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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-32293
HARTFORD LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
     
Connecticut   06-0974148
(State or other jurisdiction of   (I.R.S. Employer
Incorporation or organization)   Identification No.)
200 Hopmeadow Street, Simsbury, Connecticut 06089
(Address of principal executive offices)
(860) 547-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No þ
As of October 27, 2009 there were outstanding 1,000 shares of Common Stock, $5,690 par value per share, of the registrant, all of which were directly owned by Hartford Life and Accident Insurance Company. The Hartford Financial Services Group, Inc. is the ultimate parent of the registrant.
The registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format
 
 
 

 


 

INDEX
         
    Page
PART I. FINANCIAL INFORMATION
       
       
    3  
    4  
    5  
    6  
    7  
    8  
    47  
    94  
    94  
       
    95  
    96  
    96  
    97  
    98  
 EX-12.01
 EX-15.01
 EX-31.01
 EX-31.02
 EX-32.01
 EX-32.02
 

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Table of Contents

Item I. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Hartford Life Insurance Company
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of Hartford Life Insurance Company and subsidiaries (the “Company”) as of September 30, 2009, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2009 and 2008, and changes in stockholder’s equity and cash flows for the nine-month periods ended September 30, 2009 and 2008. 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, 2008, and the related consolidated statements of operations, changes in stockholder’s equity, and cash flows for the year then ended (not presented herein); and in our report dated February 11, 2009 (April 29, 2009 as to the effects of the change in reporting entity structure and the retrospective adoption of Financial Accounting Standards Board Accounting Standards Codification 810, Consolidation described in Notes 1 and 17), (which report includes an explanatory paragraph relating to the Company’s change in its method of accounting and reporting for the fair value measurement of financial instruments in 2008), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2008 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
November 3, 2009
 

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HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
                                 
    Three Months ended   Nine Months ended
    September 30,   September 30,
(In millions)   2009   2008   2009   2008
    (Unaudited)   (Unaudited)
 
Revenues
                               
Fee income and other
  $ 910     $ 1,082     $ 2,697     $ 3,295  
Earned premiums
    51       277       387       733  
Net investment income (loss)
                               
Securities available-for-sale and other
    644       643       1,881       2,078  
Equity securities, trading
    299       (118 )     308       (240 )
Total net investment income
    943       525       2,189       1,838  
Net realized capital gains (losses):
                               
Total other-than-temporary impairment (“OTTI”) losses
    (588 )     (1,310 )     (1,178 )     (1,624 )
OTTI losses recognized to other comprehensive income
    173             330        
 
Net OTTI losses recognized in earnings
    (415 )     (1,310 )     (848 )     (1,624 )
Net realized capital gains (losses), excluding net OTTI losses recognized in earnings
    (1,097 )     (650 )     830       (2,046 )
 
Total net realized capital gains (losses)
    (1,512 )     (1,960 )     (18 )     (3,670 )
Total revenues
    392       (76 )     5,255       2,196  
 
Benefits, losses and expenses
                               
Benefits, losses and loss adjustment expenses
    674       1,136       2,999       3,009  
Benefits, loss and loss adjustment expenses — returns credited on International unit-linked bonds and pension products
    299       (118 )     308       (240 )
Insurance operating costs and other expenses
    482       498       1,370       1,463  
Amortization of deferred policy acquisition costs and present value of future profits
    93       1,289       1,792       1,380  
Dividends to policyholders
    1             12       10  
 
Total benefits, losses and expenses
    1,549       2,805       6,481       5,622  
 
Income (loss) before income tax expense (benefit)
    (1,157 )     (2,881 )     (1,226 )     (3,426 )
Income tax expense (benefit)
    (447 )     (1,049 )     (525 )     (1,346 )
 
Net income (loss)
    (710 )     (1,832 )     (701 )     (2,080 )
Less: Net (income) loss attributable to the noncontrolling interest
    (3 )     10       (9 )     52  
Net income (loss) attributable to shareholder
  $ (713 )   $ (1,822 )   $ (710 )   $ (2,028 )
 
 

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HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
                 
    September   December
(In millions, except for share data)   30, 2009   31, 2008
    (Unaudited)
 
Assets
               
Investments
               
Fixed maturities, available for sale, at fair value (amortized cost of $44,197 and $48,444)
  $ 39,436     $ 39,560  
 
               
Equity securities, trading, at fair value (cost of $2,359 and $1,830)
    2,465       1,634  
Equity securities, available-for-sale, at fair value (cost of $464 and $614)
    409       434  
Mortgage loans
    4,630       4,896  
Policy loans, at outstanding balance
    2,156       2,154  
Limited partnership and other alternative investments
    776       1,033  
Other investments
    1,370       1,237  
Short-term investments
    5,901       5,742  
 
Total investments
    57,143       56,690  
 
               
Cash
    956       661  
Premiums receivable and agents’ balances
    25       25  
Reinsurance recoverables
    2,557       3,195  
Deferred policy acquisition costs and present value of future profits
    7,932       9,944  
Deferred income taxes
    2,671       3,444  
Goodwill
    470       462  
Other assets
    1,098       3,267  
Separate account assets
    155,944       130,171  
 
Total assets
  $ 228,796     $ 207,859  
 
Liabilities
               
Reserve for future policy benefits and unpaid losses and loss adjustment expenses
  $ 11,285     $ 10,602  
Other policyholder funds and benefits payable
    45,605       52,647  
Other policyholder funds and benefits payable — International unit-linked bonds and pension products
    2,441       1,613  
Consumer notes
    1,193       1,210  
Other liabilities
    6,225       8,373  
Separate account liabilities
    155,944       130,171  
 
Total liabilities
  $ 222,693     $ 204,616  
 
Commitments and Contingencies (Note 9)
               
Equity
               
Common stock - 1,000 shares authorized, issued and outstanding, par value $5,690
    6       6  
Additional paid in capital
    7,065       6,157  
Accumulated other comprehensive loss, net of tax
    (2,184 )     (4,531 )
Retained earnings
    1,159       1,446  
 
Total stockholder’s equity
    6,046       3,078  
 
Noncontrolling interest
    57       165  
 
Total equity
    6,103       3,243  
 
Total liabilities and equity
  $ 228,796     $ 207,859  
 
See Notes to Condensed Consolidated Financial Statements
 

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HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements Of Changes In Equity
                                                                         
    Accumulated Other
(Unaudited)   Comprehensive Income (Loss)
                    Net                                
                    Unrealized                                
                    Capital   Net (Loss)                            
                    Gains   Gain On                            
                    (Losses)   Cash Flow   Foreign                        
            Additional   On   Hedging   Currency                   Non-    
    Common   Paid In   Securities,   Instruments,   Translation   Retained   Total   Controlling   Total
(In millions)   Stock   Capital   Net of Tax   Net of Tax   Adjustments   Earnings   S.E.   Interest   Equity
 
Nine months ended September 30, 2009
                                                                       
Balance, December 31, 2008
    6       6,157       (4,806 )     440       (165 )     1,446       3,078       165       3,243  
Comprehensive income
                                                                       
Net income (loss)
                                            (710 )     (710 )             (710 )
Other comprehensive income, net of tax (1)
                                                                       
Net change in unrealized capital losses on securities (2)
                    2,897                               2,897               2,897  
Net gains (losses) on cash flow hedging instruments
                            (199 )                     (199 )             (199 )
Cumulative translation adjustments
                                    111               111               111  
 
                                                                       
Total other comprehensive income (loss)
                                                    2,809               2,809  
Total comprehensive income (loss)
                                                    2,099               2,099  
 
                                                                       
Capital contribution from parent
            908                                       908               908  
 
                                                                       
Dividends declared
                                            (39 )     (39 )             (39 )
Cumulative effect of accounting changes, net of DAC and tax
                    (462 )                     462                          
 
Change in noncontrolling interest ownership
                                                            (117 )     (117 )
 
Noncontrolling income (loss)
                                                            9       9  
 
Balance, September 30, 2009
    6       7,065       (2,371 )     241       (54 )     1,159       6,046       57       6,103  
 
Nine months ended September 30, 2008
                                                                       
Balance, December 31, 2007
    6       3,746       (318 )     (137 )     8       5,315       8,620       255       8,875  
Comprehensive income
                                                                       
Net income (loss)
                                            (2,028 )     (2,028 )             (2,028 )
Other comprehensive income, net of tax (1)
                                                                       
Net change in unrealized capital gains on securities (2)
                    (2,161 )                             (2,161 )             (2,161 )
Net losses on cash flow hedging instruments
                            134                       134               134  
Cumulative translation adjustments
                                    (40 )             (40 )             (40 )
 
                                                                       
Total other comprehensive income (loss)
                                                    (2,067 )             (2,067 )
Total comprehensive income (loss)
                                                    (4,095 )             (4,095 )
 
                                                                       
Capital contribution from parent
            480                                       480               480  
Dividends declared
                                            (268 )     (268 )             (268 )
Cumulative effect of accounting changes, net of tax
                                            (3 )     (3 )             (3 )
 
Change in noncontrolling interest ownership
                                                            50       50  
 
Noncontrolling income (loss)
                                                            (52 )     (52 )
 
Balance, September 30, 2008
    6       4,226       (2,479 )     (3 )     (32 )     3,016       4,734       253       4,987  
 
(1)   Net change in unrealized capital gains on securities is reflected net of tax benefit and other items of $(1,560) and $1,165 for the nine months ended September 30, 2009 and 2008, respectively. Net gain (loss) on cash flow hedging instruments is net of tax provision (benefit) of $107 and $(72) for the nine months ended September 30, 2009 and 2008, respectively. There is no tax effect on cumulative translation adjustments.
 
(2)   There were reclassification adjustments for after-tax gains (losses) realized in net income of $(12) and $(2,386) for the nine months ended September 30, 2009 and 2008, respectively.
See Notes to Condensed Consolidated Financial Statements
 

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HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
                 
    Nine months ended September 30,
(In millions)   2009   2008
    (Unaudited)
Operating Activities
               
Net income (loss)
  $ (701 )   $ (2,080 )
Adjustments to reconcile net income to net cash provided by operating activities
               
Amortization of deferred policy acquisition costs and present value of future profits
    1,792       1,380  
Additions to deferred policy acquisition costs and present value of future profits
    (537 )     (990 )
Change in:
               
Reserve for future policy benefits and unpaid losses and loss adjustment expenses
    464       1,006  
Reinsurance recoverables
    31       (53 )
Receivables
    (127 )     512  
Payables and accruals
    (15 )     (477 )
Accrued and deferred income taxes
    344       (1,202 )
Net realized capital (gains) losses
    18       3,670  
Net receipts from investment contracts related to policyholder funds — International unit-linked bonds and pension products
    828       481  
Net increase in equity securities trading
    (832 )     (469 )
Depreciation and amortization
    126       115  
Other, net
    (285 )     (724 )
 
Net cash provided by operating activities
    1,107       1,169  
 
Investing Activities
               
Proceeds from the sale/maturity/prepayment of:
               
Fixed maturities and short-term investments, available-for-sale
    31,939       8,368  
Equity securities, available-for-sale
    134       406  
Mortgage loans
    314       310  
Partnerships
    202       85  
Payments for the purchase of:
               
Fixed maturities and short-term investments, available-for-sale
    (29,580 )     (9,721 )
Equity securities, available-for-sale
    (50 )     (116 )
Mortgage loans
    (189 )     (848 )
Partnerships
    (97 )     (266 )
Purchase price of business acquired
    (8 )      
Change in policy loans, net
    (2 )     (91 )
Change in payables for collateral under securities lending, net
    (1,648 )     (104 )
Derivative receipts (payments)
    (542 )     (121 )
Change in all other, net
    26       (380 )
 
Net cash provided by investing activities
    499       (2,478 )
 
Financing Activities
               
Deposits and other additions to investment and universal life-type contracts
    10,172       16,603  
Withdrawals and other deductions from investment and universal life-type contracts
    (17,466 )     (20,924 )
Net transfers from (to) separate accounts related to investment and universal life-type contracts
    5,021       5,407  
Capital Contributions
    902       483  
Dividends paid
    (34 )     (255 )
Proceeds from issuance of consumer notes
          445  
Repayment at maturity of consumer notes
    (17 )     (29 )
 
Net cash used for financing activities
    (1,422 )     1,730  
 
Foreign exchange rate effect on cash
    111       (29 )
Net increase in cash
    295       392  
 
Cash — beginning of period
    661       423  
 
Cash — end of period
  $ 956     $ 815  
 
Supplemental Disclosure of Cash Flow Information:
               
Net Cash Paid During the Period For:
               
Income taxes paid (received)
  $ (552 )   $ (35 )
For the nine months ended September 30, 2009, the Company made noncash net dividends of $6 to its parent company related to the guaranteed minimum income and accumulation benefit reinsurance agreements with Hartford Life Insurance K.K. (“HLIKK”). For the nine months ended September 30, 2008, the Company made noncash dividends of $11 from its parent company related to the guaranteed minimum income and accumulation benefit reinsurance agreements with HLIKK.
See Notes to Condensed Consolidated Financial Statements
 

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HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
(unaudited)
1. Basis of Presentation and Accounting Policies
Basis of Presentation
These condensed consolidated financial statements include Hartford Life Insurance Company and its wholly-owned subsidiaries (collectively, “Hartford Life Insurance Company” or the “Company”), Hartford Life and Annuity Insurance Company (“HLAI”), Hartford International Life Reassurance Corporation (“HLRe”) Hartford Financial Services LLC (“HFSC”), Hartford Life International LTD (“HLINT”) and Woodbury Financial Services Corporation (“WFS”). The Company is a wholly-owned subsidiary of Hartford Life and Accident Insurance Company (“HLA”), which is a wholly-owned subsidiary of Hartford Life, Inc. (“Hartford Life”). Hartford Life is a direct wholly-owned subsidiary of Hartford Holdings, Inc., a direct wholly-owned subsidiary of The Hartford Financial Services Group, Inc., the Company’s ultimate parent company. As used herein, “The Hartford” refers broadly to The Hartford Financial Services Group, Inc. and its subsidiaries, which may or may not include the Company and its subsidiaries with respect to a particular issue.
The accompanying condensed consolidated financial statements and notes as of September 30, 2009, and for the three and nine months ended September 30, 2009 and 2008 are unaudited. These financial statements reflect all adjustments (consisting only of normal accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations, and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in The Company’s 2008 Form 10-K Annual Report and the Current Report on Form 8-K filed on April 29, 2009. The results of operations for the interim periods should not be considered indicative of the results to be expected for the full year.
Effective March 31,2009, Hartford Life changed its reporting entity structure to contribute certain wholly owned subsidiaries, including Hartford Life’s European insurance operations, several broker dealer entities and investment advisory and service entities from Hartford Life and Accident to the Company. The contribution of subsidiaries was effected to more closely align servicing entities with the writing company issuing the business they service as well as to more efficiently deploy capital across the organization. The change in reporting entity was retrospectively applied to the financial statements of the Company for all periods presented.
Along with its parent, HLA, the Company is a financial services and insurance group which provides (a) investment products, such as individual variable annuities and fixed market value adjusted annuities, mutual funds and retirement plan services; (b) individual life insurance; (c) group benefits products such as group life and group disability insurance that is directly written by the Company and is substantially ceded to its parent, HLA, (d) private placement life insurance and (e) assumes fixed market value adjusted annuities, guaranteed minimum withdrawal benefits (“GMWB”), guaranteed minimum income benefits (“GMIB”), guaranteed minimum accumulation benefits (“GMAB”) and guaranteed minimum death benefits (“GMDB”) from Hartford Life’s international operations.
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.
Consolidation
The condensed consolidated financial statements include the accounts of Hartford Life Insurance Company, companies in which the Company directly or indirectly has a controlling financial interest and those variable interest entities in which the Company is the primary beneficiary. The Company determines if it is the primary beneficiary using both qualitative and quantitative analyses. Entities in which Hartford Life Insurance Company does not have a controlling financial interest but in which the Company has significant influence over the operating and financing decisions are reported using the equity method. Material intercompany transactions and balances between Hartford Life Insurance Company and its subsidiaries and affiliates have been eliminated.
Use of Estimates
The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining estimated gross profits used in the valuation and amortization of assets and liabilities associated with variable annuity and other universal life-type contracts; living benefits required to be fair valued; valuation of investments and derivative instruments, evaluation of other-than-temporary impairments on available-for-sale securities; and contingencies relating to corporate litigation and regulatory matters; and goodwill impairment. 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.
 

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1. Basis of Presentation and Accounting Policies (continued)
Subsequent Events
The Company has evaluated events subsequent to September 30, 2009 and through the condensed consolidated financial statement issuance date of November 3, 2009. The Company has not evaluated subsequent events after that date for presentation in these condensed consolidated financial statements.
Significant Accounting Policies
For a description of significant accounting policies, see Note 1 of Notes to Consolidated Financial Statements included in the Company’s 2008 Form 10-K Annual Report and the Current Report on Form 8-K filed on April 29, 2009, which, accordingly, should be read in conjunction with these accompanying condensed consolidated financial statements.
Adoption of New Accounting Standards
Fair Value
In August 2009, the Financial Accounting Standards Board (“FASB”) updated the accounting standard related to the fair value measurement of liabilities. This update provides guidance on the fair value measurement of liabilities and reaffirms that the fair value measurement of a liability assumes the transfer of a liability to a market participant, that is the liability is presumed to continue and is not settled with the counterparty. This guidance also provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following valuation techniques: a) quoted price of an identical liability when traded as an asset, b) quoted price of a similar liability or of a similar liability when traded as an asset, or c) another valuation technique consistent with the fair value principles within U.S. GAAP such as a market approach or an income approach. The amendments in this guidance also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate adjustment relating to transfer restriction of the liability. This guidance is effective for the first reporting period, including interim periods, beginning after issuance. The Company adopted this guidance as of September 30, 2009, and the adoption did not have an impact on the Company’s condensed consolidated financial statements
Recognition and Presentation of Other-Than-Temporary Impairments
In April 2009, the FASB updated the guidance related to the recognition and presentation of other-than-temporary impairments which modifies the recognition of other-than-temporary impairment (“impairment”) losses for debt securities. This new guidance is also applied to certain equity securities with debt-like characteristics (collectively “debt securities”). Under the new guidance, a debt security is deemed to be other-than-temporarily impaired if it meets the following conditions: 1) the Company intends to sell or it is more likely than not the Company will be required to sell the security before a recovery in value, or 2) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell or it is more likely than not that the Company will be required to sell the security before a recovery in value, a charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security. For those other-than-temporarily impaired debt securities which do not meet the first condition and for which the Company does not expect to recover the entire amortized cost basis, the difference between the security’s amortized cost basis and the fair value is separated into the portion representing a credit impairment, which is recorded in net realized capital losses, and the remaining impairment, which is recorded in other comprehensive income (“OCI”). Generally, the Company determines a security’s credit impairment as the difference between its amortized cost basis and its best estimate of expected future cash flows discounted at the security’s effective yield prior to impairment. The previous amortized cost basis less the impairment recognized in net realized capital losses becomes the security’s new cost basis. The Company accretes the new cost basis to the estimated future cash flows over the expected remaining life of the security by prospectively adjusting the security’s yield, if necessary.
The Company evaluates whether a credit impairment exists, by considering primarily the following factors: (a) the length of time and extent to which the fair value has been less than the amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s underlying collateral and (e) the payment structure of the security. The Company’s best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the security. The Company’s best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, current delinquency rates, loan-to-value ratios and the possibility of obligor re-financing. In addition, for securitized debt securities, the Company considers factors including, but not limited to, commercial and residential property value declines that vary by property type and location and average cumulative collateral loss rates that vary by vintage year. These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries which may include estimating the underlying collateral value. In addition, projections of expected future debt security cash flows may change based upon new information regarding the performance of the issuer and/or underlying collateral such as changes in the projections of the underlying property value estimates.
This guidance does not impact the evaluation for impairment for equity securities. For those equity securities where the decline in the fair value is deemed to be other-than-temporary, a charge is recorded in net realized capital losses equal to the difference between the fair value and cost basis of the security. The previous cost basis less the impairment becomes the security’s new cost basis. The Company asserts its intent and ability to retain those equity securities deemed to be temporarily impaired until the price recovers. Once identified, these securities are systematically restricted from trading unless approved by the committee of investment and accounting
 

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1. Basis of Presentation and Accounting Policies (continued)
professionals (“the Committee”). The Committee will only authorize the sale of these securities based on predefined criteria that relate to events that could not have been reasonably foreseen. Examples of the criteria include, but are not limited to, the deterioration in the issuer’s financial condition, security price declines, a change in regulatory requirements or a major business combination or major disposition.
The primary factors considered in evaluating whether an impairment exists for an equity security include, but are not limited to: (a) the length of time and extent to which the fair value has been less than the cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated payments and (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery.
This guidance also expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. The Company adopted this new guidance for its interim reporting period ending on June 30, 2009 and upon adoption of this guidance, the Company recognized a $462, net of tax and deferred acquisition costs, increase to Retained Earnings with an offsetting decrease in Accumulated Other Comprehensive Income (“AOCI”). See Note 4 for expanded interim disclosures. Disclosures regarding the effect of the adoption of this guidance on income for interim periods subsequent to adoption have not been made, as it is not practicable to estimate the effect of such amounts.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB updated guidance for noncontrolling interests. A noncontrolling interest refers to the minority interest portion of the equity of a subsidiary that is not attributable directly or indirectly to a parent. This updated guidance establishes accounting and reporting standards that require for-profit entities that prepare consolidated financial statements to: (a) present noncontrolling interests as a component of equity, separate from the parent’s equity, (b) separately present the amount of consolidated net income attributable to noncontrolling interests in the income statement, (c) consistently account for changes in a parent’s ownership interests in a subsidiary in which the parent entity has a controlling financial interest as equity transactions, (d) require an entity to measure at fair value its remaining interest in a subsidiary that is deconsolidated, and (e) require an entity to provide sufficient disclosures that identify and clearly distinguish between interests of the parent and interests of noncontrolling owners. This guidance applies to all for-profit entities that prepare consolidated financial statements, and affects those for-profit entities that have outstanding noncontrolling interests in one or more subsidiaries or that deconsolidate a subsidiary. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 with earlier adoption prohibited. Upon adoption of this guidance on January 1, 2009, the Company reclassified $255 of noncontrolling interest, recorded in other liabilities, to equity as of January 1, 2008. See the Company’s Condensed Consolidated Statement of Changes in Equity. The adoption of this guidance resulted in certain reclassifications of noncontrolling interests within the Company’s Condensed Consolidated Statements of Operations. The adoption did not impact the Company’s accounting for separate account assets and liabilities. The FASB has added a topic to the Emerging Issues Task Force (“EITF”) agenda, “Consideration of an Insurer’s Accounting for Majority Owned Investments When the Ownership Is Through a Separate Account”. In September 2009 the FASB issued for comment, a proposal on this topic in which they clarify that specialized accounting for investments held by a separate account should continue in consolidation. In addition, the proposed amendments would not require an insurer to consolidate a majority owned voting-interest investment held by a separate account if the investment is not or would not be consolidated in the stand-alone financial statement of the separate account. The Company currently follows this proposed guidance and excludes the noncontrolling interest from its majority owned separate accounts. The resolution of this FASB agenda item will continue to be followed by the Company; however it is not expected to have an impact on the Company’s accounting for separate account assets and liabilities.
 

