The Hartford 2014 Annual Report Download - page 62

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, 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. Under RTM, the expected long term weighted average rate of return is 8.3%.
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 model. Beginning in 2015, the annual comprehensive non-market related policyholder behavior
assumption study will be completed in the fourth quarter of the 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 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 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.
EGPs are also used to determine the expected excess benefits and assessments included in the measurement of death and other insurance benefit reserves.
These excess benefits and assessments are derived from a range of stochastic scenarios that have been calibrated to the Company’s RTM separate account
returns. The determination of death and other insurance benefit reserves is also impacted by discount rates, lapses, volatilities, mortality assumptions and
benefit utilization, including assumptions around annuitization rates.
An Unlock revises EGPs, on a quarterly basis, to reflect market updates of policyholder account value and the Company’s current best estimate assumptions.
Modifications to the Company’s hedging programs may impact EGPs, and correspondingly impact DAC recoverability. After each quarterly Unlock, the
Company also tests the aggregate recoverability of DAC by comparing the DAC balance to the present value of future EGPs. The margin between the DAC
balance and the present value of future EGPs for U.S. individual variable annuities was 36% as of December 31, 2014. If the margin between the DAC asset
and the present value of future EGPs is exhausted, then further reductions in EGPs would cause portions of DAC to be unrecoverable and the DAC asset
would be written down to equal future EGPs.
Evaluation of Other-Than-Temporary Impairments on Available-for-Sale Securities and Valuation Allowances on Mortgage Loans
The Company has a monitoring process that is overseen by a committee of investment and accounting professionals which identifies investments that are
subject to an enhanced evaluation on a quarterly basis to determine if an other-than-temporary impairment (“impairment”) is present for AFS securities or a
valuation allowance is required for mortgage loans. This evaluation is a quantitative and qualitative process, which is subject to risks and uncertainties. For
further discussion of the accounting policies, see the Significant Investment Accounting Policies Section in Note 1 - Basis of Presentation and Significant
Accounting Policies of Notes to Consolidated Financial Statements. For a discussion of impairments recorded, see the Other-Than-Temporary Impairments
within the Investment Portfolio Risks and Risk Management section of the MD&A.
62