of factors including business needs, regulatory requirements and tax considerations.
For more information on the Company's reporting segments refer to Part I, Item 1, Business - Reporting Segments in The Hartford’s 2013 Form 10-K Annual Report.

Financial Highlights for the Three Months Ended September 30, 2014
•
Net income of $388, or $0.86 per diluted share, compared with net income of $293, or $0.60 per diluted share, in the comparable prior year period.

•
Amounts paid for share repurchases totaled $845 in the quarter.

•
Book value per diluted common share excluding AOCI increased to $39.82 from $39.21 as of the prior quarter end due to the effect of net income less dividends and the effect of share repurchases in the quarter.

•
Net investment income increased 3% to $810 compared to the prior year period primarily due to an increase in income from limited partnerships and other alternative investments, partially offset by a decrease in income related to fixed maturities driven by a decline in asset levels, primarily in Talcott Resolution.

•
While the annualized investment yield after-tax of 3.2% remained unchanged compared to the prior year period, new money yields decreased from 4.4% to 3.2% driven by lower interest rates, tighter credit spreads and the effect of reinvesting Japan sales proceeds into short-duration assets pending use for share repurchases.

•
Higher short term interest rates and wider credit spreads decreased the after-tax net unrealized gains in the investment portfolio by $62 in the quarter.

•
Property and Casualty written premiums increased 2% over the comparable prior year period, comprised of 1% growth in P&C Commercial and 3% in Consumer Markets.

•
Property and Casualty combined ratio, before catastrophes and prior year development, improved 2.6 points to 90.2 from 92.8 in the comparable prior year period.

•
Catastrophe losses of $40, before tax, decreased from catastrophe losses of $66, before tax, in the comparable prior year period.

•
Favorable prior year development totaled $10, before tax.

•
Group Benefits after-tax margin, excluding buyouts and realized capital gains (losses), increased to 4.5% in the quarter from 3.9% in the comparable prior year period.

•
Talcott Resolution after-tax income from continuing operations was $28, down from $80 in the prior year quarter due to a decline in net realized capital gains.









75


CONSOLIDATED RESULTS OF OPERATIONS
 
Operating Summary
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
Change
 
2014
2013
Change
Earned premiums
$
3,337

$
3,338

—
%
 
$
9,958

$
9,885

1
%
Fee income
524

538

(3
%)
 
1,522

1,561

(2
%)
Net investment income
810

787

3
%
 
2,402

2,453

(2
%)
Net realized capital gains [1]
69

131

(47
%)
 
30

1,796

(98
%)
Other revenues
29

68

(57
%)
 
85

201

(58
%)
Total revenues
4,769

4,862

(2
%)
 
13,997

15,896

(12
%)
Benefits, losses and loss adjustment expenses
2,624

2,764

(5
%)
 
8,223

8,345

(1
%)
Amortization of deferred policy acquisition costs and present value of future profits (“DAC”)
580

594

(2
%)
 
1,348

1,414

(5
%)
Insurance operating costs and other expenses
976

964

1
%
 
2,889

3,060

(6
%)
Loss on extinguishment of debt
—

—

—
%
 
—

213

(100
%)
Reinsurance loss on dispositions, including reduction in goodwill of $156
—

—

—
%
 
—

1,574

(100
%)
Interest expense
93

94

(1
%)
 
282

301

(6
%)
Total benefits, losses and expenses
4,273

4,416

(3
%)
 
12,742

14,907

(15
%)
Income from continuing operations before income taxes
496

446

11
%
 
1,255

989

27
%
Income tax expense
108

81

33
%
 
251

148

70
%
Income from continuing operations, net of tax
388

365

6
%
 
1,004

841

19
%
Loss from discontinued operations, net of tax
—

(72
)
100
%
 
(588
)
(979
)
40
%
Net income (loss)
$
388

$
293

32
%
 
$
416

$
(138
)
NM

[1]
Includes net realized gain on business dispositions of $1,575 for the nine months ended September 30, 2013.
Three months ended September 30, 2014 compared to the three months ended September 30, 2013
Net income, compared to the prior year period, increased for the three months ended September 30, 2014 primarily due to the following:
•
Dispositions of the Company's discontinued operations, HLIKK and HLIL, were completed in the second quarter of 2014 and the fourth quarter of 2013, respectively. The loss from discontinued operations of $72, net of tax, for the three months ended September 30, 2013, is primarily due to losses from the operations of the Japan and U.K. annuity businesses. For further discussion of the sale of these businesses, see Note 2 - Business Dispositions and Note 17 - Discontinued Operations of Condensed Consolidated Financial Statements.
•
Net investment income of $810, before tax, for the three months ended September 30, 2014, increased compared to the $787, before tax, for the prior year period. The increase in investment income is primarily due to an increase in income from limited partnerships and other alternative investments, partially offset by a decrease in income from fixed maturities due to a decline in asset levels, primarily in Talcott Resolution. For further discussion of investment results, see MD&A - Investment Results, Net Investment Income (Loss).
•
Current accident year catastrophe losses of $40, before tax, for the three months ended September 30, 2014, compared to $66, before tax, for the prior year period. The decrease in current accident year catastrophe losses was primarily due to reduced frequency and severity from wind and hail events across various U.S. geographic regions. For additional information, see MD&A - Critical Accounting Estimates, Property and Casualty Insurance Product Reserves, Net of Reinsurance.
•
Prior accident year reserve release of $10, before tax, for the three months ended September 30, 2014, compared to reserve strengthening of $17, before tax, for the prior year period. Reserve releases in 2014 were primarily related to a decrease in reserves in general liability, partially offset by an increase in reserves for workers' compensation discount accretion. Strengthened reserves in 2013 primarily related to increased claim frequency in Commercial Markets auto liability, partially offset by reserve releases in general liability and catastrophes. For additional information, see MD&A - Critical Accounting Estimates, Reserve Roll Forwards and Development.

76


•
An improvement in current accident year underwriting results before catastrophes in Property & Casualty Commercial and Consumer Markets and an increase in after-tax margins in Group Benefits. Commercial Markets' current accident year underwriting results before catastrophes improved $40, before tax, due primarily to improved results in Small Commercial and Middle Market. For a discussion of the Company's operating results by segment, see the segment sections of MD&A.
•
Differences between the Company's effective income tax rate and the U.S. statutory rate of 35% are due primarily to tax-exempt interest earned on invested assets and the dividends received deduction ("DRD"). Income tax expense for the three months ended September 30, 2014 increased by $27 from an income tax expense of $81 in the prior year period, primarily due to the $50, before tax, increase in income from continuing operations. The income tax expense in 2014 and 2013 includes separate account DRD benefits of $32 and $36, respectively. For further discussion of income taxes, see Note 12 - Income Taxes of Notes to Condensed Consolidated Financial Statements.
Nine months ended September 30, 2014 compared to the nine months ended September 30, 2013
Net income for the nine months ended September 30, 2014 was an improvement over a net loss in the prior year period primarily due to the following:
•
A decrease in the loss from discontinued operations to $588, net of tax, compared to $979, net of tax, for the prior year period. The loss from discontinued operations in 2014 includes the results of operations of the Japan business and the realized capital loss on the sale of HLIKK. The loss from discontinued operations in 2013 includes the results of operations of the Japan and U.K. annuity businesses and the realized capital loss on the sale of HLIL. The results of operations for the Japan annuity business in 2013 includes the write-off of DAC and higher hedging losses.
•
A $1,575 before tax realized capital gain in 2013 on the disposition of the Individual Life business and a $1,574 before tax reinsurance loss in 2013 consisting of a reduction in goodwill and a loss accrual for premium deficiency related to the disposition of the Individual Life business and losses from the operations of the Retirement Plans and Individual Life businesses sold in the first quarter of 2013. For further discussion of the sale of these businesses, see Note 2 - Business Dispositions of Condensed Consolidated Financial Statements.
•
A loss on extinguishment of debt of $213, before tax, for the nine months ended September 30, 2013 related to the repurchase of approximately $800 of senior notes at a premium to the face amount of the then outstanding debt. The resulting loss on extinguishment of debt consists of the repurchase premium, the write-off of the unamortized discount and debt issuance and other costs related to the repurchase transaction.
•
A $198 before tax improvement in current accident year underwriting results before catastrophes in Property & Casualty resulting in a 2.5 point decrease in the combined ratio before catastrophes and prior year development. Also contributing to the improvement in underwriting results was an increase in earned premiums of 2% or $150, before tax, for the nine months ended September 30, 2014, compared to the prior year period, reflecting earned premium growth of 1% in P&C Commercial and 4% in Consumer Markets. For a discussion of the Company's operating results by segment, see the segment sections of MD&A.
•
Current accident year catastrophe losses of $322, before tax, for the nine months ended September 30, 2014, compared to $284, before tax, for the prior year period. The increase in current accident year catastrophe losses was primarily due to an increase in winter storm frequency and severity across various U.S. geographic regions and an increase in the severity of thunderstorm and hail events, partially offset by a decrease in the number and severity of tornadoes.
•
Prior accident year reserve strengthening of $199, before tax, for the nine months ended September 30, 2014, compared to reserve strengthening of $177, before tax, for the prior year period. Reserve strengthenings in 2014 were primarily related to an increase in reserves for asbestos and environmental claims, principally due to a higher than previously estimated number of mesothelioma claim filings and an increase in costs associated with asbestos litigation. Reserve strengthenings in 2013 were primarily related to increased net asbestos reserves due to higher claim frequency and severity.
•
Differences between the Company's effective income tax rate and the U.S. statutory rate of 35% are due primarily to tax-exempt interest earned on invested assets and the dividends received deduction ("DRD"). Income tax expense for the nine months ended September 30, 2014 increased by $103 from an income tax expense of $148 in the prior year period, primarily due to the $266, before tax, increase in income from continuing operations. The income tax expense in 2014 and 2013 includes separate account DRD benefits of $85 and $101, respectively.

77


The following table presents net income (loss) for each reporting segment, as well as the Corporate category.
 
Three months ended September 30,
 
Nine months ended September 30,
Net income (loss) by segment
2014
2013
Increase
(Decrease) From
2013 to 2014
 
2014
2013
Increase
(Decrease) From
2013 to 2014
Property & Casualty Commercial
$
280

$
174

$
106

 
$
721

$
619

$
102

Consumer Markets
73

68

5

 
142

160

(18
)
Property & Casualty Other Operations
14

22

(8
)
 
(108
)
(28
)
(80
)
Group Benefits
37

31

6

 
143

134

9

Mutual Funds
22

19

3

 
64

57

7

Talcott Resolution
28

7

21

 
(331
)
(619
)
288

Corporate
(66
)
(28
)
(38
)
 
(215
)
(461
)
246

Net income (loss)
$
388

$
293

$
95

 
$
416

$
(138
)
$
554

Investment Results
Composition of Invested Assets
 
September 30, 2014
 
December 31, 2013
 
Amount
Percent
 
Amount
Percent
Fixed maturities, available-for-sale ("AFS"), at fair value
$
59,586

78.1
%
 
$
62,357

79.2
%
Fixed maturities, at fair value using the fair value option ("FVO")
464

0.6
%
 
844

1.1
%
Equity securities, AFS, at fair value
648

0.9
%
 
868

1.1
%
Mortgage loans
5,730

7.5
%
 
5,598

7.1
%
Policy loans, at outstanding balance
1,425

1.9
%
 
1,420

1.8
%
Limited partnerships and other alternative investments
3,027

4.0
%
 
3,040

3.9
%
Other investments [1]
326

0.4
%
 
521

0.7
%
Short-term investments
5,013

6.6
%
 
4,008

5.1
%
Total investments excluding equity securities, trading
76,219

100
%
 
78,656

100
%
Equity securities, trading, at fair value [2]
12

 
 
19,745

 
Total investments
$
76,231

 
 
$
98,401

 
[1]
Primarily relates to derivative instruments.
[2]
As of December 31, 2013, approximately $19.7 billion of equity securities, trading, supported Japan variable annuities. Those equity securities, trading, were invested in mutual funds, which, in turn, invested in the following asset classes as of December 31, 2013, Japan equity 22%, Japan fixed income (primarily government securities) 15%, global equity 22%, global government bonds 40%, and cash and other 1%.

Total investments decreased since December 31, 2013, primarily in equity securities, trading and fixed maturities, AFS, due to the sale of the Japan variable and fixed annuity business as well as the continued runoff of the remaining Talcott Resolution business. For further discussion on the Japan sale, see the Sale of Business section in Note 2 - Business Dispositions, of Notes to Condensed Consolidated Financial Statements. This decline was partially offset by an increase in the valuation of fixed maturities, AFS due to a decrease in long term interest rates and tighter credit spreads. Short-term investments increased primarily due to the investment of proceeds from the sale of HLIKK.

78



Net Investment Income (Loss)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
(Before-tax)
Amount
Yield [1]
Amount
Yield [1]
 
Amount
Yield [1]
Amount
Yield [1]
Fixed maturities [2]
$
602

4.2
%
$
638

4.3
%
 
$
1,819

4.2
%
$
1,934

4.3
%
Equity securities, AFS
9

5.1
%
7

2.9
%
 
23

3.9
%
21

3.3
%
Mortgage loans
65

4.6
%
65

4.7
%
 
197

4.6
%
191

4.8
%
Policy loans
20

5.5
%
20

5.7
%
 
59

5.5
%
62

5.9
%
Limited partnerships and other alternative investments
100

14.4
%
46

6.1
%
 
250

11.7
%
207

9.1
%
Other [3]
44

 
40

 
 
135

 
123

 
Investment expense
(30
)
 
(29
)
 
 
(81
)
 
(85
)
 
Total securities AFS and other
810

4.5
%
787

4.3
%
 
2,402

4.4
%
2,453

4.5
%
Total securities, AFS and other excluding limited partnerships and other alternative investments
$
710

4.1
%
$
741

4.2
%
 
$
2,152

4.1
%
$
2,246

4.3
%
[1]
Yields calculated using annualized net investment income divided by the monthly average invested assets at cost, amortized cost, or adjusted carrying value, as applicable, excluding repurchase agreement collateral, if any, and derivatives book value. Yield calculations for each period exclude assets associated with the dispositions of HLIKK, the Retirement Plans and Individual Life businesses, and the Hartford Life International Limited business, as applicable.
[2]
Includes net investment income on short-term investments.
[3]
Primarily includes income from derivatives that qualify for hedge accounting and hedge fixed maturities.
Three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013
Total net investment income for the three months ended September 30, 2014 increased in comparison to the three months ended September 30, 2013 primarily due to an increase in income from limited partnerships and other alternative investments, partially offset by a decrease in income from fixed maturities. Total net investment income for the nine months ended September 30, 2014 decreased in comparison to the nine months ended September 30, 2013 primarily due to an decrease in income from fixed maturities, partially offset by an increase in income from limited partnerships. The decrease in income related to fixed maturities for the three and nine months ended September 30, 2014 is a result of a decline in asset levels, primarily in Talcott Resolution, and lower income from repurchase agreements. The increase in limited partnerships and other alternative investments resulted primarily from an increase in valuations of underlying funds within private equity and real estate.
The annualized net investment income yield, excluding limited partnerships and other alternative investments, has declined to 4.1% for the nine months ended September 30, 2014 versus 4.3% for the comparable period in 2013. The decline was primarily attributable to lower income from repurchase agreements and lower reinvestment rates. Refer to Note 6 - Investments and Derivative Instruments of Notes to Condensed Consolidated Financial Statements for further discussion of repurchase agreements. The average reinvestment rate, excluding certain U.S. Treasury securities and cash equivalent securities, for the nine months ended September 30, 2014, was approximately 3.7% which was below the average yield of sales and maturities of 3.9% for the same period due to the current interest rate environment. In addition, the reinvestment rate was impacted by the investment of proceeds from the sale of HLIKK into short duration, high quality corporates and ABS. For the third quarter of 2014, the new money yield decreased to 3.2% compared to 4.4% in the prior year period driven by lower interest rates, tighter credit spreads and the effect of reinvesting Japan sales proceeds into short-duration assets pending use for share repurchases.  Despite the recent decline in new money yield, we expect the net investment income yield for the 2014 full year to be relatively consistent with the net investment income yield for the nine months ended September 30, 2014. The estimated impact on net investment income is subject to change as the composition of the portfolio changes through normal portfolio management and trading activities and changes in market conditions.


79


Net Realized Capital Gains (Losses)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Before-tax)
2014
2013
 
2014
2013
Gross gains on sales
$
116

$
105

 
$
421

$
2,021

Gross losses on sales
(29
)
(137
)
 
(191
)
(326
)
Net OTTI losses recognized in earnings
(14
)
(26
)
 
(43
)
(59
)
Valuation allowances on mortgage loans
—

—

 
(3
)
—

Periodic net coupon settlements on credit derivatives
—

(1
)
 
1

(5
)
Results of variable annuity hedge program
 
 
 
 
 
GMWB derivatives, net
6

203

 
15

219

Macro hedge program
12

(50
)
 
(13
)
(182
)
Total results of variable annuity hedge program
18

153

 
2

37

Other, net [1]
(22
)
37

 
(157
)
128

Net realized capital gains
$
69

$
131

 
$
30

$
1,796

[1]
Primarily consists of changes in value of non-qualifying derivatives, including interest rate derivatives used to manage duration, and the Japan fixed payout annuity hedge.
Details on the Company’s net realized capital gains and losses are as follows:
Gross gains and losses on sales
•   Gross gains on sales for the three months ended September 30, 2014 were primarily due to gains on the sale of industrial corporate securities, CMBS and RMBS. Gross losses on sales for the three months ended September 30, 2014 were the result of losses on the sale of other corporate securities. Gross gains on sales for the nine months ended September 30, 2014 were primarily due to gains on the sale of corporate securities, CMBS, RMBS, and municipal securities. Gross losses on sales for the nine months ended September 30, 2014 were the result of losses on the sale of emerging market securities, primarily within the foreign government and corporate sectors. The sales for both periods were primarily a result of duration and liquidity management, as well as tactical changes to the portfolio as a result of changing market conditions.
•   Gross gains for three months ended September 30, 2013 were primarily due to gains on the sale of industrial corporate, RMBS, and ABS. Gross losses on sales for the three months ended September 30, 2013 were the result of losses on sales of U.S. treasury and other corporate securities due to rising interest rates. The sales were primarily as a result of management of duration and liquidity as well as, progress towards sector allocation objectives. Gross gains and losses on sales for the nine months ended September 30, 2013 were predominately from the sale of the Retirement Plans and Individual Life businesses resulting in a gross gain of $1.5 billion.
Net OTTI losses
•      See Other-Than-Temporary Impairments within the Investment Portfolio Risks and Risk Management section of the MD&A.
Variable annuity hedge program
•
For the three months ended September 30, 2014 the gain on the macro hedge program was primarily due to gains of $19 driven by increased equity volatility. For the nine months ended September 30, 2014 the loss on the macro hedge program was primarily due to losses of $16 driven by an improvement in the domestic equity markets.
•
For the three and nine months ended September 30, 2014 the gain related to the combined GMWB derivatives, net, which include the GMWB product, reinsurance, and hedging derivatives, was primarily driven by gains of $31 on liability model assumption updates and gains of $10 and $8, respectively, due to increased volatility. For the three and nine months ended September 30, 2014 these gains were partially offset by losses of $20 and $24, respectively, resulting from policyholder behavior primarily related to increased surrenders.
•
For the three and nine months ended September 30, 2013 the gain related to the combined GMWB derivatives, net, which include the GMWB product, reinsurance, and hedging derivatives, was primarily driven by gains of $83 and $186, respectively, resulting from favorable policyholder behavior largely related to increased surrenders, and gains of $27 and $63, respectively, due to the passage of time. Additional gains of $75 related to the U.S. GMWB product for the three months ended September 30, 2013 were primarily due to liability assumption updates for lapses and withdrawal rates.
•
For the nine months ended September 30, 2013 the loss on the macro hedge program was primarily due to losses of $98 related to an improvement in domestic equity markets, losses of $44 due to passage of time, and losses of $44 driven by an increase in long term interest rates.

80


Other, net
•      Other, net loss for the three months ended September 30, 2014 was primarily due to losses of $10 on credit derivatives driven by credit spread widening and losses of $9 on interest rate derivatives due to a decline in long term interest rates.
•
Other, net loss for the nine months ended September 30, 2014 was primarily due to losses of $153 on interest rate derivatives largely used to manage duration driven by a decline in U.S. interest rates.
•      Other, net gain for the three months ended September 30, 2013 was primarily due to gains of $35 on credit derivatives due to credit spread tightening, partially offset by losses of $15 on Japan fixed payout annuity hedges primarily due to the depreciation of the Japanese yen in relation to the U.S. dollar.
•
Other, net gain for the nine months ended September 30, 2013 was primarily due to gains of $71 on interest derivatives primarily associated with fixed rate bonds sold as part of the Individual Life and Retirement Plans business dispositions. For further information on the business dispositions, see Note 2 of Notes to Condensed Consolidated Financial Statements. Additional gains of $61 were due to modified coinsurance reinsurance contracts, which are accounted for as embedded derivatives and transfer to the reinsurer the investment experience related to the assets supporting the reinsured policies, driven by a decline in interest rates. These gains were partially offset by losses of $36 related to equity futures and options used to hedge equity market risk in the investment portfolio, driven by an increase in equity markets during the period of the hedge.






81


CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ, and in the past have differed, from those estimates.
The Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
•
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 mortgage loans;
•
living benefits required to be fair valued (in other policyholder funds and benefits payable);
•
goodwill impairment;
•
valuation of investments and derivative instruments;
•
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. In developing these estimates, management makes subjective and complex judgments that are inherently uncertain and subject to material change as facts and circumstances develop. Although variability is inherent in these estimates, management believes the amounts provided are appropriate based upon the facts available upon compilation of the financial statements.
The Company’s critical accounting estimates are discussed in Part II, Item 7 MD&A in the Company’s 2013 Form 10-K Annual Report. The following discussion updates certain of the Company’s critical accounting estimates for September 30, 2014 results.


82


Property and Casualty Insurance Product Reserves, Net of Reinsurance
Based on the results of the quarterly reserve review process, the Company determines the appropriate reserve adjustments, if any, to record. Recorded reserve estimates are changed after consideration of numerous factors, including but not limited to, the magnitude of the difference between the actuarial indication and the recorded reserves, improvement or deterioration of actuarial indications in the period, the maturity of the accident year, trends observed over the recent past and the level of volatility within a particular line of business. In general, adjustments are made more quickly to more mature accident years and less volatile lines of business. Such adjustments of reserves are referred to as “reserve development”. Reserve development that increases previous estimates of ultimate cost is called “reserve strengthening”. Reserve development that decreases previous estimates of ultimate cost is called “reserve releases”. Reserve development can influence the comparability of year over year underwriting results and is set forth in the paragraphs and tables that follow.
Reserve Roll Forwards and Development
A roll-forward of property and casualty insurance product liabilities for unpaid losses and loss adjustment expenses for the nine months ended September 30, 2014 follows:
Nine Months Ended September 30, 2014
 
Property &
Casualty
Commercial
Consumer
Markets
Property &
Casualty
Other
Operations
Total
Property and
Casualty
Insurance
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
$
16,293

$
1,864

$
3,547

$
21,704

Reinsurance and other recoverables
2,442

13

573

3,028

Beginning liabilities for unpaid losses and loss adjustment expenses, net
13,851

1,851

2,974

18,676

Provision for unpaid losses and loss adjustment expenses
 
 
 
 
Current accident year before catastrophes
2,799

1,858

—

4,657

Current accident year catastrophes [3]
103

219

—

322

Prior accident years
—

(52
)
251

199

Total provision for unpaid losses and loss adjustment expenses
2,902

2,025

251

5,178

Less: Payments
2,751

2,036

291

5,078

Ending liabilities for unpaid losses and loss adjustment expenses, net
14,002

1,840

2,934

18,776

Reinsurance and other recoverables
2,483

13

613

3,109

Ending liabilities for unpaid losses and loss adjustment expenses, gross
$
16,485

$
1,853

$
3,547

$
21,885

Earned premiums
$
4,678

$
2,838

 
 
Loss and loss expense paid ratio [1]
58.8

71.7

 
 
Loss and loss expense incurred ratio
62.0

71.4

 
 
Prior accident years development (pts) [2]
—

(1.8
)
 
 
[1]
The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums.
[2]
“Prior accident years development (pts)” represents the ratio of prior accident years development to earned premiums.
[3]
Contributing to the current accident year catastrophes losses were the following events:
    
Nine Months Ended September 30, 2014
Category
Property &
Casualty
Commercial
Consumer Markets
Total
Property and
Casualty
Insurance
Wind and Hail [1]
49

189

238

Winter Storms [1]
50

17

67

Tornadoes
2

10

12

Other [2]
$
2

$
3

$
5

Total
$
103

$
219

$
322

[1] These amounts represent an aggregation of multiple catastrophes.
[2] Includes earthquake and flooding.



