The Hartford 2008 Annual Report Download - page 308

Table of Contents
Property & Casualty
Property & Casualty attempts to maximize economic value while generating appropriate after-tax income and sufficient
liquidity to meet policyholder and corporate obligations. Property & Casualty’s investment portfolio has material exposure
to interest rates. The Company continually monitors these exposures and makes portfolio adjustments to manage these risks
within established limits.
Interest Rate Risk
The primary exposure to interest rate risk in Property & Casualty relates to its fixed maturity securities, including corporate
bonds, ABS, municipal bonds, CMBS and government bonds. The fair value of these investments was $19.8 billion and
$27.2 billion at December 31, 2008 and 2007, respectively. The fair value of these and Property & Casualty’s other invested
assets fluctuates depending on the interest rate environment and other general economic conditions. A variety of derivative
instruments, primarily swaps, are used to manage interest rate risk and had a total notional amount as of December 31, 2008
and 2007 of $2.3 billion and $1.8 billion, respectively, and fair value of $23 and $(15), respectively.
One of the measures Property & Casualty uses to quantify its exposure to interest rate risk inherent in its invested assets is
duration. The weighted average duration of the fixed maturity portfolio was 4.9 years as of December 31, 2008 and 2007.
Calculated Interest Rate Sensitivity
The following table provides an analysis showing the estimated after-tax change in the fair value of Property & Casualty’s
fixed maturity investments and related derivatives, assuming 100 basis point upward and downward parallel shifts in the
yield curve as of December 31, 2008 and 2007. Certain financial instruments, such as limited partnerships, have been
omitted from the analysis due to the fact that the investments are accounted for under the equity method and generally lack
sensitivity to interest rate changes.
Change in Fair Value As of December 31,
2008 2007
Basis point shift - 100 + 100 - 100 + 100
Amount $ 718 $ (695) $ 925 $ (894)
The selection of the 100 basis point parallel shift in the yield curve was made only as an illustration of the potential
hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results
could differ materially from those illustrated above due to the nature of the estimates and assumptions used in the above
analysis. The Company’s sensitivity analysis calculation assumes that the composition of invested assets remains materially
consistent throughout the year and that the current relationship between short-term and long-term interest rates will remain
constant over time. As a result, these calculations may not fully capture the impact of portfolio re-allocations or non-parallel
changes in interest rates.
Foreign Currency Exchange Risk
Foreign currency exchange risk exists with respect to investments in non-U.S. dollar denominated fixed maturities, primarily
euro, sterling and Canadian dollar denominated securities. The risk associated with these securities relates to potential
decreases in value resulting from unfavorable changes in foreign exchange rates. The fair value of these fixed maturity
securities at December 31, 2008 and 2007 was $864 and $972, respectively.
In order to manage its currency exposures, Property & Casualty enters into foreign currency swaps and forward contracts to
hedge the variability in cash flow associated with certain foreign denominated securities. These foreign currency swap and
forward agreements are structured to match the foreign currency cash flows of the hedged foreign denominated securities.
At December 31, 2008 and 2007, the derivatives used to hedge currency exchange risk had a total notional value of $775
and $428, respectively, and total fair value of $13 and ($43), respectively.
Based on the fair values of Property & Casualty’s non-U.S. dollar denominated securities and derivative instruments as of
December 31, 2008 and 2007, management estimates that a 10% unfavorable change in exchange rates would decrease the
fair values by an after-tax total of approximately $42 and $37, respectively. The estimated impact was based upon a 10%
change in December 31 spot rates. The selection of the 10% unfavorable change was made only for illustration of the
potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual
results could differ materially from those illustrated above due to the nature of the estimates and assumptions used in the
above analysis.
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Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009