The Hartford 2008 Annual Report Download - page 353

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
Each quarter, during this analysis, the Company asserts its intent and ability to retain until recovery those securities judged
to be temporarily impaired. Once identified, these securities are systematically restricted from trading unless approved by
the committee. The committee will only authorize the sale of these securities based on predefined criteria that relate to
events that could not have been reasonably foreseen at the time the committee rendered its judgment on the Company’s
intent and ability to retain such securities until recovery. Examples of the criteria include, but are not limited to, the
deterioration in the issuer’s creditworthiness, a change in regulatory requirements or a major business combination or major
disposition.
Mortgage Loan Impairments
Mortgage loans on real estate 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. 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 original effective interest rate, (b) the loan’s observable market price or (c) the fair value of
the collateral. Changes in valuation allowances are recorded in net realized capital gains and losses.
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. 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, and the change in value of derivatives in certain
fair-value hedge relationships. Impairments are recognized as net realized capital losses when investment losses in value are
deemed other-than-temporary. Recoveries of principal received by the Company in excess of expected realizable value from
securities previously recorded as other-than-temporarily impaired are included in net realized capital gains. 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 on real estate 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
principal 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. For limited partnerships, the equity method of accounting is used to recognize the Company’s share of
earnings. For fixed maturities that have had an other-than-temporary impairment loss, the Company amortizes the new cost
basis to par or to the estimated future value over the expected remaining life of the security by adjusting the security’s yield.
Net investment income on equity securities held for 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 as provided in SOP 03-1. 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.
Derivative Instruments
Overview
The Company utilizes a variety of derivative instruments, including swaps, caps, floors, forwards, futures and options
through one of four Company-approved objectives: to hedge risk arising from interest rate, equity market, credit spread
including issuer default, price or currency exchange rate risk or volatility; to manage liquidity; to control transaction costs;
or to enter into replication transactions. For a further discussion of derivative instruments, see the Derivative Instruments
section of Note 5.
The Company’s derivative transactions are used in strategies permitted under the derivative use plans required by the State
of Connecticut, the State of Illinois and the State of New York insurance departments.
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009