The Hartford 2008 Annual Report Download - page 418

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
Equity index swaps, options, and
futures
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.
The Company may also enter into
equity indexed futures to hedge
the equity volatility of certain
liability contracts. $ 256 $ 154 $ (16) $ (22) $ (25) $ 2
Japanese variable annuity hedging
instruments
The Company enters into foreign
currency forward and option
contracts that convert euros to
Yen in order to economically
hedge the foreign currency risk
associated with certain Japanese
variable annuity products. 259 — 35 — 40 (10)
Macro hedge program
The Company utilizes option
contracts as well as futures
contracts to partially
economically hedge the
statutory reserve impact of
equity risk arising primarily
from GMDB and GMWB
obligations against a decline in
the equity markets. 2,188 661 137 18 74 (12)
Warrants
During the fourth quarter of 2008,
the Company issued warrants to
purchase the Company’s
Series C Non-Voting
Contingent Convertible
Preferred Stock. See Note 21
for a discussion of Allianz SE’s
investment in The Hartford.
These warrants are subject to
the receipt of certain approvals
and upon the Company’s
inability to obtain such
approvals on a timely basis, the
Company is subject to a
separate cash payment to the
investor. This separate cash
payment requires under EITF
00-19 that the warrants and the
separate cash payment be
accounted for as a derivative
liability at December 31, 2008. 869 — (163) — 110 —
Total non-qualifying strategies 102,198 99,796 (2,386) (455) (916) (488)
Total derivatives [1] $ 115,272 $ 111,355 $ (1,896) $ (701) $ (908) $ (487)
[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, for derivatives in non-qualifying strategies.
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009