Investments and Derivative Instruments

6 Months Ended

Jun. 30, 2012

Investments and Derivative Instruments [Abstract]

Investments and Derivative Instruments

Investments and Derivative Instruments

Significant Investment Accounting Policies

Recognition and Presentation of Other-Than-Temporary Impairments

The Company deems debt securities and certain equity securities with debt-like characteristics (collectively “debt securities”) to be other-than-temporarily impaired (“impaired”) if a security meets the following conditions: a) the Company intends to sell or it is more likely than not the Company will be required to sell the security before a recovery in value, or b) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell or it is more likely than not the Company will be required to sell the security before a recovery in value, a charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security. For those impaired debt securities which do not meet the first condition and for which the Company does not expect to recover the entire amortized cost basis, the difference between the security’s amortized cost basis and the fair value is separated into the portion representing a credit other-than-temporary impairment (“impairment”), which is recorded in net realized capital losses, and the remaining impairment, which is recorded in OCI. Generally, the Company determines a security’s credit impairment as the difference between its amortized cost basis and its best estimate of expected future cash flows discounted at the security’s effective yield prior to impairment. The remaining non-credit impairment, which is recorded in OCI, is the difference between the security’s fair value and the Company’s best estimate of expected future cash flows discounted at the security’s effective yield prior to the impairment, which typically represents current market liquidity and risk premiums. The previous amortized cost basis less the impairment recognized in net realized capital losses becomes the security’s new cost basis. The Company accretes the new cost basis to the estimated future cash flows over the expected remaining life of the security by prospectively adjusting the security’s yield, if necessary. The following table presents the change in non-credit impairments recognized in OCI as disclosed in the Company’s Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011, respectively.

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
OTTI losses recognized in OCI	$	(8	)	$	(8	)	$	(15	)	$	(72	)
Changes in fair value and/or sales	24			3			34			67
Tax and deferred acquisition costs	(3		)	1			(14		)	6
Change in OTTI losses recognized in OCI	$	13		$	(4	)	$	5		$	1

The Company’s evaluation of whether a credit impairment exists for debt securities includes, but is not limited to, the following factors: (a) changes in the financial condition of the security’s underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) changes in the financial condition, credit rating and near-term prospects of the issuer, (d) the extent to which the fair value has been less than the amortized cost of the security and (e) the payment structure of the security. The Company’s best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions and judgments regarding the future performance of the security. The Company’s best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, current and projected delinquency rates, and loan-to-value (“LTV”) ratios. In addition, for structured securities, the Company considers factors including, but not limited to, average cumulative collateral loss rates that vary by vintage year, commercial and residential property value declines that vary by property type and location and commercial real estate delinquency levels. These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries which may include estimating the underlying collateral value. In addition, projections of expected future debt security cash flows may change based upon new information regarding the performance of the issuer and/or underlying collateral such as changes in the projections of the underlying property value estimates.

For equity securities where the decline in the fair value is deemed to be other-than-temporary, a charge is recorded in net realized capital losses equal to the difference between the fair value and cost basis of the security. The previous cost basis less the impairment becomes the security’s new cost basis. The Company asserts its intent and ability to retain those equity securities deemed to be temporarily impaired until the price recovers. Once identified, these securities are systematically restricted from trading unless approved by a committee of investment and accounting professionals (“Committee”). The Committee will only authorize the sale of these securities based on predefined criteria that relate to events that could not have been reasonably foreseen. Examples of the criteria include, but are not limited to, the deterioration in the issuer’s financial condition, security price declines, a change in regulatory requirements or a major business combination or major disposition.

The primary factors considered in evaluating whether an impairment exists for an equity security include, but are not limited to: (a) the length of time and extent to which the fair value has been less than the cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on preferred stock dividends and (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery.

5. Investments and Derivative Instruments (continued)

Mortgage Loan Valuation Allowances

The Company’s security monitoring process reviews mortgage loans on a quarterly basis to identify potential credit losses. Commercial mortgage loans are considered to be impaired when management estimates that, based upon current information and events, it is probable that the Company will be unable to collect amounts due according to the contractual terms of the loan agreement. Criteria used to determine if an impairment exists include, but are not limited to: current and projected macroeconomic factors, such as unemployment rates, and property-specific factors such as rental rates, occupancy levels, LTV ratios and debt service coverage ratios (“DSCR”). In addition, the Company considers historic, current and projected delinquency rates and property values. These assumptions require the use of significant management judgment and include the probability and timing of borrower default and loss severity estimates. In addition, projections of expected future cash flows may change based upon new information regarding the performance of the borrower and/or underlying collateral such as changes in the projections of the underlying property value estimates.

For mortgage loans that are deemed impaired, a valuation allowance is established for the difference between the carrying amount and the Company’s share of either (a) the present value of the expected future cash flows discounted at the loan’s effective interest rate, (b) the loan’s observable market price or, most frequently, (c) the fair value of the collateral. A valuation allowance has been established for either individual loans or as a projected loss contingency for loans with an LTV ratio of 90% or greater and consideration of other credit quality factors, including DSCR. Changes in valuation allowances are recorded in net realized capital gains and losses. Interest income on impaired loans is accrued to the extent it is deemed collectible and the loans continue to perform under the original or restructured terms. Interest income ceases to accrue for loans when it is probable that the Company will not receive interest and principal payments according to the contractual terms of the loan agreement, or if a loan is more than 60 days past due. Loans may resume accrual status when it is determined that sufficient collateral exists to satisfy the full amount of the loan and interest payments, as well as when it is probable cash will be received in the foreseeable future. Interest income on defaulted loans is recognized when received.

Net Realized Capital Gains (Losses)

	Three Months Ended June 30,						Six Months Ended June 30,
(Before-tax)	2012			2011			2012			2011
Gross gains on sales	$	246		$	261		$	505		$	322
Gross losses on sales	(159		)	(98		)	(256		)	(231		)
Net OTTI losses recognized in earnings	(98		)	(23		)	(127		)	(78		)
Valuation allowances on mortgage loans	—			26			1			23
Japanese fixed annuity contract hedges, net [1]	2			6			(18		)	(11		)
Periodic net coupon settlements on credit derivatives/Japan	4			(2		)	(1		)	(9		)
Results of variable annuity hedge program
GMWB derivatives, net	(115		)	(33		)	70			23
U.S. macro hedge program	6			(17		)	(183		)	(101		)
Total U.S. program	(109		)	(50		)	(113		)	(78		)
International program	753			52			(466		)	(267		)
Total results of variable annuity hedge program	644			2			(579		)	(345		)
Other, net [2]	(50		)	(103		)	154			(5		)
Net realized capital gains (losses)	$	589		$	69		$	(321	)	$	(334	)

[1] Relates to the Japanese fixed annuity product (adjustment of product liability for changes in spot currency exchange rates, related derivative hedging instruments, excluding net period coupon settlements, and Japan FVO securities).

