The Hartford 2015 Annual Report Download - page 185

Table of Contents THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)
F-54
Non-qualifying Strategies
Derivative relationships that do not qualify for hedge accounting (“non-qualifying strategies”) primarily include the hedge program for
the Company's variable annuity products as well as the hedging and replication strategies that utilize credit default swaps. In addition,
hedges of interest rate, foreign currency and equity risk of certain fixed maturities, equities and liabilities do not qualify for hedge
accounting.
The non-qualifying strategies include:
Interest Rate Swaps, Swaptions and Futures
The Company may use interest rate swaps, swaptions, 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, 2015 and 2014, the notional amount of interest rate swaps in offsetting relationships was $12.9
billion and $13.1 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. During 2015, the Company entered into foreign currency forwards to hedge non-
U.S. dollar denominated cash and equity securities, as well as the currency impacts on changes in equity of a P&C runoff entity in the
United Kingdom.
Fixed Payout Annuity Hedge
The Company formerly offered certain variable annuity products with a guaranteed minimum income benefit ("GMIB") and continues to
reinsure certain yen denominated fixed payout annuities. The Company invests in U.S. dollar denominated assets to support the
reinsurance liability. The Company entered into pay U.S. dollar, receive yen swap contracts to hedge the currency and yen interest rate
exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments.
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 of fixed maturity securities. Credit default swaps are also used to assume credit risk
related to an individual entity or referenced index 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 certain structured fixed maturity securities that
have embedded credit derivatives, which 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 enters into total return swaps to hedge equity risk of specific common stock investments which are accounted for using
fair value option in order to align the accounting treatment within net realized capital gains (losses). The Company may also use equity
index options to hedge the impact of an adverse equity market environment on the investment portfolio. In addition, the Company
formerly offered certain equity indexed products, a portion of which contain embedded derivatives that require bifurcation. The
Company uses equity index swaps to economically hedge the equity volatility risk associated with the equity indexed products.
Commodity Contracts
During 2015, the Company purchased for $11 put option contracts on West Texas Intermediate oil futures with a strike of $35 dollars per
barrel in order to partially offset potential losses related to certain fixed maturity securities that could arise if oil prices decline
substantially. The Company has since reduced its exposure to the targeted fixed maturity securities and therefore, these options were
terminated at the end of 2015.
GMWB Derivatives, net
The Company formerly offered certain variable annuity products with GMWB riders. The GMWB product is a bifurcated embedded
derivative (“GMWB product derivatives”) that has a notional value equal to the GRB. The Company uses reinsurance contracts to
transfer a portion of its risk of loss due to GMWB. The reinsurance contracts covering GMWB (“GMWB reinsurance contracts”) are
accounted for as free-standing derivatives with a notional amount equal to the GRB amount.