The Hartford 2014 Annual Report Download - page 196

Table of Contents
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For the year ended December 31, 2013 the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of
the following:
• The net loss related to the Japan fixed annuity payout hedge was primarily driven by a depreciation of the Japanese yen in relation to the U.S. dollar.
• The net loss on the macro hedge program was primarily due to an improvement in domestic equity markets, an increase in interest rates, and a
decline in equity volatility.
• The net gain related to the combined GMWB hedging program, which includes the GMWB product, reinsurance, and hedging derivatives, was
primarily driven by revaluing the liability for living benefits resulting from favorable policyholder behavior largely related to increased full
surrenders and liability assumption updates for partial lapses and withdrawal rates.
For the year ended December 31, 2012 the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily due to the
following:
• The net gain related to the combined GMWB hedging program, which includes the GMWB product, reinsurance, and hedging derivatives, was
primarily driven by liability model assumption updates largely related to a reduction in the reset assumptions to better align with actual experience,
outperformance of underlying actively managed funds compared to their respective indices, and lower equity volatility.
• The gain on credit derivatives that assume credit risk as part of replication transactions resulted from credit spread tightening.
• The net loss on the macro hedge program was primarily due to the passage of time, an improvement in domestic equity markets, and a decrease in
equity volatility.
• The net loss related to the Japan fixed annuity payout hedge was primarily driven by a depreciation of the Japanese yen in relation to the U.S. dollar,
the strengthening of the currency basis swap spread between the U.S. dollar and the Japanese yen, and a decline in U.S. interest rates.
Refer to Note 14 - Commitments and Contingencies for additional disclosures regarding contingent credit related features in derivative agreements.
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The Company enters into credit default swaps that assume credit risk of a single entity or referenced index 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 after the occurrence of the credit event. 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 standard and customized diversified portfolios of corporate issuers. The diversified portfolios of corporate issuers are
established within sector concentration limits and may be divided into tranches that possess different credit ratings.
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