XNYS:HIG Hartford Financial Services Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012
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 July 26, 2012, there were outstanding 435,814,659 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 JUNE 30, 2012
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 2011 Form 10-K Annual Report; Part II, Item IA, Risk Factors in The Hartford's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012; and Part II, Item IA, Risk Factors of this Form 10-Q. These important risks and uncertainties include:
challenges related to the Company’s current operating environment, including continuing uncertainty about the strength and speed of the recovery in the United States and other key economies and the impact of governmental stimulus and austerity initiatives, sovereign credit concerns, including the potential consequences associated with recent and further potential downgrades to the credit ratings of debt issued by the United States government, European sovereigns and other adverse developments on financial, commodity and credit markets and consumer spending and investment, including in respect of Europe, and the effect of these events on our returns in our life and property and casualty investment portfolios and our hedging costs associated with our variable annuities business;
the risks, challenges and uncertainties associated with our March 21, 2012 announcement that we will focus on our Property and Casualty, Group Benefits and Mutual Fund businesses, place our Individual Annuity business into runoff and pursue sales or other strategic alternatives for the Individual Life, Woodbury Financial Services and Retirement Plans businesses and related implementation plans and goals and objectives, as set forth in our Current Report on Form 8-K dated March 21, 2012;
the success of our initiatives relating to the realignment of our business, including the continuing realignment of our hedge program for our variable annuity business, and plans to improve the profitability and long-term growth prospects of our key divisions, including through opportunistic acquisitions or divestitures or other actions or initiatives, and the impact of regulatory or other constraints on our ability to complete these initiatives and deploy capital among our businesses as and when planned;
market risks associated with our business, including changes in interest rates, credit spreads, equity prices, 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 impact on our investment portfolio if our investment portfolio is concentrated in any particular segment of the economy;
volatility in our earnings and potential material changes to our results resulting from our adjustment of our risk management program to emphasize protection of statutory surplus and cash flows;
the impact on our statutory capital of various factors, including many that are outside the Company’s control, which can in turn affect our credit and financial strength ratings, cost of capital, regulatory compliance and other aspects of our business and results;
risks to our business, financial position, prospects and results associated with negative rating actions or downgrades in the Company’s financial strength and credit ratings or negative rating actions or downgrades relating to our investments;
the potential for differing interpretations of the methodologies, estimations and assumptions that underlie the valuation of the Company’s financial instruments that could result in changes to investment valuations;
the subjective determinations that underlie the Company’s evaluation of other-than-temporary impairments on available-for-sale securities;
losses due to nonperformance or defaults by others;
the potential for further acceleration of deferred policy acquisition cost amortization;
the potential for further impairments of our goodwill or the potential for changes in valuation allowances against deferred tax assets;
the possible occurrence of terrorist attacks and the Company’s ability to contain its exposure, including the effect of the absence or insufficiency of applicable terrorism legislation on coverage;

3


the possibility of unfavorable loss development including with respect to long-tailed exposures;
the difficulty in predicting the Company’s potential exposure for asbestos and environmental claims;
the possibility of a pandemic, earthquake, or other natural or man-made disaster that may adversely affect our businesses and cost and availability of reinsurance;
weather and other natural physical events, including the severity and frequency of storms, hail, winter storms, hurricanes and tropical storms, as well as climate change and its potential impact on weather patterns;
the response of reinsurance companies under reinsurance contracts and the availability, pricing and adequacy of reinsurance to protect the Company against losses;
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 enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), which, among other effects, has resulted in the establishment of a newly created Financial Services Oversight Council with the power to designate “systemically important” institutions, will require central clearing of, and/or impose new margin and capital requirements on, derivatives transactions, and created a new “Federal Insurance Office” within the U.S. Department of the Treasury (“Treasury”);
unfavorable judicial or legislative developments;
the uncertain effects of emerging claim and coverage issues;
the potential effect of other domestic and foreign regulatory developments, including those that could adversely impact the demand for the Company’s products, operating costs and required capital levels, including changes to statutory reserves and/or risk-based capital requirements related to secondary guarantees under universal life and variable annuity products or changes in U.S. federal or other tax laws that affect the relative attractiveness of our investment products;
regulatory limitations on the ability of the Company and certain of its subsidiaries to declare and pay dividends, including dividends associated with the proceeds from a sale of any of our life businesses;
the Company’s ability to effectively price its property and casualty policies, including its ability to obtain regulatory consents to pricing actions or to non-renewal or withdrawal of certain product lines;
the Company’s ability to maintain the availability of its systems and safeguard the security of its data in the event of a disaster, cyber or other information security incident or other unanticipated event;
the risk that our framework for managing business risks may not be effective in mitigating material risk and loss to the Company;
the potential for difficulties arising from outsourcing relationships;
the impact of potential changes in federal or state tax laws, including changes affecting the availability of the separate account dividend received deduction;
the impact of potential changes in accounting principles and related financial reporting requirements;
the Company’s ability to protect its intellectual property and defend against claims of infringement; 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 June 30, 2012, and the related condensed consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2012 and 2011 and statements of changes in stockholders' equity, and cash flows for the six-month periods ended June 30, 2012 and2011. 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, 2011, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for the year then ended prior to retrospective adjustment for the adoption of Accounting Standards Update (“ASU”) No. 2010-26 Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, (not presented herein); and in our report dated February 24, 2012 (which report includes an explanatory paragraph relating to the Company's change in its method of accounting and reporting for variable interest entities and embedded credit derivatives as required by accounting guidance adopted in 2010, and for other-than-temporary impairments as required by accounting guidance adopted in 2009), we expressed an unqualified opinion on those consolidated financial statements. We also audited the adjustments described in Note 1 that were applied to retrospectively adjust the December 31, 2011 consolidated balance sheet of the Company (not presented herein). In our opinion, such adjustments are appropriate and have been properly applied to the previously issued consolidated balance sheet in deriving the accompanying retrospectively adjusted condensed consolidated balance sheet as of December 31, 2011.

