The Hartford 2008 Annual Report Download - page 358

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation and Accounting Policies (continued)
Product Derivatives
The Company offers certain variable annuity products with a guaranteed minimum withdrawal and accumulation benefit
(“GMWB” and “GMAB”) rider. The GMWB and GMAB represent embedded derivatives in the variable annuity contracts
that are required to be reported separately from the host variable annuity contract. They are carried at fair value and reported
in other policyholder funds. See Note 4 for a complete discussion of GMWB and GMAB valuations.
In valuing the embedded derivative, the Company attributes to the derivative a portion of the fees collected from the contract
holder equal to the present value of future GMWB and GMAB claims (the “Attributed Fees”). All changes in the fair value
of the embedded derivative are recorded in net realized capital gains and losses. The excess of fees collected from the
contract holder over the Attributed Fees are associated with the host variable annuity contract and recorded in fee income.
The Company has reinsurance arrangements in place to transfer a portion of its risk of loss due to GMWB. These
arrangements are recognized as derivatives and carried at fair value in reinsurance recoverables. Changes in the fair value of
the reinsurance agreements are recorded in net realized capital gains and losses. See Note 4 for a complete discussion of
GMWB reinsurance valuation
Separate Accounts
The Company maintains separate account assets, which are reported at fair value. Separate account liabilities are reported at
amounts consistent with separate account assets. Separate accounts include contracts, wherein the policyholder assumes the
investment risk. Separate account assets are segregated from other investments and investment income and gains and losses
accrue directly to the policyholder.
Deferred Policy Acquisition Costs and Present Value of Future Profits
Life — Life’s deferred policy acquisition costs asset and present value of future profits (“PVFP”) intangible asset (hereafter,
referred to collectively as “DAC”) related to investment contracts and universal life-type contracts (including variable
annuities) are amortized in the same way, over the estimated life of the contracts acquired using the retrospective deposit
method. Under the retrospective deposit method, acquisition costs are amortized in proportion to the present value of
estimated gross profits (“EGPs”). EGPs are also used to amortize other assets and liabilities on the Company’s balance
sheet, such as sales inducement assets and unearned revenue reserves (“URR”). Components of EGPs are used to determine
reserves for guaranteed minimum death, income and universal life secondary guarantee benefits accounted for and
collectively referred to as “SOP 03-1 reserves”. The specific breakdown of the most significant EGP based balances by
segment is as follows:
Individual Variable Annuities — Individual Variable Annuities —
U.S. Japan Individual Life
December 31, December 31, December 31, December 31, December 31, December 31,
2008 2007 2008 2007 2008 2007
DAC $ 4,844 $ 4,982 $ 1,834 $ 1,760 $ 2,931 $ 2,309
Sales
Inducements $ 436 $ 390 $ 21 $ 8 $ 36 $ 20
URR $ 109 $ 124 $ — $ — $ 1,299 $ 816
SOP 03-1
reserves $ 867 $ 527 $ 229 $ 42 $ 40 $ 19
For most contracts, the Company estimates gross profits over a 20 year horizon as estimated profits emerging subsequent to
that timeframe are immaterial. The Company uses other amortization bases for amortizing DAC, such as gross costs (net of
reinsurance), as a replacement for EGPs when EGPs are expected to be negative for multiple years of the contract’s life.
Actual gross profits, in a given reporting period, that vary from management’s initial estimates result in increases or
decreases in the rate of amortization, commonly referred to as a “true-up”, which are recorded in the current period. The
true-up recorded for the years ended December 31, 2008, 2007, and 2006 was an increase (decrease) to amortization of $404
(of which $194 is attributed to accelerated DAC amortization for the Company’s 3Win product in Japan as further discussed
under the “Japan Variable Annuities” section below), $(6), and $41, respectively.
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
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009