The Hartford 2011 Annual Report Download - page 102

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At December 31, 2011 and 2010, notional amounts pertaining to derivatives utilized to manage interest rate risk totaled $19.8 billion
and $19.3 billion, respectively ($19.5 billion and $18.9 billion, respectively, related to investments and $0.3 billion and $0.4 billion,
respectively, related to Wealth Management and Life Other Operations liabilities). The fair value of these derivatives was ($332) and
($372) as of December 31, 2011 and 2010, respectively
Interest Rate Sensitivity
The before-tax change in the net economic value of investment contracts (e.g., fixed annuity contracts) issued by the Company’ s Wealth
Management and Life Other Operations, as well as certain insurance product liabilities (e.g., short-term and long-term disability
contracts) issued by the Company’ s Commercial Markets operations, for which the payment rates are fixed at contract issuance and the
investment experience is substantially absorbed by the Company’ s operations, along with the corresponding invested assets are included
in the following table. Also included in this analysis are the interest rate sensitive derivatives used by the Company to hedge its
exposure to interest rate risk in the investment portfolios supporting these contracts. This analysis does not include the assets and
corresponding liabilities of certain insurance products such as auto, property, whole and term life insurance, and certain life contingent
annuities. Certain financial instruments, such as limited partnerships and other alternative investments, have been omitted from the
analysis due to the fact that the investments are accounted for under the equity method and generally lack sensitivity to interest rate
changes. Separate account assets and liabilities, equity securities, trading and the corresponding liabilities associated with the variable
annuity products sold in Japan are excluded from the analysis because gains and losses in separate accounts accrue to policyholders.
The calculation of the estimated hypothetical change in net economic value below assumes a 100 basis point upward and downward
parallel shift in the yield curve.
Change in Net Economic Value as of December 31,
2011
2010
Basis point shift
- 100
+ 100
- 100
+ 100
Amount
$
(494)
$
287
$
(190)
$
96
The fixed liabilities included above represented approximately 43% and 47% of the Company’ s general account liabilities as of
December 31, 2011 and 2010, respectively. The assets supporting the fixed liabilities are monitored and managed within set duration
guidelines, and are evaluated on a daily basis, as well as annually using scenario simulation techniques in compliance with regulatory
requirements.
The following table provides an analysis showing the estimated before-tax change in the fair value of the Company’ s fixed maturity
investments and related derivatives, not included in the table above, assuming 100 basis point upward and downward parallel shifts in
the yield curve as of December 31, 2011 and 2010. Certain financial instruments, such as limited partnerships and other alternative
investments, have been omitted from the analysis due to the fact that the investments are accounted for under the equity method and
generally lack sensitivity to interest rate changes.
Change in Fair Value as of December 31,
2011
2010
Basis point shift
- 100
+ 100
- 100
+ 100
Amount
$
3,248
$
(2,985)
$
2,988
$
(2,774)
The selection of the 100 basis point parallel shift in the yield curve was made only as an illustration of the potential hypothetical impact
of such an event and should not be construed as a prediction of future market events. Actual results could differ materially from those
illustrated above due to the nature of the estimates and assumptions used in the above analysis. The Company’ s sensitivity analysis
calculation assumes that the composition of invested assets and liabilities remain materially consistent throughout the year and that the
current relationship between short-term and long-term interest rates will remain constant over time. As a result, these calculations may
not fully capture the impact of portfolio re-allocations, significant product sales or non-parallel changes in interest rates.