DELOITTE & TOUCHE LLP
Hartford, Connecticut
August 1, 2012



5



THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Operations
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions, except for per share data)
2012
 
As currently
reported (see Note 1)
2011
 
2012
 
As currently
reported (see Note 1)
2011
 
(Unaudited)
Revenues
 
 
 
 
 
 
 
Earned premiums
$
3,400

 
$
3,545

 
$
6,842

 
$
7,064

Fee income
1,114

 
1,219

 
2,248

 
2,428

Net investment income (loss):
 
 
 
 
 
 
 
Securities available-for-sale and other
1,097

 
1,104

 
2,167

 
2,212

Equity securities, trading
(1,687
)
 
(597
)
 
1,179

 
206

Total net investment income (loss)
(590
)
 
507

 
3,346

 
2,418

Net realized capital gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
(106
)
 
(31
)
 
(142
)
 
(150
)
OTTI losses recognized in other comprehensive income (“OCI”)
8

 
8

 
15

 
72

Net OTTI losses recognized in earnings
(98
)
 
(23
)
 
(127
)
 
(78
)
Net realized capital gains (losses), excluding net OTTI losses recognized in earnings
687

 
92

 
(194
)
 
(256
)
Total net realized capital gains (losses)
589

 
69

 
(321
)
 
(334
)
Other revenues
61

 
61

 
120

 
125

Total revenues
4,574

 
5,401

 
12,235

 
11,701

Benefits, losses and expenses
 
 
 
 
 
 
 
Benefits, losses and loss adjustment expenses
3,621

 
3,976

 
6,659

 
7,154

Benefits, losses and loss adjustment expenses – returns credited on
      international variable annuities
(1,686
)
 
(597
)
 
1,178

 
206

Amortization of deferred policy acquisition costs and present value of
      future profits
554

 
592

 
875

 
1,042

Insurance operating costs and other expenses
1,309

 
1,452

 
2,621

 
2,806

Loss on extinguishment of debt
910

 

 
910

 

Interest expense
115

 
128

 
239

 
256

Total benefits, losses and expenses
4,823

 
5,551

 
12,482

 
11,464

Income (loss) from continuing operations before income taxes
(249
)
 
(150
)
 
(247
)
 
237

Income tax benefit
(149
)
 
(263
)
 
(244
)
 
(215
)
Income (loss) from continuing operations, net of tax
(100
)
 
113

 
(3
)
 
452

Income (loss) from discontinued operations, net of tax
(1
)
 
(80
)
 
(2
)
 
82

Net income (loss)
$
(101
)
 
$
33

 
$
(5
)
 
$
534

Preferred stock dividends
11

 
11

 
21

 
21

Net income (loss) available to common shareholders
$
(112
)
 
$
22

 
$
(26
)
 
$
513

Income (loss) from continuing operations, net of tax, available to common shareholders per common share
 
 
 
 
 
 
 
Basic
$
(0.25
)
 
$
0.23

 
$
(0.05
)
 
$
0.97

Diluted
$
(0.25
)
 
$
0.21

 
$
(0.05
)
 
$
0.89

Net income (loss) available to common shareholders per common share
 
 
 
 
 
 
 
Basic
$
(0.26
)
 
$
0.05

 
$
(0.06
)
 
$
1.15

Diluted
$
(0.26
)
 
$
0.05

 
$
(0.06
)
 
$
1.06

Cash dividends declared per common share
$
0.10

 
$
0.10

 
$
0.20

 
$
0.20

See Notes to Condensed Consolidated Financial Statements.

6


THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions)
2012
 
As currently
reported (see Note 1)
2011
 
2012
 
As currently
reported (see Note 1)
2011
 
(Unaudited)
Comprehensive Income
 
 
 
 
 
 
 
Net income (loss)
$
(101
)
 
$
33

 
$
(5
)
 
$
534

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in net unrealized gain / loss on securities
747

 
565

 
988

 
887

Change in OTTI losses recognized in other comprehensive income
13

 
(4
)
 
5

 
1

Change in net gain / loss on cash-flow hedging instruments
81

 
71

 
28

 
3

Change in foreign currency translation adjustments
56

 
55

 
(80
)
 
26

Change in pension and other postretirement plan adjustments
31

 
26

 
64

 
48

Total other comprehensive income
928

 
713

 
1,005

 
965

Total comprehensive income
$
827

 
$
746

 
$
1,000

 
$
1,499

See Notes to Condensed Consolidated Financial Statements.


7


THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Balance Sheets
 
(In millions, except for share and per share data)
June 30,
2012
 
As currently
reported (see Note 1) December 31, 2011
 
(Unaudited)
Assets
 
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost of $80,840 and $78,978) (includes variable interest entity assets, at fair value, of $269 and $153)
$
85,227

 
$
81,809

Fixed maturities, at fair value using the fair value option (includes variable interest entity assets of $338, as of June 30, 2012 and December 31, 2011)
1,165

 
1,328

Equity securities, trading, at fair value (cost of $30,385 and $32,928)
29,215

 
30,499

Equity securities, available-for-sale, at fair value (cost of $859 and $1,056)
851

 
921

Mortgage loans (net of allowances for loan losses of $87 and $102)
6,875

 
5,728

Policy loans, at outstanding balance
1,956

 
2,001

Limited partnerships and other alternative investments (includes variable interest entity assets of $7, as of June 30, 2012 and December 31, 2011)
2,944

