The Hartford 2007 Annual Report Download - page 142

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The following table summarizes Property & Casualty’ s net realized capital gains and losses results.
2007 2006 2005
Gross gains on sale $159 $ 205 $163
Gross losses on sale (121) (164) (110)
Impairments
Credit related [1] (63) — (9)
Other [2] (62) (45) (1)
Total impairments (125) (45) (10)
Periodic net coupon settlements on credit derivatives 15 4 —
Other, net [3] (100) 9 1
Net realized capital gains (losses), before-tax $(172) $ 9 $44
[1] Relates to impairments for which the Company has current concerns regarding the issuers ability to pay future interest and principal amounts
based upon the securities contractual terms or the depression in security value is primarily related to significant issuer specific or sector credit
spread widening.
[2] Primarily relates to impairments of securities that had declined in value primarily due to changes in interest rate or general or modest spread
widening and for which the Company was uncertain of its intent to retain the investment for a period of time sufficient to allow recovery to cost or
amortized cost.
[3] Primarily consists of changes in fair value on non-qualifying derivatives, hedge ineffectiveness on qualifying derivative instruments and other
investment gains.
Year ended December 31, 2007 compared to the year ended December 31, 2006
Before-tax net investment income increased $201, or 14%, and after-tax net investment income increased $139, or 13%, compared to
the prior year period. The increase in net investment income was primarily due to a higher average invested asset base and a higher
portfolio yield. The increase in the average invested asset base as compared to the prior year period, was primarily due to positive
operating cash flows. Limited partnerships and other alternative investments contributed to the increase in income compared to the
prior year period due to a higher portfolio yield and greater allocation of investments to this asset class. Based upon market expectation
of future interest rates and a lower expected yield from limited partnership and other alternative investments, Property and Casualty
expects the average portfolio yield in 2008 to modestly decline compared to 2007 levels. The Company expects a lower yield from
limited partnerships and other alternative investments primarily due to reduced liquidity and the wider credit spread environment.
Net realized capital losses resulted for the year ended December 31, 2007 compared to net realized capital gains in the prior year period
primarily due to Other, net losses and other-than-temporary impairments. Other, net losses in 2007 primarily resulted from the change
in value associated with credit derivatives due to credit spreads widening. Credit spreads widened primarily due to the deterioration in
the U.S. housing market, tightened lending conditions, the market’ s flight to quality securities as well as increased likelihood of a U.S.
recession. For further discussion, see the “Capital Market Risk Management” section of the MD&A. See the other-than-temporary
impairments section below for information on impairment losses.
Gross gains on sales for the year ended December 31, 2007, were primarily within fixed maturities and were largely comprised of
corporate securities. The sales were made to reallocate the portfolio to securities with more favorable risk-return profiles. The gains on
sales were primarily the result of changes in credit spreads, foreign currency exchange rates, and interest rates from the date of purchase.
Gross losses on sales for the year ended December 31, 2007, were predominantly within fixed maturities and were primarily corporate
securities. No single security was sold at a loss in excess of $4 and an average loss as a percentage of the fixed maturity’ s amortized
cost of less than 3%, which, under the Company’ s impairment policy was deemed to be depressed only to a minor extent.
Year ended December 31, 2006 compared to the year ended December 31, 2005
Before-tax net investment income increased $121, or 9%, and after-tax net investment income increased $91, or 9%, compared to the
prior year. The increase in net investment income was primarily due to income earned on a higher average invested assets base, an
increase in interest rates and a change in asset mix (i.e., greater investment in mortgage loans and limited partnerships). The increase in
the average invested assets base, as compared to the prior year, can be attributed to positive operating cash flows.
For 2006, the yield on average invested assets was consistent with the prior year. An increase in the yield on fixed maturities was offset
by a decrease in the yield on limited partnerships.
The decrease in net realized capital gains was primarily due to an increase in other-than-temporary impairments and losses on the sale of
fixed maturity investments. For further discussion of gross gains and losses on fixed maturity investments and other-than-temporary
impairments, see below.
Gross gains on the sale of fixed maturities for the year ended December 31, 2006 were concentrated in the corporate, foreign
government and municipal sectors. Certain sales were made to reposition the portfolio to a shorter duration due to the flatness of the
yield curve and the lack of market compensation for longer duration assets. Also, certain sales were made as the Company continues to
reposition the portfolio to higher quality fixed maturity investments and increase investments in mortgage loans and limited
partnerships. The gains on sales were primarily the result of changes in interest rates from the date of purchase.