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1. Basis of Presentation and Accounting Policies (continued)
Future Adoption of New Accounting Standards
Accounting for Transfers of Financial Assets
In June 2009, the FASB issued updated guidance related to the accounting for transfers of financial assets. These amendments revise derecognition guidance and eliminates the concept of a qualifying special-purpose entities (“QSPEs”). This guidance is effective for fiscal years and interim periods beginning after November 15, 2009. Early adoption is prohibited. The Company will adopt this guidance on January 1, 2010 and has not yet determined the effect of the adoption on its consolidated financial statements.
Amendments to Consolidation Guidance for Variable Interest Entities
In June 2009, the FASB issued updated guidance which amends the consolidation requirements applicable to variable interest entities (“VIE”). An entity would consolidate a VIE, as the primary beneficiary, when the entity has both of the following characteristics: (a) The power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) The obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Ongoing reassessment of whether an enterprise is the primary beneficiary of a VIE is required. This updated guidance replaces the quantitative approach previously required for determining the primary beneficiary of a VIE with a qualitative approach, modifies the criteria for determining whether a service provider or decision maker contract is a variable interest. and changes the consideration of removal rights in determining if an entity is a VIE. These changes may cause certain additional entities to now be considered a VIE. This Statement is effective for fiscal years and interim periods beginning after November 15, 2009. Although the Company has not yet determined the effect of the adoption on its consolidated financial statements, a review of the impact to the Company is currently being evaluated. The following areas of potential impact are being assessed: The Hartford managed mutual funds, (both retail and those within the Company’s separate accounts), limited partnership investments, and Company sponsored collateralized debt obligations (“CDOs”) and collateralized loan obligations (“CLOs”). The Company will adopt this guidance on January 1, 2010.
Income Taxes
The effective tax rate for the three months ended September 30, 2009 and 2008 was 39% and 37%, respectively. The effective tax rate for the nine months ended September 30, 2009 and 2008 was 43% and 40%, respectively. The principal cause of the difference between the effective rate and the U.S. statutory rate of 35% was the separate account dividends received deduction (“DRD”). The DRD caused an increase from the statutory rate as a result of a tax benefit on pretax losses.
The separate account DRD is estimated for the current year using information from the prior year-end, adjusted for current year equity market performance and other appropriate factors, including estimated levels of corporate dividend payments. 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 distributions from these mutual funds, amounts of short-term capital gains at the mutual fund level and the Company’s taxable income before the DRD. Given recent financial markets’ volatility, the Company is reviewing its DRD computations on a quarterly basis. The Company recorded benefits related to the separate account DRD of $33 and $50 in the three months ended September 30, 2009 and 2008, and $108 and $158 in the nine months ended September 30, 2009 and 2008, respectively. The benefit recorded in the three months ended September 30, 2009 included prior period adjustments of $(6) related to the 2008 tax return and $1 related to the three months ended June 30, 2009.
The Company’s federal income tax returns are routinely audited by the IRS as part of the Hartford’s consolidated tax return. During the first quarter of 2009, the Company received notification of the approval by the Joint Committee on Taxation of the results of the 2002 through 2003 examination. As a result, the Company recorded a tax benefit of $4. The 2004 through 2006 examination began during the second quarter of 2008, and is expected to close in early 2010. In addition, the Company is working with the IRS on a possible settlement of a DRD issue related to prior periods which, if settled, may result in the booking of tax benefits. Such benefits are not expected to be material to the statement of operations.
The Company has determined 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. In assessing the need for a valuation allowance, management considered future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and taxable income in prior carry back years, as well as tax planning strategies that include holding debt securities with market value losses until maturity, selling appreciated securities to offset capital losses, and sales of certain corporate assets. Such tax planning strategies are viewed by management as prudent and feasible and will be implemented if necessary to realize the deferred tax asset. However, future realized losses on investment securities could result in the recognition of additional valuation allowance if additional tax planning strategies are not available. At September 30, 2009 if the Company were to follow a “separate entity” approach, it would have recorded a valuation allowance of $280 related to realized capital losses. In addition, the current tax benefit related to any of the Company’s tax attributes realized by virtue of its inclusion in The Hartford’s consolidated tax return would have recorded directly to surplus rather than income. These benefits were $153 and $231 for the nine months ended September 30, 2009 and 2008, respectively.
 

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1. Basis of Presentation and Accounting Policies (Continued)
Reinsurance
As of September 30, 2009 the Company’s reinsurance-related concentrations of credit risk greater than 10% of the company’s stockholder’s equity was reinsurance recoverables of $614 with Connecticut General Life Insurance Company.
2. Segment Information
The Company has three groups comprised of four reporting segments: The Retail Products Group (“Retail”) and Individual Life segments make up the Individual Markets Group. The Retirement Plans segment represents the Employer Market Group and the Institutional Solutions Group (“Institutional”) make up its own group.
Financial Measures and Other Segment Information
The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies in Note 1. Life primarily evaluates performance of its segments based on revenues, net income and the segment’s return on allocated capital. Each reporting segment is allocated corporate surplus as needed to support its business.
The Company charges direct operating expenses to the appropriate segment and allocates the majority of indirect expenses to the segments based on an intercompany expense arrangement. Inter-segment revenues primarily occur between the Company’s Other category and the reporting segments. These amounts primarily include interest income on allocated surplus and interest charges on excess separate account surplus. Consolidated net investment income is unaffected by such transactions.
For further discussion of the types of products offered by each segment, see Note 2 of Notes to the Condensed Consolidated Financial Statements included in the Company’s 2008 Form 10-K Annual Report and the current report on Form 8-K filed on April 30, 2009.
The following tables represent summarized financial information concerning the Company’s segments.
                                 
    Three Months ended September 30,   Nine Months ended September 30,
    2009   2008   2009   2008
 
Revenues
                               
Retail [1]
  $ 90     $ 420       1,881     $ 1,432  
Individual Life
    258       103       798       614  
Retirement Plans
    75       1       246       293  
Institutional
    126       (81 )     561       688  
Other [1][2]
    (157 )     (519 )     1,769       (831 )
 
Total revenues [1][2]
  $ 392     $ (76 )   $ 5,255     $ 2,196  
 
[1]   The transition impact related to the adoption of fair value was a reduction in revenues of $616 and $172 in Retail and Other, respectively, for the nine months ended September 30, 2008.
 
[2]   Other segment contains the free standing derivative associated with the GMIB and GMAB reinsurance from the Company’s, affiliate, HLIKK. The reinsurance agreement is the primary driver of the revenue and net income (loss) for the Other segment.
                                 
    Three Months ended September 30,   Nine Months ended September 30,
    2009   2008   2009   2008
 
Net Income (Loss)
                               
Retail [1]
  $ (172 )   $ (825 )   $ (725 )   $ (732 )
Individual Life
    (1 )     (105 )     (8 )     (58 )
Retirement Plans
    (34 )     (160 )     (162 )     (134 )
Institutional
    (104 )     (391 )     (350 )     (543 )
Other [1][2]
    (399 )     (351 )     544       (613 )
 
Total net income (loss) [1]
  $ (710 )   $ (1,832 )   $ (701 )   $ (2,080 )
 
[1]   The transition impact related to the adoption of fair value was a reduction in net income of $209 and $102 in Retail and Other, respectively, for the nine months ended September 30, 2008.
 
[2]   Other segment contains the free standing derivative associated with the GMIB and GMAB reinsurance from the Company’s, affiliate, HLIKK. The reinsurance agreement is the primary driver of the revenue and net income (loss) for the Other segment.
 

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3. Fair Value Measurements
The following financial instruments are carried at fair value in the Company’s Condensed Consolidated Financial Statements: fixed maturities and equity securities, available-for-sale (“AFS”), equity securities, trading, short-term investments, freestanding and embedded derivatives, and separate account assets.
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, open-ended mutual funds reported in separate account assets and derivative securities, including futures and certain option contracts.
 
   
Level 2
  Observable inputs, other than quoted prices included in Level 1, for the asset or liability or prices for similar assets and liabilities. Most debt securities and preferred stocks, including those reported in separate account assets, are model priced by vendors using observable inputs and are classified within Level 2. Also included in the Level 2 category are derivative instruments that are priced using models with significant observable market inputs, including interest rate, foreign currency and certain credit swap contracts and have no significant unobservable market inputs.
 
   
Level 3
  Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk). Level 3 securities include less liquid securities such as highly structured and/or lower quality asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”), commercial real estate (“CRE”) CDOs, residential mortgage-backed securities (“RMBS”) primarily backed by below- prime loans, and private placement debt and equity securities reported in both the general and separate accounts. Embedded derivatives, including GMWB liabilities, and complex derivatives securities, including equity derivatives, longer dated interest rate swaps or swaps with optionality and certain complex credit derivatives are also included in Level 3. Because Level 3 fair values, by their nature, contain unobservable market inputs as there is 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. In most cases, both observable (e.g., changes in interest rates) and unobservable (e.g., changes in risk assumptions) inputs are used in the determination of fair values that the Company has classified within Level 3. Consequently, these values and the related gains and losses are based upon both observable and unobservable inputs. The Company’s fixed maturities included in Level 3 are classified as such as they are primarily priced by independent brokers and/or within illiquid markets (i.e., below-prime RMBS).
 

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3. 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.
                                 
    September 30, 2009
            Quoted Prices        
            in Active   Significant   Significant
            Markets for   Observable   Unobservable
            Identical Assets   Inputs   Inputs
    Total   (Level 1)   (Level 2)   (Level 3)
 
Assets accounted for at fair value on a recurring basis
                               
Fixed maturities, AFS
                               
ABS
  $ 1,988     $     $ 1,502     $ 486  
CDOs
    2,114             34       2,080  
CMBS
    5,673             5,333       340  
Corporate
    23,192             18,474       4,718  
Foreign government/government agencies
    525             471       54  
RMBS
    3,309             2,315       994  
States, municipalities and political subdivisions
    800             580       220  
U.S. Treasuries
    1,835       181       1,654        
 
Total fixed maturities, AFS
    39,436       181       30,363       8,892  
Equity securities, trading
    2,465       2,465              
Equity securities, AFS
    409       98       287       24  
Other investments
                               
Variable annuity hedging derivatives
    733             (21 )     754  
Other derivatives[1]
    509             518       (9 )
 
Total other investments
    1,242             497       745  
Short-term investments
    5,901       4,051       1,850        
Reinsurance recoverable for U.S. GMWB
    538                   538  
Separate account assets [2]
    144,009       110,050       33,241       718  
 
Total assets accounted for at fair value on a recurring basis
  $ 194,000     $ 116,845     $ 66,238     $ 10,917  
 
Liabilities accounted for at fair value on a recurring basis
                               
Other policyholder funds and benefits payable
                               
Guaranteed living benefits
  $ (4,559 )   $     $     $ (4,559 )
Institutional notes
    (7 )                 (7 )
Equity linked notes
    (8 )                 (8 )
 
Total other policyholder funds and benefits payable
    (4,574 )                 (4,574 )
Other liabilities [3]
                               
Variable annuity hedging derivatives
    (27 )           (44 )     17  
Other derivative liabilities
    (355 )           (180 )     (175 )
 
Total other liabilities
    (382 )           (224 )     (158 )
Consumer notes [4]
    (5 )                 (5 )
 
Total liabilities accounted for at fair value on a recurring basis
  $ (4,961 )   $     $ (224 )   $ (4,737 )
 
(1)   Includes over-the-counter derivative instruments in a net asset value position which may require the counterparty to pledge collateral to the Company. As of September 30, 2009, $1 billion of cash collateral liability was netted against the derivative asset value in the Condensed Consolidated Balance Sheets and is excluded from the table above. See footnote 3 below for derivative liabilities.
 
(2)   As of September 30, 2009, excludes approximately $12 billion of investment sales receivable net of investment purchases payable that are not subject to fair value accounting.
 
(3)   Includes over-the-counter derivative instruments in a net negative market value (derivative liability). In the Level 3 roll forward table included below in this Note 3, the derivative asset and liability are referred to as “freestanding derivatives” and are presented on a net basis.
 
(4)   Represents embedded derivatives associated with non-funding agreement-backed consumer equity-linked notes.
 

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3. Fair Value Measurements (continued)
                                 
    December 31, 2008
            Quoted Prices in        
            Active Markets   Significant   Significant
            for Identical   Observable   Unobservable
            Assets   Inputs   Inputs
    Total   (Level 1)   (Level 2)   (Level 3)
 
Assets accounted for at fair value on a recurring basis
                               
Fixed maturities, AFS
  $ 39,560     $ 3,502     $ 27,316     $ 8,742  
Equity securities, trading
    1,634       1,634              
Equity securities, AFS
    434       148       227       59  
Other investments
                               
Variable annuity hedging derivatives
    600             13       587  
Other derivatives [1]
    522             588       (66 )
 
Total other investments
    1,122             601       521  
Short-term investments
    5,742       4,030       1,712        
Reinsurance recoverable for U.S. GMWB
    1,302                   1,302  
Separate account assets [2]
    126,367       94,394       31,187       786  
 
Total assets accounted for at fair value on a recurring basis
  $ 176,161     $ 103,708     $ 61,043     $ 11,410  
 
 
                               
Liabilities accounted for at fair value on a recurring basis
                               
Other policyholder funds and benefits payable
                               
Guaranteed living benefits
  $ (9,206 )   $     $     $ (9,206 )
Institutional notes
    (41 )                 (41 )
Equity linked notes
    (8 )                 (8 )
 
Total other policyholder funds and benefits payable
    (9,255 )                 (9,255 )
Other liabilities [3]
                               
Variable annuity hedging derivatives
    2,201             14       2,187  
Other derivative liabilities
    5             173       (168 )
 
Total other liabilities
    2,206             187       2,019  
Consumer notes [4]
    (5 )                 (5 )
 
Total liabilities accounted for at fair value on a recurring basis
  $ (7,054 )   $     $ 187     $ (7,241 )
 
(1)   Includes over-the-counter derivative instruments in a net asset value position which may require the counterparty to pledge collateral to the Company. As of December 31, 2008, $507 of cash collateral liability was netted against the derivative asset value in the Condensed Consolidated Balance Sheets and is excluded from the table above. See footnote 3 below for derivative liabilities.
 
(2)   As of December 31, 2008, excludes approximately $3 billion of investment sales receivable net of investment purchases payable that are not subject to fair value accounting.
 
(3)   Includes over-the-counter derivative instruments in a net negative market value (derivative liability). In the Level 3 roll-forward table included below in this Note 3, the derivative asset and liability are referred to as “freestanding derivatives” and are presented on a net basis.
 
(4)   Represents embedded derivatives associated with non-funding agreement-backed consumer equity linked notes.
 

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3. Fair Value Measurements (continued)
Determination of fair values
The valuation methodologies used to determine the fair values of assets and liabilities under the “exit price” notion, reflect market-participant objectives and are based on the application of the fair value hierarchy that prioritizes relevant observable market inputs over unobservable inputs. The Company determines the fair values of certain financial assets and financial liabilities based on quoted market prices, where available and where prices represent a reasonable estimate of fair value. The Company also determines fair value based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s default spreads, liquidity and, where appropriate, risk margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for the financial instruments listed in the above tables.
Available-for-Sale Securities and Short-term Investments
The fair value of AFS securities and short-term investments, in an active and orderly market (e.g. not distressed or forced liquidation) is determined by management after considering one of three primary sources of information: third party pricing services, independent broker quotations or pricing matrices. Security pricing is applied using a “waterfall” approach whereby publicly available prices are first sought from third party pricing services, the remaining unpriced securities are submitted to independent brokers for prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these three pricing methods include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flows and prepayments speeds. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services 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 recent reported trades, the third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of ABS 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 securities for which the Company is unable to obtain either a price from a third party pricing service or an independent broker quotation. The pricing matrix used by the Company begins with current spread levels to determine the market price for the security. The credit spreads, as assigned by a knowledgeable private placement broker, incorporate the issuer’s credit rating and a risk premium, if warranted, due to the issuer’s industry and the security’s time to maturity. The issuer-specific yield adjustments, which can be positive or negative, are updated twice per year, as of June 30 and December 31, by the private placement broker and are intended to adjust security prices for issuer-specific factors. The Company assigns a credit rating to these securities based upon an internal analysis of the issuer’s financial strength.
The Company performs a monthly analysis of the prices and credit spreads received from third parties to ensure that the prices represent a reasonable estimate of the fair value. As a part of this analysis, the Company considers trading volume and other factors to determine whether the decline in market activity is significant when compared to normal activity in an active market, and if so, whether transactions may not be orderly considering the weight of available evidence. If the available evidence indicates that pricing is based upon transactions that are stale or not orderly, the Company places little, if any, weight on the transaction price and will estimate fair value utilizing an internal pricing model. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. Examples of procedures performed include, but are not limited to, initial and on-going review of third party pricing services methodologies, review of pricing statistics and trends, back testing recent trades, and monitoring of trading volumes, new issuance activity and other market activities. In addition, the Company ensures that prices received from independent brokers represent a reasonable estimate of fair value through the use of internal and external cash flow models developed based on spreads, and when available, market indices. As a result of this analysis, if the Company determines that there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly. The Company’s internal pricing model utilizes the Company’s best estimate of expected future cash flows discounted at a rate of return that a market participant would require. The significant inputs to the model include, but are not limited to, current market inputs, such as credit loss assumptions, estimated prepayment speeds and market risk premiums.
 

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3. 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. Internal matrix priced securities, primarily consisting of certain private placement debt, are also classified as Level 3 due to significant non-observable inputs.
Derivative Instruments, including embedded derivatives within investments
Freestanding derivative instruments are reported in the condensed consolidated balance sheets at fair value and are reported in Other Investments and Other Liabilities. Embedded derivatives are reported with the host instruments on the consolidated balance sheet. Derivative instruments are fair valued using pricing valuation models, which utilize market data inputs or independent broker quotations. Excluding embedded and reinsurance related derivatives, as of September 30, 2009, 96% of derivatives, based upon notional values, were priced by valuation models, which utilize independent market data. The remaining derivatives were priced by broker quotations. The derivatives are valued using mid-market inputs that are predominantly observable in the market. Inputs used to value derivatives include, but are not limited to, interest swap rates, foreign currency forward and spot rates, credit spreads and correlations, interest and equity volatility and equity index levels. The Company performs a monthly analysis on derivative valuations which includes both quantitative and qualitative analysis. Examples of procedures performed include, but are not limited to, review of pricing statistics and trends, back testing recent trades, analyzing the impacts of changes in the market environment, and review of changes in market value for each derivative including those derivatives priced by brokers.
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.
U.S. GMWB Reinsurance Derivatives
The fair values of the U.S. GMWB reinsurance derivatives are 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.
Separate Account Assets
Separate account assets are primarily invested in mutual funds but also have investments in fixed maturity and equity securities. The separate account investments are valued in the same manner, and using the same pricing sources and inputs, as the fixed maturity, equity security, and short-term investments of the Company.
Living Benefits Required to be Fair Valued (in Other Policyholder Funds and Benefits Payable)
Fair values for directly written GMWB contracts and the related reinsurance and customized derivatives that hedge certain equity markets exposure for those contracts and GMIB, GMWB and GMAB contracts assumed under reinsurance are calculated based upon internally developed models because active, observable markets do not exist for those items. The fair value of the Company’s guaranteed benefit liabilities, classified as embedded derivatives, and the related reinsurance and customized freestanding derivatives is calculated as an aggregation of the following components: Best Estimate; Actively-Managed Volatility Adjustment; Credit Standing Adjustment; Market Illiquidity Premium; and Behavior Risk Margin. The resulting aggregation is reconciled or calibrated, if necessary, to market information that is, or may be, available to the Company, but may not be observable by other market participants, including reinsurance discussions and transactions. The Company believes the aggregation of each of these components, as necessary and as reconciled or calibrated to the market information available to the Company, results in an amount that the Company would be required to transfer, for a liability, or receive, for an asset, to 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 of the components described below are unobservable in the marketplace and require subjectivity by the Company in determining their value.
  Best Estimate. This component represents the estimated amount for which a financial instrument could be exchanged in a current transaction between knowledgeable, unrelated willing parties using identifiable, measurable and significant inputs.
    The Best Estimate is calculated based on actuarial and capital market assumptions related to projected cash flows, including benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning policyholder behavior such as lapses, fund selection, resets and withdrawal utilization (for the customized derivatives, policyholder behavior is prescribed in the derivative contract). Because of the dynamic and complex nature of these cash flows, best estimate assumptions and a Monte
 

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3. Fair Value Measurements (continued)
    Carlo stochastic process involving the generation of thousands of scenarios that assume risk neutral returns consistent with swap rates and a blend of observable implied index volatility levels were used. Estimating these cash flows involves numerous estimates and subjective judgments including those regarding expected markets rates of return, market volatility, correlations of market index returns to funds, fund performance, discount rates and policyholder behavior. At each valuation date, the Company assumes expected returns based on:
    risk-free rates as represented by the current LIBOR forward curve rates;
    forward market volatility assumptions for each underlying index based primarily on a blend of observed market “implied volatility” data;
    correlations of market returns across underlying indices based on actual observed market returns and relationships over the ten years preceding the valuation date;
    three years of history for fund regression; and
    current risk-free spot rates as represented by the current LIBOR spot curve to determine the present value of expected future cash flows produced in the stochastic projection process.
As many guaranteed benefit obligations are relatively new in the marketplace, actual policyholder behavior experience is limited. As a result, estimates of future policyholder behavior are subjective and based on analogous internal and external data. As markets change, mature and evolve and actual policyholder behavior emerges, management continually evaluates the appropriateness of its assumptions for this component of the fair value model.
On a daily basis, the Company updates capital market assumptions used in the GMWB liability model such as interest rates, equity indices and a blend of implied equity index volatilities. The Company continually monitors actual policyholder behavior and revises assumptions regarding policyholder behavior as credible trends of policyholder behavior emerge. With the unprecedented market conditions beginning in the third quarter of 2008, the Company, for the first time, was able to observe policyholder behavior on its living benefit products in adverse market conditions. As actual policyholder behavior emerged in this environment, new data suggested that policyholder behavior in declining market scenarios was not as adverse as our prior assumptions. As a result, in the second quarter the Company adjusted the behavior assumptions in the GMWB model. The Company is continually evaluating various aspects of policyholder behavior and may modify certain of its assumptions, including living benefit lapses and withdrawal rates, if credible emerging data indicates that changes are warranted. At a minimum, all policyholder behavior assumptions are reviewed and updated, as appropriate, in conjunction with the completion of the Company’s comprehensive study to refine its estimate of future gross profits during the third quarter of each year.
  Actively-Managed Volatility Adjustment. This component incorporates the basis differential between the observable index implied volatilities used to calculate the Best Estimate component and the actively-managed funds underlying the variable annuity product. The Actively-Managed Volatility Adjustment is calculated using historical fund and weighted index volatilities.
  Credit Standing Adjustment. This assumption makes an adjustment that market participants would make to reflect the risk that guaranteed benefit obligations or the GMWB reinsurance recoverables will not be fulfilled (“nonperformance risk”). As a result of sustained volatility in the Company’s credit default spreads, during the first quarter of 2009 the Company changed its estimate of the Credit Standing Adjustment to incorporate observable Company and reinsurer credit default spreads from capital markets, adjusted for market recoverability. Prior to the first quarter of 2009, the Company calculated the Credit Standing Adjustment by using default rates published by rating agencies, adjusted for market recoverability. The changes made in the first quarter of 2009 resulted in a realized gain of $383, before-tax, for U.S. GMWB liabilities, a realized gain of $1.1 billion, before-tax for reinsured Japan GMIB, and a realized loss of $185, before-tax, for uncollateralized reinsurance recoverable assets. For the three and nine months ended September 30, 2009, the credit standing adjustment for U.S. GMWB liabilities resulted in a pre-tax loss of $70 and a pre-tax gain of $163, respectively. For the three and nine months ended September 30, 2009, the credit standing adjustment for reinsured Japan GMIB liabilities resulted in a pre-tax loss of $456 and a pre-tax gain of $286, respectively.
  Market Illiquidity Premium. This component makes an adjustment that market participants would require to reflect that guaranteed benefit obligations are illiquid and have no market observable exit prices in the capital markets.
  Behavior Risk Margin and Other Policyholder Behavior Assumptions. The behavior risk margin adds a margin that market participants would require 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. During the first half of 2009, the Company revised certain adverse assumptions in the behavior risk margin for withdrawals, lapses and annuitization behavior as emerging policyholder behavior experience suggested the prior adverse policyholder behavior assumptions were no longer representative of an appropriate margin for risk. These changes resulted in a realized gain of $352, before-tax, in the first quarter of 2009 and a realized gain of $118, before-tax, in the second quarter of 2009.
 

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3. Fair Value Measurements (continued)
In addition to the credit standing update described above, during the third quarter of 2009, the Company recognized non-market-based updates to the U.S. GMWB fair value driven by:
    The impact of having lower future expected separate account growth assumption caused by the Company’s decision to increase the mortality and expense fees charged to policyholders and mortality assumption updates, resulting in a pre-tax loss of approximately $126; and
    The relative outperformance of the underlying actively managed funds as compared to their respective indices and regression updates, resulting in a pre-tax gain of approximately $165.
For the nine months ended September 30, 2009, the Company recognized non-market-based assumption updates to the U.S. GMWB fair value driven by:
    The relative outperformance of the underlying actively managed funds as compared to their respective indices and regression updates, resulting in a pre-tax gain of approximately $528;
    Updates to the behavior risk margin (described above), the third quarter increase in mortality and expense fees (described above) and other policyholder behavior assumption changes made during the nine months ended September 30, 2009, resulting in a pre-tax gain of approximately $306; and
    The credit standing adjustment (described above), resulting in a pre-tax gain of approximately $163.
In addition to the non-market-based updates described above, during the third quarter of 2009, the Company recognized non-market-based updates to the reinsured Japan GMIB fair value primarily driven by updates to dynamic lapse assumptions and mortality assumptions, resulting in a pre-tax loss of approximately $233. For the nine months ended September 30, 2009, the Company recognized non-market-based assumption updates to the reinsured Japan GMIB fair value primarily driven by:
    The credit standing adjustment (described above), resulting in a pre-tax gain of approximately $286; and
    The aforementioned updates to dynamic lapse assumptions and mortality assumptions.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The tables below provide a fair value roll forward for the three and nine months ending September 30, 2009 and 2008, for the financial instruments classified as Level 3.
 

