The Hartford 2008 Annual Report Download - page 300

Table of Contents
The fixed liabilities included above represented approximately 63% and 45% of Life’s general account liabilities as of
December 31, 2008 and 2007, respectively. The assets supporting the fixed liabilities are monitored and managed within
rigorous duration guidelines, and are evaluated on a monthly basis as well as annually using scenario simulation techniques
in compliance with regulatory requirements.
The after-tax change in fair value of the invested asset portfolios that support certain universal life-type contracts and other
insurance contracts are shown in the following table. The cash flows associated with these liabilities are less predictable than
fixed liabilities. The Company identifies the most appropriate investment strategy based upon the expected policyholder
behavior and liability crediting needs. The calculation of the estimated hypothetical change in fair value below assumes a
100 basis point upward and downward parallel shift in the yield curve.
Change in Fair Value As of December 31,
2008 2007
Basis point shift - 100 + 100 - 100 + 100
Amount $ 479 $ (455) $ 375 $ (364)
The selection of the 100 basis point parallel shift in the yield curve was made only as an illustration of the potential
hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results
could differ materially from those illustrated above due to the nature of the estimates and assumptions used in the above
analysis. The Company’s sensitivity analysis calculation assumes that the composition of invested assets and liabilities
remain materially consistent throughout the year and that the current relationship between short-term and long-term interest
rates will remain constant over time. As a result, these calculations may not fully capture the impact of portfolio
re-allocations, significant product sales or non-parallel changes in interest rates.
Life’s Equity Product Risk
The Company’s Life operations are significantly influenced by changes in the U.S., Japanese, and other global equity
markets. Appreciation or depreciation in equity markets impacts certain assets and liabilities related to the Company’s
variable products and the Company’s earnings derived from those products. The Company’s variable products include
variable annuities, mutual funds, and variable life insurance sold to retail and institutional customers. These variable
products may include product guarantees such as guaranteed minimum withdrawal benefits (GMWB), guaranteed minimum
accumulation benefits (GMAB), guaranteed minimum death benefits (GMDB), and guaranteed minimum income benefits
(GMIB).
Substantially all of the Company’s variable annuity contracts contain a GMDB and a portion of those contracts also contain
one or more living benefits. The Company’s maximum exposure disclosed below for death and living benefits are calculated
independently, however, these exposures are substantially overlapping.
Generally, declines in equity markets, such as those experienced in 2008, will and did in 2008:
• reduce the value of assets under management and the amount of fee income generated from those assets;
• reduce the value of equity securities, held for trading, for international variable annuities, the related policyholder funds
and benefits payable, and the amount of fee income generated from those annuities;
• increase the liability for GMWB and GMAB benefits resulting in realized capital losses;
• increase the value of derivative assets used to hedge product guarantees resulting in realized capital gains;
• increase the Company’s net amount at risk for GMDB and GMIB benefits; and
• decrease the Company’s actual gross profits, resulting in a negative true-up to current period DAC amortization.
• increase the amount of required statutory capital necessary to maintain targeted risk based capital (RBC) ratios.
A prolonged or precipitous equity market decline may:
• turn customer sentiment toward equity-linked products negative, causing a decline in sales;
• cause a significant decrease in the range of reasonable estimates of future gross profits used in the Company’s
quantitative assessment of its modeled estimates of gross profits. If, in a given financial statement period, the modeled
estimates of gross profits are determined to be unreasonable, the Company will accelerate the amount of DAC
amortization in that period. Particularly in the case of variable annuities, an acceleration of DAC amortization could
potentially cause a material adverse deviation in that period’s earnings, but it would not affect the Company’s cash flow
or liquidity position. See Life Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities
Associated with Variable Annuity and Other Universal Life-Type Contracts within Critical Accounting Estimates for
further information on DAC and related equity market sensitivities. During 2008, the Company recorded an unlock
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009