The Hartford 2010 Annual Report Download - page 110

110
Liabilities
The Company’ s Wealth Management operations issued non-U.S. dollar denominated funding agreement liability contracts. The
Company hedges the foreign currency risk associated with these liability contracts with currency rate swaps. At December 31, 2010 and
2009, the derivatives used to hedge foreign currency exchange risk related to foreign denominated liability contracts had a total notional
amount of $771 and $814, respectively, and a total fair value of $(17) and $(2), respectively.
The yen based fixed annuity product was written by Hartford Life Insurance K.K. (“HLIKK”), a wholly-owned Japanese subsidiary of
Hartford Life, Inc. (“HLI”), and subsequently reinsured to Hartford Life Insurance Company, a U.S. dollar based wholly-owned indirect
subsidiary of HLI. During 2009, the Company has since suspended new sales of the Japan business. The underlying investment
involves investing in U.S. securities markets, which offer favorable credit spreads. The yen denominated fixed annuity product (“yen
fixed annuities”) is recorded in the consolidated balance sheets with invested assets denominated in dollars while policyholder liabilities
are denominated in yen and converted to U.S. dollars based upon the December 31, yen to U.S. dollar spot rate. The difference between
U.S. dollar denominated investments and yen denominated liabilities exposes the Company to currency risk. The Company manages
this currency risk associated with the yen fixed annuities primarily with pay variable U.S. dollar and receive fixed yen currency swaps.
As of December 31, 2010 and 2009, the notional value of the currency swaps was $2.1 billion and $2.3 billion and the fair value was
$608 and $316, respectively. Although economically an effective hedge, a divergence between the yen denominated fixed annuity
product liability and the currency swaps exists primarily due to the difference in the basis of accounting between the liability and the
derivative instruments (i.e. historical cost versus fair value). The yen denominated fixed annuity product liabilities are recorded on a
historical cost basis and are only adjusted for changes in foreign spot rates and accrued income. The currency swaps are recorded at fair
value, incorporating changes in value due to changes in forward foreign exchange rates, interest rates and accrued income. A before-tax
net gain of $27 and $47 for the years ended December 31, 2010 and 2009, respectively, which includes the changes in value of the
currency swaps, excluding net periodic coupon settlements, and the yen fixed annuity contract remeasurement, was recorded in net
realized capital gains and losses.
Prior to 2010, the Company had also issued guaranteed benefits (GMDB and GMIB) that were reinsured from HLIKK to the U.S.
insurance subsidiaries. During 2010, the Company entered into foreign currency forward contracts that convert U.S. dollars to yen in
order to hedge the foreign currency risk due to U.S. dollar denominated assets backing the yen denominated liabilities. The Company
also enters into foreign currency forward contracts that convert euros to yen in order to economically hedge the risk arising when the
Japan policyholders’ variable annuity sub-accounts are invested in non-Japanese yen denominated securities while the related GMDB
and GMIB guarantees are effectively yen-denominated. As of December 31, 2010 and 2009, the derivatives used to hedge foreign
currency risk associated with Japanese variable annuity products had a total notional amount of $1.7 billion and $257, respectively, and
a total fair value of $73 and $(8), respectively.