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3. Fair Value Measurements (continued)
Roll-forward of Financial Instruments Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) for the three months ended September 30, 2009:
                                                         
                                                    Changes in unrealized
                                                    gains (losses)
            Total realized/unrealized   Purchases,                   included in net income
    Fair value   gains (losses) included in:   issuances,   Transfers in   Fair value   related to financial
    as of   Net income       and   and/or (out)   as of   instruments still held at
Asset (Liability)   July 1, 2009   [1], [2]   OCI [3]   settlements   of Level 3 [4]   September 30, 2009   September 30, 2009 [2]
 
Assets
                                                       
Fixed maturities, AFS
                                                       
ABS
  $ 401     $ (31 )   $ 113     $ (15 )   $ 18     $ 486     $ (31 )
CDO
    1,922       (168 )     393       (36 )     (31 )     2,080       (168 )
CMBS
    162       (67 )     96       (3 )     152       340       (67 )
Corporate
    4,386       (13 )     352       41       (48 )     4,718       (14 )
Foreign govt./govt. agencies
    52             3       (1 )           54        
RMBS
    1,062       (65 )     150       (102 )     (51 )     994       (65 )
States, municipalities and political subdivisions
    179             12       22       7       220        
 
Fixed maturities, AFS
    8,164       (344 )     1,119       (94 )     47       8,892       (345 )
Equity securities, AFS
    25       (1 )                       24        
Derivatives [5]
                                                       
Variable annuity hedging derivatives
    1,135       (441 )           77             771       (234 )
Other freestanding derivatives
    (241 )     47       5       5             (184 )     52  
 
Total freestanding derivatives
    894       (394 )     5       82             587       (182 )
Reinsurance recoverable for U.S. GMWB [1]
    632       (103 )           9             538       (103 )
Separate accounts [6]
    673       40             29       (24 )     718       34  
 
Supplemental Asset Information:
                                                       
Total freestanding derivatives used
to hedge U.S. GMWB including
those in Levels 1, 2 and 3
    855       (478 )           7             384       (478 )
 
Liabilities
                                                       
Other policyholder funds and benefits payable
                                                       
Guaranteed living benefits[1]
  $ (4,367 )   $ (30 )   $ (100 )   $ (62 )   $     $ (4,559 )   $ (30 )
Institutional notes
    2       (9 )                       (7 )     (9 )
Equity linked notes
    (6 )     (2 )                       (8 )     (2 )
 
Total other policyholder funds and benefits payable
    (4,371 )     (41 )     (100 )     (62 )           (4,574 )     (41 )
Consumer notes
    (4 )     (1 )                       (5 )     (1 )
Supplemental Information:
                                                       
Net U.S. GMWB (Embedded derivatives, freestanding derivatives including those in Levels 1, 2 and 3 and reinsurance recoverable) [7]
    (1,802 )     (198 )           (21 )           (2,021 )     (198 )
 
(1)   The Company classifies gains and losses on GMWB reinsurance derivatives and Guaranteed Living Benefit embedded derivatives and reinsured free standing 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 columns are reported in net realized capital gains (losses). All amounts are before income taxes and amortization of deferred policy acquisition costs and present value of future profits (“DAC”).
 
(3)   All amounts are before income taxes and amortization of DAC.
 
(4)   Transfers in and/or (out) of Level 3 are attributable to a change in the availability of market observable information, as well as downgrades of CMBS.
 
(5)   Derivative instruments are reported in this table on a net basis for asset/(liability) positions and reported in the Condensed Consolidated Balance Sheets in other investments and other liabilities.
 
(6)   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.
 
(7)   The net (loss) on U.S. GMWB since July 1, 2009 was primarily due to losses of $154 resulting from the Company’s net market-based dynamic hedging positions, of which approximately $97 related to falling long-term risk-free interest rates and non-market-based assumption updates described above.
 

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3. Fair Value Measurements (continued)
Roll-forward of Financial Instruments Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) for the nine months ended September 30, 2009:
                                                         
                                                    Changes in unrealized
                                                    gains (losses)
    Fair value   Total realized/unrealized   Purchases,                   included in net income
    as of   gains (losses) included in:   issuances,   Transfers in   Fair value   related to financial
    January 1,   Net income           and   and/or (out)   as of   instruments still held at
Asset (Liability)   2009   [1], [2]   OCI [3]   settlements   of Level 3 [4]   September 30, 2009   September 30, 2009 [2]
 
Assets
                                                       
Fixed maturities, AFS
                                                       
ABS
  $ 429     $ (36 )   $ 139     $ (13 )   $ (33 )   $ 486     $ (32 )
CDO
    1,981       (248 )     460       (82 )     (31 )     2,080       (247 )
CMBS
    263       (85 )     94       (5 )     73       340       (75 )
Corporate
    4,421       (53 )     599       194       (443 )     4,718       (35 )
Foreign govt./govt. agencies
    74             1       (8 )     (13 )     54        
RMBS
    1,419       (188 )     (101 )     (88 )     (48 )     994       (143 )
States, municipalities and political subdivisions
    155             7       21       37       220        
 
Fixed maturities, AFS
    8,742       (610 )     1,199       19       (458 )     8,892       (532 )
Equity securities, AFS
    59       (1 )           (1 )     (33 )     24        
Derivatives [5]
                                                       
Variable annuity hedging derivatives
    2,774       (1,534 )           (469 )           771       (1,276 )
Other freestanding derivatives
    (234 )     43       (5 )     18       (6 )     (184 )     62  
 
Total freestanding derivatives
    2,540       (1,491 )     (5 )     (451 )     (6 )     587       (1,214 )
Reinsurance recoverable for U.S. GMWB [1]
    1,302       (788 )           24             538       (788 )
Separate accounts [6]
    786       (82 )           139       (125 )     718       (39 )
 
Supplemental Asset Information:
                                                       
Total freestanding derivatives used
to hedge U.S. GMWB including
those in Levels 1, 2 and 3
    2,664       (1,878 )           (402 )           384       (1,878 )
 
Liabilities
                                                       
Other policyholder funds and benefits payable [1]
                                                       
Guaranteed living benefits
  $ (9,206 )   $ 4,731     $ 103     $ (187 )   $     $ (4,559 )   $ 4,731  
Institutional notes
    (41 )     34                         (7 )     34  
Equity linked notes
    (8 )                             (8 )      
 
Total other policyholder funds and benefits payable [1]
    (9,255 )     4,765       103       (187 )           (4,574 )     4,765  
Consumer notes
    (5 )                             (5 )      
Supplemental Information:
                                                       
Net U.S. GMWB (Embedded derivatives, freestanding derivatives including those in Levels 1, 2 and 3 and reinsurance recoverable) [7]
    (2,560 )     1,017             (478 )           (2,021 )     1,017  
 
(1)   The Company classifies gains and losses on GMWB reinsurance derivatives and Guaranteed Living Benefit embedded derivatives and reinsured free standing 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 columns are reported in net realized capital gains (losses), except for $2, which is reported in benefits, losses and loss adjustment expenses. All amounts are before income taxes and amortization of DAC.
 
(3)   All amounts are before income taxes and amortization of DAC.
 
(4)   Transfers in and/or (out) of Level 3 are attributable to a change in the availability of market observable information and re-evaluation of the observability of pricing inputs for individual securities within respective categories.
 
(5)   Derivative instruments are reported in this table on a net basis for asset/(liability) positions and reported in the Condensed Consolidated Balance Sheets in other investments and other liabilities.
 
(6)   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.
 
(7)   The net gain on U.S. GMWB since January 1, 2009 was primarily due to the non-market-based assumption updates described above.
 

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3. Fair Value Measurements (continued)
Roll-forward of Financial Instruments Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) for the three months ended September 30, 2008
                                                         
                                                    Changes in unrealized
                                                    gains (losses)
            Total realized/unrealized   Purchases,                   included in net income
    Fair value   gains (losses) included in:   issuances,   Transfers in   Fair value   related to financial
    as of   Net income           and   and/or (out)   as of   instruments still held at
Asset (Liability)   July 1, 2008   [1], [2]   OCI [3]   settlements   of Level 3 [4]   September 30, 2008   September 30, 2008 [2]
 
Assets
                                                       
Fixed maturities, AFS
  $ 12,264     $ (391 )   $ (616 )   $ 5     $ 887     $ 12,149     $ (389 )
Equity securities, AFS
    508       (73 )     26       (3 )     (10 )     448       (73 )
Derivatives [5]
                                                       
Variable annuity hedging derivatives
    793       437             9             1,239       394  
Other freestanding derivatives
    (260 )     (125 )     (4 )     23             (366 )     (116 )
 
Total freestanding derivatives
    533       312       (4 )     32             873       278  
Reinsurance recoverable for U.S. GMWB [1]
    250       106             82             438       106  
Separate accounts [6]
    665       (53 )           (25 )     426       1,013       (34 )
 
Supplemental Asset Information:
                                                       
Total freestanding derivatives used
to hedge U.S. GMWB including
those in Levels 1, 2, and 3
    784       475             (106 )           1,153       475  
 
Liabilities
                                                       
Other policyholder funds and benefits payable
                                                       
Guaranteed living benefits [1]
  $ (2,126 )   $ (1,113 )   $ 1     $ (68 )   $     $ (3,306 )   $ (1,113 )
Institutional notes
    (21 )     12                         (9 )     12  
Equity linked notes
    (15 )     3                         (12 )     3  
 
Total other policyholder funds and benefits payable
    (2,162 )     (1,098 )     1       (68 )           (3,327 )     (1098 )
Consumer notes
    (3 )     2             (5 )           (6 )     2  
Supplemental Information:
                                                       
Net U.S. GMWB (Embedded derivatives, freestanding derivatives including those in Levels 1, 2 and 3 and reinsurance recoverable) [7]
    (630 )     (116 )           (60 )           (806 )     (116 )
 
(1)   The Company classifies gains and losses on GMWB reinsurance derivatives and Guaranteed Living Benefit embedded derivatives and reinsured free standing 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 columns are reported in net realized capital gains (losses), except for $2, which is reported in benefits, losses and loss adjustment expenses. All amounts are before income taxes and amortization of DAC.
 
(3)   All amounts are before income taxes and amortization of DAC.
 
(4)   Transfers in and/or (out) of Level 3 are attributable to a change in the availability of market observable information and re-evaluation of the observability of pricing inputs for individual securities within respective categories.
 
(5)   Derivative instruments are reported in this table on a net basis for asset/(liability) positions and reported on the Condensed Consolidated Balance Sheets in other investments and other liabilities.
 
(6)   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.
 
(7)   The net loss on U.S. GMWB was primarily related to market-based hedge ineffectiveness in the third quarter due to extremely volatile capital markets in September.
 

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Table of Contents

3. Fair Value Measurements (continued)
Roll-forward of Financial Instruments Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) for the nine months ended September 30, 2008
                                                         
                                                    Changes in unrealized
                                                    gains (losses)
    Fair value   Total realized/unrealized   Purchases,                   included in net income
    as of   gains (losses) included in:   issuances,   Transfers in   Fair value   related to financial
    January 1,   Net income           and   and/or (out)   as of   instruments still held at
Asset (Liability)   2008   [1], [2]   OCI [3]   settlements   of Level 3 [4]   September 30, 2008   September 30, 2008 [2]
 
Assets
                                                       
Fixed maturities, AFS
  $ 13,558     $ (525 )   $ (1,672 )   $ 743     $ 45     $ 12,149     $ (506 )
Equity securities, AFS
    563       (77 )     (51 )     26       (13 )     448       (81 )
Derivatives [5]
                                                       
Variable annuity hedging derivatives
    673       500             66             1,239       453  
Other freestanding derivatives
    (303 )     (305 )     (2 )     146       98       (366 )     (211 )
 
Total freestanding derivatives
    370       195       (2 )     212       98       873       242  
Reinsurance recoverable for U.S. GMWB [1] [7]
    238       108             92             438       108  
Separate accounts [6]
    701       (109 )           (5 )     426       1,013       (89 )
 
Supplemental Asset Information:
                                                       
Total freestanding derivatives used
to hedge U.S. GMWB including
those in Levels 1, 2 and3
    643       520             (10 )           1,153       520  
 
Liabilities
                                                       
Other policyholder funds and benefits payable
                                                       
Guaranteed living benefits [1]
  $ (1,692 )   $ (1,430 )   $ 3     $ (187 )   $     $ (3,306 )   $ (1,430 )
Institutional notes
    (24 )     15                         (9 )     15  
Equity linked notes
    (21 )     9                         (12 )     9  
 
Total other policyholder funds and benefits payable
    (1,737 )     (1,406 )     3       (187 )           (3,327 )     (1,406 )
Consumer notes
    (5 )     4             (5 )           (6 )     4  
Supplemental Information:
                                                       
Net U.S. GMWB (Embedded derivatives, freestanding derivatives including those in Levels 1, 2 and 3 and reinsurance recoverable) (7)
    (552 )     (241 )           (13 )           (806 )     (241 )
 
(1)   The Company classifies gains and losses on GMWB reinsurance derivatives and Guaranteed Living Benefit embedded derivatives and reinsured free standing 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 columns are reported in net realized capital gains (losses), except for $3, which is reported in benefits, losses and loss adjustment expenses. All amounts are before income taxes and amortization of DAC.
 
(3)   All amounts are before income taxes and amortization of DAC.
 
(4)   Transfers in and/or (out) of Level 3 are attributable to a change in the availability of market observable information and re-evaluation of the observability of pricing inputs for individual securities within respective categories.
 
(5)   Derivative instruments are reported in this table on a net basis for asset/(liability) positions and reported on the Condensed Consolidated Balance Sheets in other investments and other liabilities.
 
(6)   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.
 
(7)   The net loss on U.S. GMWB since January 1, 2008 was primarily related to liability model assumption updates for mortality in the first quarter and market-based hedge ineffectiveness in the third quarter due to extremely volatile capital markets in September.
 

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Table of Contents

3. Fair Value Measurements (continued)
Financial Instruments Not Carried at Fair Value
The following include disclosures for other financial instruments not carried at fair value and not included in above fair value discussion.
The carrying amounts and fair values of the Company’s financial instruments not carried at fair value, as of September 30, 2009 and December 31, 2008 were as follows:
                                 
    September 30,   December 31,
    2009   2008
    Carrying   Fair   Carrying   Fair
    Amount   Value   Amount   Value
 
Assets
                               
Policy loans
  $ 2,156     $ 2,347     $ 2,154     $ 2,366  
Mortgage loans
    4,630       3,719       4,896       4,265  
 
Liabilities
                               
Other policyholder funds and benefits payable [1]
  $ 12,692       12,882     $ 14,421     $ 14,158  
Consumer Notes [2]
    1,193       1,268       1,210       1,188  
 
[1]   Excludes guarantees on variable annuities, group accident and health and universal life insurance contracts, including corporate owned life insurance.
 
[2]   Excludes amounts carried at fair value and included in disclosures above.
The Company has not made any changes in its valuation methodologies for the following assets and liabilities since December 31, 2008.
  Fair value for policy loans and consumer notes were estimated using discounted cash flow calculations using current interest rates.
  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.
  Other policyholder funds and benefits payable, not carried at fair value, is determined by estimating future cash flows, discounted at the current market rate.
 

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Table of Contents

4. Investments and Derivative Instruments
Available-for-Sale Securities
The following table presents the Company’s AFS securities by type.
                                                                         
    September 30, 2009   December 31, 2008
    Cost or   Gross   Gross           Non-   Cost or   Gross   Gross    
    Amortized   Unrealized   Unrealized   Fair   Credit   Amortized   Unrealized   Unrealized   Fair
    Cost   Gains   Losses   Value   OTTI [1]   Cost   Gains   Losses   Value
 
ABS
  $ 2,488     $ 43     $ (543 )   $ 1,988     $ (27 )   $ 2,790     $ 5     $ (819 )   $ 1,976  
CDOs
    3,377       23       (1,286 )     2,114       (111 )     3,692       2       (1,713 )     1,981  
CMBS
    7,496       99       (1,922 )     5,673       4       8,243       21       (2,915 )     5,349  
Corporate
    23,227       1,167       (1,202 )     23,192       (10 )     21,252       441       (2,958 )     18,735  
Foreign govt./govt. agencies
    492       40       (7 )     525             2,094       86       (33 )     2,147  
RMBS
    4,200       74       (965 )     3,309       (121 )     4,423       57       (882 )     3,598  
States, municipalities and political subdivisions
    961       10       (171 )     800             917       8       (220 )     705  
U.S. Treasuries
    1,956       23       (144 )     1,835             5,033       75       (39 )     5,069  
 
Total fixed maturities
    44,197       1,479       (6,240 )     39,436       (265 )     48,444       695       (9,579 )     39,560  
Equity securities
    464       28       (83 )     409             614       4       (184 )     434  
 
Total AFS securities
  $ 44,661     $ 1,507     $ (6,323 )   $ 39,845     $ (265 )   $ 49,058     $ 699     $ (9,763 )   $ 39,994  
 
[1]   Represents the amount of cumulative non-credit OTTI losses recognized in other comprehensive loss on securities that also had a credit impairment. These losses are included in gross unrealized losses as of September 30, 2009.
The Company participates in securities lending programs to generate additional income. Through these programs, certain domestic fixed income securities are loaned from the Company’s portfolio to qualifying third party borrowers in return for collateral in the form of cash or U.S. Treasuries. As of September 30, 2009 and December 31, 2008, under terms of securities lending programs, the fair value of loaned securities was approximately $209 and $1.8 billion, respectively, which was included in fixed maturities in the Condensed Consolidated Balance Sheet. As of September 30, 2009 and December 31, 2008, the Company held collateral associated with the loaned securities in the amount of $213 and $1.8 billion, respectively. The decrease in both the fair value of loaned securities and the associated collateral is attributable to the maturation of the loans in the term lending program throughout 2009.
The following table presents the Company’s fixed maturities by contractual maturity year.
                 
    September 30, 2009
Maturity   Amortized Cost   Fair Value
 
One year or less
  $ 985     $ 1,017  
Over one year through five years
    7,672       7,864  
Over five years through ten years
    7,356       7,329  
Over ten years
    10,623       10,142  
 
Subtotal
    26,636       26,352  
Mortgage-backed and asset-backed securities
    17,561       13,084  
 
Total fixed maturities
  $ 44,197     $ 39,436  
 
Estimated maturities may differ from contractual maturities due to security call or prepayment provisions. Due to the potential for variability in payment spreads (i.e. prepayments or extensions), mortgage-backed and asset-backed securities are not categorized by contractual maturity.
 

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Table of Contents

4. Investments and Derivative Instruments (continued)
Net Realized Capital Losses
The following table presents the Company’s net realized capital losses.
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
(Before-tax)   2009   2008   2009   2008
 
Gross gains on sales
  $ 103     $ 34     $ 302     $ 102  
Gross losses on sales
    (57 )     (85 )     (588 )     (260 )
Net OTTI losses recognized in earnings
    (415 )     (1,310 )     (848 )     (1,624 )
Japanese fixed annuity contract hedges, net [1]
    (7 )     36       28       13  
Periodic net coupon settlements on credit derivatives/Japan
    (2 )     (9 )     (25 )     (26 )
Fair value measurement transition impact
                      (798 )
Results of variable annuity hedge program
                               
GMWB derivatives, net
    (191 )     (133 )     1,053       (257 )
Macro hedge program
    (328 )     24       (692 )     29  
 
Total results of variable annuity hedge program
    (519 )     (109 )     361       (228 )
GMIB/GMAB/GMWB reinsurance
    (420 )     (403 )     1,012       (549 )
Other, net [2]
    (195 )     (114 )     (260 )     (300 )
 
Net realized capital losses
  $ (1,512 )   $ (1,960 )   $ (18 )   $ (3,670 )
 
[1]   Relates to derivative hedging instruments, excluding periodic net coupon settlements, and is net of the Japanese fixed annuity product liability adjustment for changes in the dollar/yen exchange spot rate.
 
[2]   Consists of changes in fair value on non-qualifying derivatives, hedge ineffectiveness on qualifying derivative instruments, foreign currency gains and losses related to the internal reinsurance of the Japan variable annuity business, which is offset in AOCI, valuation allowances and other investment gains and losses.
Net realized capital gains and losses from investment sales, after deducting the life and pension policyholders’ share for certain products, are reported as a component of revenues and are determined on a specific identification basis. Net realized capital losses reported for the three and nine months ended September 30, 2009 related to AFS impairments and net losses on sales were $369 and $1.1 billion, respectively, and were previously reported as unrealized losses in AOCI. Proceeds from sales of AFS securities totaled $4.1 billion and $25.2 billion, respectively, for the three and nine months ended September 30, 2009, and $1.6 billion and $6.1 billion, respectively, for the three and nine months ended September 30, 2008.
Other-Than-Temporary Impairment Losses
The following table presents a roll-forward of the Company’s cumulative credit impairments on debt securities held as of September 30, 2009.
                 
    Three Months Ended   Six Months Ended
    September 30, 2009   September 30, 2009
 
Balance as of beginning of period
  $ (1,146 )   $ (941 )
Additions for credit impairments recognized on [1]:
               
Securities not previously impaired
    (273 )     (444 )
Securities previously impaired
    (105 )     (140 )
Reductions for credit impairments previously recognized on:
               
Securities that matured or were sold during the period
    22       22  
Securities that the Company intends to sell or more likely than not will be required to sell before recovery
          1  
Securities due to an increase in expected cash flows
    1       1  
 
Balance as of September 30, 2009
  $ (1,501 )   $ (1,501 )
 
[1]   Total additions of $378 and $584 for the three and six months ended September 30, 2009, respectively, are included in the net OTTI losses recognized in earnings of $415 and $848, respectively, in the Condensed Consolidated Statements of Operations.
 

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Table of Contents

4. Investments and Derivative Instruments (continued)
Security Unrealized Loss Aging
The following tables present the Company’s unrealized loss aging for AFS securities by type and length of time the security was in a continuous unrealized loss position.
                                                                         
    September 30, 2009
    Less Than 12 Months   12 Months or More   Total
    Amortized   Fair   Unrealized   Amortized   Fair   Unrealized   Amortized   Fair   Unrealized
    Cost   Value   Losses   Cost   Value   Losses   Cost   Value   Losses
 
ABS
  $ 135     $ 89     $ (46 )   $ 1,753     $ 1,256     $ (497 )   $ 1,888     $ 1,345     $ (543 )
CDOs
    1,119       949       (170 )     2,245       1,129       (1,116 )     3,364       2,078       (1,286 )
CMBS
    1,080       827       (253 )     4,512       2,843       (1,669 )     5,592       3,670       (1,922 )
Corporate
    2,174       1,813       (361 )     5,371       4,530       (841 )     7,545       6,343       (1,202 )
Foreign govt./govt. agencies
    56       53       (3 )     39       35       (4 )     95       88       (7 )
RMBS
    307       243       (64 )     1,979       1,078       (901 )     2,286       1,321       (965 )
States, municipalities and political subdivisions
    110       79       (31 )     680       540       (140 )     790       619       (171 )
U.S. Treasuries
    1,010       866       (144 )                       1,010       866       (144 )
 
Total fixed maturities
    5,991       4,919       (1,072 )     16,579       11,411       (5,168 )     22,570       16,330       (6,240 )
Equity securities
    188       145       (43 )     135       95       (40 )     323       240       (83 )
 
Total securities in an unrealized loss
  $ 6,179     $ 5,064     $ (1,115 )   $ 16,714     $ 11,506     $ (5,208 )   $ 22,893     $ 16,570     $ (6,323 )
 
                                                                         
    December 31, 2008
    Less Than 12 Months   12 Months or More   Total
    Amortized   Fair   Unrealized   Amortized   Fair   Unrealized   Amortized   Fair   Unrealized
    Cost   Value   Losses   Cost   Value   Losses   Cost   Value   Losses
 
ABS
  $ 873     $ 705     $ (168 )   $ 1,790     $ 1,139     $ (651 )   $ 2,663     $ 1,844     $ (819 )
CDOs
    608       394       (214 )     3,068       1,569       (1,499 )     3,676       1,963       (1,713 )
CMBS
    3,875       2,907       (968 )     3,978       2,031       (1,947 )     7,853       4,938       (2,915 )
Corporate
    11,101       9,500       (1,601 )     4,757       3,400       (1,357 )     15,858       12,900       (2,958 )
Foreign govt./govt. agencies
    788       762       (26 )     29       22       (7 )     817       784       (33 )
RMBS
    564       415       (149 )     2,210       1,477       (733 )     2,774       1,892       (882 )
States, municipalities and political subdivisions
    524       381       (143 )     297       220       (77 )     821       601       (220 )
U.S. Treasuries
    3,952       3,913       (39 )     38       38             3,990       3,951       (39 )
 
Total fixed maturities
    22,285       18,977       (3,308 )     16,167       9,896       (6,271 )     38,452       28,873       (9,579 )
Equity securities
    433       296       (137 )     136       89       (47 )     569       385       (184 )
 
Total securities in an unrealized loss
  $ 22,718     $ 19,273     $ (3,445 )   $ 16,303     $ 9,985     $ (6,318 )   $ 39,021     $ 29,258     $ (9,763 )
 
As of September 30, 2009, AFS securities in an unrealized loss position, comprised of 2,326 securities, primarily related to CMBS, CDOs, corporate securities primarily within the financial services sector and RMBS which have experienced significant price deterioration. The Company neither has an intention to sell nor does it expect to be required to sell the securities outlined above.
 

