The Hartford 2008 Annual Report Download - page 115

Table of Contents
The increase in Life’s net income was due to the following:
• The DAC unlock benefit of $210 recorded in the third quarter of 2007.
• Increased income on asset growth in the variable annuity, mutual fund, retirement and institutional businesses.
Partially offsetting the increase in Life’s net income were the following:
• Increased non-deferrable individual annuity asset based commissions.
• Unfavorable mortality in Individual Life.
• Increased DAC amortization in Group Benefits due to the adoption of Statement of Position 05-1, “Accounting by
Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance
Contracts” (“SOP 05-1”).
• During the first quarter of 2006, the Company achieved favorable settlements in several cases brought against the
Company by policyholders regarding their purchase of broad-based leveraged corporate owned life insurance
(“leveraged COLI”) policies in the early to mid-1990s and therefore, released a reserve for these matters of $34,
after-tax.
• Realized losses increased for the year ended December 31, 2007 as compared to the comparable prior year periods
primarily due to net losses on GMWB derivatives and impairments.
Property & Casualty net income decreased by $12 for the year ended December 31, 2007. Ongoing Operations’ net income
decreased by $77 for the year, while Other Operations improved its results by $65, primarily due to a reduction in
unfavorable loss reserve development.
• Ongoing Operations’ net income decreased by $77, primarily due to a $92 after-tax decrease in underwriting results
and a change from net realized capital gains of $29, after-tax, in 2006 to net realized capital losses of $104, after-tax, in
2007. The decrease in underwriting results and the change to net realized capital losses was partially offset by a $150
after-tax increase in net investment income. The decrease in underwriting results was primarily driven by an increase in
the loss and loss adjustment expense ratio before catastrophes and prior accident year development and an increase in
insurance and operating costs and dividends, partially offset by a reduction in prior accident year reserves for workers’
compensation business.
• Other Operations reported net income of $30 in 2007 compared to a net loss of $35 in 2006. The
improvement in results was primarily due to a decrease in unfavorable prior accident year reserve
development, partially offset by a change from net realized gains in 2006 to net realized losses in 2007 and a
decrease in net investment income.
Net Realized Capital Gains and Losses
See “Investment Results” in the Investments section and the “Realized Capital Gains and Losses by Segment” table within
the Life section of the MD&A.
Income Taxes
The effective tax rate for 2008, 2007 and 2006 was 40%, 26%, and 24%, respectively. The principal causes of the difference
between the effective rate and the U.S. statutory rate of 35% for 2008, 2007 and 2006 were tax-exempt interest earned on
invested assets and the separate account dividends received deduction (“DRD”). This caused an increase in the tax benefit
on the 2008 pre-tax loss and a decrease in the tax expense on the 2007 and 2006 pre-tax income. Income taxes paid in 2008,
2007 and 2006 were $253, $451, and $179 respectively. For additional information, see Note 13 of Notes to Consolidated
Financial Statements.
The separate account dividends-received deduction (“DRD”) is estimated for the current year using information from the
prior year-end, adjusted for current year equity market performance and other appropriate factors, including estimated levels
of corporate dividend payments. The estimated DRD was updated in the third quarter for the provision-to-filed-return
adjustments, and in the fourth quarter based on current year ultimate mutual fund distributions and fee income from the
Company’s variable insurance products. The actual current year DRD varied from earlier estimates based on, but not limited
to, changes in eligible dividends received by the mutual funds, amounts of distributions from these mutual funds, amounts of
short-term capital gains and asset values at the mutual fund level and the Company’s taxable income before the DRD. Given
recent financial markets’ volatility, the Company intends to review its DRD computations on a quarterly basis, beginning in
2009. The Company recorded benefits of $176, $155 and $174 related to the separate account DRD in the years ended
December 31, 2008, December 31, 2007 and December 31, 2006, respectively. The 2008 benefit included a benefit of $9
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009