83


Prior accident years development recorded in 2014
Included within prior accident years development for the three and nine months ended September 30, 2014 were the following reserve strengthenings (releases):
Three Months Ended September 30, 2014
 
Property &
Casualty
Commercial
Consumer
Markets
Property &
Casualty
Other
Operations
Total Property and
Casualty Insurance
Auto liability
$
—

$
(4
)
$
—

$
(4
)
Package business
2

—

—

2

General liability
(19
)
—

—

(19
)
Fidelity and surety
4

—

—

4

Commercial property
(1
)
—

—

(1
)
Net environmental reserves
—

—

3

3

Change in workers’ compensation discount, including accretion
8

—

—

8

Catastrophes
1

(3
)
—

(2
)
Other reserve re-estimates, net
—

(8
)
7

(1
)
Total prior accident years development
$
(5
)
$
(15
)
$
10

$
(10
)
Nine Months Ended September 30, 2014
 
Property &
Casualty
Commercial
Consumer
Markets
Property &
Casualty
Other
Operations
Total Property and
Casualty Insurance
Auto liability
$
14

$
(4
)
$
—

$
10

Homeowners
—

(10
)
—

(10
)
Professional liability
(16
)
—

—

(16
)
Package business
1

—

—

1

General liability
(22
)
—

—

(22
)
Fidelity and surety
4

—

—

4

Commercial property
(3
)
—

—

(3
)
Net asbestos reserves
—

—

212

212

Net environmental reserves
—

—

30

30

Workers’ compensation
5

—

—

5

Change in workers’ compensation discount, including accretion
23

—

—

23

Catastrophes
(17
)
(29
)
—

(46
)
Other reserve re-estimates, net
11

(9
)
9

11

Total prior accident years development
$
—

$
(52
)
$
251

$
199

During 2014, the Company’s re-estimates of prior accident years reserves included the following significant reserve changes:
•
Strengthened reserves in commercial auto liability due to an increased frequency of severe claims spread across several accident years.
•
Homeowners reserves emerged favorably for accident year 2013, primarily related to favorable development on fire and water-related claims.
•
Released reserves in professional liability for accident years 2013, 2012 and 2010 due to lower frequency of reported claims.
•
Released reserves in general liability due to lower frequency in late emerging claims.
•
Fidelity and surety reserves emerged favorably for accident years 2008 forward, offset by adverse emergence on reserves for accident years 2007 and prior.
•
Released reserves primarily for accident year 2013 catastrophes as fourth quarter 2013 catastrophes have developed favorably.
•
Refer to the Property & Casualty Other Operations Claims section for discussion on the increase to net asbestos and net environmental reserves.

84


A roll-forward of property and casualty insurance product liabilities for unpaid losses and loss adjustment expenses for the nine months ended September 30, 2013 follows:
Nine Months Ended September 30, 2013
 
Property &
Casualty
Commercial
Consumer
Markets
Property &
Casualty
Other
Operations
Total
Property and
Casualty
Insurance
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
$
16,020

$
1,926

$
3,770

$
21,716

Reinsurance and other recoverables
2,365

16

646

3,027

Beginning liabilities for unpaid losses and loss adjustment expenses, net
13,655

1,910

3,124

18,689

Provision for unpaid losses and loss adjustment expenses
 
 
 
 
Current accident year before catastrophes
2,925

1,769

—

4,694

Current accident year catastrophes [3]
98

186

—

284

Prior accident years
71

(39
)
145

177

Total provision for unpaid losses and loss adjustment expenses
3,094

1,916

145

5,155

Less: Payments
2,973

2,027

225

5,225

Ending liabilities for unpaid losses and loss adjustment expenses, net
13,776

1,799

3,044

18,619

Reinsurance and other recoverables
2,481

14

600

3,095

Ending liabilities for unpaid losses and loss adjustment expenses, gross
$
16,257

$
1,813

$
3,644

$
21,714

Earned premiums
$
4,637

$
2,729

 
 
Loss and loss expense paid ratio [1]
64.1

74.3

 
 
Loss and loss expense incurred ratio
66.7

70.2

 
 
Prior accident years development (pts) [2]
1.5

(1.4
)
 
 
[1]
The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums.
[2]
“Prior accident years development (pts)” represents the ratio of prior accident years development to earned premiums.
[3]
Contributing to the current accident year catastrophes losses were the following events:
    
Nine Months Ended September 30, 2013
Category [1]
Property &
Casualty
Commercial
Consumer
Markets
Total
Property and
Casualty
Insurance
Wind and Hail
$
69

$
106

$
175

Tornadoes
17

42

59

Other [2]
12

38

50

Total
$
98

$
186

$
284

[1] These amounts represent an aggregation of multiple catastrophes.
[2] Includes wildfire, winter storms and flooding.


85


Prior accident years development recorded in 2013
Included within prior accident years development for the three and nine months ended September 30, 2013 were the following reserve strengthenings (releases):
Three Months Ended September 30, 2013
 
Property &
Casualty
Commercial
Consumer
Markets
Property &
Casualty
Other
Operations
Total Property and
Casualty Insurance
Auto liability
$
86

$
—

$
—

$
86

Homeowners
—

1

—

1

General liability
(45
)
—

—

(45
)
Commercial property
(1
)
—

—

(1
)
Net environmental reserves
—

—

1

1

Workers’ compensation
(10
)
—

—

(10
)
Change in workers’ compensation discount, including accretion
8

—

—

8

Catastrophes
(12
)
(8
)
—

(20
)
Other reserve re-estimates, net
—

(4
)
1

(3
)
Total prior accident years development
$
26

$
(11
)
$
2

$
17

Nine Months Ended September 30, 2013
 
Property &
Casualty
Commercial
Consumer
Markets
Property &
Casualty
Other
Operations
Total Property and
Casualty Insurance
Auto liability
$
141

$
2

$
—

$
143

Homeowners
—

(9
)
—

(9
)
Professional liability
(29
)
—

—

(29
)
Package business
(14
)
—

—

(14
)
General liability
(74
)
—

—

(74
)
Fidelity and surety
(5
)
—

—

(5
)
Commercial property
(7
)
—

—

(7
)
Net asbestos reserves
—

—

130

130

Net environmental reserves
—

—

12

12

Workers’ compensation
9

—

—

9

Workers’ compensation - NY 25a Fund for Reopened Cases
80

—

—

80

Change in workers’ compensation discount, including accretion
23

—

—

23

Catastrophes
(21
)
(37
)
—

(58
)
Uncollectible reinsurance
(25
)
—

—

(25
)
Other reserve re-estimates, net
(7
)
5

3

1

Total prior accident years development
$
71

$
(39
)
$
145

$
177

During 2013, the Company’s re-estimates of prior accident years reserves included the following significant reserve changes:
•
Strengthened reserves in commercial auto liability, primarily related to specialty lines claims, arising from a higher frequency of large loss bodily injury claims in accident years 2010 through 2012.
•
Released reserves in general liability in accident years 2006 through 2011. The emergence of claim severity as well as the frequency of late reported claims for these years was lower than expected and management has placed more weight on the emerged experience.
•
Released reserves in professional liability for accident years 2008 through 2012 due to lower than expected claim severity, primarily for large-sized accounts.
•
Released reserves for catastrophes primarily related to Storm Sandy.

86


•
Other reserve re-estimates, net includes an $18 recovery related to a class action settlement with American International Group involving prior accident years involuntary workers compensation pool loss and loss adjustment expense.
•
Reserve strengthening in the nine months ended September 30, 2013 related to the closing of the New York Section 25A Fund for Reopened Cases (the "Fund"). These claims were previously funded through assessments and paid by the Fund. The claims will become payable by the Company effective January 1, 2014.
•
The Company reviewed its allowance for uncollectible reinsurance in the second quarter of 2013 and reduced its allowance as a result of favorable collections compared to expectations.
•
Refer to the Property & Casualty Other Operations Claims section for further discussion on net asbestos and net environmental reserves.


87


Property & Casualty Other Operations Claims
Reserve Activity
Reserves and reserve activity in Property & Casualty Other Operations are categorized and reported as asbestos, environmental, or “all other”. The “all other” category of reserves covers a wide range of insurance and assumed reinsurance coverages, including, but not limited to, potential liability for construction defects, lead paint, silica, pharmaceutical products, molestation and other long-tail liabilities.
The following table presents reserve activity, inclusive of estimates for both reported and incurred but not reported claims, net of reinsurance, categorized by asbestos, environmental and all other claims, for the three and nine months ended September 30, 2014.
Property & Casualty Other Operations Losses and Loss Adjustment Expenses
 
Three Months Ended September 30, 2014
Asbestos
 
Environmental
All Other [1]
Total
Beginning liability—net [2][3]
$
1,820

  
$
278

$
932

$
3,030

Losses and loss adjustment expenses incurred
—

 
3

7

10

Less : losses and loss adjustment expenses paid
65

 
14

27

106

Ending liability – net [2][3]
$
1,755

[4] 
$
267

$
912

$
2,934

 
 
 
 
 
 
Nine Months Ended September 30, 2014
Asbestos
 
Environmental
All Other [1]
Total
Beginning liability—net [2][3]
$
1,714

  
$
270

$
990

$
2,974

Losses and loss adjustment expenses incurred
212

 
30

9

251

Less: losses and loss adjustment expenses paid
171

 
33

87

291

Ending liability – net [2][3]
$
1,755

[4] 
$
267

$
912

$
2,934

[1]
In addition to various insurance and assumed reinsurance exposures, “All Other” includes unallocated loss adjustment expense reserves. “All Other” also includes The Company's allowance for uncollectible reinsurance. When the Company commutes a ceded reinsurance contract or settles a ceded reinsurance dispute, the portion of the allowance for uncollectible reinsurance attributable to that commutation or settlement, if any, is reclassified to the appropriate cause of loss.
[2]
Excludes amounts reported in Property & Casualty Commercial and Consumer Markets reporting segments (collectively “Ongoing Operations”) for asbestos and environmental net liabilities of $17 and $6, respectively, as of September 30, 2014. Total net losses and loss adjustment expenses incurred for the three and nine months ended September 30, 2014 includes $7 and $12, respectively, related to asbestos and environmental claims. Total net losses and loss adjustment expenses paid for the three and nine months ended September 30, 2014 includes $5 and $13, respectively, related to asbestos and environmental claims.
[3]
Gross of reinsurance, asbestos and environmental reserves, including liabilities in Ongoing Operations, were $2,280 and $299.
[4]
The one year and average three year net paid amounts for asbestos claims, including Ongoing Operations, are $231 and $201, respectively, resulting in a one year net survival ratio of 7.7 and a three year net survival ratio of 8.8. Net survival ratio is the quotient of the net carried reserves divided by the average annual payment amount and is an indication of the number of years that the net carried reserve would last (i.e. survive) if the future annual claim payments were consistent with the calculated historical average.
For paid and incurred losses and loss adjustment expenses reporting, the Company classifies its asbestos and environmental reserves into three categories: Direct, Assumed Reinsurance and London Market. Direct insurance includes primary and excess coverage. Assumed reinsurance includes both “treaty” reinsurance (covering broad categories of claims or blocks of business) and “facultative” reinsurance (covering specific risks or individual policies of primary or excess insurance companies). London Market business includes the business written by one or more of the Company’s subsidiaries in the United Kingdom, which are no longer active in the insurance or reinsurance business. Such business includes both direct insurance and assumed reinsurance.
Of the three categories of claims (Direct, Assumed Reinsurance and London Market), direct policies tend to have the greatest factual development from which to estimate the Company’s exposures.
Assumed reinsurance exposures are inherently less predictable than direct insurance exposures because the Company may not receive notice of a reinsurance claim until the underlying direct insurance claim is mature. This causes a delay in the receipt of information at the reinsurer level and adds to the uncertainty of estimating related reserves.
London Market exposures are the most uncertain of the three categories of claims. As a participant in the London Market (comprised of both Lloyd's of London and London Market companies), certain subsidiaries of the Company wrote business on a subscription basis, with those subsidiaries' involvement being limited to a relatively small percentage of a total contract placement. Claims are reported, via a broker, to the “lead” underwriter and, once agreed to, are presented to the following markets for concurrence. This reporting and claim agreement process makes estimating liabilities for this business the most uncertain of the three categories of claims.

88


The following table sets forth, for the three and nine months ended September 30, 2014, paid and incurred loss activity by the three categories of claims for asbestos and environmental.
Paid and Incurred Losses and Loss Adjustment Expenses (“LAE”) Development – Asbestos and Environmental
 
 
Asbestos [1]
Environmental [1]
Three Months Ended September 30, 2014
Paid
Losses &  LAE
Incurred
Losses &  LAE
Paid
Losses &  LAE
Incurred
Losses &  LAE
Gross
 
 
 
 
Direct
$
39

$
—

$
9

$
3

Assumed Reinsurance
13

—

1

—

London Market
3

—

1

—

Total
55

—

11

3

Ceded
10

—

3

—

Net
$
65

$
—

$
14

$
3

 
 
 
 
 
Nine Months Ended September 30, 2014
Paid
Losses &  LAE
Incurred
Losses &  LAE
Paid
Losses &  LAE
Incurred
Losses &  LAE
Gross
 
 
 
 
      Direct
$
152

$
206

$
30

$
23

      Assumed Reinsurance
40

70

6

—

      London Market
12

28

5

7

            Total
204

304

41

30

Ceded
(33
)
(92
)
(8
)
—

Net
$
171

$
212

$
33

$
30

[1]
Excludes asbestos and environmental paid and incurred loss and LAE reported in Ongoing Operations. Total gross losses and LAE incurred in Ongoing Operations for the three and nine months ended September 30, 2014 includes $8 and $16, respectively, related to asbestos and environmental claims. Total gross losses and LAE paid in Ongoing Operations for the three and nine months ended September 30, 2014 includes $5 and $16, respectively, related to asbestos and environmental claims.
During the second quarter of 2014, the Company completed its annual ground-up asbestos reserve evaluation. As part of this evaluation, the Company reviewed all of its open direct domestic insurance accounts exposed to asbestos liability, as well as assumed reinsurance accounts and its London Market exposures for both direct insurance and assumed reinsurance. Based on this evaluation, the Company increased its net asbestos reserves by $212.  The Company found that estimates for certain direct accounts increased, principally due to a higher than previously estimated number of mesothelioma claim filings and an increase in costs associated with asbestos litigation.  The Company also experienced unfavorable development on certain of its assumed reinsurance accounts driven by a variety of account-specific factors, including those experienced by the direct policyholders. The Company currently expects to continue to perform an evaluation of its asbestos liabilities annually.
During the second quarter of 2014, the Company completed its annual ground-up environmental reserve evaluation. As part of this evaluation, the Company reviewed all of its open direct domestic insurance accounts exposed to environmental liability, as well as assumed reinsurance accounts and its London Market exposures for both direct and assumed reinsurance. Based on this evaluation, the Company increased its net environmental reserves by $27. The Company found estimates for certain individual account exposures increased based upon unfavorable litigation results and increased clean-up and expense costs. The Company currently expects to continue to perform a ground-up evaluation of its environmental liabilities annually and regularly evaluate the Company's historical direct net loss and expense paid and reported experience, and net loss and expense paid and reported experience by calendar and/or report year, to assess any emerging trends, fluctuations or characteristics suggested by the aggregate paid and reported activity.
Uncertainties Regarding Adequacy of Asbestos and Environmental Reserves
A number of factors affect the variability of estimates for asbestos and environmental reserves including assumptions with respect to the frequency of claims, the average severity of those claims settled with payment, the dismissal rate of claims with no payment and the expense to indemnity ratio. The uncertainty with respect to the underlying reserve assumptions for asbestos and environmental adds a greater degree of variability to these reserve estimates than reserve estimates for more traditional exposures. While this variability is reflected in part in the size of the range of reserves developed by the Company, that range may still not be indicative of the potential variance between the ultimate outcome and the recorded reserves. The recorded net reserves as of September 30, 2014 of $2.0 billion ($1.77 billion and $273 for asbestos and environmental, respectively) is within an estimated range, unadjusted for covariance, of $1.6 billion to $2.4 billion.

89


The process of estimating asbestos and environmental reserves remains subject to a wide variety of uncertainties, which are detailed in the Company's 2013 Form 10-K Annual Report. The Company believes that its current asbestos and environmental reserves are appropriate. However, analyses of future developments could cause the Company to change its estimates and ranges of its asbestos and environmental reserves, and the effect of these changes could be material to the Company's consolidated operating results and liquidity.
Consistent with the Company's long-standing reserve practices, the Company will continue to review and monitor its reserves in Property & Casualty Other Operations regularly, including its annual reviews of asbestos liabilities, reinsurance recoverables and the allowance for uncollectible reinsurance, and environmental liabilities, and where future developments indicate, make appropriate adjustments to the reserves. For a discussion of the Company's reserving practices, see the Critical Accounting Estimates - Property and Casualty Insurance Product Reserves, Net of Reinsurance section of the MD&A included in the Company's 2013 Form 10-K Annual Report.


90


Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and Other Universal Life-Type Contracts
Estimated gross profits are used in the amortization of: the deferred policy acquisition costs ("DAC") asset, which includes the present value of future profits; sales inducement assets (“SIA”); and unearned revenue reserves (“URR”). Portions of EGPs are also used in the valuation of reserves for death and other insurance benefit features on variable annuity and other universal life-type contracts.
In the third quarter of 2014, the Company completed its annual comprehensive non-market related policyholder behavior assumption
study and incorporated the results of the study into its projections of estimated future gross profits. All assumptions changes are
considered an Unlock in the period of revision. The Company will continue to evaluate our assumptions related to policyholder
behavior as we continue to implement initiatives to reduce the size of the variable annuity business.

The most significant EGP based balances are as follows:

 
Talcott Resolution
 
As of September 30, 2014
 
As of December 31, 2013
DAC [1]
$
1,236

 
$
1,552

SIA [1]
$
93

 
$
149

URR
$
1

 
$
50

Death and Other Insurance Benefit Reserves, net of reinsurance [2]
$
327

 
$
565

[1]
For additional information on DAC and SIA, see Note 8 - Deferred Policy Acquisition Costs and Present Value of Future Profits and Note 9 - Sales Inducements, respectively, of Notes to Condensed Consolidated Financial Statements.
[2]
For additional information on death and other insurance benefit reserves, see Note 10 - Separate Accounts, Death Benefits and Other Insurance Benefit Features of Notes to Condensed Consolidated Financial Statements.
Unlocks
The benefit (charge) to net income (loss) by asset and liability as a result of the Unlocks is as follow:
 
Talcott Resolution
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
DAC
$
(176
)
$
(170
)
 
$
(148
)
$
(204
)
SIA
(41
)
(12
)
 
(35
)
(19
)
URR
44

12

 
42

15

Death and Other Insurance Benefit Reserves
15

9

 
26

38

Total (before tax)
$
(158
)
$
(161
)
 
$
(115
)
$
(170
)
Income tax effect
(56
)
(57
)
 
(40
)
(60
)
Total (after-tax)
$
(102
)
$
(104
)
 
$
(75
)
$
(110
)
The Unlock charge, after-tax, for the three months ended September 30, 2014, was primarily due to lower future estimated gross profits on the fixed annuity block driven by the continued low interest rate environment as well as higher variable annuity unit costs. The Unlock charge for the nine months ended September 30, 2014 was primarily due to lower future estimated gross profits on the fixed annuity block driven by the continued low interest rate environment as well as higher variable annuity units costs due to higher than expected surrenders, partially offset by actual separate account returns being above our aggregated estimated returns during the period. The Unlock charge, for the three months and nine months ended September 30, 2013, was primarily due to assumption changes in connection with the annual policyholder behavior assumption study, partially offset by actual separate account returns above our aggregated estimated returns during the period.
The after-tax charge related to the annual policyholder assumption changes and market performance and other attributes for the three months ended September 30, 2014 is as follows:
 
Individual Annuity
Assumption changes
$
84

Market performance and other attributes [1]
18

Total (after-tax)
$
102

[1]
Other attributes include non-market components such as lapses.

91


An Unlock revises EGPs, on a quarterly basis, to reflect the Company’s current best estimate assumptions and market updates of policyholder account value. Modifications to the Company’s hedging programs may impact EGPs, and correspondingly impact DAC recoverability. After each quarterly Unlock, the Company also tests the aggregate recoverability of DAC by comparing the DAC balance to the present value of future EGPs. The margin between the DAC balance and the present value of future EGPs for variable annuities was 36% as of September 30, 2014. If the margin between the DAC asset and the present value of future EGPs is exhausted, then further reductions in EGPs would cause portions of DAC to be unrecoverable and the DAC asset would be written down to equal future EGPs.
Goodwill Impairment
Goodwill balances are reviewed for impairment at least annually or more frequently if events occur or circumstances change that would indicate that a triggering event for a potential impairment has occurred. The goodwill impairment test follows a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit’s goodwill exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that excess.
Management’s determination of the fair value of each reporting unit incorporates multiple inputs into discounted cash flow calculations including assumptions that market participants would make in valuing the reporting unit. Assumptions include levels of economic capital, future business growth, earnings projections, assets under management for Mutual Funds, and the weighted average cost of capital used for purposes of discounting. Decreases in the amount of economic capital allocated to a reporting unit, decreases in business growth, decreases in earnings projections and increases in the weighted average cost of capital will all cause a reporting unit’s fair value to decrease.
A reporting unit is defined as an operating segment or one level below an operating segment. The Company’s reporting units, for which goodwill has been allocated, are equivalent to the Company’s operating segments as there is no discrete financial information available for the separate components of the operating segment, all of the components of the segment have similar economic characteristics, and it is the segment level that management reviews. The Group Benefits, Consumer Markets and Mutual Funds operating segments all have equivalent reporting units. Goodwill associated with the June 30, 2000 buyback of Hartford Life, Inc. was allocated to each of Hartford Life’s reporting units based on the reporting unit's fair value of in-force business at the time of the buyback. Although this goodwill was allocated to each reporting unit it is held in Corporate for segment reporting.
In 2013, the Company completed the sale of its Retirement Plans business to Mass Mutual. Accordingly, the carrying value of the reporting unit's goodwill of $156 was eliminated and included in reinsurance loss on disposition in the Company's Consolidated Statements of Operations.
The annual goodwill assessment for the Mutual Funds, Group Benefits, and Consumer Markets reporting units was completed during the fourth quarter of 2013, which resulted in no write-downs of goodwill for the year ended December 31, 2013. All reporting units passed the first step of their annual impairment test with a significant margin.
The carrying value of goodwill is $498 as of September 30, 2014 and December 31, 2013.




92


KEY PERFORMANCE MEASURES AND RATIOS
The Company considers several measures and ratios to be the key performance indicators for its businesses. The following discussions include the more significant ratios and measures of profitability for the three and nine months ended September 30, 2014 and 2013. Management believes that these ratios and measures are useful in understanding the underlying trends in The Hartford’s businesses. However, these key performance indicators should only be used in conjunction with, and not in lieu of, the results presented in the segment discussions that follow in this MD&A. These ratios and measures may not be comparable to other performance measures used by the Company’s competitors. For additional information on key performance measures and ratios, see Definitions of Non-GAAP and other measures and ratios within MD&A of The Hartford’s 2013 Form 10-K Annual Report.
Definitions of Non-GAAP and other measures and ratios
Account Value
Account value includes policyholders’ balances for investment contracts and reserves for future policy benefits for insurance contracts. Account value is a measure used by the Company because a significant portion of the Company’s fee income is based upon the level of account value. These revenues increase or decrease with a rise or fall in the amount of account value whether caused by changes in the market or through net flows.
After-tax Margin, excluding buyouts and realized gains (losses)
After-tax margin, excluding buyouts and realized gains (losses), is a non-GAAP financial measure that the Company uses to evaluate, and believes is an important measure of, the Group Benefits segment’s operating performance. After-tax margin is the most directly comparable U.S. GAAP measure. The Company believes that after-tax margin, excluding buyouts and realized gains (losses), provides investors with a valuable measure of the performance of Group Benefits because it reveals trends in the business that may be obscured by the effect of buyouts and realized gains (losses). After-tax margin, excluding buyouts and realized gains (losses), should not be considered as a substitute for after-tax margin and does not reflect the overall profitability of Group Benefits. Therefore, the Company believes it is important for investors to evaluate both after-tax margin, excluding buyouts and realized gains (losses), and after-tax margin when reviewing performance. After-tax margin, excluding buyouts and realized gains (losses) is calculated by dividing core earnings excluding buyouts and realized gains (losses) by total core revenues excluding buyouts and realized gains (losses). A reconciliation of after-tax margin to after-tax margin, excluding buyouts and realized gains (losses) for the three and nine months ended September 30, 2014 and 2013 is set forth in the After-tax Margin section within MD&A - Group Benefits.
Assets Under Management
Assets under management (“AUM”) include account values and mutual fund assets. AUM is a measure used by the Company because a significant portion of the Company’s revenues are based upon asset values. These revenues increase or decrease with a rise or fall in the amount of account value whether caused by changes in the market or through net flows.
Catastrophe ratio
The catastrophe ratio (a component of the loss and loss adjustment expense ratio) represents the ratio of catastrophe losses incurred in the current calendar year (net of reinsurance) to earned premiums and includes catastrophe losses incurred for both the current and prior accident years. A catastrophe is an event that causes $25 or more in industry insured property losses and affects a significant number of property and casualty policyholders and insurers. The catastrophe ratio includes the effect of catastrophe losses, but does not include the effect of reinstatement premiums.
Combined ratio
The combined ratio is the sum of the loss and loss adjustment expense ratio, the expense ratio and the policyholder dividend ratio. This ratio is a relative measurement that describes the related cost of losses and expenses for every $100 of earned premiums. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting losses.
Combined ratio before catastrophes and prior accident year development
The combined ratio before catastrophes and prior accident year development, a non-GAAP financial measure, represents the combined ratio for the current accident year, excluding the impact of catastrophes. Combined ratio is the most directly comparable U.S. GAAP measure. A reconciliation of combined ratio to combined ratio before prior accident year reserve development for the three and nine months ended September 30, 2014 and 2013 is set forth in MD&A - Property & Casualty Commercial and Consumer Markets.

