The Hartford 2015 Annual Report Download - page 15

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Our statutory surplus is also affected by widening credit spreads as a result of the accounting for the assets and liabilities on our fixed
market value adjusted (“MVA”) annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded at fair
value. In determining the statutory reserve for the fixed MVA annuities we are required to use current crediting rates. In many capital
market scenarios, current crediting rates are highly correlated with market rates implicit in the fair value of statutory separate account
assets. As a result, the change in the statutory reserve from period to period will likely substantially offset the change in the fair value of
the statutory separate account assets. However, in periods of volatile credit markets, actual credit spreads on investment assets may
increase sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value losses. As
actual credit spreads are not fully reflected in current crediting rates, the calculation of statutory reserves may not substantially offset the
change in fair value of the statutory separate account assets, resulting in reductions in statutory surplus. This may result in the need to
devote significant additional capital to support the fixed MVA product.
In addition, a reduction in market liquidity can make it difficult to value certain of our securities when trading becomes less frequent. As
such, valuations may include assumptions or estimates that may be more susceptible to significant period-to-period changes, which
could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Our exposure to commodity prices primarily relates to our investment portfolio. Our investment portfolio includes fixed maturities and
equity securities issued by companies and sovereigns that derive a portion of their revenues from commodities, including oil, coal,
natural gas, and precious and non-precious metals. In periods in which the prices of these and other commodities fall, absent other
countervailing changes, decreases in the market value of our investment portfolio will likely result. If these declines in commodities
prices are severe and persist over an extended period of time, other-than-temporary impairments may result.
Significant declines in equity prices, changes in U.S. interest rates, changes in credit spreads, inflation, or real estate market
deterioration, individually or in combination, could have a material adverse effect on our business, financial condition, results of
operations or liquidity. Our hedging assets seek to reduce the net economic sensitivity of our potential obligations from guaranteed
benefits to equity market and interest rate fluctuations. Because of the accounting asymmetries between our hedging targets and statutory
and GAAP accounting principles for our guaranteed benefits, rising equity markets and/or rising interest rates may result in statutory or
GAAP losses.
Concentration of our investment portfolio in any particular segment of the economy may have adverse effects on our business,
financial condition, results of operations and liquidity.
The concentration of our investment portfolios in any particular industry, collateral type, group of related industries or geographic sector
could have an adverse effect on our investment portfolios and consequently on our business, financial condition, results of operations
and liquidity. Events or developments that have a negative impact on any particular industry, group of related industries or geographic
region may have a greater adverse effect on our investment portfolio to the extent that the portfolio is concentrated rather than
diversified.
Risks Relating to Estimates, Assumptions and Valuations
Actual results could materially differ from the analytical models we use to assist our decision making in key areas such as
underwriting, capital, hedging, reserving, and catastrophe risks, which could have a material adverse effect on our business,
financial condition, results of operations or liquidity.
We employ various modeling techniques (e.g., scenarios, predictive, stochastic and/or forecasting) to analyze and estimate exposures,
loss trends and other risks associated with our insurance businesses, investments and capital management. We use the modeled outputs
and related analyses to assist us in decision-making related to, among other things, underwriting, pricing, capital allocation, reserving,
investments, hedging, reinsurance, and catastrophe risk. Both proprietary and third party models we use incorporate numerous
assumptions and forecasts about the future level and variability of interest rates, capital requirements, loss frequency and severity,
currency exchange rates, policyholder behavior, equity markets and inflation, among others. The modeled outputs and related analyses
are subject to the inherent limitations of any statistical analysis, including the use of historical internal and industry data and
assumptions, which may be stale, incomplete or erroneous. Consequently, actual results may differ materially from our modeled results.
The profitability and financial condition of the Company substantially depends on the extent to which our actual experience is consistent
with assumptions we use in our models and ultimate model outputs. If, based upon these models or other factors, we misprice our
products or our estimates of the risks we are exposed to prove to be materially inaccurate, our business, financial condition, results of
operations or liquidity may be adversely affected.