The Hartford 2008 Annual Report Download - page 121

Table of Contents
Given the recent market declines and increased volatility during the fourth quarter of 2008, the Company has seen and
expects that growth in Retirement deposits will be negatively affected if businesses reduce their workforces and offer more
modest salary increases and as workers potentially allocate less to retirement accounts in the near term. The severe decline
in equity markets in the second half of 2008 has significantly reduced Retirement Plans assets under management, which has
strained its net income. This earnings strain is expected to continue throughout 2009 or until the equity markets improve.
Group Benefits
Group Benefits’ sales may fluctuate based on the competitive pricing environment in the marketplace. In 2008, the
Company generated fully insured ongoing premium growth in the group life and disability operations. During 2007, the
Company completed a renewal rights transaction associated with its medical stop loss business, which caused lower earned
premium and sales growth in 2008. The Company anticipates relatively stable loss ratios and expense ratios based on
underlying trends in the in-force business and disciplined new business and renewal underwriting. The Company has not
seen a meaningful impact in disability loss ratios as a result of the recent economic downturn. While claims incidence may
increase during a recession, the Company would expect the impact to the disability loss ratio to be within the normal range
of volatility.
The current economic downturn has resulted in rising unemployment combined with the potential for employees to lessen
spending on the Company’s products may impact future premium growth. Nonetheless, employees continue to look to the
workplace for a broader and ever expanding array of insurance products. As employers design benefit strategies to attract
and retain employees, while attempting to control their benefit costs, management believes that the need for the Company’s
products will continue to expand. This combined with the significant number of employees who currently do not have
coverage or adequate levels of coverage, creates opportunities for our products and services.
International
Financial results depend on the account values of our customers, which are affected by equity, bond and currency markets.
Periods of favorable market performance will increase assets under management and thus increase fee income earned on
those assets, while unfavorable market performance will have the reverse effect. In addition, higher or lower account value
levels, whether driven by market or currency impacts on the underlying investments, will generally reduce or increase,
respectively, certain costs for individual annuities to the Company, such as guaranteed minimum death benefits (“GMDB”),
guaranteed minimum income benefits (“GMIB”), guaranteed minimum accumulation benefits (“GMAB”) and guaranteed
minimum withdrawal benefits (“GMWB”). In addition, International’s financial results are significantly impacted by the
exchange rate between the U.S. dollar and the Japanese yen. Prudent expense management is also an important component
of product financial results.
Due to significant market declines in the fourth quarter, approximately 97% of our in-force 3 Win policies, or $3.1 billion in
account value, have triggered the associated GMIB. As a result of the GMIB trigger, the majority of our 3 Win policies
annuitized or surrendered free of charge in the fourth quarter of 2008. This significantly and negatively impacted fourth
quarter net flows and will continue to reduce future profitability. For further details on the trigger of the GMIB associated
with the 3 Win product, see Unlock and Sensitivity Analysis within Critical Accounting Estimates.
Competition has increased dramatically in the Japanese market from both domestic and foreign insurers. In addition to
seeing new entrants in the Japanese market, our existing competitors are rapidly introducing new products, some of which
include shorter guarantee periods as well as ratcheting guarantee features and higher equity asset allocation. This increase in
competition has impacted current deposits and is expected to negatively impact future deposit levels. In addition, the
Company continues to evaluate product designs that meet customers’ needs while maintaining prudent risk management.
During the second and third quarters of 2008, the Company launched a new product called “Rising Income/Care Story,”
which is a GMWB variable annuity combined with a nursing care rider, as well as the new product “Plus 5,” which is a
10-year GMAB variable annuity with a 5% bonus at year 10. The success of the Company’s product offerings will
ultimately be based on customer acceptance in an increasingly competitive environment.
During 2008 the Company has experienced lower than expected surrenders and related surrender fees. In addition, the
Company has experienced significant market declines and therefore some of the product guarantees have increased in cost.
Specifically, the trigger of the 3 Win product, referenced above, has reduced variable annuity assets under management and
will negatively impact overall financial results and is expected to result in a lower return on assets than in prior years.
In 2009, the Company intends to review its variable annuity product features in an effort to reduce the risks and costs
associated with variable annuity benefit features in the current economic environment.
67
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009