2007 Corporate Report

I am proud to report that The Hartford had a strong 2007. Even with the market challenges we faced in the second half of the year, our full-year 2007 results were the best in the company’s history.

Core earnings rose 22 percent to $3.5 billion, a full-year record. Core earnings per diluted share grew to $10.99, a 21 percent increase over 2006.¹

Net income reached $2.9 billion, an increase of 7 percent year-over-year. Assets under management surpassed $426 billion.

Book value per share² was up 11 percent, and our return on equity topped 15 percent.

To begin to tell the story of our 2007 performance, one must first consider the market dynamics we faced. In the first half of 2007, like much of the rest of our industry, The Hartford enjoyed the economic tailwinds of 2006. At the same time, we saw soft pricing and competition emerging more strongly in the property and casualty insurance marketplace.

Still, fueled by the fine performance of our 31,000 employees, our business results across the enterprise were strong, and our share price rose to all-time highs in 2007, closing at $106.02 on May 22. But soon volatility became the norm for the equity markets, and our share price roller-coastered throughout the rest of the year, finishing 2007 at $87.19.

Two market dynamics in the latter half of 2007 influenced investor sentiment toward the insurance and financial services industries. First, there were lower earnings growth expectations for property and casualty and life insurance companies. And second, the subprime crisis and the disruption in the credit and equity markets led to growing anxiety about the possibility of a recession.

The Hartford’s operating strength has provided its shareholders with excellent long-term value. Over the past three years, our total shareholder return³ was an annualized 10 percent, outperforming the S&P 500 Index at 8.6 percent and the S&P Insurance Composite Index at 5.8 percent.

Returns over the five-year period were even better, with a total annualized return of 16.2 percent, surpassing the S&P 500 and insurance composite indices at 12.8 percent and 9 percent, respectively.

However, our excellent operating results in 2007 were not enough to overcome challenging equity and credit markets, and our total shareholder return was down 4.6 percent for the year, compared to the S&P 500, which increased 5.5 percent. While our stock performance in 2007 was disappointing, we did manage to outpace our peers slightly, as the S&P Insurance Composite Index declined 6.3 percent in 2007.

Strength and Diversification

In this challenging marketplace, the companies that win are those that couple diverse business operations and opportunities with strong balance sheets. The Hartford has prepared itself in the past decade to become such a company.

Our strong balance sheet – with more than $20 billion in stockholders’ equity⁴ – provides the company with the capital strength and flexibility to compete in all of our product lines while navigating the range of market conditions we faced in the second half of 2007 and continue to experience so far in 2008.

The Hartford benefits from diverse earnings streams, which have contributed to our ability to generate strong returns in different market environments. Our core earnings are generally split 60/40 between protection solutions and asset management/retirement income solutions. Our customer base includes individuals and families (49 percent of earnings), small and mid-size businesses (25 percent), and large enterprises and government entities (26 percent). With a range of products in multiple markets, the company is able to target new investment in those areas with the greatest potential for organic growth.

The Hartford’s product offerings generated excellent returns in 2007. Our asset management and retirement income businesses – global retail investment products, retirement plans, and institutional financial products – delivered record profits, reflecting our efforts to diversify our earnings base and grow scale. We saw especially strong growth in mutual funds, 401(k) plans, and institutional financial products. Overall, we had deposits of $53 billion in 2007, up 23 percent from 2006.

Our protection businesses – property and casualty insurance, individual life insurance, and group benefits – produced similarly impressive results in 2007. Facing intense competition, a slowing economy, and softening pricing in the property and casualty insurance marketplace, these businesses saw increasing top-line pressure throughout the year.

Still, our property and casualty business grew while exercising underwriting discipline, managing costs, and delivering exemplary service. That formula led to record performance. Property and casualty ongoing operations achieved a full-year combined ratio of 90.8, a measure of profitability which here means that, after claims and expenses, we earned more than 9 cents on every dollar of premium. Record full-year core earnings topped $1.6 billion, a 10 percent increase over 2006.

