The Hartford 2015 Annual Report Download - page 96

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Fixed Maturity Investments
The Company’s investment portfolios primarily consist of investment grade fixed maturity securities. The fair value of fixed maturity
investments was $59.7 billion and $59.9 billion at December 31, 2015 and 2014, respectively. The fair value of these and other invested
assets fluctuate depending on the interest rate environment and other general economic conditions. The weighted average duration of the
portfolio, including fixed maturities, commercial mortgage loans, certain derivatives, and cash equivalents, was approximately 5.5 years
and 5.3 years as of December 31, 2015 and 2014, respectively.
Liabilities
The Company’s issued investment contracts and certain insurance product liabilities, other than non-guaranteed separate accounts,
include asset accumulation vehicles such as fixed annuities, guaranteed investment contracts, other investment and universal life-type
contracts and certain insurance products such as long-term disability.
Asset accumulation vehicles primarily require a fixed rate payment, often for a specified period of time, such as fixed rate annuities with
a market value adjustment feature. The term to maturity of these contracts generally range from less than one year to ten years. A fixed
interest rate is specified in the contract based upon the term selected. These contracts contain surrender values that are based upon a
market value adjustment formula if held for shorter periods. The formula typically is based on current interest crediting rates being
offered for new market value annuity purchases at the time of contract issuance with terms equal to the remaining term to maturity. The
market value adjustment may be positive or negative, depending upon market interest rates at surrender. In addition, certain products
such as corporate owned life insurance contracts and the general account portion of Talcott Resolution's variable annuity products credit
interest to policyholders subject to market conditions and minimum interest rate guarantees. The term to maturity of the asset portfolio
supporting these products may range from short to intermediate.
While interest rate risk associated with many of these products has been reduced through the use of market value adjustment features and
surrender charges, the primary risk associated with these products is that the spread between investment return and credited rate may not
be sufficient to earn targeted returns.
The Company also manages the risk of certain insurance liabilities similarly to investment type products due to the relative predictability
of the aggregate cash flow payment streams. Products in this category may contain significant reliance upon actuarial pricing
assumptions (including mortality and morbidity) and do have some element of cash flow uncertainty. Product examples include
structured settlement contracts, on-benefit annuities (i.e., the annuitant is currently receiving benefits thereon) and short-term and long-
term disability contracts. The cash outflows associated with these policy liabilities are not interest rate sensitive but do vary based on the
timing and amount of benefit payments. The primary risks associated with these products are that the benefits will exceed expected
actuarial pricing and/or that the actual timing of the cash flows will differ from those anticipated, or interest rate levels earned on the
investment portfolio may deviate from those assumed in product pricing, ultimately resulting in an investment return lower than that
assumed in pricing. The average duration of the liability cash flow payments can range from less than one year to in excess of fifteen
years.
Derivatives
The Company utilizes a variety of derivative instruments to mitigate interest rate risk associated with its investment portfolio or hedge
liabilities. Interest rate swaps are primarily used to convert interest receipts or payments to a fixed or variable rate. The use of such
swaps enable the Company to customize contract terms and conditions to desired objectives and manage the duration profile within
established tolerances. Interest rate swaps are also used to hedge the variability in the cash flow of a forecasted purchase or sale of fixed
rate securities due to changes in interest rates. Interest rate caps, floors, swaps, swaptions, and futures may be used to manage portfolio
duration.
As of December 31, 2015 and 2014, notional amounts pertaining to derivatives utilized to manage interest rate risk, including offsetting
positions, totaled $17.8 billion and $19.3 billion, respectively ($17.7 billion and $19.2 billion, respectively, related to investments and
$0.1 billion and $0.1 billion, respectively, related to Talcott Resolution liabilities). The fair value of these derivatives was $(796) and
$(468) as of December 31, 2015 and 2014, respectively. These amounts do not include derivatives associated with the Variable Annuity
Hedging Program.