The Hartford 2012 Annual Report Download - page 110

Table of Contents
The Company has reinsured approximately 17% of its risk associated with U.S. GMWB and 67.2% of its risk associated with the aggregate U.S. GMDB
exposure. These reinsurance agreements serve to reduce the Company’s exposure to changes in the statutory reserves and the related capital and RBC ratios
associated with changes in the capital markets. The Company also continues to explore other solutions for mitigating the capital market risk effect on surplus,
such as internal and external reinsurance solutions, modifications to our hedging program, changes in product design, increasing pricing and expense
management.
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Credit risk is defined as the risk of financial loss due to uncertainty of an obligor’s or counterparty’s ability or willingness to meet its obligations in
accordance with agreed upon terms. The majority of the Company’s credit risk is concentrated in its investment holdings but is also present in reinsurance
and insurance portfolios. Credit risk is comprised of three major factors: the risk of change in credit quality, or credit migration risk; the risk of default; and
the risk of a change in value of a financial instrument due to changes in credit spread that are unrelated to changes in obligor credit quality. A decline in
creditworthiness is typically associated with an increase in an investment’s credit spread, potentially resulting in an increase in other-than-temporary
impairments and an increased probability of a realized loss upon sale.
The objective of the Company’s enterprise credit risk management strategy is to identify, quantify, and manage credit risk on an aggregate portfolio basis and
to limit potential losses in accordance with an established credit risk appetite. The Company manages to its risk appetite by primarily holding a diversified
mix of investment grade issuers and counterparties across its investment, reinsurance, and insurance portfolios. Potential losses are also limited within
portfolios by diversifying across geographic regions, asset types, and sectors.
The Company manages a credit exposure from its inception to its maturity or sale. Both the investment and reinsurance areas have formulated procedures for
counterparty approvals and authorizations. Although approval processes may vary by area and type of credit risk, approval processes establish minimum
levels of creditworthiness and financial stability. Eligible credits are subjected to prudent and conservative underwriting reviews. Within the investment
portfolio, private securities, such as commercial mortgages, and private placements, must be presented to their respective review committees for approval.
Credit risks are managed on an on-going basis through the use of various processes and analyses. At the investment, reinsurance, and insurance product
levels, fundamental credit analyses are performed at the issuer/counterparty level on a regular basis. To provide a holistic review within the investment
portfolio, fundamental analyses are supported by credit ratings, assigned by nationally recognized rating agencies or internally assigned, and by quantitative
credit analyses. The Company utilizes a credit Value at Risk ("VaR") to measure default and migration risk on a monthly basis. Issuer and security level risk
measures are also utilized. In the event of deterioration in credit quality, the Company maintains watch lists of problem counterparties within the investment
and reinsurance portfolios. The watch lists are updated based on regular credit examinations and management reviews. The Company also performs quarterly
assessments of probable expected losses in the investment portfolio. The process is conducted on a sector basis and is intended to promptly assess and
identify potential problems in the portfolio and to recognize necessary impairments.
Credit risk policies at the enterprise and operation level ensure comprehensive and consistent approaches to quantifying, evaluating, and managing credit risk
under expected and stressed conditions. These policies define the scope of the risk, authorities, accountabilities, terms, and limits, and are regularly reviewed
and approved by senior management and ERM. Aggregate counterparty credit quality and exposure is monitored on a daily basis utilizing an enterprise-wide
credit exposure information system that contains data on issuers, ratings, exposures, and credit limits. Exposures are tracked on a current and potential basis.
Credit exposures are reported regularly to the ERCC and to the Finance, Investment and Risk Management Committee (“FIRMCo”). Exposures are aggregated
by ultimate parent across investments, reinsurance receivables, insurance products with credit risk, and derivative counterparties. The credit database and
reporting system are available to all key credit practitioners in the enterprise.
The Company exercises various and differing methods to mitigate its credit risk exposure within its investment and reinsurance portfolios. Some of the
reasons for mitigating credit risk include financial instability or poor credit, avoidance of arbitration or litigation, future uncertainty, and exposure in excess of
risk tolerances. Credit risk within the investment portfolio is most commonly mitigated through the use of derivative instruments or asset sales. Counterparty
credit risk is mitigated through the practice of entering into contracts only with highly creditworthy institutions and through the practice of holding and posting
of collateral. Systemic credit risk is mitigated through the construction of high-quality, diverse portfolios that are subject to regular underwriting of credit
risks. For further discussion of the Company’s investment and derivative instruments, see the Investment Management section and Note 6 of the Notes to
Consolidated Financial Statements. Further discussion on managing and mitigating credit risk from the use of reinsurance via an enterprise security review
process, see the Reinsurance section.
As of December 31, 2012, the Company's only exposure to any credit concentration risk of a single issuer greater than 10% of the Company's stockholders'
equity, other than the U.S. government and certain U.S. government securities, was the Government of Japan, which represented $2.7 billion, or 12% of
stockholders' equity, and 2% of total invested assets. For further discussion of concentration of credit risk, see the Concentration of Credit Risk section in
Note 6 of the Notes to Consolidated Financial Statements.
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