93


Core Earnings
Core earnings, a non-GAAP measure, is an important measure of the Company’s operating performance. The Company believes that core earnings provides investors with a valuable measure of the performance of the Company’s ongoing businesses because it reveals trends in our insurance and financial services businesses that may be obscured by including the net effect of certain realized capital gains and losses, discontinued operations, loss on extinguishment of debt, gains and losses on business disposition transactions, certain restructuring and other costs and the impact of Unlocks to DAC, SIA, URR and death and other insurance benefit reserve balances. Some realized capital gains and losses are primarily driven by investment decisions and external economic developments, the nature and timing of which are unrelated to the insurance and underwriting aspects of our business. Accordingly, core earnings excludes the effect of all realized gains and losses (net of tax and the effects of DAC) that tend to be highly variable from period to period based on capital market conditions. The Company believes, however, that some realized capital gains and losses are integrally related to our insurance operations, so core earnings includes net realized gains and losses such as net periodic settlements on credit derivatives. These net realized gains and losses are directly related to an offsetting item included in the income statement such as net investment income. Net income (loss) is the most directly comparable U.S. GAAP measure. Core earnings should not be considered as a substitute for net income (loss) and does not reflect the overall profitability of the Company’s business. Therefore, the Company believes that it is useful for investors to evaluate both net income (loss) and core earnings when reviewing the Company’s performance.
A reconciliation of net income (loss) to core earnings is set forth below.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
 
2014
2013
Net income (loss)
$
388

$
293

 
$
416

$
(138
)
Less: Unlock charge, after-tax
(102
)
(104
)
 
(75
)
(110
)
Less: Restructuring and other costs, after-tax
(14
)
(10
)
 
(32
)
(34
)
Less: Loss from discontinued operations, after-tax
—

(72
)
 
(588
)
(979
)
Less: Loss on extinguishment of debt, after-tax
—

—

 
—

(138
)
Less: Net reinsurance loss on dispositions, after-tax
—

—

 
—

(24
)
Less: Net realized capital gains (losses), after-tax and DAC, excluded from core earnings [1]
27

63

 
(11
)
110

Core earnings
$
477

$
416

 
$
1,122

$
1,037

[1]
Excludes net realized gain on dispositions of $1.0 billion, after-tax, for the nine months ended September 30, 2013 relating to the sales of the Retirement Plans and Individual Life businesses which are included in net reinsurance loss on dispositions, after-tax.
Current accident year loss and loss adjustment expense ratio before catastrophes
The current accident year loss and loss adjustment expense ratio before catastrophes is a measure of the cost of non-catastrophe claims incurred in the current accident year divided by earned premiums. Management believes that the current accident year loss and loss adjustment expense ratio before catastrophes is a performance measure that is useful to investors as it removes the impact of volatile and unpredictable catastrophe losses and prior accident year reserve development.
Expense ratio
The expense ratio for the underwriting segments of Property & Casualty Commercial and Consumer Markets is the ratio of underwriting expenses, excluding bad debt expense and certain corporate expenses, to earned premiums. Underwriting expenses include the amortization of deferred policy acquisition costs and insurance operating costs and expenses. Deferred policy acquisition costs include commissions, taxes, licenses and fees and other underwriting expenses and are amortized over the policy term.
The expense ratio for Group Benefits is expressed as a ratio of insurance operating costs and other expenses and amortization of deferred policy acquisition costs, to premiums and other considerations, excluding buyout premiums.
Fee Income
Fee income is largely driven from amounts collected as a result of contractually defined percentages of assets under management. These fees are generally collected on a daily basis. Therefore, the growth in assets under management either through positive net flows or net sales, or favorable equity market performance will have a favorable impact on fee income. Conversely, either negative net flows or net sales, or unfavorable equity market performance will reduce fee income.
Full Surrender Rates
Full surrender rates are an internal measure of contract surrenders calculated using annualized full surrenders divided by a two-point average of annuity account values. The full surrender rate represents full contract liquidation and excludes partial withdrawals.

94


Loss and loss adjustment expense ratio
The loss and loss adjustment expense ratio is a measure of the cost of claims incurred in the calendar year divided by earned premium and includes losses incurred for both the current and prior accident years, as well as the costs of mortality and morbidity and other contractholder benefits to policyholders. Among other factors, the loss and loss adjustment expense ratio needed for the Company to achieve its targeted return on equity fluctuates from year to year based on changes in the expected investment yield over the claim settlement period, the timing of expected claim settlements and the targeted returns set by management based on the competitive environment.
The loss and loss adjustment expense ratio is affected by claim frequency and claim severity, particularly for shorter-tail property lines of business, where the emergence of claim frequency and severity is credible and likely indicative of ultimate losses. Claim frequency represents the percentage change in the average number of reported claims per unit of exposure in the current accident year compared to that of the previous accident year. Claim severity represents the percentage change in the estimated average cost per claim in the current accident year compared to that of the previous accident year. As one of the factors used to determine pricing, the Company’s practice is to first make an overall assumption about claim frequency and severity for a given line of business and then, as part of the ratemaking process, adjust the assumption as appropriate for the particular state, product or coverage.
Loss ratio, excluding buyouts
The loss ratio is utilized for the Group Benefits segment and is expressed as a ratio of benefits, losses and loss adjustment expenses to premiums and other considerations, excluding buyout premiums. Since Group Benefits occasionally buys a block of claims for a stated premium amount, the Company excludes this buyout from the loss ratio used for evaluating the underwriting results of the business as buyouts may distort the loss ratio. Buyout premiums represent takeover of open claim liabilities and other non-recurring premium amounts.
Mutual Fund Assets
Mutual fund assets are owned by the shareholders of those funds and not by the Company and therefore are not reflected in the Company’s consolidated financial statements. Mutual fund assets are a measure used by the Company because a significant portion of the Company’s revenues are based upon asset values. These revenues increase or decrease with a rise or fall in the amount of account value whether caused by changes in the market or through net flows.
New business written premium
New business written premium represents the amount of premiums charged for policies issued to customers who were not insured with the Company in the previous policy term. New business written premium plus renewal policy written premium equals total written premium.
Policies in force
Policies in force represent the number of policies with coverage in effect as of the end of the period. The number of policies in force is a growth measure used for Consumer Markets and standard commercial lines within Property & Casualty Commercial and is affected by both new business growth and policy count retention.
Policy count retention
Policy count retention represents the ratio of the number of policies renewed during the period divided by the number of policies available to renew. The number of policies available to renew represents the number of policies, net of any cancellations, written in the previous policy term. Policy count retention is affected by a number of factors, including the percentage of renewal policy quotes accepted and decisions by the Company to non-renew policies because of specific policy underwriting concerns or because of a decision to reduce premium writings in certain classes of business or states. Policy count retention is also affected by advertising and rate actions taken by competitors.
Policyholder dividend ratio
The policyholder dividend ratio is the ratio of policyholder dividends to earned premium.
Prior accident year loss and loss adjustment expense ratio
The prior year loss and loss adjustment expense ratio represents the increase (decrease) in the estimated cost of settling catastrophe and non-catastrophe claims incurred in prior accident years as recorded in the current calendar year divided by earned premiums.
Reinstatement premiums
Reinstatement premium represents additional ceded premium paid for the reinstatement of the amount of reinsurance coverage that was reduced as a result of a reinsurance loss payment.

95


Renewal earned price increase (decrease)
Written premiums are earned over the policy term, which is six months for certain personal lines auto business and twelve months for substantially all of the remainder of the Company’s property and casualty business. Since the Company earns premiums over the six to twelve month term of the policies, renewal earned price increases (decreases) lag renewal written price increases (decreases) by six to twelve months.
Renewal written price increase (decrease)
Renewal written price increase (decrease) represents the combined effect of rate changes, amount of insurance and individual risk pricing decisions per unit of exposure since the prior year. The rate component represents the change in rate filings during the period and the amount of insurance represents the change in the value of the rating base, such as model year/vehicle symbol for auto, building replacement costs for property and wage inflation for workers’ compensation. A number of factors affect renewal written price increases (decreases) including expected loss costs as projected by the Company’s pricing actuaries, rate filings approved by state regulators, risk selection decisions made by the Company’s underwriters and marketplace competition. Renewal written price changes reflect the property and casualty insurance market cycle. Prices tend to increase for a particular line of business when insurance carriers have incurred significant losses in that line of business in the recent past or the industry as a whole commits less of its capital to writing exposures in that line of business. Prices tend to decrease when recent loss experience has been favorable or when competition among insurance carriers increases. Renewal written price statistics are subject to change from period to period, based on a number of factors, including changes in actuarial estimates and the effect of subsequent cancellations and non-renewals on rate achieved, and modifications made to better reflect ultimate pricing achieved.
Return on Assets (“ROA”), core earnings
ROA, core earnings, is a non-GAAP financial measure that the Company uses to evaluate, and believes is an important measure of, certain of the segment’s operating performance. ROA is the most directly comparable U.S. GAAP measure. The Company believes that ROA, core earnings, provides investors with a valuable measure of the performance of certain of the Company’s on-going businesses because it reveals trends in our businesses that may be obscured by the effect of realized gains (losses). ROA, core earnings, should not be considered as a substitute for ROA and does not reflect the overall profitability of our businesses. Therefore, the Company believes it is important for investors to evaluate both ROA, core earnings, and ROA when reviewing the Company’s performance. ROA is calculated by dividing core earnings by a two-point average AUM. A reconciliation of ROA to ROA, core earnings for the three and nine months ended September 30, 2014 and 2013 is set forth in the ROA section within MD&A - Mutual Funds.
Underwriting gain (loss)
The Company's management evaluates profitability of the P&C businesses primarily on the basis of underwriting gain (loss). Underwriting gain (loss) is a before tax measure that represents earned premiums less incurred losses, loss adjustment expenses and underwriting expenses. Underwriting gain (loss) is influenced significantly by earned premium growth and the adequacy of the Company's pricing. Underwriting profitability over time is also greatly influenced by the Company's underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through economies of scale and its management of acquisition costs and other underwriting expenses. The Company believes that underwriting gain (loss) provides investors with a valuable measure of before tax profitability derived from underwriting activities, which are managed separately from the Company's investing activities. A reconciliation of underwriting gain (loss) to net income for Property & Casualty Commercial and Consumer Markets is set forth in their respective discussions herein.
Written and earned premiums
Written premium is a statutory accounting financial measure which represents the amount of premiums charged for policies issued, net of reinsurance, during a fiscal period. Earned premium is a U.S. GAAP and statutory measure. Premiums are considered earned and are included in the financial results on a pro rata basis over the policy period. Management believes that written premium is a performance measure that is useful to investors as it reflects current trends in the Company’s sale of property and casualty insurance products. Written and earned premium are recorded net of ceded reinsurance premium.
Traditional life insurance type products, such as those sold by Group Benefits, collect premiums from policyholders in exchange for financial protection for the policyholder from a specified insurable loss, such as death or disability. These premiums together with net investment income earned from the overall investment strategy are used to pay the contractual obligations under these insurance contracts. Two major factors, new sales and persistency, impact premium growth. Sales can increase or decrease in a given year based on a number of factors, including but not limited to, customer demand for the Company’s product offerings, pricing competition, distribution channels and the Company’s reputation and ratings. Persistency refers to the percentage of policies remaining in-force from year-to-year.

96



PROPERTY & CASUALTY COMMERCIAL
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Underwriting Summary
2014
2013
Change
 
2014
2013
Change
Written premiums
$
1,583

$
1,567

1
%
 
$
4,823

$
4,745

2
%
Change in unearned premium reserve
5

4

25
%
 
145

108

34
%
Earned premiums
1,578

1,563

1
%
 
4,678

4,637

1
%
Losses and loss adjustment expenses
 
 
 
 
 
 
 
Current accident year before catastrophes
931

991

(6
%)
 
2,799

2,925

(4
%)
Current accident year catastrophes
8

48

(83
%)
 
103

98

5
%
Prior accident years
(5
)
26

(119
%)
 
—

71

(100
%)
Total losses and loss adjustment expenses
934

1,065

(12
%)
 
2,902

3,094

(6
%)
Amortization of DAC
230

226

2
%
 
686

679

1
%
Underwriting expenses
259

238

9
%
 
701

706

(1
%)
Dividends to policyholders
4

4

—
%
 
11

12

(8
%)
Underwriting gain
151

30

NM

 
378

146

159
%
Net servicing income [1]
5

5

—
%
 
14

18

(22
%)
Net investment income
250

230

9
%
 
736

732

1
%
Net realized capital gains (losses)
18

(1
)
NM

 
(38
)
35

NM

Other expenses
(28
)
(29
)
3
%
 
(86
)
(87
)
1
%
Income before income taxes
396

235

69
%
 
1,004

844

19
%
Income tax expense
116

62

87
%
 
283

224

26
%
Income from continuing operations, net of tax
280

173

62
%
 
721

620

16
%
Income (loss) from discontinued operations, net of tax
—

1

(100
%)
 
—

(1
)
100
%
Net income
$
280

$
174

61
%
 
$
721

$
619

16
%
[1]
Includes servicing revenues of $30 and $29 for the three months ended September 30, 2014 and 2013 and $86 and $88 for the nine months ended September 30, 2014 and 2013, respectively.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Premium Measures [1]
2014
2013
 
2014
2013
New business premium
$
263

$
253

 
$
810

$
797

Standard commercial lines policy count retention
84
%
81
%
 
83
%
81
%
Standard commercial lines renewal written pricing increase
5
%
7
%
 
6
%
7
%
Standard commercial lines renewal earned pricing increase
6
%
8
%
 
7
%
8
%
Standard commercial lines policies in-force as of end of period (in thousands)
 
 
 
1,269

1,255

[1]
Standard commercial lines consists of small commercial and middle market.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Underwriting Ratios
2014
2013
Change
 
2014
2013
Change
Loss and loss adjustment expense ratio
 
 
 
 
 
 
 
Current accident year before catastrophes
59.0

63.4

4.4

 
59.8

63.1

3.3

Current accident year catastrophes
0.5

3.1

2.6

 
2.2

2.1

(0.1
)
Prior year development
(0.3
)
1.7

2.0

 
—

1.5

1.5

Total loss and loss adjustment expense ratio
59.2

68.1

8.9

 
62.0

66.7

4.7

Expense ratio
31.0

29.7

(1.3
)
 
29.6

29.9

0.3

Policyholder dividend ratio
0.3

0.3

—

 
0.2

0.3

0.1

Combined ratio
90.4

98.1

7.7

 
91.9

96.9

5.0

Current accident year catastrophes and prior year development
0.2

4.8

4.6

 
2.2

3.6

1.4

Combined ratio before catastrophes and prior year development
90.2

93.3

3.1

 
89.7

93.2

3.5






97


Three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013
Overview
Net income for the three months ended September 30, 2014, as compared to the prior year period, increased primarily due to a higher underwriting gain and increases in net investment income and net realized capital gains.
Net income for the nine months ended September 30, 2014, as compared to the prior year period, increased primarily due to a higher underwriting gain, including a decrease in current accident year loss and loss adjustment expenses before catastrophes and a reduction in unfavorable prior accident year development, partially offset by net realized capital losses in 2014 as compared to net realized capital gains in 2013.
Revenues - Earned and Written Premiums
Earned premiums for the three and nine months ended September 30, 2014, as compared to the prior year periods, increased reflecting written premium growth over the preceding twelve months.
Written premiums, compared to the prior year period, increased for the three months ended September 30, 2014 in small commercial and middle market, partially offset by a decrease in premiums in specialty commercial. Written premium increases in small commercial and middle market were driven primarily by higher retention, written pricing increases as well as new business growth. Written premium decreases in specialty commercial were primarily the result of continued underwriting actions exit unprofitable programs as well as lower written premium in national accounts. Written premiums, compared to the prior year period, increased for the nine months ended September 30, 2014 in small commercial and middle market, partially offset by a decrease in premiums in specialty commercial.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses for the three months ended September 30, 2014, as compared to the prior year period, decreased reflecting lower current accident year losses before catastrophes in small commercial and middle market, a change to net favorable prior accident year development and a decrease in current accident year catastrophes. Losses and loss adjustment expenses for the nine months ended September 30, 2014, as compared to the prior year period, decreased reflecting lower current accident year losses before catastrophes in all three lines of business and a decrease in unfavorable prior accident year development, partially offset by an increase in current accident year catastrophes.
•
The reduction in the current accident year loss and loss adjustment expense ratios before catastrophes for the three and nine months ended September 30, 2014, as compared to the prior year periods, was primarily driven by a lower loss and loss adjustment expense ratio in workers' compensation due to favorable frequency and severity trends.
•
Current accident year catastrophe losses totaled $8, before tax, for the three months ended September 30, 2014, compared to $48, before tax, for the three months ended September 30, 2013. Decreased losses for the three months ended September 30, 2014, as compared to the prior year period, were primarily due to a reduction in storm severity across various U.S. geographic regions.
•
Current accident year catastrophe losses totaled $103, before tax, for the nine months ended September 30, 2014, compared to $98, before tax, for the nine months ended September 30, 2013. Increased losses for the nine months ended September 30, 2014 were primarily due to unfavorable winter storm frequency and severity across various U.S. geographic regions. For additional information, see MD&A - Critical Accounting Estimates, Property and Casualty Insurance Product Reserves, Net of Reinsurance.
•
Prior accident year reserve release of $5, before tax, for the three months ended September 30, 2014, compared to reserve strengthening of $26, before tax, for the three months ended September 30, 2013. Development for the three months ended September 30, 2014 was principally due to reserve releases related to general liability. Development for the three months ended September 30, 2013 was primarily due to reserve strengthening related to auto liability, partially offset by reserve releases related to professional and general liability and catastrophes.
•
Prior accident year reserve strengthening of $71, before tax, for the nine months ended September 30, 2013. was primarily due to reserve strengthening related auto liability and the closing of the workers' compensation New York Section 25A Fund for Reopened Cases, partially offset by reserve releases related to professional and general liability and uncollectible reinsurance. For additional information, see MD&A - Critical Accounting Estimates, Reserve Roll-forwards and Development.




98


Underwriting Ratios
The combined ratio, before catastrophes and prior year development, improved 3.1 points for the three months ended September 30, 2014 primarily due to a decrease in the current accident year loss and loss adjustment expense ratio before catastrophes, partially offset by an increase in the expense ratio due to higher commissions. The combined ratio, before catastrophes and prior year development, improved 3.5 points for the nine months ended September 30, 2014 primarily due to a decrease in the current accident year loss and loss adjustment expense ratio before catastrophes and the expense ratio (including a 1.0 point favorable impact related to a reduction in NY State Workers' Compensation Board assessments).
Investment Results
Investment income increased for the three and nine months ended September 30, 2014, as compared to the prior year periods. For discussion of consolidated investment results, see MD&A - Investment Results, Net Investment Income (Loss) and Net Realized Capital Gains (Losses).
Income Taxes
The effective tax rates in 2014 and 2013 differ from the U.S. Federal statutory rate of 35% primarily due to permanent differences related to investments in tax exempt securities. For further discussion of income taxes, see the Income Taxes section within Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.

99


CONSUMER MARKETS
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Underwriting Summary
2014
2013
Change
 
2014
2013
Change
Written premiums
$
1,019

$
988

3
%
 
$
2,949

$
2,833

4
%
Change in unearned premium reserve
55

63

(13
%)
 
111

104

7
%
Earned premiums
964

925

4
%
 
2,838

2,729

4
%
Losses and loss adjustment expenses
 
 

 
 
 

Current accident year before catastrophes
639

616

4
%
 
1,858

1,769

5
%
Current accident year catastrophes
32

18

78
%
 
219

186

18
%
Prior accident years
(15
)
(11
)
(36
%)
 
(52
)
(39
)
(33
%)
Total losses and loss adjustment expenses
656

623

5
%
 
2,025

1,916

6
%
Amortization of DAC
88

82

7
%
 
259

248

4
%
Underwriting expenses
135

145

(7
%)
 
404

427

(5
%)
Underwriting gain
85

75

13
%
 
150

138

9
%
Net servicing income [1]
2

5

(60
%)
 
2

20

(90
%)
Net investment income
33

33

—
%
 
99

109

(9
%)
Net realized capital gains (losses)
4

1

NM

 
(4
)
5

(180
%)
Other expenses
(17
)
(14
)
(21
%)
 
(43
)
(42
)
(2
%)
Income before income taxes
107

100

7
 %
 
204

230

(11
)%
Income tax expense
34

32

6
%
 
62

70

(11
%)
Net income
$
73

$
68

7
 %
 
$
142

$
160

(11
)%
 [1] Includes servicing revenues of $39 and $114 for the three and nine months ended September 30, 2013 related to Catalyst 360.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Written Premiums
2014
2013
Change
 
2014
2013
Change
Product Line
 
 
 
 
 
 
 
Automobile
690

668

3
%
 
2,030

1,954

4
%
Homeowners
329

320

3
%
 
919

879

5
%
Total
1,019

988

3
%
 
2,949

2,833

4
%
Earned Premiums
 
 

 
 
 


Product Line
 
 

 
 
 


Automobile
662

637

4
%
 
1,948

1,882

4
%
Homeowners
302

288

5
%
 
890

847

5
%
Total
964

925

4
%
 
2,838

2,729

4
%


100


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Premium Measures
2014
2013
 
2014
2013
Policies in-force end of period (in thousands)
 
 
 
 
 
Automobile
 
 
 
2,047

2,021

Homeowners
 
 
 
1,318

1,321

New business written premium
 
 
 
 
 
Automobile
$
108

$
100

 
$
315

$
280

Homeowners
$
34

$
35

 
$
101

$
99

Policy count retention
 
 
 
 
 
Automobile
85
%
86
%
 
86
%
86
%
Homeowners
86
%
86
%
 
87
%
87
%
Renewal written pricing increase
 
 
 
 
 
Automobile
5
%
5
%
 
5
%
5
%
Homeowners
7
%
8
%
 
7
%
7
%
Renewal earned pricing increase
 
 
 
 
 
Automobile
5
%
5
%
 
5
%
5
%
Homeowners
8
%
6
%
 
7
%
6
%
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Underwriting Ratios
2014
2013
Change
 
2014
2013
Change
Loss and loss adjustment expense ratio
 
 
 
 
 
 
 
Current accident year before catastrophes
66.3

66.6

0.3

 
65.5

64.8

(0.7
)
Current accident year catastrophes
3.3

1.9

(1.4
)
 
7.7

6.8

(0.9
)
Prior year development
(1.6
)
(1.2
)
0.4

 
(1.8
)
(1.4
)
0.4

Total loss and loss adjustment expense ratio
68.0

67.4

(0.6
)
 
71.4

70.2

(1.2
)
Expense ratio
23.1

24.5

1.4

 
23.4

24.7

1.3

Combined ratio
91.2

91.9

0.7

 
94.7

94.9

0.2

Current accident year catastrophes and prior year development
1.7

0.7

(1.0
)
 
5.9

5.4

(0.5
)
Combined ratio before catastrophes and prior year development
89.4

91.1

1.7

 
88.8

89.6

0.8

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Product Combined Ratios
2014
2013
Change
 
2014
2013
Change
Automobile
96.6

96.3

(0.3
)
 
95.6

95.6

—

Homeowners
83.1

81.2

(1.9
)
 
94.1

92.9

(1.2
)
Three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013
Overview
Net income increased for the three months ended September 30, 2014, as compared to the prior period, primarily due to an increase in underwriting gains driven by higher earned premium and lower underwriting expenses. Net income decreased for the nine months ended September 30, 2014, as compared to the prior period, primarily due to a decrease in net servicing income and a decrease in net investment income, partially offset by higher underwriting gains.
Revenues - Earned and Written Premiums
Earned and written premiums increased for the three and nine months ended September 30, 2014, primarily due to auto new business growth and stable premium retention.

101


Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses for the three and nine months ended September 30, 2014, as compared to the prior year periods, reflects higher current accident year losses before catastrophes and higher current accident year catastrophes partially offset by increased favorable prior accident years development.
•
Current accident year losses and loss adjustment expenses before catastrophes increased for the three months ended September 30, 2014, compared to the prior year period, consistent with the increase in earned premiums during the period.
Current accident year losses and loss adjustment expenses before catastrophes increased for the nine months ended September 30, 2014, compared to the prior year period, as a result of higher earned premiums and higher homeowners and auto physical damage claims due to increased non-catastrophe weather experience and large fire losses. The current accident year loss and loss adjustment expense ratio before catastrophes of 65.5 in 2014 increased 0.7 points from 64.8 in 2013.
•
Current accident year catastrophe losses of $32, before tax, for the three months ended September 30, 2014 compared to $18 for the prior year period. Losses for 2014 were primarily driven by multiple wind and hail events across various U.S. geographic regions. Losses for 2013 were primarily driven by multiple wind and hail events across various U.S. geographic regions and increased severity from tornadoes.
Current accident year catastrophe losses of $219, before tax, for the nine months ended September 30, 2014 compared with $186 for the prior year period. Losses for 2014 and 2013 were primarily driven by multiple wind and hail events across various U.S. geographic regions partially offset by lower losses from tornadoes and winter storms. For additional information, see MD&A - Critical Accounting Estimates, Property and Casualty Insurance Product Reserves, Net of Reinsurance.
•
Prior accident years reserve release of $15, before tax, for the three months ended September 30, 2014 compared to a release of $11, before tax, for the prior year period. Reserve releases for 2014 were related primarily to auto liability claims.
Prior accident years reserve release of $52, before tax, for the nine months ended September 30, 2014 compared to a release of $39, before tax, for the prior year period. Reserve releases for 2014 were primarily related to favorable development on accident year 2013 fire and water-related homeowners claims, and reserve releases related to fourth quarter 2013 catastrophes. Reserve releases for 2013 were related to catastrophes primarily due to Storm Sandy. For additional information, see MD&A - Critical Accounting Estimates, Property and Casualty Insurance Product Reserves, Net of Reinsurance.
Underwriting Ratios
The combined ratio, before current accident year catastrophes and prior year development, decreased 1.7 points to 89.4 for the three months ended September 30, 2014. The decrease primarily reflects a decrease in the current accident year loss and loss adjustment expense ratio before catastrophes due to moderate loss costs and strong earned pricing in auto and home, as well as a decrease in the expense ratio. The combined ratio, before current accident year catastrophes and prior year development, slightly improved by 0.8 points to 88.8 for the nine months ended September 30, 2014.
Investment Results
Investment income remained flat and decreased by $10 for the three and nine months ended September 30, 2014, respectively, as compared to the prior year periods. For discussion of consolidated investment results, see MD&A - Investment Results, Net Investment Income (Loss) and Net Realized Capital Gains (Losses).
Income Taxes
The effective tax rates in 2014 and 2013 differ from the U.S. Federal statutory rate of 35% primarily due to permanent differences related to investments in tax exempt securities. For further discussion of income taxes, see the Income Taxes section within Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.


