The Hartford 2008 Annual Report Download - page 277

Table of Contents
The Company uses credit derivatives to assume credit risk from and reduce credit risk to a single entity, referenced index, or
asset pool. The credit default swaps in which the Company assumes credit risk reference investment grade single corporate
issuers, baskets of up to five corporate issuers and diversified portfolios of corporate issuers. The diversified portfolios of
corporate issuers are established within sector concentration limits and are typically divided into tranches which possess
different credit ratings ranging from AAA through the CCC rated first loss position. In addition to the credit default swaps
that assume credit exposure, the Company also purchases credit protection through credit default swaps to economically
hedge and manage credit risk of certain fixed maturity investments across multiple sectors of the investment portfolio.
The credit default swaps are carried on the balance sheet at fair value. The Company received upfront premium payments on
certain credit default swaps, which reduces the Company’s overall credit exposure. The following table summarizes the
credit default swaps used by the Company to manage credit risk within the portfolio, excluding credit default swaps in
offsetting positions, which had a notional amount of $2.6 billion as of December 31, 2008.
Credit Default Swaps
December 31, 2008 December 31, 2007
Initial Initial
Notional Premium Notional Premium
Amount Received Fair Value Amount Received Fair Value
Assuming credit risk $ 1,082 $ (2) $ (399) $ 2,715 $ (203) $ (416)
Reducing credit risk 3,668 (1) 340 5,166 (1) 81
Total credit default
swaps $ 4,750 $ (3) $ (59) $ 7,881 $ (204) $ (335)
During 2008, the Company continued to reduce overall credit risk exposure to general credit spread movements by both
reducing and rebalancing the total notional amount of the credit default swap portfolio. In addition, all credit derivatives that
reference the first loss position of a basket of corporate issuers were terminated during 2008. The Company’s credit default
swap portfolio has experienced and may continue to experience market value fluctuations based upon certain market
conditions, including credit spread movement of specific referenced entities. For the year ended December 31, 2008, the
Company realized losses of $153, including net periodic coupon settlements, on credit default swaps.
Prior to the first quarter of 2008, the Company also assumed credit exposure through credit index swaps referencing AAA
rated CMBS indices. During the first and second quarter of 2008, the Company realized a loss of $100 and $3, before-tax,
respectively, as a result of these swaps maturing as well as the Company eliminating exposure to the remaining swaps by
entering into offsetting positions. As of December 31, 2008, the Company does not have exposure to CMBS through credit
derivatives.
Available-for-Sale Securities
The following table identifies fixed maturities by credit quality on a consolidated basis. The ratings referenced below are
based on the ratings of a nationally recognized rating organization or, if not rated, assigned based on the Company’s internal
analysis of such securities.
Consolidated Fixed Maturities by Credit Quality
December 31, 2008 December 31, 2007
Percent of Percent of
Amortized Total Fair Amortized Total Fair
Cost Fair Value Value Cost Fair Value Value
AAA $ 17,844 $ 13,489 20.7% $ 28,547 $ 28,318 35.4%
AA 14,093 11,646 17.9% 11,326 10,999 13.7%
A 18,742 15,831 24.4% 16,999 17,030 21.3%
BBB 15,749 12,794 19.6% 15,093 14,974 18.7%
United States
Government/Government
agencies 9,409 9,568 14.7% 5,165 5,229 6.5%
BB & below 2,401 1,784 2.7% 3,594 3,505 4.4%
Total fixed maturities $ 78,238 $ 65,112 100.0% $ 80,724 $ 80,055 100.0%
The Company’s investment ratings as a percentage of total fixed maturities experienced a downward shift from AAA since
December 31, 2007 primarily due to rating agency downgrades of monoline insurers, as well as, downgrades of sub-prime,
CMBS, and financial services sector securities. The movement in both government rated and BB & below securities is
attributable to efforts to reallocate the portfolio to higher quality, risk adverse assets through purchases of U.S. Treasuries
and sales of high yield securities.
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009