The Hartford 2008 Annual Report Download - page 92

Table of Contents
Products sold in a particular year are aggregated into cohorts. Future gross profits for each cohort are projected over the
estimated lives of the underlying contracts, and are, to a large extent, a function of future account value projections for
variable annuity products and to a lesser extent for variable universal life products. The projection of future account values
requires the use of certain assumptions. The assumptions considered to be important in the projection of future account value,
and hence the EGPs, include separate account fund performance, which is impacted by separate account fund mix, less fees
assessed against the contract holder’s account balance, surrender and lapse rates, interest margin, mortality, and hedging
costs. The assumptions are developed as part of an annual process and are dependent upon the Company’s current best
estimates of future events. The Company’s current 20 year separate account return assumption is approximately 7.2% (after
fund fees, but before mortality and expense charges) for U.S. products and 5.1% (after fund fees, but before mortality and
expense charges) in aggregate for all Japanese products, but varies from product to product. The Company estimates gross
profits using the mean of EGPs derived from a set of stochastic scenarios that have been calibrated to our estimated separate
account return. The following table summarizes the general impacts to individual variable annuity EGPs and earnings for
DAC amortization caused by changes in separate account returns, mortality and future lapse rate assumptions:
Impact on Earnings for DAC
Assumption Impact to EGPs Amortization
Future separate account return increases Increase: Expected fee income would
increase and expected claims would
decrease.
Benefit
Future separate account return decreases Decrease: Expected fee income would
decrease and expected claims would
increase.
Charge
Future mortality increases Decrease: Expected fee income would
decrease because the time period in which
fees would be collected would be reduced
and claims would increase
Charge
Future mortality decreases Increase: Expected fee income would
increase because the time period in which
fees would be collected would increase and
claims would decrease
Benefit
Future lapse rate increases Decrease: Expected fee income would
decrease because the time period in which
fees would be collected would be reduced
and claims would decrease.
Charge
Future lapse rate decreases Increase: Expected fee income would
increase because the time period in which
fees would be collected would increase and
claims would increase.
Benefit
In addition to changes to the assumptions described above, changes to other policyholder behaviors such as resets, partial
surrenders, reaction to price increases, and asset allocations could cause EGPs to fluctuate.
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 “Unlocking”. 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.
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Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009