The Hartford’s group benefits business grew fully insured premium in 2007 to $4.2 billion, a 3 percent increase over the prior year, and core earnings increased 10 percent to a record $338 million. In individual life insurance, The Hartford grew insurance in force by 9 percent year-over-year to $179 billion.

The Power of Our Brand

The Hartford’s success in 2007 is in many ways the result of the power of our brand and a passionate focus on three customer opportunities. We grow and ensure the lifelong wealth of individuals and families. We protect their personal property and assets. And we serve the protection and financial solution needs of businesses, public entities, and not-for-profits.

Growing Your Wealth and Ensuring Lifelong Income

As the Baby Boom generation’s need for supplemental retirement income solutions has increased, so has The Hartford grown its reputation in personal wealth management. We provide smart financial solutions to investors through the wealth accumulation period of pre-retirement, as well as during retirement itself, when security is sought with lifelong guaranteed income.

Let’s first take a look at the wealth accumulation phase. Mutual funds are among the most effective ways to grow wealth in the years leading up to retirement, and The Hartford’s family of mutual funds has never been more attractive. In fact, in 2007, we achieved a significant milestone, accumulating more than $50 billion in assets, a 27 percent increase year-over-year.

Our growing reputation is founded on strong fund performance. Over the past five years, 86 percent of The Hartford’s equity funds have ranked in the top two Lipper quartiles.⁵ In fact, Barron’s ranked The Hartford’s family of funds fourth overall in a field of 67 competitors and first among U.S. equity funds in 2007.⁶

The Hartford’s leadership in the next phase of financing retirement – securing retirement income – continues to grow. With longevity increasing and traditional government- and employer-sponsored pensions in decline, ensuring a lifelong income stream is more important than ever for retirees.

The Hartford is a global leader in variable annuity products, many of which offer guaranteed lifetime income options. Even in an increasingly challenging marketplace for sales of variable annuities, The Hartford has consistently met customers’ needs and balanced the benefits and costs of lifetime guarantees.

In the United States, our variable annuity sales increased 9 percent to $13.2 billion, led by sales of our Lifetime Income Builder II. Individual annuity assets under management, including fixed annuities, grew to $129 billion at the end of 2007.

In Japan, The Hartford continues to grow its reputation as a leader in retirement income solutions. In fact, The Hartford ranks No. 1 in variable annuity assets under management, with a 24 percent share of the market.⁷ In 2007, Japan variable annuity sales increased 8 percent to $6.3 billion, fueled by increased distribution and the introduction of a new product that satisfies customer demand for a shorter investment horizon. Our total assets under management in Japan increased to almost $38 billion at year-end, up 20 percent from 2006.

In the United Kingdom, The Hartford’s relatively new operation there distinguished itself with the successful launch of a groundbreaking personal pension product. It provides guaranteed income with the potential for growth through participation in the equity markets. Awarded “Best Innovation” for 2007 by Moneyfacts magazine, the new pension product made headlines throughout the U.K. financial press.

Protecting Your Property, Income, and Assets

The Hartford provides a full suite of insurance solutions for individuals and families, ensuring that key assets – auto, home, and life – are protected against the unexpected.

We distribute auto and homeowners insurance through two channels – via independent agents and direct to customers through our exclusive relationship with AARP, an affinity group of 39 million members, 50 years of age or older. In 2007, we extended our agreement with AARP to 2020.

The auto and home insurance marketplace in 2007 was very challenging. Growth rates were flat, prices were soft, and competition was fierce. Still, The Hartford outperformed the market and grew total policies in force by 3 percent over the prior year. In fact, in our direct sales channel to AARP members, we grew written premium by 7 percent.

In our independent agency channel, we continue to invest in the expansion of our distribution network, adding regional offices and new agents. In the past two years, The Hartford has increased the number of agents selling its auto and homeowners insurance by more than 75 percent to 7,000.

Overall written premiums in personal lines totaled $3.9 billion in 2007, up 5 percent year-over-year.⁸ Disciplined underwriting in this business – resulting in a combined ratio of 91.7 – led to strong results. Full-year under-writing income was $322 million.