[2] Primarily consists of gains and losses on non-qualifying derivatives and fixed maturities, FVO, Japan 3Win related foreign currency swaps, and other investment gains and losses.

Net realized capital gains and losses from investment sales, after deducting the life and pension policyholders’ share for certain products, are reported as a component of revenues and are determined on a specific identification basis. Gross gains and losses on sales and impairments previously reported as unrealized gains (losses) in AOCI were $(11) and $122 , respectively, for the three and six months ended June 30, 2012 and $140 and $13 for the three and six months ended June 30, 2011, respectively. Proceeds from sales of AFS securities totaled $10.7 billion and $23.4 billion for the three and six months ended June 30, 2012, respectively, and $10.1 billion and $17.5 billion for the three and six months ended June 30, 2011, respectively.

5. Investments and Derivative Instruments (continued)

Other-Than-Temporary Impairment Losses

The following table presents a roll-forward of the Company’s cumulative credit impairments on debt securities held.

	Three Months Ended June 30,						Six Months Ended June 30,
(Before-tax)	2012			2011			2012			2011
Balance as of beginning of period	$	(1,530	)	$	(2,003	)	$	(1,676	)	$	(2,072	)
Additions for credit impairments recognized on [1]:
Securities not previously impaired	(4		)	(8		)	(16		)	(36		)
Securities previously impaired	(5		)	(8		)	(10		)	(25		)
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period	128			83			288			192
Securities due to an increase in expected cash flows	4			3			7			8
Balance as of end of period	$	(1,407	)	$	(1,933	)	$	(1,407	)	$	(1,933	)

[1] These additions are included in the net OTTI losses recognized in earnings in the Condensed Consolidated Statements of Operations.

Available-for-Sale Securities

The following table presents the Company’s AFS securities by type.

	June 30, 2012												December 31, 2011
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Non-Credit OTTI [1]			Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Non-Credit OTTI [1]
ABS	$	3,190	$	59	$	(247	)	$	3,002	$	(3	)	$	3,430	$	55	$	(332	)	$	3,153	$	(7	)
CDOs [2]	3,311		45		(268		)	3,037		(38		)	2,819		16		(348		)	2,487		(44		)
CMBS	6,368		317		(339		)	6,346		(17		)	7,192		271		(512		)	6,951		(31		)
Corporate [2]	39,393		4,050		(460		)	42,983		(2		)	41,161		3,661		(739		)	44,011		—
Foreign govt./govt. agencies	3,476		135		(13		)	3,598		—			2,030		141		(10		)	2,161		—
Municipal	13,068		1,100		(43		)	14,125		—			12,557		775		(72		)	13,260		—
RMBS	7,084		283		(386		)	6,981		(108		)	5,961		252		(456		)	5,757		(105		)
U.S. Treasuries	4,950		215		(10		)	5,155		—			3,828		203		(2		)	4,029		—
Total fixed maturities, AFS	80,840		6,204		(1,766		)	85,227		(168		)	78,978		5,374		(2,471		)	81,809		(187		)
Equity securities, AFS	859		71		(79		)	851		—			1,056		68		(203		)	921		—
Total AFS securities	$	81,699	$	6,275	$	(1,845	)	$	86,078	$	(168	)	$	80,034	$	5,442	$	(2,674	)	$	82,730	$	(187	)

[1] Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses as of June 30, 2012 and December 31, 2011.

[2] Gross unrealized gains (losses) exclude the change in fair value of bifurcated embedded derivative features of certain securities. Changes in fair value are recorded in net realized capital gains (losses).

5. Investments and Derivative Instruments (continued)

The following table presents the Company’s fixed maturities, AFS, by contractual maturity year.

	June 30, 2012
Contractual Maturity	Amortized Cost		Fair Value
One year or less	$	2,240	$	2,277
Over one year through five years	15,331		16,139
Over five years through ten years	15,641		16,905
Over ten years	27,675		30,540
Subtotal	60,887		65,861
Mortgage-backed and asset-backed securities	19,953		19,366
Total fixed maturities, AFS	$	80,840	$	85,227

Estimated maturities may differ from contractual maturities due to security call or prepayment provisions. Due to the potential for variability in payment speeds (i.e. prepayments or extensions), mortgage-backed and asset-backed securities are not categorized by contractual maturity.

Securities Unrealized Loss Aging

The following tables present the Company’s unrealized loss aging for AFS securities by type and length of time the security was in a continuous unrealized loss position.

	June 30, 2012
	Less Than 12 Months							12 Months or More							Total
	Amortized Cost		Fair Value		Unrealized Losses			Amortized Cost		Fair Value		Unrealized Losses			Amortized Cost		Fair Value		Unrealized Losses
ABS	$	168	$	167	$	(1	)	$	1,110	$	864	$	(246	)	$	1,278	$	1,031	$	(247	)
CDOs [1]	3		2		(1		)	3,208		2,891		(267		)	3,211		2,893		(268		)
CMBS	400		366		(34		)	2,143		1,838		(305		)	2,543		2,204		(339		)
Corporate	2,493		2,418		(75		)	2,576		2,191		(385		)	5,069		4,609		(460		)
Foreign govt./govt. agencies	557		546		(11		)	30		28		(2		)	587		574		(13		)
Municipal	699		689		(10		)	232		199		(33		)	931		888		(43		)
RMBS	131		131		—			1,288		902		(386		)	1,419		1,033		(386		)
U.S. Treasuries	1,913		1,903		(10		)	—		—		—			1,913		1,903		(10		)
Total fixed maturities	6,364		6,222		(142		)	10,587		8,913		(1,624		)	16,951		15,135		(1,766		)
Equity securities	183		178		(5		)	369		295		(74		)	552		473		(79		)
Total securities in an unrealized loss	$	6,547	$	6,400	$	(147	)	$	10,956	$	9,208	$	(1,698	)	$	17,503	$	15,608	$	(1,845	)

