The Hartford 2008 Annual Report Download - page 271

Table of Contents
At December 31, 2008 and 2007, limited partnerships represent investments in two hedge funds that are financed by issuing
equity shares to investors, and are VIEs based on the lack of decision making ability held by the equity investors. The
primary source of variability generated by these VIEs is the fund’s investment portfolio and that variability is passed to
equity holders. The Company holds a majority interest in the equity of the funds and as a result will absorb the majority of
the funds’ expected losses or residual returns and therefore is the primary beneficiary. Consolidated assets and liabilities are
classified in other investments and other liabilities, respectively.
Other investments at December 31, 2008 consist of two investment trusts that are financed by issuing beneficial interests
that do not have voting rights to investors. The Company holds a majority of the beneficial interests issued by these trusts
and as the majority holder, will absorb a majority of expected losses or residual returns and therefore is the primary
beneficiary. The Company was not the primary beneficiary of one of those trusts at December 31, 2007. Consolidated assets
and liabilities are classified in fixed maturities and other liabilities, respectively. At December 31, 2007, other investments
included three investment trusts, two of which have liquidated and the third remains at December 31, 2008.
As of December 31, 2008 and 2007, the Company also held significant variable interests in four and five VIEs, respectively,
where the Company is not the primary beneficiary. That determination has been made based on a quantitative analysis of
whether the Company will absorb a majority of the expected losses or residual returns of the VIE, considering its variable
interests as well as those of other variable interest holders. These investments have been held by the Company for two years.
The following table sets forth the carrying value of assets and liabilities that relate to the Company’s variable interests in
unconsolidated VIEs, and the Company’s maximum exposure to loss resulting from involvement with those VIEs.
December 31, 2008 December 31, 2007
Maximum Maximum
Exposure Exposure
Assets Liabilities to Loss Assets Liabilities to Loss
CLOs [1] $ 308 $ — $ 349 $ 26 $ — $ 37
CDOs [1] 3 — 15 76 — 108
Other [2] 42 40 5 43 43 5
Total [3] $ 353 $ 40 $ 369 $ 145 $ 43 $ 150
[1] Maximum exposure to loss represents the Company’s investment in securities issued by CLOs/CDOs at cost.
[2] Maximum exposure to loss represents issuance costs that were incurred to establish the contingent capital facility.
[3] The Company has no implied or unfunded commitments to these VIEs.
At December 31, 2008, CLOs include one fund that is financed by issuing debt securities in tranches of varying seniority.
That fund is a cash flow CLO and a VIE due to the lack of voting equity in its capital structure. The Company holds variable
interests through fees earned as the collateral manager and investments in debt and preferred equity issued by the fund with
a carrying amount at December 31, 2008 of $306 and $2, respectively. At December 31, 2007, CLOs represent two market
value CLOs, one of which converted to the cash flow CLO described above and the second for which the Company is no
longer involved with following its conversion from a market value to a cash flow CLO.
At December 31, 2008 and 2007, CDOs consist of two VIEs that are financed by issuing debt having no voting rights to
investors. The Company has variable interests in each CDO by virtue of its investment in that debt and fees received as the
collateral manager. The carrying amount of the investment in debt issued by the CDOs is $3 at December 31, 2008 and is
classified in fixed maturities.
Other, at December 31, 2008 and 2007, represents the Company’s variable interest in the Glen Meadow ABC Trust, which
is a put option agreement that requires the trust, at any time, to purchase the Company’s junior subordinated notes in a
maximum principal amount not to exceed $500. There is no equity investment and thus the trust is a VIE based on that lack
of voting equity. The put option agreement held by the Company is a variable interest in the trust. The carrying amount of
that option at December 31, 2008 classified in other assets is $42 and the carrying value of the liability for premiums due
under the option contract at December 31, 2008 classified in other liabilities is $40.
Other-Than-Temporary Impairments
The Company has a comprehensive security monitoring process overseen by a committee of investment and accounting
professionals that, on a quarterly basis, identifies securities that could potentially be other-than-temporarily impaired. When
a security is deemed to be other-than-temporarily impaired, its cost or amortized cost is written down to current fair value
and a realized loss is recorded in the Company’s consolidated statements of operations. For fixed maturities, the Company
accretes the new cost basis to par or to the estimated future value over the expected remaining life of the security by
adjusting the security’s yield. For further discussion regarding the Company’s other-than-temporary impairment policy, see
“Evaluation of Other-Than-Temporary Impairments on Available-for-Sale Securities” included in the Critical Accounting
Estimates section of the MD&A, Note 1 of Notes to Consolidated Financial Statements and Item 1A, Risk Factors.
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009