102


PROPERTY & CASUALTY OTHER OPERATIONS
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Underwriting Summary
2014
2013
Change
 
2014
2013
Change
Losses and loss adjustment expenses [1]
10

2

NM

 
251

145

73
%
Underwriting expenses
8

8

—
%
 
22

22

—
%
Underwriting loss
(18
)
(10
)
(80
%)
 
(273
)
(167
)
(63
%)
Net servicing expense
—

—

—
%
 
—

(1
)
100
%
Net investment income
33

33

—
%
 
99

105

(6
%)
Net realized capital gains
2

2

—
%
 
4

6

(33
%)
Other income
1

1

—
%
 
3

2

50
%
Income (loss) before income taxes
18

26

(31
%)
 
(167
)
(55
)
NM

Income tax expense (benefit)
4

4

—
%
 
(59
)
(27
)
(119
%)
Net income (loss)
$
14

$
22

(36
%)
 
$
(108
)
$
(28
)
NM

[1] Consists of prior year loss reserve development.
Three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013
Net income decreased for the three months ended September 30, 2014, as compared to the prior year period, primarily due to assumed reinsurance reserve strengthening related to the London market business in runoff. Net loss increased for the nine months ended September 30, 2014, as compared to the prior year period, primarily due to the strengthening of asbestos and environmental reserves. As part of its annual ground-up asbestos and environmental reserve evaluations, the Company strengthened the asbestos and environmental reserves by $212 and $27, before tax, respectively, primarily due to a higher than previously estimated number of mesothelioma claim filings and an increase in costs associated with asbestos litigation. In 2013, the Company strengthened its asbestos and environmental reserves by $130 and $10, before tax, respectively, primarily related to an increase in net asbestos reserves due to higher claim frequency and severity.
For information on asbestos and environmental reserves, see Property & Casualty Other Operations Claims within the Property and Casualty Insurance Product Reserves, Net of Reinsurance section in Critical Accounting Estimates.
The effective tax rates in 2014 and 2013 differ from the U.S. Federal statutory rate of 35% primarily due to permanent differences related to investments in tax exempt securities. For further discussion of income taxes, see the Income Taxes section within Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.




103


GROUP BENEFITS
 
Three months ended September 30,
 
Nine months ended September 30,
Operating Summary
2014
2013
Change
 
2014
2013
Change
Premiums and other considerations [1]
$
753

$
831

(9
)%
 
$
2,329

$
2,495

(7
)%
Net investment income
93

96

(3
)%
 
284

293

(3
)%
Net realized capital gains (losses)
(3
)
(8
)
63
 %
 
11

47

(77
)%
Total revenues
843

919

(8
)%
 
2,624

2,835

(7
)%
Benefits, losses and loss adjustment expenses
584

637

(8
)%
 
1,782

1,911

(7
)%
Amortization of deferred policy acquisition costs
8

8

—
 %
 
24

24

—
 %
Insurance operating costs and other expenses
205

237

(14
)%
 
628

725

(13
)%
Total benefits, losses and expenses
797

882

(10
)%
 
2,434

2,660

(8
)%
Income before income taxes
46

37

24
 %
 
190

175

9
 %
Income tax expense
9

6

50
 %
 
47

41

15
 %
Net income [1]
$
37

$
31

19
 %
 
$
143

$
134

7
 %
 
Three months ended September 30,
 
Nine months ended September 30,
Premiums and other considerations
2014
2013
Change
 
2014
2013
Change
Fully insured – ongoing premiums
$
738

$
817

(10
)%
 
$
2,275

$
2,451

(7
)%
Buyout premiums
—

—

—
 %
 
8

1

NM

Other
15

14

7
 %
 
46

43

7
 %
Total premiums and other considerations
753

831

(9
)%
 
2,329

2,495

(7
)%
Fully insured ongoing sales, excluding buyouts
57

63

(10
)%
 
282

335

(16
)%
 
Three months ended September 30,
 
Nine months ended September 30,
Ratios, excluding buyouts
2014
2013
Change
 
2014
2013
Change
Group disability loss ratio
85.7
%
87.9
%
2.2
 
84.0
%
86.8
%
2.8
Group life loss ratio
71.7
%
68.2
%
(3.5)
 
70.6
%
69.0
%
(1.6)
Total loss ratio
77.6
%
76.7
%
(0.9)
 
76.4
%
76.6
%
0.2
Expense ratio
28.3
%
29.5
%
1.2
 
28.1
%
30.0
%
1.9
Selected ratios excluding Association - Financial Institutions
 
 
 
 
 
 
 
Group life loss ratio, excluding Association - Financial Institutions
72.9
%
75.8
%
2.9
 
73.2
%
76.7
%
3.5
Loss ratio, excluding Association - Financial Institutions
78.3
%
80.9
%
2.6
 
77.8
%
80.9
%
3.1
Expense ratio, excluding Association - Financial Institutions
27.6
%
25.8
%
(1.8)
 
26.9
%
26.4
%
(0.5)
 
Three months ended September 30,
 
Nine months ended September 30,
After-tax margin
2014
2013
Change
 
2014
2013
Change
After-tax margin (excluding buyouts)
4.4
 %
3.4
 %
1.0

 
5.5
%
4.7
%
0.8

Effect of net capital realized gains (losses), net of tax on after-tax margin
(0.1
)%
(0.5
)%
0.4

 
0.3
%
1.0
%
(0.7
)
After-tax margin (excluding buyouts), excluding realized gains (losses)
4.5
 %
3.9
 %
0.6

 
5.2
%
3.7
%
1.5

[1] Group Benefits has a block of Association - Financial Institutions business that is subject to a profit sharing arrangement with third parties. The Association - Financial Institutions business represented $7and $68 of premiums and other considerations and $0 and $1 of net income for the three months ended September 30, 2014 and 2013, respectively and $70 and $212 of premiums and other considerations and $1 and $2 of net income for the nine months ended September 30, 2014 and 2013, respectively.



104


Three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013
Net income increased for the three months ended September 30, 2014, as compared to the prior year period, due to lower benefits, losses and loss adjustment expenses and insurance operating costs and other expenses partially offset by lower premiums and other considerations. Net income increased for the nine months ended September 30, 2014, as compared to the prior year period, primarily due to lower benefits, losses and loss adjustment expenses and insurance operating costs and other expenses partially offset by lower premiums and other considerations and net realized capital gains (losses).
Premiums and other considerations decreased for the three and nine months ended September 30, 2014, compared to the prior year periods, due primarily to management actions related to the Association - Financial Institutions block of business. Insurance operating costs and other expenses decreased for the three and nine months ended September 30, 2014, compared to the prior year periods, due primarily to lower profit sharing expense related to the Association - Financial Institutions block of business.
Fully insured ongoing sales, excluding buyouts declined by 10% for the three months ended September 30, 2014, as compared to the prior year period, due to management actions related to the Association - Financial Institutions block of business. Fully insured ongoing sales, excluding buyouts declined 16% for the nine months ended September 30, 2014, as compared to prior year period. Excluding Association - Financial Institutions block of business, fully insured ongoing sales, excluding buyouts decreased 11% for the nine month period primarily due to lower large case sales.
The total loss ratio increased 0.9 points for the three months ended September 30, 2014, as compared to the prior year period. The increase was due to the unfavorable impact of the Association - Financial Institutions block of business and changes in reserve assumptions made in the prior year which favorably impacted prior year loss ratio by 1.3 points. Excluding the Association - Financial Institutions block of business, the loss ratio improved 2.6 points as compared to the prior year period, due to favorable life mortality experience and favorable disability results driven by continued pricing improvement and improved incidence, slightly offset by increased severity and less favorable recoveries.
The total loss ratio improved 0.2 points for the nine months ended September 30, 2014, as compared to the prior year period, due to an improved disability loss ratio offset by the unfavorable impact of the Association - Financial Institutions block of business. Excluding the Association - Financial Institutions block of business, the loss ratio improved 3.1 points for the nine month period due to favorable life mortality experience and favorable disability experience reflecting continued improved pricing and long-term disability incidence trends.
The expense ratio improved 1.2 points and 1.9 points for the three and nine months ended September 30, 2014, respectively, compared to the prior year periods, primarily due to lower profit sharing expense related to the Association - Financial Institutions block of business in relation to lower premium and other considerations.
The after-tax margin, excluding buyouts and net realized capital gains (losses), improved 0.6 points and 1.5 points, respectively, for the three and nine months ended September 30, 2014, compared to the prior year periods. The improvement was primarily due to the improved loss ratio excluding the Association - Financial Institutions block of business.
Investment income decreased for the three and nine months ended September 30, 2014, compared to the prior year periods. For discussion of consolidated investment results, see MD&A - Investment Results, Investment Income (Loss) and Net Realized Capital Gains (Losses).
The effective tax rates in 2014 and 2013 differ from the U.S. Federal statutory rate of 35% primarily due to permanent differences related to investments in tax exempt securities. For further discussion of income taxes, see the Income Taxes section within Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.





105


MUTUAL FUNDS
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Operating Summary
2014
2013 [1]
Change
 
2014
2013
Change
Fee income and other
$
185

$
168

10
 %
 
$
542

$
493

10
 %
Total revenues
185

168

10
 %
 
542

493

10
 %
Amortization of DAC
6

11

(45
)%
 
22

30

(27
)%
Insurance operating costs and other expenses
143

128

12
 %
 
419

375

12
 %
Total benefits, losses and expenses
149

139

7
 %
 
441

405

9
 %
Income before income taxes
36

29

24
 %
 
101

88

15
 %
Income tax expense
14

10

40
 %
 
37

31

19
 %
Net income
$
22

$
19

16
 %
 
$
64

$
57

12
 %
MUTUAL FUNDS AUM by DISTRIBUTION CHANNEL
 
 
 
 
 
 
 
Retail Mutual Funds [2]
 
 
 
 
 
 
 
 AUM, beginning of period
$
55,702

$
47,617

17
 %
 
$
53,040

$
45,013

18
 %
Sales
2,910

2,864

2
 %
 
$
8,235

$
8,815

(7
)%
Redemptions
(2,703
)
(2,901
)
7
 %
 
(8,010
)
(10,152
)
21
 %
Net Flows
$
207

$
(37
)
NM

 
$
225

$
(1,337
)
117
 %
Change in market value and other
(785
)
2,358

(133
)%
 
1,859

6,262

(70
)%
 AUM, end of period
$
55,124

$
49,938

10
 %
 
$
55,124

$
49,938

10
 %
 
 
 
 
 
 
 
 
Retirement Mutual Funds [3]
 
 
 
 
 
 
 
 AUM, beginning of period
$
18,628

$
15,991

16
 %
 
$
17,878

$
16,598

8
 %
Sales
843

923

(9
)%
 
3,120

2,802

11
 %
Redemptions
(957
)
(1,531
)
37
 %
 
(3,672
)
(5,547
)
34
 %
Net Flows
(114
)
(608
)
81
 %
 
(552
)
(2,745
)
80
 %
Change in market value and other
(343
)
1,438

(124
)%
 
845

2,968

(72
)%
 AUM, end of period
$
18,171

$
16,821

8
 %
 
$
18,171

$
16,821

8
 %
 
 
 
 
 
 
 
 
Total Mutual Funds
 
 
 
 
 
 
 
 AUM, beginning of period
$
74,330

$
63,608

17
 %
 
$
70,918

$
61,611

15
 %
Sales
3,753

3,787

(1
)%
 
11,355

11,617

(2
)%
Redemptions [4]
(3,660
)
(4,432
)
17
 %
 
(11,682
)
(15,699
)
26
 %
Net Flows
93

(645
)
114
 %
 
(327
)
(4,082
)
92
 %
Change in market value and other
(1,128
)
3,796

(130
)%
 
2,704

9,230

(71
)%
 AUM, end of period
$
73,295

$
66,759

10
 %
 
$
73,295

$
66,759

10
 %
Average Mutual Funds Assets Under Management
$
73,813

$
65,183

13
 %
 
$
72,107

$
64,185

12
 %
Annuity Mutual Fund Assets [5]
$
22,867

$
25,638

(11
)%
 
$
22,867

$
25,638

(11
)%
Total Assets Under Management
$
96,162

$
92,397

4
 %
 
$
96,162

$
92,397

4
 %
Average Assets Under Management
$
97,511

$
90,953

7
 %
 
$
96,449

$
90,022

7
 %
[1]
Retrospectively adjusted to conform to the current year method of reporting revenues and expenses. Fee income and directly related expenses previously reported as gross amounts are being reported as a net amount in insurance operating costs and other expenses. This change in the method of reporting revenues and expenses did not have a material impact on the segment’s operating results.
[2]
Includes mutual funds offered within 529 college savings plans.
[3]
Includes mutual funds offered within employee directed retirement plans including on-going business related to the Company's Retirement Plans and Individual Life businesses sold in January 2013.
[4]
Includes a $0.7 billion liquidation of the Company's target-date funds in the nine months ended September 30,2014 and an institutional redemption as well as a portfolio rebalance at a key distributor, together totaling $2.5 billion in the nine months ended September 30, 2013.
[5]
Includes Company-sponsored mutual fund assets held in separate accounts supporting variable insurance and investment products.

106


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
2013
Change
 
2014
2013
Change
MUTUAL FUNDS AUM by ASSET CLASS
 
 
 
 
 
 
 
Equity
44,308

39,057

13
 %
 
44,308

39,057

13
%
Fixed Income
14,765

14,595

1
 %
 
14,765

14,595

1
%
Multi-Strategy Investments
14,222

13,107

9
 %
 
14,222

13,107

9
%
Total Mutual Funds AUM, end of period
$
73,295

$
66,759

10
 %
 
$
73,295

$
66,759

10
%
RETURN ON ASSETS
 
 
 
 
 
 
 
ROA
9.0

8.4

7
 %
 
8.8

8.4

5
%
Effect of restructuring, net of tax
—

0.4

(100
)%
 
—

(0.2
)
100
%
Effect of net realized gains, net of tax and DAC
—

—

—
 %
 
—

 -

—
%
ROA, core earnings
9.0

8.0

13
 %
 
8.8

8.6

2
%
Three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013
Net income, compared to the prior year periods, increased for the three and nine months ended September 30, 2014 primarily due to a higher fee income driven by higher AUM. Average AUM for the three and nine months ended September 30, 2014, compared to the three and nine months ended September 30, 2013, increased by 7%. Operating expenses were also higher, driven by variable distribution and subadvisory costs, which tend to move in line with revenue.
Total mutual fund sales were fairly consistent for both the three and nine month periods ended September 30, 2014. However, net flows improved in both periods primarily driven by lower redemption rates.
Total AUM increased to $96.2 billion for the three and nine months ended September 30, 2014 due to growth in equity capital markets and high net equity sales while fixed income AUM remained relatively flat.
In October 2014, the Company transferred mutual fund assets from the Mutual Funds segment to a variable insurance trust within the Corporate segment as these funds are no longer aligned with the core strategy of our Mutual Funds segment business. The transfer includes approximately $700 of mutual fund assets supporting the retirement plans business sold to MassMutual and approximately $2.0 billion of mutual fund assets supporting variable annuity products in Talcott Resolution.  Fee income associated with these funds of approximately $9 per year will be included in the Corporate segment instead of the Mutual Funds segment beginning in the fourth quarter of 2014.













107


TALCOTT RESOLUTION

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Operating Summary
2014
2013
Change
 
2014
2013
Change
Earned premiums, fees and other
$
379

$
387

(2
%)
 
$
1,084

$
1,085

—
%
Net investment income
396

389

2
%
 
1,172

1,195

(2
%)
Realized capital gains (losses):
 
 


 
 
 
 
Net realized capital gains on business dispositions
—

—

—
%
 
—

1,575

(100
%)
Total other-than-temporary impairment (“OTTI”) losses
(6
)
—

NM

 
(13
)
—

NM

Other net realized capital gains
43

142

(70
%)
 
54

219

(75
%)
Net realized capital gains
37

142

(74
%)
 
41

1,794

(98
%)
Total revenues
812

918

(12
%)
 
2,297

4,074

(44
%)
Benefits, losses and loss adjustment expenses
440

437

1
%
 
1,263

1,279

(1
%)
Amortization of DAC
248

267

(7
%)
 
357

433

(18
%)
Insurance operating costs and other expenses
130

150

(13
%)
 
423

473

(11
%)
Reinsurance loss on dispositions
—

—

—
%
 
—

1,505

(100
%)
Total benefits, losses and expenses
818

854

(4
%)
 
2,043

3,690

(45
%)
Income from continuing operations before income taxes
(6
)
64

(109
%)
 
254

384

(34
%)
Income tax expense (benefit)
(34
)
(16
)
(113
%)
 
(3
)
25

(112
%)
Income from continuing operations, net of tax
28

80

(65
%)
 
$
257

$
359

(28
%)
Loss from discontinued operations, net of tax [1]
—

(73
)
100
%
 
$
(588
)
$
(978
)
40
%
Net income (loss)
$
28

$
7

NM

 
$
(331
)
$
(619
)
47
%
Assets Under Management (end of period)
 
 

 
 
 
 
Variable annuity account value
$
54,349

$
84,358

(36
%)
 
 
 


Fixed Market Value Adjusted annuity and other account value
8,959

13,839

(35
%)
 
 
 


Institutional annuity account value
15,824

17,118

(8
%)
 
 
 


Other account value [2]
107,274

107,935

(1
%)
 
 
 


Total account value [3]
$
186,406

$
222,049

(16
%)
 
 
 


Variable Annuity Account Value [4]
 
 

 
 
 
 
Account value, beginning of period
$
58,350

$
62,579

(7
%)
 
$
61,812

$
64,824

(5
%)
Net outflows
(3,231
)
(4,170
)
23
%
 
(9,237
)
(11,205
)
18
%
Change in market value and other
(770
)
3,103

(125
%)
 
1,774

7,893

(78
)%
Account value, end of period
$
54,349

$
61,512

(12
%)
 
$
54,349

$
61,512

(12
%)
[1]
Represents the loss from operations and sale of HLIKK in 2014 and 2013, and HLIL in 2013. For additional information, see Note 17 - Discontinued Operations of Notes to Condensed Consolidated Financial Statements.
[2]
Other account value includes $53.0 billion, $14.8 billion, and $39.5 billion as of September 30, 2014 for the Retirement Plans, Individual Life and Private Placement Life Insurance, respectively. Other account value includes $53.7 billion, $14.2 billion, $38.3 billion and $1.7 billion at September 30, 2013 for the Retirement Plans, Individual Life, Private Placement Life Insurance and discontinued U.K variable annuity businesses, respectively. Account values associated with the Retirement Plans and Individual Life businesses no longer generate asset-based fee income due to the sales of these businesses through reinsurance transactions.
[3]
Included in the total account value is approximately $(1.2) billion as of September 30, 2013 related to a Talcott Resolution intra-segment funding agreement which is eliminated in consolidation. Also included in the variable and fixed annuity account values as of September 30, 2013 is account value related to the Japan and UK businesses sold on June 30, 2014, and December 12, 2013; respectively.
[4]
Excludes account value related to the Japan business sold on June 30, 2014.

108


Three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013
The increase in net income for the three months ended September 30, 2014, and the decrease in net loss for the nine months ended September 30, 2014 compared to the prior years' periods were primarily driven by the decrease in the loss from discontinued operations, net of tax, related to the sale of HLIKK. Also contributing to the increase in net income for the three month period and decrease in net loss for the nine month period were lower amortization of DAC, and lower insurance operating costs and other expenses, including lower costs associated with the enhanced surrender value program, and higher income from limited partnerships and other alternative investments, partially offset by a decline in earned fee income attributable to the continued runoff of the business.
Account values for Talcott Resolution decreased to approximately $186 billion at September 30, 2014 from approximately $222 billion at September 30, 2013 due primarily to the sale of HLIKK, and net outflows partially offset by market value appreciation in variable annuities. For the three months ended September 30, 2014 variable annuity net outflows decreased by approximately $939 as compared to the prior year period due to a decrease in policy surrenders, primarily due to a decline in separate account returns.
For the three months ended September 30, 2014 the annualized full surrender rate on variable annuities declined to 16.5% compared to 20.3% for the three months ended September 30, 2013. This decline was primarily due to market appreciation for the three months ended September 30, 2013 as compared to a flat market in the three months ended September 30, 2014.
Contract counts decreased 13% for variable annuities at September 30, 2014 compared to September 30, 2013.  The Company expects annuity account values, and consequently earnings, to decline over time as fee income decreases due to surrenders, or potential transactions with third parties, reducing the size of the related book of business.
The effective tax rates in 2014 and 2013 differ from the U.S. Federal statutory rate of 35% primarily due to permanent differences related to investments in separate account DRD. For further discussion of income taxes, see the Income Taxes section within Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.



109


CORPORATE
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Operating Summary
2014
2013
Change
 
2014
2013
Change
Fee income [1]
$
2

$
2

—
%
 
$
9

$
7

29
%
Net investment income
5

6

(17
%)
 
12

19

(37
%)
Net realized capital gains (losses)
11

(5
)
NM

 
16

(91
)
118
%
Total revenues
18

3

NM

 
37

(65
)
157
%
Insurance operating costs and other expenses [1]
26

(46
)
157
%
 
86

29

197
%
Loss on extinguishment of debt
—

—

—
%
 
—

213

(100
%)
Reinsurance loss on disposition
—

—

—
%
 
—

69

(100
%)
Interest expense
93

94

(1
%)
 
282

301

(6
%)
Total benefits, losses and expenses
119

48

148
%
 
368

612

(40
%)
Loss from continuing operations before income taxes
(101
)
(45
)
(124
%)
 
(331
)
(677
)
51
%
Income tax benefit
(35
)
(17
)
(106
%)
 
(116
)
(216
)
46
%
Net loss
$
(66
)
$
(28
)
(136
%)
 
$
(215
)
$
(461
)
53
%
[1]
Fee income includes the income associated with the sales of non-proprietary insurance products in the Company’s broker-dealer subsidiaries that has an offsetting commission expense in insurance operating costs and other expenses.
Three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013
Net loss increased for the three months ended September 30, 2014 compared to the prior year period primarily due to an increase in insurance operating costs and other expenses driven by lower recovery of legal expenses and higher restructuring costs. Net loss decreased for the nine months ended September 30, 2014 compared to the prior period primarily due to net realized capital losses, loss on extinguishment of debt and reinsurance loss on dispositions in 2013 as well as lower interest expense, partially offset by higher insurance operating costs and other expenses. For discussion of investment results, see MD&A - Investment Results, Net Investment Income (Loss) and Net Realized Capital Gains (Losses).
Insurance operating costs and other expenses for the three and nine months ended September 30, 2014 included recoveries of $10, before tax, for past legal expenses associated with closed litigation and recoveries of $57, before tax, for the three and nine months ended September 30, 2013. In addition, insurance operating costs and other expenses for the three and nine months ended September 30, 2013 included a benefit of $19, before tax, from the resolution of items under the Company's spin-off agreement with its former parent company.
Restructuring costs, included in insurance operating costs and other expenses, related to outsourcing contract terminations increased by $8 for the three months ended September 30, 2014 compared to the prior year period. For discussion of restructuring costs, see Note 18 - Restructuring and Other Costs of Notes to Condensed Consolidated Financial Statements.
In March 2013, the Company repurchased approximately $800 of senior notes at a premium to the face amount of the then outstanding debt. The resulting loss on extinguishment of debt of $213 consists of the repurchase premium, the write-off of the unamortized discount, and debt issuance and other costs related to the repurchase transaction. The decrease in interest expense for the three and nine months ended September 30, 2014 is largely due to this debt repurchase.
In connection with the disposition of the Retirement Plans business in January 2013, the Company also wrote off goodwill of $69 representing all of the goodwill held in Corporate and allocated to Retirement Plans related to the Hartford Life, Inc. buyback in 2000.
For a reconciliation of the tax provision at the U.S. Federal statutory rate of 35% to the provision (benefit) for income taxes, see the Income Taxes section of Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.

110


ENTERPRISE RISK MANAGEMENT
The Company has an enterprise risk management function (“ERM”) that is charged with providing analysis of the Company’s risks on an individual and aggregated basis and with ensuring that the Company’s risks remain within its risk appetite and tolerances. The Company has established the Enterprise Risk and Capital Committee (“ERCC”) that includes the Company’s CEO, President of the Company, Chief Financial Officer (“CFO”), Chief Investment Officer (“CIO”), Chief Risk Officer, EVP of Human Resources, divisional Presidents and General Counsel. The ERCC is responsible for managing the Company’s risks and overseeing the enterprise risk management program.
The Company categorizes its main risks as follows:
•
Insurance Risk
•
Operational Risk
•
Financial Risk
Refer to the MD&A in The Hartford’s 2013 Form 10-K Annual Report for an explanation of the Company’s Operational Risk.
Insurance Risk Management
The Company categorizes its insurance risks across both property-casualty and life products. The Company establishes risk limits to control potential loss and actively monitors the risk exposures as a percent of statutory surplus. The Company also uses reinsurance to transfer insurance risk to well-established and financially secure reinsurers.
Reinsurance as a Risk Management Strategy
The Company utilizes reinsurance to transfer risk to affiliated and unaffiliated insurers in order to limit its maximum losses and to diversify its exposures and provide statutory surplus relief. Such arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. Reinsurance is used to manage aggregation of risk as well as to transfer certain risk to reinsurance companies based on specific geographic or risk concentrations.
The Company is a member of and participates in several reinsurance pools and associations. The Company evaluates the financial condition of its reinsurers and concentrations of credit risk. Reinsurance is placed with reinsurers that meet strict financial criteria established by the Company.
Reinsurance for Catastrophes
The Company has several catastrophe reinsurance programs, including reinsurance treaties that cover property and workers' compensation losses aggregating from single catastrophe events. The following table summarizes the primary catastrophe treaty reinsurance coverages that the Company has in place as of September 30, 2014:
Coverage
Treaty term
% of layer(s) reinsurance
Per occurrence limit
 
Retention
Principal property catastrophe program covering property catastrophe losses from a single event
1/1/2014 to 1/1/2015
90%
$
850

 
$
350

Reinsurance with the FHCF covering Florida Personal Lines property catastrophe losses from a single event
6/1/2014 to 6/1/2015
90%
$
119

[1]
$
43

Workers compensation losses arising from a single catastrophe event [2]
7/1/2014 to 7/1/2015
80%
$
350

 
$
100

[1]
The per occurrence limit on the FHCF treaty is $119 for the 6/1/2014 to 6/1/2015 treaty year based on the Company's election to purchase the required coverage from FHCF. Coverage is based on the best available information from FHCF, which was updated in January 2014. Updated information will be made available by the CAT fund in November 2014.
[2]
In addition, to the limit shown above, the workers compensation reinsurance includes a non-catastrophe, industrial accident layer, 80% of $30 excess a $20 retention.

