The Hartford 2009 Annual Report Download - page 192

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-43
5. Investments and Derivative Instruments (continued)
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.
GMWB hedging instruments
The Company enters into derivative contracts to partially hedge exposure to the income volatility associated with the portion of the
GMWB liabilities which 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. As of December
31, 2009, the notional amount related to the GMWB hedging instruments is $15.6 billion and consists of $10.8 billion of customized
swaps, $1.8 billion of interest rate swaps and futures, and $3.0 billion of equity swaps, options, and futures.
Macro hedge program
The Company utilizes equity options, currency options, and equity futures contracts to partially hedge the statutory reserve impact of
equity risk and foreign currency risk arising primarily from guaranteed minimum death benefit (“GMDB”), GMIB and GMWB
obligations against a decline in the equity markets or changes in foreign currency exchange rates. As of December 31, 2009, the
notional amount related to the macro hedge program is $27.4 billion and consists of $25.1 billion of equity options, $2.1 billion of
currency options, and $0.2 billion of equity futures. The $27.4 billion of notional includes $1.2 billion of short put option contracts,
therefore resulting in a net notional amount for the macro hedge program of approximately $26.2 billion.
GMAB product derivatives
The GMAB rider associated with certain of the Company’ s Japanese variable annuity products is accounted for as a bifurcated
embedded derivative. The GMAB provides the policyholder with their initial deposit in a lump sum after a specified waiting period.
The notional amount of the embedded derivative is the Yen denominated GRB balance converted to U.S. dollars at the current foreign
spot exchange rate as of the reporting period date.
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.