The Hartford 2009 Annual Report Download - page 129

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Calculated Interest Rate Sensitivity
The after-tax change in the net economic value of investment contracts (e.g., guaranteed investment contracts) and certain insurance
product liabilities (e.g., short-term and long-term disability contracts), for which the payment rates are fixed at contract issuance and the
investment experience is substantially absorbed by the Company’ s Life operations, are included in the following table along with the
corresponding invested assets. Also included in this analysis are the interest rate sensitive derivatives used by the Company to hedge its
exposure to interest rate risk. Certain financial instruments, such as limited partnerships and other alternative investments, have been
omitted from the analysis due to the fact that the investments are accounted for under the equity method and generally lack sensitivity to
interest rate changes. Separate account assets and liabilities, equity securities, trading and the corresponding liabilities associated with
the variable annuity products sold in Japan are excluded from the analysis because gains and losses in separate accounts accrue to
policyholders. The calculation of the estimated hypothetical change in net economic value below assumes a 100 basis point upward and
downward parallel shift in the yield curve.
Change in Net Economic Value As of December 31,
2009 2008
Basis point shift - 100 + 100 - 100 + 100
Amount $ (30) $ (9) $ (173) $ 114
The fixed liabilities included above represented approximately 63% of the Company’ s Life operations’ general account liabilities as of
December 31, 2009 and 2008. The assets supporting the fixed liabilities are monitored and managed within rigorous duration
guidelines, and are evaluated on a monthly basis, as well as annually using scenario simulation techniques in compliance with
regulatory requirements.
The following table provides an analysis showing the estimated after-tax change in the fair value of the Company’ s fixed maturity
investments and related derivatives, assuming 100 basis point upward and downward parallel shifts in the yield curve as of December
31, 2009 and 2008. Certain financial instruments, such as limited partnerships and other alternative investments, have been omitted
from the analysis due to the fact that the investments are accounted for under the equity method and generally lack sensitivity to interest
rate changes.
Change in Fair Value As of December 31,
2009 2008
Basis point shift - 100 + 100 - 100 + 100
Amount $ 2,326 $ (2,230) $ 2,015 $ (1,944)
The selection of the 100 basis point parallel shift in the yield curve was made only as an illustration of the potential hypothetical impact
of such an event and should not be construed as a prediction of future market events. Actual results could differ materially from those
illustrated above due to the nature of the estimates and assumptions used in the above analysis. The Company’ s sensitivity analysis
calculation assumes that the composition of invested assets and liabilities remain materially consistent throughout the year and that the
current relationship between short-term and long-term interest rates will remain constant over time. As a result, these calculations may
not fully capture the impact of portfolio re-allocations, significant product sales or non-parallel changes in interest rates.
Credit Risk
The Company is exposed to credit risk within our investment portfolio and through counterparties. Credit risk relates to the uncertainty
of an obligor’ s continued ability to make timely payments in accordance with the contractual terms of the instrument or contract. The
Company manages credit risk through established investment credit policies which address quality of obligors and counterparties, credit
concentration limits, diversification requirements and acceptable risk levels under expected and stressed scenarios. These policies are
regularly reviewed and approved by senior management.
The derivative counterparty exposure policy 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 in derivative instruments by entering into transactions with high quality counterparties rated A2/A or better,
which are monitored and evaluated by the Company’ s risk management team 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. For further information on derivative counterparty credit risk, see the Investment Credit Risk section of the MD&A.
In addition to counterparty credit risk, the Company enters into credit derivative instruments to manage credit exposure. The Company
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 Company has also entered into credit default swaps that assume
credit risk to synthetically replicate the characteristics and performance of assets that would otherwise be permissible investments under
the Company’ s investment policies. Credit spread widening will generally result in an increase in fair value of derivatives that purchase
credit protection and a decrease in fair value of derivatives that assume credit risk. These derivatives do not receive hedge accounting
treatment and, as such, changes in fair value are reported through earnings. As of December 31, 2009 and 2008, the notional amount
related to credit derivatives that purchase credit protection was $2.6 billion and $3.7 billion, respectively, while the fair value was $(50)
and $340, respectively. As of December 31, 2009 and 2008, the notional amount related to credit derivatives that assume credit risk was
$1.2 billion, while the fair value was $(240) and $(403), respectively. For further information on credit derivatives, see the Investment
Credit Risk section of the MD&A and Note 5 of the Notes to Consolidated Financial Statements.