The Hartford 2008 Annual Report Download - page 351

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
Accounting Policies
Investments
The Hartford’s investments in fixed maturities include bonds, redeemable preferred stock and commercial paper. These
investments, along with certain equity securities, which include common and non-redeemable preferred stocks, are classified
as “available-for-sale” and are carried at fair value. The after-tax difference from cost or amortized cost is reflected in
stockholders’ equity as a component of AOCI, after adjustments for the effect of deducting the life and pension
policyholders’ share of the immediate participation guaranteed contracts and certain life and annuity deferred policy
acquisition costs and reserve adjustments. The equity investments associated with the variable annuity products offered in
Japan are recorded at fair value and are classified as “trading” with changes in fair value recorded in net investment income.
Policy loans are carried at outstanding balance. Mortgage loans on real estate are recorded at the outstanding principal
balance adjusted for amortization of premiums or discounts and net of valuation allowances, if any. Short-term investments
are carried at amortized cost, which approximates fair value. Limited partnerships and other alternative investments are
reported at their carrying value with the change in carrying value accounted for under the equity method and accordingly the
Company’s share of earnings are included in net investment income. Recognition of limited partnerships and other
alternative investment income is delayed due to the availability of the related financial statements, as private equity and
other funds are generally on a three-month delay and hedge funds are on a one-month delay. Accordingly, income at
December 31, 2008 may not include the full impact of current year changes in valuation of the underlying assets and
liabilities. Other investments primarily consist of derivatives instruments which are carried at fair value.
Other-Than-Temporary Impairments on Available-for-Sale Securities
One of the significant estimates related to available-for-sale securities is the evaluation of investments for
other-than-temporary impairments. If a decline in the fair value of an available-for-sale security is judged to be
other-than-temporary, a charge is recorded in net realized capital losses equal to the difference between the fair value and
cost or amortized cost basis of the security. In addition, for securities expected to be sold, an other-than-temporary
impairment charge is recognized if the Company does not expect the fair value of a security to recover to cost or amortized
cost prior to the expected date of sale. The fair value of the other-than-temporarily impaired investment becomes its new
cost basis. For fixed maturities, the Company accretes the new cost basis to par or to the estimated future cash flows over the
expected remaining life of the security by adjusting the security’s yield.
The evaluation of securities for impairments is a quantitative and qualitative process, which is subject to risks and
uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current
period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition
and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period. The
Company has a security monitoring process overseen by a committee of investment and accounting professionals (“the
committee”) that identifies securities that, due to certain characteristics, as described below, are subjected to an enhanced
analysis on a quarterly basis. Based on this evaluation, during 2008, the Company concluded $4.0 billion of unrealized
losses were other-than-temporarily impaired and as of December 31, 2008, the Company’s unrealized losses on
available-for-sale securities of $14.6 billion were temporarily impaired.
Securities not subject to EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial
Interests and Beneficial Interests That Continued to Be Held by a Transferor in Securitized Financial Assets” (“non-EITF
Issue No. 99-20 securities”) that are in an unrealized loss position, are reviewed at least quarterly to determine if an
other-than-temporary impairment is present based on certain quantitative and qualitative factors. The primary factors
considered in evaluating whether a decline in value for non-EITF Issue No. 99-20 securities is other-than-temporary include:
(a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery
period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is
current on contractually obligated interest and principal payments and (d) the intent and ability of the Company to retain the
investment for a period of time sufficient to allow for recovery.
Through September 30, 2008, for securitized financial assets with contractual cash flows, including those subject to EITF
Issue No. 99-20, the Company periodically updated its best estimate of cash flows over the life of the security. The
Company’s best estimate of cash flows used severe economic recession assumptions due to market uncertainty, similar to
those the Company believed market participants would use. If the fair value of a securitized financial asset was less than its
cost or amortized cost and there has been an adverse change in timing or amount of anticipated future cash flows since the
last revised estimate, an other-than-temporary impairment charge was recognized. The Company also considered its intent
and ability to retain a temporarily depressed security until recovery. Estimating future cash flows is a quantitative and
qualitative process that incorporates information received from third party sources along with certain internal assumptions
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009