The Hartford 2008 Annual Report Download - page 385

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
SFAS 157 Transition
The Company applied the provisions of SFAS 157 prospectively to financial instruments that are recorded at fair value
including guaranteed living benefits that are required to be fair valued. The Company also applied the provisions of SFAS
157 using limited retrospective application (i.e., cumulative effect adjustment through opening retained earnings) to certain
customized derivatives historically measured at fair value in accordance with EITF 02-3.
The impact on January 1, 2008 of adopting SFAS 157 for guaranteed benefits accounted for under SFAS 133 and the related
reinsurance was a reduction to net income of $220, after the effects of DAC amortization and income taxes.
Moreover, the adoption of SFAS 157 has resulted in lower variable annuity fee income for new business issued in 2008 as
Attributed Fees have increased consistent with incorporating additional risk margins and other indicia of “exit value” in the
valuation of the embedded derivative. The level of Attributed Fees for new business each quarter also depends on the level
of equity index volatility, as well as other factors, including interest rates. As equity index volatility has risen, interest rates
have declined, and the Company adopted SFAS 157, the fees ascribed to the new business cohorts issued in 2008 have risen
to levels above the rider fee for most products. The extent of any excess of Attributed Fee over rider fee will vary by
product.
The Company also recognized a decrease in opening retained earnings of $51 in relation to the loss deferred in accordance
with EITF 02-3 on customized derivatives purchased in 2007, and used to hedge a portion of the U.S. GMWB risk. In
addition, the change in value of the customized derivatives due to the initial adoption of SFAS 157 of $41 was recorded as
an increase in opening retained earnings with subsequent changes in fair value recorded in net realized capital gains
(losses) in net income. After amortization of DAC and the effect of income taxes, the impact on opening retained earnings is
a decrease of $3.
The Company’s adoption of SFAS 157 did not materially impact the fair values of other financial instruments, including, but
not limited to, other derivative instruments used to hedge guaranteed minimum benefits.
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Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009