 
2,532

Other investments
1,548

 
2,394

Short-term investments (includes variable interest entity assets, at fair value, of $9 as of June 30, 2012)
5,154

 
7,736

Total investments
134,935

 
134,948

Cash
2,338

 
2,581

Premiums receivable and agents’ balances, net
3,537

 
3,446

Reinsurance recoverables, net
4,943

 
4,768

Deferred policy acquisition costs and present value of future profits
6,336

 
6,556

Deferred income taxes, net
1,808

 
2,131

Goodwill
1,006

 
1,006

Property and equipment, net
1,001

 
1,029

Other assets
3,411

 
2,274

Separate account assets
144,662

 
143,870

Total assets
$
303,977

 
$
302,609

Liabilities
 
 
 
Reserve for future policy benefits and unpaid losses and loss adjustment expenses
$
40,980

 
$
41,016

Other policyholder funds and benefits payable
44,014

 
45,612

Other policyholder funds and benefits payable – international variable annuities
29,174

 
30,461

Unearned premiums
5,278

 
5,222

Long-term debt
7,125

 
6,216

Consumer notes
254

 
314

Other liabilities (includes variable interest entity liabilities of $439 and $471)
10,529

 
8,412

Separate account liabilities
144,662

 
143,870

Total liabilities
282,016

 
281,123

Commitments and Contingencies (Note 9)

 

Stockholders’ Equity
 
 
 
Preferred stock, $0.01 par value — 50,000,000 shares authorized, 575,000 shares issued, liquidation preference $1,000 per share
556

 
556

Common stock, $0.01 par value — 1,500,000,000 shares authorized, 469,746,638 and 469,750,171 shares issued
5

 
5

Additional paid-in capital
10,037

 
10,391

Retained earnings
10,887

 
11,001

Treasury stock, at cost — 34,147,822 and 27,211,115 shares
(1,780
)
 
(1,718
)
Accumulated other comprehensive income, net of tax
2,256

 
1,251

Total stockholders’ equity
21,961

 
21,486

Total liabilities and stockholders’ equity
$
303,977

 
$
302,609

See Notes to Condensed Consolidated Financial Statements.

8


THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
 
 
Six Months Ended
June 30,
(In millions, except for share data)
2012
 
As currently
reported (see Note 1)
2011
 
(Unaudited)
Preferred Stock
$
556

 
$
556

Common Stock
5

 
5

Additional Paid-in Capital, beginning of period
10,391

 
10,448

Repurchase of warrants
(300
)
 

Issuance of shares under incentive and stock compensation plans
(52
)
 
(45
)
Tax expense on employee stock options and awards
(2
)
 
(10
)
Additional Paid-in Capital, end of period
10,037

 
10,393

Retained Earnings, beginning of period
11,001

 
10,509

Net income (loss)
(5
)
 
534

Dividends on preferred stock
(21
)
 
(21
)
Dividends declared on common stock
(88
)
 
(88
)
Retained Earnings, end of period
10,887

 
10,934

Treasury Stock, at Cost, beginning of period
(1,718
)
 
(1,774
)
Treasury stock acquired
(149
)
 

Issuance of shares under incentive and stock compensation plans from treasury stock
94

 
76

Return of shares under incentive and stock compensation plans and other to treasury stock
(7
)
 
(7
)
Treasury Stock, at Cost, end of period
(1,780
)
 
(1,705
)
Accumulated Other Comprehensive Income (Loss), net of tax, beginning of period
1,251

 
(990
)
Total other comprehensive income
1,005

 
965

Accumulated Other Comprehensive Income (Loss), net of tax, end of period
2,256

 
(25
)
Total Stockholders’ Equity
$
21,961

 
$
20,158

Preferred Shares Outstanding (in thousands)
575

 
575

Common Shares Outstanding, at beginning of period (in thousands)
442,539

 
444,549

Treasury stock acquired
(8,045
)
 

Issuance of shares under incentive and stock compensation plans
1,435

 
972

Return of shares under incentive and stock compensation plans and other to treasury stock
(330
)
 
(235
)
Common Shares Outstanding, at end of period
435,599

 
445,286

See Notes to Condensed Consolidated Financial Statements.


9


THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Cash Flows
 
Six Months Ended June 30,
(In millions)
2012
 
As currently reported (see Note 1)
2011
 
(Unaudited)
Operating Activities
 
 
 
Net income (loss)
$
(5
)
 
$
534

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Amortization of deferred policy acquisition costs and present value of future profits
875

 
1,042

Additions to deferred policy acquisition costs and present value of future profits
(852
)
 
(844
)
Change in reserve for future policy benefits and unpaid losses and loss adjustment expenses and unearned premiums
27

 
651

Change in reinsurance recoverables
(291
)
 
(33
)
Change in receivables and other assets
(274
)
 
(339
)
Change in payables and accruals
615

 
87

Change in accrued and deferred income taxes
(190
)
 
(420
)
Net realized capital losses
321

 
215

Net disbursements from investment contracts related to policyholder funds—international variable annuities
(1,287
)
 
(556
)
Net decrease in equity securities, trading
1,284

 
542

Depreciation and amortization
250

 
384

Loss on extinguishment of debt
910

 

Other operating activities, net
(147
)
 
(299
)
Net cash provided by operating activities
1,236

 
964

Investing Activities
 
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
 
Fixed maturities, available-for-sale
25,121

 
18,076

Fixed maturities, fair value option
153

 
1

Equity securities, available-for-sale
165

 
122

Mortgage loans
159

 
228

Partnerships
84

 
106

Payments for the purchase of:
 
 
 
Fixed maturities, available-for-sale
(24,484
)
 
(17,295
)
Fixed maturities, fair value option

 
(534
)
Equity securities, available-for-sale
(55
)
 
(192
)
Mortgage loans
(1,307
)
 