111


Reinsurance Recoverables
Reinsurance Security
To manage reinsurer credit risk, a reinsurance security review committee evaluates the credit standing, financial performance, management and operational quality of each potential reinsurer. Through this process, the Company maintains a centralized list of reinsurers approved for participation in reinsurance transactions. Only reinsurers approved through this process are eligible to participate in new reinsurance transactions. The Company's approval designations reflect the differing credit exposure associated with various classes of business. Participation eligibility is categorized based upon the nature of the risk reinsured, including the expected liability payout duration. In addition to defining participation eligibility, the Company regularly monitors credit risk exposure to each reinsurance counterparty and has established limits tiered by counterparty credit rating. For further discussions on how the Company manages and mitigates third party credit risk, refer to the Credit Risk section.
Property and Casualty Insurance Product Reinsurance Recoverable
Property and casualty insurance product reinsurance recoverables represent loss and loss adjustment expense recoverables from a number of entities, including reinsurers and pools. The components of the gross and net reinsurance recoverable are as follows:
Reinsurance Recoverable
As of September 30, 2014
As of December 31, 2013
Paid loss and loss adjustment expenses
$
123

$
138

Unpaid loss and loss adjustment expenses
2,915

2,841

Gross reinsurance recoverable
$
3,038

$
2,979

Less: Allowance for uncollectible reinsurance
(247
)
(244
)
Net reinsurance recoverable
$
2,791

$
2,735

Life Insurance Product Reinsurance Recoverable
Life insurance product reinsurance recoverables represent future policy benefits and unpaid loss and loss adjustment expenses and other policyholder funds and benefits payable that are recoverable from a number of reinsurers. The components of the gross and net reinsurance recoverable are as follows:
Reinsurance Recoverable
As of September 30, 2014
As of December 31, 2013
Future policy benefits and unpaid loss and loss adjustment expenses and other policyholder funds and benefits payable
20,023

20,595

Gross reinsurance recoverable [1]
$
20,023

$
20,595

[1] No allowance for uncollectible reinsurance is required as of period end.
As of September 30, 2014, the Company has reinsurance recoverables from MassMutual and Prudential of $8.6 billion and $10.2 billion, respectively. These reinsurance recoverables are secured by invested assets held in trust for the benefit of the Company in the event of a default by the reinsurers. As of September 30, 2014, the fair value of assets held in trust securing the reinsurance recoverables from MassMutual and Prudential were $9.5 billion and $8.7 billion, respectively. As of September 30, 2014, the Company has no reinsurance-related concentrations of credit risk greater than 10% of the Company’s stockholders’ equity.
For further explanation of the Company's Insurance Risk Management strategy, see MD&A - Enterprise Risk Management - Insurance Risk Management in The Hartford's 2013 Form 10-K Annual Report.
Financial Risk Management
The Company identifies the following categories of financial risk:
•
Liquidity Risk
•
Interest Rate Risk
•
Foreign Currency Exchange Risk
•
Equity Risk
•
Credit Risk

112


Financial risks include direct, and indirect risks to the Company’s financial objectives coming from events that impact market conditions or prices. Financial risk also includes exposure to events that may cause correlated movement in multiple risk factors. The primary source of financial risks are the Company’s general account assets and the liabilities that those assets back, together with the guarantees which the company has written over various liability products, particularly its portfolio of variable annuities. The Company assesses its financial risk on a U.S. GAAP, statutory and economic basis. The Hartford has developed a disciplined approach to financial risk management that is well integrated into the Company’s underwriting, pricing, hedging, claims, asset and liability management, new product, and capital management processes. Consistent with its risk appetite, the Company establishes financial risk limits to control potential loss. Exposures are actively monitored, and mitigated where appropriate. The Company uses various risk management strategies, including reinsurance and over-the-counter and exchange traded derivatives with counterparties meeting the appropriate regulatory and due diligence requirements.
Liquidity Risk
Liquidity risk is the risk to current or prospective earnings or capital arising from the Company’s inability or perceived inability to meet its contractual cash obligations at the legal entity level when they come due over given time horizons without incurring unacceptable costs and without relying on uncommitted funding sources. Liquidity risk includes the inability to manage unplanned increases or accelerations in cash outflows, decreases or changes in funding sources, and changes in market conditions that affect the ability to liquidate assets quickly to meet obligations with minimal loss in value. Components of liquidity risk include funding risk, company specific liquidity risk and market liquidity risk. Funding risk is the gap between sources and uses of cash under normal and stressed conditions taking into consideration structural, regulatory and legal entity constraints. Changes in institution-specific conditions that affect the Company’s ability to sell assets or otherwise transact business without incurring a significant loss in value is company specific liquidity risk. Changes in general market conditions that affect the institution’s ability to sell assets or otherwise transact business without incurring a significant loss in value is market liquidity risk.
The Company has defined ongoing monitoring and reporting requirements to assess liquidity across the enterprise. The Company measures and manages liquidity risk exposures and funding needs within prescribed limits and across legal entities, business lines and currencies, taking into account legal, regulatory and operational limitations to the transferability of liquidity. The Company also monitors internal and external conditions, identifies material risk changes and emerging risks that may impact liquidity. The Company’s CFO has primary responsibility for liquidity risk.
For further discussion on liquidity see the section on Capital Resources and Liquidity.
Interest Rate Risk
Interest rate risk is the risk of financial loss due to adverse changes in the value of assets and liabilities arising from movements in interest rates. Interest rate risk encompasses exposures with respect to changes in the level of interest rates, the shape of the term structure of rates and the volatility of interest rates. Interest rate risk does not include exposure to changes in credit spreads. The Company has exposure to interest rates arising from its fixed maturity securities, interest sensitive liabilities and discount rate assumptions associated with the Company’s pension and other post retirement benefit obligations.
An increase in interest rates from current levels is generally a favorable development for the Company. Interest rate increases are expected to provide additional net investment income, reduce the cost of the variable annuity hedging program, and limit the potential risk of margin erosion due to minimum guaranteed crediting rates in certain Talcott Resolution products. Conversely, a rise in interest rates will reduce the fair value of the investment portfolio and if long-term interest rates rise dramatically within a six to twelve month time period, certain Talcott Resolution businesses may be exposed to disintermediation risk. Disintermediation risk refers to the risk that policyholders will surrender their contracts in a rising interest rate environment requiring the Company to liquidate assets in an unrealized loss position. In conjunction with the interest rate risk measurement and management techniques, certain of Talcott Resolution's fixed income product offerings have market value adjustment provisions at contract surrender. An increase in interest rates may also impact the Company’s tax planning strategies and in particular its ability to utilize tax benefits to offset certain previously recognized realized capital losses.
A decline in interest rates results in certain mortgage-backed and municipal securities being more susceptible to paydowns and prepayments or calls. During such periods, the Company generally will not be able to reinvest the proceeds at comparable yields. Lower interest rates will also likely result in lower net investment income, increased hedging cost associated with variable annuities and, if declines are sustained for a long period of time, it may subject the Company to reinvestment risk and possibly reduced profit margins associated with guaranteed crediting rates on certain Talcott Resolution products. Conversely, the fair value of the investment portfolio will increase when interest rates decline and the Company’s interest expense will be lower on its variable rate debt obligations.

113


The Company manages its exposure to interest rate risk by constructing investment portfolios that maintain asset allocation limits and asset/liability duration matching targets which may include the use of derivatives. The Company analyzes interest rate risk using various models including parametric models and cash flow simulation under various market scenarios of the liabilities and their supporting investment portfolios, which may include derivative instruments. Measures the Company uses to quantify its exposure to interest rate risk inherent in its invested assets and interest rate sensitive liabilities include duration, convexity and key rate duration. Duration is the price sensitivity of a financial instrument or series of cash flows to a parallel change in the underlying yield curve used to value the financial instrument or series of cash flows. For example, a duration of 5 means the price of the security will change by approximately 5% for a 100 basis point change in interest rates. Convexity is used to approximate how the duration of a security changes as interest rates change in a parallel manner. Key rate duration analysis measures the price sensitivity of a security or series of cash flows to each point along the yield curve and enables the Company to estimate the price change of a security assuming non-parallel interest rate movements.
To calculate duration, convexity, and key rate durations, projections of asset and liability cash flows are discounted to a present value using interest rate assumptions. These cash flows are then revalued at alternative interest rate levels to determine the percentage change in fair value due to an incremental change in the entire yield curve for duration and convexity, or a particular point on the yield curve for key rate duration. Cash flows from corporate obligations are assumed to be consistent with the contractual payment streams on a yield to worst basis. Yield to worst is a basis that represents the lowest potential yield that can be received without the issuer actually defaulting. The primary assumptions used in calculating cash flow projections include expected asset payment streams taking into account prepayment speeds, issuer call options and contract holder behavior. Mortgage-backed and asset-backed securities are modeled based on estimates of the rate of future prepayments of principal over the remaining life of the securities. These estimates are developed by incorporating collateral surveillance and anticipated future market dynamics. Actual prepayment experience may vary from these estimates.
The Company is also exposed to interest rate risk based upon the discount rate assumption associated with the Company’s pension and other postretirement benefit obligations. The discount rate assumption is based upon an interest rate yield curve comprised of bonds rated AA with maturities primarily between zero and thirty years. For further discussion of discounting pension and other postretirement benefit obligations, see the Critical Accounting Estimates Section of the MD&A under Pension and Other Postretirement Benefit Obligations and Note 18- Employee Benefit Plans of Notes to Consolidated Financial Statements in The Hartford’s 2013 Form 10-K Annual Report. In addition, management evaluates performance of certain Talcott Resolution products based on net investment spread which is, in part, influenced by changes in interest rates. For further discussion, see the Talcott Resolution section of the MD&A.
Foreign Currency Exchange Risk
Foreign currency exchange risk is defined as the risk of financial loss due to changes in the relative value between currencies. The Company’s foreign currency exchange risk is related to non-U.S. dollar denominated investments, which primarily consist of fixed maturity investments, and a yen denominated fixed payout annuity that is reinsured from HLIKK, a former indirect wholly-owned subsidiary that was sold on June 30, 2014. For further discussion of the sale, see Note 2 - Business Dispositions. In addition, the Company’s Talcott Resolution operations issued non-U.S. dollar denominated funding agreement liability contracts. A significant portion of the Company’s foreign currency exposure is mitigated through the use of derivatives.
Fixed Maturity Investments
The risk associated with the non-U.S. dollar denominated fixed maturities relates to potential decreases in value and income resulting from unfavorable changes in foreign exchange rates. In order to manage currency exposures, the Company enters into foreign currency swaps to hedge the variability in cash flows as the fair value associated with certain foreign denominated fixed maturities decline. These foreign currency swaps are structured to match the foreign currency cash flows of the hedged foreign denominated securities.
Liabilities
The Company has foreign currency exchange risk associated with the yen denominated Japan fixed payout annuities reinsured from HLIKK. The Company has entered into pay U.S. dollar, receive yen swap contracts to hedge the currency exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments.
The Company’s Talcott Resolution operations issued non-U.S. dollar denominated funding agreement liability contracts. The Company hedges the foreign currency risk associated with these liability contracts with currency rate swaps.


114

Variable Product Guarantee Risks and Risk Management
The Company’s variable products are significantly influenced by the U.S. and other equity markets. Increases or declines in equity markets impact certain assets and liabilities related to the Company’s variable products and the Company’s earnings derived from those products. The Company’s variable products include variable annuity contracts and mutual funds.
Generally, declines in equity markets will:
•
reduce the value of assets under management and the amount of fee income generated from those assets;
•
increase the liability for GMWB benefits resulting in realized capital losses;
•
increase the value of derivative assets used to hedge product guarantees resulting in realized capital gains;
•
increase the costs of the hedging instruments we use in our hedging program;
•
increase the Company’s net amount at risk ("NAR") for GMDB and GMWB;
•
increase the amount of required assets to be held backing variable annuity guarantees to maintain required regulatory reserve levels and targeted risk based capital ratios; and
•
decrease the Company’s projection of future estimated gross profits, resulting in a DAC unlock charge. See Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity Contracts within the Critical Accounting Estimates section of the MD&A for further information.
Generally, increases in equity markets will reduce the value of the hedge derivative assets, resulting in realized capital losses, and will generally have the inverse impact of those listed above. For additional information, see Risk Hedging - Variable Annuity Hedging Program section.
Variable Annuity Guaranteed Benefits
The Company’s variable annuities include GMDB and certain contracts include GMWB features. Declines in the equity markets will increase the Company’s liability for these benefits. A GMWB contract is ‘in the money’ if the contract holder’s guaranteed remaining benefit (“GRB”) becomes greater than the account value.
The NAR is generally defined as the guaranteed minimum benefit amount in excess of the contract holder’s current account value. Variable annuity account values with guarantee features were $54.3 billion and $81.9 billion (including HLIKK) as of September 30, 2014 and December 31, 2013, respectively.
The following table summarizes the account values of the Company’s variable annuities with guarantee features and the NAR split between various guarantee features (retained net amount at risk does not take into consideration the effects of the variable annuity hedge programs in place as of each balance sheet date):
Total Variable Annuity Guarantees
As of September 30, 2014
($ in billions)
Account
Value
Gross Net
Amount at Risk
Retained Net
Amount at Risk
% of Contracts In
the Money [3]
% In the
Money [3] [4]
U. S. Variable Annuity [1]
 
 
 
 
 
GMDB
54.3

4.0

0.9

27
%
13
%
GMWB
25.8

0.2

0.1

6
%
10
%
Total Variable Annuity Guarantees
As of December 31, 2013
($ in billions)
Account
Value
Gross Net
Amount at Risk
Retained Net
Amount at Risk
% of Contracts In
the Money [3]
% In the
Money [3] [4]
U. S. Variable Annuity [1]
 
 
 
 
 
GMDB
$
61.8

$
4.3

$
1.0

16
%
26
%
GMWB
30.3

0.2

0.1

5
%
12
%
Japan Variable Annuity [1] [5]
 
 
 
 
 
GMDB
20.1

0.8

0.6

31
%
8
%
GMIB [2]
18.5

0.1

0.1

20
%
3
%
[1]
Policies with a guaranteed living benefit also have a guaranteed death benefit. The NAR for each benefit is shown; however these benefits are not additive. When a policy terminates due to death, any NAR related to GMWB is released. Similarly, when a policy goes into benefit status on a GMWB, the GMDB NAR is reduced to zero.
[2]
Includes small amount of GMWB and GMAB.
[3]
Excludes contracts that are fully reinsured.
[4]
For all contracts that are “in the money”, this represents the percentage by which the average contract was in the money.
[5]
On June 30, 2014, the Company completed the sale of the Japan variable annuity business of HLIKK. For further information of the sale of the Japan variable annuity business, HLIKK in 2014, see Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements.

115

Many policyholders with a GMDB also have a GMWB. Policyholders that have a product that offer both guarantees can only receive the GMDB or GMWB. The GMDB NAR disclosed in the tables above is a point in time measurement and assumes that all participants utilize the GMDB benefit on that measurement date. For additional information on the Company’s GMDB liability, see Note 10 - Separate Accounts, Death Benefits and Other Insurance Benefit Features of Notes to Condensed Consolidated Financial Statements.
The Company expects to incur GMDB payments in the future only if the policyholder has an “in the money” GMDB at their death or their account value is reduced to a specified level, through contractually permitted withdrawals and/or market declines. If the account value is reduced to a specified level, the the contract holder will receive an annuity equal to the guaranteed remaining benefit (“GRB”). For the Company’s “life-time” GMWB products, this annuity can exceed the GRB. As the account value fluctuates with equity market returns on a daily basis and the “life-time” GMWB payments may exceed the GRB, the ultimate amount to be paid by the Company, if any, is uncertain and could be significantly more or less than the Company’s current carried liability. For additional information on the Company’s GMWB liability, see Note 5 - Fair Value Measurements of Notes to Condensed Consolidated Financial Statements.
Variable Annuity Market Risk Exposures
The following table summarizes the broad Variable Annuity Guarantees offered by the Company and the market risks to which the guarantee is most exposed from a U.S. GAAP accounting perspective.
Variable Annuity Guarantees [1]
U.S. GAAP Treatment [1]
Primary Market Risk Exposures [1]
Variable Guarantees
GMDB
Accumulation of the portion of fees required to cover expected claims, less accumulation of actual claims paid
Equity Market Levels
GMWB
Fair Value
Equity Market Levels / Implied Volatility / Interest Rates
For Life Component of GMWB
Accumulation of the portion of fees required to cover expected claims, less accumulation of actual claims paid
Equity Market Levels
[1]
Each of these guarantees and the related U.S. GAAP accounting volatility will also be influenced by actual and estimated policyholder behavior.
Risk Hedging
Variable Annuity Hedging Program
The Company’s variable annuity hedging is primarily focused on reducing the economic exposure to market risks associated with guaranteed benefits that are embedded in our global VA contracts, through the use of reinsurance and capital market derivative instruments. The variable annuity hedging also considers the potential impacts on Statutory accounting results.
Reinsurance
The Company uses reinsurance for a portion of contracts with GMWB riders issued prior to the third quarter of 2003 and GMWB risks associated with a block of business sold between the third quarter of 2003 and the second quarter of 2006. The Company also uses reinsurance for a majority of the GMDB issued.
Capital Market Derivatives
GMWB Hedge Program
The Company enters into derivative contracts to hedge market risk exposures associated with 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.
Additionally, the Company holds customized derivative contracts to provide protection from certain capital market risks for the remaining term of specified blocks of non-reinsured GMWB riders. These customized derivative contracts are based on policyholder behavior assumptions specified at the inception of the derivative contracts. The Company retains the risk for differences between assumed and actual policyholder behavior and between the performance of the actively managed funds underlying the separate accounts and their respective indices.
While the Company actively manages this dynamic hedging program, increased U.S. GAAP earnings volatility may result from factors including, but not limited to: policyholder behavior, capital markets, divergence between the performance of the underlying funds and the hedging indices, changes in hedging positions and the relative emphasis placed on various risk management objectives.

116

Macro Hedge Program
The Company’s macro hedging program uses derivative instruments, such as options and futures on equities and interest rates, to provide protection against the statutory tail scenario risk arising from U.S. GMWB and GMDB liabilities on the Company’s statutory surplus. These macro hedges cover some of the residual risks not otherwise covered by specific dynamic hedging programs. Management assesses this residual risk under various scenarios in designing and executing the macro hedge program. The macro hedge program will result in additional U.S. GAAP earnings volatility as changes in the value of the macro hedge derivatives, which are designed to reduce statutory reserve and capital volatility, may not be closely aligned to changes in GAAP liabilities.
Variable Annuity Hedging Program Sensitivities
The underlying guaranteed living benefit liabilities and the related hedge assets within the GMWB (excluding life contingent GMWB contracts) and Macro hedge programs are carried at fair value, with the exception of liabilities within the Macro hedge program.
The following table presents our estimates of the potential instantaneous impacts from sudden market stresses related to equity market prices, interest rates, and implied market volatilities. The sensitivities below represent: (1) the net estimated difference between the change in the fair value of GMWB liabilities and the underlying hedge instruments and (2) the estimated change in fair value of the hedge instruments for the macro program, before the impacts of amortization of DAC, and taxes. As noted above, certain hedge assets are used to hedge liabilities that are not carried at fair value and will not have a liability offset in the U.S. GAAP sensitivity analysis. All sensitivities are measured as of September 30, 2014 and are related to the fair value of liabilities and hedge instruments in place at that date for the Company’s variable annuity hedge programs. The impacts presented in the table below are estimated individually and measured without consideration of any correlation among market risk factors.
GAAP Sensitivity Analysis
As of September 30, 2014
(pre Tax/DAC) [1]
Programs
 
GMWB
Macro
Equity Market Return
-20
 %
-10
 %
10
 %
-20
 %
-10
 %
10
 %
Potential Net Fair Value Impact
$
(10
)
$
(7
)
$
8

$
74

$
26

$
(18
)
Interest Rates
-50 bps

-25 bps

+25 bps

-50 bps

-25 bps

+25 bps

Potential Net Fair Value Impact
$
(2
)
$
(1
)
$
—

$
14

$
7

$
(7
)
Implied Volatilities
10
 %
2
 %
-10
 %
10
 %
2
 %
-10
 %
Potential Net Fair Value Impact
$
37

$
7

$
(22
)
$
73

$
15

$
(75
)
[1]
These sensitivities are based on the following key market levels as of September 30, 2014: 1) S&P of 1972; 2) 10yr US swap rate of 2.73%; and 3) S&P 10yr volatility of 25.16%

The above sensitivity analysis is an estimate and should not be used to predict the future financial performance of the Company’s variable annuity hedge programs. The actual net changes in the fair value liability and the hedging assets illustrated in the above table may vary materially depending on a variety of factors which include but are not limited to:
•
The sensitivity analysis is only valid as of the measurement date and assumes instantaneous changes in the capital market factors and no ability to rebalance hedge positions prior to the market changes;
•
Changes to the underlying hedging program, policyholder behavior, and variation in underlying fund performance relative to the hedged index, which could materially impact the liability; and
•
The impact of elapsed time on liabilities or hedge assets, any non-parallel shifts in capital market factors, or correlated moves across the sensitivities.

117


Financial Risk on Statutory Capital
Statutory surplus amounts and risk-based capital (“RBC”) ratios may increase or decrease in any period depending upon a variety of factors and may be compounded in extreme scenarios or if multiple factors occur at the same time. At times the impact of changes in certain market factors or a combination of multiple factors on RBC ratios can be counterintuitive. Factors include:
•
In general, as equity market levels and interest rates decline, the amount and volatility of both our actual potential obligation, as well as the related statutory surplus and capital margin for death and living benefit guarantees associated with variable annuity contracts can be materially negatively affected, sometimes at a greater than linear rate. Other market factors that can impact statutory surplus, reserve levels and capital margin include differences in performance of variable subaccounts relative to indices and/or realized equity and interest rate volatilities. In addition, as equity market levels increase, generally surplus levels will increase. RBC ratios will also tend to increase when equity markets increase. However, as a result of a number of factors and market conditions, including the level of hedging costs and other risk transfer activities, reserve requirements for death and living benefit guarantees and RBC requirements could increase with rising equity markets, resulting in lower RBC ratios. Non-market factors, which can also impact the amount and volatility of both our actual potential obligation, as well as the related statutory surplus and capital margin, include actual and estimated policyholder behavior experience as it pertains to lapsation, partial withdrawals, and mortality.
•
As the value of certain fixed-income and equity securities in our investment portfolio decreases, due in part to credit spread widening, statutory surplus and RBC ratios may decrease.
•
As the value of certain derivative instruments that do not get hedge accounting decreases, statutory surplus and RBC ratios may decrease.
•
Our statutory surplus is also impacted by widening credit spreads as a result of the accounting for the assets and liabilities in our fixed market value adjusted (“MVA”) annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded at fair value. In determining the statutory reserve for the fixed MVA annuities, we are required to use current crediting rates in the U.S. In many capital market scenarios, current crediting rates in the U.S. are highly correlated with market rates implicit in the fair value of statutory separate account assets. As a result, the change in statutory reserve from period to period will likely substantially offset the change in the fair value of the statutory separate account assets. However, in periods of volatile credit markets, such as we have experienced in 2008 and 2009, actual credit spreads on investment assets may increase sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value losses. As actual credit spreads are not fully reflected in the current crediting rates in the U.S. the calculation of statutory reserves will not substantially offset the change in fair value of the statutory separate account assets resulting in reductions in statutory surplus. This has resulted and may continue to result in the need to devote significant additional capital to support the product.
•
With respect to our fixed annuity business, sustained low interest rates may result in a reduction in statutory surplus and an increase in NAIC required capital.
Most of these factors are outside of the Company’s control. The Company’s financial strength and credit ratings are significantly influenced by the statutory surplus amounts and RBC ratios of our insurance company subsidiaries. In addition, rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of statutory capital we must hold in order to maintain our current ratings.
The Company has reinsured approximately 24% of its risk associated with GMWB and 78% of its risk associated with the aggregate GMDB exposure. These reinsurance agreements serve to reduce the Company’s exposure to changes in the statutory reserves and the related capital and RBC ratios associated with changes in the capital markets. The Company also continues to explore other solutions for mitigating the capital market risk effect on surplus, such as internal and external reinsurance solutions, modifications to our hedging program, changes in product design and expense management.

