The Hartford 2008 Annual Report Download - page 360

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
Estimating future gross profits is a complex process requiring considerable judgment and the forecasting of events well into
the future. Given the current volatility in the capital markets and the evaluation of other factors, the Company will
continually evaluate its separate account return estimation process and may change that process from time to time.
The Company plans to complete a comprehensive assumption study and refine its estimate of future gross profits during the
third quarter of each year. Upon completion of an assumption study, the Company revises its assumptions to reflect its
current best estimate, thereby changing its estimate of projected account values and the related EGPs in the DAC, sales
inducement and unearned revenue reserve amortization models as well as SOP 03-1 reserving models. The DAC asset, as
well as the sales inducement asset, unearned revenue reserves and SOP 03-1 reserves are adjusted with an offsetting benefit
or charge to income to reflect such changes in the period of the revision, a process known as an “Unlock”. An Unlock that
results in an after-tax benefit generally occurs as a result of actual experience or future expectations of product profitability
being favorable compared to previous estimates. An Unlock that results in an after-tax charge generally occurs as a result of
actual experience or future expectations of product profitability being unfavorable compared to previous estimates.
In addition to when a comprehensive assumption study is completed, revisions to best estimate assumptions used to estimate
future gross profits are necessary when the EGPs in the Company’s models fall outside of an independently determined
reasonable range of EGPs. The Company performs a quantitative process each quarter to determine the reasonable range of
EGPs. This process involves the use of internally developed models, which run a large number of stochastically determined
scenarios of separate account fund performance. Incorporated in each scenario are assumptions with respect to lapse rates,
mortality and expenses, based on the Company’s most recent assumption study. These scenarios are run for the Company’s
individual variable annuity businesses in the United States and Japan, the Company’s Retirement Plans businesses, and for
the Company’s individual variable universal life business and are used to calculate statistically significant ranges of
reasonable EGPs. The statistical ranges produced from the stochastic scenarios are compared to the present value of EGPs
used in the Company’s models. If EGPs used in the Company’s models fall outside of the statistical ranges of reasonable
EGPs, an “Unlock” would be necessary. If EGPs used in the Company’s models fall inside of the statistical ranges of
reasonable EGPs, the Company will not solely rely on the results of the quantitative analysis to determine the necessity of an
Unlock. In addition, the Company considers, on a quarterly basis, other qualitative factors such as product, regulatory and
policyholder behavior trends and may also revise EGPs if those trends are expected to be significant and were not or could
not be included in the statistically significant ranges of reasonable EGPs. As of December 31, 2008, the EGPs used in the
Company’s models fell within the statistical ranges of reasonable EGPs. As a result of this statistical test and review of
qualitative factors, the Company did not Unlock the EGPs used in the Company’s models during the fourth quarter of 2008.
F-18
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009