(1,075
)
Partnerships
(588
)
 
(128
)
Proceeds from business sold

 
278

Derivatives, net
(816
)
 
(300
)
Change in policy loans, net
45

 
(7
)
Other investing activities, net
(28
)
 
(87
)
Net cash used for investing activities
(1,551
)
 
(807
)
Financing Activities
 
 
 
Deposits and other additions to investment and universal life-type contracts
6,218

 
5,840

Withdrawals and other deductions from investment and universal life-type contracts
(12,094
)
 
(11,701
)
Net transfers from separate accounts related to investment and universal life-type contracts
5,058

 
5,649

Repayments at maturity or settlement of consumer notes
(60
)
 
(14
)
Net increase (decrease) in securities loaned or sold under agreements to repurchase
1,560

 

Repurchase of warrants
(300
)
 

Repayment of long-term debt
(2,133
)
 

Proceeds from the issuance of long-term debt
2,123

 

Proceeds from net issuance of shares under incentive and stock compensation plans, excess tax benefit and other
1

 
2

Treasury stock acquired
(154
)
 

Dividends paid on preferred stock
(21
)
 
(21
)
Dividends paid on common stock
(89
)
 
(64
)
Changes in bank deposits and payments on bank advances

 
(10
)
Net cash provided by (used for) financing activities
109

 
(319
)
Foreign exchange rate effect on cash
(37
)
 
(2
)
Net decrease in cash
(243
)
 
(164
)
Cash – beginning of period
2,581

 
2,062

Cash – end of period
$
2,338

 
$
1,898

Supplemental Disclosure of Cash Flow Information
 
 
 
Income taxes paid (received)
$
(446
)
 
$
246

Interest paid
$
241

 
$
250

See Notes to Condensed Consolidated Financial Statements

10


THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
(Unaudited)
1. Basis of Presentation and Accounting Policies
Basis of Presentation
The Hartford Financial Services Group, Inc. is a holding company for insurance and financial services subsidiaries that provide investment products and life and property and casualty insurance to both individual and business customers in the United States (collectively, “The Hartford”, the “Company”, “we” or “our”). Also, The Hartford continues to administer business previously sold in Japan and the U.K.
On March 21, 2012, the Company announced the completion of its businesses and strategy evaluation. As a result of this review, the Company announced that it will focus on its Property and Casualty, Group Benefits and Mutual Fund businesses, place its existing Individual Annuity business into runoff and pursue sales or other strategic alternatives for the Individual Life and Retirement Plans businesses and Woodbury Financial Services, an indirect wholly-owned subsidiary.
On April 26, 2012, the Company announced that it had entered into an agreement to sell its U.S. individual annuity new business capabilities to a third party. A purchase and sale agreement was entered into with Forethought Financial Group in mid-June 2012 and the anticipated transaction closing date is in late 2012 or early 2013. Effective May 1, 2012, all new U.S. annuity policies sold by the Company are reinsured to Forethought Life Insurance Company. The Company will cease the sale of such annuity policies and the reinsurance agreement will terminate as to new business in the second quarter of 2013. The reinsurance agreement has no impact on in-force policies issued on or before April 27, 2012.
On July 31, 2012, the Company entered into an agreement to sell Woodbury Financial Services to a third party. The transaction is expected to close by the end of 2012, pending regulatory approval.
The Condensed Consolidated Financial Statements have been prepared on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), which differ materially from the accounting practices prescribed by various insurance regulatory authorities. These Condensed Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in The Hartford’s 2011 Form 10-K Annual Report. The results of operations for the interim periods should not be considered indicative of the results to be expected for the full year.
The accompanying Condensed Consolidated Financial Statements and Notes as of June 30, 2012, and for the three and six months ended June 30, 2012 and 2011 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.
On January 1, 2012, the Company retrospectively adopted Accounting Standards Update (“ASU”) No. 2010-26, Financial Services – Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts which clarifies the definition of policy acquisition costs that are eligible for deferral. Previously reported financial information has been revised to reflect the effect of the Company’s adoption of this accounting standard. As a result of this accounting change, total stockholders’ equity as of January 1, 2011, decreased by approximately $1.6 billion, after-tax from $20.3 billion, as previously reported, to $18.7 billion due to a reduction of the Company’s deferred acquisition cost asset balance related to certain costs that do not meet the provisions of the revised standard.
The effect of adoption of this accounting standard on the Company’s Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Operations was as follows:
 
 
December 31, 2011
 
As previously
reported
 
Effect of 
change
 
As currently
reported
Deferred policy acquisition costs and present value of future profits
$
8,744

 
$
(2,188
)
 
$
6,556

Deferred income taxes, net
$
1,398

 
$
733

 
$
2,131

Other liabilities
$
8,443

 
$
(31
)
 
$
8,412

Retained earnings
$
12,519

 
$
(1,518
)
 
$
11,001

Accumulated other comprehensive income, net of tax
$
1,157

 
$
94

 
$
1,251

Total stockholders’ equity
$
22,910

 
$
(1,424
)
 
$
21,486

 

11

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


1. Basis of Presentation and Accounting Policies (continued)
 
Three Months Ended June 30, 2011
 
As previously
reported
 
Effect of 
change
 
As currently
reported
Amortization of deferred policy acquisition costs and present value of future profits
$
835

 
$
(243
)
 
$
592

Insurance operating costs and other expenses
$
1,224

 
$
228

 
$
1,452

Income (loss) from continuing operations before income taxes
$
(165
)
 
$
15

 
$
(150
)
Income tax expense (benefit)
$
(269
)
 
$
6

 
$
(263
)
Net income (loss)
$
24

 
$
9

 
$
33

Net income available to common shareholders
$
13

 
$
9

 
$
22

Income from continuing operations, net of tax, available to common shareholders per common share
 
