The Hartford 2014 Annual Report Download - page 104

As of December 31, 2014, the Company had no exposure to any credit concentration risk of a single issuer or counterparty greater than 10% of the Company's
stockholders' equity, other than the U.S. government and certain U.S. government securities. As of December 31, 2013, the Company's only exposure to any
credit concentration risk of a single issuer or counterparty greater than 10% of the Company's stockholders' equity, other than the U.S. government and
certain U.S. government securities, were the Government of Japan. The Government of Japan securities represented $2.6 billion, or 14% of stockholders'
equity, and 3% of total invested assets. For further discussion of concentration of credit risk in the investment portfolio, see the Concentration of Credit Risk
section in Note 6 - Investments and Derivative Instruments of Notes to Consolidated Financial Statements.
Derivative Instruments
The Company utilizes a variety of OTC, OTC-cleared and exchange-traded derivative instruments as a part of its overall risk management strategy, as well as
to enter into replication transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, credit spread, issuer default,
price, and currency exchange rate risk or volatility. Replication transactions are used as an economical means to synthetically replicate the characteristics
and performance of assets that are permissible investments under the Company’s investment policies. For further information on the Company’s use of
derivatives, see Note 6 of Notes to Consolidated Financial Statements.
Derivative activities are monitored and evaluated by the Company’s compliance and risk management teams and reviewed by senior management. In
addition, the Company monitors counterparty credit exposure on a monthly basis to ensure compliance with Company policies and statutory limitations. The
notional amounts of derivative contracts represent the basis upon which pay or receive amounts are calculated and are not reflective of credit risk.
Downgrades to the credit ratings of The Hartford’s insurance operating companies may have adverse implications for its use of derivatives including those
used to hedge benefit guarantees of variable annuities. In some cases, downgrades may give derivative counterparties for OTC derivatives and clearing
brokers for OTC-cleared derivatives the right to cancel and settle outstanding derivative trades or require additional collateral to be posted. In addition,
downgrades may result in counterparties and clearing brokers becoming unwilling to engage in or clear additional derivatives or may require
collateralization before entering into any new trades. This will restrict the supply of derivative instruments commonly used to hedge variable annuity
guarantees, particularly long-dated equity derivatives and interest rate swaps.
The Company uses various derivative counterparties in executing its derivative transactions. The use of counterparties creates credit risk that the
counterparty may not perform in accordance with the terms of the derivative transaction. The Company has derivative counterparty exposure policies which
limit the Company’s exposure to credit risk. The Company’s policies with respect to derivative counterparty exposure establishes market-based credit limits,
favors long-term financial stability and creditworthiness of the counterparty and typically requires credit enhancement/credit risk reducing agreements. The
Company minimizes the credit risk of derivative instruments by entering into transactions with high quality counterparties primarily rated A or better, which
are monitored and evaluated by the Company’s risk management team and reviewed by senior management. The Company also generally requires that OTC
derivative contracts be governed by an International Swaps and Derivatives Association ("ISDA") Master Agreement, which is structured by legal entity and
by counterparty and permits right of offset.
The Company has developed credit exposure thresholds which are based upon counterparty ratings. Credit exposures are measured using the market value of
the derivatives, resulting in amounts owed to the Company by its counterparties or potential payment obligations from the Company to its counterparties.
The Company enters into credit support annexes in conjunction with the ISDA agreements, which require daily collateral settlement based upon agreed upon
thresholds. For purposes of daily derivative collateral maintenance, credit exposures are generally quantified based on the prior business day’s market value
and collateral is pledged to and held by, or on behalf of, the Company to the extent the current value of the derivatives exceed the contractual thresholds. In
accordance with industry standard and the contractual agreements, collateral is typically settled on the next business day. The Company has exposure to
credit risk for amounts below the exposure thresholds which are uncollateralized, as well as for market fluctuations that may occur between contractual
settlement periods of collateral movements.
For the company’s derivative programs, the maximum uncollateralized threshold for a derivative counterparty for a single legal entity is $10. The Company
currently transacts OTC derivatives in five legal entities that have a threshold greater than zero; and therefore the maximum combined threshold for a single
counterparty across all legal entities that use derivatives is $50. In addition, the Company may have exposure to multiple counterparties in a single corporate
family due to a common credit support provider. As of December 31, 2014 the maximum combined threshold for all counterparties under a single credit
support provider across all legal entities that use derivatives is $100. Based on the contractual terms of the collateral agreements, these thresholds may be
immediately reduced due to a downgrade in either party’s credit rating. For further discussion, see the Derivative Commitments section of Note 15 of Notes to
Consolidated Financial Statements.
For the year ended December 31, 2014, the Company has incurred no losses on derivative instruments due to counterparty default.
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