5. Investments and Derivative Instruments (continued)

	December 31, 2011
	Less Than 12 Months							12 Months or More							Total
	Amortized Cost		Fair Value		Unrealized Losses			Amortized Cost		Fair Value		Unrealized Losses			Amortized Cost		Fair Value		Unrealized Losses
ABS	$	629	$	594	$	(35	)	$	1,169	$	872	$	(297	)	$	1,798	$	1,466	$	(332	)
CDOs	81		59		(22		)	2,709		2,383		(326		)	2,790		2,442		(348		)
CMBS	1,297		1,194		(103		)	2,144		1,735		(409		)	3,441		2,929		(512		)
Corporate [1]	4,388		4,219		(169		)	3,268		2,627		(570		)	7,656		6,846		(739		)
Foreign govt./govt. agencies	218		212		(6		)	51		47		(4		)	269		259		(10		)
Municipal	299		294		(5		)	627		560		(67		)	926		854		(72		)
RMBS	415		330		(85		)	1,206		835		(371		)	1,621		1,165		(456		)
U.S. Treasuries	343		341		(2		)	—		—		—			343		341		(2		)
Total fixed maturities	7,670		7,243		(427		)	11,174		9,059		(2,044		)	18,844		16,302		(2,471		)
Equity securities	167		138		(29		)	439		265		(174		)	606		403		(203		)
Total securities in an unrealized loss	$	7,837	$	7,381	$	(456	)	$	11,613	$	9,324	$	(2,218	)	$	19,450	$	16,705	$	(2,674	)

[1] Unrealized losses exclude the change in fair value of bifurcated embedded derivative features of certain securities. Changes in fair value are recorded in net realized capital gains (losses).

As of June 30, 2012, AFS securities in an unrealized loss position, comprised of 2,415 securities, primarily related to commercial real estate, corporate securities within the financial services sector and RMBS which have experienced price deterioration. As of June 30, 2012, 79% of these securities were depressed less than 20% of cost or amortized cost. The decline in unrealized losses during 2012 was primarily attributable to credit spread tightening and declining interest rates.

Most of the securities depressed for twelve months or more relate to structured securities with exposure to commercial and residential real estate, as well as certain floating rate corporate securities or securities with greater than 10 years to maturity, concentrated in the financial services sector. Current market spreads continue to be significantly wider than spreads at the security's respective purchase date for structured securities with exposure to commercial and residential real estate largely due to the economic and market uncertainties regarding future performance of commercial and residential real estate. The majority of these securities have a floating-rate coupon referenced to a market index that has declined substantially. In addition, equity securities include investment grade perpetual preferred securities that contain “debt-like” characteristics where the decline in fair value is not attributable to issuer-specific credit deterioration, none of which have, nor are expected to, miss a periodic dividend payment. These securities have been depressed due to the securities’ floating-rate coupon in the current low interest rate environment, general market credit spread widening since the date of purchase and the long-dated nature of the securities. The Company neither has an intention to sell nor does it expect to be required to sell the securities outlined above.

Mortgage Loans

	June 30, 2012							December 31, 2011
	Amortized Cost [1]		Valuation Allowance			Carrying Value		Amortized Cost [1]		Valuation Allowance			Carrying Value
Commercial	$	6,962	$	(87	)	$	6,875	$	5,830	$	(102	)	$	5,728
Total mortgage loans	$	6,962	$	(87	)	$	6,875	$	5,830	$	(102	)	$	5,728

[1] Amortized cost represents carrying value prior to valuation allowances, if any.

As of June 30, 2012 and December 31, 2011, the carrying value of mortgage loans associated with the valuation allowance was $548 and $621, respectively. Included in the table above are mortgage loans held-for-sale with a carrying value and valuation allowance of $57 and $4, respectively, as of June 30, 2012 and $74 and $4, respectively, as of December 31, 2011. The carrying value of these loans is included in mortgage loans in the Company’s Condensed Consolidated Balance Sheets. As of June 30, 2012, loans within the Company’s mortgage loan portfolio that have had extensions or restructurings other than what is allowable under the original terms of the contract are immaterial.

5. Investments and Derivative Instruments (continued)

The following table presents the activity within the Company’s valuation allowance for mortgage loans. These loans have been evaluated both individually and collectively for impairment. Loans evaluated collectively for impairment are immaterial.

	2012			2011
Balance as of January 1	$	(102	)	$	(155	)
(Additions)/Reversals	1			(27		)
Deductions	14			11
Balance as of June 30	$	(87	)	$	(171	)

The current weighted-average LTV ratio of the Company’s commercial mortgage loan portfolio was 65% as of June 30, 2012, while the weighted-average LTV ratio at origination of these loans was 63%. LTV ratios compare the loan amount to the value of the underlying property collateralizing the loan. The loan values are updated no less than annually through property level reviews of the portfolio. Factors considered in the property valuation include, but are not limited to, actual and expected property cash flows, geographic market data and capitalization rates. DSCRs compare a property’s net operating income to the borrower’s principal and interest payments. The current weighted average DSCR of the Company’s commercial mortgage loan portfolio was 2.05x as of June 30, 2012. The Company held only two delinquent commercial mortgage loans past due by 90 days or more. The total carrying value and valuation allowance of these loans totaled $5 and $50, respectively, as of June 30, 2012, and are not accruing income.

The following table presents the carrying value of the Company’s commercial mortgage loans by LTV and DSCR.

Commercial Mortgage Loans Credit Quality
	June 30, 2012			December 31, 2011
Loan-to-value	Carrying Value		Avg. Debt-Service Coverage Ratio	Carrying Value		Avg. Debt-Service Coverage Ratio
Greater than 80%	$	566	1.45x	$	707	1.45x
65% - 80%	2,811		1.76x	2,384		1.60x
Less than 65%	3,498		2.39x	2,637		2.40x
Total commercial mortgage loans	$	6,875	2.05x	$	5,728	1.94x

The following tables present the carrying value of the Company’s mortgage loans by region and property type.

