The Hartford 2010 Annual Report Download - page 175

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-47
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.
Warrants
During the fourth quarter of 2008, the Company issued warrants to purchase the Company's Series C Non-Voting Contingent
Convertible Preferred Stock, which were required to be accounted for as a derivative liability at December 31, 2008. As of March 31,
2009, the warrants were no longer required to be accounted for as derivatives and were reclassified to equity.
GMWB product derivatives
The Company offers certain variable annuity products with a GMWB rider in the U.S. and formerly in the U.K. and Japan. 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.
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 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 GMWB hedging instruments.
Notional Amount Fair Value
December 31,
2010
December 31,
2009
December 31,
2010
December 31,
2009
Customized swaps $ 10,113 $ 10,838 $ 209 $ 234
Equity swaps, options, and futures 4,943 2,994 391 9
Interest rate swaps and futures 2,800 1,735 (133) (191)
Total $ 17,856 $ 15,567 $ 467 $ 52