The Hartford 2007 Annual Report Download - page 191

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-14
1. Basis of Presentation and Accounting Policies (continued)
The following table provides the account value, SFAS 133 fair value and GRB at December 31, 2007, for each type of guaranteed
living benefit liability sold by the Company that is accounted for under SFAS 133:
Account
Value [1]
SFAS 133
Fair Value[2]
of the
Liability (Asset)
Guaranteed
Remaining
Balance
U.S. Guaranteed Minimum Withdrawal Benefits $ 46,088 $ 553 $ 34,622
Non-Life Contingent Portion of “for Life”
Guaranteed Minimum Withdrawal Benefits
U.S. Products 10,272 154 10,230
International Products 1,038 8 1,048
Total 11,310 162 11,278
International Guaranteed Minimum
Accumulation Benefits 2,734 (2) 2,768
Total $ 60,132 $ 713 $ 48,668
[1] “For life” GMWB policies, and their related account values, include both benefits accounted for under SFAS 133 and SOP 03-1 and thus are
included in this SFAS 133 table and the SOP 03-1 table above. However, benefits payable are generally mutually exclusive (e.g., for a given
contract, only the death or living benefits, but not both are payable at one time).
[2] The magnitude of the SFAS 133 fair value, at December 31, 2007, was highly dependent upon the size of the block of business for guaranteed
living benefits that are required to be fair valued, and the market conditions at the date of valuation, in particular high implied volatilities and
low risk-free interest rates. If implied volatilities were lower and risk-free interest rates were higher at December 31, 2007, the SFAS 133 fair
value would have been lower and vice versa.
Derivatives That Hedge Capital Markets Risk for Guaranteed Minimum Benefit Accounted for as Derivatives
Changes in capital markets or policyholder behavior may increase or decrease the Company’ s exposure to benefits under the
guarantees. The Company uses derivative transactions, including GMWB reinsurance (described below) which meets the definition of
a derivative under SFAS 133 and customized derivative transactions, to mitigate some of that exposure. Derivatives are recorded at fair
value with changes in fair value recorded in net realized capital gains (losses) in net income.
GMWB Reinsurance
For all U.S. GMWB contracts in effect through July 2003, the Company entered into a reinsurance arrangement to offset its exposure to
the GMWB for the remaining lives of those contracts. Substantially all of the Company’ s reinsurance capacity was utilized as of the
third quarter of 2003. Substantially all U.S. GMWB riders sold since July 2003, are not covered by reinsurance.
Customized Derivatives
In June and July of 2007, the Company entered into two customized swap contracts to hedge certain risk components for the remaining
term of certain blocks of non-reinsured GMWB riders. These customized derivative contracts provide protection from capital markets
risks based on policyholder behavior assumptions as specified by the Company at the inception of the derivative transactions. Due to
the significance of the non-observable inputs associated with pricing these derivatives, the initial difference between the transaction
price and modeled value was deferred in accordance with EITF No. 02-3 “Issues Involved in Accounting for Derivative Contracts Held
for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” (“EITF 02-3”) and included in other
assets in the Consolidated Balance Sheets.
Other Derivative Instruments
The Company uses other hedging instruments to hedge its unreinsured GMWB exposure. These instruments include interest rate
futures and swaps, variance swaps, S&P 500 and NASDAQ index put options and futures contracts. The Company also uses EAFE
Index swaps to hedge GMWB exposure to international equity markets.