The Hartford 2008 Annual Report Download - page 414

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Derivative Change
Notional Amount Fair Value in Value, Before-tax
Hedging Strategy 2008 2007 2008 2007 2008 2007
Non-qualifying Strategies
Interest rate swaps, caps, floors, and
forwards
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, thereby offsetting the
changes in value of the original
swap. As of December 31, 2008
and 2007, the notional amount
of interest rate swaps in
offsetting relationships was
$6.8 billion and $2.6 billion,
respectively.
The Company may also use interest
rate forwards to replicate the
purchase of mortgage-backed
securities to manage duration
risk and liquidity. $ 8,156 $ 9,287 $ (97) $ (17) $ 12 $ 29
Foreign currency swaps, forwards, and
swaptions
The Company enters into foreign
currency swaps and forwards to
hedge the foreign currency
exposures in certain of its
foreign fixed maturity
investments.
The Company also enters into
foreign currency interest rate
swaps and swaptions to hedge
Yen interest rate exposures
related to certain liability
contracts sold in Japan. 1,113 412 21 (14) 47 (14)
Credit default swaps that sell credit
protection
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. Also
included are embedded
derivatives associated with
credit linked notes with a
notional amount of $117 and
$142 as of December 31, 2008
and 2007, respectively. The
maximum potential future
exposure to the Company is the
notional amount of the swap
contracts, which is $1,199 and
$2,857, before-tax, as of
December 31, 2008 and 2007,
respectively. 1,199 2,857 (403) (416) (457) (205)
Total return and credit index swaps
— 2,306 — (70) (166) (127)
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009