The Hartford 2007 Annual Report Download - page 220

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-43
4. Investments and Derivative Instruments (continued)
Notional Amount Fair Value
Derivative Change
in Value, After-tax
Hedging Strategy 2007 2006 2007 2006 2007 2006
Other Investment and/or Risk Management Activities
Interest rate swaps, caps and floors
The Company uses interest rate swaps, caps and floors to manage duration
risk between assets and liabilities in certain portfolios. In addition, the
Company enters into interest rate swaps to terminate existing swaps in
hedging relationships, thereby offsetting the changes in value of the original
swap.
$
9,287
$
6,560
$
(17)
$
(30)
$
20
$
(34)
Interest rate forwards
The Company uses interest rate forwards to replicate the purchase of
mortgage-backed securities to manage duration risk and liquidity. — 1,269 — (7) (1) 10
Foreign currency swaps and forwards
The Company enters into foreign currency swaps and forwards to hedge the
foreign currency exposures in certain of its foreign fixed maturity
investments.
412 663 (14) (14) (9) (8)
Credit default and total return swaps
The Company enters into credit default swap agreements in which the
Company assumes credit risk of an individual entity, referenced index or
asset pool. These contracts entitle the Company to receive a periodic fee in
exchange for an obligation to compensate the derivative counterparty should
a credit event occur on the part of the referenced security issuers. The
maximum potential future exposure to the Company is the notional value of
the swap contracts, which is $1,857 and $1,203, after-tax, as of December 31,
2007 and 2006, respectively.
2,857
1,852 (416) (184) (134) 30
The Company also assumes credit risk through total return and credit index
swaps which reference a specific index or collateral portfolio. The maximum
potential future exposure to the Company for the credit index swaps is the
notional value and for the total return swaps is the cash collateral associated
with the transaction, which has termination triggers that limit investment
losses. As of December 31, 2007 and 2006, the maximum potential future
exposure to the Company from such contracts is $1,013 and $1,386, after-
tax, respectively.
2,306 2,674
(70) 1 (83) 1
The Company enters into credit default swap agreements, in which the
Company reduces credit risk to an individual entity. These contracts require
the Company to pay a derivative counterparty a periodic fee in exchange for
compensation from the counterparty should a credit event occur on the part
of the referenced security issuer. The Company entered into these
agreements as an efficient means to reduce credit exposure to specified
issuers or sectors.
5,166
3,085
81
(11)
55
(6)
Contingent Capital Facility
During the first quarter of 2007, 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. The instrument is
accounted for as a derivative. 500 — 43 — (2) —
Yen fixed annuity hedging instruments
The Company enters into currency rate swaps and forwards to mitigate the
foreign currency exchange rate and yen interest rate exposures associated
with the yen denominated individual fixed annuity product. The associated
liability is adjusted for changes in spot rates which was $(66) and $12, after-
tax, as of December 31, 2007 and 2006, respectively, and offsets the
derivative change in value.
1,849
1,869
(115)
(225)
34
(64)