The Hartford 2008 Annual Report Download - page 126

Table of Contents
LIFE
Executive Overview
Life provides retail and institutional investment products such as variable and fixed annuities, mutual funds, PPLI, and
retirement plan services, individual life insurance and group benefit products, such as group life and group disability
insurance.
Retail offers individual variable and fixed market value adjusted (“MVA”) annuities, retail mutual funds, 529 college
savings plans, Canadian and offshore investment products.
Individual Life sells a variety of life insurance products, including variable universal life, universal life, interest sensitive
whole life and term life.
Retirement Plans offers retirement plan products and services to corporations and municipalities under Section 401(k),
403(b) and 457 plans.
Group Benefits provides individual members of employer groups, associations, affinity groups and financial institutions
with group life, accident and disability coverage, along with other products and services, including voluntary benefits and
group retiree health.
International, which has operations located in Japan, Brazil, Ireland and the United Kingdom, provides investments,
retirement savings and other insurance and savings products to individuals and groups outside the United States and Canada.
Institutional provides customized investment, insurance, and income solutions to select markets. Products include structured
settlements, institutional annuities (primarily terminal funding cases), stable value products, and income annuities.
Furthermore, Institutional offers variable private placement life insurance (“PPLI”) owned by corporations and high net
worth individuals, as well as mutual funds owned by institutional investors.
Life charges direct operating expenses to the appropriate segment and allocates the majority of indirect expenses to the
segments based on an intercompany expense arrangement. Inter-segment revenues primarily occur between Life’s Other
category and the reporting segments. These amounts primarily include interest income on allocated surplus and interest
charges on excess separate account surplus.
Life derives its revenues principally from: (a) fee income, including asset management fees, on separate account and mutual
fund assets and mortality and expense fees, as well as cost of insurance charges; (b) net investment income on general
account assets; (c) fully insured premiums; and (d) certain other fees. Asset management fees and mortality and expense fees
are primarily generated from separate account assets, which are deposited with Life through the sale of variable annuity and
variable universal life products and from mutual funds. Cost of insurance charges are assessed on the net amount at risk for
investment-oriented life insurance products. Premium revenues are derived primarily from the sale of group life, group
disability and individual term insurance products.
Life’s expenses essentially consist of interest credited to policyholders on general account liabilities, insurance benefits
provided, amortization of deferred policy acquisition costs, expenses related to selling and servicing the various products
offered by the Company, dividends to policyholders, and other general business expenses.
Life’s financial results in its variable annuity, mutual fund and, to a lesser extent, variable universal life businesses, depends
largely on the amount of the contract holder account value or assets under management on which it earns fees and the level
of fees charged. Changes in account value or assets under management are driven by two main factors: net flows, which
measure the success of the Company’s asset gathering and retention efforts, and the market return of the funds, which is
heavily influenced by the return realized in the equity markets. Net flows are comprised of new sales and other deposits less
surrenders, death benefits, policy charges and annuitizations of investment type contracts, such as variable annuity contracts.
In the mutual fund business, net flows are known as net sales. Net sales are comprised of new sales less redemptions by
mutual fund customers. Life uses the average daily value of the S&P 500 Index as an indicator for evaluating market returns
of the underlying account portfolios in the United States. Relative financial results of variable products is highly correlated
to the growth in account values or assets under management since these products generally earn fee income on a daily basis.
Equity market movements could also result in benefits for or charges against deferred acquisition costs. See the Critical
Accounting Estimates section of the MD&A for further information on DAC unlocks. During 2008, primarily as a result of
current market conditions, the Company recorded an unlock charge of $932.
The profitability of Life’s fixed annuities and other “spread-based” products depends largely on its ability to earn target
spreads between earned investment rates on its general account assets and interest credited to policyholders. Profitability is
also influenced by operating expense management including the benefits of economies of scale in the administration of its
United States variable annuity businesses in particular. In addition, the size and persistency of gross profits from these
businesses is an important driver of earnings as it affects the rate of amortization of deferred policy acquisition costs.
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009