The Hartford 2012 Annual Report Download - page 154

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Mortgage Loan Valuation Allowances
The Company’s security monitoring process reviews mortgage loans on a quarterly basis to identify potential credit losses. Commercial mortgage loans are
considered to be impaired when management estimates that, based upon current information and events, it is probable that the Company will be unable to
collect amounts due according to the contractual terms of the loan agreement. Criteria used to determine if an impairment exists include, but are not limited to:
current and projected macroeconomic factors, such as unemployment rates, and property-specific factors such as rental rates, occupancy levels, LTV ratios
and debt service coverage ratios (“DSCR”). In addition, the Company considers historic, current and projected delinquency rates and property values. These
assumptions require the use of significant management judgment and include the probability and timing of borrower default and loss severity estimates. In
addition, projections of expected future cash flows may change based upon new information regarding the performance of the borrower and/or underlying
collateral such as changes in the projections of the underlying property value estimates.
For mortgage loans that are deemed impaired, a valuation allowance is established for the difference between the carrying amount and the Company’s share of
either (a) the present value of the expected future cash flows discounted at the loan’s effective interest rate, (b) the loan’s observable market price or, most
frequently, (c) the fair value of the collateral. A valuation allowance has been established for either individual loans or as a projected loss contingency for loans
with an LTV ratio of 90% or greater and consideration of other credit quality factors, including DSCR. Changes in valuation allowances are recorded in net
realized capital gains and losses. Interest income on impaired loans is accrued to the extent it is deemed collectible and the loans continue to perform under the
original or restructured terms. Interest income ceases to accrue for loans when it is probable that the Company will not receive interest and principal payments
according to the contractual terms of the loan agreement, or if a loan is more than 60 days past due. Loans may resume accrual status when it is determined
that sufficient collateral exists to satisfy the full amount of the loan and interest payments, as well as when it is probable cash will be received in the
foreseeable future. Interest income on defaulted loans is recognized when received.
Net Realized Capital Gains and Losses
Net realized capital gains and losses from investment sales, after deducting the life and pension policyholders’ share for certain products, are reported as a
component of revenues and are determined on a specific identification basis, as well as changes in value associated with fixed maturities for which the fair
value option was elected. Net realized capital gains and losses also result from fair value changes in derivatives contracts (both free-standing and embedded)
that do not qualify, or are not designated, as a hedge for accounting purposes, ineffectiveness on derivatives that qualify for hedge accounting treatment, and
the change in value of derivatives in certain fair-value hedge relationships and their associated hedged asset. Impairments and mortgage loan valuation
allowances are recognized as net realized capital losses in accordance with the Company’s impairment and mortgage loan valuation allowance policies
previously discussed above. Foreign currency transaction remeasurements are also included in net realized capital gains and losses.
Net Investment Income
Interest income from fixed maturities and mortgage loans is recognized when earned on the constant effective yield method based on estimated timing of cash
flows. The amortization of premium and accretion of discount for fixed maturities also takes into consideration call and maturity dates that produce the lowest
yield. For securitized financial assets subject to prepayment risk, yields are recalculated and adjusted periodically to reflect historical and/or estimated future
repayments using the retrospective method; however, if these investments are impaired, any yield adjustments are made using the prospective method.
Prepayment fees on fixed maturities and mortgage loans are recorded in net investment income when earned. Limited partnerships and other alternative
investments primarily use the equity method of accounting to recognize the Company’s share of earnings, as well as investment fund accounting applied to a
wholly-owned fund of funds. For impaired debt securities, the Company accretes the new cost basis to the estimated future cash flows over the expected
remaining life of the security by prospectively adjusting the security’s yield, if necessary. The Company’s non-income producing investments were not
material for the years ended December 31, 2012, 2011 and 2010.
Net investment income on equity securities, trading, includes dividend income and the changes in market value of the securities associated with the variable
annuity products sold in Japan and the United Kingdom. The returns on these policyholder-directed investments inure to the benefit of the variable annuity
policyholders but the underlying funds do not meet the criteria for separate account reporting. Accordingly, these assets are reflected in the Company’s general
account and the returns credited to the policyholders are reflected in interest credited, a component of benefits, losses and loss adjustment expenses.
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