Investments and Derivative Instruments

9 Months Ended

Sep. 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 nine months ended September 30, 2012 and 2011, respectively.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
OTTI losses recognized in OCI	$	(22	)	$	(11	)	$	(37	)	$	(83	)
Changes in fair value and/or sales	91			21			125			88
Tax and deferred acquisition costs	(34		)	—			(48		)	6
Change in OTTI losses recognized in OCI	$	35		$	10		$	40		$	11

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 September 30,						Nine Months Ended September 30,
(Before-tax)	2012			2011			2012			2011
Gross gains on sales	$	205		$	197		$	710		$	519
Gross losses on sales	(131		)	(63		)	(387		)	(294		)
Net OTTI losses recognized in earnings	(37		)	(60		)	(164		)	(138		)
Valuation allowances on mortgage loans	—			—			1			23
Japanese fixed annuity contract hedges, net [1]	(24		)	9			(42		)	(2		)
Periodic net coupon settlements on credit derivatives/Japan	2			1			1			(8		)
Results of variable annuity hedge program
GMWB derivatives, net	381			(323		)	451			(300		)
U.S. macro hedge program	(109		)	107			(292		)	6
Total U.S. program	272			(216		)	159			(294		)
International program	(167		)	1,132			(633		)	865
Total results of variable annuity hedge program	105			916			(474		)	571
Other, net [2]	(1		)	(425		)	153			(430		)
Net realized capital gains (losses)	$	119		$	575		$	(202	)	$	241

[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 in AOCI were $37 and $159 , respectively, for the three and nine months ended September 30, 2012 and $74 and $87 for the three and nine months ended September 30, 2011, respectively. Proceeds from sales of AFS securities totaled $10.8 billion and $34.2 billion for the three and nine months ended September 30, 2012, respectively, and $8.7 billion and $26.3 billion for the three and nine months ended September 30, 2011, respectively. For the three and nine months ended September 30, 2012, the gain on U.S. GMWB related derivatives, net, was primarily due to liability model assumption updates of $301 related to lower benefit utilization by policyholders.

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 September 30,						Nine Months Ended September 30,
(Before-tax)	2012			2011			2012			2011
Balance as of beginning of period	$	(1,407	)	$	(1,933	)	$	(1,676	)	$	(2,072	)
Additions for credit impairments recognized on [1]:
Securities not previously impaired	(5		)	(4		)	(21		)	(40		)
Securities previously impaired	(9		)	(38		)	(19		)	(63		)
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period	104			157			392			349
Securities due to an increase in expected cash flows	2			4			9			12
Balance as of end of period	$	(1,315	)	$	(1,814	)	$	(1,315	)	$	(1,814	)

[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.

	September 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	$	2,916	$	69	$	(227	)	$	2,758	$	(3	)	$	3,430	$	55	$	(332	)	$	3,153	$	(7	)
CDOs [2]	3,279		50		(217		)	3,072		(13		)	2,819		16		(348		)	2,487		(44		)
CMBS	6,114		403		(244		)	6,273		(13		)	7,192		271		(512		)	6,951		(31		)
Corporate [2]	39,032		4,794		(393		)	43,433		(23		)	41,161		3,661		(739		)	44,011		—
Foreign govt./govt. agencies	4,019		202		(5		)	4,216		—			2,030		141		(10		)	2,161		—
Municipal	12,939		1,372		(20		)	14,291		—			12,557		775		(72		)	13,260		—
RMBS	7,382		337		(242		)	7,477		(47		)	5,961		252		(456		)	5,757		(105		)
U.S. Treasuries	5,009		213		(16		)	5,206		—			3,828		203		(2		)	4,029		—
Total fixed maturities, AFS	80,690		7,440		(1,364		)	86,726		(99		)	78,978		5,374		(2,471		)	81,809		(187		)
Equity securities, AFS	865		77		(64		)	878		—			1,056		68		(203		)	921		—
Total AFS securities	$	81,555	$	7,517	$	(1,428	)	$	87,604	$	(99	)	$	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 September 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.

