The Hartford 2008 Annual Report Download - page 422

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Investments and Derivative Instruments (continued)
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk from a single entity, referenced index, or asset pool in
order to synthetically replicate investment transactions. The Company will receive periodic payments based on an agreed
upon rate and notional amount and will only make a payment if there is a credit event. A credit event payment will typically
be equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation. A credit
event is generally defined as default on contractually obligated interest or principal payments or bankruptcy of the
referenced entity. The credit default swaps in which the Company assumes credit risk primarily 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 that possess different credit ratings.
The following table presents the notional amount, fair value, weighted average years to maturity, underlying referenced
credit obligation type and average credit ratings, and offsetting notional amounts and fair value for credit derivatives in
which the Company is assuming credit risk as of December 31, 2008.
As of December 31, 2008
Underlying Referenced Credit
Weighted Obligation(s) [1]
Average Average Offsetting
Credit Derivative type by derivative Notional Fair Years to Credit Notional Offsetting
risk exposure Amount [2] Value Maturity Type Rating Amount [3] Fair Value [3]
Single name credit default swaps
Investment grade risk exposure $ 60 $ (1) 4 years Corporate Credit A- $ 35 $ (9)
Below investment grade risk exposure 82 (19) 4 years Corporate Credit B- — —
Basket credit default swaps [4]
Investment grade risk exposure 1,778 (235) 5 years Corporate Credit A- 1,003 21
Investment grade risk exposure 275 (92) 42 years CMBS Credit AAA 275 92
Below investment grade risk exposure 200 (166) 6 years Corporate Credit BB+ — —
Credit linked notes
Investment grade risk exposure 117 106 2 years Corporate Credit BBB+ — —
Total $ 2,512 $ (407) $ 1,313 $ 104
[1] The average credit ratings are based on availability and the midpoint of the applicable ratings among Moody’s, S&P,
and Fitch. If no rating is available from a rating agency, then an internally developed rating is used.
[2] Notional amount is equal to the maximum potential future loss amount. There is no specific collateral related to these
contracts or recourse provisions included in the contracts to offset losses.
[3] The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby
offsetting the future changes in value of or losses paid related to the original swap.
[4] Includes $1.9 billion of standard market indices of diversified portfolios of corporate issuers referenced through credit
default swaps. These swaps are subsequently valued based upon the observable standard market index. Also includes
$325 of customized diversified portfolios of corporate issuers.
F-58
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009