Mortgage Loans by Region
	June 30, 2012				December 31, 2011
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
East North Central	$	148	2.2	%	$	94	1.6	%
Middle Atlantic	499		7.3	%	508		8.9	%
Mountain	124		1.8	%	125		2.2	%
New England	336		4.9	%	294		5.1	%
Pacific	1,976		28.7	%	1,690		29.5	%
South Atlantic	1,434		20.9	%	1,149		20.1	%
West North Central	16		0.2	%	30		0.5	%
West South Central	414		6.0	%	224		3.9	%
Other [1]	1,928		28.0	%	1,614		28.2	%
Total mortgage loans	$	6,875	100.0	%	$	5,728	100.0	%

[1] Primarily represents loans collateralized by multiple properties in various regions.

5. Investments and Derivative Instruments (continued)

Mortgage Loans by Property Type
	June 30, 2012				December 31, 2011
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
Commercial
Agricultural	$	179	2.6	%	$	249	4.3	%
Industrial	2,065		30.1	%	1,747		30.5	%
Lodging	91		1.3	%	93		1.6	%
Multifamily	1,391		20.2	%	1,070		18.7	%
Office	1,404		20.4	%	1,078		18.8	%
Retail	1,494		21.7	%	1,234		21.5	%
Other	251		3.7	%	257		4.6	%
Total mortgage loans	$	6,875	100.0	%	$	5,728	100.0	%

Variable Interest Entities

The Company is involved with various special purpose entities and other entities that are deemed to be VIEs primarily as a collateral manager and as an investor through normal investment activities, as well as a means of accessing capital. A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest or lacks sufficient funds to finance its own activities without financial support provided by other entities.

The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in the VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. Based on the Company’s assessment, if it determines it is the primary beneficiary, the Company consolidates the VIE in the Company’s Condensed Consolidated Financial Statements.

Consolidated VIEs

The following table presents the carrying value of assets and liabilities, and the maximum exposure to loss relating to the VIEs for which the Company is the primary beneficiary. Creditors have no recourse against the Company in the event of default by these VIEs nor does the Company have any implied or unfunded commitments to these VIEs. The Company’s financial or other support provided to these VIEs is limited to its investment management services and original investment.

	June 30, 2012						December 31, 2011
	Total Assets		Total Liabilities  [1]		Maximum Exposure to Loss [2]		Total Assets		Total Liabilities  [1]		Maximum Exposure to Loss [2]
CDOs [3]	$	459	$	438	$	17	$	491	$	471	$	29
Investment funds [4]	157		—		157		—		—		—
Limited partnerships	7		1		6		7		—		7
Total	$	623	$	439	$	180	$	498	$	471	$	36

[1] Included in other liabilities in the Company’s Condensed Consolidated Balance Sheets.

[2] The maximum exposure to loss represents the maximum loss amount that the Company could recognize as a reduction in net investment income or as a realized capital loss and is the cost basis of the Company’s investment.

[3] Total assets included in fixed maturities, AFS, and fixed maturities, FVO, in the Company’s Condensed Consolidated Balance Sheets.

[4] Total assets included in fixed maturities, AFS, and short-term investments in the Company’s Condensed Consolidated Balance Sheets.

CDOs represent structured investment vehicles for which the Company has a controlling financial interest as it provides collateral management services, earns a fee for those services and also holds investments in the securities issued by these vehicles. Investment funds represents wholly-owned fixed income funds established in 2012 for which the Company has exclusive management and control of this investment which is the activity that most significantly impacts its economic performance. Limited partnerships represent one hedge fund for which the Company holds a majority interest in the fund as an investment.

5. Investments and Derivative Instruments (continued)

Non-Consolidated VIEs

The Company holds a significant variable interest for one VIE for which it is not the primary beneficiary and, therefore, was not consolidated on the Company’s Condensed Consolidated Balance Sheets. This VIE represents a contingent capital facility (“facility”) that has been held by the Company since February 2007 for which the Company has no implied or unfunded commitments. Assets and liabilities recorded for the facility were $26 and $26, respectively as of June 30, 2012 and $28 and $28, respectively, as of December 31, 2011. Additionally, the Company has a maximum exposure to loss of $3 and $3, respectively, as of June 30, 2012 and December 31, 2011, which represents the issuance costs that were incurred to establish the facility. The Company does not have a controlling financial interest as it does not manage the assets of the facility nor does it have the obligation to absorb losses or the right to receive benefits that could potentially be significant to the facility, as the asset manager has significant variable interest in the vehicle. The Company’s financial or other support provided to the facility is limited to providing ongoing support to cover the facility’s operating expenses. For further information on the facility, see Note 14 of the Notes to Consolidated Financial Statements included in The Hartford’s 2011 Form 10-K Annual Report.

In addition, the Company, through normal investment activities, makes passive investments in structured securities issued by VIEs for which the Company is not the manager which are included in ABS, CDOs, CMBS and RMBS in the Available-for-Sale Securities table and fixed maturities, FVO, in the Company’s Condensed Consolidated Balance Sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the relative size of the Company’s investment in comparison to the principal amount of the structured securities issued by the VIEs, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits and the Company’s inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of the Company’s investment.

Repurchase Agreements and Dollar Roll Agreements

The Company enters into repurchase agreements and dollar roll agreements to earn incremental spread income. A repurchase agreement is a transaction in which one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous agreement to repurchase the same securities at a specified price at a later date. A dollar roll is a type of repurchase agreement where a mortgage backed security is sold with an agreement to repurchase substantially the same security at a specified time in the future. These transactions are generally short-term in nature, and therefore, the carrying amounts of these instruments approximate fair value.

As part of repurchase and dollar roll agreements, the Company transfers U.S. government and government agency securities and receives cash as collateral. For the repurchase agreements, the Company obtains collateral in an amount equal to at least 95% of the fair value of the securities transferred, and the agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary. The cash received from the repurchase program is typically invested in short-term investments or fixed maturities. The Company accounts for the repurchase agreements and dollar roll transactions as collateralized borrowings. The securities transferred under repurchase agreements and dollar roll agreements are included in fixed maturity, available-for-sale securities with the obligation to repurchase those securities recorded in Other Liabilities on the Company's Condensed Consolidated Balance Sheets. The fair value of the securities transferred was $1.6 billion as of June 30, 2012. The obligation for securities sold under agreement to repurchase was $(1.6) billion as of June 30, 2012.

Derivative Instruments

The Company utilizes a variety of over-the-counter and exchange traded derivative instruments as a part of its overall risk management strategy, as well as to enter into replication transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, credit spread, issuer default, price, and currency exchange rate risk or volatility. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that would otherwise be permissible investments under the Company’s investment policies. The Company also purchases and issues financial instruments and products that either are accounted for as free-standing derivatives, such as certain reinsurance contracts, or may contain features that are deemed to be embedded derivative instruments, such as the GMWB rider included with certain variable annuity products.

