The Hartford 2011 Annual Report Download - page 177

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-42
5. Investments and Derivative Instruments (continued)
Non-qualifying strategies
Interest rate swaps, swaptions, caps, floors, and futures
The Company uses interest rate swaps, swaptions, caps, floors, and futures to manage duration between assets and liabilities in certain
investment 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, 2011 and 2010, the notional amount of interest rate swaps in offsetting
relationships was $7.8 billion and $7.1 billion, respectively.
Foreign currency swaps and forwards
The Company enters into foreign currency swaps and forwards to convert the foreign currency exposures of certain foreign currency-
denominated fixed maturity investments to U.S. dollars.
Japan 3Win foreign currency swaps
Prior to the second quarter of 2009, The Company offered certain variable annuity products with a GMIB rider through a wholly-owned
Japanese subsidiary. The GMIB rider is reinsured to a wholly-owned U.S. subsidiary, which invests in U.S. dollar denominated assets
to support the liability. The U.S. subsidiary entered into pay U.S. dollar, receive yen swap contracts to hedge the currency and interest
rate exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments.
Japanese fixed annuity hedging instruments
Prior to the second quarter of 2009, The Company offered a yen denominated fixed annuity product through a wholly-owned Japanese
subsidiary and reinsured to a wholly-owned U.S. subsidiary. The U.S. subsidiary invests in U.S. dollar denominated securities to
support the yen denominated fixed liability payments and entered into currency rate swaps to hedge the foreign currency exchange rate
and yen interest rate exposures that exist as a result of U.S. dollar assets backing the yen denominated liability.
Credit derivatives that purchase credit protection
Credit default swaps are used to purchase credit protection on an individual entity or referenced index to economically hedge against
default risk and credit-related changes in value on fixed maturity securities. These contracts require the Company to pay a periodic fee
in exchange for compensation from the counterparty should the referenced security issuers experience a credit event, as defined in the
contract.
Credit derivatives that assume credit risk
Credit default swaps are used to assume credit risk related to an individual entity, referenced index, or asset pool, as a part of replication
transactions. These contracts entitle the Company to receive a periodic fee in exchange for an obligation to compensate the derivative
counterparty should the referenced security issuers experience a credit event, as defined in the contract. The Company is also exposed
to credit risk due to credit derivatives embedded within certain fixed maturity securities. These securities are primarily comprised of
structured securities that contain credit derivatives that reference a standard index of corporate securities.
Credit derivatives in offsetting positions
The Company enters into credit default swaps to terminate existing credit default swaps, thereby offsetting the changes in value of the
original swap going forward.
Equity index swaps and options
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, during the third quarter of 2011, the Company entered into equity index options and futures with the purpose of
hedging the impact of an adverse equity market environment on the investment portfolio.
U.S GMWB product derivatives
The Company offers certain variable annuity products with a GMWB rider in the U.S. The GMWB is a bifurcated embedded derivative
that provides the policyholder with a guaranteed remaining balance (“GRB”) if the account value is reduced to zero through a
combination of market declines and withdrawals. The GRB is generally equal to premiums less withdrawals. Certain contract
provisions can increase the GRB at contractholder election or after the passage of time. The notional value of the embedded derivative
is the GRB.
U.S. GMWB reinsurance contracts
The Company has entered into reinsurance arrangements to offset a portion of its risk exposure to the GMWB for the remaining lives of
covered variable annuity contracts. Reinsurance contracts covering GMWB are accounted for as free-standing derivatives. The
notional amount of the reinsurance contracts is the GRB amount.