The Hartford 2012 Annual Report Download - page 185

Table of Contents
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

Fair Value Option
The Company holds fair value option investments that contain an embedded credit derivative with underlying credit risk primarily related to commercial real
estate. Also included are foreign government securities that align with the accounting for yen-based fixed annuity liabilities, which are adjusted for changes in
spot rates through realized gains and losses. Similar to other fixed maturities, income earned from these securities is recorded in net investment income.
Changes in the fair value of these securities are recorded in net realized capital gains and losses.
In 2012, the Company disposed of substantially all of its interest in a consolidated VIE, resulting in its deconsolidation. See Note 6, Investments and
Derivative Instruments, for additional information related to the deconsolidation of this VIE. The Company previously elected the fair value option for this
consolidated VIE in order to apply a consistent accounting model for the VIE’s assets and liabilities. The VIE is an investment vehicle that holds high quality
investments, derivative instruments that reference third-party corporate credit and issues notes to investors that reflect the credit characteristics of the high
quality investments and derivative instruments. The risks and rewards associated with the assets of the VIE inure to the investors. The investors have no
recourse against the Company. As a result, there was no adjustment to the market value of the notes for the Company’s own credit risk.
The Company elected the fair value option for consolidated VIE investment funds that were established in 2012. The Company elected the fair value option in
order to report investments of consolidated investment companies at fair value with changes in the fair value of these securities recognized in net realized capital
gains and losses, consistent with Investment Company accounting. The investment funds hold fixed income securities and the Company has management and
control of the funds as well as a significant ownership interest.
The following table presents the changes in fair value of those assets and liabilities accounted for using the fair value option reported in net realized capital
gains and losses in the Company’s Consolidated Statements of Operations.

 

Fixed maturities, FVO
Corporate 13 10
CRE CDOs 63 (33)
CMBS bonds (2) —
Foreign government (86) 45
RMBS 5 —

Credit-linked notes (34) 28
   
The following table presents the fair value of assets and liabilities accounted for using the fair value option included in the Company’s Consolidated Balance
Sheets.

 

Fixed maturities, FVO
ABS $ — $ 65
CRE CDOs 205 225
CMBS 5 —
Corporate 140 272
Foreign government 730 766
U.S. government 2 —
Municipals 1 —
RMBS 4—
Total fixed maturities, FVO $ 1,087 $ 1,328

Credit-linked notes [1] $ — $ 9
[1] As of December 31, 2011, the outstanding principal balance of the notes was $243.
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