The Hartford also offers individuals and families a comprehensive set of life insurance products: variable life, universal life, whole life, and term life insurance. In 2007, The Hartford grew life insurance account values by 9 percent. In variable life insurance, where we rank first in the industry in total premium,⁹ sales grew 13 percent over the prior year. Net income increased 21 percent in 2007, to $182 million.

Protecting and Growing Your Business

When it comes to protecting and growing America’s businesses, The Hartford has a well-earned reputation for trust, consistently delivering value, service, and dependability. Our suite of business insurance and financial solutions is well-known in the industry for its quality and breadth: commercial auto and property insurance, professional and employer liability protection, employee benefit and retirement plans, group annuities, and more.

Our strong product portfolio has helped establish The Hartford as the business partner of choice for many companies. This was especially important in 2007, as competition intensified and prices in the property and casualty insurance marketplace continued to soften.

Our small business insurance products are market leaders in the United States, with more than 1 million property and casualty policies in force in 2007. Our proficiency in the mid-size and large business insurance market is also significant. We continue to exercise our deep expertise in sectors such as communications, technology, professional services, and private education, allowing us to continue to grow policies in force in a market that saw intense competition in 2007.

Our strong underwriting performance in both small commercial and middle market – full-year combined ratios of 81.4 and 93.9, respectively – led us to post strong bottom-line results in 2007, generating $508 million and $144 million, respectively, in underwriting income.

In addition to business insurance, The Hartford also offers a range of protection and wealth accumulation solutions to businesses for their employees, including group life, accident and disability insurance, and retirement plans such as 401(k), 457, and 403(b).

In 2007, The Hartford’s group benefits product line maintained its No. 2 ranking in fully-insured group disability insurance and moved up one place to No. 3 in group life insurance.¹⁰ We achieved these leadership positions while our after-tax profit in 2007 expanded to 7.1 percent.¹¹

Our retirement plan products first found success serving the special needs of small businesses. In fact, The Hartford has been ranked “Best in Class” by PLANSPONSOR magazine in the micro- and small-plan market segments.

Our passion for service has contributed to strong results. In 2007, retirement plan assets under management grew to $28.5 billion, a 16 percent increase over year-end 2006.

In December 2007, The Hartford announced three strategic acquisitions to accelerate future growth of our retirement plans business. These acquisitions¹² will add scale in core market segments, an established presence in new market segments, and enhanced technology to serve our customers more effectively.

Looking Ahead: 2008 and Beyond

In a slowing economy and challenging marketplace, The Hartford’s financial strength and diversified business model make a compelling case for enduring shareholder value. The company has a well-developed culture of financial discipline and astute capital and risk management. Together, these add up to a strong balance sheet, attractive returns, and a history of rational pricing and financial guarantees.

With this sound financial platform and smart, inspired leadership, we will build on the benchmark achievements of 2007 and continue to unlock the power of our brand in 2008.

One leader in our exceptional management ranks bears highlighting. In 2007, Tom Marra, a longtime colleague and the former leader of our Life operations, was named President and Chief Operating Officer of The Hartford.¹³ Tom has been with the company for more than a quarter century, building superior customer solutions and delivering exceptional business results.

As I partner with Tom on many of the challenges facing the company, I look forward to more of the same success from him and the rest of The Hartford’s senior management team in 2008.

Keeping our focus on the business at hand – and winning with integrity – will produce even more opportunity and ensure The Hartford’s long-term success.

Sincerely,
Ramani Ayer
Chairman and CEO

1. Core earnings is a financial measure not calculated based on generally accepted accounting principles.
2. Excluding accumulated other comprehensive income.
3. Includes dividends.
4. Excluding accumulated other comprehensive income.
5. Of those funds with five-year records, at December 31, 2007.
6. Barron’s, February 4, 2008.
7. Hoken Mainichi Shimbun.
8. Excluding the effect of our non-standard auto insurance business, which was sold in 2006.
9. As measured by total premium, by LIMRA International.
10. As measured by in force premium, by LIMRA International, as of the first six months of 2007.
11. As a percentage of revenue, excluding buyouts and non-core realized gains and losses.
12. Sun Life Retirement Services, Inc., TopNoggin, and Princeton Retirement Group.
13. See “A Conversation with Tom Marra”