The Hartford 2014 Annual Report Download - page 98

The Company's exposure to equity risk includes the potential for lower earnings associated with certain businesses such as mutual funds and variable
annuities where fee income is earned based upon the value of the assets under management. For further discussion of equity risk, see the Variable Product
Guarantee Risks and Risk Management section below. In addition, Talcott Resolution includes certain guaranteed benefits, primarily associated with
variable annuity products, which increase the Company's potential benefit exposure in the periods that equity markets decline.
The Company is also subject to equity risk based upon the assets that support its pension plans. The asset allocation mix is reviewed on a periodic basis. In
order to minimize risk, the pension plans maintain a listing of permissible and prohibited investments. In addition, the pension plans have certain
concentration limits and investment quality requirements imposed on permissible investment options. For further discussion of equity risk associated with
the pension plans, see the Critical Accounting Estimates section of the MD&A under “Pension and Other Postretirement Benefit Obligations” and Note 17 of
Notes to Consolidated Financial Statements.
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The Company’s variable products are significantly influenced by the U.S. and other equity markets. Increases or declines in equity markets impact certain
assets and liabilities related to the Company’s variable products and the Company’s earnings derived from those products. The Company’s variable products
currently include U.S. variable annuity contracts and mutual funds.
Generally, declines in equity markets will:
• reduce the value of assets under management and the amount of fee income generated from those assets;
• increase the liability for GMWB benefits resulting in realized capital losses;
• increase the value of derivative assets used to hedge product guarantees resulting in realized capital gains;
• increase the costs of the hedging instruments we use in our hedging program;
• increase the Company’s net amount at risk ("NAR") for GMDB and GMWB benefits;
• increase the amount of required assets to be held backing variable annuity guarantees to maintain required regulatory reserve levels and targeted risk
based capital ratios; and
• decrease the Company’s estimated future gross profits, resulting in a DAC unlock charge. See Estimated Gross Profits Used in the Valuation and
Amortization of Assets and Liabilities Associated with Variable Annuity Contracts within the Critical Accounting Estimates section of the MD&A
for further information.
Generally, increases in equity markets will reduce the value of the hedge derivative assets, resulting in realized capital losses, and will generally have the
inverse impact of those listed above. For additional information, see Risk Hedging - Variable Annuity Hedging Program section.
Variable Annuity Guaranteed Benefits
The Company’s variable annuities include GMDB and certain contracts include GMWB features. Declines in the equity markets will increase the Company’s
liability for these benefits. Generally, a GMWB contract is ‘in the money’ if the contract holder’s guaranteed remaining benefit becomes greater than the
account value.
The NAR is generally defined as the guaranteed minimum benefit amount in excess of the contract holder’s current account value. Variable annuity account
values with guarantee features were $52.9 billion and $81.9 billion (including HLIKK) as of December 31, 2014 and December 31, 2013, respectively.
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