The Hartford 2013 Annual Report Download - page 99

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Equity Risk
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
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 18 of Notes to Consolidated Financial Statements.
Variable Product Guarantee Risks and Risk Management
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, GMWB 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 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 U.S. and Japan variable annuities include guaranteed minimum death benefits and certain contracts include optional
living benefit features. A majority of the Company’s GMDB benefits, both direct and assumed, are reinsured with an affiliated captive
reinsurer and an external reinsurer. The net amount at risk (“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 $81.9 billion and
$94.4 billion as of December 31, 2013 and December 31, 2012, respectively.
The Company’s U.S. variable annuities include a GMWB rider. Declines in the equity markets will increase the Company’s liability for
these benefits. A GMWB contract is ‘in the money’ if the contract holder’s guaranteed remaining benefit (“GRB”) becomes greater than
the account value. The Company reinsures a majority of the GMWB benefits with an affiliated captive reinsurer.