The Hartford 2008 Annual Report Download - page 302

Table of Contents
Guaranteed Minimum Withdrawal Benefits and Guaranteed Minimum Accumulation Benefits
The majority of the Company’s U.S. and U.K. variable annuities are sold with a GMWB living benefit rider or a GMAB
living benefit rider, which are accounted for under SFAS 133. Declines in the equity market may increase the Company’s
exposure to benefits, under the GMWB and GMAB contracts, leading to an increase in the Company’s existing liability for
those benefits.
For example, a GMWB and/or GMAB contract is ‘in the money’ if the contract holder’s guaranteed remaining benefit
(GRB) becomes greater than the account value. As of December 31, 2008 and December 31, 2007, 88% and 19%,
respectively, of all unreinsured U.S. GMWB ‘in-force’ contracts were ‘in the money’. For U.S. and U.K. GMWB contracts
that were ‘in the money’ the Company’s exposure to the GRB, after reinsurance, as of December 31, 2008 and
December 31, 2007, was $7.7 billion and $146, respectively. For GMAB contracts that were ‘in the money’ the Company’s
exposure, as of December 31, 2008 and December 31, 2007, was $15 and $38, respectively.
However, the only ways the GMWB contract holder can monetize the excess of the GRB over the account value of the
contract is upon death or if their account value is reduced to a contractually specified minimum level, through a combination
of a series of withdrawals that do not exceed a specific percentage of the premiums paid per year and market declines. If the
account value is reduced to the contractually specified minimum level, the contract holder will receive an annuity equal to
the remaining GRB and, for the Company’s “life-time” GMWB products, the annuity can continue beyond the GRB. As the
amount of the excess of the GRB over the account value can fluctuate with equity market returns on a daily basis, and the
ultimate life-time GMWB payments can exceed the GRB, the ultimate amount to be paid by the Company, if any, is
uncertain and could be significantly more or less than $7.7 billion.
For GMAB benefits, the only ways the contract holder can monetize the excess of the GRB over the account value of the
contract is upon death or by waiting until the end of the contractual deferral period of 10 years. As the amount of the excess
of the GRB over the account value can fluctuate with equity market returns on a daily basis, the ultimate amount to be paid
by the Company, if any, is uncertain and could be significantly more or less than $15.
Guaranteed Minimum Death Benefits and Guaranteed Minimum Income Benefits
In the U.S., the Company sells variable annuity contracts that offer various guaranteed death benefits. Declines in the equity
market may increase the Company’s exposure to death benefits under these contracts. The Company accounts for these
death benefit liabilities under SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts, and, as such, these liabilities are not carried at fair value under SFAS
157.
The Company’s total gross exposure (i.e., before reinsurance) to U.S. guaranteed death benefits as of December 31, 2008 is
$36.3 billion. The Company will incur these guaranteed death benefit payments in the future only if the policyholder has an
in-the-money guaranteed death benefit at their time of death. The Company currently reinsures 51% of these death benefit
guarantees. Under certain of these reinsurance agreements, the reinsurers’ exposure is subject to an annual cap. The
Company’s net exposure (i.e. after reinsurance) is $17.8 billion, as of December 31, 2008. This amount is often referred to
as the retained net amount at risk.
In Japan, the Company offers certain variable annuity products with both a guaranteed death benefit and a guaranteed
income benefit. Declines in equity markets as well as a strengthening of the Japanese yen in comparison to the U.S. dollar
and other currencies may increase the Company’s exposure to these guaranteed benefits. This increased exposure may be
significant in extreme market scenarios.
The Company’s total gross exposure (i.e., before reinsurance) to these guaranteed death benefits and income benefits offered
in Japan as of December 31, 2008 is $9 billion. However, the Company will incur these guaranteed death or income benefits
in the future only if the contract holder has an in-the-money guaranteed benefit at either the time of their death or if the
account value is insufficient to fund the guaranteed living benefits. The Company currently reinsures 15% of the death
benefit guarantees. Under certain of these reinsurance agreements, the reinsurers’ exposure is subject to an annual cap. For
these products, the Company’s retained net amount at risk is $7.8 billion.
Life’s Product Guarantee Accounting Models
The accounting for living and death benefit guarantees can be significantly different and may influence the form of risk
management employed by the Company. Many benefit guarantees meet the definition of an embedded derivative under
SFAS 133 (GMWB and GMAB) and are recorded at fair value under SFAS 157, incorporating changes in equity indices and
equity index volatility, with changes in fair value recorded in earnings. However, for other benefit guarantees, certain
contract features that define how the contract holder can access the value and substance of the guaranteed benefit change the
accounting from SFAS 133 to SOP 03-1. For contracts where the contract holder can only obtain the value of the guaranteed
benefit upon the occurrence of an insurable event such as death (GMDB) or when the benefit received is in substance a
long-term financing (GMIB), the accounting for the benefit is prescribed by SOP 03-1.
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009