The Hartford 2014 Annual Report Download - page 61

Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities Associated with Variable Annuity and Other Universal Life-Type
Contracts
Estimated gross profits are used in the amortization of the deferred policy acquisition costs ("DAC") asset, sales inducement assets (“SIA”) and unearned
revenue reserves (“URR”). Portions of EGPs are also used in the valuation of reserves for death and other insurance benefit features on variable annuity and
other universal life type contracts.
The most significant EGP based balances are as follows:


 
DAC [1] $ 1,200 $ 1,552
SIA $ 89 $ 149
URR $ — $ 50
Death and Other Insurance Benefit Reserves, net of reinsurance [2] $ 331 $ 565
[1] For additional information on DAC, see Note 8 - Deferred Policy Acquisition Costs and Present Value of Future Profits of Notes to Consolidated Financial Statements.
[2] For additional information on death and other insurance benefit reserves, see Note 10 - Separate Accounts, Death Benefits and Other Insurance Benefit Features of Notes to
Consolidated Financial Statements.
Unlocks
The benefit (charge) to income from continuing operations, net of tax by asset and liability as a result of the Unlocks is as follows:


  
DAC $ (136) $ (199) $ (214)
SIA (35) (20) (82)
URR 42 16 12
Death and Other Insurance Benefit Reserves 34 36 73
 $ (95) $ (167) $ (211)
Income tax effect (33) (58) (73)
      
The Unlock charge for the year ended December 31, 2014 was primarily due to lower future estimated gross profits on the fixed annuity block driven by the
continued low interest rate environment as well as higher variable annuity units costs due to higher than expected surrenders, partially offset by actual
separate account returns being above our aggregated estimated returns during the period.
The Unlock charge for the year ended December 31, 2013 was primarily due to assumption changes in connection with the annual policyholder behavior
assumption study, partially offset by actual separate account returns above our aggregated estimated returns during the period.
The Unlock charge for the year ended December 31, 2012 was driven primarily by policyholder assumption changes which reduced expected future gross
profits including additional costs associated with the U.S. variable annuity macro hedge program, partially offset by actual separate account returns above
our aggregated estimated return.
For most annuity contracts, the Company estimates gross profits over 20 years as EGPs emerging subsequent to that time frame are immaterial. 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, based
on future account value projections for variable annuity. The projection of future account values requires the use of certain assumptions including: separate
account returns; separate account fund mix; fees assessed against the contract holder’s account balance; surrender and lapse rates; interest margin; mortality;
and the extent and duration of hedging activities and hedging costs. Changes in these assumptions and, in addition, changes to other policyholder behavior
assumptions such as resets, partial surrenders, reaction to price increases, and asset allocations causes EGPs to fluctuate which impacts earnings.
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