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Table of Contents

4. Investments and Derivative Instruments (continued)
Mortgage Loans
The following table presents the Company’s mortgage loans by type.
                                                 
    September 30, 2009   December 31, 2008
    Amortized   Valuation   Carrying   Amortized   Valuation   Carrying
    Cost [1]   Allowance   Value   Cost [1]   Allowance   Value
 
Agricultural
  $ 426     $     $ 426     $ 446     $ (11 )   $ 435  
Commercial
    4,319       (115 )     4,204       4,463       (2 )     4,461  
 
Total mortgage loans
  $ 4,745     $ (115 )   $ 4,630     $ 4,909     $ (13 )   $ 4,896  
 
[1]   Amortized cost represents carrying value prior to valuation allowances, if any.
The Company has a monitoring process that is overseen by a committee of investment and accounting professionals that identifies mortgage loans for impairment. For those mortgage loans that, based upon current information and events, it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement, an impairment is recognized and a valuation allowance is established with an offsetting charge to net realized capital losses.
The following table presents the activity within the Company’s valuation allowance for mortgage loans for the nine months ended September 30, 2009.
         
    Valuation Allowance
 
Balance at December 31, 2008
  $ (13 )
Additions
    (136 )
Deductions
    34  
 
Balance at September 30, 2009
  $ (115 )
 
The following tables present the Company’s mortgage loans by region and property type.
                                 
Mortgage Loans by Region
    September 30, 2009   December 31, 2008
    Carrying   Percent of   Carrying   Percent of
    Value   Total   Value   Total
 
East North Central
  $ 100       2.2 %   $ 121       2.5 %
Middle Atlantic
    620       13.4 %     664       13.6 %
Mountain
    74       1.6 %     115       2.3 %
New England
    380       8.2 %     407       8.3 %
Pacific
    1,207       26.1 %     1,205       24.6 %
South Atlantic
    647       14.0 %     665       13.6 %
West North Central
    56       1.2 %     56       1.1 %
West South Central
    202       4.4 %     205       4.2 %
Other [1]
    1,344       28.9 %     1,458       29.8 %
 
Total mortgage loans
  $ 4,630       100.0 %   $ 4,896       100.0 %
 
[1]   Primarily represents multi-regional properties.
                                 
Mortgage Loans by Property Type
    September 30, 2009   December 31, 2008
    Carrying   Percent of   Carrying   Percent of
    Value   Total   Value   Total
 
Agricultural
  $ 426       9.2 %   $ 435       8.9 %
Industrial
    786       17.0 %     790       16.1 %
Lodging
    377       8.1 %     383       7.8 %
Multifamily
    668       14.4 %     798       16.3 %
Office
    1,434       31.0 %     1,456       29.8 %
Retail
    682       14.7 %     764       15.6 %
Other
    257       5.6 %     270       5.5 %
 
Total mortgage loans
  $ 4,630       100.0 %   $ 4,896       100.0 %
 
 

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Table of Contents

4. Investments and Derivative Instruments (continued)
Variable Interest Entities
The Company is involved with VIEs primarily as a collateral manager and as an investor through normal investment activities. The Company’s involvement includes providing investment management and administrative services for a fee and holding ownership or other interests as an investor. The Company also has involvement with VIEs as a means of accessing capital.
The following table presents the carrying value of assets and liabilities and the maximum exposure to loss relating to VIEs for which the Company has concluded that it is the primary beneficiary and therefore are consolidated in the Company’s Condensed Consolidated Financial Statements.
                                                 
    September 30, 2009   December 31, 2008
                    Maximum                   Maximum
    Total   Total   Exposure   Total   Total   Exposure
    Assets   Liabilities [1]   to Loss [2]   Assets   Liabilities [1]   to Loss
 
CLOs
  $ 238     $ 45     $ 197     $ 339     $ 89     $ 237  
Limited partnerships
    32       14       18       151       72       79  
Other investments
    75       41       32       249       103       166  
 
Total
  $ 345     $ 100     $ 247     $ 739     $ 264     $ 482  
 
[1]   Creditors have no recourse against the Company in the event of default by the VIE. Includes noncontrolling interest in limited partnerships and other investments of $43 and $154 as of September 30, 2009 and December 31, 2008, respectively, that is reported as a separate component of equity in the Company’s Condensed Consolidated Balance Sheets.
 
[2]   The Company’s 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 consolidated assets at cost net of liabilities. The Company has no implied or unfunded commitments to these VIEs.
During the nine months ended September 30, 2009, the Company partially liquidated one limited partnership and liquidated one other investment for which the Company had been the primary beneficiary. As a result of the liquidations, the Company is no longer deemed to be the primary beneficiary and accordingly, these VIEs were deconsolidated.
The following table presents the carrying value of assets and liabilities and the maximum exposure to loss relating to VIEs for which the Company has a significant involvement with but has concluded that it is not the primary beneficiary and therefore are not consolidated. Each of these investments has been held by the Company for less than three years.
                                                 
    September 30, 2009   December 31, 2008
                    Maximum                   Maximum
                    Exposure                   Exposure
    Assets   Liabilities   to Loss   Assets   Liabilities   to Loss
 
CLOs
  $ 249     $     $ 264     $ 280     $     $ 316  
CDOs
    7             8       3             13  
 
Total [1]
  $ 256     $     $ 272     $ 283     $     $ 329  
 
[1]   Maximum exposure to loss represents the Company’s investment in securities issued by CLOs/CDOs at cost. The Company has no implied or unfunded commitments to these VIEs.
 

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4. Investments and Derivative Instruments (continued)
Derivative instruments
The Company utilizes a variety of over-the-counter and exchange traded derivative instruments as a part of its overall risk management strategy as well as to enter into replication transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, credit spread, issuer default, price, and currency exchange rate risk or volatility. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that would otherwise be permissible investments under the Company’s investment policies. The Company also purchases and issues financial instruments and products that either are accounted for as free-standing derivatives, such as certain reinsurance contracts, or may contain features that are deemed to be embedded derivative instruments, such as the GMWB rider included with certain variable annuity products.
The Company designates each derivative instrument as either a cash flow hedging instrument (“cash flow hedge”), a fair value hedging instrument (“fair value hedge”), or not qualified as a hedging instrument (“non-qualifying strategies”).
Cash flow hedges
Interest rate swaps
Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed maturity securities or interest payments on floating-rate guaranteed investment contracts to fixed rates. These derivatives are predominantly used to better match cash receipts from assets with cash disbursements required to fund liabilities.
The Company also enters into forward starting swap agreements to hedge the interest rate exposure related to the purchase of fixed-rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in interest rates. These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.
Foreign currency swaps
Foreign currency swaps are used to convert foreign denominated cash flows related to certain investment receipts and liability payments to U.S. dollars in order to minimize cash flow fluctuations due to changes in currency rates.
Fair value hedges
Interest rate swaps
Interest rate swaps are used to hedge the changes in fair value of certain fixed rate liabilities and fixed maturity securities due to fluctuations in interest rates.
Foreign currency swaps
Foreign currency swaps are used to hedge the changes in fair value of certain foreign denominated fixed rate liabilities due to changes in foreign currency rates by swapping the fixed foreign payments to floating rate U.S. dollar denominated payments.
Non-qualifying strategies
Interest rate swaps, caps, floors, and futures
The Company uses interest rate swaps, caps, floors, and futures to manage duration between assets and liabilities in certain investment portfolios. In addition, the Company enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap. As of September 30, 2009 and December 31, 2008, the notional amount of interest rate swaps in offsetting relationships was $4.4 billion and $3.9 billion, respectively.
Foreign currency swaps and forwards
The Company enters into foreign currency swaps and forwards to convert the foreign currency exposures to U.S. dollars in certain of its foreign denominated fixed maturity investments. The Company also enters into foreign currency forward contracts that convert Euros to Yen in order to economically hedge the foreign currency risk associated with certain assumed Japanese variable annuity products.
Japan 3Win related foreign currency swaps
During the first quarter of 2009, the Company entered into foreign currency swaps to hedge the foreign currency exposure related to the Japan 3Win product guaranteed minimum income benefit (“GMIB”) fixed liability payments.
Japanese fixed annuity hedging instruments
The Company enters into currency rate swaps and forwards to mitigate the foreign currency exchange rate and Yen interest rate exposures associated with the Yen denominated individual fixed annuity product.
 

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4. Investments and Derivative Instruments (continued)
Credit derivatives that purchase credit protection
Credit default swaps are used to purchase credit protection on an individual entity or referenced index to economically hedge against default risk and credit-related changes in value on fixed maturity securities. These contracts require the Company to pay a periodic fee in exchange for compensation from the counterparty should the referenced security issuers experience a credit event, as defined in the contract.
Credit derivatives that assume credit risk
Credit default swaps are used to assume credit risk related to an individual entity, referenced index, or asset pool, as a part of replication transactions. These contracts entitle the Company to receive a periodic fee in exchange for an obligation to compensate the derivative counterparty should the referenced security issuers experience a credit event, as defined in the contract. The Company is also exposed to credit risk due to embedded derivatives associated with credit linked notes.
Credit derivatives in offsetting positions
The Company enters into credit default swaps to terminate existing credit default swaps, thereby offsetting the changes in value of the original swap going forward.
Equity index swaps, options, and futures
The Company offers certain equity indexed products, which may contain an embedded derivative that requires bifurcation. The Company enters into S&P index swaps and options to economically hedge the equity volatility risk associated with these embedded derivatives. In addition, the Company is exposed to bifurcated options embedded in certain fixed maturity investments.
GMWB product derivatives
The Company offers certain variable annuity products with a GMWB rider in the U.S. and formerly in the U.K. and Japan. The GMWB is a bifurcated embedded derivative that provides the policyholder with a GRB if the account value is reduced to zero through a combination of market declines and withdrawals. The GRB is generally equal to premiums less withdrawals. Certain contract provisions can increase the GRB at contractholder election or after the passage of time. The notional value of the embedded derivative is the GRB balance.
GMWB reinsurance contracts
The Company has entered into reinsurance arrangements to offset a portion of its risk exposure to the GMWB for the remaining lives of covered variable annuity contracts. Reinsurance contracts covering GMWB are accounted for as free-standing derivatives. The notional amount of the reinsurance contracts is the GRB amount.
GMWB hedging instruments
The Company enters into derivative contracts to partially hedge exposure to the income volatility associated with the portion of the GMWB liabilities which 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. As of September 30, 2009, the notional amount related to the GMWB hedging instruments is $15.9 billion and consists of $10.9 billion of customized swaps, $1.4 billion of interest rate swaps and futures, and $3.6 billion of equity swaps, options, and futures.
Macro hedge program
The Company utilizes equity options, currency options, and equity futures contracts to partially hedge the statutory reserve impact of equity risk and foreign currency risk arising primarily from guaranteed minimum death benefit (“GMDB”) and GMWB obligations against a decline in the equity markets or changes in foreign currency exchange rates. As of September 30, 2009, the notional amount related to the macro hedge program is $18.1 billion and consists of $15.6 billion of equity options, $2.1 billion of currency options, and $0.4 billion of equity futures. The $2.1 billion of currency options include $1.1 billion of short put option contracts, therefore resulting in a net notional amount for the macro hedge program of approximately $17.0 billion.
GMIB and guaranteed minimum accumulation benefit (“GMAB”) reinsurance contracts
The Company reinsured the GMIB and GMAB embedded derivatives for host variable annuity contracts written by its affiliate, HLIKK, in Japan. The reinsurance contracts are accounted for as free-standing derivative contracts. The notional amount of the reinsurance contracts is the Yen denominated GRB balance value converted at the period-end Yen to U.S. dollar foreign spot exchange rate.
Coinsurance and modified coinsurance reinsurance contract
During 2007, a subsidiary insurance company entered into a coinsurance with funds withheld and modified coinsurance reinsurance agreement (“Agreement”) with an affiliate reinsurance company to provide statutory surplus relief for certain life insurance policies. The Agreement is accounted for as a financing transaction for GAAP and includes a compound embedded derivative.
 

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4. Investments and Derivative Instruments (continued)
Derivative Balance Sheet Classification
Derivative instruments are recorded in the Condensed Consolidated Balance Sheets at fair value. The Company offsets the fair value amounts, income accruals, and cash collateral held, related to derivative instruments executed in a legal entity and with the same counterparty under a master netting agreement. The table below summarizes the balance sheet classification of the Company’s derivative related fair value amounts, as well as the gross asset and liability fair value amounts. Derivatives in the Company’s separate accounts are not included because the associated gains and losses accrue directly to policyholders. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the table below. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of the Company’s derivative activity. Notional amounts are not necessarily reflective of credit risk.
                                                                 
                                    Asset   Liability
    Net Derivatives   Derivatives   Derivatives
    Notional Amount   Fair Value   Fair Value   Fair Value
    Sep. 30,   Dec. 31,   Sep. 30,   Dec. 31,   Sep. 30,   Dec. 31,   Sep. 30,   Dec. 31,
Hedge Designation/ Derivative Type   2009   2008   2009   2008   2009   2008   2009   2008
 
Cash flow hedges
                                                               
Interest rate swaps
  $ 8,743     $ 6,798     $ 174     $ 422     $ 249     $ 425     $ (75 )   $ (3 )
Foreign currency swaps
    491       1,005       (6 )     (21 )     44       126       (50 )     (147 )
 
Total cash flow hedges
  $ 9,234     $ 7,803     $ 168     $ 401     $ 293     $ 551     $ (125 )   $ (150 )
 
 
                                                               
Fair value hedges
                                                               
Interest rate swaps
  $ 1,667     $ 2,138     $ (41 )   $ (86 )   $ 15     $ 41     $ (56 )   $ (127 )
Foreign currency swaps
    696       696       (9 )     (57 )     53       48       (62 )     (105 )
 
Total fair value hedges
  $ 2,363     $ 2,834     $ (50 )   $ (143 )   $ 68     $ 89     $ (118 )   $ (232 )
 
 
                                                               
Non-qualifying strategies
                                                               
Interest rate contracts
                                                               
Interest rate swaps, caps, floors, and futures
  $ 5,615     $ 5,269     $ (86 )   $ (90 )   $ 311     $ 687     $ (397 )     (777 )
Foreign exchange contracts
                                                               
Foreign currency swaps and forwards
    937       648       (15 )     45       8       52       (23 )     (7 )
Japan 3Win related foreign currency swaps
    2,740             15             36             (21 )      
Japanese fixed annuity hedging instruments
    2,270       2,334       396       383       396       383              
Credit contracts
                                                               
Credit derivatives that purchase credit protection
    2,228       2,633       (31 )     246       49       262       (80 )     (16 )
Credit derivatives that assume credit risk [1]
    906       940       (209 )     (309 )                 (209 )     (309 )
Credit derivatives in offsetting positions
    3,023       1,453       (40 )     (8 )     115       85       (155 )     (93 )
Equity contracts
                                                               
Equity index swaps, options, and futures
    220       249       (15 )     (14 )     3       3       (18 )     (17 )
Variable annuity hedge program
                                                               
GMWB product derivatives [1]
    47,456       48,406       (2,981 )     (6,590 )                 (2,981 )     (6,590 )
GMWB reinsurance contracts
    11,035       11,798       524       1,268       538       1,302       (14 )     (34 )
GMWB hedging instruments
    15,870       18,620       384       2,664       584       2,697       (200 )     (33 )
Macro hedge program
    18,118       2,188       322       137       513       137       (191 )      
Other
                                                               
GMIB and GMAB reinsurance contracts
    20,123       20,192       (1,564 )     (2,582 )                 (1,564 )     (2,582 )
Coinsurance and modified coinsurance reinsurance contract
    1,359       1,068                                      
 
Total non-qualifying strategies
  $ 131,900     $ 115,798     $ (3,300 )   $ (4,850 )   $ 2,553     $ 5,608     $ (5,853 )   $ (10,458 )
 
Total cash flow hedges, fair value hedges, and non-qualifying strategies
  $ 143,497     $ 126,435     $ (3,182 )   $ (4,592 )   $ 2,914     $ 6,248     $ (6,096 )   $ (10,840 )
 
Balance Sheet Location
                                                               
Fixed maturities, available-for-sale
  $ 170     $ 204     $ (8 )   $ (3 )   $     $     $ (8 )   $ (3 )
Other investments
    40,716       12,197       1,242       1,122       1,843       1,576       (601 )     (454 )
Other liabilities
    22,515       32,442       (382 )     2,206       533       3,370       (915 )     (1,164 )
Consumer notes
    64       70       (5 )     (5 )                 (5 )     (5 )
Reinsurance recoverables
    10,593       11,437       538       1,302       538       1,302              
Other policyholder funds and benefits payable
    69,439       70,085       (4,567 )     (9,214 )                 (4,567 )     (9,214 )
 
Total Derivatives
  $ 143,497     $ 126,435     $ (3,182 )   $ (4,592 )   $ 2,914     $ 6,248     $ (6,096 )   $ (10,840 )
 
[1]   The derivative instruments related to these hedging strategies are held for other investment purposes.
 

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4. Investments and Derivative Instruments (continued)
Change in Notional Amount
The notional amount of derivatives increased since December 31, 2008, primarily related to derivatives associated with the macro hedge program, while GMWB related derivatives decreased, as a result of the Company rebalancing its risk management strategy to place a greater relative emphasis on the protection of statutory surplus. Approximately $1.1 billion of the $15.9 billion increase in the macro hedge notional amount represents short put option contracts therefore resulting in a net increase in notional of approximately $14.8 billion.
Change in Fair Value
The increase in the total fair value of derivative instruments since December 31, 2008, was primarily related to a net increase in GMIB and GMAB internal reinsurance derivatives and GMWB related derivatives, partially offset by a decrease in the fair value of interest rate derivatives, and credit derivatives.
  The net improvement in the fair value of all GMWB related derivatives is primarily due to lower implied market volatility and a general increase in long-term interest rates, partially offset by rising equity markets. Additional improvements in GMWB product derivatives beyond market impacts include the relative outperformance of the underlying actively managed funds as compared to their respective indices, liability model assumption updates, and changes in credit standing. For more information on the policyholder behavior and liability model assumption updates, refer to Note 3.
  The fair value of GMIB and GMAB internal reinsurance derivatives improved primarily due to liability model assumption updates for credit standing, an increase in the Japan equity markets, an increase in interest rates, and a decline in Japan equity market volatility. For more information on the liability model assumption update, refer to Note 3.
  The fair value of interest rate derivatives used in cash flow hedge relationships declined due to rising long-term interest rates.
  The fair value related to credit derivatives that economically hedge fixed maturity securities decreased while the fair value related to credit derivatives that assume credit risk as a part of replication transactions increased, both resulting from credit spreads tightening.
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 earnings. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
The following table presents the components of the gain or loss on derivatives that qualify as cash flow hedges:
Derivatives in Cash Flow Hedging Relationships
 
                                                                 
                                    Net Realized Capital Gains (Losses)
    Gain (Loss) Recognized in OCI   Recognized in Income
    on Derivative (Effective Portion)   on Derivative (Ineffective Portion)
    Three Months Ended   Nine Months Ended   Three Months Ended   Nine Months Ended
    September 30,   September 30,   September 30,   September 30,
    2009   2008   2009   2008   2009   2008   2009   2008
 
Interest rate swaps
  $ 120     $ 71     $ (237 )   $ 48     $     $ (1 )   $     $ 3  
Foreign currency swaps
    (21 )     107       (144 )     79       17             57       (1 )
 
Total
  $ 99     $ 178     $ (381 )   $ 127     $ 17     $ (1 )   $ 57     $ 2  
 
 

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4. Investments and Derivative Instruments (continued)
Derivatives in Cash Flow Hedging Relationships
 
                                         
            Gain (Loss) Reclassified from AOCI into
            Income (Effective Portion)
            Three Months Ended   Nine Months Ended
            September 30,   September 30,
            2009   2008   2009   2008
 
Interest rate swaps
  Net realized capital gains (losses)   $     $     $     $  
Interest rate swaps
  Net investment income (loss)     8       (5 )     20       (19 )
Foreign currency swaps
  Net realized capital gains (losses)     (24 )     (19 )     (97 )     (59 )
Foreign currency swaps
  Net investment income (loss)                 2        
 
Total
          $ (16 )   $ (24 )   $ (75 )   $ (78 )
 
As of September 30, 2009, 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 $27. 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 four years.
For the three and nine months ended September 30, 2009 and 2008, the Company had $1 and $(4), respectively, before-tax, of net reclassifications from AOCI to earnings resulting from the discontinuance of cash flow hedges due to forecasted transactions that were no longer probable of occurring.
Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The Company includes the gain or loss on the derivative in the same line item as the offsetting loss or gain on the hedged item. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
The Company recognized in income gains (losses) representing the ineffective portion of all fair value hedges as follows:
Derivatives in Fair Value Hedging Relationships
 
                                                                 
    Gain (Loss) Recognized in Income [1]
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2009   2008   2009   2008
    Derivative   Hedged
Item
  Derivative   Hedged
Item
  Derivative   Hedged
Item
  Derivative   Hedged
Item
 
Interest rate swaps
                                                               
Net realized capital gains (losses)
  $ (15 )   $ 15     $ (13 )   $ 12     $ 51     $ (47 )   $ (13 )   $ 10  
Benefits, losses and loss adjustment expenses
    9       (9 )     (11 )     12       (33 )     35       (12 )     15  
Foreign currency swaps
                                                               
Net realized capital gains (losses)
    (1 )     1       (74 )     74       46       (46 )     (50 )     50  
Benefits, losses and loss adjustment expenses
    2       (2 )     25       (25 )     2       (2 )     5       (5 )
 
Total
  $ (5 )   $ 5     $ (73 )   $ 73     $ 66     $ (60 )   $ (70 )   $ 70  
 
[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.
 

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4. Investments and Derivative Instruments (continued)
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:
Non-qualifying Strategies
Gain (Loss) Recognized within Net Realized Capital Gains (Losses)
 
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2009   2008   2009   2008
 
Interest rate contracts
                               
Interest rate swaps, caps, floors, and forwards
  $ 3     $ (11 )   $ 24     $ 7  
Foreign exchange contracts
                               
Foreign currency swaps and forwards
    (9 )     37       (49 )     14  
Japan 3Win hedging derivatives [1]
    128             18        
Japanese fixed annuity hedging instruments [2]
    178       28       60       69  
Credit contracts
                               
Credit derivatives that purchase credit protection
    (71 )     20       (351 )     72  
Credit derivatives that assume credit risk
    45       (114 )     103       (347 )
Equity contracts
                               
Equity index swaps, options, and futures
    2       2       (2 )     2  
Variable annuity hedge program
                               
GMWB product derivatives
    390       (714 )     3,719       (1,621 )
GMWB reinsurance contracts
    (110 )     106       (766 )     218  
GMWB hedging instruments
    (478 )     475       (1,878 )     520  
Macro hedge program
    (328 )     24       (692 )     29  
Other
                               
GMIB and GMAB product reinsurance contracts
    (413 )     (399 )     990       (717 )
 
Total
  $ (663 )   $ (546 )   $ 1,176     $ (1,754 )
 
[1]   The associated liability is adjusted for changes in dollar/yen exchange spot rates through realized capital gains and losses and was $(150) for the three months ended September 30, 2009 and $(10) for the nine months ended September 30, 2009.
 
