The Hartford 2008 Annual Report Download - page 97

Table of Contents
[3] The overall actual return generated by the U.S. variable annuity separate accounts is dependent on several factors,
including the relative mix of the underlying sub-accounts among bond funds and equity funds as well as equity sector
weightings and as a result of the large proportion of separate account assets invested in U.S. equity markets, the
Company’s overall U.S. separate account fund performance has been reasonably correlated to the overall performance
of the S&P 500 although no assurance can be provided that this correlation will continue in the future. Since
September 30, 2008, the date of the last unlock, the actual return on U.S. variable annuity assets has been 21% below
our estimated aggregate return. The Company estimates the actual return would need to drop by an additional 6% since
December 31, 2008, before EGPs in the Company’s models fall outside of the statistical ranges of reasonable EGPs.
[4] The overall actual return generated by the Japan variable annuity separate accounts is influenced by the variable
annuity products offered in Japan as well as the wide variety of funds offered within the sub-accounts of those
products. The actual return is also dependent upon the relative mix of the underlying sub-accounts among the funds.
Unlike in the U.S., there is no global index or market that reasonably correlates with the overall Japan actual separate
account fund performance. Since September 30, 2008, the date of the last unlock, the actual return on Japan variable
annuity assets has been 15.5% below our estimated aggregate return. The Company estimates the actual return would
need to drop by an additional 7.5% since December 31, 2008, before EGPs in the Company’s models fall outside of the
statistical ranges of reasonable EGPs.
[5] For the Company’s 3Win product in Japan, decreases in the contract holder’s account value (which is partially
dependent upon equity market movements due to fixed contractual investment allocations) of greater than 20% of the
initial deposit require the contract holder to withdraw 80% of their initial deposit without penalty or recover their initial
investment through a payout annuity. The exercise of these options results in an acceleration of the amount of DAC
amortization in a specific reporting period. During the fourth quarter of 2008 approximately 97% of all 3Win
contractholders had account values that fell by 20% or more from their initial deposit. This resulted in accelerated
amortization of DAC in the fourth quarter of 2008 of $194, pre-tax. Further declines in equity markets during 2009
could cause the entire remaining DAC balance of $11 to be amortized.
An “Unlock” only revises EGPs to reflect current best estimate assumptions. With or without an Unlock, and even after an
Unlock occurs, the Company must also test the aggregate recoverability of the DAC and sales inducement assets by
comparing the existing DAC balance to the present value of future EGPs. In addition, the Company routinely stress tests its
DAC and sales inducement assets for recoverability against severe declines in its separate account assets, which could occur
if the equity markets experienced a significant sell-off, as the majority of policyholders’ funds in the separate accounts is
invested in the equity market. As of December 31, 2008, the Company believed U.S. individual and Japan individual
variable annuity EGPs could fall, through a combination of negative market returns, lapses and mortality, by at least 6% and
49%, respectively, before portions of its DAC and sales inducement assets would be unrecoverable. The extent of the charge
against earnings upon the DAC and sales inducement assets becoming unrecoverable is dependent upon how much further
beyond the thresholds listed above variable annuity EGPs decline. The Company estimates that for every 1% decline in
variable annuity EGPs beyond the thresholds listed above, the DAC and sales inducements write-off would be $65 and $12,
after-tax, for U.S. variable annuity and Japan variable annuity, respectively. If, at the end of any quarter, the EGPs in the
Company’s models fall outside of the statistical ranges of reasonable EGPs, see footnote [3] above, and the Company has
exceeded the threshold for recoverability, the Company will first “Unlock” the future EGPs to reflect the Company’s revised
best estimates and second will re-test for recoverability.
Living Benefits Required to be Fair Valued
The Company offers certain variable annuity products with a guaranteed minimum withdrawal benefit (“GMWB”) rider in
the U.S., Japan and the U.K. The Company also offers a guaranteed minimum accumulation benefit (“GMAB”) with a
variable annuity product offered in Japan. As of December 31, 2008 and December 31, 2007, the fair values of the GMWB
liabilities are $6.6 billion and $715, respectively. As of December 31, 2008 the fair value of the GMAB liability is $0. As of
December 31, 2007 the fair value of the GMAB was an asset of $2 because the present value of the fees expected to be
earned in the future exceeded the present value claims expected to be paid in the future. Due to significant market declines
in the fourth quarter of 2008, a large majority of the Company’s in force Japan 3 Win policies, which include a GMAB
feature, annuitized or surrendered free of charge in the fourth quarter of 2008. See Note 4 of Notes to Consolidated Financial
Statements for a description of the Japan GMAB.
Fair values for GMWB and GMAB contracts are calculated based upon internally developed models because active,
observable markets do not exist for those items. Below is a description of the Company’s fair value methodologies for
guaranteed benefit liabilities, the related reinsurance and customized derivatives, all accounted for under SFAS 133, prior to
the adoption of SFAS 157 and subsequent to adoption of SFAS 157.
53
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009