Cash flow hedges

Interest rate swaps

Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed maturity securities. These derivatives are predominantly used to better match cash receipts from assets with cash disbursements required to fund liabilities. The Company also enters into forward starting swap agreements to hedge the interest rate exposure related to the purchase of fixed-rate securities. These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.

5. Investments and Derivative Instruments (continued)

Foreign currency swaps

Foreign currency swaps are used to convert foreign currency-denominated cash flows related to certain investment receipts and liability payments to U.S. dollars in order to reduce cash flow fluctuations due to changes in currency rates.

Fair value hedges

Interest rate swaps

Interest rate swaps are used to hedge the changes in fair value of certain fixed rate liabilities and fixed maturity securities due to fluctuations in interest rates.

Foreign currency swaps

Foreign currency swaps are used to hedge the changes in fair value of certain foreign currency-denominated fixed rate liabilities due to changes in foreign currency rates by swapping the fixed foreign payments to floating rate U.S. dollar denominated payments.

Non-qualifying strategies

Interest rate swaps, swaptions, caps, floors, and futures

The Company uses interest rate swaps, swaptions, caps, floors, and futures to manage duration between assets and liabilities in certain investment portfolios. In addition, the Company enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap. As of June 30, 2012 and December 31, 2011, the notional amount of interest rate swaps in offsetting relationships was $7.5 billion and $7.8 billion, respectively.

Foreign currency swaps and forwards

The Company enters into foreign currency swaps and forwards to convert the foreign currency exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars.

Japan 3Win foreign currency swaps

Prior to the second quarter of 2009, The Company offered certain variable annuity products with a guaranteed minimum income benefit (“GMIB”) rider through a wholly-owned Japanese subsidiary. The GMIB rider is reinsured to a wholly-owned U.S. subsidiary, which invests in U.S. dollar denominated assets to support the liability. The U.S. subsidiary entered into pay U.S. dollar, receive yen swap contracts to hedge the currency and interest rate exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments.

Japanese fixed annuity hedging instruments

Prior to the second quarter of 2009, The Company offered a yen denominated fixed annuity product through a wholly-owned Japanese subsidiary and reinsured to a wholly-owned U.S. subsidiary. The U.S. subsidiary invests in U.S. dollar denominated securities to support the yen denominated fixed liability payments and entered into currency rate swaps to hedge the foreign currency exchange rate and yen interest rate exposures that exist as a result of U.S. dollar assets backing the yen denominated liability.

Credit derivatives that purchase credit protection

Credit default swaps are used to purchase credit protection on an individual entity or referenced index to economically hedge against default risk and credit-related changes in value on fixed maturity securities. These contracts require the Company to pay a periodic fee in exchange for compensation from the counterparty should the referenced security issuers experience a credit event, as defined in the contract.

Credit derivatives that assume credit risk

Credit default swaps are used to assume credit risk related to an individual entity, referenced index, or asset pool, as a part of replication transactions. These contracts entitle the Company to receive a periodic fee in exchange for an obligation to compensate the derivative counterparty should the referenced security issuers experience a credit event, as defined in the contract. The Company is also exposed to credit risk due to credit derivatives embedded within certain fixed maturity securities. These securities are primarily comprised of structured securities that contain credit derivatives that reference a standard index of corporate securities.

Credit derivatives in offsetting positions

The Company enters into credit default swaps to terminate existing credit default swaps, thereby offsetting the changes in value of the original swap going forward.

5. Investments and Derivative Instruments (continued)

Equity index swaps and options

The Company offers certain equity indexed products, which may contain an embedded derivative that requires bifurcation. The Company enters into S&P index swaps and options to economically hedge the equity volatility risk associated with these embedded derivatives. In addition, during the third quarter of 2011, the Company entered into equity index options and futures with the purpose of hedging the impact of an adverse equity market environment on the investment portfolio.

U.S. GMWB product derivatives

The Company currently offers certain variable annuity products with a GMWB rider in the U.S. Effective May 1, 2012, all new U.S. annuity policies, including the GMWB rider, sold by the Company are reinsured to a third party. The GMWB is a bifurcated embedded derivative that provides the policyholder with a guaranteed remaining balance (“GRB”) if the account value is reduced to zero through a combination of market declines and withdrawals. The GRB is generally equal to premiums less withdrawals. Certain contract provisions can increase the GRB at contractholder election or after the passage of time. The notional value of the embedded derivative is the GRB.

U.S. GMWB reinsurance contracts

The Company has entered into reinsurance arrangements to offset a portion of its risk exposure to the GMWB for the remaining lives of covered variable annuity contracts. Reinsurance contracts covering GMWB are accounted for as free-standing derivatives. The notional amount of the reinsurance contracts is the GRB amount.

U.S. GMWB hedging instruments

The Company enters into derivative contracts to partially hedge exposure associated with a portion of the GMWB liabilities that are not reinsured. These derivative contracts include customized swaps, interest rate swaps and futures, and equity swaps, options, and futures, on certain indices including the S&P 500 index, EAFE index, and NASDAQ index.

The following table represents notional and fair value for U.S. GMWB hedging instruments.

	Notional Amount				Fair Value
	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Customized swaps	$	8,142	$	8,389	$	329	$	385
Equity swaps, options, and futures	5,621		5,320		385		498
Interest rate swaps and futures	4,390		2,697		96		11
Total	$	18,153	$	16,406	$	810	$	894

U.S. macro hedge program

The Company utilizes equity options and futures contracts to partially hedge against a decline in the equity markets and the resulting statutory surplus and capital impact primarily arising from guaranteed minimum death benefit (“GMDB”), GMIB and GMWB obligations.

The following table represents notional and fair value for the U.S. macro hedge program.

	Notional Amount				Fair Value
	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Equity futures	$	—	$	59	$	—	$	—
Equity options	5,278		6,760		180		357
Total	$	5,278	$	6,819	$	180	$	357

International program product derivatives

The Company formerly offered certain variable annuity products with GMWB or GMAB riders in the U.K. and Japan. The GMWB and GMAB are bifurcated embedded derivatives. The GMWB provides the policyholder with a GRB if the account value is reduced to zero through a combination of market declines and withdrawals. The GRB is generally equal to premiums less withdrawals. Certain contract provisions can increase the GRB at contractholder election or after the passage of time. The GMAB provides the policyholder with their initial deposit in a lump sum after a specified waiting period. The notional amount of the embedded derivatives are the foreign currency denominated GRBs converted to U.S. dollars at the current foreign spot exchange rate as of the reporting period date.

