The Hartford 2008 Annual Report Download - page 91

Table of Contents
Life Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable
Annuity and Other Universal Life-Type Contracts
Accounting Policy and Assumptions
Life’s deferred policy acquisition costs asset and present value of future profits (“PVFP”) intangible asset (hereafter,
referred to collectively as “DAC”) related to investment contracts and universal life-type contracts (including variable
annuities) are amortized in the same way, over the estimated life of the contracts acquired using the retrospective deposit
method. Under the retrospective deposit method, acquisition costs are amortized in proportion to the present value of
estimated gross profits (“EGPs”). EGPs are also used to amortize other assets and liabilities on the Company’s balance
sheet, such as sales inducement assets and unearned revenue reserves (“URR”). Components of EGPs are used to determine
reserves for guaranteed minimum death, income and universal life secondary guarantee benefits accounted for and
collectively referred to as “SOP 03-1 reserves”. The specific breakdown of the most significant EGP based balances by
segment is as follows:
Individual Variable Annuities - Individual Variable Annuities -
U.S. Japan Individual Life
December 31, December 31, December 31, December 31, December 31, December 31,
2008 2007 2008 2007 2008 2007
DAC $ 4,844 $ 4,982 $ 1,834 $ 1,760 $ 2,931 $ 2,309
Sales
Inducements $ 436 $ 390 $ 19 $ 8 $ 36 $ 20
URR $ 109 $ 124 $ — $ — $ 1,299 $ 816
SOP 03-1
reserves $ 867 $ 527 $ 229 $ 42 $ 40 $ 19
For most contracts, the Company estimates gross profits over a 20 year horizon as estimated profits emerging subsequent to
that timeframe are immaterial. The Company uses other amortization bases for amortizing DAC, such as gross costs (net of
reinsurance), as a replacement for EGPs when EGPs are expected to be negative for multiple years of the contract’s life.
Actual gross profits, in a given reporting period, that vary from management’s initial estimates result in increases or
decreases in the rate of amortization, commonly referred to as a “true-up”, which are recorded in the current period. The
true-up recorded for the years ended December 31, 2008, 2007, and 2006 was an increase (decrease) to amortization of $404
(of which $194 is attributed to accelerated DAC amortization for the Company’s 3Win product in Japan as further discussed
under the “Japan Variable Annuities” section below), $(6), and $41, respectively.
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Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009