The Hartford 2008 Annual Report Download - page 257

Table of Contents
INVESTMENTS
General
The Hartford’s investment portfolios are primarily divided between Life and Property & Casualty. The investment portfolios
of Life and Property & Casualty are managed by Hartford Investment Management Company (“HIMCO”), a wholly-owned
subsidiary of The Hartford. HIMCO manages the portfolios to maximize economic value, while attempting to generate the
income necessary to support the Company’s various product obligations, within internally established objectives, guidelines
and risk tolerances. The portfolio objectives and guidelines are developed based upon the asset/liability profile, including
duration, convexity and other characteristics within specified risk tolerances. The risk tolerances considered include, for
example, asset and credit issuer allocation limits, maximum portfolio below investment grade (“BIG”) holdings and foreign
currency exposure. The Company attempts to minimize adverse impacts to the portfolio and the Company’s results of
operations due to changes in economic conditions through asset allocation limits, asset/liability duration matching and
through the use of derivatives. For a further discussion of how the investment portfolio’s credit and market risks are assessed
and managed, see the Investment Credit Risk and Capital Markets Risk Management sections of the MD&A.
HIMCO portfolio managers may sell securities (except those securities in an unrealized loss position for which the Company
has indicated its intent and ability to hold until the price recovers) due to portfolio guidelines or market technicals or trends.
For example, the Company may sell securities to manage risk, capture market valuation inefficiencies or relative value
opportunities, to remain compliant with internal asset/liability duration matching guidelines, or to modify a portfolio’s
duration to capitalize on interest rate levels or the yield curve slope.
HIMCO believes that advantageously buying and selling securities within a disciplined framework, provides the greatest
economic value for the Company over the long-term.
Return on general account invested assets is an important element of The Hartford’s financial results. Significant
fluctuations in the fixed income or equity markets could weaken the Company’s financial condition or its results of
operations. Additionally, changes in market interest rates may impact the period of time over which certain investments,
such as MBS, are repaid and whether certain investments are called by the issuers. Such changes may, in turn, impact the
yield on these investments and also may result in re-investment of funds received from calls and prepayments at rates below
the average portfolio yield. Net investment income and net realized capital gains and losses reduced the Company’s
consolidated revenues by $11.9 billion for the year ended December 31, 2008, and contributed to the Company’s
consolidated revenues by $4.4 billion and $6.3 billion for the years ended December 31, 2007 and 2006, respectively. Net
investment income and net realized capital gains and losses, excluding net investment income from trading securities,
reduced the Company’s consolidated revenues by $1.6 billion for the year ended December 31, 2008, and contributed to the
Company’s consolidated revenues by $4.2 billion and $4.4 billion for the years ended December 31, 2007 and 2006,
respectively. The reduction to consolidated revenues for 2008, as compared to prior year periods, is primarily due to a net
loss in the value of equity securities, held for trading, and realized capital losses.
Fluctuations in interest rates affect the Company’s return on, and the fair value of, fixed maturity investments, which
comprised approximately 54% and 61% of the fair value of its invested assets as of December 31, 2008 and 2007,
respectively. Other events beyond the Company’s control, including changes in credit spreads, a downgrade of an issuer’s
credit rating or default of payment by an issuer, could also adversely impact the fair value of these investments.
The Company invests in private placement securities, mortgage loans and limited partnerships and other alternative
investments in order to further diversify its investment portfolio. These investment types comprised approximately 20% and
23% of the fair value of its invested assets as of December 31, 2008 and 2007, respectively. These security types are
typically less liquid than direct investments in publicly traded fixed income or equity investments. However, generally these
securities have higher yields over the life of the investment to compensate for the liquidity risk.
A decrease in the fair value of any investment that is deemed other-than-temporary would result in the Company’s
recognition of a net realized capital loss in its financial results prior to the actual sale of the investment. Following the
recognition of an other-than-temporary impairment for fixed maturities, the Company accretes the new cost basis to par or to
estimated future value over the remaining life of the security based on future estimated cash flows by adjusting the security’s
yields. For a further discussion of the evaluation of other-than-temporary impairments, see the Critical Accounting Estimates
section of the MD&A under “Evaluation of Other-Than-Temporary Impairments on Available-for-Sale Securities”.
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Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009