 
 
 
 
Basic
$
0.21

 
$
0.02

 
$
0.23

Diluted
$
0.19

 
$
0.02

 
$
0.21

Net income available to common shareholders per common share
 
 
 
 
 
Basic
$
0.03

 
$
0.02

 
$
0.05

Diluted
$
0.03

 
$
0.02

 
$
0.05

 
Six Months Ended June 30, 2011
 
As previously
reported
 
Effect of 
change
 
As currently
reported
Amortization of deferred policy acquisition costs and present value of future profits
$
1,499

 
$
(457
)
 
$
1,042

Insurance operating costs and other expenses
$
2,344

 
$
462

 
$
2,806

Income (loss) from continuing operations before income taxes
$
242

 
$
(5
)
 
$
237

Income tax expense (benefit)
$
(211
)
 
$
(4
)
 
$
(215
)
Net income (loss)
$
535

 
$
(1
)
 
$
534

Net income available to common shareholders
$
514

 
$
(1
)
 
$
513

Income from continuing operations, net of tax, available to common shareholders per common share
 
 
 
 
 
Basic
$
0.97

 
$

 
$
0.97

Diluted
$
0.89

 
$

 
$
0.89

Net income available to common shareholders per common share
 
 
 
 
 
Basic
$
1.16

 
$
(0.01
)
 
$
1.15

Diluted
$
1.06

 
$

 
$
1.06

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. Material intercompany transactions and balances between The Hartford and its subsidiaries and affiliates have been eliminated. For further discussions on VIEs see Note 5 of the Notes to Condensed Consolidated Financial Statements.

12

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


1. Basis of Presentation and Accounting Policies (continued)
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 is presenting the operations of certain businesses that meet the criteria for reporting as discontinued operations. Amounts for prior periods have been retrospectively reclassified. See Note 12 of the Notes to Condensed Consolidated Financial Statements for information on the specific subsidiaries and related impacts.
Use of Estimates
The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining property and casualty insurance product reserves, net of reinsurance; estimated gross profits used in the valuation and amortization of assets and liabilities associated with variable annuity and other universal life-type contracts; evaluation of other-than-temporary impairments on available-for-sale securities and valuation allowances on investments; living benefits required to be fair valued; goodwill impairment; valuation of investments and derivative instruments; pension and other postretirement benefit obligations; valuation allowance on deferred tax assets; and contingencies relating to corporate litigation and regulatory matters. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the Condensed Consolidated Financial Statements.
Mutual Funds
The Company maintains a retail mutual fund operation whereby the Company provides investment management, administrative and distribution services to The Hartford Mutual Funds, Inc. and The Hartford Mutual Funds II, Inc. (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 year financial information to conform to the current year presentation.
Significant Accounting Policies
For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in The Hartford’s 2011 Form 10-K Annual Report, which should be read in conjunction with these accompanying Condensed Consolidated Financial Statements.

13

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


1. Basis of Presentation and Accounting Policies (continued)
Income Taxes
A reconciliation of the tax provision at the U.S. Federal statutory rate to the provision for income taxes is as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Tax expense (benefit) at U.S. Federal statutory rate
$
(87
)
 
$
(53
)
 
$
(86
)
 
$
83

Tax-exempt interest
(35
)
 
(38
)
 
(71
)
 
(75
)
Dividends-received deduction
(30
)
 
(90
)
 
(63
)
 
(127
)
Valuation allowance
6

 
(89
)
 
(14
)
 
(91
)
Other
(3
)
 
7

 
(10
)
 
(5
)
Income tax benefit
$
(149
)
 
$
(263
)
 
$
(244
)
 
$
(215
)
The current year separate account dividends-received deduction (“DRD”) is estimated based on information from the prior year-end, adjusted for current year equity market performance and other appropriate factors, including estimated levels of corporate dividend payments and level of policy owner equity account balances. The actual current year DRD can vary from estimates based on, but not limited to, changes in eligible dividends received by the mutual funds, amounts of distribution from these mutual funds, amounts of short-term capital gains at the mutual fund level and the Company’s taxable income before the DRD. The Company evaluates its DRD computations on a quarterly basis.
The Company’s unrecognized tax benefits were unchanged during the three and six months ended June 30, 2012, remaining at $48 as of June 30, 2012. This entire amount, if it were recognized, would affect the effective tax rate in the period it is released.
The Internal Revenue Service (“IRS”) routinely audits the Company's federal income tax returns. Audits have concluded for all years through 2006. The audit of the years 2007—2009 commenced during 2010 and is expected to conclude by the end of 2012.
The Company has recorded a deferred tax asset valuation allowance that is adequate to reduce the total deferred tax asset to an amount that will more likely than not be realized. The deferred tax asset valuation allowance, which related predominantly to foreign net operating losses, was $70 as of June 30, 2012 and $84 as of December 31, 2011. In evaluating the need for a valuation allowance, management considers many factors, including: future taxable temporary differences reversals, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in open carry back years, and other tax planning strategies.
The Company’s June 30, 2012 $1.8 billion net deferred tax asset includes $2.8 billion relating to items treated as ordinary for federal income tax purposes, and a $1.0 billion net deferred tax liability for items classified as capital in nature. The $1.0 billion for capital items is comprised of $685 of gross deferred tax assets related to realized capital losses and $1.7 billion of gross deferred tax liabilities related to net unrealized capital gains.

14

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


2. Earnings (Loss) Per Common Share
The following table presents a reconciliation of net income and shares used in calculating basic earnings (loss) per common share to those used in calculating diluted earnings (loss) per common share.
 