[2]   The associated liability is adjusted for changes in dollar/yen exchange spot rates through realized capital gains and losses and was $(176) and $0 for the three months ended September 30, 2009 and 2008, respectively, and $(25) and $(82) for the nine months ended September 30, 2009 and 2008, respectively.
The net realized capital loss for the three months ended and the net realized capital gain for the nine months ended September 30, 2009, related to derivatives used in non-qualifying strategies was primarily due to the following:
  The net loss on all GMWB related derivatives for the three months ended September 30, 2009, was primarily due to a general decrease in long-term interest rates, higher implied market volatility, and rising equity markets. Additional losses in the GMWB product related derivatives beyond market impacts include liability model assumption updates and changes in credit standing, partially offset by gains due to the relative outperformance of the underlying actively managed funds as compared to their respective indices. The net gain for the nine months ended September 30, 2009, was primarily due to lower implied market volatility and a general increase in long-term interest rates, partially offset by rising equity markets. Additional gains on GMWB product derivatives beyond market impacts include the relative outperformance of the underlying actively managed funds as compared to their respective indices, liability model assumption updates, and changes in credit standing. For more information on the policyholder behavior and liability model assumption updates, refer to Note 3.
  The net loss for the three months ended September 30, 2009, on derivatives associated with GMIB and GMAB product reinsurance contracts, which are reinsured to a related party, was primarily due to changes in the credit market and liability model assumption updates for lapses and mortality. The net gain for the nine months ended September 30, 2009, was primarily due to liability model assumption updates for credit standing, an increase in the Japan equity markets, an increase in interest rates, and a decline in Japan equity market volatility. For more information on the liability model assumption update, refer to Note 3.
  The net loss on the macro hedge program was primarily the result of an increase in the equity markets and the impact of trading activity.
  The net gain on the Japanese fixed annuity and Japan 3Win hedging instruments for the three months ended September 30, 2009, was primarily due to weakening of the U.S. dollar against the Japanese Yen.
  The net loss on credit derivatives that purchase credit protection to economically hedge fixed maturity securities and the net gain on credit derivatives that assume credit risk as a part of replication transactions resulted from credit spreads tightening.
 

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4. Investments and Derivative Instruments (continued)
For the three and nine months ended September 30, 2008, the net realized capital loss of related to non-qualifying strategies were primarily due to the following:
  The net losses on GMWB related derivatives were primarily related to liability model assumption updates for mortality in the first quarter and market-based hedge ineffectiveness in the third quarter due to extremely volatile capital markets.
  The net loss related to GMIB product reinsurance contract derivatives, which are reinsured to a related party, was primarily due to a decline in the Japan equity markets.
  The losses on credit derivatives that assume credit risk and the gains on credit derivatives that purchase credit protection were a result of credit spreads widening.
  The gains on the Japanese fixed annuity hedging instruments for nine months ended September 30, 2008, were primarily due to the Japanese yen strengthening against the U.S. dollar.
For the three and nine months ended September 30, 2008, the Company has incurred losses of $(39) on derivative instruments due to counterparty default related to the bankruptcy of Lehman Brothers Inc. These losses were a result of the contractual collateral threshold amounts and open collateral calls in excess of such amounts immediately 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.
Refer to Note 9 for additional disclosures regarding contingent credit related features in derivative agreements.
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk from a single entity, referenced index, or asset pool in order to synthetically replicate investment transactions. The Company will receive periodic payments based on an agreed upon rate and notional amount and will only make a payment if there is a credit event. A credit event payment will typically be equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation. A credit event is generally defined as a default on contractually obligated interest or principal payments or bankruptcy of the referenced entity. The credit default swaps in which the Company assumes credit risk primarily reference investment grade single corporate issuers and baskets, which include trades ranging from baskets of up to five corporate issuers to standard and customized diversified portfolios of corporate issuers. The diversified portfolios of corporate issuers are established within sector concentration limits and are typically divided into tranches that possess different credit ratings.
The 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, 2009 and December 31, 2008.
                                                         
As of September 30, 2009
                            Underlying Referenced        
                            Credit Obligation(s) [1]        
                    Weighted                    
                    Average           Average   Offsetting    
Credit Derivative type by derivative   Notional   Fair   Years to           Credit   Notional   Offsetting
   risk exposure   Amount [2]   Value   Maturity   Type   Rating   Amount [3]   Fair Value [3]
 
Single name credit default swaps
                                                       
Investment grade risk exposure
  $ 466     $ 6     5 years   Corporate Credit/
Foreign Gov.
    A+     $ 454     $ (33 )
Below investment grade risk exposure
    114       (7 )   4 years   Corporate Credit     B+       71       (10 )
Basket credit default swaps [4]
                                                       
Investment grade risk exposure
    684       8     4 years   Corporate Credit   BBB+     634       (9 )
Investment grade risk exposure
    353       (91 )   7 years   CMBS Credit   BBB+     353       91  
Below investment grade risk exposure
    725       (196 )   5 years   Corporate Credit   BBB            
Credit linked notes
                                                       
Investment grade risk exposure
    76       68     2 years   Corporate Credit   BBB+            
 
Total
  $ 2,418     $ (212 )                           $ 1,512     $ 39  
 
 

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4. Investments and Derivative Instruments (continued)
                                                         
As of December 31, 2008
                            Underlying Referenced        
                            Credit Obligation(s) [1]        
                    Weighted                    
                    Average           Average   Offsetting    
Credit Derivative type by derivative   Notional   Fair   Years to           Credit   Notional   Offsetting
   risk exposure   Amount [2]   Value   Maturity   Type   Rating   Amount [3]   Fair Value [3]
 
Single name credit default swaps
                                                       
Investment grade risk exposure
  $ 47     $     4 years   Corporate Credit     A-     $ 35     $ (9 )
Below investment grade risk exposure
    46       (12 )   4 years   Corporate Credit   CCC+            
Basket credit default swaps [4]
                                                       
Investment grade risk exposure
    1,139       (196 )   5 years   Corporate Credit     A-       489       8  
Investment grade risk exposure
    203       (70 )   8 years   CMBS Credit   AAA     203       70  
Below investment grade risk exposure
    125       (104 )   6 years   Corporate Credit   BB+            
Credit linked notes
                                                       
Investment grade risk exposure
    106       95     2 years   Corporate Credit   BBB+            
 
Total
  $ 1,666     $ (287 )                           $ 727     $ 69  
 
[1]   The average credit ratings are based on availability and the midpoint of the applicable ratings among Moody’s, S&P, and Fitch. If no rating is available from a rating agency, then an internally developed rating is used.
 
[2]   Notional amount is equal to the maximum potential future loss amount. There is no specific collateral related to these contracts or recourse provisions included in the contracts to offset losses.
 
[3]   The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of or losses paid related to the original swap.
 
[4]   Includes $1.6 billion and $1.3 billion as of September 30, 2009 and December 31, 2008, respectively, of standard market indices of diversified portfolios of corporate issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index. Also includes $175 as of September 30, 2009 and December 31, 2008, of customized diversified portfolios of corporate issuers referenced through credit default swaps.
5. Deferred Policy Acquisition Costs and Present Value of Future Profits
Life
Unlock Results
During the second quarter of 2009, the Company revised its estimation of future gross profits using a “Reversion to Mean” (“RTM”) estimation technique to estimate future separate account returns. RTM is an estimation technique commonly used by insurance entities to project future separate account returns. Through this estimation technique, the Company’s DAC model will be adjusted to reflect actual account values at the end of each quarter and through a consideration of recent returns, we will adjust future projected returns over a five year period so that the account value returns to the long-term expected rate of return, providing that those projected returns for the next five years do not exceed certain caps or floors. This will result in a DAC Unlock, described below, each quarter. However, benefits and assessments used in the determination of death benefits and other insurance benefit reserves, on variable annuity and universal life contracts which are in addition to the account value liability representing the policyholders’ funds, will be derived from a set of stochastic scenarios that have been calibrated to our reversion to mean separate account returns. Refer to Note 7 for further information on death benefits and other insurance benefit reserves. In addition, at a minimum, annually during third quarter, the Company completes non-market related assumptions studies and incorporates the results of those studies into its projection of future gross profits.
 

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5. Deferred Policy Acquisition Costs and Present Value of Future Profits (continued)
The policy related in-force or account values at September 30, 2009 were used to project future gross profits using the RTM separate account return estimate. During the third quarter of 2009, the Company recorded an Unlock benefit of $62. This Unlock benefit included the effect of strong equity market returns generating an Unlock benefit of $224, offset by changes in non-market related assumptions generating an Unlock charge of $162. The Unlock benefit resulting from equity market growth was less than that recorded in the second quarter of 2009 despite comparable returns of the S&P 500. This decline was primarily due to actual Company separate account returns earning less than in the second quarter and a slower decline in expected death benefits as policyholders become less “in-the- money”. Unlock charges from non-market assumption changes were primarily driven by the Company’s estimate of higher assumed macro hedge program costs in 2010. Other significant assumption changes included decreases in mortality, increases in credit loss estimates and declines in net investment spread. The Company is continually evaluating 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 following table displays the components, by segment, of the Company’s third quarter Unlock.
                                         
                    Death            
                    and Other            
            Unearned   Insurance   Sales        
Segment           Revenue   Benefit   Inducement        
After-tax (charge) benefit   DAC   Reserves   Reserves [1]   Assets Total
 
Retail
  $ 14     $ (13 )   $ 77     $ (9 )   $ 69  
Retirement Plans
    (1 )           1              
Individual Life
    (27 )     7       (4 )           (24 )
Institutional
    (1 )                       (1 )
Other
    7             12       (1 )     18  
Total
  $ (8 )   $ (6 )   $ 86     $ (10 )   $ 62  
 
[1]   As a result of the Unlock, reserves, in Retail, decreased $223, pre-tax, offset by a decrease of $105, pre-tax, in reinsurance recoverables.
In addition, during the first quarter of 2009, the Company failed its quarterly tests resulting in an Unlock of future estimated gross profits (the “Unlock”). The policy related in-force or account values at March 31, 2009 were used to project future gross profits. The after-tax impact on the Company’s assets and liabilities as a result of the first quarter Unlock, based on our quantitative and qualitative tests and the third quarter Unlock using the RTM estimation technique, for the nine months ended September 30, 2009 was:
                                         
                    Death            
                    and Other            
            Unearned   Insurance   Sales        
Segment           Revenue   Benefit   Inducement        
After-tax (charge) benefit   DAC   Reserves   Reserves [1]   Assets Total
 
Retail
  $ (489 )   $ 18     $ (153 )   $ (39 )   $ (663 )
Retirement Plans
    (54 )           (1 )     (1 )     (56 )
Institutional
    (1 )                       (1 )
Individual Life
    (91 )     47       (4 )           (48 )
Other [2]
    (67 )     6       (11 )     (9 )     (81 )
Total
  $ (702 )   $ 71     $ (169 )   $ (49 )   $ (849 )
 
[1]   As a result of the Unlock, reserves, in Retail, increased $518, pre-tax, offset by an increase of $281, pre-tax, in reinsurance recoverables.
 
[2]   The most significant contributor to the Unlock amounts recorded during the first quarter of 2009 were as a result of actual separate account returns from the period ending October 1, 2008 to March 31, 2009 being significantly below our aggregated estimated return while the opposite was true for the second and third quarters of 2009.
 

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5. Deferred Policy Acquisition Costs and Present Value of Future Profits (continued)
The after-tax impact on the Company’s assets and liabilities as a result of the Unlock during the third quarter 2008 was as follows:
                                         
                    Death and            
                    Other            
            Unearned   Insurance   Sales        
Segment           Revenue   Benefit   Inducement        
After-tax (charge) benefit   DAC   Reserves   Reserves [1]   Assets Total
 
Retail
  $ (648 )   $ 18     $ (75 )   $ (27 )   $ (732 )
Retirement Plans
    (49 )                       (49 )
Individual Life
    (29 )     (12 )     (3 )           (44 )
 
Total
  $ (726 )   $ 6     $ (78 )   $ (27 )   $ (825 )
 
[1]   As a result of the Unlock, death benefit reserves, in Retail, increased $389, pre-tax, offset by an increase of $273, pre-tax, in reinsurance recoverables.
Changes in deferred policy acquisition costs and present value of future profits were as follows:
                 
    2009   2008
 
Balance, January 1
    9,944       8,601  
Deferred costs
    537       991  
Amortization — Deferred policy acquisition costs and present value of future profits [1]
    (749 )     (265 )
Amortization — Unlock, pre-tax
    (1,043 )     (1,118 )
Adjustments to unrealized gains and losses on securities, available-for-sale and other [3]
    (724 )     811  
Effect of currency translation adjustment
    21       (2 )
Effects of new accounting guidance for investments other-than-temporarily impaired [2]
    (54 )      
 
Balance, September 30
    7,932       9,018  
 
[1]   The increase in amortization from the prior year period is due to lower actual gross profits in 2008 resulting from increased realized capital losses primarily from the adoption of new accounting guidance for fair values at the beginning of the first quarter of 2008.
 
[2]   The adjustment reflects the effect of credit spreads tightening, resulting in unrealized gains on securities in 2009.
 
[3]   The effect of adopting new accounting guidance for investments other-than-temporarily impaired resulted in an increase to retained earnings and as a result a DAC charge of $54. In addition, an offsetting amount was recorded in unrealized losses as unrealized losses increased upon adoption of new accounting guidance for investments other-than-temporarily impaired.
6. Goodwill
The carrying amount of goodwill allocated to the Company’s reporting units as of September 30, 2009 and December 31, 2008 is shown below.
                 
    September 30,   December 31,
Reporting Unit   2009   2008
Retail — Other
  $ 159     $ 159  
Retirement
    87       79  
Individual Life
    224       224  
 
Total
  $ 470     $ 462  
 
In accordance with Goodwill and Other Intangible Assets, the Company performed a goodwill impairment test on its reporting units in the first quarter of 2009. No goodwill impairment charges were recorded as a result of that test.
 

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7. Separate Accounts, Death Benefits and Other Insurance Benefit Features
The Company records the variable portion of individual variable annuities, 401(k), institutional, 403(b)/457, private placement life and variable life insurance products within separate account assets and liabilities. Separate account assets are reported at fair value. Separate account liabilities are set equal to separate account assets. Separate account assets are segregated from other investments. Investment income and gains and losses from those separate account assets, which accrue directly to, and whereby investment risk is borne by the policyholder, are offset by the related liability changes within the same line item in the condensed consolidated statements of operations. The fees earned for administrative and contract holder maintenance services performed for these separate accounts are included in fee income. For the nine months ended September 30, 2009 and 2008, there were no gains or losses on transfers of assets from the general account to the separate account.
Many of the variable annuity and universal life (“UL”) contracts issued by the Company offer death benefits and other insurance benefit features including guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefit (“GMIB”), and UL secondary guarantee benefits. UL secondary guarantee benefits ensure that the policy will not terminate, and will continue to provide a death benefit, even if there is insufficient policy value to cover the monthly deductions and charges. GMDBs are offered in various forms as described in further detail throughout this Note 7. These death benefits and other insurance benefit features require an additional liability be held above the account value liability representing the policy holders funds. The Company reinsures a portion of the GMDBs and UL secondary guarantees associated with its in-force block of business. The Company also assumes, through reinsurance, GMDB, GMIB, GMWB, and GMAB offered by an affiliate. For additional information related to the risk associated with the affiliate reinsurance of the GMIB, GMWB, and GMAB, see Note 3.
Changes in the gross GMDB and UL secondary guarantee benefits sold with annuity and/or UL products are as follows:
                 
            UL Secondary
    GMDB [1]   Guarantees [1]
 
Liability balance as of January 1, 2009
    882       40  
Incurred
    293       21  
Unlock
    537       5  
Paid
    (417 )      
 
Liability balance as of September 30, 2009
    1,295       66  
 
[1]   The reinsurance recoverable asset related to the GMDB was $802 as of September 30, 2009. The reinsurance recoverable asset related to the UL Secondary Guarantees was $20 as of September 30, 2009.
                 
            UL Secondary
    GMDB [1]   Guarantees [1]
 
Liability balance as of January 1, 2008
    531       19  
Incurred
    135       16  
Unlock
    389        
Paid
    (127 )      
 
Liability balance as of September 30, 2008
    928       35  
 
[1]   The reinsurance recoverable asset related to the GMDB was $611 as of September 30, 2008. The reinsurance recoverable asset related to the UL Secondary Guarantees was $14 as of September 30, 2008.
The net death benefit and other insurance benefit reserves are established by estimating the expected value of net reinsurance costs and death benefits in excess of the projected account balance. The additional death benefits and net reinsurance costs are recognized ratably over the accumulation period based on total expected assessments. The death benefit and other insurance benefit reserves are recorded in reserve for future policy benefits in the Company’s condensed consolidated balance sheets. Changes in the death benefit and other insurance benefit reserves are recorded in benefits, losses and loss adjustment expenses in the Company’s condensed consolidated statements of operations. In a manner consistent with the Company’s accounting policy for deferred acquisition costs, the Company regularly evaluates estimates used and adjusts the additional liability balances, with a related charge or credit to benefit expense if actual experience or other evidence suggests that earlier assumptions should be revised.
 

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7. Separate Accounts, Death Benefits and Other Insurance Benefit Features (continued)
The following table provides details concerning GMDB exposure directly written by the Company:
Breakdown of Variable Annuity Account Value by GMDB Type at September 30, 2009
 
                                 
                    Retained Net   Weighted Average
    Account   Net amount   Amount   Attained Age of
Maximum anniversary value (“MAV”) [1]   Value   at Risk [8]   at Risk [8]   Annuitant
 
MAV only
  $ 27,380     $ 9,565     $ 2,929       66  
With 5% rollup [2]
    1,991       802       306       66  
With Earnings Protection Benefit Rider (“EPB”) [3]
    5,880       1,490       159       63  
With 5% rollup & EPB
    784       257       51       66  
 
Total MAV
    36,035       12,114       3,445          
Asset Protection Benefit (“APB”) [4]
    28,303       6,480       4,158       64  
Lifetime Income Benefit (“LIB”) [5]
    1,299       260       260       62  
Reset [6] (5-7 years)
    3,715       604       604       67  
Return of Premium [7] /Other
    20,724       1,898       1,751       64  
 
Subtotal Account Value Subject to U.S. Guaranteed Minimum Death Benefits [9]
  $ 90,076     $ 21,356     $ 10,218       65  
Less: General Account Value Subject to U.S. Guaranteed Minimum Death Benefits
    6,858                          
 
Subtotal Separate Account Liabilities Subject to U.S. Guaranteed Minimum Death Benefits
    83,218                          
Separate Account Liabilities Not Subject to U.S. Guaranteed Minimum Death Benefits
    72,726                          
 
Total Separate Account Liabilities
    155,944                          
 
Note:   This table does not include assumed GMDB reinsurance from HLIKK with net amount at risk of $3.1 billion as of September 30, 2009
 
[1]   MAV: the death benefit is the greatest of current account value, net premiums paid and the highest account value on any anniversary before age 80 (adjusted for withdrawals).
 
[2]   Rollup: the death benefit is the greatest of the MAV, current account value, net premium paid and premiums (adjusted for withdrawals) accumulated at generally 5% simple interest up to the earlier of age 80 or 100% of adjusted premiums.
 
[3]   EPB: the death benefit is the greatest of the MAV, current account value, or contract value plus a percentage of the contract’s growth. The contract’s growth is account value less premiums net of withdrawals, subject to a cap of 200% of premiums net of withdrawals.
 
[4]   APB: the death benefit is the greater of current account value or MAV, not to exceed current account value plus 25% times the greater of net premiums and MAV (each adjusted for premiums in the past 12 months).
 
[5]   LIB: the death benefit is the greatest of current account value, net premiums paid, or for certain contracts a benefit amount that ratchets over time, generally based on market performance.
 
[6]   Reset: the death benefit is the greatest of current account value, net premiums paid and the most recent five to seven year anniversary account value before age 80 (adjusted for withdrawals).
 
[7]   Return of premium: the death benefit is the greater of current account value and net premiums paid.
 
[8]   Net amount at risk is defined as the guaranteed benefit in excess of the current account value. Retained net amount at risk is net amount at risk reduced by that amount which has been reinsured to third parties. Net amount at risk and retained net amount at risk are highly sensitive to equity market movements. For example, as equity market declines, net amount at risk and retained net amount at risk will generally increase.
 
[9]   Account value includes the contractholder’s investment in the separate account and the general account.
See Note 3 for a description of the Company’s guaranteed living benefits that are accounted for at fair value.
Account balances of contracts with guarantees were invested in variable separate accounts as follows:
                 
Asset type   September 30, 2009   December 31, 2008
 
Equity securities
  $ 73,808     $ 63,114  
Cash and cash equivalents
    9,410       10,174  
 
Total
  $ 83,218     $ 73,288  
 
As of September 30, 2009 and December 31, 2008, approximately 15% and 16%, respectively, of the equity securities above were invested in fixed income securities through these funds and approximately 85% and 84%, respectively, were invested in equity securities.
 

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8. Sales Inducements
The Company currently offers enhanced crediting rates or bonus payments to contract holders on certain of its individual and group annuity products. The expense associated with offering a bonus is deferred and amortized over the life of the related contract in a pattern consistent with the amortization of deferred policy acquisition costs. Consistent with the Company’s Unlocks in the nine months ended September 30, 2009, the Company Unlocked the amortization of the sales inducement asset. See Note 5, for more information concerning the Unlocks.
Changes in deferred sales inducement activity were as follows for the nine months ended September 30:
                 
    2009   2008
     
Balance, January 1
  $ 533     $ 459  
Sales inducements deferred
    37       121  
Amortization — Unlock
    (70 )     (43 )
Amortization
    (95 )     13  
 
Balance, end of period
  $ 405     $ 550  
 
9. Commitments and Contingencies
Litigation
The Company 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 Company accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. 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 Company.
The Company is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative state and federal class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, improper sales practices in connection with the sale of life insurance and other investment products; and improper fee arrangements in connection with investment products and structured settlements. The Company also is involved in individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims. 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 Company. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s consolidated results of operations or cash flows in particular quarterly or annual periods.
Broker Compensation Litigation -
Following the New York Attorney General’s filing of a civil complaint against Marsh & McLennan Companies, Inc., and Marsh, Inc. (collectively, “Marsh”) in October 2004 alleging that certain insurance companies, including The Hartford, participated with Marsh in arrangements to submit inflated bids for business insurance and paid contingent commissions to ensure that Marsh would direct business to them, private plaintiffs brought several lawsuits against the Company predicated on the allegations in the Marsh complaint, to which the Company was not party. Among these is a multidistrict litigation in the United States District Court for the District of New Jersey. There are two consolidated amended complaints filed in the multidistrict litigation, one related to conduct in connection with the sale of property-casualty insurance and the other related to alleged conduct in connection with the sale of group benefits products. The Company and various of its subsidiaries are named in both complaints. The complaints assert, on behalf of a putative class of persons who purchased insurance through broker defendants, claims under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act (“RICO”), state law, and in the case of the group benefits complaint, claims under the Employee Retirement Income Security Act of 1974 (“ERISA”). The claims are predicated upon allegedly undisclosed or otherwise improper payments of contingent commissions to the broker defendants to steer business to the insurance company defendants. The district court has dismissed the Sherman Act and RICO claims in both complaints for failure to state a claim and has granted the defendants’ motions for summary judgment on the ERISA claims in the group-benefits products complaint. The district court further has declined to exercise supplemental jurisdiction over the state law claims, has dismissed those state law claims without prejudice, and has closed both cases. The plaintiffs have appealed the dismissal of the claims in both consolidated amended complaints, except the ERISA claims.
Structured Settlement Class Action Litigation - In October 2005, a putative nationwide class action was filed in the United States District Court for the District of Connecticut against the Company and several of its subsidiaries on behalf of persons who had asserted claims against an insured of a Hartford property & casualty insurance company that resulted in a settlement in which some or all of the
 

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9. Commitments and Contingencies
settlement amount was structured to afford a schedule of future payments of specified amounts funded by an annuity from a Hartford life insurance company (“Structured Settlements”). The operative complaint alleges that since 1997 the Company has systematically deprived the settling claimants of the value of their damages recoveries by secretly deducting 15% of the annuity premium of every Structured Settlement to cover brokers’ commissions, other fees and costs, taxes, and a profit for the annuity provider, and asserts claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and state law. The plaintiffs seek compensatory damages, punitive damages, pre-judgment interest, attorney’s fees and costs, and injunctive or other equitable relief. The Company vigorously denies that any claimant was misled or otherwise received less than the amount specified in the structured-settlement agreements. In March 2009, the district court certified a class for the RICO and fraud claims composed of all persons, other than those represented by a plaintiffs’ broker, who entered into a Structured Settlement since 1997 and received certain written representations about the cost or value of the settlement. The district court declined to certify a class for the breach-of-contract and unjust-enrichment claims. The Company’s petition to the United States Court of Appeals for the Second Circuit for permission to file an interlocutory appeal of the class-certification ruling was denied in October 2009.
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 insurance operating 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 insurance operating entity’s ability to conduct hedging activities by increasing the associated costs and decreasing the willingness of counterparties to transact with the insurance operating 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, 2009, is $578. Of this $578, the insurance operating entities have posted collateral of $577 in the normal course of business. Based on derivative market values as of September 30, 2009, a downgrade of one level below the current financial strength ratings by either Moody’s or S&P could require approximately an additional $17 to be posted as collateral. These collateral amounts could change as derivative market values change, as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the collateral that we may be required to post is primarily in the form of U.S. Treasury bills and U.S. Treasury notes.
10. Stock Compensation Plans
Hartford Life’s employees are included in The Hartford 2005 Incentive Stock Plan and The Hartford Employee Stock Purchase Plan and The Hartford Deferred Stock Unit Plan.
The Hartford has two primary stock-based compensation plans. Shares issued in satisfaction of stock-based compensation may be made available from authorized but unissued shares, shares held by The Hartford in treasury or from shares purchased in the open market. The Hartford typically issues shares from treasury in satisfaction of stock-based compensation. The Company was allocated compensation expense of $9 and $3 for the three months ended September 30, 2009 and 2008 and $15 and $14 for the nine months ended September 30, 2009 and 2008, respectively. The Company’s income tax benefit recognized for stock-based compensation plans was $2 and $1 for the three months ended September 30, 2009 and 2008 and $4 and $4 for the nine months ended September 30, 2009 and 2008, respectively. The Company did not capitalize any cost of stock-based compensation.
 