118


Credit Risk
Credit risk is defined as the risk of financial loss due to uncertainty of an obligor’s or counterparty’s ability or willingness to meet its obligations in accordance with contractually agreed upon terms. The majority of the Company’s credit risk is concentrated in its investment holdings but is also present in reinsurance and insurance portfolios. Credit risk is comprised of three major factors: the risk of change in credit quality, or credit migration risk; the risk of default; and the risk of a change in value of a financial instrument due to changes in credit spread that are unrelated to changes in obligor credit quality. A decline in creditworthiness is typically associated with an increase in an investment’s credit spread, potentially resulting in an increase in other-than-temporary impairments and an increased probability of a realized loss upon sale.
The objective of the Company’s enterprise credit risk management strategy is to identify, quantify, and manage credit risk on an aggregate portfolio basis and to limit potential losses in accordance with an established credit risk appetite. The Company manages to its risk appetite by primarily holding a diversified mix of investment grade issuers and counterparties across its investment, reinsurance, and insurance portfolios. Potential losses are also limited within portfolios by diversifying across geographic regions, asset types, and sectors.
The Company manages a credit exposure from its inception to its maturity or sale. Both the investment and reinsurance areas have formulated procedures for counterparty approvals and authorizations. Although approval processes may vary by area and type of credit risk, approval processes establish minimum levels of creditworthiness and financial stability. Eligible credits are subjected to prudent and conservative underwriting reviews. Within the investment portfolio, private investments, such as commercial mortgages, and private placements, must be presented to their respective review committees for approval.
Credit risks are managed on an on-going basis through the use of various processes and analyses. At the investment, reinsurance, and insurance product levels, fundamental credit analyses are performed at the issuer/counterparty level on a regular basis. To provide a holistic review within the investment portfolio, fundamental analyses are supported by credit ratings, assigned by nationally recognized rating agencies or internally assigned, and by quantitative credit analyses. The Company utilizes a credit value at risk ("VaR") to measure default and migration risk on a monthly basis. Issuer and security level risk measures are also utilized. In the event of deterioration in credit quality, the Company maintains watch lists of problem counterparties within the investment and reinsurance portfolios. The watch lists are updated based on regular credit examinations and management reviews. The Company also performs quarterly assessments of probable expected losses in the investment portfolio. The process is conducted on a sector basis and is intended to promptly assess and identify potential problems in the portfolio and to recognize necessary impairments.
Credit risk policies at the enterprise and operation level ensure comprehensive and consistent approaches to quantifying, evaluating, and managing credit risk under expected and stressed conditions. These policies define the scope of the risk, authorities, accountabilities, terms, and limits, and are regularly reviewed and approved by senior management and ERM. Aggregate counterparty credit quality and exposure is monitored on a daily basis utilizing an enterprise-wide credit exposure information system that contains data on issuers, ratings, exposures, and credit limits. Exposures are tracked on a current and potential basis. Credit exposures are reported regularly to the ERCC and to the Finance, Investment and Risk Management Committee (“FIRMCo”). Exposures are aggregated by ultimate parent across investments, reinsurance receivables, insurance products with credit risk, and derivative counterparties. The credit database and reporting system are available to all key credit practitioners in the enterprise.
The Company exercises various and differing methods to mitigate its credit risk exposure within its investment and reinsurance portfolios. Some of the reasons for mitigating credit risk include financial instability or poor credit, avoidance of arbitration or litigation, future uncertainty, and exposure in excess of risk tolerances. Credit risk within the investment portfolio is most commonly mitigated through the use of derivative instruments or asset sales. Counterparty credit risk is mitigated through the practice of entering into contracts only with highly creditworthy institutions and through the practice of holding and posting of collateral. Systemic credit risk is mitigated through the construction of high-quality, diverse portfolios that are subject to regular underwriting of credit risks. For further discussion of the Company’s investment and derivative instruments, see the Portfolio Risks and Risk Management section and Note 6 - Investments and Derivative Instruments of Notes to Condensed Consolidated Financial Statements. Further discussion on managing and mitigating credit risk from the use of reinsurance via an enterprise security review process, see the Reinsurance as a Risk Management Strategy within the Insurance Risk Management section.
As of September 30, 2014, the Company had no exposures to any credit concentration risk of a single issuer or counterparty greater than 10% of the Company’s stockholders’ equity, other than the U.S. government. For further discussion of concentration of credit risk, see the Concentration of Credit Risk section in Note 6 - Investments and Derivative Instruments of Notes to Consolidated Financial Statements in The Hartford’s 2013 Form 10-K Annual Report.

119


Derivative Instruments
The Company utilizes a variety of over-the-counter ("OTC"), OTC-cleared 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 are permissible investments under the Company’s investment policies. For further information on the Company’s use of derivatives, see Note 6 - Investments and Derivative Instruments of Notes to Condensed Consolidated Financial Statements.
Derivative activities are monitored and evaluated by the Company’s compliance and risk management teams and reviewed by senior management. In addition, the Company monitors counterparty credit exposure on a monthly basis to ensure compliance with Company policies and statutory limitations. The notional amounts of derivative contracts represent the basis upon which pay or receive amounts are calculated and are not reflective of credit risk. Downgrades to the credit ratings of The Hartford’s insurance operating companies may have adverse implications for its use of derivatives including those used to hedge benefit guarantees of variable annuities. In some cases, downgrades may give derivative counterparties for OTC derivatives the unilateral contractual right to cancel and settle outstanding derivative trades or require additional collateral to be posted. In addition, downgrades may result in counterparties becoming unwilling to engage in additional OTC derivatives or may require collateralization before entering into any new trades. This will restrict the supply of derivative instruments commonly used to hedge variable annuity guarantees, particularly long-dated equity derivatives and interest rate swaps. Under these circumstances, the Company’s operating subsidiaries could conduct hedging activity using a combination of cash and exchange-traded instruments, in addition to using the available OTC derivatives.
The Company uses various derivative counterparties in executing its derivative transactions. The use of counterparties creates credit risk that the counterparty may not perform in accordance with the terms of the derivative transaction. The Company has derivative counterparty exposure policies which limit the Company’s exposure to credit risk. The Company’s policies with respect to derivative counterparty exposure establishes market-based credit limits, favors long-term financial stability and creditworthiness of the counterparty and typically requires credit enhancement/credit risk reducing agreements. The Company minimizes the credit risk of derivative instruments by entering into transactions with high quality counterparties primarily rated A or better, which are monitored and evaluated by the Company’s risk management team and reviewed by senior management. The Company also generally requires that derivative contracts, other than exchange-traded contracts, OTC-cleared swaps, certain forward contracts, and certain embedded and reinsurance derivatives, be governed by an International Swaps and Derivatives Association ("ISDA") Master Agreement, which is structured by legal entity and by counterparty and permits right of offset.
The Company has developed credit exposure thresholds which are based upon counterparty ratings. Credit exposures are measured using the market value of the derivatives, resulting in amounts owed to the Company by its counterparties or potential payment obligations from the Company to its counterparties. The Company generally enters into credit support annexes in conjunction with the ISDA agreements, which require daily collateral settlement based upon agreed upon thresholds. For purposes of daily derivative collateral maintenance, credit exposures are generally quantified based on the prior business day’s market value and collateral is pledged to and held by, or on behalf of, the Company to the extent the current value of the derivatives exceed the contractual thresholds. In accordance with industry standard and the contractual agreements, collateral is typically settled on the next business day. The Company has exposure to credit risk for amounts below the exposure thresholds which are uncollateralized, as well as for market fluctuations that may occur between contractual settlement periods of collateral movements.
For the Company’s derivative programs, the maximum uncollateralized threshold for a derivative counterparty for a single legal entity is $10. The Company currently transacts OTC derivatives in five legal entities that have a threshold greater than zero; and therefore the maximum combined threshold for a single counterparty across all legal entities that use derivatives is $50. In addition, the Company may have exposure to multiple counterparties in a single corporate family due to a common credit support provider. As of September 30, 2014, the maximum combined threshold for all counterparties under a single credit support provider across all legal entities that use derivatives is $100. Based on the contractual terms of the collateral agreements, these thresholds may be immediately reduced due to a downgrade in either party’s credit rating. For further discussion, see the Derivative Commitments section of Note 11 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements.
For the nine months ended September 30, 2014, the Company has incurred no losses on derivative instruments due to counterparty default.
In addition to counterparty credit risk, the Company may also introduce credit risk through the use of credit default swaps that are entered into to manage credit exposure. Credit default swaps involve a transfer of credit risk of one or many referenced entities from one party to another in exchange for periodic payments. The party that purchases credit protection will make periodic payments based on an agreed upon rate and notional amount, and for certain transactions there will also be an upfront premium payment. The second party, who assumes credit risk, will typically only make a payment if there is a credit event as defined in the contract and such payment will be typically equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation. A credit event is generally defined as default on contractually obligated interest or principal payments or bankruptcy of the referenced entity.

120


The Company uses credit derivatives to purchase credit protection and to assume credit risk with respect to a single entity, referenced index, or asset pool. The Company purchases credit protection through credit default swaps to economically hedge and manage credit risk of certain fixed maturity investments across multiple sectors of the investment portfolio. The Company also enters into credit default swaps that assume credit risk as part of replication transactions. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that are permissible investments under the Company’s investment policies. These swaps reference investment grade single corporate issuers and baskets, which include customized diversified portfolios of corporate issuers, which are established within sector concentration limits and may be divided into tranches which possess different credit ratings.
Investment Portfolio Risks and Risk Management
Investment Portfolio Composition
The following table presents the Company’s fixed maturities, AFS, by credit quality. The average credit ratings referenced below and throughout this section are based on availability and the midpoint of the applicable ratings among Moody’s, S&P, Fitch and Morningstar. If no rating is available from a rating agency, then an internally developed rating is used.
Fixed Maturities by Credit Quality
 
September 30, 2014
December 31, 2013
 
Amortized Cost
Fair Value
Percent of Total Fair Value
Amortized Cost
Fair Value
Percent of Total Fair Value
United States Government/Government agencies
$
7,590

$
7,874

13.2
%
$
8,231

$
8,208

13.2
%
AAA
6,820

7,074

11.9
%
6,215

6,376

10.2
%
AA
9,352

10,094

16.9
%
12,054

12,273

19.7
%
A
14,836

16,143

27.1
%
14,777

15,498

24.9
%
BBB
13,797

14,764

24.8
%
15,555

16,087

25.7
%
BB & below
3,503

3,637

6.1
%
3,809

3,915

6.3
%
Total fixed maturities, AFS
$
55,898

$
59,586

100
%
$
60,641

$
62,357

100
%
The value of securities in the AA category declined as compared to December 31, 2013, primarily due to the sale of Japan Government bonds concurrent with the disposition of the Japan variable and fixed annuity business. The value of securities in the A category increased as a percentage of total as a result of the reduction in the AA rated securities discussed above, and the impact of higher valuations as a result of lower long term interest rates and tighter credit spreads. In addition, the value of securities in the BBB and BB & below categories has declined, primarily due to sales of certain emerging market securities, primarily within the foreign government and corporate sectors. Fixed maturities, FVO, are not included in the above table. For further discussion on fair value option securities, see Note 5 - Fair Value Measurements of Notes to Condensed Consolidated Financial Statements.

121


The following table presents the Company’s AFS securities by type, as well as fixed maturities, FVO.
Securities by Type
 
September 30, 2014
 
December 31, 2013
 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Percent of Total Fair Value
 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Percent of Total Fair Value
ABS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
$
2,024

 
$
11

 
$
(27
)
 
$
2,008

 
3.4
%
 
$
1,982

 
$
11

 
$
(48
)
 
$
1,945

 
3.1
%
Small business
172

 
11

 
(10
)
 
173

 
0.3
%
 
194

 
3

 
(16
)
 
181

 
0.3
%
Other
248

 
10

 
—

 
258

 
0.4
%
 
228

 
11

 
—

 
239

 
0.4
%
Collateralized debt obligations ("CDOs")
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
Collateralized loan obligations (“CLOs”)
1,867

 
6

 
(17
)
 
1,856

 
3.1
%
 
1,781

 
3

 
(34
)
 
1,750

 
2.8
%
Commercial real estate ("CREs")
118

 
92

 
(10
)
 
200

 
0.3
%
 
176

 
88

 
(16
)
 
248

 
0.4
%
Other [1]
383

 
15

 
(6
)
 
389

 
0.7
%
 
383

 
17

 
(9
)
 
389

 
0.6
%
Commercial mortgage-backed securities ("CMBS")
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency backed [2]
1,085

 
39

 
(2
)
 
1,122

 
1.9
%
 
1,068

 
20

 
(12
)
 
1,076

 
1.7
%
Bonds
2,752

 
122

 
(7
)
 
2,867

 
4.8
%
 
2,836

 
168

 
(31
)
 
2,973

 
4.8
%
Interest only (“IOs”)
473

 
30

 
(10
)
 
493

 
0.8
%
 
384

 
28

 
(15
)
 
397

 
0.6
%
Corporate
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
Basic industry
1,792

 
110

 
(11
)
 
1,891

 
3.2
%
 
2,085

 
106

 
(38
)
 
2,153

 
3.5
%
Capital goods
1,895

 
186

 
(3
)
 
2,078

 
3.5
%
 
2,077

 
161

 
(14
)
 
2,224

 
3.6
%
Consumer cyclical
1,623

 
115

 
(6
)
 
1,732

 
2.9
%
 
1,801

 
119

 
(17
)
 
1,903

 
3.1
%
Consumer non-cyclical
3,376

 
323

 
(6
)
 
3,693

 
6.2
%
 
3,600

 
288

 
(21
)
 
3,867

 
6.2
%
Energy [3]
3,409

 
321

 
(21
)
 
3,709

 
6.2
%
 
2,384

 
174

 
(17
)
 
2,541

 
4.1
%
Financial services
4,992

 
373

 
(82
)
 
5,283

 
8.9
%
 
5,044

 
287

 
(145
)
 
5,186

 
8.3
%
Tech./comm.
3,130

 
328

 
(11
)
 
3,447

 
5.8
%
 
3,223

 
223

 
(28
)
 
3,418

 
5.5
%
Transportation
900

 
77

 
(3
)
 
974

 
1.6
%
 
972

 
65

 
(13
)
 
1,024

 
1.6
%
Utilities [3]
4,308

 
444

 
(19
)
 
4,733

 
7.9
%
 
5,605

 
386

 
(51
)
 
5,940

 
9.5
%
Other
158

 
16

 
—

 
174

 
0.3
%
 
222

 
14

 
(2
)
 
234

 
0.4
%
Foreign govt./govt. agencies
1,632

 
67

 
(27
)
 
1,672

 
2.8
%
 
4,228

 
52

 
(176
)
 
4,104

 
6.6
%
Municipal
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
1,121

 
102

 
(6
)
 
1,217

 
2.0
%
 
1,299

 
32

 
(67
)
 
1,264

 
2.0
%
Tax-exempt
10,623

 
925

 
(4
)
 
11,544

 
19.5
%
 
10,633

 
393

 
(117
)
 
10,909

 
17.5
%
RMBS
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
Agency
2,595

 
85

 
(6
)
 
2,674

 
4.5
%
 
3,366

 
59

 
(38
)
 
3,387

 
5.4
%
Non-agency
82

 
2

 
—

 
84

 
0.1
%
 
86

 
—

 
—

 
86

 
0.1
%
Alt-A
58

 
1

 
—

 
59

 
0.1
%
 
—

 
—

 
—

 
—

 
—
%
Sub-prime
1,172

 
23

 
(17
)
 
1,178

 
2.0
%
 
1,187

 
31

 
(44
)
 
1,174

 
1.9
%
U.S. Treasuries
3,910

 
180

 
(12
)
 
4,078

 
6.8
%
 
3,797

 
7

 
(59
)
 
3,745

 
6.0
%
Fixed maturities, AFS
55,898

 
4,014

 
(323
)
 
59,586

 
100
%
 
60,641

 
2,746

 
(1,028
)
 
62,357

 
100
%
Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial services
122

 
16

 
—

 
138

 
21.3
%
 
233

 
11

 
(29
)
 
215

 
24.8
%
Other
490

 
42

 
(22
)
 
510

 
78.7
%
 
617

 
56

 
(20
)
 
653

 
75.2
%
Equity securities, AFS
612

 
58

 
(22
)
 
648

 
100
%
 
850

 
67

 
(49
)
 
868

 
100
%
Total AFS securities
$
56,510

 
$
4,072

 
$
(345
)
 
$
60,234

 
 
 
$
61,491

 
$
2,813

 
$
(1,077
)
 
$
63,225

 
 
Fixed maturities, FVO
 
 
 
 
 
 
$
464

 
 
 
 
 
 
 
 
 
$
844

 
 
[1]
Gross unrealized gains (losses) exclude the fair value of bifurcated embedded derivative features of certain securities. Changes in value are recorded in net realized capital gains (losses).
[2]
Includes securities with pools of loans issued by the Small Business Administration which are backed by the full faith and credit of the U.S. government.
[3]
Securities with an amortized cost and fair value of $1.0 billion and $1.1 billion, respectively, as of December 31, 2013, were reclassified in 2014 from utilities to energy as a result of an update to the Barclays bond index which is the primary component used in determining the classification in the above table.

122


The decline in the fair value of AFS and FVO securities as compared to December 31, 2013 is primarily attributable to the sale of the Japan variable and fixed annuity business. In addition asset decline due to the effect of net outflows as a result of the continued runoff of Talcott Resolution; partially offset by higher valuations as a result of a decrease in long term interest rates and tighter credit spreads.
Emerging Market Exposure
Early in 2014, emerging market securities were negatively impacted by lower European interest rates, increased political tension in eastern Europe, softer-than-expected economic growth, as well as trade and budget deficits, raising the potential for destabilizing capital outflows and rapid currency depreciation, causing bondholders to demand a higher yield which caused the the fair value of securities held to decline. Credit spreads for emerging market securities have been volatile and we expect continued sensitivity to geopolitical events, the ongoing evolution of Fed policy and other economic factors, including contagion risk.
The Company has limited direct exposure within its investment portfolio to emerging market issuers, totaling only 2% of total invested assets as of September 30, 2014, and is primarily comprised of sovereign and corporate debt issued in US dollars. The Company identifies exposures with the issuers’ ultimate parent country of domicile, which may not be the country of the security issuer. The following table presents the Company’s exposure to securities within certain emerging markets currently under the greatest stress, defined as countries that have a sovereign S&P credit rating of B- or below; or countries that have had a current account deficit and have an inflation level greater than 5%, for the past six months or more.
 
September 30, 2014
December 31, 2013
 
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Argentina
$
3

$
3

$
38

$
40

Brazil
154

154

274

257

India
65

69

62

62

Indonesia
83

80

107

93

Lebanon
29

30

26

26

South Africa
59

57

65

60

Turkey
65

64

88

79

Ukraine
4

4

50

50

Uruguay
17

16

27

25

Venezuela
5

5

67

60

Other
19

19

—

—

Total
$
503

$
501

$
804

$
752

The Company manages the credit risk associated with emerging market securities within the investment portfolio on an on-going basis using macroeconomic analysis and issuer credit analysis subject to diversification and individual credit risk management limits. For additional details regarding the Company’s management of credit risk, see the Credit Risk section of this MD&A. Due to increased political tensions in Argentina, Ukraine, and Venezuela, the Company substantially reduced its exposure to these economies during the first quarter of 2014.
In addition, the Company has limited exposure to the Russian Federation, with a total amortized cost and fair value of $50 and $48, respectively, as of September 30, 2014. The exposure is primarily comprised of government and government agency bonds, but also includes corporate bonds.

123


Financial Services
The Company’s exposure to the financial services sector is predominantly through investment grade banking and insurance institutions. The following table presents the Company’s fixed maturity, AFS and equity, AFS securities in the financial services sector that are included in the Securities by Type table above.
 
September 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Fair Value
 
Net Unrealized
 
Amortized Cost
 
Fair Value
 
Net Unrealized
AAA
$
39

 
$
41

 
$
2

 
$
49

 
$
52

 
$
3

AA
416

 
445

 
29

 
468

 
493

 
25

A
2,574

 
2,748

 
174

 
2,518

 
2,616

 
98

BBB
1,710

 
1,764

 
54

 
1,978

 
1,952

 
(26
)
BB & below
375

 
423

 
48

 
264

 
288

 
24

Total
$
5,114

 
$
5,421

 
$
307

 
$
5,277

 
$
5,401

 
$
124

The overall increase in the financial services sector is due to higher valuations as a result of decreasing long term interest rates.
Commercial Real Estate
Commercial real estate market fundamentals, including property prices, financial conditions, transaction volume, and delinquencies, continue to improve. In addition, the availability of credit has increased and there is now less concern about the ability of borrowers to refinance as loans come due.
The following table presents the Company’s exposure to CMBS bonds by current credit quality and vintage year, included in the Securities by Type table above. Credit protection represents the current weighted average percentage of the outstanding capital structure subordinated to the Company’s investment holding that is available to absorb losses before the security incurs the first dollar loss of principal and excludes any equity interest or property value in excess of outstanding debt.
CMBS – Bonds [1]
September 30, 2014
 
AAA
 
AA
 
A
 
BBB
 
BB and Below
 
Total
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
2003 & Prior
$
10

 
$
10

 
$
5

 
$
5

 
$
11

 
$
11

 
$
3

 
$
3

 
$
19

 
$
23

 
$
48

 
$
52

2004
19

 
19

 
71

 
78

 
8

 
8

 
—

 
—

 
—

 
—

 
98

 
105

2005
247

 
261

 
86

 
89

 
99

 
101

 
83

 
84

 
46

 
46

 
561

 
581

2006
292

 
311

 
108

 
116

 
121

 
128

 
69

 
72

 
22

 
23

 
612

 
650

2007
214

 
225

 
170

 
183

 
78

 
83

 
31

 
31

 
93

 
93

 
586

 
615

2008
43

 
47

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
43

 
47

2009
11

 
11

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
11

 
11

2010
18

 
20

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
18

 
20

2011
56

 
61

 
—

 
—

 
—

 
—

 
6

 
6

 
—

 
—

 
62

 
67

2012
44

 
44

 
—

 
—

 
14

 
13

 
11

 
10

 
—

 
—

 
69

 
67

2013
16

 
16

 
94

 
96

 
71

 
74

 
12

 
13

 
—

 
—

 
193

 
199

2014
381

 
383

 
53

 
53

 
17

 
17

 
—

 
—

 
—

 
—

 
451

 
453

Total
$
1,351

 
$
1,408

 
$
587

 
$
620

 
$
419

 
$
435

 
$
215

 
$
219

 
$
180

 
$
185

 
$
2,752

 
$
2,867

Credit  protection
32.9%
 
24.8%
 
21.1%
 
20.9%
 
15.5%
 
27.3%

124


December 31, 2013
 
AAA
 
AA
 
A
 
BBB
 
BB and Below
 
Total
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
2003 
& Prior
$
10

 
$
10

 
$
35

 
$
36

 
$
6

 
$
6

 
$
10

 
$
10

 
$
31

 
$
33

 
$
92

 
$
95

2004
79

 
80

 
77

 
83

 
29

 
29

 
13

 
13

 
7

 
12

 
205

 
217

2005
307

 
324

 
79

 
82

 
101

 
104

 
71

 
71

 
68

 
75

 
626

 
656

2006
336

 
362

 
107

 
116

 
120

 
127

 
102

 
106

 
224

 
238

 
889

 
949

2007
188

 
202

 
211

 
218

 
112

 
127

 
—

 
—

 
130

 
125

 
641

 
672

2008
43

 
49

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
43

 
49

2009
11

 
11

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
11

 
11

2010
18

 
19

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
18

 
19

2011
63

 
66

 
—

 
—

 
—

 
—

 
6

 
5

 
—

 
—

 
69

 
71

2012
35

 
34

 
—

 
—

 
8

 
8

 
11

 
10

 
—

 
—

 
54

 
52

2013
30

 
29

 
89

 
86

 
59

 
58

 
10

 
9

 
—

 
—

 
188

 
182

Total
$
1,120

 
$
1,186

 
$
598

 
$
621

 
$
435

 
$
459

 
$
223

 
$
224

 
$
460

 
$
483

 
$
2,836

 
$
2,973

Credit 
protection
31.9%
 
25.9%
 
19.7%
 
19.8%
 
12.2%
 
24.6%
[1]
The vintage year represents the year the pool of loans was originated.
The Company also has exposure to CRE CDOs with an amortized cost and fair value of $118 and $200, respectively, as of September 30, 2014, and $176 and $248 respectively, as of December 31, 2013. These securities are comprised of diversified pools of commercial mortgage loans or equity positions of other CMBS securitizations. We continue to monitor these investments as economic and market uncertainties regarding future performance impact market liquidity and security premiums.
In addition to CMBS bonds and CRE CDOs, the Company has exposure to commercial mortgage loans as presented in the following table. These loans are collateralized by a variety of commercial properties and are diversified both geographically throughout the United States and by property type. These loans are primarily whole loans, where the Company is the sole lender, or may include participations. Loan participations are loans where the Company has purchased or retained a portion of an outstanding loan or package of loans and participates on a pro-rata basis in collecting interest and principal pursuant to the terms of the participation agreement. In general, A-Note participations have senior payment priority, followed by B-Note participations and then mezzanine loan participations. As of September 30, 2014, loans within the Company’s mortgage loan portfolio that have had extensions or restructurings, other than what is allowable under the original terms of the contract, are immaterial.
Commercial Mortgage Loans
 
September 30, 2014
 
December 31, 2013
 
Amortized Cost [1]
 
Valuation Allowance
 
Carrying Value
 
Amortized Cost [1]
 
Valuation Allowance
 
Carrying Value
Agricultural
$
67

 
$
(6
)
 
$
61

 
$
132

 
$
(7
)
 
$
125

Whole loans
5,491

 
(13
)
 
5,478

 
5,223

 
(10
)
 
5,213

A-Note participations
155

 
—

 
155

 
192

 
—

 
192

B-Note participations
17

 
—

 
17

 
99

 
(50
)
 
49

Mezzanine loans
19

 
—

 
19

 
19

 
—

 
19

Total
$
5,749

 
$
(19
)
 
$
5,730

 
$
5,665

 
$
(67
)
 
$
5,598

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

The increase in whole loans is attributable to the increased allocation to this asset class. During 2014, the Company funded $466 of commercial whole loans with a weighted average loan-to-value (“LTV”) ratio of 61% and a weighted average yield of 4.17%. The Company continues to originate commercial whole loans within primary markets, office, industrial and multi-family, focusing on loans with strong LTV ratios and high quality property collateral. The decline in the valuation allowance as compared to December 31, 2013 resulted from the sale of the underlying collateral supporting a B-note participation. The loan was fully reserved for and the Company did not recover any proceeds as a result of the sale. Included in the table above are mortgage loans held-for-sale with a carrying value and valuation allowance of $61 and $3, respectively, as of December 31, 2013. The carrying value of these loans is included in mortgage loans in the Company’s Condensed Consolidated Balance Sheets. There were no mortgage loans held-for-sale as of September 30, 2014.