Three Months Ended
June 30,
Six Months Ended
June 30,
(In millions, except for per share data)
2012
 
2011
2012
 
2011
Earnings
 
 
 
 
 
 
Income (loss) from continuing operations
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
$
(100
)
 
$
113

$
(3
)
 
$
452

Less: Preferred stock dividends
11

 
11

21

 
21

Income (loss) from continuing operations, net of tax, available to common shareholders
(111
)
 
102

(24
)
 
431

Add: Dilutive effect of preferred stock dividends

 


 

Income (loss) from continuing operations, net of tax, available to common shareholders and assumed conversion of preferred shares
$
(111
)
 
$
102

$
(24
)
 
$
431

Income (loss) from discontinued operations, net of tax
$
(1
)
 
$
(80
)
$
(2
)
 
$
82

Net income (loss)
 
 
 
 
 
 
Net income (loss)
$
(101
)
 
$
33

$
(5
)
 
$
534

Less: Preferred stock dividends
11

 
11

21

 
21

Net income (loss) available to common shareholders
(112
)
 
22

(26
)
 
513

Add: Dilutive effect of preferred stock dividends

 


 
21

Net income (loss) available to common shareholders and assumed conversion of preferred shares
$
(112
)
 
$
22

$
(26
)
 
$
534

Shares
 
 
 
 
 
 
Weighted average common shares outstanding, basic
438.2

 
445.1

439.4

 
444.9

Dilutive effect of warrants

 
36.3


 
38.6

Dilutive effect of stock compensation plans

 
1.0


 
1.4

Dilutive effect of mandatory convertible preferred shares

 


 
20.7

Weighted average shares outstanding and dilutive potential common shares
438.2

 
482.4

439.4

 
505.6

Earnings (loss) per common share
 
 
 
 
 
 
Basic
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax, available to common shareholders
$
(0.25
)
 
$
0.23

$
(0.05
)
 
$
0.97

Income (loss) from discontinued operations, net of tax
(0.01
)
 
(0.18
)
(0.01
)
 
0.18

Net income (loss) available to common shareholders
$
(0.26
)
 
$
0.05

$
(0.06
)
 
$
1.15

Diluted
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax, available to common shareholders
$
(0.25
)
 
$
0.21

$
(0.05
)
 
$
0.89

Income (loss) from discontinued operations, net of tax
(0.01
)
 
(0.16
)
(0.01
)
 
0.17

Net income (loss) available to common shareholders
$
(0.26
)
 
$
0.05

$
(0.06
)
 
$
1.06

 

15

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


2. Earnings (Loss) Per Common Share (continued)
As a result of the losses available to common shareholders for the three months ended June 30, 2012, the Company was required to use basic weighted average common shares outstanding in the calculation of diluted loss per share, since the inclusion of shares for warrants of 25.1 million, stock compensation plans of 1.5 million and mandatory convertible preferred shares, along with the related dividend adjustment, of 21.0 million, would have been antidilutive to the earnings per share calculations. In the absence of the losses, weighted average common shares outstanding and dilutive potential common shares would have totaled 485.8 million.
As a result of the losses available to common shareholders for the six months ended June 30, 2012, the Company was required to use basic weighted average common shares outstanding in the calculation of diluted loss per share, since the inclusion of shares for warrants of 25.7 million, stock compensation plans of 1.8 million and mandatory convertible preferred shares, along with the related dividend adjustment, of 21.0 million, would have been antidilutive to the earnings per share calculations. In the absence of the losses, weighted average common shares outstanding and dilutive potential common shares would have totaled 487.9 million.
For the three months ended June 30, 2011, 20.7 million shares for mandatory convertible preferred shares, along with the related dividend adjustment, would have been antidilutive to the earnings per share calculations. Assuming the impact of the mandatory convertible preferred shares was not antidilutive, weighted average common shares outstanding and dilutive potential common shares would have totaled 503.1 million.
For the six months ended June 30, 2011, the diluted earnings per share calculation on income from continuing operations, net of tax, available to common shareholders was calculated using 484.9 million weighted average common shares outstanding and dilutive potential common shares, as the inclusion of 20.7 million shares for mandatory convertible preferred shares, along with the related dividend adjustment, would have been antidilutive.
The declaration of a quarterly common stock dividend of $0.10 during the first and second quarter of 2012 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 June 30, 2012, March 31, 2012 and December 31, 2011 was $9.649, $9.676 and $9.699, respectively.
In addition, the declaration of a quarterly common stock dividend in the first quarter of 2012 triggered a provision in The Hartford’s Fixed Conversion Rate Agreement, relating to the Company’s mandatory convertible preferred stock, resulting in an adjustment to the minimum conversion rate to 29.8831 from 29.536 shares of Common Stock per share of Series F Preferred Stock and the maximum conversion rate to 36.4596 from 36.036 shares of Common Stock per share of Series F Preferred Stock.
On March 30, 2012 the Company entered into an agreement with Allianz and repurchased the outstanding Series B and Series C warrants. As a result, Allianz no longer holds potentially dilutive outstanding warrants. See Note 15 for additional information regarding the warrant repurchase.