	September 30, 2012
Contractual Maturity	Amortized Cost		Fair Value
One year or less	$	2,178	$	2,195
Over one year through five years	14,920		15,851
Over five years through ten years	15,614		17,161
Over ten years	28,287		31,939
Subtotal	60,999		67,146
Mortgage-backed and asset-backed securities	19,691		19,580
Total fixed maturities, AFS	$	80,690	$	86,726

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.

	September 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	$	12	$	11	$	(1	)	$	1,071	$	845	$	(226	)	$	1,083	$	856	$	(227	)
CDOs [1]	20		19		(1		)	3,169		2,914		(216		)	3,189		2,933		(217		)
CMBS	232		201		(31		)	1,575		1,362		(213		)	1,807		1,563		(244		)
Corporate	1,402		1,332		(70		)	2,289		1,966		(323		)	3,691		3,298		(393		)
Foreign govt./govt. agencies	272		270		(2		)	19		16		(3		)	291		286		(5		)
Municipal	135		131		(4		)	183		167		(16		)	318		298		(20		)
RMBS	148		146		(2		)	1,147		907		(240		)	1,295		1,053		(242		)
U.S. Treasuries	1,085		1,069		(16		)	—		—		—			1,085		1,069		(16		)
Total fixed maturities	3,306		3,179		(127		)	9,453		8,177		(1,237		)	12,759		11,356		(1,364		)
Equity securities	112		106		(6		)	278		220		(58		)	390		326		(64		)
Total securities in an unrealized loss	$	3,418	$	3,285	$	(133	)	$	9,731	$	8,397	$	(1,295	)	$	13,149	$	11,682	$	(1,428	)

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 [1]	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	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 September 30, 2012, AFS securities in an unrealized loss position, comprised of 2,191 securities, primarily related to commercial real estate, corporate securities within the financial services sector RMBS and ABS which have experienced price deterioration. As of September 30, 2012, 81% 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

	September 30, 2012							December 31, 2011
	Amortized Cost [1]		Valuation Allowance			Carrying Value		Amortized Cost [1]		Valuation Allowance			Carrying Value
Commercial	$	6,946	$	(83	)	$	6,863	$	5,830	$	(102	)	$	5,728
Total mortgage loans	$	6,946	$	(83	)	$	6,863	$	5,830	$	(102	)	$	5,728

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

As of September 30, 2012 and December 31, 2011, the carrying value of mortgage loans associated with the valuation allowance was $546 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 September 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 September 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	18			35
Balance, as of September 30	$	(83	)	$	(147	)

The current weighted-average LTV ratio of the Company’s commercial mortgage loan portfolio was 64% as of September 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 2.29x as of September 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 $32 and $50, respectively, as of September 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
	September 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%	$	372	1.54x	$	707	1.45x
65% - 80%	2,569		2.12x	2,384		1.60x
Less than 65%	3,922		2.49x	2,637		2.40x
Total commercial mortgage loans	$	6,863	2.29x	$	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
	September 30, 2012				December 31, 2011
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
East North Central	$	145	2.1	%	$	94	1.6	%
Middle Atlantic	498		7.3	%	508		8.9	%
Mountain	100		1.5	%	125		2.2	%
New England	335		4.9	%	294		5.1	%
Pacific	2,054		29.9	%	1,690		29.5	%
South Atlantic	1,388		20.2	%	1,149		20.1	%
West North Central	16		0.2	%	30		0.5	%
West South Central	435		6.3	%	224		3.9	%
Other [1]	1,892		27.6	%	1,614		28.2	%
Total mortgage loans	$	6,863	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
	September 30, 2012				December 31, 2011
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
Commercial
Agricultural	$	155	2.3	%	$	249	4.3	%
Industrial	2,082		30.3	%	1,747		30.5	%
Lodging	82		1.2	%	93		1.6	%
Multifamily	1,329		19.4	%	1,070		18.7	%
Office	1,517		22.1	%	1,078		18.8	%
Retail	1,449		21.1	%	1,234		21.5	%
Other	249		3.6	%	257		4.6	%
Total mortgage loans	$	6,863	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.

