The Hartford 2012 Annual Report Download - page 102

Table of Contents
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Equity risk is defined as the risk of financial loss due to changes in the value of global equities or equity indices. The Company has exposure to equity risk
from assets under management, embedded derivatives within the Company’s variable annuities and assets that support the Company’s pension plans. Equity
Risk on the Company’s Variable Annuity products is mitigated through various hedging programs. (See the Variable Annuity Hedge Program Section)
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 as the 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 peri odic 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 18 of the
Notes to Consolidated Financial Statements.
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The Company’s variable products are significantly influenced by the U.S., Japanese, 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 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;
•reduce the value of equity securities trading supporting the international variable annuities, the related policyholder funds and benefits payable, and
the amount of fee income generated from those variable annuities;
•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 for GMDB and GMIB benefits;
•decrease the Company’s actual gross profits, resulting in increased DAC amortization;
•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. See Estimated Gross Profits Used in the Valuation and Amortization of Assets and Liabilities
Associated with Variable Annuity and Other Universal Life-Type 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 dynamic hedge program and macro hedge derivative assets, resulting in realized capital
losses, and will generally have the inverse impact of those listed above. See section on Variable Annuity Hedging Program for more information.
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