16

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


3. Segment Information
The Company is organized into four divisions: Commercial Markets, Consumer Markets, Wealth Management and Runoff Operations and conducts business principally in eight reporting segments, as well as a Corporate category. Starting in the second quarter of 2012, financial results for the Individual Annuity segment have been reported in the Life Other Operations segment and segment data for prior reporting periods has been adjusted accordingly. The Company’s reporting segments as of June 30, 2012 are as follows:
Commercial Markets
Property & Casualty Commercial
Property & Casualty Commercial provides workers’ compensation, property, automobile, marine, livestock, liability and umbrella coverages primarily throughout the United States (“U.S.”), along with a variety of customized insurance products and risk management services including professional liability, fidelity, surety, and specialty casualty coverages.
Group Benefits
Group Benefits provides employers, associations, affinity groups and financial institutions with group life, accident and disability coverage, along with other products and services, including voluntary benefits, and group retiree health.
Consumer Markets
Consumer Markets provides standard automobile, homeowners and home-based business coverages to individuals across the U.S., including a special program designed exclusively for members of AARP. Consumer Markets also operates a member contact center for health insurance products offered through the AARP Health program.
Wealth Management
Individual Life
Individual Life sells a variety of life insurance products, including variable universal life, universal life, and term life.
Retirement Plans
Retirement Plans provides products and services to corporations pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), and products and services to municipalities and not-for-profit organizations under Sections 457 and 403(b) of the Code, collectively referred to as government plans.
Mutual Funds
Mutual Funds offers retail mutual funds, investment-only mutual funds and college savings plans under Section 529 of the Code (collectively referred to as non-proprietary) and proprietary mutual funds supporting insurance products issued by The Hartford.
Runoff Operations
Life Other Operations
Life Other Operations includes the Company's management of certain life operations that have discontinued writing new business encompassing U.S. individual, international (primarily in Japan and Europe) and institutional annuity products and private placement life insurance.
Property & Casualty Other Operations
Property & Casualty Other Operations includes the Company’s management of certain property and casualty operations that have discontinued writing new business and substantially all of the Company’s asbestos and environmental exposures.
Corporate
The Company includes in the Corporate category the Company’s debt financing and related interest expense, as well as other capital raising activities; banking operations; certain fee income and commission expenses associated with sales of non-proprietary products by broker-dealer subsidiaries; and certain purchase accounting adjustments and other charges not allocated to the segments.

17

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


3. Segment Information (continued)
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
June 30,
 
Six Months Ended
June 30,
Net income (loss)
2012
 
2011
 
2012
 
2011
Property & Casualty Commercial
$
149

 
$
118

 
$
338

 
$
441

Group Benefits
35

 
41

 
53

 
52

Consumer Markets
(50
)
 
(172
)
 
58

 
(64
)
Individual Life
36

 
46

 
55

 
64

Retirement Plans
(2
)
 
27

 
16

 
32

Mutual Funds
18

 
27

 
38

 
55

Life Other Operations
406

 
261

 
199

 
334

Property & Casualty Other Operations
(15
)
 
(164
)
 
12

 
(143
)
Corporate
(678
)
 
(151
)
 
(774
)
 
(237
)
Net income (loss)
$
(101
)
 
$
33

 
$
(5
)
 
$
534

 

18

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


3. Segment Information (continued)
The following table presents revenues by product line for each reporting segment, as well as the Corporate category.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Revenues
2012
 
2011
 
2012
 
2011
Earned premiums, fees, and other considerations
 
 
 
 
 
 
 
Property & Casualty Commercial
 
 
 
 
 
 
 
Workers’ compensation
$
737

 
$
685

 
$
1,470

 
$
1,350

Property
126

 
134

 
251

 
269

Automobile
146

 
145

 
292

 
291

Package business
289

 
285

 
581

 
568

Liability
136

 
134

 
277

 
269

Fidelity and surety
51

 
54

 
103

 
109

Professional liability
67

 
80

 
135

 
159

Total Property & Casualty Commercial
1,552

 
1,517

 
3,109

 
3,015

Group Benefits
 
 
 
 
 
 
 
Group disability
439

 
516

 
882

 
993

Group life and accident
478

 
511

 
957

 
1,028

Other
49

 
49

 
99

 
99

Total Group Benefits
966

 
1,076

 
1,938

 
2,120

Consumer Markets
 
 
 
 
 
 
 
Automobile
630

 
657

 
1,262

 
1,329

Homeowners
274

 
282

 
551

 
566

Total Consumer Markets [1]
904

 
939

 
1,813

 
1,895

Individual Life
 
 
 
 
 
 
 
Variable life
85

 
91

 
172

 
182

Universal life
122

 
109

 
248

 
215

Term / Other life
13

 
12

 
27

 
24

Total Individual Life
220

 
212

 
447

 
421

Retirement Plans
 
 
 
 
 
 
 
401(k)
81

 
88

 
165

 
172

Government plans
13

 
13

 
25

 
26

Total Retirement Plans
94

 
101

 
190

 
198

Mutual Funds
 
 
 
 
 
 
 
Non-Proprietary
134

 
161

 
270

 
323

Proprietary
14

 
14

 
29

 
30

Total Mutual Funds
148

 
175

 
299

 
353

Life Other Operations
587

 
690

 
1,199

 
1,384

Property & Casualty Other Operations
(2
)
 

 
(2
)
 

Corporate
45

 
54

 
97

 
106

Total earned premiums, fees, and other considerations
4,514

 
4,764

 
9,090

 
9,492

Net investment income:
 
 
 
 
 
 
 
Securities available-for-sale and other
1,097

 
1,104

 
2,167

 
2,212

Equity securities, trading
(1,687
)
 
(597
)
 
1,179

 
206

Total net investment income
(590
)
 
507

 
3,346

 
2,418

Net realized capital gains (losses)
589

 
69

 
(321
)
 
(334
)
Other revenues
61

 
61

 
120

 
125

Total revenues
$
4,574

 
$
5,401

 
$
12,235

 
$
11,701

[1]
For the three months ended June 30, 2012 and 2011, AARP members accounted for earned premiums of $671 and $694, respectively. For the six months ended June 30, 2012 and 2011, AARP members accounted for earned premiums of $1.3 billion and $1.4 billion, respectively.

