The Hartford 2013 Annual Report Download - page 190

F-54
Japanese fixed annuity hedging instruments
The Company formerly 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 contracts
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. Credit default swaps are also used to assume credit risk
related to an individual entity, referenced index, or asset pool, as a part of replication transactions. These contracts require the Company
to pay or receive a periodic fee in exchange for compensation from the counterparty should the referenced security issuers experience a
credit event, as defined in the contract. The Company is also exposed to credit risk related 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. In addition, 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 formerly offered certain equity indexed products, which may contain an embedded derivative that requires bifurcation.
The Company has entered into equity index swaps and options to economically hedge the equity volatility risk associated with these
embedded derivatives. The Company also enters 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 derivatives, net
The Company formerly offered certain variable annuity products with GMWB riders in the U.S. The GMWB product is a bifurcated
embedded derivative (“U.S. GMWB product derivatives”) that has a notional value equal to the guaranteed remaining balance ("GRB").
The Company uses reinsurance contracts to transfer a portion of its risk of loss due to U.S GMWB. The reinsurance contracts covering
U.S. GMWB (“U.S. GMWB reinsurance contracts”) are accounted for as free-standing derivatives with a notional amount equal to the
GRB amount.
The Company utilizes derivatives (“U.S. GMWB hedging derivatives”) as part of an actively managed program designed to hedge a
portion of the capital market risk exposures of the non-reinsured GMWB due to changes in interest rates, equity market levels, and
equity volatility. These derivatives include customized swaps, interest rate swaps and futures, and equity swaps, options, and futures, on
certain indices including the S&P 500 index, EAFE index, and NASDAQ index. The following table represents notional and fair value
for U.S. GMWB hedging instruments.
Notional Amount Fair Value
December 31,
2013 December 31, 2012 December 31, 2013 December 31, 2012
Customized swaps $ 7,839 $ 7,787 $ 74 $ 238
Equity swaps, options, and futures 4,237 5,130 44 267
Interest rate swaps and futures 6,615 5,705 (77) 67
Total $ 18,691 $ 18,622 $ 41 $ 572
U.S. macro hedge program
The Company utilizes equity options and swaps to partially hedge against a decline in the equity markets and the resulting statutory
surplus and capital impact primarily arising from GMDB and GMWB obligations. The following table represents notional and fair
value for the U.S. macro hedge program.
Notional Amount Fair Value
December 31,
2013 December 31, 2012 December 31, 2013 December 31, 2012
Equity options and swaps 9,934 7,442 139 286
Total $ 9,934 $ 7,442 $ 139 $ 286
Table of Contents THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)