125


Municipal Bonds
The following table summarizes the amortized cost, fair value, and weighted average credit quality of the Company's investments in securities backed by states, municipalities and political subdivisions (“municipal bonds”).
 
September 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Fair Value
 
Weighted Average Credit Quality
 
Amortized Cost
 
Fair Value
 
Weighted Average Credit Quality
General Obligation
$
2,264

 
$
2,468

 
AA-
 
$
2,358

 
$
2,455

 
AA
Pre-Refunded [1]
614

 
643

 
AAA
 
567

 
605

 
AAA
Revenue


 


 

 


 


 

Transportation
1,642

 
1,805

 
A+
 
1,880

 
1,879

 
A
Health Care
1,388

 
1,516

 
AA-
 
1,305

 
1,335

 
AA
Water & Sewer
1,239

 
1,332

 
AA
 
1,455

 
1,476

 
AA-
Education
1,108

 
1,212

 
AA
 
1,077

 
1,105

 
AA
Leasing [2]
817

 
903

 
A+
 
877

 
897

 
AA-
Sales Tax
911

 
997

 
AA-
 
793

 
795

 
AA-
Power
734

 
800

 
A+
 
706

 
722

 
A+
Housing
134

 
137

 
AA
 
177

 
171

 
AA
Other
893

 
948

 
AA-
 
737

 
733

 
A+
Total Revenue
8,866

 
9,650

 
AA-
 
9,007

 
9,113

 
AA-
Total Municipal
$
11,744

 
$
12,761

 
AA-
 
$
11,932

 
$
12,173

 
AA-
[1]
Pre-refunded bonds are bonds for which an irrevocable trust containing sufficient U.S. treasury, agency, or other securities has been established to fund the remaining payments of principal and interest.
[2]
Leasing revenue bonds are generally the obligations of a financing authority established by the municipality that leases facilities back to a municipality. The notes are typically secured by lease payments made by the municipality that is leasing the facilities financed by the issue. Lease payments may be subject to annual appropriation by the municipality or the municipality may be obligated to appropriate general tax revenues to make lease payments.
As of September 30, 2014 the largest issuer concentrations were the states of Illinois, California and Massachusetts, which each comprised less than 3% of the municipal bond portfolio and were primarily comprised of general obligation and taxable bonds. As of December 31, 2013, the largest issuer concentrations were the states of Illinois, California and Massachusetts, which each comprised less than 3% of the municipal bond portfolio and were primarily comprised of general obligation and taxable bonds.
Limited Partnerships and Other Alternative Investments
The following table presents the Company’s investments in limited partnerships and other alternative investments which include hedge funds, mortgage and real estate funds, mezzanine debt funds, and private equity and other funds. Hedge funds are comprised of approximately half credit and equity related funds and approximately half global macro related funds with a market neutral focus. Mortgage and real estate funds consist of investments in funds whose assets consist of mortgage loans, mortgage loan participations, mezzanine loans or other notes which may be below investment grade, as well as equity real estate and real estate joint ventures. Mezzanine debt funds include investments in funds whose assets consist of subordinated debt that often incorporates equity-based options such as warrants and a limited amount of direct equity investments. Private equity and other funds primarily consist of investments in funds whose assets typically consist of a diversified pool of investments in small to mid-sized non-public businesses with high growth potential.
 
September 30, 2014
 
December 31, 2013
 
Amount
 
Percent
 
Amount
 
Percent
Hedge funds
$
1,215

 
40.2
%
 
$
1,341

 
44.1
%
Mortgage and real estate funds
578

 
19.1
%
 
534

 
17.6
%
Mezzanine debt funds
68

 
2.2
%
 
82

 
2.7
%
Private equity and other funds
1,166

 
38.5
%
 
1,083

 
35.6
%
Total
$
3,027

 
100
%
 
$
3,040

 
100
%
Available-for-Sale Securities — Unrealized Loss Aging
The total gross unrealized losses were $345 as of September 30, 2014, and have decreased $732, or 68%, from December 31, 2013 due to decreases in interest rates and tighter credit spreads. As of September 30, 2014, $320 of the gross unrealized losses were associated with securities depressed less than 20% of cost or amortized cost.

126


The remaining $25 of gross unrealized losses were associated with securities depressed greater than 20%. The securities depressed more than 20% are securities with exposure to commercial real estate that have market spreads that continue to be wider than the spreads at the securities' respective purchase dates. Unrealized losses on securities with exposure to commercial real estate are largely due to the continued market and economic uncertainties surrounding the performance of certain structures or vintages. Based upon the Company’s cash flow modeling and current market and collateral performance assumptions, these securities with exposure to commercial real estate have sufficient credit protection levels to receive contractually obligated principal and interest payments.
As part of the Company’s ongoing security monitoring process, the Company has reviewed its AFS securities in an unrealized loss position and concluded that these securities are temporarily depressed and are expected to recover in value as the securities approach maturity or as market spreads continue to improve. For these securities in an unrealized loss position where a credit impairment has not been recorded, the Company’s best estimate of 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. For further information regarding the Company’s impairment analysis, see Other-Than-Temporary Impairments in the Investment Portfolio Risks and Risk Management section of this MD&A.
The following table presents the Company’s unrealized loss aging for AFS securities by length of time the security was in a continuous unrealized loss position.
 
September 30, 2014
 
December 31, 2013
Consecutive Months
Items
 
Cost or Amortized Cost
 
Fair Value
 
Unrealized Loss [1]
 
Items
 
Cost or Amortized Cost
 
Fair Value
 
Unrealized Loss [1]
Three months or less
1,641

 
$
5,518

 
$
5,452

 
$
(66
)
 
1,184

 
$
10,056

 
$
9,939

 
$
(117
)
Greater than three to six months
354

 
777

 
765

 
(12
)
 
349

 
1,200

 
1,167

 
(33
)
Greater than six to nine months
160

 
247

 
241

 
(6
)
 
956

 
6,362

 
5,988

 
(374
)
Greater than nine to eleven months
86

 
79

 
78

 
(1
)
 
148

 
413

 
374

 
(39
)
Twelve months or more
766

 
5,368

 
5,105

 
(260
)
 
578

 
5,625

 
5,109

 
(514
)
Total
3,007

 
$
11,989

 
$
11,641

 
$
(345
)
 
3,215

 
$
23,656

 
$
22,577

 
$
(1,077
)
[1]
Unrealized losses exclude the fair value of bifurcated embedded derivative features of certain securities as changes in value are recorded in net realized capital gains (losses).
The following tables present the Company’s unrealized loss aging for AFS securities continuously depressed over 20% by length of time (included in the table above).
 
September 30, 2014
 
December 31, 2013
Consecutive Months
Items
 
Cost or Amortized Cost
 
Fair Value
 
Unrealized Loss [1]
 
Items
 
Cost or Amortized Cost
 
Fair Value
 
Unrealized Loss [1]
Three months or less
85

 
$
30

 
$
23

 
$
(7
)
 
63

 
$
213

 
$
162

 
$
(51
)
Greater than three to six months
17

 
4

 
2

 
(2
)
 
20

 
177

 
130

 
(47
)
Greater than six to nine months
12

 
2

 
1

 
(1
)
 
28

 
449

 
336

 
(113
)
Greater than nine to eleven months
5

 
—

 
—

 
—

 
10

 
4

 
3

 
(1
)
Twelve months or more
55

 
39

 
24

 
(15
)
 
58

 
132

 
93

 
(39
)
Total
174

 
$
75

 
$
50

 
$
(25
)
 
179

 
$
975

 
$
724

 
$
(251
)
[1]
Unrealized losses exclude the fair value of bifurcated embedded derivatives features of certain securities as changes in value are recorded in net realized capital gains (losses).
 



127


Other-Than-Temporary Impairments
The following table presents the Company’s impairments recognized in earnings by security type.
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2014
2013
2014
2013
ABS
$
—

$
—

$
—

$
4

CRE CDOs
—

—

—

2

CMBS
 
 
 
 
Bonds
—

8

—

17

IOs
1

1

1

2

Corporate
4

5

26

15

Equity
9

7

11

13

Municipal
—

—

1

—

RMBS
 
 
 
 
Agency
—

—

3

—

Sub-prime
—

5

1

6

Total
$
14

$
26

$
43

$
59

Three and nine months ended September 30, 2014
For the three months ended September 30, 2014, impairments recognized in earnings were comprised of securities the Company intends to sell of $10 and credit impairments of $4. For the nine months ended September 30, 2014, impairments recognized in earnings were comprised of credit impairments of $26, securities the Company intends to sell of $15, and impairments on equity securities of $2.
Impairments for the the three months ended September 30, 2014 were primarily due to certain equity, AFS securities with debt-like characteristics that the Company intends to sell. For the three and nine months ended September 30, 2014, credit impairments were primarily concentrated in corporate securities. The primary driver for the corporate and equity impairments was one issuer that has declared bankruptcy and the Company has determined that it is more-likely-than-not that the issuer will not be able to repay a portion of the principal and interest that are owed to the Company and that the decline in the value of equity issued by the entity is other-than-temporary. Also included in the nine months ended September 30, 2014, were private placements that were impaired due to declines in expected cash flows related to the underlying referenced money market interest only strips, as a result of the low interest rate environment. The Company’s determination of expected future cash flows used to calculate the credit loss amount is a quantitative and qualitative process. The Company incorporates its best estimate of future performance using internal assumptions and judgments that are informed by economic and industry specific trends, as well as our expectation with respect to security specific developments. Credit impairments for the three and nine months ended September 30, 2014 were primarily identified through a security specific reviews and resulted from changes in the financial condition and near term prospects of certain issuers.
In addition to the credit impairments recognized in earnings, the Company recognized non-credit impairments in other comprehensive income of $1 and $3 for the three and nine months ended September 30, 2014, respectively. These non-credit impairments represent the difference between fair value and the Company's best estimate of expected future cash flows discounted at the security's effective yield prior to impairment, rather than at current market implied credit spreads. These non-credit impairments primarily represent increases in market liquidity premiums and credit spread widening that occurred after the securities were purchased, as well as a discount for variable-rate coupons which are paying less than at purchase date. In general, larger liquidity premiums and wider credit spreads are the result of deterioration of the underlying collateral performance of the securities.
Future impairments may develop as the result of changes in intent to sell of specific securities or if actual results underperform current modeling assumptions, which may be the result of, but are not limited to, macroeconomic factors and security-specific performance below current expectations. Ultimate loss formation will be a function of macroeconomic factors and idiosyncratic security-specific performance.
Three and nine months ended September 30, 2013
For the three and nine months ended September 30, 2013, the Company recognized impairments on securities that the Company intends to sell of $16 and $21, respectively, impairments on equity securities of $7 and $13, respectively, and credit impairments of $3 and $25, respectively. Intent-to-sell impairments for the three and nine months ended September 30, 2013, were primarily related to structured securities with exposure to commercial and residential real estate and corporate securities as a result of the Company's desire to reduce exposure to certain higher risk securities that were trading at relatively attractive valuations. Impairments on equity securities for the three and nine months ended September 30, 2013, were comprised of securities that were in an unrealized loss position and are not expected to recover in the foreseeable future. Credit impairments for the three months ended September 30, 2013 primarily consisted of private placement and CMBS interest only securities. For the nine months ended September 30, 2013, credit impairments were primarily concentrated in corporate and fixed-rate CMBS bonds and equity securities.

128


CAPITAL RESOURCES AND LIQUIDITY
The following section discusses the overall financial strength of The Hartford and its insurance operations including their ability to generate cash flows from each of their business segments, borrow funds at competitive rates and raise new capital to meet operating and growth needs over the next twelve months.
Liquidity Requirements and Sources of Capital
The Hartford Financial Services Group, Inc. (Holding Company)
The liquidity requirements of the holding company of The Hartford Financial Services Group, Inc. (“HFSG Holding Company”) have been and will continue to be met by HFSG Holding Company’s fixed maturities, short-term investments and cash, dividends from its insurance operations, as well as the issuance of common stock, debt or other capital securities and borrowings from its credit facilities, as needed.
As of September 30, 2014, HFSG Holding Company held fixed maturities, short-term investments and cash of $2.4 billion. Expected liquidity requirements of the HFSG Holding Company for the next twelve months include interest on debt of approximately $360 and common stockholder dividends, subject to the discretion of the Board of Directors, of approximately $300.
The Hartford has an intercompany liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates of up to $2.0 billion for liquidity and other general corporate purposes. The Connecticut Insurance Department granted approval for certain affiliated insurance companies that are parties to the agreement to treat receivables from a parent, including the HFSG Holding Company, as admitted assets for statutory accounting purposes. As of September 30, 2014, there were no amounts outstanding with the HFSG holding company.
Equity
In July 2014, the Board of Directors approved a $775 increase in the Company's authorized equity repurchase program that provides the Company with the ability to repurchase $2.775 billion in equity during the period commencing on January 1, 2014 and ending on December 31, 2015.
On July 30, 2014, the Company entered into an accelerated share repurchase agreement (“ASR”) with an investment bank to facilitate share repurchases under the Company's equity repurchase program in a timely and economical manner. Under the ASR agreement, the investment bank provided an initial delivery of shares upon execution of the agreement. The ASR agreement includes a forward component for future delivery of additional shares (or a return of a portion of the initially delivered shares) depending on changes in the VWAP of the Company's stock, less a discount and subject to certain adjustments.
Under this agreement, the Company paid $525 and received an initial delivery of 11.2 million shares of its common stock under the ASR. Of the $525 paid, $394 was recorded as treasury stock for the 11.2 million shares delivered and $131 was recorded as additional paid in capital representing the amount paid for additional shares not yet delivered as of September 30, 2014. Any additional shares to be received under the ASR will be reflected in treasury stock in the period they are delivered to the Company. Had the contract settled on September 30, 2014, the Company would have received an additional 3.5 million shares for a total of 14.7 million shares. The additional 3.5 million shares are included in the weighted average common shares outstanding as of September 30, 2014 for the calculation of basic and diluted earnings per share as the effect of excluding these shares would be anti-dilutive. Final maturity of the ASR will occur no later than the end of 2014, and may occur earlier at the financial institution's discretion.
During the three months ended September 30, 2014, the Company repurchased 20.1 million common shares for $714 and during the nine months ended September 30, 2014, the Company repurchased 39.1 million common shares for $1,365. These amounts exclude the 3.5 million additional shares the Company would have received under the ASR based on the VWAP through September 30, 2014. Including amounts paid under the ASR for the addition shares, the Company paid a total of $845 in the three month period and $1,496 in the nine month period for share repurchases. In addition, the Company repurchased 2.3 million common shares, for $82, from October 1, 2014 to October 22, 2014.
Debt
In July 2014, the Board also authorized the Company to allocate up to $500, including any premium or associated costs, to reduce debt outstanding. Initially expected to be completed prior to year end 2014, any call or tender offer for debt under the debt reduction allocation is now intended to occur in 2015 given the market conditions. In addition, the Company intends to repay at maturity the 4% senior notes due March 2015 and 7.3% senior notes due November 2015.
For additional information regarding debt, see Note 11 - Debt of Notes to Condensed Consolidated Financial Statements.

129


Intercompany liquidity agreements
On April 29, 2013 Hartford Life Insurance Company, a subsidiary of the Company, issued a Revolving Note (the "Note") in the principal amount of $100 to Hartford Life and Accident Insurance Company, a subsidiary of the Company, under the intercompany liquidity agreement. The Note bore interest at 0.92% and matured on April 29, 2014. On May 29, 2013 Hartford Life and Annuity Insurance Company, a subsidiary of the Company, issued a Note in the principal amount of $225 to Hartford Life and Accident Insurance Company, under the intercompany liquidity agreement. The Note bore interest at 1.00% and matured on May 29, 2014. On February 28, 2014, the total outstanding balances on these notes were repaid in full. On July 14, 2014, Hartford Fire Insurance Company ("Hartford Fire"), a subsidiary of the Company borrowed a total of $385 from Hartford Accident and Indemnity Company and Hartford Insurance Company of Illinois, both subsidiaries of the Company, under the intercompany liquidity agreement in the principal amounts of $310 and $75, respectively. Both notes mature on July 13, 2015 and accrue interest at a rate of 0.53% per annum. The effects of these intercompany arrangements were eliminated in consolidation. On September 30, 2014, Hartford Insurance Company of the Midwest repaid a loan of $20 to Hartford Casualty Insurance Company. The loan was effective July 1, 2014 at an accruing interest rate of .53% per annum.
Until April 1, 2014, HLAI ceded certain variable annuity contracts and their associated riders as well as certain payout annuities issued by HLAI or assumed by it to White River Life Reinsurance Company ("WRR"), an affiliate captive reinsurer. This arrangement provided the Company with a vehicle to provide more efficient financing of the risk associated with this business with internal funds. The reinsurance arrangement between HLAI and WRR did not impact the Company's reserving methodology or the amount of required regulatory capital associated with the reinsured business. The effects of this intercompany arrangement were eliminated in consolidation.
Pursuant to an intercompany note agreement between WRR and HFSG Holding Company, WRR was able to borrow up to $1 billion from the HFSG Holding Company in order to maintain certain statutory capital levels required by its plan of operations and which could have been used by WRR to settle outstanding intercompany payables with HLAI. WRR had $655 outstanding under the intercompany note agreement as of March 31, 2014. The effects of this intercompany arrangement are eliminated in consolidation. Effective April 1, 2014, the Company recaptured all reinsured risks from WRR to HLAI. On April 30, 2014, the Company dissolved WRR which resulted in WRR paying off the $655 surplus note and returning $367 in capital, all of which was contributed as capital to HLAI to support the recaptured risks. This transaction received required regulatory approvals.
Dividends
On February 27, 2014, The Hartford's Board of Directors declared a quarterly dividend of $0.15 per common share payable on April 1, 2014 to common shareholders of record as of March 10, 2014.
On May 22, 2014, The Hartford's Board of Directors declared a quarterly dividend of $0.15 per common share payable on July 1, 2014 to common shareholders of record as of June 2, 2014.
On July 30, 2014, The Hartford's Board of Directors declared a quarterly dividend of $0.18 per common share payable on October 1, 2014 to common shareholders of record as of September 2, 2014.
On October 16, 2014, The Hartford's Board of Directors declared a quarterly dividend of $0.18 per common share payable on January 2, 2015 to common shareholders of record as of December 1, 2014.
There are no current restrictions on the HFSG Holding Company's ability to pay dividends to its shareholders. For a discussion of restrictions on dividends to the HFSG Holding Company from its insurance subsidiaries, see "Dividends from Insurance Subsidiaries" below. For a discussion of potential restrictions on the HFSG Holding Company's ability to pay dividends, see the risk factor "Our ability to declare and pay dividends is subject to limitations" in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Pension Plans and Other Postretirement Benefits
While the Company has significant discretion in making voluntary contributions to the U. S. qualified defined benefit pension plan, the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006, the Worker, Retiree, and Employer Recovery Act of 2008, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, the Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21), and Internal Revenue Code regulations mandate minimum contributions in certain circumstances. The Company does not have a 2014 required minimum funding contribution for the U.S. qualified defined benefit pension plan and the funding requirements for all pension plans are expected to be immaterial. The Company contributed $100 in September 2014 to its U.S. qualified pension plan.

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In September 2014, the Company extended a limited time voluntary lump sum offer to approximately 13,500 vested participants in the U.S. qualified defined benefit pension plan who had separated from service, but who had not yet commenced annuity benefits. These participants have until November 2014 to elect to receive their benefit in a lump-sum payment, rather than as an annuity. The Company will make the payments in December 2014 using assets from the U.S. qualified defined benefit pension plan. The funded status of the plan is not expected to be adversely impacted by this program. Depending on the acceptance rate of participants, the Company may recognize a settlement charge to net income in the fourth quarter 2014. If the acceptance rate is high enough to trigger a settlement charge, the likely high end of the range for a charge is approximately $140 after tax. The charge would be offset by a corresponding increase in accumulated other comprehensive income and therefore not impact total stockholders’ equity.
Dividends from Insurance Subsidiaries
Dividends to the HFSG Holding Company from its insurance subsidiaries are restricted by insurance regulation. The payment of dividends by Connecticut-domiciled insurers is limited under the insurance holding company laws of Connecticut. These laws require notice to and approval by the state insurance commissioner for the declaration or payment of any dividend, which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer’s policyholder surplus as of December 31 of the preceding year or (ii) net income (or net gain from operations, if such company is a life insurance company) for the twelve-month period ending on the thirty-first day of December last preceding, in each case determined under statutory insurance accounting principles. In addition, if any dividend of a Connecticut-domiciled insurer exceeds the insurer’s earned surplus, it requires the prior approval of the Connecticut Insurance Commissioner. The insurance holding company laws of the other jurisdictions in which The Hartford’s insurance subsidiaries are incorporated (or deemed commercially domiciled) generally contain similar (although in certain instances somewhat more restrictive) limitations on the payment of dividends. Dividends paid to HFSG Holding Company by its life insurance subsidiaries are further dependent on cash requirements of HLI and other factors. In addition to statutory limitations on paying dividends, the Company also takes other items into consideration when determining dividends from subsidiaries. These considerations include, but are not limited to expected earnings and capitalization of the subsidiary, regulatory capital requirements and liquidity requirements of the individual operating company.
Before considering the transactions discussed below, the Company’s property-casualty insurance subsidiaries are permitted to pay up to a maximum of approximately $1.5 billion in dividends to HFSG Holding Company in 2014 without prior approval from the applicable insurance commissioner and the domestic life insurance subsidiaries' dividend limitation under the holding company laws of Connecticut is $560 in 2014.
As discussed further below, for the nine months ended September 30, 2014, HFSG Holding Company received $2.5 billion in dividends from its property-casualty insurance subsidiaries. The amounts received from its property-casualty insurance subsidiaries included $97 related to funding interest payments on an intercompany note between Hartford Holdings Inc. ("HHI") and Hartford Fire.
On January 30, 2014, The Hartford received approval from the State of Connecticut Insurance Department ("CTDOI") for HLAI and HLIC to dividend approximately $800 of cash and invested assets to HLA and this dividend was paid on February 27, 2014.   All of the issued and outstanding equity of HLIC was then distributed from HLA to HLI. As a result, HLA and HLIC have no remaining ordinary dividend capacity for the twelve months following this transaction. Any additional dividends from HLA and HLIC in 2014 would be extraordinary in nature and require prior approval from the CTDOI.
On July 14 and 15, 2014, HFSG Holding Company received approximately $2.0 billion in dividends from Hartford Fire through a series of transactions affecting the property and casualty and life insurance subsidiaries. These dividends consisted of approximately $600 in accelerated ordinary dividends and an extraordinary dividend of $1.4 billion based on approval received from the CTDOI on July 8, 2014. The extraordinary dividend consisted of approximately $900 of proceeds from the sale of HLIKK and approximately $500 from the Company's domestic life insurance subsidiaries. This $500 dividend was paid by HLAI to HLIC on July 15, 2014 and then distributed to HLI. HLI then used this dividend and the HLIKK sale proceeds to pay a dividend of $1.4 billion to HHI, its parent. HHI used the $1.4 billion dividend to pay down its obligation under an intercompany note with Hartford Fire. Hartford Fire has no remaining ordinary dividend capacity for the twelve months following this transaction. Any additional dividends from Hartford Fire in 2014 would be extraordinary in nature and require prior approval from the CTDOI. As a result of the accelerated dividend, the Company does not anticipate taking any dividends from Hartford Fire until the third quarter of 2015.
On February 5, 2013 the Company received approval from the CTDOI for a $1.2 billion extraordinary dividend from its Connecticut domiciled life insurance subsidiaries. This dividend was paid on February 22, 2013.
Other Sources of Capital for the HFSG Holding Company
The Hartford endeavors to maintain a capital structure that provides financial and operational flexibility to its insurance subsidiaries, ratings that support its competitive position in the financial services marketplace (for further detail see Ratings within the Capital Resources and Liquidity section of MD&A), and shareholder returns. As a result, the Company may from time to time raise capital from the issuance of equity, equity-related debt or other capital securities and is continuously evaluating strategic opportunities. The issuance of common equity, equity-related debt or other capital securities could result in the dilution of shareholder interests or reduced net income due to additional interest expense.

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Shelf Registrations
On August 9, 2013, The Hartford filed with the Securities and Exchange Commission (the “SEC”) an automatic shelf registration statement (Registration No. 333-190506) for the potential offering and sale of debt and equity securities. The registration statement allows for the following types of securities to be offered: debt securities, junior subordinated debt securities, preferred stock, common stock, depositary shares, warrants, stock purchase contracts, and stock purchase units. Because The Hartford is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act of 1933, the registration statement went effective immediately upon filing and The Hartford may offer and sell an unlimited amount of securities under the registration statement during its three-year life.
Contingent Capital Facility
The Hartford is party to a put option agreement that provides The Hartford with the right to require the Glen Meadow ABC Trust, a Delaware statutory trust, at any time and from time to time, to purchase The Hartford’s junior subordinated notes in a maximum aggregate principal amount not to exceed $500. Under the Put Option Agreement, The Hartford will pay the Glen Meadow ABC Trust premiums on a periodic basis, calculated with respect to the aggregate principal amount of Notes that The Hartford had the right to put to the Glen Meadow ABC Trust for such period. The Hartford has agreed to reimburse the Glen Meadow ABC Trust for certain fees and ordinary expenses. The Company holds a variable interest in the Glen Meadow ABC Trust where the Company is not the primary beneficiary. As a result, the Company did not consolidate the Glen Meadow ABC Trust. As of September 30, 2014, The Hartford has not exercised its right to require Glen Meadow ABC Trust to purchase the Notes. As a result, the Notes remain a source of capital for the HFSG Holding Company.
Commercial Paper and Revolving Credit Facility
Commercial Paper
While The Hartford’s maximum borrowings available under its commercial paper program are $2.0 billion, the Company is dependent upon market conditions to access short-term financing through the issuance of commercial paper to investors. As of September 30, 2014 there is no commercial paper outstanding.
Revolving Credit Facilities
As of September 30, 2014, the Company has a senior unsecured revolving credit facility (the “Credit Facility”) that provides for borrowing capacity up to $1.75 billion (available in U.S. dollars, Euro, Sterling, Canadian dollars and Japanese Yen) through January 6, 2016. Of the total availability under the Credit Facility, up to $250 is available to support letters of credit issued on behalf of the Company or subsidiaries of the Company. Under the Credit Facility, the Company must maintain a minimum level of consolidated net worth of $14.9 billion. The definition of consolidated net worth under the terms of the Credit Facility, excludes AOCI and includes the Company’s outstanding junior subordinated debentures and perpetual preferred securities, net of discount. In addition, the Company’s maximum ratio of consolidated total debt to consolidated total capitalization is 35%, and the ratio of consolidated total debt of subsidiaries to consolidated total capitalization is limited to 10%. As of September 30, 2014, the Company was in compliance with all financial covenants under the Credit Facility.
HLIKK previously had four revolving credit facilities in support of operations. These credit facilities were transfered with the sale of HLIKK on June 30, 2014.
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 September 30, 2014 is $1.0 billion. Of this $1.0 billion the legal entities have posted collateral of $1.1 billion in the normal course of business. In addition, the Company has posted collateral of $42 associated with a customized GMWB derivative. Based on derivative market values as of September 30, 2014 a downgrade of one level below the current financial strength ratings by either Moody’s or S&P could require approximately an additional $6 to be posted as collateral. Based on derivative market values as of September 30, 2014 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 $26 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 would post, if required, would be primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities.
As of September 30, 2014, the aggregate notional amount and fair value of derivative relationships that could be subject to immediate termination in the event of rating agency downgrades to either BBB+ or Baa1 was $392 and $(5), respectively.