5. Investments and Derivative Instruments (continued)

International program hedging instruments

The Company utilizes equity futures, options and swaps, and currency forwards and options to partially hedge against a decline in the debt and equity markets or changes in foreign currency exchange rates and the resulting statutory surplus and capital impact primarily arising from GMDB, GMIB and GMWB obligations issued in the U.K. and Japan. The Company also enters into foreign currency denominated interest rate swaps and swaptions to hedge the interest rate exposure related to the potential annuitization of certain benefit obligations.

The following table represents notional and fair value for the international program hedging instruments.

	Notional Amount				Fair Value
	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Currency forwards [1]	$	15,565	$	8,622	$	33	$	446
Currency options	10,842		7,357		142		127
Equity futures	4,052		3,835		—		—
Equity options	4,111		1,565		178		74
Equity swaps [2]	1,910		392		21		(8		)
Interest rate futures	983		739		—		—
Interest rate swaps and swaptions	26,523		11,216		214		111
Total	$	63,986	$	33,726	$	588	$	750

[1] As of June 30, 2012 and December 31, 2011 net notional amounts are $5.0 billion and $7.2 billion, respectively, which include $10.3 billion and $7.9 billion, respectively, related to long positions and $5.3 billion and $0.7 billion, respectively, related to short positions.

[2] As of June 30, 2012 the net notional amount is $0.3 billion, which includes $1.1 billion related to long positions and $0.8 billion related to short positions. As of December 31, 2011 the net notional amount of $0.4 billion related to long positions only.

Contingent capital facility put option

The Company entered into a put option agreement that provides the Company the right to require a third-party trust to purchase, at any time, The Hartford’s junior subordinated notes in a maximum aggregate principal amount of $500. Under the put option agreement, The Hartford will pay premiums on a periodic basis and will reimburse the trust for certain fees and ordinary expenses.

Derivative Balance Sheet Classification

The table below summarizes the balance sheet classification of the Company’s derivative related fair value amounts, as well as the gross asset and liability fair value amounts. For reporting purposes, the Company offsets the fair value amounts, income accruals, and cash collateral held related to derivative instruments executed in a legal entity and with the same counterparty under a master netting agreement, which provides the Company with the legal right of offset. The fair value amounts presented below do not include income accruals or cash collateral held amounts, which are netted with derivative fair value amounts to determine balance sheet presentation. Derivative fair value reported as liabilities after taking into account the master netting agreements, is $2.5 billion and $3.2 billion as of June 30, 2012, and December 31, 2011, respectively. Derivatives in the Company’s separate accounts are not included because the associated gains and losses accrue directly to policyholders. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the table below. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of the Company’s derivative activity. Notional amounts are not necessarily reflective of credit risk.

5. Investments and Derivative Instruments (continued)

	Net Derivatives										Asset Derivatives				Liability Derivatives
	Notional Amount				Fair Value						Fair Value				Fair Value
Hedge Designation/ Derivative Type	Jun 30, 2012		Dec 31, 2011		Jun 30, 2012			Dec 31, 2011			Jun 30, 2012		Dec 31, 2011		Jun 30, 2012			Dec 31, 2011
Cash flow hedges
Interest rate swaps	$	8,286	$	8,652	$	328		$	329		$	328	$	329	$	—		$	—
Foreign currency swaps	195		291		(17		)	6			7		30		(24		)	(24		)
Total cash flow hedges	8,481		8,943		311			335			335		359		(24		)	(24		)
Fair value hedges
Interest rate swaps	1,091		1,007		(75		)	(78		)	—		—		(75		)	(78		)
Foreign currency swaps	185		677		57			(39		)	57		63		—			(102		)
Total fair value hedges	1,276		1,684		(18		)	(117		)	57		63		(75		)	(180		)
Non-qualifying strategies
Interest rate contracts
Interest rate swaps, caps, floors, and futures	9,335		10,144		(565		)	(583		)	595		531		(1,160		)	(1,114		)
Foreign exchange contracts
Foreign currency swaps and forwards	436		380		4			(12		)	22		6		(18		)	(18		)
Japan 3Win foreign currency swaps	2,054		2,054		63			184			63		184		—			—
Japanese fixed annuity hedging instruments	1,907		1,945		399			514			415		540		(16		)	(26		)
Credit contracts
Credit derivatives that purchase credit protection	1,103		1,721		9			36			24		56		(15		)	(20		)
Credit derivatives that assume credit risk [1]	3,870		2,952		(527		)	(648		)	8		2		(535		)	(650		)
Credit derivatives in offsetting positions	9,272		8,189		(45		)	(57		)	153		164		(198		)	(221		)
Equity contracts
Equity index swaps and options	631		1,501		39			27			53		40		(14		)	(13		)
Variable annuity hedge program
U.S. GMWB product derivatives [2]	31,802		34,569		(2,203		)	(2,538		)	—		—		(2,203		)	(2,538		)
U.S. GMWB reinsurance contracts	6,445		7,193		376			443			376		443		—			—
U.S. GMWB hedging instruments	18,153		16,406		810			894			954		1,022		(144		)	(128		)
U.S. macro hedge program	5,278		6,819		180			357			180		357		—			—
International program product derivatives [2]	2,573		2,710		(57		)	(71		)	—		—		(57		)	(71		)
International program hedging instruments	63,986		33,726		588			750			1,340		887		(752		)	(137		)
Other
Contingent capital facility put option	500		500		26			28			26		28		—			—
Total non-qualifying strategies	157,345		130,809		(903		)	(676		)	4,209		4,260		(5,112		)	(4,936		)
Total cash flow hedges, fair value hedges, and non-qualifying strategies	$	167,102	$	141,436	$	(610	)	$	(458	)	$	4,601	$	4,682	$	(5,211	)	$	(5,140	)
Balance Sheet Location
Fixed maturities, available-for-sale	$	703	$	703	$	(50	)	$	(72	)	$	—	$	—	$	(50	)	$	(72	)
Other investments	48,652		60,227		1,486			2,331			1,990		3,165		(504		)	(834		)
Other liabilities	76,837		35,944		(148		)	(538		)	2,235		1,074		(2,383		)	(1,612		)
Consumer notes	35		35		(4		)	(4		)	—		—		(4		)	(4		)
Reinsurance recoverables	6,445		7,193		376			443			376		443		—			—
Other policyholder funds and benefits payable	34,430		37,334		(2,270		)	(2,618		)	—		—		(2,270		)	(2,618		)
Total derivatives	$	167,102	$	141,436	$	(610	)	$	(458	)	$	4,601	$	4,682	$	(5,211	)	$	(5,140	)

[1] The derivative instruments related to this strategy are held for other investment purposes.