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11. Transactions with Affiliates
Transactions of the Company with Hartford Fire Insurance Company, Hartford Holdings and its affiliates relate principally to tax settlements, reinsurance, insurance coverage, rental and service fees, payment of dividends and capital contributions. In addition, an affiliated entity purchased group annuity contracts from the Company to fund structured settlement periodic payment obligations assumed by the affiliated entity as part of claims settlements with property casualty insurance companies and self-insured entities. As of September 30, 2009 and December 31, 2008 the Company had $49 and $49, respectively of claim annuities purchased from an affiliated entity. Substantially all general insurance expenses related to the Company, including rent and employee benefit plan expenses are initially paid by The Hartford. Direct expenses are allocated to the Company using specific identification, and indirect expenses are allocated using other applicable methods. Indirect expenses include those for corporate areas which, depending on type, are allocated based on either a percentage of direct expenses or on utilization.
Hartford Life sold fixed market value adjusted (“MVA”) annuity products to customers in Japan. The yen based MVA product was written by the Hartford Life Insurance KK (“HLIKK”), a wholly owned Japanese subsidiary of Hartford Life and subsequently reinsured to the Company. As of September 30, 2009 and December 31, 2008, $ 2.7 billion and $2.8 billion, respectively, of the account value had been assumed by the Company.
Effective August 31, 2005, a subsidiary of the Company, Hartford Life and Annuity Insurance Company (“HLAI”), entered into a reinsurance agreement with HLIKK. Through this agreement, HLIKK agreed to cede and HLAI agreed to reinsure 100% of the risks associated with the in-force and prospective GMIB riders issued by HLIKK on its variable annuity business. Effective July 31, 2006, the agreement was modified to include the GMDB on covered contracts that have an associated GMIB rider. The modified reinsurance agreement applies to all contracts, GMIB riders and GMDB riders in-force and issued as of July 31, 2006 and prospectively, except for policies and GMIB riders issued prior to April 1, 2005, which were recaptured. Additionally, a tiered reinsurance premium structure was implemented. On the date of recapture, HLAI forgave the reinsurance derivative asset of $110 and paid HLIKK $38. The net result of the recapture was recorded as a dividend of $93, after-tax. GMIB riders issued by HLIKK subsequent to April 1, 2005 continue to be reinsured by HLAI. While the form of the agreement between HLAI and HLIKK for GMIB business is reinsurance, in substance and for accounting purposes the agreement is a free standing derivative. As such, the reinsurance agreement for GMIB business is recorded at fair value on the Company’s balance sheet, with prospective changes in fair value recorded in net realized capital gains (losses) in net income. The fair value of GMIB liability at September 30, 2009 and December 31, 2008 is $1.6 billion and $2.6 billion (of which $148 relates to the adoption of fair value), respectively. HLIKK ceased issuing new business effective June 1, 2009. For additional information regarding GMIB liability, see Note 3 of Notes to Condensed Consolidated Financial Statements.
Effective September 30, 2007, HLAI entered into another reinsurance agreement where HLIKK agreed to cede and HLAI agreed to reinsure 100% of the risks associated with the in-force and prospective GMAB, GMIB and GMDB riders issued by HLIKK on certain of its variable annuity business. The reinsurance of the GMAB riders is accounted for as a free-standing derivative recorded at fair value on the Company’s balance sheet, with prospective changes in fair value recorded in net realized capital gains (losses) in net income. The fair value of the GMAB is a liability of $1 and $1 at September 30, 2009 and December 31, 2008, respectively. This treaty covered HLIKK’s “3 Win” annuity. This product contains a GMIB feature that triggers at a float value of 80% of original premium and gives the policyholder an option to receive either an immediate withdrawal of account value without surrender charges or a payout annuity of the original premium over time. As a result of capital markets underperformance, 97% of contracts, a total of $3.1 billion triggered during the fourth quarter of 2008, and of this amount $2.2 billion have elected the payout annuity. The Company received the proceeds of this triggering impact, net of the first annuity payout, through a structured financing transaction with HLIKK and will pay the associated benefits to HLIKK over a 12-year payout.
Effective February 29, 2008, HLAI entered into another reinsurance agreement where HLIKK agreed to cede and HLAI agreed to reinsure 100% of the risks associated with the in-force and prospective GMWB riders issued by HLIKK on certain variable annuity business. The reinsurance of the GMWB riders is accounted for as a free-standing derivative recorded at fair value on the Company’s balance sheet, with prospective changes in fair value recorded in net realized capital gains (losses) in net income. The fair value of the GMWB was a liability of $14 and $34 at September 30, 2009 and December 31, 2008, respectively.
The Reinsurance Agreement for GMDB business is accounted for as a Death Benefit and Other Insurance Benefit Reserves which is not reported at fair value. As of September 30, 2009 the liability for the assumed reinsurance of the GMDB and the net amount at risk was $50 and $ 3.1 billion, respectively. As of December 31, 2008 the liability for the assumed reinsurance of the GMDB and the net amount at risk was $14 and $4.3 billion, respectively.
The Company has issued a guarantee to retirees and vested terminated employees (“Retirees”) of The Hartford Retirement Plan for U.S. Employees (“the Plan”) who retired or terminated prior to January 1, 2004. The Plan is sponsored by The Hartford. The guarantee is an irrevocable commitment to pay all accrued benefits which the Retiree or the Retiree’s designated beneficiary is entitled to receive under the Plan in the event the Plan assets are insufficient to fund those benefits and The Hartford is unable to provide sufficient assets to fund those benefits. The Company believes that the likelihood that payments will be required under this guarantee is remote.
Effective November 1, 2007, a subsidiary of the Company (“Ceding Company”) entered into a coinsurance with funds withheld and modified coinsurance reinsurance agreement (“Agreement”) with an affiliate reinsurance company (“Reinsurer”) to provide statutory surplus relief for certain life insurance policies. The Agreement is accounted for as a financing transaction for GAAP. A standby unaffiliated third party Letter of Credit (“LOC”) supports a portion of the statutory reserves that have been ceded to the Reinsurer.
 

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12. Equity
Noncontrolling Interests
Noncontrolling interest includes VIEs in which the Company has concluded that it is the primary beneficiary; see Note 4 for further discussion of the Company’s involvement in VIEs, and general account mutual funds where the Company holds the majority interest in seed money investments. The Company records noncontrolling interest as a component of equity. The noncontrolling interest within these entities is likely to change, as these entities represent investment vehicles whereby investors may frequently redeem or contribute to these investments. As such, the change in noncontrolling ownership interest represented in the Company’s Condensed Consolidated Statement of Changes in Equity will primarily represent redemptions and additional subscriptions within these investment vehicles.
The following table represents the change in noncontrolling ownership interest recorded in the Company’s Condensed Consolidated Statement of Changes in Equity for the VIEs and mutual fund seed investments for the nine months ended September 30, 2009 and 2008:
                 
    September 30,
    2009   2008
 
Redemptions of The Hartford’s interest in VIEs and mutual fund seed investments resulting in deconsolidation (1)
  $ (48 )   $ (22 )
 
Net (redemptions) and subscriptions from noncontrolling interests
  $ (69 )   $ 72  
 
Total change in noncontrolling interest ownership
  $ (117 )   $ 50  
 
(1)   The redemptions of the The Hartford’s interest in VIEs and mutual fund seed investments for the nine months ended September 30, 2009 and 2008 resulted in a loss of $6 and a gain of $1, respectively, which were recognized in realized capital gains (losses).
 

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13. Restructuring, Severance and Other Costs
In the second quarter of 2009, we completed a review of several strategic alternatives with a goal of preserving capital, reducing risk and stabilizing our ratings. These alternatives included the potential restructuring, discontinuation or disposition of various business lines. Following that review, the Company announced that it would suspend all new sales in the European’s operations and that it was evaluating strategic options with respect to its Institutional Markets businesses. The Company has also initiated plans to change the management structure of the organization and fundamentally reorganize the nature and focus of the Company’s operations. These plans will result in termination benefits to current employees, costs to terminate leases and other contracts and asset impairment charges. The Company intends to complete these restructuring activities and execute final payment by December 2010.
Termination benefits related to workforce reductions, asset impairment charges and lease and other contract terminations have been accrued through September 30, 2009. No significant additional costs are expected.
The following pre-tax charges were incurred during the nine months ended September 30, 2009 in connection with the restructuring initiatives previously announced:
         
Total restructuring costs
       
 
Other severance benefits
  $ 19  
Asset impairment charges
  $ 26  
Other contract termination charges
  $ 5  
 
Total restructuring, severance and other costs for the three months ended September 30, 2009
  $ 50  
 
As of September 30, 2009 the liability for other contract termination charges was $5 as there were no payments made during the three months ended September 30, 2009 for these charges. Amounts incurred during the three months ended September 30, 2009 were recorded in the Life Other segment as other expenses.
14. Subsequent Events
On October 29, 2009 approval was received from the domiciliary state for a subsidiary of HLIC to enter into one or more reinsurance agreements with an affiliated captive reinsurance company to cede both in-force and future U.S. and assumed Japan variable annuity business. The arrangement includes both modified coinsurance and coinsurance with funds withheld components.
In ceding this business, future profits of these contracts will be transferred to the affiliated captive reinsurance company. This transfer of future profits will result in a reduction of DAC and a corresponding charge to Net Income. Partially offsetting this will be a reduction in the fair value associated with guaranteed living benefit riders on the contracts being reinsured. This reduction in liability will result in an increase to HLIC’s equity. The combination of these two components as well as capital anticipated to be contributed to the affiliated entity is expected to reduce HLIC’s consolidated GAAP equity between $700 and $1.3 billion dollars.
The purpose of this transaction is to reduce the volatility associated with statutory risk based capital requirements.
 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in millions, unless otherwise stated)
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the financial condition of Hartford Life Insurance Company and its subsidiaries (“Hartford Life Insurance Company”, “Life” or the “Company”) as of September 30, 2009, compared with December 31, 2008, and its results of operations for the three and nine months ended September 30, 2009 compared to the equivalent 2008 periods. This discussion should be read in conjunction with the MD&A in Hartford Life Insurance Company’s 2008 Form 10-K Annual Report and the Current Report on Form 8-K filed on April 30, 2009.
Certain of the statements contained herein are forward-looking statements. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include estimates and assumptions related to economic, competitive and legislative developments. These forward-looking statements are subject to change and uncertainties that are, in many instances, beyond the Company’s control and have been made based upon management’s expectations and beliefs concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with management’s expectations or that the effect of future developments on the Company will be those anticipated by management. Actual results could differ materially from those expected by the Company, depending on the outcome of various factors, including, but not limited to, those set forth in Part II, Item 1A, Risk Factors as well as Part II, Item 1A, Risk Factors of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, and Part I, Item 1A, Risk Factors in the Company Form 10-K Annual Report and the Current Report on Form 8-K filed on April 30, 2009. These important risks and uncertainties include, without limitation, uncertainties related to the depth and duration of the current recession and financial market conditions which could continue to pressure our capital position and adversely affect the Company’s business and results; the extent of the impact on the Company’s results and prospects of recent downgrades in the Company’s financial strength ratings and the impact of further downgrades on the Company’s business and results; the success of management initiatives to stabilize the Company’s ratings and mitigate and reduce risks associated with various business lines, the additional restrictions, oversight, costs and other potential consequences of The Hartford’s participation in the Capital Purchase Program under the Emergency Economic Stabilization Act of 2008; changes in financial and capital markets, including changes in interest rates, credit spreads, equity prices and foreign exchange rates; the inability to effectively mitigate the impact of equity market volatility on the Company’s financial position and results of operations arising from obligations under annuity product guarantees; the amount of statutory capital that the Company has, changes to the statutory reserves and/or risk based capital requirements, and the Company’s ability to hold and protect sufficient statutory capital to maintain financial strength and credit ratings; the incidence and severity of catastrophes, both natural and man-made; losses due to nonperformance or defaults by others; 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; the potential for further acceleration of DAC amortization; the potential for further impairment of our goodwill; the possible occurrence of terrorist attacks; the response of reinsurance companies under reinsurance contracts and the availability, pricing and adequacy of reinsurance to protect the Company against losses; stronger than anticipated competitive activity; unfavorable judicial or legislative developments; the potential effect of domestic and foreign regulatory developments, including those which could increase the Company’s business costs and required capital levels; the Company’s ability to distribute its products through distribution channels, both current and future; the ability to recover the Company’s systems and information in the event of a disaster or other unanticipated event; potential for difficulties arising from outsourcing relationships; potential changes in federal or state tax laws, including changes impacting the availability of the separate account dividend received deduction; the Company’s ability to protect its intellectual property and defend against claims of infringement; and other factors described in such forward-looking statements.
INDEX
             
Overview
  47   Other   75
 
           
Critical Accounting Estimates
  48   Investment Credit Risk   76
 
           
Consolidated Results of Operations
  66   Capital Resources and Liquidity   91
 
           
Retail
  68   Accounting Standards   94
 
           
Individual Life
  70        
 
           
Retirement Plans
  72        
 
           
Institutional
  74        
 

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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 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: estimated gross profits used in the valuation and amortization of assets and liabilities associated with variable annuity and other universal life-type contracts; living benefits required to be fair valued; valuation of investments and derivative instruments; evaluation of other-than-temporary impairments on available-for-sale securities and contingencies relating to corporate litigation, goodwill 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 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. For discussion of the critical accounting estimates not discussed below, see MD&A in the Company’s 2008 Form 10-K Annual Report and the current report on Form 8-K filed on April 30, 2009.
Life Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and Other Universal Life-Type Contracts
Accounting Policy and Assumptions
The deferred policy acquisition costs asset and present value of future profits (“PVFP”) intangible asset (hereafter, referred to collectively as “DAC”) related to investment contracts and universal life-type contracts (including variable annuities) are amortized in the same way, over the estimated life of the contracts acquired using the retrospective deposit method. Under the retrospective deposit method, acquisition costs are amortized in proportion to the present value of estimated gross profits (“EGPs”). EGPs are also used to amortize other assets and liabilities on the Company’s balance sheet, such as sales inducement assets and unearned revenue reserves (“URR”). Components of EGPs are used to determine reserves for guaranteed minimum death, income and universal life secondary guarantee benefits accounted for and collectively referred to as the death benefit and other insurance benefit reserves. At September 30, 2009 and December 31, 2008, the carrying value of the Company’s DAC asset was $7.9 billion and $9.9 billion, respectively. At September 30, 2009, the sales inducement asset, unearned revenue reserves, and the death benefit and other insurance benefit reserve balances were $405, $1.3 billion and $1.4 billion, respectively. At December 31, 2008, the sales inducement asset, unearned revenue reserves and the death benefit and other insurance benefit reserves were $533, $1.5 billion and $925, respectively.
For most contracts, the Company estimates gross profits over a 20-year horizon as estimated profits emerging subsequent to that timeframe are immaterial. The Company uses other amortization bases for amortizing DAC, such as gross costs (net of reinsurance), as a replacement for EGPs when EGPs are expected to be negative for multiple years of the contract’s life. Actual gross profits, in a given reporting period, that vary from management’s initial estimates result in increases or decreases in the rate of amortization, commonly referred to as a “true-up”, which are recorded in the current period.
Products sold in a particular year are aggregated into cohorts. Future gross profits for each cohort are projected over the estimated lives of the underlying contracts, and are, to a large extent, a function of future account value projections for variable annuity products and to a lesser extent for variable universal life products. The projection of future account values requires the use of certain assumptions. The assumptions considered to be important in the projection of future account value, and hence the EGPs, include separate account fund performance, which is impacted by separate account fund mix, less fees assessed against the contract holder’s account balance, surrender and lapse rates, interest margin, mortality, and hedging costs. The assumptions are developed as part of an on-going process and are dependent upon the Company’s current best estimates of future events.
Through March 31, 2009, the Company estimated gross profits using the mean of EGPs derived from a set of stochastic scenarios that had been calibrated to our estimated separate account return. Beginning in the second quarter of 2009, the Company estimated gross profits from a single deterministic reversion-to-mean (“RTM”) separate account return projection. RTM is an estimation technique commonly used by insurance entities to project future separate account returns. Through this estimation technique, the Company’s DAC model will be adjusted to reflect actual account values at the end of each quarter and through a consideration of recent returns, we will adjust future projected returns over a five year period so that the account value grows to the long-term expected rate of return, providing that those projected returns for the next five years do not exceed certain caps or floors. This will result in a DAC Unlock, describe below, each quarter. However, benefits and assessments used in the determination of the death benefit and other insurance benefit reserves will be derived from a set of stochastic scenarios that have been calibrated to our reversion to mean separate account returns. Under RTM, the Company makes the following assumptions about the asset categories that comprise separate accounts:
    Equities: The reversion period combines a five-year prospective period and a look-back period to April 1, 2009 intended to reflect the results of recent historical market experience. The expected long-term equity rate of return on the U.S. equity asset classes is 9.5%, subject to a 15% cap.
    Fixed Income: The expected long-term rate of return on the U.S. fixed income asset class is 6.0%.
 

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The following table summarizes the general impacts to individual variable annuity EGPs and earnings for DAC amortization caused by changes in separate account returns, mortality and future lapse rate assumptions:
         
        Impact on Earnings
        for DAC
Assumption   Impact to EGPs   Amortization
Expected long-term rates of return increases
  Increase: As expected fee income would increase and expected claims would decrease.   Benefit
 
       
Expected long-term rates of return decreases
  Decrease: As expected fee income would decrease and expected claims would increase.   Charge
 
       
Future mortality increases
  Decrease: As expected fee income would decrease because the time period in which fees would be collected would be reduced and claims would increase.   Charge
 
       
Future mortality decreases
  Increase: As expected fee income would increase because the time period in which fees would be collected would increase and claims would decrease.   Benefit
 
       
Future lapse rate increases
  Decrease: As expected fee income would decrease because the time period in which fees would be collected would be reduced at a greater rate than claims would decrease. (1)   Charge (1)
 
       
Future lapse rate decreases
  Increase: As expected fee income would increase because the time period in which fees would be collected would increase at a greater rate than claims would increase. (1)   Benefit (1)
 
(1)   If a contract is significantly in-the-money such that expected lifetime claims exceed lifetime fee income, this relationship would reverse.
 
In addition to changes to the assumptions described above, changes to other policyholder behaviors such as resets, partial surrenders, reaction to price increases, and asset allocations could cause EGPs to fluctuate.
Estimating future gross profits is complex and requires considerable judgment and the forecasting of events well into the future. Even though the Company has adopted a RTM estimation technique for determining future separate account returns, the Company will continue to complete a comprehensive assumption study and refine its estimate of future gross profits, as a result of that study, during the third quarter of each year. Upon completion of an assumption study, the Company revises its assumptions to reflect its current best estimate, thereby changing its estimate of projected account values and the related EGPs in the DAC, sales inducement and unearned revenue reserve amortization models as well as the death benefit and other insurance benefit reserving models. The DAC asset, as well as the sales inducement asset, unearned revenue reserves and the death benefit and other insurance benefit reserves are adjusted with an offsetting benefit or charge to income to reflect such changes in the period of the revision. All assumption changes that affect the estimate of future EGPs including the update of current account values, the use of the RTM estimation technique or policyholder behavior assumptions are considered an Unlock in the period of revision. An Unlock that results in an after-tax benefit generally occurs as a result of actual experience or future expectations of product profitability being favorable compared to previous estimates. An Unlock that results in an after-tax charge generally occurs as a result of actual experience or future expectations of product profitability being unfavorable compared to previous estimates.
Prior to adopting the RTM estimation technique for determining future separate account returns, in addition to the comprehensive assumption study performed in the third quarter of each year, revisions to best estimate assumptions used to estimate future gross profits were also necessary when the EGPs in the Company’s models fell outside of an independently determined reasonable range of EGPs. In addition, the Company considered, on a quarterly basis, other qualitative factors such as product, regulatory and policyholder behavior trends and would also revise EGPs if those trends were expected to be significant and were not or could not be included in the statistically significant ranges of reasonable EGPs. After reviewing both the quantitative test results and certain qualitative factors as of March 31, 2009, the Company determined an interim Unlock was necessary.
 

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Unlock
During the third quarter of 2009, the Company recorded an Unlock benefit of $62. This Unlock benefit included the effect of strong equity market returns generating an Unlock benefit of $224 offset by changes in non-market related assumptions generating an Unlock charge of $162. The Unlock benefit resulting from equity market growth was less than that recorded in the second quarter of 2009 despite comparable returns of the S&P 500. This decline was primarily due to actual Company separate account returns earnings less than in the second quarter and a slower decline in expected death benefits as policyholders become less “in-the-money”. Unlock charges from non-market assumption changes were primarily driven by the Company’s estimate of higher assumed macro hedge program costs in 2010. Other significant assumption changes included decreases in mortality, increases in credit loss estimates and declines in net investment spread. The Company is continually evaluating 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 following table displays the components, by segment, of the Company’s third quarter Unlock.
                                         
                    Death            
                    and Other            
            Unearned   Insurance   Sales        
Segment           Revenue   Benefit   Inducement        
After-tax (charge) benefit   DAC   Reserves   Reserves [1]   Assets Total
 
Retail
  $ 14     $ (13 )   $ 77     $ (9 )   $ 69  
Retirement Plans
    (1 )           1              
Individual Life
    (27 )     7       (4 )           (24 )
Institutional
    (1 )                       (1 )
Other
    7             12       (1 )     18  
 
Total
  $ (8 )   $ (6 )   $ 86     $ (10 )   $ 62  
 
[1]   As a result of the Unlock, reserves, in Retail, decreased $223, pre-tax, offset by a decrease of $105, pre-tax, in reinsurance recoverables.
The after-tax impact on the Company’s assets and liabilities as a result of the Unlock in the first quarter based on our quantitative and qualitative tests and the third quarter, based on the RTM estimation technique, for the nine months ended September 30, 2009 was:
                                         
                    Death            
                    and Other            
            Unearned   Insurance   Sales        
Segment           Revenue   Benefit   Inducement        
After-tax (charge) benefit   DAC   Reserves   Reserves [1]   Assets Total
 
Retail
  $ (489 )   $ 18     $ (153 )   $ (39 )   $ (663 )
Retirement Plans
    (54 )           (1 )     (1 )     (56 )
Individual Life
    (91 )     47       (4 )           (48 )
Institutional
    (1 )                       (1 )
Other [2]
    (67 )     6       (11 )     (9 )     (81 )
 
Total
  $ (702 )   $ 71     $ (169 )   $ (49 )   $ (849 )
 
[1]   As a result of the Unlock, reserves, in Retail, increased $518, pre-tax, offset by an increase of $281, pre-tax, in reinsurance recoverables.
 
[2]   The most significant contributor to the Unlock amounts recorded during the first quarter of 2009 were as a result of actual separate account returns from the period ending October 1, 2008 to March 31, 2009 being significantly below our aggregated estimated return.
The after-tax impact on the Company’s assets and liabilities as a result of the Unlock during the third quarter 2008 was as follows:
                                         
                    Death            
                    and Other            
            Unearned   Insurance   Sales        
Segment           Revenue   Benefit   Inducement        
After-tax (charge) benefit   DAC   Reserves   Reserves [1]   Assets Total
 
Retail
  $ (648 )   $ 18     $ (75 )   $ (27 )   $ (732 )
Retirement Plans
    (49 )                       (49 )
Individual Life
    (29 )     (12 )     (3 )           (44 )
 
Total
  $ (726 )   $ 6     $ (78 )   $ (27 )   $ (825 )
 
[1]   As a result of the Unlock, death benefit reserves, in Retail, increased $389, pre-tax, offset by an increase of $273, pre-tax, in reinsurance recoverables.
 

