The Hartford 2012 Annual Report Download - page 196

Table of Contents



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
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. Credit default swaps are also used to assume credit risk related to an individual entity, referenced index,
or asset pool, as a part of replication transactions. These contracts require the Company to pay or receive a periodic fee in exchange for compensation from the
counterparty should the referenced security issuers experience a credit event, as defined in the contract. The Company is also exposed to credit risk related 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. In addition, 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.
Equity index swaps and options
The Company formerly offered 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. The Company also enters 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 derivatives, net
The Company formerly offered certain variable annuity products with GMWB riders in the U.S. The GMWB product is a bifurcated embedded derivative
(“U.S. GMWB product derivative”) that has a notional value equal to the GRB. The Company uses reinsurance contracts to transfer a portion of its risk of
loss due to U.S GMWB. The reinsurance contracts covering U.S. GMWB (“U.S. GMWB reinsurance contracts”) are accounted for as free-standing
derivatives with a notional amount equal to the GRB amount.
The Company utilizes derivatives (“ U.S. GMWB hedging derivatives”) as part of an actively managed program designed to hedge a portion of the capital
market risk exposures of the un-reinsured GMWB due to changes in interest rates, equity market levels, and equity volatility. These derivatives 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.
 








Customized swaps $7,787 $8,389 $238 $ 385
Equity swaps, options, and futures 5,130 5,320 267 498
Interest rate swaps and futures 5,705 2,697 67 11
    
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 GMDB and GMWB obligations. The following table represents notional and fair value for the U.S. macro hedge
program.
 








Equity futures $ — $ 59 $ — $ —
Equity options 7,442 6,760 286 357
    
F-54