The Hartford 2008 Annual Report Download - page 306

Table of Contents
In response to these severe economic drivers, the Company initiated a redesign of the variable annuity product suite strategy
designed to lessen the financial risk of variable annuity product guarantees and increase the rider fees on new sales and on
in-force, as contractually permitted. The Company will continue to hedge the risk of the product guarantees with a greater
relative emphasis on protection of statutory surplus. This rebalancing of the hedging program affords an additional measure
of protection to improve the Company’s capital efficiency in managing tail risk for statutory surplus during periods of
declines in the equity markets. This shift in relative emphasis will likely result in greater U.S. GAAP earnings volatility.
In the fourth quarter of 2008, the rebalancing of variable annuity hedging programs resulted in the sale of certain derivative
positions, a portion of which proceeds were used to purchase other derivatives for the protection of statutory surplus and the
associated target RBC ratios. The Company entered into hedge positions on the S&P 500 index to economically hedge
statutory reserves and to provide protection of statutory surplus arising primarily from GMDB and GMWB obligations.
Refer to Note 5 of Notes to Consolidated Financial Statements for additional information on hedging derivatives.
The following table summarizes the Company‘s U.S. GMWB account value by type of risk management strategy as of
December 31, 2008:
GMWB
Account % of GMWB
Risk Management Strategy Duration Value Account Value
Entire GMWB risk reinsured with a third party Life of the product $ 10,225 27%
Capital markets risk transferred to a third Designed to cover the
party — behavior risk retained by the effective life of the
Company product 10,464 27%
Dynamic hedging of capital markets risk using various
derivative instruments [1]
Weighted average of 5 years
17,628 46%
$ 38,317 100%
[1] During the fourth quarter of 2008, the Company maintained a reduced level of dynamic hedge protection on U.S.
GAAP earnings while placing a greater relative emphasis on the protection of statutory surplus. This shift in emphasis
includes the macro hedge program.
Equity Risk Impact on Statutory Capital and Risked Based Capital
See Capital Resources and Liquidity, Ratings for information on the equity risk impact on statutory results.
Foreign Currency Exchange Risk
Life’s exposure to foreign currency exchange risk exists with respect to non-U.S. dollar denominated investments, Life’s
investment in foreign operations, primarily in Japan and the U.K., and non-U.S. dollar denominated liability contracts,
including the yen based individual fixed annuity product and its GMDB, GMAB, GMWB, and GMIB benefits associated
with its Japanese and U.K. variable annuities. A significant portion of the Company’s foreign fixed maturity currency
exposure is mitigated through the use of derivatives.
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Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009