The Hartford 2008 Annual Report Download - page 420

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Change in Fair Value
The decrease of $1.2 billion in the total fair value of derivative instruments since December 31, 2007, was primarily related
to the following:
• For a discussion on the decrease in fair value of GMWB related derivatives refer to Note 4.
• The fair value of the Japanese fixed annuity hedging instruments increased primarily due to the Japanese Yen
strengthening against the U.S. dollar.
• The fair value of interest rate derivatives increased primarily due to a decline in interest rates as well as an increase in
notional amount.
• The fair value of foreign currency swaps hedging foreign fixed rate bonds increased primarily due to the U.S. dollar
strengthening against the euro.
Net Realized Capital Gains (Losses)
The total change in value for non-qualifying strategies, including periodic derivative net coupon settlements, are reported in
net realized capital gains (losses). For the year ended December 31, 2008, the net realized capital loss of $916 related to
non-qualifying strategies was primarily due to the following:
• For a discussion on the net loss associated with GMWB related hedging derivatives refer to Note 4.
• The net loss on credit default swaps was primarily due to losses on credit derivatives that sell credit protection, partially
offset by gains on credit derivatives that purchase credit protection, both resulting from credit spreads widening
significantly during the year.
• The gain on the Japanese fixed annuity hedging instruments was primarily a result of the Japanese Yen strengthening
against the U.S. dollar.
• The gain on warrants associated with the Allianz transaction was primarily due to a decrease in the Company’s stock
price since the issue date.
• The net gain on the macro hedge program was primarily driven by a decline in the equity markets, partially offset by
losses due to swap spreads tightening.
For the year ended December 31, 2007, the net realized capital loss of $488 related to non-qualifying strategies was
primarily related to the following:
• For a discussion on the net loss associated with GMWB related derivatives refer to Note 4.
• The net loss on credit default swaps was a result of credit spreads widening.
• The gain on the Japanese fixed annuity hedging instruments was primarily a result of the Japanese Yen strengthening
against the U.S. dollar.
For the year ended December 31, 2008, the Company incurred losses of $46 on derivative instruments due to counterparty
default related to the bankruptcy of Lehman Brothers Holdings 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.
For the year ended December 31, 2008 and 2007, 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 $10 and ($16), respectively. 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 all forecasted transactions, excluding interest payments on existing
variable-rate financial instruments) is five years. For the year ended December 31, 2008, the Company had $198, 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. Of this amount, $202 resulted from the termination of an interest rate
swap due to the sale of the related hedged structured security. The interest rate swap was used to convert the LIBOR based
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009