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Insurance Operations
Current and expected patterns of claim frequency and severity or surrenders may change from period to period but continue to be within historical norms and, therefore, the Company’s insurance operations’ current liquidity position is considered to be sufficient to meet anticipated demands over the next twelve months, including any obligations related to the Company’s restructuring activities. For a discussion and tabular presentation of the Company’s current contractual obligations by period, refer to Off-Balance Sheet Arrangements and Aggregate Contractual Obligations within the Capital Resources and Liquidity section of the MD&A included in The Hartford’s 2013 Form 10-K Annual Report.
The principal sources of operating funds are premiums, fees earned from assets under management and investment income, while investing cash flows originate from maturities and sales of invested assets. The primary uses of funds are to pay claims, claim adjustment expenses, commissions and other underwriting expenses, to purchase new investments and to make dividend payments to the HFSG Holding Company.
The Company’s insurance operations consist of property and casualty insurance products (collectively referred to as “Property & Casualty Operations”) and life insurance and legacy annuity products (collectively referred to as “Life Operations”).
Property & Casualty Operations
Property & Casualty Operations holds fixed maturity securities including a significant short-term investment position (securities with maturities of one year or less at the time of purchase) to meet liquidity needs.
As of September 30, 2014 Property & Casualty Operations’ fixed maturities, short-term investments, and cash are summarized as follows: 
Fixed maturities
$
25,588

Short-term investments
1,055

Cash
150

Less: Derivative collateral
176

Total
$
26,617

Liquidity requirements that are unable to be funded by Property & Casualty Operation’s short-term investments would be satisfied with current operating funds, including premiums received or through the sale of invested assets. A sale of invested assets could result in significant realized losses.
Life Operations
Life Operations’ total general account contractholder obligations are supported by $44 billion of cash and total general account invested assets, which includes a significant short-term investment position to meet liquidity needs.
As of September 30, 2014 Life Operations’ fixed maturities, short-term investments, and cash are summarized as follows:
Fixed maturities
$
33,289

Short-term investments
2,724

Cash
286

Less: Derivative collateral
1,047

Total
$
35,252

Capital resources available to fund liquidity upon contractholder surrender are a function of the legal entity in which the liquidity requirement resides. Generally, obligations of Group Benefits will be funded by Hartford Life and Accident Insurance Company. Obligations of Talcott Resolution will generally be funded by Hartford Life Insurance Company and Hartford Life and Annuity Insurance Company.
Contractholder obligations of the former Retirement Plans business were funded by Hartford Life Insurance Company and of the former Individual Life business were funded by both Hartford Life Insurance Company and Hartford Life and Annuity Insurance Company. See Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements as to the sale of the Retirement Plans and Individual Life businesses and related transfer of invested assets in January 2013.
HLIC, an indirect wholly-owned subsidiary, became a member of the Federal Home Loan Bank of Boston (“FHLBB”) in May 2011. Membership allows HLIC access to collateralized advances, which may be used to support various spread-based businesses and enhance liquidity management. The Connecticut Department of Insurance (“CTDOI”) will permit HLIC to pledge up to $1.25 billion in qualifying assets to secure FHLBB advances for 2014. The amount of advances that can be taken are dependent on the asset types pledged to secure the advances. The pledge limit is recalculated annually based on statutory admitted assets and capital and surplus. HLIC would need to seek the prior approval of the CTDOI if there were a desire to exceed these limits. As of September 30, 2014, HLIC had no advances outstanding under the FHLBB facility.

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Contractholder Obligations
September 30, 2014
Total Life contractholder obligations
$
188,694

Less: Separate account assets [1]
136,319

General account contractholder obligations
$
52,375

Composition of General Account Contractholder Obligations
 
Contracts without a surrender provision and/or fixed payout dates [2]
$
21,918

U.S. Fixed MVA annuities and Other [3]
8,959

Guaranteed investment contracts (“GIC”) [4]
28

Other [5]
21,470

General account contractholder obligations
$
52,375

[1]
In the event customers elect to surrender separate account assets or international statutory separate accounts, Life Operations will use the proceeds from the sale of the assets to fund the surrender, and Life Operations’ liquidity position will not be impacted. In many instances Life Operations will receive a percentage of the surrender amount as compensation for early surrender (surrender charge), increasing Life Operations’ liquidity position. In addition, a surrender of variable annuity separate account or general account assets (see below) will decrease Life Operations’ obligation for payments on guaranteed living and death benefits.
[2]
Relates to contracts such as payout annuities or institutional notes, other than guaranteed investment products with an MVA feature (discussed below) or surrenders of term life, group benefit contracts or death and living benefit reserves for which surrenders will have no current effect on Life Operations’ liquidity requirements.
[3]
Relates to annuities that are recorded in the general account (under U.S. GAAP), although these annuities are held in a statutory separate account, as the contractholders are subject to the Company's credit risk. In the statutory separate account, Life Operations is required to maintain invested assets with a fair value greater than or equal to the MVA surrender value of the Fixed MVA contract. In the event assets decline in value at a greater rate than the MVA surrender value of the Fixed MVA contract, Life Operations is required to contribute additional capital to the statutory separate account. Life Operations will fund these required contributions with operating cash flows or short-term investments. In the event that operating cash flows or short-term investments are not sufficient to fund required contributions, the Company may have to sell other invested assets at a loss, potentially resulting in a decrease in statutory surplus. As the fair value of invested assets in the statutory separate account are generally equal to the MVA surrender value of the Fixed MVA contract, surrender of Fixed MVA annuities will have an insignificant impact on the liquidity requirements of Life Operations.
[4]
GICs are subject to discontinuance provisions which allow the policyholders to terminate their contracts prior to scheduled maturity at the lesser of the book value or market value. Generally, the market value adjustment reflects changes in interest rates and credit spreads. As a result, the market value adjustment feature in the GIC serves to protect the Company from interest rate risks and limit Life Operations’ liquidity requirements in the event of a surrender.
[5]
Surrenders of, or policy loans taken from, as applicable, these general account liabilities, which include the general account option for Talcott Resolution’s individual variable annuities and the variable life contracts of the former Individual Life business, the general account option for annuities of the former Retirement Plans business and universal life contracts sold by the former Individual Life business, may be funded through operating cash flows of Life Operations, available short-term investments, or Life Operations may be required to sell fixed maturity investments to fund the surrender payment. Sales of fixed maturity investments could result in the recognition of realized losses and insufficient proceeds to fully fund the surrender amount. In this circumstance, Life Operations may need to take other actions, including enforcing certain contract provisions which could restrict surrenders and/or slow or defer payouts. See Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements as to the sale of the Retirement Plans and Individual Life businesses and related transfer of invested assets in January 2013.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Due to the sale of HLIKK in the second quarter of 2014, the Company's life, annuity and disability total obligations were reduced by approximately 5.6%, or $18 billion. Excluding the sale of HLIKK, there have been no material changes to the Company’s aggregate contractual obligations since the filing of the Company’s 2013 Form 10-K Annual Report. There have been no material changes to the Company's off-balance sheet arrangements since the filing of the Company’s 2013 Form 10-K Annual Report.

134


Capitalization
The capital structure of The Hartford as of September 30, 2014 and December 31, 2013 consisted of debt and stockholders’ equity, summarized as follows:
 
September 30, 2014
December 31, 2013
Change
Short-term debt (includes current maturities of long-term debt)
$
289

$
200

45
 %
Short-term due on revolving credit facility
—

238

(100
)%
Long-term debt
5,819

6,106

(5
)%
Total debt [1]
6,108

6,544

(7
)%
Stockholders’ equity excluding accumulated other comprehensive income (loss), net of tax (“AOCI”)
17,758

18,984

(6
)%
AOCI, net of tax
1,077

(79
)
NM

Total stockholders’ equity
$
18,835

$
18,905

—
 %
Total capitalization including AOCI
$
24,943

$
25,449

(2
)%
Debt to stockholders’ equity
32
%
35
%
 
Debt to capitalization
25
%
26
%
 
[1]
Total debt of the Company excludes $70 and $84 of consumer notes as of September 30, 2014 and December 31, 2013, respectively.
The Hartford’s total capitalization decreased $506, or 2.0%, from December 31, 2013 to September 30, 2014 primarily due to a decrease in total debt. Total stockholders' equity remained flat from December 31, 2013 to September 30, 2014 due to share repurchases during the period, offset by an increase in AOCI, primarily due to net unrealized capital gains from securities.
For additional information on AOCI, net of tax, and unrealized capital gains from securities, see Note 19 - Changes in and Reclassifications From Accumulated Other Comprehensive Income, and Note 6 - Investments and Derivative Instruments of Notes to Condensed Consolidated Financial Statements.

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Cash Flows
 
Nine Months Ended September 30,
 
2014
2013
Net cash provided by operating activities
$
895

$
903

Net cash provided by investing activities
$
1,919

$
1,688

Net cash used for financing activities
$
(3,676
)
$
(3,454
)
Cash – end of period
$
440

$
1,422

Cash provided by operating activities in 2014 reflect an increase in premiums collected and a decrease in loss and loss adjustment expenses paid, partially offset by an increase in payments for payables and accruals.
Cash provided by investing activities in 2014 primarily relates to net proceeds from available for sale securities of $2.8 billion , proceeds from business sold of $963, offset by change in short-term investments of $1.9 billion. Cash provided by investing activities in 2013 primarily relates to net proceeds from available for sale securities of $3.1 billion, proceeds from businesses sold of $485, partially offset by net purchases of derivatives of $1.7 billion and net payments of mortgage loans of $226.
Cash used for financing activities in 2014 consists primarily of $1.8 billion related to net activity for investments and universal life products, repayment of debt of $200, and acquisition of treasury stock of $1.5 billion. Cash used for financing activities in 2013 consists primarily of repurchases of $751 related to net activity for investments and universal life products, net decreases in securities loaned or sold of $1 billion, repayment of debt of $1.3 billion and acquisition of treasury stock of $375 offset by proceeds from issuance of debt of $295.
Operating cash flows for the nine months ended September 30, 2014 and 2013 have been adequate to meet liquidity requirements. On June 30, 2014, the Company completed the sale of its Japan annuity business. The operations of this business are reported as discontinued operations and are primarily in Net cash provided by operating activities. For further information regarding these transactions, see Note 2 - Business Dispositions of Notes to Condensed Consolidated Financial Statements. The sale of this business is not expected to have a material impact on the liquidity of the Company.
Equity Markets
For a discussion of the potential impact of the equity markets on capital and liquidity, see the Enterprise Risk Management section of the MD&A.
Ratings
Ratings impact the Company’s cost of borrowing and its ability to access financing and are an important factor in establishing competitive position in the insurance and financial services marketplace. There can be no assurance that the Company’s ratings will continue for any given period of time or that they will not be changed. In the event the Company’s ratings are downgraded, the Company’s cost of borrowing and ability to access financing, as well as the level of revenues or the persistency of its business may be adversely impacted.
On March 6, 2014, Moody’s Investors Service (“Moody’s”) affirmed the debt ratings of The Hartford Financial Services Group, Inc. and the insurance financial strength ratings of its property and casualty subsidiaries and Hartford Life and Accident Insurance Company. The outlook on these entities was changed to positive from stable. Moody’s downgraded the insurance financial strength rating of Hartford Life Insurance Company to Baa2 from A3. Moody’s affirmed the insurance financial strength rating of Hartford Life and Annuity Insurance Company. The outlook for Hartford Life Insurance Company and Hartford Life and Annuity Insurance Company is stable.
On April 3, 2014, A.M. Best revised the outlook to positive from stable and affirmed the issuer credit ratings and debt ratings of The Hartford Financial Services Group, Inc. and the financial strength ratings and issuer credit ratings of the property and casualty subsidiaries. A.M. Best upgraded the financial strength rating of Hartford Life and Accident Insurance Company to A from A- and affirmed the ratings of Hartford Life Insurance Company and Hartford Life and Annuity Insurance Company. The outlook for Hartford Life and Accident Insurance Company, Hartford Life Insurance Company and Hartford Life and Annuity Insurance Company is stable.
On April 15, 2014 Standard & Poor’s (“S&P”) raised its long-term financial strength rating and counterparty credit ratings on Hartford Life and Accident Insurance Company to A from A-. At the same time S&P raised the rating on Hartford Life Inc. to BBB from BBB-. The outlook for Hartford Life and Accident Insurance Company and Hartford Life, Inc. is stable.
On August 29, 2014 Fitch Ratings affirmed and withdrew the ratings on the HFSG holding company, as well as the insurer financial strength rating of its insurance subsidiaries for commercial reasons.


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The following table summarizes The Hartford’s significant member companies’ financial strength ratings from the major independent rating organizations as of October 22, 2014.
Insurance Financial Strength Ratings:
A.M. Best
Standard & Poor’s
Moody’s
Hartford Fire Insurance Company
A
A
A2
Hartford Life and Accident Insurance Company
A
A
A3
Hartford Life Insurance Company
A-
BBB+
Baa2
Hartford Life and Annuity Insurance Company
A-
BBB+
Baa2
Other Ratings:
 
 
 
The Hartford Financial Services Group, Inc.:
 
 
 
Senior debt
bbb+
BBB
Baa3
Commercial paper
AMB-2
A-2
P-3
These ratings are not a recommendation to buy or hold any of The Hartford’s securities and they may be revised or revoked at any time at the sole discretion of the rating organization.
The agencies consider many factors in determining the final rating of an insurance company. One consideration is the relative level of statutory surplus necessary to support the business written. Statutory surplus represents the capital of the insurance company reported in accordance with accounting practices prescribed by the applicable state insurance department.
Statutory Surplus
The table below sets forth statutory surplus for the Company’s insurance companies as of September 30, 2014 and December 31, 2013:
 
September 30,
2014
December 31, 2013
U.S. life insurance subsidiaries, includes domestic captive insurance subsidiaries
$
7,048

$
6,639

Property and casualty insurance subsidiaries
7,821

8,022

Total
$
14,869

$
14,661

Statutory capital and surplus for the U.S. life insurance subsidiaries, including domestic captive insurance subsidiaries, increased by $409, primarily due to variable annuity surplus impacts of $657, increases in unrealized gains from other investments carrying values of $166, and increase in deferred income tax of $148, partially offset by returns of capital of $500 and decreases in other surplus changes of $62. Effective April 30, 2014, the last domestic captive ceased operations.
Statutory capital and surplus for property and casualty decreased by $201, primarily due to net income of $753, capital contributions of $16, unrealized gains of $1,421, and a decrease in statutory nonadmitted assets of $67, offset by dividends to HFSG Holding Company of $2,385, and a reduction of deferred tax assets of $73. Both net income and dividends are net of interest payments and dividends, respectively, on an intercompany note between Hartford Holdings, Inc. and Hartford Fire Insurance Company.
The Company held regulatory capital and surplus for its former operations in Japan until the sale of those operations on June 30, 2014. Under the accounting practices and procedures governed by Japanese regulatory authorities, the Company’s statutory capital and surplus was $1.2 billion as of December 31, 2013.
Contingencies
Legal Proceedings – For a discussion regarding contingencies related to The Hartford’s legal proceedings, please see the information contained under “Litigation” in Note 14 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements and Part II, Item 1 Legal Proceedings, which are incorporated herein by reference.
Legislative Developments
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”)
Since it was enacted in 2010, the Dodd-Frank act has resulted in significant changes to the regulation of the financial services industry, including changes to the rules governing derivatives, restrictions on proprietary trading by certain entities, the creation of a Federal Insurance Office within the U.S. Treasury, and enhancements to corporate governance rules, among other things. The Dodd-Frank Act requires significant rulemaking across numerous agencies within the federal government. Rulemaking, and implementation of newly-adopted rules, is ongoing and may affect our operations and governance in ways that could adversely affect our financial condition and results of operations.

137


Patient Protection and Affordable Care Act of 2010 (the "Affordable Care Act")
On March 23, 2010, the President signed the Affordable Care Act. Implementation of the Affordable Care Act will impact The Hartford in the same way it impacts other large employers. The Hartford’s core business does not involve the issuance of health insurance. We do not issue any products that insure customers under the Affordable Care Act’s individual mandate. It is too early to tell how the Affordable Care Act will impact The Hartford’s businesses as key aspects of the law are still not fully implemented. For example, private exchanges may provide The Hartford additional opportunities to market our group benefit products and services. Similarly, access to medical care and medical costs are a substantial component of both disability and workers compensation products offered by The Hartford. We are currently analyzing how the Affordable Care Act may impact consumer, broker and medical provider behavior.
Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”)
On December 26, 2007, the President signed TRIPRA extending the Terrorism Risk Insurance Act of 2002 (“TRIA”) through the end of 2014. The Company's principal reinsurance protection against large-scale terrorist attacks is the coverage currently provided through TRIPRA, as private sector catastrophe reinsurance is extremely limited and generally unavailable for terrorism losses caused by attacks with nuclear, biological, chemical or radiological weapons. TRIPRA is due to expire at the end of 2014 unless Congress takes legislative action to reauthorize it. If Congress fails to act, the Company may be required to take actions to reduce its exposure to terrorism risks, which could negatively impact its business. Even if Congress extends TRIPRA beyond 2014, it could make changes that would negatively impact the Company. For example, legislation passed by the Senate Banking Committee on June 3, 2014 would extend TRIA for seven years, but would also raise the co-share for insurers and reduce the total amount of losses covered by the federal government. For additional information on TRIPRA see “Terrorism” under the Insurance Risk Management section of the MD&A.
Budget of the United States Government
On March 4, 2014, the Obama Administration released its “Fiscal Year 2015, Budget of the U.S. Government” (the “Budget”). Although the Administration has not released proposed statutory language, the Budget includes proposals that, if enacted, would affect the taxation of life insurance companies and certain life insurance products. In particular, the proposals would change the method used to determine the amount of dividend income received by a life insurance company on assets held in separate accounts used to support products, including variable life insurance and variable annuity contracts, which are eligible for the dividends received deduction (“DRD”). The DRD reduces the amount of dividend income subject to tax and is a significant component of the difference between the Company's actual tax expense and expected amount determined using the federal statutory tax rate of 35%. If this proposal were enacted, the Company's actual tax expense could increase, reducing earnings.

138


IMPACT OF NEW ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements included in The Hartford’s 2013 Form 10-K Annual Report and Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements in this Form 10-Q.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Financial Risk Management section of Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company’s principal executive officer and its principal financial officer, based on their evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) have concluded that the Company’s disclosure controls and procedures are effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of September 30, 2014.
Changes in internal control over financial reporting
There was no change in the Company's internal control over financial reporting that occurred during the Company's current fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.




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Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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, and in addition to the matters described below, 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, disability, life and inland marine. 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 or other allegedly unfair or improper business practices. 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, the outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
Apart from the inherent difficulty of predicting litigation outcomes, the Mutual Funds Litigation identified below purports to seek substantial damages for unsubstantiated conduct spanning a multi-year period based on novel applications of complex legal theories. The alleged damages 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. The matter is still in the early stages of litigation, with no substantive legal decisions by the court defining the scope of the claims or the potentially available damages; fact discovery is ongoing and expert discovery has not commenced. Accordingly, management cannot reasonably estimate the possible loss or range of loss, if any, or predict the timing of the eventual resolution of this matter.
Mutual Funds Litigation — In February 2011, a derivative action was brought on behalf of six Hartford retail mutual funds in the United States District Court for the District of New Jersey, alleging that Hartford Investment Financial Services, LLC (“HIFSCO”), an indirect subsidiary of the Company, received excessive advisory and distribution fees in violation of its statutory fiduciary duty under Section 36(b) of the Investment Company Act of 1940. HIFSCO moved to dismiss and, in September 2011, the motion was granted in part and denied in part, with leave to amend the complaint. In November 2011, plaintiffs filed an amended complaint on behalf of The Hartford Global Health Fund, The Hartford Conservative Allocation Fund, The Hartford Growth Opportunities Fund, The Hartford Inflation Plus Fund, The Hartford Advisors Fund, and The Hartford Capital Appreciation Fund. Plaintiffs seek to rescind the investment management agreements and distribution plans between HIFSCO and these funds and to recover the total fees charged thereunder or, in the alternative, to recover any improper compensation HIFSCO received, in addition to lost earnings. HIFSCO filed a partial motion to dismiss the amended complaint and, in December 2012, the court dismissed without prejudice the claims regarding distribution fees and denied the motion with respect to the advisory fees claims. In March 2014, the plaintiffs filed a new complaint that, among other things, added as new plaintiffs The Hartford Floating Rate Fund and The Hartford Small Company Fund and named as a defendant Hartford Funds Management Company, LLC (“HFMC”), an indirect subsidiary of the Company which assumed the role as advisor to the funds as of January 2013. HFMC and HIFSCO dispute the allegations and intend to defend vigorously.
Asbestos and Environmental Claims – As discussed in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Property and Casualty Insurance Product Reserves, Net of Reinsurance - Property & Casualty Other Operations Claims, 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 and liquidity.

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Item 1A. RISK FACTORS
Investing in The Hartford involves risk. In deciding whether to invest in The Hartford, you should carefully consider the risk factors disclosed in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as updated in Item IA of Part II of the Company’s Form 10-Q for the period ended June 30, 2014, any of which could have a significant or material adverse effect on the business, financial condition, operating results or liquidity of The Hartford. This information should be considered carefully together with the other information contained in this report and the other reports and materials filed by The Hartford with the SEC.


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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
The following table summarizes the Company’s repurchases of its common stock for the three months ended September 30, 2014:
Period
Total Number
of Shares
Purchased
 
Average Price
Paid Per
Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value
of Shares that May Yet Be
Purchased Under
the Plans or Programs [1]
 
 
 
 
 
(in millions)
July 1, 2014 - July 31, 2014 [2]
15,419,500

 
$
35.51

4,269,500

$
1,196

August 1, 2014 - August 31, 2014
4,154,275

 
$
35.39

4,139,000

$
1,050

September 1, 2014 - September 30, 2014
539,645

 
$
37.01

539,700

$
1,030

Total
20,113,420

  
$
35.52

8,948,200

 
[1]
In July 2014, the Board of Directors approved an increase in the Company's authorized equity repurchase program that provides the Company with the ability to repurchase $2.775 billion in equity during the period commencing on January 1, 2014 and ending on December 31, 2015. The Company’s repurchase authorization, which expires on December 31, 2015, permits purchases of common stock, as well as warrants or other derivative securities. Repurchases may be made in the open market, through derivative, accelerated share repurchase and other privately negotiated transactions, and through plans designed to comply with Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended. The timing of any future repurchases will be dependent upon several factors, including the market price of the Company’s securities, the Company’s capital position, consideration of the effect of any repurchases on the Company’s financial strength or credit ratings, and other corporate considerations. The repurchase program may be modified, extended or terminated by the Board of Directors at any time.
[2]
On July 30, 2014, the Company entered into an accelerated share repurchase agreement (“ASR”) with a major financial institution, which was not part of a publicly announced plan or program. Under the terms of the agreement, on July 31, 2014 The Hartford paid $525 and received an initial delivery of 11.2 million shares of its common stock. For discussion of the terms of the agreement, see MD&A - Capital Resources and Liquidity, The Hartford Financial Services Group, Inc. (Holding Company).
Item 6. EXHIBITS
See Exhibits Index on page

142


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
The Hartford Financial Services Group, Inc.
 
 
(Registrant)
 
 
Date:
October 27, 2014
/s/ Scott R. Lewis
 
 
Scott R. Lewis
 
 
Senior Vice President and Controller
 
 
(Chief accounting officer and duly
authorized signatory)


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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FOR THE QUARTER ENDED SEPTEMBER 30, 2014
FORM 10-Q
EXHIBITS INDEX
 
Exhibit No.
 
Description
 
 
 
15.01
 
Deloitte & Touche LLP Letter of Awareness.**
 
 
31.01
 
Certification of Christopher J. Swift pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
 
 
31.02
 
Certification of Beth A. Bombara pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
 
 
32.01
 
Certification of Christopher J. Swift pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
 
 
32.02
 
Certification of Beth A. Bombara pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
 
 
101.INS
 
XBRL Instance Document.**
 
 
101.SCH
 
XBRL Taxonomy Extension Schema.**
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.**
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase.**
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.**
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.**
 
 
*
 
Management contract, compensatory plan or arrangement.
 
 
**
 
Filed with the Securities and Exchange Commission as an exhibit to this report.

144