	September 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]	$	446	$	420	$	15	$	491	$	471	$	29
Investment funds [4]	164		—		157		—		—		—
Limited partnerships	6		—		6		7		—		7
Total	$	616	$	420	$	178	$	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 $24 and $23, respectively as of September 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 September 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 transactions 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 transaction 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 agreements and dollar roll transactions, the Company transfers U.S. government and government agency securities and receives cash. 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 transactions 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 September 30, 2012. The obligation for securities sold under agreement to repurchase was $(1.6) billion as of September 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 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, during the three months ended September 30, 2012, the Company entered into interest rate swaptions to hedge the interest rate risk of the securities being transferred related to the sale of the Retirement Plan business segment.

The Company also enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap. As of September 30, 2012 and December 31, 2011, the notional amount of interest rate swaps in offsetting relationships was $7.6 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
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
Customized swaps	$	8,153	$	8,389	$	269	$	385
Equity swaps, options, and futures	6,330		5,320		308		498
Interest rate swaps and futures	5,330		2,697		97		11
Total	$	19,813	$	16,406	$	674	$	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
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
Equity futures	$	—	$	59	$	—	$	—
Equity options	5,583		6,760		82		357
Total	$	5,583	$	6,819	$	82	$	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
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
Credit derivatives	$	50	$	—	$	6	$	—
Currency forwards [1]	10,148		8,622		14		446
Currency options	9,708		7,357		166		127
Equity futures	4,323		3,835		—		—
Equity options	4,751		1,565		51		74
Equity swaps [2]	2,588		392		34		(8		)
Interest rate futures	727		739		—		—
Interest rate swaps and swaptions	34,999		11,216		291		111
Total	$	67,294	$	33,726	$	562	$	750

[1] As of September 30, 2012 and December 31, 2011 net notional amounts are $1.9 billion and $7.2 billion, respectively, which include $6.0 billion and $7.9 billion, respectively, related to long positions and $4.1 billion and $0.7 billion, respectively, related to short positions.

[2] As of September 30, 2012 the net notional amount is $0.8 billion, which includes $1.7 billion related to long positions and $0.9 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 $1.7 billion and $3.2 billion as of September 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	Sep 30, 2012		Dec 31, 2011		Sep 30, 2012			Dec 31, 2011			Sep 30, 2012		Dec 31, 2011		Sep 30, 2012			Dec 31, 2011
Cash flow hedges
Interest rate swaps	$	7,914	$	8,652	$	359		$	329		$	359	$	329	$	—		$	—
Foreign currency swaps	180		291		(18		)	6			4		30		(22		)	(24		)
Total cash flow hedges	8,094		8,943		341			335			363		359		(22		)	(24		)
Fair value hedges
Interest rate swaps	776		1,007		(61		)	(78		)	—		—		(61		)	(78		)
Foreign currency swaps	40		677		15			(39		)	15		63		—			(102		)
Total fair value hedges	816		1,684		(46		)	(117		)	15		63		(61		)	(180		)
Non-qualifying strategies
Interest rate contracts
Interest rate swaps, caps, floors, and futures	13,179		10,144		(553		)	(583		)	578		531		(1,131		)	(1,114		)
Foreign exchange contracts
Foreign currency swaps and forwards	397		380		(14		)	(12		)	7		6		(21		)	(18		)
Japan 3Win foreign currency swaps	2,054		2,054		78			184			78		184		—			—
Japanese fixed annuity hedging instruments	1,648		1,945		371			514			392		540		(21		)	(26		)
Credit contracts
Credit derivatives that purchase credit protection	1,041		1,721		(4		)	36			15		56		(19		)	(20		)
Credit derivatives that assume credit risk [1]	3,669		2,952		(339		)	(648		)	13		2		(352		)	(650		)
Credit derivatives in offsetting positions	9,428		8,189		(39		)	(57		)	110		164		(149		)	(221		)
Equity contracts
Equity index swaps and options	924		1,501		55			27			68		40		(13		)	(13		)
Variable annuity hedge program
U.S. GMWB product derivatives [2]	30,213		34,569		(1,413		)	(2,538		)	—		—		(1,413		)	(2,538		)
U.S. GMWB reinsurance contracts	6,116		7,193		199			443			199		443		—			—
U.S. GMWB hedging instruments	19,813		16,406		674			894			842		1,022		(168		)	(128		)
U.S. macro hedge program	5,583		6,819		82			357			82		357		—			—
International program product derivatives [2]	2,607		2,710		(36		)	(71		)	—		—		(36		)	(71		)
International program hedging instruments	67,294		33,726		562			750			1,150		887		(588		)	(137		)
Other
Contingent capital facility put option	500		500		24			28			24		28		—			—
Total non-qualifying strategies	164,466		130,809		(353		)	(676		)	3,558		4,260		(3,911		)	(4,936		)
Total cash flow hedges, fair value hedges, and non-qualifying strategies	$	173,376	$	141,436	$	(58	)	$	(458	)	$	3,936	$	4,682	$	(3,994	)	$	(5,140	)
Balance Sheet Location
Fixed maturities, available-for-sale	$	703	$	703	$	(40	)	$	(72	)	$	—	$	—	$	(40	)	$	(72	)
Other investments	74,605		60,227		1,473			2,331			2,322		3,165		(849		)	(834		)
Other liabilities	59,051		35,944		(229		)	(538		)	1,415		1,074		(1,644		)	(1,612		)
Consumer notes	27		35		(2		)	(4		)	—		—		(2		)	(4		)
Reinsurance recoverables	6,116		7,193		199			443			199		443		—			—
Other policyholder funds and benefits payable	32,874		37,334		(1,459		)	(2,618		)	—		—		(1,459		)	(2,618		)
Total derivatives	$	173,376	$	141,436	$	(58	)	$	(458	)	$	3,936	$	4,682	$	(3,994	)	$	(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 $67.3 billion notional amount related to the international program hedging instruments as of September 30, 2012, consisted of $62.3 billion of long positions and $5.0 billion of offsetting short positions, resulting in a net notional amount of $57.3 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 $25.0 billion primarily resulted from The Company increasing its hedging of interest rate exposure.