19

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


4. Fair Value Measurements
The following financial instruments are carried at fair value in the Company’s Condensed Consolidated Financial Statements: fixed maturity and equity securities, available-for-sale (“AFS”), fixed maturities at fair value using fair value option (“FVO”), equity securities, trading, short-term investments, freestanding and embedded derivatives, separate account assets and certain other liabilities.
The following section applies the fair value hierarchy and disclosure requirements for the Company’s financial instruments that are carried at fair value. The fair value hierarchy prioritizes the inputs in the valuation techniques used to measure fair value into three broad Levels (Level 1, 2 or 3).
Level 1
Observable inputs that reflect quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. Level 1 securities include highly liquid U.S. Treasuries, money market funds and exchange traded equity securities, open-ended mutual funds reported in separate account assets and derivative securities.
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.
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 securities. 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. For the three and six months ended June 30, 2012, transfers of $781 and $919, respectively, from Level 1 to Level 2 occurred, which represented previously on-the-run U.S. Treasury securities that are now off-the-run. No transfers from Level 2 to 1 occurred during the three and six months ended June 30, 2012. 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.

20

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


4. Fair Value Measurements (continued)
These disclosures provide information as to the extent to which the Company uses fair value to measure financial instruments and information about the inputs used to value those financial instruments to allow users to assess the relative reliability of the measurements. The following tables present assets and (liabilities) carried at fair value by hierarchy level.
 
June 30, 2012
 
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”)
$
3,002

 
$

 
$
2,679

 
$
323

Collateralized debt obligations ("CDOs")
3,037

 

 
2,137

 
900

Commercial mortgage-backed securities ("CMBS")
6,346

 

 
5,360

 
986

Corporate
42,983

 

 
41,178

 
1,805

Foreign government/government agencies
3,598

 

 
3,543

 
55

States, municipalities and political subdivisions (“Municipal”)
14,125

 

 
13,475

 
650

Residential mortgage-backed securities ("RMBS")
6,981

 

 
5,773

 
1,208

U.S. Treasuries
5,155

 
1,080

 
4,075

 

Total fixed maturities
85,227

 
1,080

 
78,220

 
5,927

Fixed maturities, FVO
1,165

 

 
672

 
493

Equity securities, trading
29,215

 
1,902

 
27,313

 

Equity securities, AFS
851

 
328

 
437

 
86

Derivative assets
 
 

 

 

Credit derivatives
(19
)
 

 
(29
)
 
10

Equity derivatives
28

 

 

 
28

Foreign exchange derivatives
293

 

 
293

 

Interest rate derivatives
310

 

 
222

 
88

U.S. guaranteed minimum withdrawal benefit
("GMWB") hedging instruments
213

 

 
11

 
202

U.S. macro hedge program
70

 

 

 
70

International program hedging instruments
565

 

 
362

 
203

Other derivative contracts
26

 

 

 
26

Total derivative assets [1]
1,486

 

 
859

 
627

Short-term investments
5,154

 
309

 
4,845

 

Reinsurance recoverable for U.S. GMWB
376

 

 

 
376

Separate account assets [2]
141,110

 
102,608

 
37,167

 
1,335

Total assets accounted for at fair value on a recurring basis
$
264,584

 
$
106,227

 
$
149,513

 
$
8,844

Percentage of level to total
100
%
 
40
%
 
57
%
 
3
%
Liabilities accounted for at fair value on a recurring basis
 
 
 
 
 
 
 
Other policyholder funds and benefits payable
 
 
 
 
 
 
 
U.S guaranteed withdrawal benefits
$
(2,203
)
 
$

 
$

 
$
(2,203
)
International guaranteed withdrawal benefits
(53
)
 

 

 
(53
)
International other guaranteed living benefits
(4
)
 

 

 
(4
)
Equity linked notes
(10
)
 

 

 
(10
)
Total other policyholder funds and benefits payable
(2,270
)
 

 

 
(2,270
)
Derivative liabilities
 
 
 
 
 
 
 
Credit derivatives
(494
)
 

 
(45
)
 
(449
)
Equity derivatives
25

 

 

 
25

Foreign exchange derivatives
213

 

 
213

 

Interest rate derivatives
(622
)
 

 
(468
)
 
(154
)
U.S. GMWB hedging instruments
597

 

 
43

 
554

U.S. macro hedge program
110

 

 

 
110

International program hedging instruments
23

 

 
65

 
(42
)
Total derivative liabilities [3]
(148
)
 

 
(192
)
 
44

Other Liabilities
(29
)
 

 

 
(29
)
Consumer notes [4]
(4
)
 

 

 
(4
)
Total liabilities accounted for at fair value on a recurring basis
$
(2,451
)
 
$

 
$
(192
)
 
$
(2,259
)

21

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


4. Fair Value Measurements (continued) 
 
December 31, 2011
 
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
$
3,153

 
$

 
$
2,792

 
$
361

CDOs
2,487

 

 
2,119

 
368

CMBS
6,951

 

 
6,363

 
588

Corporate
44,011

 

 
41,756

 
2,255

Foreign government/government agencies
2,161

 

 
2,112

 
49

States, municipalities and political subdivisions (“Municipal”)
13,260

 

 
12,823

 
437

RMBS
5,757

 

 
4,694

 
1,063

U.S. Treasuries
4,029

 
750

 
3,279

 

Total fixed maturities
81,809

 
750

 
75,938

 
5,121

Fixed maturities, FVO
1,328

 

 
833

 
495

Equity securities, trading
30,499

 
1,967

 
28,532

 

Equity securities, AFS
921

 
352

 
476

 
93

Derivative assets
 
 
 
 
 
 
 
Credit derivatives
(24
)
 

 
(11
)
 
(13
)
Equity derivatives
31

 

 

 
31

Foreign exchange derivatives
519

 

 
519

 

Interest rate derivatives
195

 

 
147

 
48

U.S. GMWB hedging instruments
494

 

 
11