The Hartford 2015 Annual Report Download - page 103

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Credit Risk
Credit risk is defined as the risk to earnings or capital due to uncertainty of an obligor’s or counterparty’s ability or willingness to meet
its obligations in accordance with contractually agreed upon terms. The majority of the Company’s credit risk is concentrated in its
investment holdings but is also present in reinsurance and insurance portfolios. Credit risk is comprised of three major factors: the risk of
change in credit quality, or credit migration risk; the risk of default; and the risk of a change in value due to changes in credit spread. A
decline in creditworthiness is typically associated with an increase in an investment’s credit spread, potentially resulting in an increase in
other-than-temporary impairments and an increased probability of a realized loss upon sale.
The objective of the Company’s enterprise credit risk management strategy is to identify, quantify, and manage credit risk on an
aggregate portfolio basis and to limit potential losses in accordance with an established credit risk management policy. The Company
manages to its credit risk appetite by primarily holding a diversified mix of investment grade issuers and counterparties across its
investment, reinsurance, and insurance portfolios. Potential losses are also limited within portfolios by diversifying across geographic
regions, asset types, and sectors.
The Company manages credit risk exposure from its inception to its maturity or sale. Both the investment and reinsurance areas have
formulated procedures for counterparty approvals and authorizations. Although approval processes may vary by area and type of credit
risk, approval processes establish minimum levels of creditworthiness and financial stability. Credits considered for investment are
subjected to underwriting reviews. Within the investment portfolio, private securities are subject to committee review for approval.
Credit risks are managed on an on-going basis through the use of various processes and analyses. At the investment, reinsurance, and
insurance product levels, fundamental credit analyses are performed at the issuer/counterparty level on a regular basis. To provide a
holistic review within the investment portfolio, fundamental analyses are supported by credit ratings, assigned by nationally recognized
rating agencies or internally assigned, and by quantitative credit analyses. The Company utilizes various risk tools, such as credit value
at risk ("VaR") to measure spread, migration, and default risk on a monthly basis. Issuer and security level risk measures are also
utilized. In the event of deterioration in credit quality, the Company maintains watch lists of problem counterparties within the
investment and reinsurance portfolios. The watch lists are updated based on regular credit examinations and management reviews. The
Company also performs quarterly assessments of probable expected losses in the investment portfolio. The process is conducted on a
sector basis and is intended to promptly assess and identify potential problems in the portfolio and to recognize necessary impairments.
Credit risk policies at the enterprise and operation level ensure comprehensive and consistent approaches to quantifying, evaluating, and
managing credit risk under expected and stressed conditions. These policies define the scope of the risk, authorities, accountabilities,
terms, and limits, and are regularly reviewed and approved by senior management. Aggregate counterparty credit quality and exposure is
monitored on a daily basis utilizing an enterprise-wide credit exposure information system that contains data on issuers, ratings,
exposures, and credit limits. Exposures are tracked on a current and potential basis. Credit exposures are reported regularly to the
Company's Asset Liability Committee ("ALCO") and the ERCC. Exposures are aggregated by ultimate parent across investments,
reinsurance receivables, insurance products with credit risk, and derivative counterparties.
The Company exercises various methods to mitigate its credit risk exposure within its investment and reinsurance portfolios. Some of
the reasons for mitigating credit risk include financial instability or poor credit, avoidance of arbitration or litigation, future uncertainty
of the counterparty, and exposure in excess of risk tolerances. Credit risk within the investment portfolio is most commonly mitigated
through asset sales or the use of derivative instruments. Counterparty credit risk is mitigated through the practice of entering into
contracts only with strong creditworthy institutions and through the practice of holding and posting of collateral. In addition, transactions
cleared through a central clearing house reduce risk due to their ability to require daily variation margin, monitor the Company's ability to
request additional collateral in the event of a counterparty downgrade, and be an independent valuation source. Systemic credit risk is
mitigated through the construction of high-quality, diverse portfolios that are subject to regular underwriting of credit risks. For further
discussion of the Company’s investment and derivative instruments, see MD&A - Enterprise Risk Management, Portfolio Risks and
Risk Management and Note 6 - Investments and Derivative Instruments of Notes to Consolidated Financial Statements. For further
discussion on managing and mitigating credit risk from the use of reinsurance via an enterprise security review process, see MD&A -
Enterprise Risk Management, Insurance Risk Management, Reinsurance as a Risk Management Strategy.
As of December 31, 2015, the Company had no investment exposure to any credit concentration risk of a single issuer or counterparty
greater than 10% of the Company's stockholders' equity, other than the U.S. government and certain U.S. government securities. For
further discussion of concentration of credit risk in the investment portfolio, see the Concentration of Credit Risk section in Note 6 -
Investments and Derivative Instruments of Notes to Consolidated Financial Statements.