Oct. 30 (Bloomberg) -- Hartford Financial Services Group Inc., the insurer that got an investment from Germany's Allianz SE this month, lost more than half its market value today after reporting its first unprofitable quarter in five years.

The insurer plunged $10.24, or 52 percent, to $9.62 at 4:15 p.m. in New York Stock Exchange composite trading, the most since its 1995 spinoff from ITT Corp. Hartford, based in the Connecticut city of the same name, posted a third-quarter net loss of $2.63 billion late yesterday on writedowns of investments in financial firms.

``The third quarter was the most challenging in the Hartford's history,'' Chief Executive Officer Ramani Ayer said yesterday on a conference call with analysts and investors. Ayer said he wouldn't ``categorically sit here'' and rule out another capital raise to cover investment losses after Allianz, Europe's biggest insurer, agreed Oct. 6 to invest $2.5 billion.

Hartford shares have fallen 77 percent this month to their lowest since the spinoff on concern that the funds from Allianz may not be enough to cover future investment losses and stave off a downgrade by ratings companies. The insurer had $2.2 billion in investment losses and a $932 million accounting charge tied to its retirement products in the quarter.

``We are not that far away from a scenario where Hartford could need to raise another $2 billion or more to maintain ratings,'' analysts Jay Cohen and Edward Spehar of Merrill Lynch & Co. wrote in a note to clients today in which they lowered their rating on the firm to ``neutral.''

Treasury Program

Hartford would consider selling a stake to the Treasury if a U.S. program to inject capital into financial firms were extended to insurers, said Chief Financial Officer Lizabeth Zlatkus.

``We feel very well capitalized,'' Zlatkus said on the call. ``But in terms of would we access the Capital Purchase Program, if that's available -- we certainly think there are favorable terms as we see it, and we would look to do that.''

Book value, the measure of Hartford's assets minus liabilities, fell 25 percent over three months to $41.80 a share. The decline was driven in part by the investment losses.

The majority of the writedowns were related to the company's investments in financial firms. Last month the insurer said in a separate statement it held $511 million in preferred stock of mortgage lenders Fannie Mae and Freddie Mac and more than $260 million of stock and debt in bankrupt Lehman Brothers Holdings Inc. and American International Group Inc., which ceded majority control to the government in September.

Lehman's bankruptcy and AIG's government bailout roiled credit markets, pushing down the value of insurers' portfolios.

Commercial Real Estate

Separately, Hartford took the $932 million accounting charge to reflect the underperformance of securities that back retirement products the firm sold in previous quarters. Life insurers guarantee minimum returns for some customers, and adjust their profit assumptions when investment returns fail to meet the company's targets.

Gross unrealized losses on securities backed by commercial mortgages widened by more than $900 million to $2.8 billion in the three months ended Sept. 30, the insurer said in a regulatory filing. Unrealized losses on asset-backed securities increased by more than $200 million in the same span.

``It is clear that overweight positions on financial services and structured securities hurt us in the third quarter,'' Ayer said. The firm is re-evaluating its investment strategy and paring back hedge-fund investments after replacing its chief investment officer this month, he said.

`Minimal Margin for Error'

Moody's Investors Service said last month that it may downgrade Hartford on investment losses. Fitch Ratings this month said U.S. life insurers face a ``significant'' risk of downgrades.

The biggest insurers in the U.S. and Bermuda have reported more than $98 billion in writedowns and unrealized losses tied to the collapse of subprime loans since the beginning of last year.

``The possibility exists that rating agencies may want life insurers to hold more capital against the backdrop of today's highly volatile environment,'' said Nigel Dally, an analyst at Morgan Stanley, in a note to investors today. Hartford, he said, has ``a minimal margin for error.''

Credit-default swaps on Hartford rose 134 basis points to a mid-price of 603 basis points, according to CMA Datavision. The increase indicates deterioration in the perception of credit quality; a decline signals the opposite.

Credit-default swaps are contracts conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.

Last Updated: October 30, 2008 16:22 EDT