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Table of Contents

Macro Hedge Program

The Company’s macro hedging program uses derivative instruments such as options and futures on equities and interest rates to provide protection against the

statutory tail scenario risk arising from U.S., GMWB and GMDB liabilities, on the Company’s statutory surplus. These macro hedges cover some of the

residual risks not otherwise covered by specific dynamic hedging programs. Management assesses this residual risk under various scenarios in designing and

executing the macro hedge program. The macro hedge program will result in additional U.S. GAAP earnings volatility as changes in the value of the macro

hedge derivatives, which are designed to reduce statutory reserve and capital volatility, may not be closely aligned to changes in U.S. GAAP liabilities.

International Hedge Programs

The Company enters into derivative contracts to hedge market risk exposures associated with the guaranteed benefits which are embedded in the international

variable annuity contracts. These derivative contracts include foreign currency forwards and options, interest rate swaps and futures, and equity swaps,

customized swaps, options, and futures on certain broadly traded global equity indices including the S&P500 index, Nikkei 225 index, FTSE 100 index,

and Euro Stoxx 50.

While the Company actively manages these dynamic hedging programs, increased U.S. GAAP earnings volatility may result from factors including, but not

limited to: focus on reducing the economic exposure to market risks associated with guaranteed benefits, capital markets, changes in hedging positions and the

relative emphasis placed on various risk management objectives.

Variable Annuity Hedging Program Sensitivities

The following table presents the accounting treatment of the underlying guaranteed living benefits and the related hedge assets by hedge program.

 

  

     

Fair Value Fair Value Fair Value Not Fair Value Fair Value Not Fair Value

[1] The liabilities for international variable annuity are primarily not measured on a fair value basis. However there is an immaterial portion of the

international variable annuity with a GMWB or GMAB which is measured on a fair value basis.

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