The Hartford 2015 Annual Report Download - page 100

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Variable Annuity Market Risk Exposures
The following table summarizes the broad Variable Annuity Guarantees offered by the Company and the market risks to which the
guarantee is most exposed from a U.S. GAAP accounting perspective:
Variable Annuity Guarantees [1] U.S. GAAP Treatment [1] Primary Market Risk Exposures [1]
GMDB and life-contingent
component of the GMWB
Accumulation of the portion of fees required to cover
expected claims, less accumulation of actual claims paid
Equity Market Levels
GMWB (excluding life-
contingent portions)
Fair Value Equity Market Levels / Implied
Volatility / Interest Rates
[1] Each of these guarantees and the related U.S. GAAP accounting volatility will also be influenced by actual and estimated policyholder behavior.
Risk Hedging
Variable Annuity Hedging Program
The Company’s variable annuity hedging is primarily focused, through the use of reinsurance and capital market derivative instruments,
on reducing the economic exposure to market risks associated with guaranteed benefits that are embedded in our variable annuity
contracts. The variable annuity hedging also considers the potential impacts on statutory accounting results.
Reinsurance
The Company uses reinsurance for a portion of contracts with GMWB riders issued prior to the third quarter of 2003 and GMWB risks
associated with a block of business sold between the third quarter of 2003 and the second quarter of 2006. The Company also uses
reinsurance for a majority of the GMDB issued.
Capital Market Derivatives
GMWB Hedge Program
The Company enters into derivative contracts to hedge market risk exposures associated with the GMWB liabilities that are not
reinsured. These derivative contracts include customized swaps, interest rate swaps and futures, and equity swaps, options, and futures,
on certain indices including the S&P 500 index, EAFE index, and NASDAQ index.
Additionally, the Company holds customized derivative contracts to provide protection from certain capital market risks for the
remaining term of specified blocks of non-reinsured GMWB riders. These customized derivative contracts are based on policyholder
behavior assumptions specified at the inception of the derivative contracts. The Company retains the risk for differences between
assumed and actual policyholder behavior and between the performance of the actively managed funds underlying the separate accounts
and their respective indices.
While the Company actively manages this dynamic hedging program, increased U.S. GAAP earnings volatility may result from factors
including, but not limited to: policyholder behavior, capital markets, divergence between the performance of the underlying funds and
the hedging indices, changes in hedging positions and the relative emphasis placed on various risk management objectives.
Macro Hedge Program
The Company’s macro hedging program uses derivative instruments, such as options and futures on equities and interest rates, to
provide protection against the statutory tail scenario risk arising from GMWB and GMDB liabilities on the Company’s statutory surplus.
These macro hedges cover some of the residual risks not otherwise covered by the dynamic hedging program. Management assesses this
residual risk under various scenarios in designing and executing the macro hedge program. The macro hedge program will result in
additional U.S. GAAP earnings volatility as changes in the value of the macro hedge derivatives, which are designed to reduce statutory
reserve and capital volatility, may not be closely aligned to changes in GAAP liabilities.
Variable Annuity Hedging Program Sensitivities
The underlying guaranteed living benefit liabilities and the related hedge assets within the GMWB (excluding life contingent GMWB
payments) and Macro hedge programs are carried at fair value, with the exception of liabilities within the Macro hedge program.