The Hartford 2008 Annual Report Download - page 94

Table of Contents
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.
Unlock and Sensitivity Analysis
As described above, as of September 30 2008, the Company completed a comprehensive study of assumptions underlying
EGPs, resulting in an Unlock. The study covered all assumptions, including mortality, lapses, expenses, interest rate spreads,
hedging costs, and separate account returns, in substantially all product lines. The new best estimate assumptions were
applied to the current policy related in-force or account values to project future gross profits. The after-tax impact on the
Company’s assets and liabilities as a result of the Unlock during the third quarter of 2008 was as follows:
Death and
DAC Unearned Income Sales
and Revenue Benefit Inducement
Segment After-tax (charge) benefit PVFP Reserves Reserves [1] Assets Total [2]
Retail $ (648) $ 18 $ (75) $ (27) $ (732)
Retirement Plans (49) — — — (49)
Individual Life (29) (12) (3) — (44)
International — Japan (23) (1) (90) (2) (116)
Corporate 9 — — — 9
Total $ (740) $ 5 $ (168) $ (29) $ (932)
[1] As a result of the Unlock, death benefit reserves in Retail, increased $389, pre-tax, offset by an increase of $273,
pre-tax, in reinsurance recoverables. In International, death benefit reserves increased $164, pre-tax, offset by an
increase of $25, pre-tax, in reinsurance recoverables.
[2] The following were the most significant contributors to the Unlock amounts recorded during the third quarter of 2008:
• Actual separate account returns from the period ending July 31, 2007 to September 30, 2008 were significantly
below our aggregated estimated return.
• The Company reduced its 20 year projected separate account return assumption from 7.8% to 7.2% in the U.S.
• In Retirement Plans, the Company reduced its estimate of future fees as plans meet contractual size limits
(“breakpoints”) causing a lower fee schedule to apply and the Company increased its assumption for future
deposits by existing plan participants.
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Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009