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An “Unlock” only revises EGPs to reflect current best estimate assumptions. With or without an Unlock, and even after an Unlock occurs, the Company must also test the aggregate recoverability of the DAC and sales inducement assets by comparing the existing DAC balance to the present value of future EGPs. In addition, the Company routinely stress tests its DAC and sales inducement assets for recoverability against severe declines in its separate account assets, which could occur if the equity markets experienced a significant sell-off, as the majority of policyholders’ funds in the separate accounts is invested in the equity market. The Company’s decision to suspend its U.K. variable annuity sales negatively impacted the loss recognition testing on the DAC and sales inducement assets. As a result, a $49 loss was reported within the earnings of the Other segment during the second quarter of 2009 and included in the Unlock results in the tables above. As of September 30, 2009, the Company believed individual variable annuity EGPs could fall, through a combination of negative market returns, lapses and mortality, by at least 22% before portions of its DAC and sales inducement assets would be unrecoverable as compared to 23% as of June 30, 2009.
Valuation of Investments and Derivative Instruments
The Company’s investments in fixed maturities include bonds, redeemable preferred stock and commercial paper. These investments, along with certain equity securities, which include common and non-redeemable preferred stocks, are classified as “available-for-sale” (“AFS”) and are carried at fair value. The after-tax difference from cost or amortized cost is reflected in stockholders’ equity as a component of Other Comprehensive Income (Loss), after adjustments for the effect of deducting the life and pension policyholders’ share of the immediate participation guaranteed contracts and certain life and annuity deferred policy acquisition costs and reserve adjustments. The equity investments associated with the variable annuity products offered in the U.K. are recorded at fair value and are classified as “trading” with changes in fair value recorded in net investment income. Policy loans are carried at outstanding balance. Mortgage loans are recorded at the outstanding principal balance adjusted for amortization of premiums or discounts and net of valuation allowances. Short-term investments are carried at amortized cost, which approximates fair value. Limited partnerships and other alternative investments are reported at their carrying value with the change in carrying value accounted for under the equity method and accordingly the Company’s share of earnings are included in net investment income. Recognition of limited partnerships and other alternative investment income is delayed due to the availability of the related financial statements, as private equity and other funds are generally on a three-month delay and hedge funds are on a one-month delay. Accordingly, income for the three and nine months ended September 30, 2009 may not include the full impact of current year changes in valuation of the underlying assets and liabilities, which are generally obtained from the limited partnership and other alternative investments’ general partners. Other investments primarily consist of derivatives instruments which are carried at fair value.
Available-for-Sale Securities and Short-term Investments
The fair value of AFS securities and short-term investments in an active and orderly market (i.e. not distressed or forced liquidation) is determined by management after considering one of three primary sources of information: third party pricing services, independent broker quotations or pricing matrices. Security pricing is applied using a “waterfall” approach whereby prices are first sought from third party pricing services, the remaining unpriced securities are submitted to independent brokers for prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these pricing methods include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, and/or estimated cash flows and prepayments speeds. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services will normally derive the security prices through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recent reported trades, the third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. For further discussion, see the Available-for-Sale and Short-term Investments Section in Note 3 of the Notes to the Condensed Consolidated Financial Statements.
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. For further discussion of fair value measurement, see Note 3 of the Notes to the Condensed Consolidated Financial Statements.
 

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The following table presents the fair value of AFS securities and short-term investments by pricing source and hierarchy level as of September 30, 2009.
                                 
    Quoted Prices in                
    Active Markets           Significant    
    for Identical   Significant   Unobservable    
    Assets   Observable Inputs   Inputs    
    (Level 1)   (Level 2)   (Level 3)   Total
 
Priced via third party pricing services [1]
  $ 279     $ 30,613     $ 1,595     $ 32,487  
Priced via independent broker quotations
                3,016       3,016  
Priced via matrices
                4,092       4,092  
Priced via other methods [2]
          37       213       250  
Short-term investments
    4,051       1,850             5,901  
 
Total
  $ 4,330     $ 32,500     $ 8,916     $ 45,746  
 
% of Total
    9.5 %     71.0 %     19.5 %     100.0 %
 
[1]   Includes index pricing
 
[2]   Represents securities for which adjustments were made to reduce prices received from third parties and certain private equity investments that are carried at the Company’s determination of fair value from inception.
The fair value is the amount at which the security could be exchanged in a current transaction between knowledgeable, unrelated willing parties using inputs, including assumptions and estimates, a market participant would utilize. As the estimated fair value of a security utilizes assumptions and estimates, the amount that may be realized may differ significantly.
Valuation of Derivative Instruments, excluding embedded derivatives within liability contracts
Derivative instruments are reported in the Condensed Consolidated Balance Sheets at fair value and are reported in Other Investments and Other Liabilities. Derivative instruments are fair valued using pricing valuation models, which utilize market data inputs or independent broker quotations. Excluding embedded and reinsurance related derivatives, as of September 30, 2009 and December 31, 2008, 96% and 95% of derivatives, respectively, based upon notional values, were priced by valuation models, which utilize independent market data. The remaining derivatives were priced by broker quotations. The derivatives are valued using mid-market level inputs, with the exception of the customized swap contracts that hedge GMWB liabilities, that are predominantly observable in the market. Inputs used to value derivatives include, but are not limited to, interest swap rates, foreign currency forward and spot rates, credit spreads and correlations, interest and equity volatility and equity index levels. The Company performs a monthly analysis on derivative valuations which includes both quantitative and qualitative analysis. Examples of procedures performed include, but are not limited to, review of pricing statistics and trends, back testing recent trades, analyzing the impacts of changes in the market environment, and review of changes in market value for each derivative including those derivatives priced by brokers.
The following table presents the notional value and net fair value of derivatives instruments by hierarchy level as of September 30, 2009.
                 
    Notional Value   Fair Value
 
Quoted prices in active markets for identical assets (Level 1)
  $ 1,736     $  
Significant observable inputs (Level 2)
    26,831       273  
Significant unobservable inputs (Level 3)
    34,663       587  
 
Total
  $ 63,230     $ 860  
 
The following table presents the notional value and net fair value of the derivative instruments within the Level 3 securities classification as of September 30, 2009.
                 
    Notional Value   Fair Value
 
Credit derivatives
  $ 2,798     $ (189 )
Interest derivatives
    2,842       5  
Equity derivatives
    28,999       771  
Other
    24        
 
Total Level 3
  $ 34,663     $ 587  
 
Derivative instruments classified as Level 3 include complex derivatives, primarily consisting of equity options and swaps, interest rate derivatives which have interest rate optionality, certain credit default swaps, and long-dated interest rate swaps. These derivative instruments are valued using pricing models which utilize both observable and unobservable inputs and, to a lesser extent, broker quotations. A derivative instrument that is priced using both observable and unobservable inputs will be classified as a Level 3 financial instrument in its entirety if the unobservable input is significant in developing the price. 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.
 

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Evaluation of Other-Than-Temporary Impairments on Available-for-Sale Securities
One of the significant estimates related to AFS securities is the evaluation for other-than-temporary impairments (“impairment”). The Company has a security monitoring process overseen by a committee of investment and accounting professionals that identifies AFS securities that are subjected to an enhanced evaluation on a quarterly basis to determine if an impairment is present. This evaluation is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of AFS securities should be recognized in current period earnings. For further discussion of the accounting policy, see the Recognition and Presentation of Other-Than-Temporary Impairments Section of Note 1 of the Notes to the Condensed Consolidated Financial Statements. For a discussion of results, see the Other-Than-Temporary Impairments section of the MD&A.
 

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Outlook
Life
Retail
In the long-term, management continues to believe the market for retirement products will expand as individuals increasingly save and plan for retirement. Demographic trends suggest that as the “baby boom” generation matures, a significant portion of the United States population will allocate a greater percentage of their disposable incomes to saving for their retirement years due to uncertainty surrounding the Social Security system and increases in average life expectancy.
Near-term, the Company is continuing to experience lower variable annuity sales as a result of market disruption and the competitiveness of the Company’s current product offerings. Despite the partial equity market recovery over the past six months, the current market level and market volatility have resulted in higher claim costs, and have increased the cost and volatility of hedging programs, and the level of capital needed to support living benefit guarantees. Many competitors have responded to recent market turbulence by increasing the price of their guaranteed living benefits and changing the amount of the guarantee offered. Management believes that the most significant industry de-risking changes have occurred. In the first six months of 2009, the Company adjusted pricing levels and took other actions to de-risk its variable annuity product features in order to address the risks and costs associated with variable annuity benefit features in the current economic environment and continues to explore other risk limiting techniques such as changes to hedging or other reinsurance structures. The Company will continue to evaluate the benefits offered within its variable annuities and launched a new variable annuity product in October 2009 that responds to customer needs for growth and income within the risk tolerances of The Hartford.
Continued equity market volatility or significant declines in interest rates are also likely to continue to impact the cost and effectiveness of our GMWB hedging program and could result in material losses in our hedging program. For more information on the GMWB hedging program, see the Life Equity Product Risk Management section within Capital Markets Risk Management.
The Company’s fixed annuity sales have declined throughout 2009 as a result of lower interest rates and the transition to a new product. Management expects fixed annuity sales to continue to be challenged until interest rates increase. In the third quarter of 2009, the Company has continued, but moderated, its policy of offering higher crediting rates available to renewals of its market value adjusted (“MVA”) fixed annuity business. This higher crediting rate strategy for MVA renewals is expected to continue for some time, which will strain earnings on this renewal business. The Company actively monitors this strategy and will continue to adjust crediting rates in response to market conditions and the Company’s capital position.
For the retail mutual fund business, net sales can vary significantly depending on market conditions, as was experienced in the first nine months of 2009. The continued declines in equity markets in the first quarter of 2009 helped drive declines in the Company’s mutual fund deposits and assets under management. During the second and third quarter, the equity markets improved from the first quarter and as a result the Company’s mutual fund assets under management and deposits have increased correspondingly. As this business continues to evolve, success will be driven by diversifying net sales across the mutual fund platform, delivering superior investment performance and creating new investment solutions for current and future mutual fund shareholders.
The decline in assets under management as compared to 2008 is the result of continued depressed values of the equity markets in 2009 as compared to 2008, which has decreased the extent of the scale efficiencies that Retail has benefited from in recent years. The significant reduction in assets under management has resulted in revenues declining faster than expenses causing lower earnings during the first three quarters of 2009 and management expects this strain to continue in the fourth quarter. Individual Annuity net investment spread has been impacted by losses on limited partnership and other alternative investments, lower yields on fixed maturities and an increase in crediting rates on renewals for MVA annuities. Management expects these conditions to persist in the fourth quarter of 2009 and beyond. Management has evaluated, and will continue to actively evaluate, its expense structure to ensure the business is controlling costs while maintaining an appropriate level of service to our customers.
Individual Life
Future sales for all products will be influenced by the Company’s ratings, as published by the various ratings agencies, and active management of current distribution relationships, responding to the impact of recent merger and consolidation activity on existing distribution relationships and the development of new sources of distribution, while offering competitive and innovative products and product features. The current economic environment poses challenges for future sales; while life insurance products respond well to consumer demand for financial security and wealth accumulation solutions, individuals may be reluctant to transfer funds when market volatility has recently resulted in significant declines in investment values. In addition, the availability and terms of capital solutions in the marketplace, as discussed below, to support universal life products with secondary guarantees, may reduce future growth in these products.
Even considering the previous six months of partial equity market recovery, sales and account values for variable universal life products have been under pressure due to continued equity market volatility and declines. For the three and nine months ended September 30, 2009, variable universal life sales decreased 64% and 66%, respectively, and account values decreased 5% compared to prior year. Continued volatility and declines in the equity markets may reduce the attractiveness of variable universal life products and put additional strain on future earnings as variable life fees earned by the Company are driven by the level of assets under management. The variable universal life mix was 39% of total life insurance in-force as of September 30, 2009.
 

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Individual Life has reinsured the policy liability related to statutory reserves in universal life with secondary guarantees to a captive reinsurance affiliate. An unaffiliated standby third party letter of credit supports a portion of the statutory reserves that have been ceded to this affiliate. As of September 30, 2009, the transaction provided approximately $490 of statutory capital relief associated with the Company’s universal life products with secondary guarantees. For the three and nine months ended September 30, 2009 and 2008, the use of the letter of credit resulted in a decline in net investment income and increased expenses. At the current level of sales, the Company expects this transaction to accommodate future statutory capital needs for in-force business and new business written through 2009 and into 2010. Under the terms of the letter of credit, the issuer has the right to require The Hartford to terminate the reinsurance agreement with the captive reinsurance affiliate, as it applies to new business, at any time after September 30, 2009. The Company is currently in discussions with the issuer of the letter of credit regarding the possible modification of terms of the letter of credit for business written after September 30, 2009. The modification of terms could lead to increased costs for Individual Life. Management is currently reviewing product design with the objective of developing a competitively priced product that meets the Company’s capital efficiency objectives.
For risk management purposes, Individual Life accepts and retains up to $10 in risk on any one life. Individual Life uses reinsurance where appropriate to protect against the severity of losses on individual claims; however, death claim experience may continue to lead to periodic short-term earnings volatility. In the fourth quarter of 2008, Individual Life began ceding insurance under a new reinsurance structure for all new business excluding term life insurance. The new reinsurance structure allows Individual Life greater flexibility in writing larger policies, while retaining less of the overall risk associated with individual insured lives. This new reinsurance structure will help balance the overall profitability of Individual Life’s business. The financial results of the new structure will be recognized over time as new business subject to the structure grows as a percentage of Individual Life’s total in-force. As a result of the new reinsurance structure, Individual Life will recognize increasing reinsurance premiums while reducing earnings volatility associated with mortality experience.
Individual Life continues to face uncertainty surrounding estate tax legislation, aggressive competition from other life insurance providers, reduced availability and higher price of reinsurance, and the current regulatory environment related to reserving for term life insurance and universal life products with no-lapse guarantees. These risks may have a negative impact on Individual Life’s future sales and earnings.
Retirement Plans
The future financial results of the Retirement Plans segment will depend on Life’s ability to increase assets under management across all businesses, achieve scale in areas with a high degree of fixed costs and maintain its investment spread earnings on the general account products sold largely in the 403(b)/457 business. Disciplined expense management will continue to be a focus of the Retirement Plans segment as necessary investments in service and technology are made to effect the integration of the acquisitions described below.
During 2008, the Company completed three Retirement Plans acquisitions. The acquisition of part of the defined contribution record keeping business of Princeton Retirement Group gives Life a foothold in the business of providing recordkeeping services to large financial firms which offer defined contribution plans to their clients and at acquisition added $2.9 billion in mutual funds to Retirement Plans assets under management and $5.7 billion of assets under administration. The acquisition of Sun Life Retirement Services, Inc., at acquisition added $15.8 billion in Retirement Plans assets under management across 6,000 plans and provides new service locations in Boston, Massachusetts and Phoenix, Arizona. The acquisition of TopNoggin LLC, provides web-based technology to address data management, administration and benefit calculations. These three acquisitions were not accretive to 2008 net income. Furthermore, return on assets has been lower in 2009 reflecting a full year of the new business mix represented by the acquisitions, which includes larger, more institutionally priced plans, predominantly executed on a mutual fund platform, and the cost of maintaining multiple technology platforms during the integration period.
Given the market declines in the fourth quarter of 2008 and first quarter of 2009 and increased market volatility, the Company has seen and expects that growth in Retirement Plans deposits have been, and will continue to be, negatively affected if businesses reduce their workforces and offer more modest salary increases and as workers potentially allocate less to retirement accounts in the near term. The impact of the partial equity markets recovery over the last six months has been offset by a few large case surrenders, resulting in an overall decline in assets under management compared to 2008. The reduction in assets under management has strained net income over the past three quarters, and this earnings strain is expected to continue until average account value exceeds the level seen in the first half of 2008.
 

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Institutional
The Company has completed the strategic review of the Instutional businesses and has decided to exit several businesses that have been determined to be outside of the Company’s core business model. Several lines — institutional mutual funds, private placement life insurance, income annuities and certain institutional annuities will continue to be managed for growth. The remaining businesses, Structured Settelements, Guaranteed Investment Products, and most Institutional Annuities will be managed in conjunction with other businesses that the Company has previously decided will not be actively marketed. Certain Guaranteed Investment Products may be offered on a selective basis.
The net income of this segment depends on Institutional’s ability to retain assets under management, the relative mix of business, and net investment spread. Net investment spread, as discussed in the Performance Measures section of this MD&A, has declined in the third quarter of 2009 versus prior year and management expects net investment spread will remain pressured in the intermediate future due to the low level of short-term interest rates, increased allocation to lower yielding U.S. Treasuries and short-term investments, and anticipated performance of limited partnerships and other alternative investments.
Stable value products will experience negative net flows in 2009 as a result of contractual maturities and the payments associated with certain contracts which allow an investor to accelerate principal repayments (after a defined notice period of typically thirteen months). Approximately $825 of account value will be paid out on stable value contracts during the remainder of 2009. Institutional will fund these obligations from cash and short-term investments presently held in its investment portfolios along with projected receipts of earned interest and principal maturities from long-term invested assets. As of September 30, 2009, Institutional has no remaining contracts that contain an unexercised investor option feature that allows for contract surrender at book value. The Company has the option to accelerate the repayment of principal for certain other stable value products and will evaluate calling these contracts on a contract by contract basis based upon the financial impact to the Company.
Performance Measures
DAC amortization ratio, return on assets (“ROA”)” or after-tax margin, excluding realized gains (losses) or DAC Unlock are non-GAAP financial measures that the Company uses to evaluate, and believes are important measures of, segment operating performance. DAC amortization ratio, ROA or after-tax margin is the most directly comparable GAAP measure. The Hartford believes that the measures of DAC amortization ratio, ROA or after-tax margin, excluding realized gains (losses) and DAC Unlock provide investors with a valuable measure of the performance 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) or periodic DAC Unlocks. 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 insurance aspects of our businesses. Accordingly, these non-GAAP measures exclude the effect of all realized gains and losses 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 DAC amortization ratio, ROA and after-tax margin, excluding the realized gains (losses) and DAC Unlock but should include net realized gains and losses on net periodic settlements on the Japan fixed annuity cross-currency swap. These net realized gains and losses are directly related to an offsetting item included in the statement of operations such as net investment income. DAC Unlocks occur when the Company determines based on actual experience or other evidence, that estimates of future gross profits should be revised. As the DAC Unlock is a reflection of the Company’s new best estimates of future gross profits, the result and its impact on DAC amortization ratio, ROA and after-tax margin is meaningful; however, it does distort the trend of DAC amortization ratio, ROA and after-tax margin. DAC amortization ratio, ROA or after-tax margin, excluding realized gains (losses) and DAC Unlock should not be considered as a substitute for DAC amortization ratio, ROA or after-tax margin and does not reflect the overall profitability of our businesses. Therefore, the Company believes it is important for investors to evaluate both DAC amortization ratio, ROA and after-tax margin, excluding realized gains (losses) and DAC Unlock and DAC amortization ratio, ROA and after-tax margin when reviewing the Company’s performance.
 

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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. For individual life insurance products, fees are contractually defined as percentages based on levels of insurance, age, premiums and deposits collected and contract holder value. Life insurance fees are generally collected on a monthly 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.
                                 
    As of and For the   As of and For the
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
Product/Key Indicator Information   2009   2008   2009   2008
 
Individual Variable Annuities
                               
Account value, beginning of period
    75,613       105,345       74,578       119,071  
Net flows
    (1,683 )     (1,540 )     (5,243 )     (4,357 )
Change in market value and other
    9,385       (11,555 )     13,980       (22,464 )
 
Account value, end of period
    83,315       92,250       83,315       92,250  
 
Retail Mutual Funds
                               
Assets under management, beginning of period
    34,708       47,239       31,032       48,383  
Net sales
    779       816       1,406       3,838  
Change in market value and other
    4,640       (7,152 )     7,689       (11,318 )
 
Assets under management, end of period
    40,127       40,903       40,127       40,903  
 
Retirement Plans Group Annuities
                               
Account value, beginning of period
    23,490       27,029       22,198       27,094  
Net flows
    259       587       305       2,098  
Change in market value and other
    2,350       (2,448 )     3,596       (4,024 )
 
Account value, end of period
    26,099       25,168       26,099       25,168  
 
Retirement Plans Mutual Funds
                               
Assets under management, beginning of period
    15,342       19,854       14,838       1,454  
Net sales
    (748 )     39       (1,388 )     (69 )
Acquisitions
                      18,725  
Change in market value and other
    2,054       (1,767 )     3,198       (1,984 )
 
Assets under management, end of period
    16,648       18,126       16,648       18,126  
 
Individual Life
                               
Variable universal life account value, end of period
    5,552       5,848       5,552       5,848  
Variable universal life insurance in-force
    75,667       78,809       75,667       78,809  
 
S&P 500 Index
                               
Period end closing value
    1,057       1,165       1,057       1,165  
Daily average value
    996       1,252       900       1,324  
 
Assets under management, across all businesses, shown above, have had substantial reductions in values from prior year primarily due to declines in equity markets during 2008 and first quarter of 2009. The changes in line of business assets under management have also been affected by:
  Retail U.S. individual variable annuity recorded lower deposits for the three and nine months ended September 30, 2009 as a result of market disruptions, recent pricing actions and management’s review of product offerings.
  Retail Mutual funds have seen a decline in net sales for the three and nine months ended September 30, 2009 as a result of lower deposits driven by equity market declines and volatility.
  Retirement Plans has seen declines in net flows in group annuities and net sales in mutual funds due largely to a few large case surrenders.
  Individual Life experienced decreases in variable universal life account values as a result of the declines in equity markets, while variable universal life in-force declined as a result of lower sales in 2009 and aging of the variable universal life insurance block of business resulting in increasing mortality and surrender experience.
 

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Net Investment Spread
Management evaluates performance of certain products based on net investment spread. These products include those that have insignificant mortality risk, such as fixed annuities, certain general account universal life contracts and certain institutional contracts. Net investment spread is determined by taking the difference between the earned rate, (excluding the effects of capital gains and losses, including those related to the Company’s GMWB product and related reinsurance and hedging programs), and the related crediting rates on average general account assets under management. The net investment spreads shown below are for the total portfolio of relevant contracts in each segment and reflect business written at different times. When pricing products, the Company considers current investment yields and not the portfolio average. The determination of credited rates is based upon consideration of current market rates for similar products, portfolio yields and contractually guaranteed minimum credited rates. Net investment spread can be volatile period over period, which can have a significant positive or negative effect on the operating results of each segment. Investment earnings can also be influenced by factors such as the actions of the Federal Reserve and a decision to hold higher levels of short-term investments. The volatile nature of net investment spread is driven primarily by prepayment premiums on securities and earnings on limited partnership and other alternative investments.
Net investment spread is calculated as a percentage of general account assets and expressed in basis points (“bps”):
                                 
    Three Months Ended September 30,   Nine Months Ended September 30,
    2009   2008   2009   2008
 
Retail- Individual Annuity
  64.0  bps   70.3  bps   21.4  bps   111.5  bps
Retirement Plans
  93.8  bps   106.4  bps   65.2  bps   127.1  bps
Institutional (GIC’s, Funding Agreements, Funding Agreement Backed Notes and Consumer Notes)
  (33.2 ) bps   20.5  bps   (47.6 ) bps   63.0  bps
Individual Life
  109.9  bps   83.5  bps   89.0  bps   115.6  bps
 
The primary reasons for the drop in net investment spread during the three and nine months ended September 30, 2009 compared to the comparable 2008 periods were negative limited partnership income, lower earnings on fixed maturities offset by certain reductions in credited rates. The Company expects these conditions to persist throughout 2009.
  For Retail — Individual Annuity for the three months ended September 30, 2009 the drop in net investment spread is primarily related to higher crediting rates of 11 bps and lower earnings on fixed maturities of 10 bps, partially offset by improved partnership returns of 15 bps. For the nine months ended September 30, 2009 the drop in net investment spread is primarily related to lower partnership returns of 35 bps, lower earnings on fixed maturities of 31 bps and higher crediting rates of 18 bps. The decline in fixed maturity returns was primarily related to a higher percentage of fixed maturities being held in short-term investments.
  In Individual Life, the increase in net investment spread for the three months ended September 30, 2009 is attributable to increased partnership returns of 26 bps and a reduction in the credited rate of 30 bps partially offset by lower fixed maturity income returns. The drop in net investment spread for the nine months ended September 30, 2009 is attributable to lower partnership returns of 30 bps and lower maturity income returns partially offset by a reduction in the credited rate of 20 bps.
  In Retirement Plans, for the three months ended September 30, 2009, lower net investment spread was a result of lower fixed income returns of 46 bps, partially offset by higher limited partnership returns of 19 bps and lower crediting rates of 15 bps. For the nine months ended September 30, 2009, lower net investment spread was a result of lower limited partnership returns of 32 bps and lower fixed income returns of 43 bps, partially offset by lower crediting rates of 13 bps.
  In Institutional — Stable Value, for the three months ended September 30,2009,net investment spreads were negatively impacted in the amount of 79 bps due to lower yields on variable rate securities and management’s desire to maintain additional liquidity in the Institutional portfolios, partially offset by 30 bps of higher limited partnership returns. For the nine months ended September 30, 2009, net investment spreads were negatively impacted by 100 bps due to lower yields on variable rate securities and maintaining additional liquidity in the Institutional portfolios in the form of short term and Treasury securities, and 33 bps attributable to negative limited partnership returns.
Expenses
There are three major categories for expenses. The first major category of expenses is benefits and losses. These include the costs of mortality in the individual life business, as well as other contractholder benefits to policyholders. The second major category is insurance operating costs and expenses, which is commonly expressed in a ratio of a revenue measure depending on the type of business. The third major category is the amortization of deferred policy acquisition costs and the present value of future profits (“DAC amortization ratio”), which is typically expressed as a percentage of pre-tax income before the cost of this amortization (an approximation of actual gross profits) and excludes the effects of unrealized gains (losses). Retail — Individual Annuity business accounts for the majority of the amortization of deferred policy acquisition costs and present value of future profits for the Company.
 

