The Hartford 2013 Annual Report Download - page 189

F-53
Derivative Instruments
The Company utilizes a variety of OTC, OTC-cleared 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 has previously issued 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.
Strategies that qualify for hedge accounting
Certain derivatives the Company enters into satisfy the hedge accounting requirements as outlined in Note 1 of these financial
statements. Typically, these hedge relationships include interest rate and foreign currency swaps where the terms or expected cash flows
of the securities closely match the terms of the swap. The swaps are typically used to manage interest rate duration of certain fixed
maturity securities, or liability contracts, or convert securities, or liabilities, denominated in a foreign currency to US dollars. The hedge
strategies by hedge accounting designation include:
Cash flow hedges
Interest rate swaps are predominantly used to manage portfolio duration and better match cash receipts from assets with cash
disbursements required to fund liabilities. These derivatives convert interest receipts on floating-rate fixed maturity securities or interest
payments on floating-rate guaranteed investment contracts to fixed rates. The Company also enters into forward starting swap
agreements primarily to hedge interest rate risk inherent in the assumptions used to price certain liabilities. In addition, during the first
quarter of 2013 the Company entered into a treasury lock contract to hedge the anticipated interest payments of a fixed rate debt issuance
that was subsequently terminated upon the debt issuance.
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 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 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
Derivative relationships that do not qualify for hedge accounting or “non-qualifying strategies” primarily include the hedge programs for
our U.S. and international variable annuity products as well as the hedging and replication strategies that utilize credit default swaps. In
addition, hedges of interest rate and foreign currency risk of certain fixed maturities and liabilities do not qualify for hedge accounting.
These non-qualifying strategies include:
Interest rate swaps, swaptions, caps, floors, and futures
The Company may use 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 December 31, 2013 and 2012, the notional amount of interest rate swaps in offsetting
relationships was $6.9 billion and $7.5 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
The Company formerly 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 yen interest rate exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance
payments.
Table of Contents THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)