The Hartford 2008 Annual Report Download - page 408

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Variable Interest Entities (“VIE”)
The Company is involved with variable interest entities primarily as a collateral manager and as an investor through normal
investment activities. The Company’s involvement includes providing investment management and administrative services
for a fee and holding ownership or other interests as an investor. The Company also has involvement with VIEs as a means
of accessing capital.
VIEs may or may not be consolidated on the Company’s consolidated financial statements. When the Company is the
primary beneficiary of the VIE, all of the assets and liabilities of the VIE are consolidated into the Company’s financial
statements. The Company also reports a liability for the portion of the VIE that represents the minority interest of other
investors in the VIE. When the Company concludes that it is not the primary beneficiary of the VIE, only the fair value of
the Company’s interest in the VIE is recorded in the Company’s financial statements.
As of December 31, 2007, Hartford Investment Management Company (“HIMCO”) was the collateral manager of four VIEs
with provisions that allowed for termination if the fair value of the aggregate referenced bank loan portfolio declined below
a stated level. These VIEs were market value CLOs that invested in senior secured bank loans through total return swaps.
Two of these market value CLOs were consolidated, and two were not consolidated. During the first quarter of 2008, the fair
value of the aggregate referenced bank loan portfolio declined below the stated level in all four market value CLOs and the
total return swap counterparties terminated the transactions. Three of these CLOs were restructured from market value CLOs
to cash flow CLOs without market value triggers and the remaining CLO terminated in January 2009. The Company
realized a capital loss of $90, before-tax, from the termination of these CLOs. In connection with the restructurings, the
Company purchased interests in two of the resulting VIEs, one of which the Company is the primary beneficiary. These
purchases resulted in an increase in the Company’s maximum exposure to loss for both consolidated and non-consolidated
VIEs.
At December 31, 2008 and 2007, the Company had relationships with five and seven VIEs, respectively, where the
Company was the primary beneficiary. The following table sets forth the carrying value of assets and liabilities, and the
Company’s maximum exposure to loss on these consolidated VIEs.
December 31, 2008 December 31, 2007
Maximum Maximum
Total Total Exposure Total Total Exposure
Assets Liabilities [1] to Loss [2] Assets Liabilities [1] to Loss
CLOs $ 339 $ 69 $ 257 $ 128 $ 47 $ 107
Limited partnerships 151 43 108 309 47 262
Other investments 249 59 221 377 71 317
Total $ 739 $ 171 $ 586 $ 814 $ 165 $ 686
[1] Creditors have no recourse against the Company in the event of default by the VIE.
[2] The Company’s maximum exposure to loss represents the maximum loss amount that the Company could recognize as
a reduction in net investment income or as a realized capital loss and is the consolidated assets net of liabilities at cost.
The Company has no implied or unfunded commitments to these VIEs.
CLOs represent one fund at December 31, 2008, which is a cash flow CLO financed by issuing debt in tranches of varying
seniority and is a VIE due to the lack of voting equity in the capital structure. The Company provides collateral management
services to the CLO and earns a fee for those services and also has investments in debt issued by the CLO. Taking those
interests into consideration, the Company has performed a quantitative analysis and determined that it will absorb a majority
of the expected losses or residual returns in the fund and as a result is the primary beneficiary. Consolidated assets are
classified in cash and fixed maturities and consolidated liabilities are classified in other liabilities. At December 31, 2007,
CLOs represent two market value CLOs, one of which converted to the cash flow CLO described above and the second
which terminated during the fourth quarter of 2008.
At December 31, 2008 and 2007, limited partnerships represent investments in two hedge funds that are financed by issuing
equity shares to investors, and are VIEs based on the lack of decision making ability held by the equity investors. The
primary source of variability generated by these VIEs is the fund’s investment portfolio and that variability is passed to
equity holders. The Company holds a majority interest in the equity of the funds and as a result will absorb the majority of
the funds’ expected losses or residual returns and therefore is the primary beneficiary. Consolidated assets and liabilities are
classified in other investments and other liabilities, respectively.
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009