The Hartford 2013 Annual Report Download - page 187

F-51
Variable Interest Entities
The Company is involved with various special purpose entities and other entities that are deemed to be VIEs primarily as a collateral or investment
manager and as an investor through normal investment activities, as well as a means of accessing capital through a contingent capital facility.
For further information on the facility, see Note 13 - Debt of Notes to Consolidated Financial Statements.
A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest or lacks sufficient funds to
finance its own activities without financial support provided by other entities.
The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in the
VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct
the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or right to receive benefits
from the VIE that could potentially be significant to the VIE. Based on the Company’s assessment, if it determines it is the primary beneficiary,
the Company consolidates the VIE in the Company’s Consolidated Financial Statements.
Consolidated VIEs
The following table presents the carrying value of assets and liabilities, and the maximum exposure to loss relating to the VIEs for which the
Company is the primary beneficiary. Creditors have no recourse against the Company in the event of default by these VIEs nor does the Company
have any implied or unfunded commitments to these VIEs. The Company’s financial or other support provided to these VIEs is limited to its
collateral or investment management services and original investment.
December 31, 2013 December 31, 2012
Total Assets Total Liabilities [1]
Maximum
Exposure to
Loss [2] Total Assets Total Liabilities [1]
Maximum
Exposure to
Loss [2]
CDOs [3] $ 31 $ 33 $ — $ 89 $ 88 $ 7
Investment funds [4] 164 — 173 163 — 162
Limited partnerships 4—4615
Total $ 199 $ 33 $ 177 $ 258 $ 89 $ 174
[1] Included in other liabilities in the Company’s Consolidated Balance Sheets.
[2] The maximum exposure to loss represents the maximum loss amount that the Company could recognize as a reduction in net investment income or
as a realized capital loss and is the cost basis of the Company’s investment.
[3] Total assets included in fixed maturities, AFS in the Company’s Consolidated Balance Sheets.
[4] Total assets included in fixed maturities, FVO, short-term investments, and equity, AFS in the Company's Consolidated Balance Sheets.
CDOs represent structured investment vehicles for which the Company has a controlling financial interest as it provides collateral management
services, earns a fee for those services and also holds investments in the securities issued by these vehicles. Investment funds represent wholly-
owned fixed income funds for which the Company has management and control of the investments which is the activity that most significantly
impacts its economic performance. Limited partnerships represent one hedge fund for which the Company holds a majority interest in the fund
as an investment.
Non-Consolidated VIEs
The Company holds a significant variable interest for one VIE for which it is not the primary beneficiary and, therefore, was not consolidated
on the Company’s Consolidated Balance Sheets. This VIE represents a contingent capital facility (“facility”) that has been held by the Company
since February 2007 for which the Company has no implied or unfunded commitments. Assets and liabilities recorded for the facility were $17
and $19 as of December 31, 2013, respectively, and $23 and $23, respectively, as of December 31, 2012. Additionally, the Company has a
maximum exposure to loss of $3 and $3, respectively, as of December 31, 2013 and 2012, which represents the issuance costs that were
incurred to establish the facility. The Company does not have a controlling financial interest as it does not manage the assets of the facility nor
does it have the obligation to absorb losses or the right to receive benefits that could potentially be significant to the facility, as the asset manager
has significant variable interest in the vehicle. The Company’s financial or other support provided to the facility is limited to providing ongoing
support to cover the facility’s operating expenses. For further information on the facility, see Note 13 - Debt of Notes to Consolidated Financial
Statements.
In addition, the Company, through normal investment activities, makes passive investments in structured securities issued by VIEs for which the
Company is not the manager which are included in ABS, CDOs, CMBS and RMBS in the Available-for-Sale Securities table and fixed maturities,
FVO, in the Company’s Consolidated Balance Sheets. The Company has not provided financial or other support with respect to these investments
other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the relative size of the
Company’s investment in comparison to the principal amount of the structured securities issued by the VIEs, the level of credit subordination
which reduces the Company’s obligation to absorb losses or right to receive benefits and the Company’s inability to direct the activities that most
significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the
amount of the Company’s investment.
Table of Contents THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Investments and Derivative Instruments (continued)