Change in Fair Value

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

• 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 a liability model assumption update, favorable policyholder behavior, and lower equity market volatility.

• The increase in fair value related to credit derivatives that assume credit risk was primarily due to credit spread tightening.

• The fair value related to the international program hedging instruments decreased as a result of 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, passage of time, 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 a decline in U.S. interest rates, 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.

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 September 30,					Nine Months Ended September 30,					Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011		2012		2011			2012		2011
Interest rate swaps	$	42		$	263	$	185		$	345	$	—	$	(3	)	$	—	$	(5	)
Foreign currency swaps	(2		)	—		(31		)	—		—		—			—		—
Total	$	40		$	263	$	154		$	345	$	—	$	(3	)	$	—	$	(5	)

Derivatives in Cash Flow Hedging Relationships

		Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
		Three Months Ended September 30,					Nine Months Ended September 30,
	Location	2012		2011			2012			2011
Interest rate swaps	Net realized capital gain/(loss)	$	4	$	4		$	10		$	8
Interest rate swaps	Net investment income	36		33			110			96
Foreign currency swaps	Net realized capital gain/(loss)	1		(9		)	(7		)	(1		)
Total		$	41	$	28		$	113		$	103

5. Investments and Derivative Instruments (continued)

As of September 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 $119. 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 months ended September 30, 2012, 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. During the nine months ended September 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 nine months ended September 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 September 30,										Nine Months Ended September 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)	$	(2	)	$	1	$	(54	)	$	54	$	(7	)	$	4	$	(71	)	$	71
Foreign currency swaps
Net realized capital gain/(loss)	(6		)	6		(28		)	28		(8		)	8		8			(8		)
Benefits, losses and loss adjustment expenses	—			—		(5		)	5		(6		)	6		(14		)	14
Total	$	(8	)	$	7	$	(87	)	$	87	$	(21	)	$	18	$	(77	)	$	77

