The Hartford 2014 Annual Report Download - page 151

Table of Contents
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For life insurance products, the DAC asset related to most universal life-type contracts (including variable annuities) is amortized over the estimated life of
the contracts acquired in proportion to the present value of estimated gross profits (“EGPs”). EGPs are also used to amortize other assets and liabilities in the
Company’s Consolidated Balance Sheets, such as, sales inducement assets (“SIA”) and unearned revenue reserves (“URR”). Components of EGPs are used to
determine reserves for universal life-type contracts (including variable annuities) with death or other insurance benefits such as guaranteed minimum death,
guaranteed minimum withdrawal and universal life insurance secondary guarantee benefits. These benefits are accounted for and collectively referred to as
death and other insurance benefit reserves and are held in addition to the account value liability representing policyholder funds.
For most life insurance product contracts, the Company estimates gross profits over 20 years as EGPs emerging subsequent to that timeframe are immaterial.
Products sold in a particular year are aggregated into cohorts. Future gross profits for each cohort are projected over the estimated lives of the underlying
contracts, based on future account value projections for variable annuity and variable universal life products. The projection of future account values requires
the use of certain assumptions including: separate account returns; separate account fund mix; fees assessed against the contract holder’s account balance;
surrender and lapse rates; interest margin; mortality; and the extent and duration of hedging activities and hedging costs.
The Company determines EGPs from a single deterministic reversion to mean (“RTM”) separate account return projection which is an estimation technique
commonly used by insurance entities to project future separate account returns. Through this estimation technique, the Company’s DAC model is adjusted to
reflect actual account values at the end of each quarter. Through consideration of recent market returns, the Company will unlock ("Unlock"), or adjust,
projected returns over a future period so that the account value returns to the long-term expected rate of return, providing that those projected returns do not
exceed certain caps. This Unlock for future separate account returns is determined each quarter.
In the third quarter of 2014, the Company completed a comprehensive non-market related policyholder behavior assumption study and incorporates the
results of those studies into its projection of future gross profits. Additionally, throughout the year, the Company evaluates various aspects of policyholder
behavior and periodically revises its policyholder assumptions as credible emerging data indicates that changes are warranted. The Company will continue to
evaluate its assumptions related to policyholder behavior as initiatives to reduce the size of the variable annuity business are implemented by management.
Upon completion of an annual assumption study or evaluation of credible new information, the Company will revise its assumptions to reflect its current best
estimate. These assumption revisions will change the projected account values and the related EGPs in the DAC, SIA and URR amortization models, as well
as, the death and other insurance benefit reserving models. Beginning in 2015, the annual comprehensive non-market related policyholder behavior
assumption study will be completed in the fourth quarter of each year.
All assumption changes that affect the estimate of future EGPs including the update of current account values, the use of the RTM estimation technique and
policyholder behavior assumptions are considered an Unlock in the period of revision. An Unlock adjusts the DAC, SIA, URR and death and other insurance
benefit reserve balances in the Consolidated Balance Sheets with an offsetting benefit or charge in the Consolidated Statements of Operations in the period of
the revision. An Unlock revises EGPs to reflect the Company’s current best estimate assumptions. The Company also tests the aggregate recoverability of
DAC by comparing the existing DAC balance to the present value of future EGPs. An Unlock that results in an after-tax benefit generally occurs as a result of
actual experience or future expectations of product profitability being favorable compared to previous estimates. An Unlock that results in an after-tax charge
generally occurs as a result of actual experience or future expectations of product profitability being unfavorable compared to previous estimates.
Income Taxes
The Company recognizes taxes payable or refundable for the current year and deferred taxes for the tax consequences of temporary differences between the
financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years the temporary differences are expected to reverse. A deferred tax provision is recorded for the tax effects of differences between the
Company's current taxable income and its income before tax under generally accepted accounting principles in the Consolidated Statements of Operations.
The Company records a deferred tax asset valuation allowance that is adequate to reduce the total deferred tax asset to an amount that will more likely than
not be realized.
Goodwill
Goodwill represents the excess of costs over the fair value of net assets acquired. Goodwill is not amortized but is reviewed for impairment at least annually or
more frequently if events occur or circumstances change that would indicate that a triggering event for a potential impairment has occurred. The goodwill
impairment test follows a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a
reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair
value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount
of the reporting unit’s goodwill exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that excess.
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