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    Three Months ended September 30,   Nine months ended September 30,
    2009   2008   2009   2008
 
Retail
                               
 
General insurance expense ratio (individual annuity)
    19.7  bps     20.9  bps     21.0  bps     19.5  bps  
DAC amortization ratio (individual annuity) [1]
    33.3 %     632.4 %     437.1 %     168.8 %
DAC amortization ratio (individual annuity) excluding DAC Unlock [1], [2]
    56.2 %     44.3 %     63.5 %     46.2 %
 
Individual Life
                               
 
Death benefits
  $ 79     $ 78     $ 233     $ 238  
 
 
                               
Institutional
                               
 
General insurance expense ratio
    12.0  bps     13.7  bps     11.8  bps     14.5  bps  
 
[1]   Excludes the effects of realized gains and losses.
 
[2]   See Unlock and Sensitivity Analysis in the Critical Accounting Estimates section of the MD&A.
  The Retail general insurance expense ratio decreased for the three months ended September, 30 2009 as a result of management’s efforts to reduce expenses. For the nine months ended September 30, 2009 the Retail general expense ratio increased primarily due to the impact of a sharply declining asset base on lower expenses.
  The Retail DAC amortization ratio (Individual Annuity) excluding realized gains (losses) and the effect of the DAC Unlock increased as a result of lower actual gross profits primarily as a result of lower fees earned on declining assets and for the nine months ended September 30, 2009, lower net investment income due to a greater percentage of fixed maturities being held in short-term and lower returns on limited partnerships and other alternative investments.
  Individual Life death benefits decreased for the nine months ended September 30, 2009 due to favorable mortality volatility partially offset by an increase in net amount at risk for variable universal life policies caused by equity market declines.
  Institutional general expense ratio decreased due to active expense management efforts and reduced information technology expenses.
Profitability
Management evaluates the rates of return various businesses can provide as an input in determining where additional capital should be invested to increase net income and shareholder returns. The Company uses the return on assets for the Individual Annuity, Retirement Plans and Institutional businesses for evaluating profitability. In Individual Life, after-tax margin is a key indicator of overall profitability.
 

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    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2009   2008   2009   2008
Retail
                               
Individual annuity return on assets (“ROA”)
    (80.0 ) bps      (305.9 ) bps      (109.2 ) bps      (88.4 ) bps 
Effect of net realized gains (losses), net of tax and DAC on ROA [1]
    (149.4 ) bps      (99.9 ) bps      (43.5 ) bps      (65.4 ) bps 
Effect of DAC Unlock on ROA [2]
    30.2  bps      (267.5 )     (97.6 ) bps      (83.9 ) bps 
 
ROA excluding realized gains (losses) and effects of DAC Unlock
    39.2  bps      61.5  bps      31.9  bps      60.9  bps 
 
Retirement Plans
                               
Retirement Plans ROA
    (33.3 ) bps      (141.9 ) bps      (54.1 ) bps      (49.7 ) bps 
Effect of net realized gains (losses), net of tax and DAC on ROA [1]
    (41.6 ) bps      (109.1 ) bps      (40.9 ) bps      (55.1 ) bps 
Effect of DAC Unlock on ROA [2]
     bps      (43.4 ) bps      (18.7 ) bps      (18.1 ) bps 
 
ROA excluding realized gains (losses) and effects of DAC Unlock
    8.3  bps      10.6  bps      5.5  bps      23.5  bps 
 
Institutional
                               
Institutional ROA
    (69.1 ) bps      (255.4 ) bps      (78.2 ) bps      (119.1 ) bps 
Effect of net realized gains (losses), net of tax and DAC on ROA [1]
    (63.5 ) bps      (255.1 ) bps      (69.8 ) bps      (129.3 ) bps 
 
ROA excluding realized gains (losses) and effects of DAC Unlock
    (5.6 ) bps      (0.3 ) bps      (8.4 ) bps      10.2  bps 
 
Individual Life
                               
After-tax margin
    (0.4 %)     (101.9 %)     (1.0 %)     (9.4 %)
Effect of net realized gains (losses), net of tax and DAC on after-tax margin [1]
    (5.4 %)     (75.4 %)     (7.2 %)     (14.8 %)
Effect of DAC Unlock on after-tax margin [2]
    (9.7 %)     (39.5 %)     (6.6 %)     (8.0 %)
 
After-tax margin excluding realized gains (losses) and effects of DAC Unlock
    14.7 %     13.0 %     12.8 %     13.3 %
 
[1]   See “Realized Capital Gains and Losses by Segment” table within this section of the MD&A
 
[2]   See Unlock and Sensitivity Analysis within the Critical Accounting Estimates section of the MD&A.
  The decrease in Individual Annuity’s ROA, excluding realized gains (losses) and the effect of the DAC Unlock, reflects higher DAC rates due to lower actual gross profits over the past year; lower tax benefits, primarily related to DRD; and for the nine months ended September 30, 2009 significant losses on limited partnership and other alternative investments.
 
  The decrease in Retirement Plans ROA, excluding realized gains (losses) and the effect of the DAC Unlock for the three months ended September 30, 2009, was primarily driven by lower fees from equity market declines. For the nine months ended September 30, 2009, the decrease in ROA, excluding realized gains (losses) and the effect of the DAC Unlock was driven by lower returns on limited partnership and other alternative investments and lower fees from equity market declines.
 
  The decrease in Institutional’s ROA, excluding realized gains (losses), is primarily due to lower yields on investments and a decline in income from limited partnership and other alternative investments
 
  The increase in Individual Life’s after-tax margin, excluding realized gains (losses) and the effect of the DAC Unlock, for the three months ended September 30, 2009 was primarily due to the recognition of tax benefits associated with the dividends received deduction. For the nine months ended September 30, 2009 the after-tax margin decreased primarily due to reserve increases on secondary guaranteed universal life insurance products, lower fees from equity market declines and lower net investment income from limited partnership and other alternative investments, partially offset by increased cost of insurance charges, favorable mortality volatility and life insurance in-force growth.
 

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Investment Results
The primary investment objective of the Company’s general account is to maximize economic value consistent with acceptable risk parameters, including the management of credit risk and interest rate sensitivity of investment assets, while generating sufficient after-tax income to support policyholder and corporate obligations.
The following table presents the Company’s invested assets by type.
Composition of Invested Assets
 
                                 
    September 30, 2009   December 31, 2008
    Amount   Percent   Amount   Percent
 
Fixed maturities, AFS, at fair value
  $ 39,436       72.2 %   $ 39,560       71.9 %
Equity securities, AFS, at fair value
    409       0.7 %     434       0.8 %
Mortgage loans
    4,630       8.5 %     4,896       8.9 %
Policy loans, at outstanding balance
    2,156       3.9 %     2,154       3.9 %
Limited partnerships and other alternative investments
    776       1.4 %     1,033       1.9 %
Other investments [1]
    1,370       2.5 %     1,237       2.2 %
Short-term investments
    5,901       10.8 %     5,742       10.4 %
 
Total investments excl. equity securities, trading
    54,678       100.0 %     55,056       100.0 %
Equity securities, trading, at fair value [2]
    2,465               1,634          
 
Total investments
  $ 57,143             $ 56,690          
 
[1]   Primarily relates to derivative instruments.
 
[2]   These assets primarily support the European variable annuity business. Changes in these balances are also reflected in the respective liabilities.
Total investments increased primarily due to equity securities, trading, partially offset by declines in mortgage loans and limited partnerships and other alternative investments. Equity securities, trading, increased primarily as a result of positive cash flows generated from sales and deposits of U.K. unit-linked and pension product, as well as foreign currency gains due to the appreciation of the British pound in comparison to the U.S. dollar and positive market performance for the underlying investment funds. The decline in mortgage loans resulted from valuation allowances and maturities, and the decline in limited partnerships and other alternative investments was due to hedge fund redemptions and negative re-valuations of the underlying investments associated with the real estate and private equity markets.
The following table summarizes the Company’s net investment income (loss).
                                                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2009   2008   2009   2008
    Amount   Yield [1]   Amount   Yield [1]   Amount   Yield [1]   Amount   Yield [1]
 
Fixed maturities [2]
  $ 513       4.5 %   $ 614       5.3 %   $ 1,620       4.5 %   $ 1,893       5.4 %
Equity securities, AFS
    12       9.6 %     12       6.6 %     35       8.7 %     48       8.4 %
Mortgage loans
    58       5.0 %     62       5.4 %     177       4.9 %     184       5.6 %
Policy loans
    35       6.5 %     33       6.3 %     106       6.6 %     98       6.3 %
Limited partnerships and other alternative investments
    (16 )     (7.2 %)     (57 )     (17.5 %)     (165 )     (23.1 %)     (56 )     (6.1 %)
Other [3]
    65             (4 )           163             (41 )      
Investment expense
    (23 )           (17 )           (55 )           (48 )      
 
Total net investment income excl. equity securities, trading
    644       4.3 %     643       4.7 %     1,881       4.1 %     2,078       5.1 %
Equity securities, trading
    299             (118 )           308             (240 )      
 
Total net investment income (loss)
  $ 943           $ 525           $ 2,189           $ 1,838        
 
[1]   Yields calculated using annualized net investment income before investment expenses divided by the monthly average invested assets at cost, amortized cost, or adjusted carrying value, as applicable, excluding collateral received associated with the securities lending program and consolidated variable interest entity non-controlling interests. Included in the fixed maturity yield is other, which primarily relates to fixed maturities (see footnote [3] below). Included in the total net investment income yield is investment expense.
 
[2]   Includes net investment income on short-term bonds.
 
[3]   Includes income from derivatives that qualify for hedge accounting and hedge fixed maturities. Also includes fees associated with securities lending activities of $0 and $4, for the three and nine months ended September 30, 2009, respectively, and $9 and $42 for the three and nine months ended September 30, 2008, respectively. The income from securities lending activities is included within fixed maturities.
 

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Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008
Net investment income, excluding equity securities, trading, decreased primarily due to lower income on fixed maturities and limited partnerships and other alternative investments, partially offset by other income. The decline in fixed maturity income was primarily due to increased allocation to short-term investments and lower yields on variable rate securities due to declines in short-term interest rates. The decline in limited partnerships and other alternative investment income was largely due to negative re-valuations of the underlying investments associated primarily with the real estate and private equity markets. These losses were partially offset by income from interest rate swaps reported above as other income.
The increase in net investment income on equity securities, trading, for the three and nine months ended September 30, 2009 compared to the prior year periods was primarily attributed to the market performance of the underlying investment funds supporting the U.K. unit-linked and pension product.
 

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Realized Capital Gains and Losses by Segment
The Company includes net realized capital gains and losses in each reporting segment. Following is a summary of the types of realized gains and losses by segment:
Net realized capital gains (losses) for three months ended September 30, 2009
                                                   
            Individual                  
    Retail   Life   Retirement   Institutional   Other     Total
       
Gross gains on sales
  $ 28     $ 9     $ 10     $ 37     $ 19       $ 103  
Gross losses on sales
    (24 )     (10 )     (2 )     (8 )     (13 )       (57 )
Net OTTI losses recognized in earnings
    (111 )     (28 )     (83 )     (168 )     (25 )       (415 )
Japanese fixed annuity contract hedges, net
                            (7 )       (7 )
Periodic net coupon settlements on credit derivatives/Japan
    (4 )     (1 )     (2 )     (2 )     7         (2 )
Results of variable annuity hedge program
                                                 
GMWB derivatives, net
    (198 )                       7         (191 )
Macro hedge
    (282 )                       (46 )       (328 )
       
Total results of variable annuity hedge program
    (480 )                       (39 )       (519 )
       
GMIB/GMAB/GMWB reinsurance
                            (420 )       (420 )
Other, net
    (26 )     (7 )     (12 )     (5 )     (145 )       (195 )
       
Total net realized capital gains/(losses)
    (617 )     (37 )     (89 )     (146 )     (623 )       (1,512 )
       
Income tax expense/(benefit) and DAC
    (118 )     (13 )     (39 )     (52 )     (215 )       (437 )
       
Total net realized losses, net of tax and DAC
  $ (499 )   $ (24 )   $ (50 )   $ (94 )   $ (408 )     $ (1,075 )
       
Net realized capital gains (losses) for three months ended September 30, 2008
                                                   
            Individual                  
    Retail   Life   Retirement   Institutional   Other     Total
       
Gross gains on sales
  $ 6     $ 7     $ 1     $ 16     $ 4       $ 34  
Gross losses on sales
    (22 )     (12 )     (12 )     (25 )     (14 )       (85 )
Net OTTI losses recognized in earnings
    (329 )     (165 )     (174 )     (494 )     (148 )       (1,310 )
Japanese fixed annuity contract hedges, net
                            36         36  
Periodic net coupon settlements on credit derivatives/Japan
    (1 )           (1 )           (7 )       (9 )
Fair value measurement transition impact
                                     
Results of variable annuity hedge program
                                                 
GMWB derivatives, net
    (115 )                       (18 )       (133 )
Macro hedge
    19                         5         24  
       
Total results of variable annuity hedge program
    (96 )                       (13 )       (109 )
       
GMIB/GMAB/GMWB reinsurance
                            (403 )       (403 )
Other, net
    (40 )     4       5       (98 )     15         (114 )
       
Total net realized capital gains/(losses)
    (482 )     (166 )     (181 )     (601 )     (530 )       (1,960 )
       
Income tax expense/(benefit) and DAC
    (201 )     (61 )     (58 )     (210 )     (174 )       (704 )
       
Total net realized losses, net of tax and DAC
  $ (281 )   $ (105 )   $ (123 )   $ (391 )   $ (356 )     $ (1,256 )
       
 

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Net realized capital gains (losses) for nine months ended September 30, 2009
                                                   
            Individual                  
    Retail   Life   Retirement   Institutional   Other     Total
       
Gross gains on sales
  $ 80     $ 19     $ 28     $ 65     $ 110       $ 302  
Gross losses on sales
    (314 )     (32 )     (39 )     (119 )     (84 )       (588 )
Net OTTI losses recognized in earnings
    (196 )     (41 )     (130 )     (406 )     (75 )       (848 )
Japanese fixed annuity contract hedges, net
                            28         28  
Periodic net coupon settlements on credit derivatives/Japan
    (12 )     (3 )     (6 )     (6 )     2         (25 )
Results of variable annuity hedge program
                                                 
GMWB derivatives, net
    1,017                         36         1,053  
Macro hedge
    (596 )                       (96 )       (692 )
       
Total results of variable annuity hedge program
    421                         (60 )       361  
       
GMIB/GMAB/GMWB reinsurance
                            1,012         1,012  
Other, net
    (134 )     (60 )     (81 )     (14 )     29         (260 )
       
Total net realized capital gains/(losses)
    (155 )     (117 )     (228 )     (480 )     962         (18 )
       
Income tax expense/(benefit) and DAC
    288     (46     (95     (168     345         324  
       
Total net realized gains/(losses), net of tax and DAC
  $ (443 )   $ (71 )   $ (133 )   $ (312 )   $ 617       $ (342 )
       
Net realized capital gains (losses) for nine months ended September 30, 2008
                                                   
            Individual                  
    Retail   Life   Retirement   Institutional   Other     Total
       
Gross gains on sales
  $ 26     $ 9     $ 8     $ 27     $ 32       $ 102  
Gross losses on sales
    (50 )     (24 )     (33 )     (72 )     (81 )       (260 )
Net OTTI losses recognized in earnings
    (393 )     (197 )     (210 )     (643 )     (181 )       (1,624 )
Japanese fixed annuity contract hedges, net
                            13         13  
Periodic net coupon settlements on credit derivatives/Japan
    (3 )     (1 )     (2 )     1       (21 )       (26 )
Fair value measurement transition impact
    (616 )                       (182 )       (798 )
Results of variable annuity hedge program
                                                 
GMWB derivatives, net
    (241 )                       (16 )       (257 )
Macro hedge
    24                         5         29  
       
Total results of variable annuity hedge program
    (217 )                       (11 )       (228 )
       
GMIB/GMAB/GMWB reinsurance
                            (549 )       (549 )
Other, net
    (57 )     (6 )     1       (220 )     (18 )       (300 )
       
Total net realized capital gains/(losses)
    (1,310 )     (219 )     (236 )     (907 )     (998 )       (3,670 )
       
Income tax benefit and DAC
    (736 )     (81 )     (87 )     (318 )     (338 )       (1,560 )
       
Total net realized losses, net of tax and DAC
  $ (574 )   $ (138 )   $ (149 )   $ (589 )   $ (660 )     $ (2,110 )
       
 

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For the three and nine months ended September 30, 2009 and 2008, the circumstances giving rise to the Company’s net realized capital losses are as follows:
     
Gross gains and losses on sales
 
     Gross gains and losses on sales for the three and nine months ended September 30, 2009 were predominantly within corporate securities resulting primarily from efforts to reduce portfolio risk and within U.S. Treasuries in order to reallocate the portfolio to securities with more favorable return profiles.
 
   
 
 
     Gross gains and losses on sales for the three and nine months ended September 30, 2008 were predominantly within fixed maturities and were primarily comprised of corporate securities. Gross gains and losses on sales primarily resulted from the decision to reallocate the portfolio to securities with more favorable risk/return profiles.
 
   
Net OTTI losses
 
     For further information, see Other-Than-Temporary Impairments within the Investment Credit Risk Section of the MD&A.
 
   
Variable annuity hedge program
 
     For the three months ended September 30, 2009, the Company recorded a loss of $191 on GMWB derivatives, net, comprised of a loss of $103 related to the Company’s GMWB reinsurance recoverable and a loss of $478 related to the Company’s GMWB dynamic hedging program partially offset by a gain of $390 related to the decrease in the liability for GMWB. Increasing equity markets resulted in a loss of $328 related to the Company’s macro hedge program.
 
   
 
 
     For the nine months ended September 30, 2009, the Company recorded a gain of $1.1 billion on GMWB derivatives, net, comprised of a gain of $3.7 billion related to the decrease in the liability for GMWB, significantly offset by a loss of $788 related to the Company’s GMWB reinsurance recoverable and a loss of $1.9 billion related to the Company’s GMWB dynamic hedging program. Increasing equity markets resulted in a loss of $692 related to the Company’s macro hedge program. For further information, see Investments and Derivative Instruments in Note 4 of the Notes to Condensed Consolidated Financial Statements. In addition, see the Company’s variable annuity hedging program sensitivity disclosures within Capital Markets Risk Management section of the MD&A.
 
   
GMIB/GMAB/GMWB
reinsurance
 
     The net loss on derivatives associated with GMIB/GMAB/GMWB product reinsurance contracts, which are reinsured to a related party, for the three months ended September 30, 2009, was primarily due to changes in the credit market and liability model assumption updates for lapses and mortality, while the gain for the nine months ended was primarily due to liability model assumption updates for credit standing, an increase in the Japan equity markets, an increase in interest rates, and a decline in Japan equity market volatility. For more information on the liability model assumption updates for credit standing, refer to Note 3 of the Notes to the Condensed Consolidated Financial Statements.
     
 
 
     The net loss for the three and nine months ended September 30, 2008, related to GMIB/GMAB/GMWB product reinsurance contract derivatives, which are reinsured to a related party, was primarily due to a decline in the Japan equity markets.
 
   
Other, net
 
     Other, net losses for the three months ended September 30, 2009 primarily resulted from transactional foreign currency losses of $99, predominately on the internal reinsurance of the Japan variable annuity business, which is offset in AOCI. Also included were net additions to valuation allowances on impaired mortgage loans of $43.
 
   
 
 
     Other, net losses for the nine months ended September 30, 2009 primarily resulted from net losses of $212 on credit derivatives driven by credit spread tightening and net additions to valuation allowances on impaired mortgage loans of $135. These losses were partially offset by transactional foreign currency gains of $85, predominately on the internal reinsurance of the Japan variable annuity business.
 
   
 
 
     Other, net losses for the three and nine months ended September 30, 2008 were primarily related to net losses on credit derivatives of $93 and $271, respectively, due to significant credit spread widening on credit derivatives that assume credit exposure. Also included were derivative related losses of $39 due to counterparty default related to the bankruptcy of Lehman Brothers Holdings Inc.
 

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     CONSOLIDATED RESULTS OF OPERATIONS
Operating Summary
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2009   2008   2009 2008
 
Fee income and other
  $ 910     $ 1,082     $ 2,697     $ 3,295  
Earned premiums
    51       277       387       733  
Net investment income
                               
Securities available-for-sale and other
    644       643       1,881       2,078  
Equity securities, trading [3]
    299       (118 )     308       (240 )
Total net investment income
    943       525       2,189       1,838  
Net realized capital gains (losses):
                               
Total other-than-temporary impairment (“OTTI”) losses
    (588 )     (1,310 )     (1,178 )     (1,624 )
OTTI losses recognized to other comprehensive income
    173             330        
 
Net OTTI losses recognized in earnings
    (415 )     (1,310 )     (848 )     (1,624 )
Net realized capital gains (losses), excluding net OTTI losses recognized in earnings
    (1,097 )     (650 )     830       (2,046 )
 
Total net realized capital losses
    (1,512 )     (1,960 )     (18 )     (3,670 )
Total revenues [1]
    392       (76 )     5,255       2,196  
Benefits, losses and loss adjustment expenses
    674       1,136       2,999       3,009  
Benefits, loss and loss adjustment expenses — returns credited on International unit-linked bonds and pension products [3]
    299       (118 )     308       (240 )
Insurance operating costs and other expenses
    483       498       1,382       1,473  
Amortization of deferred policy acquisition costs and present value of future profits
    93       1,289       1,792       1,380  
 
Total benefits, losses and expenses
    1,549       2,805       6,481       5,622  
Income (loss) before income taxes
    (1,157 )     (2,881 )     (1,226 )     (3,426 )
Income tax expense (benefit)
    (447 )     (1,049 )     (525 )     (1,346 )
 
Net income (loss) [2]
  $ (710 )   $ (1,832 )   $ (701 )   $ (2,080 )
 
Net (income) loss attributable to the noncontrolling interest
    (3 )     10       (9 )     (52 )
 
                               
 
Net income (loss) attributable to shareholder
  $ (713 )   $ (1,822 )   $ (710 )   $ (2,028 )
 
[1]   The transition impact related to the adoption of fair value accounting guidance was a reduction in revenues of $798 for the nine months ended September 30, 2008.
 
[2]   The transition impact related to the adoption of fair value accounting guidance was a reduction in net income of $311 for the nine months ended September 30, 2008.
 
[3]   Includes investment income and mark-to-market effects of equity securities, trading supporting the European variable annuity business, which are classified in net investment income with corresponding amounts credited to policyholders within benefits, losses and loss adjustment expenses.
Three months ended September 30, 2009 compared to the three months ended September 30, 2008
The decrease in Life’s net loss was due to the following:
    Favorable DAC Unlock in the Retail segment compared to prior year period. See Critical Accounting Estimates of the MD&A for a further discussion on the DAC Unlock. Lower realized losses resulting from greater impaired assets in the comparable prior year period. For further discussion, please refer to the Realized Capital Gains and Losses by Segment table under the Operating Section of the MD&A.
Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008
The decrease in Life’s net loss was due to the following:
    Net realized losses decreased in the current period as compared to the prior year period primarily due to gains on the GMWB derivative and lower net OTTI losses. For further discussion, please refer to the Realized Capital Gains and Losses by Segment table under the Operating Section of the MD&A.
Partially offsetting these results was:
    A DAC Unlock charge of $849, after-tax, during the nine months ended September 30, 2009. See Critical Accounting Estimates of the MD&A for a further discussion on the DAC Unlock.
 
    Continued declines in assets under management in Retail effecting fee income.
 
    Net investment income on securities, available-for-sale, and other declined primarily due to declines in limited partnership and other alternative investment and fixed maturities income. See investment results.
 

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Income Taxes