[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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Interest rate contracts
Interest rate swaps, caps, floors, and forwards	$	3		$	(25	)	$	(12	)	$	(24	)
Foreign exchange contracts
Foreign currency swaps and forwards	(4		)	19			23			7
Japan 3Win foreign currency swaps [1]	15			39			(106		)	14
Japanese fixed annuity hedging instruments [2]	24			103			(46		)	98
Credit contracts
Credit derivatives that purchase credit protection	(18		)	31			(49		)	11
Credit derivatives that assume credit risk	99			(183		)	272			(178		)
Equity contracts
Equity index swaps and options	(13		)	(56		)	(29		)	(54		)
Variable annuity hedge program
U.S. GMWB product derivatives	823			(1,315		)	1,235			(1,047		)
U.S. GMWB reinsurance contracts	(184		)	241			(265		)	180
U.S. GMWB hedging instruments	(258		)	751			(519		)	567
U.S. macro hedge program	(109		)	107			(292		)	6
International program product derivatives	26			(54		)	45			(44		)
International program hedging instruments	(193		)	1,186			(678		)	909
Other
Contingent capital facility put option	(2		)	(1		)	(5		)	(4		)
Total	$	209		$	843		$	(426	)	$	441

[1] The associated liability is adjusted for changes in spot rates through realized capital gains and was $(46) and $(93) for the three months ended September 30, 2012 and 2011, respectively, and $19 and $(100) for the nine months ended September 30, 2012 and 2011, respectively.

[2] The associated liability is adjusted for changes in spot rates through realized capital gains and was $(54) and $(115) for the three months ended September 30, 2012 and 2011, respectively, and $33 and $(125) for the nine months ended September 30, 2012 and 2011, respectively.

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

• The net loss for the three months ended September 30, 2012, associated with the international program hedging instruments was primarily driven by an improvement in global and domestic equity markets, partially offset by appreciation of the Japanese yen in relation to the euro and the U.S. dollar. The net loss for the nine months ended September 30, 2012, 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 and nine months ended September 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 a liability model assumption update related to lower benefit utilization by policyholders, a decrease in equity volatility, and outperformance of the underlying actively managed funds as compared to their respective indices.

• For the three and nine months ended September 30, 2012 the net gain related to credit derivatives that assume credit risk was primarily due to the credit spread tightening.

• For the nine months ended September 30, 2012 the net loss related to the Japan 3Win foreign currency swaps was primarily due to a decline in U.S. interest rates, 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 and nine months ended September 30, 2011, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:

• The net gain associated with the international program hedging instruments was primarily due to a decrease in equity markets and foreign currency movements, primarily the Japanese yen strengthening in comparison to the euro.

• The 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 a general decrease in long-term interest rates and higher interest rate volatility.

• The loss on credit derivatives that assume credit risk was primarily due to credit spread widening.

• The net gain related to the Japanese fixed annuity hedging instruments was primarily due to the U.S. dollar weakening in comparison to the Japanese yen.

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 September 30, 2012 and December 31, 2011.

5. Investments and Derivative Instruments (continued)

As of September 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	$	2,402	$	(7	)	3 years	Corporate Credit/ Foreign Gov.	A	$	1,368	$	(30	)
Below investment grade risk exposure	144		(1		)	1 year	Corporate Credit	BB-	144		(4		)
Basket credit default swaps [4]
Investment grade risk exposure	4,434		(10		)	4 years	Corporate Credit	BBB+	2,677		(4		)
Investment grade risk exposure	330		(24		)	4 years	CMBS Credit	A	330		24
Below investment grade risk exposure	353		(282		)	3 years	Corporate Credit	BB	—		—
Below investment grade risk exposure	195		(54		)	4 years	CMBS Credit	B+	195		54
Embedded credit derivatives
Investment grade risk exposure	225		205			4 years	Corporate Credit	BBB-	—		—
Below investment grade risk exposure	300		264			4 years	Corporate Credit	BB+	—		—
Total	$	8,383	$	91					$	4,714	$	40

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 $5.0 billion and $4.2 billion as of September 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 $353 and $533 as of September 30, 2012 and December 31, 2011, respectively, of customized diversified portfolios of corporate issuers referenced through credit default swaps.