[2] These derivatives are embedded within liabilities and are not held for risk management purposes.

5. Investments and Derivative Instruments (continued)

Change in Notional Amount

The net increase in notional amount of derivatives since December 31, 2011, was primarily due to the following:

• The $64.0 billion notional amount related to the international program hedging instruments as of June 30, 2012, consisted of $57.9 billion of long positions and $6.1 billion of offsetting short positions, resulting in a net notional amount of $51.8 billion. The $33.7 billion notional amount as of December 31, 2011, consisted of $33.0 billion of long positions and $0.7 billion of offsetting short positions, resulting in a net notional amount of $32.3 billion. The increase in net notional of $19.5 billion primarily resulted from The Company increasing its hedging of interest rate exposure.

Change in Fair Value

The net decrease in the total fair value of derivative instruments since December 31, 2011, was primarily related to the following:

• The fair value related to the international program hedging instruments decreased as a result an improvement in global and domestic equity markets and depreciation of the Japanese yen in relation to the euro and the U.S. dollar.

• The fair value related to the U.S. macro hedge program decreased due to an improvement in domestic equity markets, time decay, and lower equity volatility.

• The fair value related to the Japanese fixed annuity hedging instruments and Japan 3Win foreign currency swaps decreased primarily due to depreciation of the Japanese yen in relation to the U.S. dollar and strengthening of the currency basis swap spread between U.S. dollar and Japanese yen.

• The increase in fair value related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily due to favorable policyholder behavior.

Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current period earnings. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.

The following table presents the components of the gain or loss on derivatives that qualify as cash flow hedges:

Derivatives in Cash Flow Hedging Relationships

	Gain (Loss) Recognized in OCI on Derivative (Effective Portion)										Net Realized Capital Gains (Losses) Recognized in Income on Derivative (Ineffective Portion)
	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
	2012			2011		2012			2011		2012		2011		2012		2011
Interest rate swaps	$	176		$	148	$	143		$	82	$	—	$	—	$	—	$	(2	)
Foreign currency swaps	(24		)	—		(29		)	—		—		—		—		—
Total	$	152		$	148	$	114		$	82	$	—	$	—	$	—	$	(2	)

Derivatives in Cash Flow Hedging Relationships

		Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
		Three Months Ended June 30,					Six Months Ended June 30,
	Location	2012			2011		2012			2011
Interest rate swaps	Net realized capital gain/(loss)	$	1		$	2	$	6		$	4
Interest rate swaps	Net investment income	38			31		74			63
Foreign currency swaps	Net realized capital gain/(loss)	(11		)	3		(8		)	8
Total		$	28		$	36	$	72		$	75

5. Investments and Derivative Instruments (continued)

As of June 30, 2012, 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 $123. 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 forecasted transactions, excluding interest payments on existing variable-rate financial instruments) is approximately three years.

During the three months and six months ended June 30, 2012, the Company had $15 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. During the three months and six months ended June 30, 2011, the Company had no 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.

Fair Value Hedges

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The Company includes the gain or loss on the derivative in the same line item as the offsetting loss or gain on the hedged item. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.

The Company recognized in income gains (losses) representing the ineffective portion of fair value hedges as follows:

Derivatives in Fair-Value Hedging Relationships

	Gain or (Loss) Recognized in Income [1]
	Three Months Ended June 30,												Six Months Ended June 30,
	2012						2011						2012						2011
	Derivative			Hedge Item			Derivative			Hedge Item			Derivative			Hedge Item			Derivative			Hedge Item
Interest rate swaps
Net realized capital gain/(loss)	$	(16	)	$	13		$	(27	)	$	26		$	(5	)	$	3		$	(17	)	$	17
Foreign currency swaps
Net realized capital gain/(loss)	(11		)	11			22			(22		)	(2		)	2			36			(36		)
Benefits, losses and loss adjustment expenses	5			(5		)	(1		)	1			2			(2		)	(9		)	9
Total	$	(22	)	$	19		$	(6	)	$	5		$	(5	)	$	3		$	10		$	(10	)

[1] The amounts presented do not include the periodic net coupon settlements of the derivative or the coupon income (expense) related to the hedged item. The net of the amounts presented represents the ineffective portion of the hedge.

5. Investments and Derivative Instruments (continued)

Non-qualifying Strategies

For non-qualifying strategies, including embedded derivatives that are required to be bifurcated from their host contracts and accounted for as derivatives, the gain or loss on the derivative is recognized currently in earnings within net realized capital gains (losses). The following table presents the gain or loss recognized in income on non-qualifying strategies:

Derivatives Used in Non-Qualifying Strategies

Gain or (Loss) Recognized within Net Realized Capital Gains and Losses

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Interest rate contracts
Interest rate swaps, caps, floors, and forwards	$	(17	)	$	(4	)	$	(15	)	$	1
Foreign exchange contracts
Foreign currency swaps and forwards	32			(7		)	27			(12		)
Japan 3Win foreign currency swaps [1]	60			33			(121		)	(25		)
Japanese fixed annuity hedging instruments [2]	58			57			(70		)	(5		)
Credit contracts
Credit derivatives that purchase credit protection	5			(3		)	(31		)	(20		)
Credit derivatives that assume credit risk	24			(14		)	173			5
Equity contracts
Equity index swaps and options	3			2			(16		)	2
Variable annuity hedge program
U.S. GMWB product derivatives	(484		)	(80		)	412			268
U.S. GMWB reinsurance contracts	62			4			(81		)	(61		)
U.S. GMWB hedging instruments	307			43			(261		)	(184		)
U.S. macro hedge program	6			(17		)	(183		)	(101		)
International program product derivatives	(16		)	(6		)	19			10
International program hedging instruments	769			58			(485		)	(277		)
Other
Contingent capital facility put option	(1		)	(1		)	(3		)	(3		)
Total	$	808		$	65		$	(635	)	$	(402	)

[1] The associated liability is adjusted for changes in spot rates through realized capital gains and was $(53) and $(49) for the three months ended June 30, 2012 and 2011, respectively, and $65 and $(7) for the six months ended June 30, 2012 and 2011, respectively.

