The Hartford 2007 Annual Report Download - page 221

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-44
4. Investments and Derivative Instruments (continued)
Notional Amount Fair Value
Derivative Change
in Value, After-tax
Hedging Strategy 2007 2006 2007 2006 2007 2006
Guaranteed Minimum Accumulation Benefit (“GMAB”) product derivatives
The Company offers certain variable annuity products in Japan that may have
a GMAB rider. The GMAB is a bifurcated embedded derivative that
provides the policyholder with their initial deposit in a lump sum after a
specified waiting period. The notional value of the embedded derivative is
the yen denominated GRB balance converted to U.S. dollars at the current
December 31, 2007 foreign spot exchange rate.
$ 2,768 $ — $ 2
$ — $ 1 $ —
GMWB product derivatives
The Company offers certain variable annuity products with a GMWB rider
primarily in the U.S. and, to a lesser extent, the U.K. The GMWB is a
bifurcated embedded derivative that provides the policyholder with a 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. The policyholder also has the option, after a specified time
period, to reset the GRB to the then-current account value, if greater. The
notional value of the embedded derivative is the GRB balance. For a further
discussion, see the Derivative Instruments section of Note 1. 45,900 37,769 (715)
53 (435) 79
GMWB reinsurance contracts
Reinsurance arrangements are used to offset the Company’ s exposure to the
GMWB embedded derivative for the lives of the host variable annuity
contracts. The notional amount of the reinsurance contracts is the GRB
amount. 6,579 7,172 128 (22) 83 (19)
GMWB hedging instruments
The Company enters into derivative contracts to economically hedge
exposure to the volatility associated with the portion of the GMWB liabilities
which are not reinsured. These derivative contracts include customized
swaps, interest rate swaps and futures, and equity swaps, put and call options,
and futures, on certain indices including the S&P 500 index, EAFE index,
and NASDAQ index.
21,357
8,379 642 346 167 (77)
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. In addition, the Company is
exposed to bifurcated options embedded in certain fixed maturity
investments. 154 30 (22) — 1
—
Statutory reserve hedging instruments
The Company purchases one and two year S&P 500 put option contracts to
economically hedge the statutory reserve impact of equity risk arising
primarily from GMDB and GMWB obligations against a decline in the
equity markets. 661 2,220 18 29 (14)
(9)
Total other investment and/or risk management activities $ 99,796 $ 73,542 $ (455) $ (64) $ (317) $ (97)
Total derivatives [1] $ 111,355 $ 85,844 $ (701) $ (455) $ (316) $ (111)
[1] Derivative change in value includes hedge ineffectiveness for cash-flow and fair-value hedges and total change in value, including periodic
derivative net coupon settlements, derivatives held for other investment and/or risk management activities.
The increase in notional amount since December 31, 2006, is primarily due to an increase in embedded derivatives associated with the
GMWB rider and an increase in the related GMWB hedging derivatives. The Company offers certain variable annuity products with a
GMWB rider, which is accounted for as an embedded derivative. For further discussion on the GMWB rider, refer to Note 9 of Notes
to Consolidated Financial Statements.