The Hartford 2009 Annual Report Download - page 197

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-48
5. Investments and Derivative Instruments (continued)
For the year ended December 31, 2008, the net realized capital loss related to derivatives used in non-qualifying strategies was primarily
due to the following:
• The net loss on GMWB related derivatives was primarily due to liability model assumption updates related to market-based hedge
ineffectiveness due to extremely volatile capital markets, and the relative underperformance of the underlying actively managed
funds as compared to their respective indices, partially offset by gains in the fourth quarter related to liability model assumption
updates for lapse rates.
• The net loss on credit default swaps was primarily due to losses on credit derivatives that assume credit risk as a part of replication
transactions, 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 weakening of the U.S. dollar against the
Japanese Yen.
In addition, 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 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, 2007, net realized capital loss related to derivatives used in non-qualifying strategies was primarily
due to the following:
• The net loss on GMWB related derivatives was primarily due to liability model assumption updates and model refinements made
during the year, including those for dynamic lapse behavior and correlations of market returns across underlying indices, as well as
other assumption updates made during the second quarter to reflect newly reliable market inputs for volatility.
• The net loss on credit derivatives that assume credit risk was due to credit spreads widening.
• The gain on the Japanese fixed annuity hedging instruments was primarily a result of weakening of the U.S. dollar against the
Japanese Yen.
See to Note 9 for additional disclosures regarding contingent credit related features in derivative agreements.