The Hartford 2013 Annual Report Download - page 147

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Significant Accounting Policies (continued)
F-11
Recognition and Presentation of Other-Than-Temporary Impairments
The Company deems bonds and certain equity securities with debt-like characteristics (collectively “debt securities”) to be other-than-
temporarily impaired (“impaired”) if a security meets the following conditions: a) the Company intends to sell or it is more likely than
not that the Company will be required to sell the security before a recovery in value, or b) the Company does not expect to recover the
entire amortized cost basis of the security. If the Company intends to sell or it is more likely than not that the Company will be required
to sell the security before a recovery in value, a charge is recorded in net realized capital losses equal to the difference between the fair
value and amortized cost basis of the security. For those impaired debt securities which do not meet the first condition and for which the
Company does not expect to recover the entire amortized cost basis, the difference between the security’s amortized cost basis and the
fair value is separated into the portion representing a credit other-than-temporary impairment (“impairment”), which is recorded in net
realized capital losses, and the remaining impairment, which is recorded in OCI. Generally, the Company determines a security’s credit
impairment as the difference between its amortized cost basis and its best estimate of expected future cash flows discounted at the
security’s effective yield prior to impairment. The remaining non-credit impairment, which is recorded in OCI, is the difference between
the security’s fair value and the Company’s best estimate of expected future cash flows discounted at the security’s effective yield prior
to the impairment, which typically represents current market liquidity and risk premiums. The previous amortized cost basis less the
impairment recognized in net realized capital losses becomes the security’s new cost basis. 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 evaluation of whether a credit impairment exists for debt securities includes but is not limited to, the following factors:
(a) changes in the financial condition of the security’s underlying collateral, (b) whether the issuer is current on contractually obligated
interest and principal payments, (c) changes in the financial condition, credit rating and near-term prospects of the issuer, (d) the extent
to which the fair value has been less than the amortized cost of the security and (e) the payment structure of the security. The Company’s
best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process that
incorporates information received from third-party sources along with certain internal assumptions and judgments regarding the future
performance of the security. The Company’s best estimate of future cash flows involves assumptions including, but not limited to,
various performance indicators, such as historical and projected default and recovery rates, credit ratings, current and projected
delinquency rates, and loan-to-value ("LTV") ratios. In addition, for structured securities, the Company considers factors including, but
not limited to, average cumulative collateral loss rates that vary by vintage year, commercial and residential property value declines that
vary by property type and location and commercial real estate delinquency levels. These assumptions require the use of significant
management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries
which may include estimating the underlying collateral value. In addition, projections of expected future debt security cash flows may
change based upon new information regarding the performance of the issuer and/or underlying collateral such as changes in the
projections of the underlying property value estimates.
For equity securities where the decline in the fair value is deemed to be other-than-temporary, a charge is recorded in net realized capital
losses equal to the difference between the fair value and cost basis of the security. The previous cost basis less the impairment becomes
the security’s new cost basis. The Company asserts its intent and ability to retain those equity securities deemed to be temporarily
impaired until the price recovers. Once identified, these securities are systematically restricted from trading unless approved by
investment and accounting professionals. The investment and accounting professionals will only authorize the sale of these securities
based on predefined criteria that relate to events that could not have been reasonably foreseen. Examples of the criteria include, but are
not limited to, the deterioration in the issuer’s financial condition, security price declines, a change in regulatory requirements or a major
business combination or major disposition.
The primary factors considered in evaluating whether an impairment exists for an equity security include, but are not limited to: (a) the
length of time and extent to which the fair value has been less than the cost of the security, (b) changes in the financial condition, credit
rating and near-term prospects of the issuer, (c) whether the issuer is current on preferred stock dividends and (d) the intent and ability of
the Company to retain the investment for a period of time sufficient to allow for recovery.
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.