The Hartford 2015 Annual Report Download - page 65

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Living Benefits Required to be Fair Valued (in Other Policyholder Funds and Benefits Payable)
Fair values for GMWBs classified as embedded derivatives 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 these GMWBs and the related reinsurance and
customized freestanding derivatives are calculated as an aggregation of the following components: Best Estimate Claim 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 to or receive 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. Oversight of the Company's valuation policies and
processes for product and GMWB reinsurance derivatives is performed by a multidisciplinary group comprised of finance, actuarial and
risk management professionals. This multidisciplinary group reviews and approves changes and enhancements to the Company's
valuation model as well as associated controls
For further discussion on the impact of fair value changes from living benefits see Note 4 - Fair Value Measurements of Notes to
Consolidated Financial Statements, and for a discussion on the sensitivities of certain living benefits due to capital market factors see
Part II, Item 7, MD&A — Variable Product Guarantee Risks and Risk Management.
Evaluation of Goodwill for 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, assets under management for Mutual Funds, and the weighted average cost of
capital used for purposes of discounting. Decreases in the amount of legal entity capital held or 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, increasing the possibility of impairment.
A reporting unit is defined as an operating segment or one level below an operating segment. The Company’s reporting units, for which
goodwill has been allocated, are equivalent to the Company’s operating segments of Group Benefits, Personal Lines and Mutual Funds.
The carrying value of goodwill is $498 as of December 31, 2015 and is comprised of $241 for Mutual Funds, $138 for Group Benefits
and $119 for Personal Lines.
The annual goodwill assessment for the Mutual Funds, Group Benefits and Personal Lines reporting units was completed as of October
31, 2015, which resulted in no write-downs of goodwill for the year ended December 31, 2015. All reporting units passed the first step
of the annual impairment test with a significant margin. For information regarding the 2014 and 2013 impairment tests see Note 8 -
Goodwill of Notes to Consolidated Financial Statements.