HARTFORD INSURANCE GROUP, INC. quarterly report, Q3 FY2009

Business Context and Reporting Period

The Hartford Financial Services Group, Inc. is a financial holding company providing life insurance, retirement and investment products, property and casualty insurance, and related services in the United States and internationally. This unaudited Form 10-Q covers the three and nine months ended September 30, 2009, with comparisons to the corresponding 2008 periods. The interim statements were reviewed by Deloitte & Touche LLP, not audited.

Financial Metrics

Metric	Q3 2009	Q3 2008	9M 2009	9M 2008
Earned premiums	$3.499 billion	$3.903 billion	$10.920 billion	$11.637 billion
Fee income	$1.140 billion	$1.333 billion	$3.369 billion	$4.056 billion
Total net investment income/(loss)	$1.687 billion	$(2.312) billion	$5.427 billion	$(2.314) billion
Net realized capital losses	$(1.219) billion	$(3.449) billion	$(1.816) billion	$(5.102) billion
Total revenues	$5.230 billion	$(393) million	$18.261 billion	$8.654 billion
Net loss	$(220) million	$(2.631) billion	$(1.444) billion	$(1.943) billion
Loss per diluted share	$(0.79)	$(8.74)	$(4.52)	$(6.29)
Operating cash flow	Not separately provided	Not separately provided	$2.745 billion	$2.938 billion

Q3 2009 total revenues benefited from positive mark-to-market results on equity securities supporting International variable annuities. These gains were substantially offset by policyholder credits and should not be viewed as ordinary operating revenue.

Property & Casualty generated net income of $190 million in Q3 and $475 million for nine months, compared with losses of $774 million and $199 million, respectively, in the prior-year periods.
Life reported a net loss of $323 million in Q3 and $1.405 billion for nine months, compared with losses of $1.815 billion and $1.636 billion, respectively.
Ongoing Operations’ combined ratio was 93.0% in Q3 and 92.2% for nine months, compared with 101.7% and 95.1% in 2008.
Total assets were $316.720 billion at September 30, 2009, versus $287.583 billion at December 31, 2008. Separate account assets and liabilities were each $155.958 billion.
Total stockholders’ equity increased to $17.456 billion from $9.268 billion, primarily due to Treasury preferred stock and warrants, common equity issuance, accounting changes, and improved accumulated other comprehensive income.
Debt declined to $5.835 billion from $6.221 billion, including $342 million of short-term debt and $5.493 billion of long-term debt on the balance sheet. The Company had no commercial paper outstanding.
Cash increased to $2.417 billion from $1.811 billion at year-end. Reported total liquidity available to The Hartford was approximately $16.0 billion, including cash, short-term investments and U.S. Treasuries, less derivative collateral and cash associated with Japan variable annuities.

Material Changes Versus Prior Comparable Period

Net losses narrowed substantially because of lower investment impairments, improved variable-annuity-related results, lower catastrophe losses, and stronger Property & Casualty underwriting.
Net other-than-temporary impairment losses recognized in earnings declined to $536 million in Q3 and $1.074 billion for nine months, compared with $3.077 billion and $3.545 billion in 2008.
The Q3 2009 Life DAC Unlock produced a $63 million after-tax benefit, compared with a $932 million after-tax charge in Q3 2008. For the first nine months, however, DAC Unlocks produced a $1.071 billion after-tax charge, including a $663 million Retail charge and a $300 million International charge.
Property & Casualty earned premiums declined 5% in Q3 and 4% for nine months, reflecting recession-related exposure declines, lower commercial retention, pricing pressure, ratings concerns and the sale of First State Management Group.
Life fee income declined 15% in Q3 and 17% for nine months, primarily because equity-market declines reduced assets under management and account values.
The Company raised $3.4 billion from Treasury under the Capital Purchase Program, issuing Series E preferred stock and warrants, and raised $887 million through a discretionary issuance of 56.1 million common shares.
The Company acquired Federal Trust Corporation on June 24, 2009, becoming a savings and loan holding company and supporting its participation in the Treasury program. Federal Trust Bank was reported as well capitalized, with a Tier 1 leverage ratio of 7.1%.

Guidance, Outlook, Risks and Unusual Items

Management expected 2009 Property & Casualty written premiums to remain under pressure because of the recession, lower payrolls, declining business activity, competitive pricing and ratings-related effects. Full-year Ongoing Operations combined ratio before catastrophes and prior accident-year development was expected to be higher than 88.9% in 2008.
Management expected catastrophe losses for full-year 2009 to be approximately 3.6% to 4.0% of Ongoing Operations earned premiums, subject to significant uncertainty.
Variable annuity profitability remained highly sensitive to equity markets, interest rates, volatility, foreign exchange rates, policyholder behavior and hedging effectiveness. The Company had suspended new sales in Japan and the United Kingdom and was redesigning U.S. products to reduce guarantee risk.
As of September 30, 2009, the retained net amount at risk was $10.2 billion for U.S. guaranteed minimum death benefits and $5.8 billion for Japan guaranteed death and living benefits. U.S. GMWB contracts had approximately $44.5 billion of account value, with 51% subject to dynamic hedging.
Q3 restructuring charges were $25 million pre-tax; nine-month charges were $105 million. Total restructuring and related costs were expected to reach approximately $150 million to $160 million pre-tax, with activities expected to be completed by December 2010.
The Company suspended new sales in International’s Japan and European operations and continued to reorganize its business to preserve capital, reduce risk and stabilize ratings.
Asbestos and environmental reserves were highly uncertain. Net reserves at September 30, 2009 were approximately $2.28 billion, including $1.95 billion for asbestos and $324 million for environmental claims, within an estimated range of $1.81 billion to $2.58 billion.
Derivative agreements could require additional collateral or settlement after ratings downgrades. A one-level downgrade could require approximately $41 million of additional collateral; a two-level downgrade could require approximately $63 million.
The Company expected to pay approximately $463 million of holding-company debt interest, $275 million of senior notes maturing in June 2010, $200 million to Allianz, approximately $76 million of common dividends and approximately $170 million of preferred dividends over the next twelve months.
In October 2009, the Company sold its Verisk Analytics investment for $360 million pre-tax and expected an approximately $234 million after-tax realized gain in the fourth quarter.
Adoption of new impairment guidance increased retained earnings by $912 million and reduced accumulated other comprehensive income by the same amount. Future guidance on transfers of financial assets and variable-interest entities was scheduled for adoption on January 1, 2010; the financial statement effects were not yet determined.

Important Facts for Investors to Verify

Whether the improvement in reported earnings persists after excluding investment-market gains, impairment reductions, DAC Unlocks and variable-annuity hedge effects.
The sustainability of Property & Casualty underwriting performance as catastrophe losses normalize, commercial premiums decline and current accident-year claim severity increases.
Required statutory reserves and capital following expiration of permitted practices and adoption of VA CARVM requirements for variable annuities.
Actual policyholder behavior, hedge effectiveness and collateral requirements under GMWB and other guaranteed-benefit contracts.
Future realized losses or impairments in CMBS, CRE CDOs, sub-prime RMBS, financial-services securities, mortgage loans and other Level 3 investments.
The adequacy and collectibility of reinsurance, including the $224 million allowance for uncollectible reinsurance in Other Operations.
Potential adverse developments in asbestos, environmental, structured-settlement, ERISA, broker-compensation and other litigation matters.
Effects of Treasury CPP restrictions, preferred dividends, Allianz obligations, debt maturities and potential common-share dilution from outstanding warrants.
The timing and after-tax impact of the Verisk sale and any subsequent changes in ratings, liquidity or dividend capacity from insurance subsidiaries.