The Hartford 2012 Annual Report Download - page 64

Table of Contents
Living Benefits Required to be Fair Valued (in Other Policyholder Funds and Benefits Payable 
Fair values for GMWB and GMAB contracts are calculated using the income approach based upon internally developed models because active, observable
markets do not exist for those items. The fair value of the Company’s guaranteed benefit liabilities, classified as embedded derivatives, and the related
reinsurance and customized freestanding derivatives is calculated as an aggregation of the following components: Best Estimate Claims Payments; Credit
Standing Adjustment; and Margins. The resulting aggregation is reconciled or calibrated, if necessary, to market information that is, or may be, available to
the Company, but may not be observable by other market participants, including reinsurance discussions and transactions. The Company believes the
aggregation of these components, as necessary and as reconciled or calibrated to the market information available to the Company, results in an amount that
the Company would be required to transfer, or receive, for an asset, to or from market participants in an active liquid market, if one existed, for those market
participants to assume the risks associated with the guaranteed minimum benefits and the related reinsurance and customized derivatives. The fair value is
likely to materially diverge from the ultimate settlement of the liability as the Company believes settlement will be based on our best estimate assumptions
rather than those best estimate assumptions plus risk margins. In the absence of any transfer of the guaranteed benefit liability to a third party, the release of
risk margins is likely to be reflected as realized gains in future periods’ net income. For further discussion on the impact of fair value changes from living
benefits see Note 5 of the Notes to Consolidated Financial Statements and for a discussion on the sensitivities of certain living benefits due to capital market
factors see Variable Product Guarantee Risks and Risk Management section of the MD&A.
Goodwill Impairment
Goodwill balances are 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.
Management’s determination of the fair value of each reporting unit incorporates multiple inputs into discounted cash flow calculations including assumptions
that market participants would make in valuing the reporting unit. Assumptions include levels of economic capital, future business growth, earnings
projections, and assets under management for Mutual Funds and the reporting units within Talcott Resolution and the weighted average cost of capital used for
purposes of discounting. Decreases in the amount of economic capital allocated to a reporting unit, decreases in business growth, decreases in earnings
projections and increases in the weighted average cost of capital will all cause a reporting unit’s fair value to decrease.
A reporting unit is defined as an operating segment or one level below an operating segment. Certain of the Company’s reporting units, for which goodwill has
been allocated, are equivalent to the Company’s operating segments as there is no discrete financial information available for the separate components of the
segment or all of the components of the segment have similar economic characteristics. The Group Benefits, Consumer Markets and Mutual Funds operating
segments all have equivalent reporting units. In 2012 and 2011, The Hartford changed its operating segments with no change to reporting units. As part of the
operating segment changes in 2012, the Individual Life and Retirement Plans reporting units are now included in the Talcott Resolution operating segment.
Goodwill associated with the June 30, 2000 buyback of Hartford Life, Inc. was allocated to each of Hartford Life’s reporting units based on the reporting unit's
fair value of in-force business at the time of the buyback. Although this goodwill was allocated to each reporting unit, as shown in the table below, it is held in
Corporate for segment reporting.
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