The Hartford 2008 Annual Report Download - page 55

Table of Contents
If assumptions used in estimating future gross profits differ from actual experience, we may be required to accelerate the
amortization of DAC and increase reserves for guaranteed minimum death benefits, which could have a material adverse
effect on our results of operations and financial condition.
The Company defers acquisition costs associated with the sales of its universal and variable life and variable annuity
products. These costs are amortized over the expected life of the contracts. The remaining deferred but not yet amortized
cost is referred to as the Deferred Acquisition Cost (“DAC”) asset. We amortize these costs in proportion to the present
value of estimated gross profits. The Company also establishes reserves for GMDB using components of estimated gross
profits (“EGPs”). The projection of estimated gross profits requires the use of certain assumptions, principally related to
separate account fund returns in excess of amounts credited to policyholders, surrender and lapse rates, interest margin,
mortality, and hedging costs. Of these factors, we anticipate that changes in investment returns are most likely to impact the
rate of amortization of such costs. However, other factors such as those the Company might employ to reduce risk, such as
the cost of hedging or other risk mitigating techniques could also significantly reduce estimates of future gross profits.
Estimating future gross profits is a complex process requiring considerable judgment and the forecasting of events well into
the future. If our assumptions regarding policyholder behavior, hedging costs or costs to employ other risk mitigating
techniques prove to be inaccurate or if significant or sustained equity market declines persist, we could be required to
accelerate the amortization of DAC related to variable annuity and variable universal life contracts, and increase reserves for
GMDB which would result in a charge to net income. Such adjustments could have a material adverse effect on our results
of operations and financial condition. During the year ended December 31, 2008, the Company recorded a $932, after-tax,
charge related to the unlock. 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% from December 31, 2008 before EGPs in the Company’s models fall outside of the statistical ranges of
reasonable EGPs. 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% from December 31, 2008 before EGPs in the Company’s models fall outside of the statistical ranges of
reasonable EGPs.
If our businesses do not perform well, we may be required to recognize an impairment of our goodwill or to establish a
valuation allowance against the deferred income tax asset, which could have a material adverse effect on our results of
operations and financial condition.
Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses over the fair value of
their net assets at the date of acquisition. We test goodwill at least annually for impairment. Impairment testing is performed
based upon estimates of the fair value of the “reporting unit” to which the goodwill relates. The reporting unit is the
operating segment or a business one level below that operating segment if discrete financial information is prepared and
regularly reviewed by management at that level. The fair value of the reporting unit is impacted by the performance of the
business and could be adversely impacted by any efforts made by the Company to limit risk. If it is determined that the
goodwill has been impaired, the Company must write down the goodwill by the amount of the impairment, with a
corresponding charge to net income. Such write downs could have a material adverse effect on our results of operations or
financial position. During 2008, the Company took an impairment charge of $745, pre-tax, with respect to its Individual
Annuity and International reporting units.
If current market conditions persist during 2009, in particular, if the Company’s share price remains below book value per
share, or if the Company’s actions to limit risk associated with its products or investments causes a significant change in any
one reporting unit’s fair value, the Company may need to reassess goodwill impairment at the end of each quarter as part of
an annual or interim impairment test. Subsequent reviews of goodwill could result in additional impairment of goodwill
during 2009.
Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities.
Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in management’s
determination include the performance of the business including the ability to generate capital gains from a variety of
sources and tax planning strategies. If based on available information, it is more likely than not that the deferred income tax
asset will not be realized then a valuation allowance must be established with a corresponding charge to net income. Our
valuation allowance of $75, as of December 31, 2008, based on future facts and circumstances may not be sufficient.
Charges to increase our valuation allowance could have a material adverse effect on our results of operations and financial
position.
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Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009