[2] The associated liability is adjusted for changes in spot rates through realized capital gains and was $(70) and $(63) for the three months ended June 30, 2012 and 2011, respectively, and $87 and $(10) for the six months ended June 30, 2012 and 2011, respectively.

For the three and six months ended June 30, 2012, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:

• The net gain for the three months ended June 30, 2012, associated with the international program hedging instruments was primarily driven by appreciation of the Japanese yen in relation to the euro and the U.S. dollar, a decrease in global and domestic equity markets, and a decrease in interest rates. The net loss for the six months ended June 30, 2012, associated with the international program hedging instruments was primarily driven by an improvement in global and domestic equity markets and depreciation of the Japanese yen in relation to the euro and the U.S. dollar, partially offset by a decrease in interest rates.

• For the three months ended June 30, 2012, the net gain related to the Japanese fixed annuity hedging instruments and Japan 3Win foreign currency swaps was primarily due to appreciation of the Japanese yen in relation to the U.S. dollar. For the six months ended June 30, 2012 the net loss related to the Japanese fixed annuity hedging instruments and Japan 3Win foreign currency swaps was primarily due to depreciation of the Japanese yen in relation to the U.S. dollar and strengthening of the currency basis swap spread between U.S. dollar and Japanese yen.

5. Investments and Derivative Instruments (continued)

• For the three months ended June 30, 2012 the net loss related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily a result of an increase in equity and interest rate volatility and a general decrease in long-term interest rates. For the six months ended June 30, 2012 the net gain related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily a result of favorable policyholder behavior, partially offset by an increase in the domestic equity market and a credit standing adjustment.

For the three months ended June 30, 2011, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:

• For the three months ended June 30, 2011, the net gain related to the Japanese fixed annuity hedging instruments is primarily due to the U.S. dollar weakening in comparison to the Japanese yen.

• For the three months ended June 30, 2011, the net gain associated with the international program hedging instruments is primarily due to a decline in Japanese interest rates and foreign currency movements. For the six months ended June 30, 2011, the net loss related to the international program hedging instruments is primarily the result of foreign currency movements and an improvement in the equity markets.

• For the three months ended June 30, 2011, the loss related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, is primarily a result of a general decrease in long-term interest rates. For the six months ended June 30, 2011, the gain related to the combined U.S. GMWB hedging program is primarily due to a lower implied market volatility and outperformance of the underlying actively managed funds as compared to their respective indices.

Refer to Note 9 for additional disclosures regarding contingent credit related features in derivative agreements.

Credit Risk Assumed through Credit Derivatives

The Company enters into credit default swaps that assume credit risk of a single entity, referenced index, or asset pool 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.

The following tables present the notional amount, fair value, weighted average years to maturity, underlying referenced credit obligation type and average credit ratings, and offsetting notional amounts and fair value for credit derivatives in which the Company is assuming credit risk as of June 30, 2012 and December 31, 2011.

As of June 30, 2012

							Underlying Referenced Credit Obligation(s) [1]
Credit Derivative type by derivative risk exposure	Notional Amount [2]		Fair Value			Weighted Average Years to Maturity	Type	Average Credit Rating	Offsetting Notional Amount [3]		Offsetting Fair Value [3]
Single name credit default swaps
Investment grade risk exposure	$	2,352	$	(37	)	3 years	Corporate Credit/ Foreign Gov.	A	$	1,343	$	(18	)
Below investment grade risk exposure	160		(2		)	1 year	Corporate Credit	BB-	144		(4		)
Basket credit default swaps [4]
Investment grade risk exposure	4,391		(56		)	4 years	Corporate Credit	BBB+	2,624		24
Investment grade risk exposure	525		(93		)	5 years	CMBS Credit	BBB+	525		93
Below investment grade risk exposure	553		(429		)	3 years	Corporate Credit	BBB	—		—
Embedded credit derivatives
Investment grade risk exposure	225		201			5 years	Corporate Credit	BBB-	—		—
Below investment grade risk exposure	300		257			4 years	Corporate Credit	BB+	—		—
Total	$	8,506	$	(159	)				$	4,636	$	95

5. Investments and Derivative Instruments (continued)

As of December 31, 2011

							Underlying Referenced Credit Obligation(s) [1]
Credit Derivative type by derivative risk exposure	Notional Amount [2]		Fair Value			Weighted Average Years to Maturity	Type	Average Credit Rating	Offsetting Notional Amount [3]		Offsetting Fair Value [3]
Single name credit default swaps
Investment grade risk exposure	$	1,628	$	(34	)	3 years	Corporate Credit/ Foreign Gov.	A+	$	1,424	$	(15	)
Below investment grade risk exposure	170		(7		)	2 years	Corporate Credit	BB-	144		(5		)
Basket credit default swaps [4]
Investment grade risk exposure	3,645		(92		)	3 years	Corporate Credit	BBB+	2,001		29
Investment grade risk exposure	525		(98		)	5 years	CMBS Credit	BBB+	525		98
Below investment grade risk exposure	553		(509		)	3 years	Corporate Credit	BBB+	—		—
Embedded credit derivatives
Investment grade risk exposure	25		24			3 years	Corporate Credit	BBB-	—		—
Below investment grade risk exposure	500		411			5 years	Corporate Credit	BB+	—		—
Total	$	7,046	$	(305	)				$	4,094	$	107

[1] The average credit ratings are based on availability and the midpoint of the applicable ratings among Moody’s, S&P, and Fitch. If no rating is available from a rating agency, then an internally developed rating is used.

[2] Notional amount is equal to the maximum potential future loss amount. There is no specific collateral related to these contracts or recourse provisions included in the contracts to offset losses.

[3] The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid related to, the original swap.

[4] Includes $4.9 billion and $4.2 billion as of June 30, 2012 and December 31, 2011, respectively, of standard market indices of diversified portfolios of corporate issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index. Also includes $533 as of both June 30, 2012 and December 31, 2011 of customized diversified portfolios of corporate issuers referenced through credit default swaps.