The Hartford 2010 Annual Report Download - page 113

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Contingent Capital Facility
On February 12, 2007, The Hartford entered into a put option agreement (the “Put Option Agreement”) with Glen Meadow ABC Trust,
a Delaware statutory trust (the “ABC Trust”), and LaSalle Bank National Association, as put option calculation agent. The Put Option
Agreement provides The Hartford with the right to require the ABC Trust, at any time and from time to time, to purchase The Hartford’ s
junior subordinated notes (the “Notes”) in a maximum aggregate principal amount not to exceed $500. Under the Put Option
Agreement, The Hartford will pay the ABC Trust premiums on a periodic basis, calculated with respect to the aggregate principal
amount of Notes that The Hartford had the right to put to the ABC Trust for such period. The Hartford has agreed to reimburse the
ABC Trust for certain fees and ordinary expenses. The Company holds a variable interest in the ABC Trust where the Company is not
the primary beneficiary. As a result, the Company did not consolidate the ABC Trust. As of December 31, 2010, The Hartford has not
exercised its right to require ABC Trust to purchase the Notes. As a result, the Notes remain a source of capital for the HFSG Holding
Company.
Commercial Paper and Revolving Credit Facility
The table below details the Company’ s short-term debt programs and the applicable balances outstanding.
Maximum Available As of Outstanding As of
Effective Expiration December 31,
December 31,
Description Date Date 2010 2009
2010 2009
Commercial Paper
The Hartford 11/10/86 N/A $ 2,000 $ 2,000 $ — $ —
Revolving Credit Facility
5-year revolving credit facility 8/9/07 8/9/12 1,900 1,900 — —
Total Commercial Paper and Revolving Credit Facility $ 3,900 $ 3,900 $ — $ —
While The Hartford’ s maximum borrowings available under its commercial paper program are $2.0 billion, the Company is dependent
upon market conditions to access short-term financing through the issuance of commercial paper to investors. As of December 31,
2010, the Company has no commercial paper outstanding.
The revolving credit facility provides for up to $1.9 billion of unsecured credit through August 9, 2012. Of the total availability under
the revolving credit facility, up to $100 is available to support letters of credit issued on behalf of The Hartford or other subsidiaries of
The Hartford. Under the revolving credit facility, the Company must maintain a minimum level of consolidated net worth of $12.5
billion. At December 31, 2010, the consolidated net worth of the Company as calculated in accordance with the terms of the credit
facility was $23 billion. The definition of consolidated net worth under the terms of the credit facility, excludes AOCI and includes the
Company’ s outstanding junior subordinated debentures and perpetual preferred securities, net of discount. In addition, the Company
must not exceed a maximum ratio of debt to capitalization of 40%. At December 31, 2010, as calculated in accordance with the terms of
the credit facility, the Company’ s debt to capitalization ratio was 17%. Quarterly, the Company certifies compliance with the financial
covenants for the syndicate of participating financial institutions. As of December 31, 2010, the Company was in compliance with all
such covenants.
The Hartford’ s Japan operation also maintains lines of credit in support of the subsidiary operations. As of December 31, 2010 there
was a line of credit in the amount of $62, or ¥5 billion, which expires January 4, 2012. On February 14, 2011 an additional line of credit
was executed in the amount of $60, or ¥5 billion, which expires September 30, 2011.
Derivative Commitments
Certain of the Company’ s derivative agreements contain provisions that are tied to the financial strength ratings of the individual legal
entity that entered into the derivative agreement as set by nationally recognized statistical rating agencies. If the legal entity’ s financial
strength were to fall below certain ratings, the counterparties to the derivative agreements could demand immediate and ongoing full
collateralization and in certain instances demand immediate settlement of all outstanding derivative positions traded under each
impacted bilateral agreement. The settlement amount is determined by netting the derivative positions transacted under each agreement.
If the termination rights were to be exercised by the counterparties, it could impact the legal entity’ s ability to conduct hedging activities
by increasing the associated costs and decreasing the willingness of counterparties to transact with the legal entity. The aggregate fair
value of all derivative instruments with credit-risk-related contingent features that are in a net liability position as of December 31, 2010,
is $557. Of this $557 the legal entities have posted collateral of $530 in the normal course of business. Based on derivative market
values as of December 31, 2010, a downgrade of one level below the current financial strength ratings by either Moody’ s or S&P could
require approximately an additional $29 to be posted as collateral. Based on derivative market values as of December 31, 2010, a
downgrade by either Moody’ s or S&P of two levels below the legal entities’ current financial strength ratings could require
approximately an additional $56 of assets to be posted as collateral. These collateral amounts could change as derivative market values
change, as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the
collateral that we may be required to post is primarily in the form of U.S. Treasury bills and U.S. Treasury notes.
The table below presents the aggregate notional amount and fair value of derivative relationships that could be subject to immediate
termination in the event of further rating agency downgrades.
As of December 31, 2010
Ratings levels Notional Amount Fair Value
Either BBB+ or Baa1 [1] $ 16,117 $ 307
[1] The notional and fair value amounts include a customized GMWB derivative with a notional amount of $5.1 billion and a fair value of $122, for
which the Company has a contractual right to make a collateral payment in the amount of approximately $60 to prevent its termination.