The Hartford 2012 Annual Report Download - page 18

Table of Contents
The amount of statutory capital that we have, and the amount of statutory capital that we must hold to maintain our financial strength and credit
ratings and meet other requirements, can vary significantly from time to time and is sensitive to a number of factors outside of our control,
including equity market, credit market, interest rate and foreign currency conditions, changes in policyholder behavior and changes in rating
agency models.
We conduct the vast majority of our business through licensed insurance company subsidiaries. Accounting standards and statutory capital and reserve
requirements for these entities are prescribed by the applicable insurance regulators and the National Association of Insurance Commissioners (“NAIC”).
Insurance regulators have established regulations that provide minimum capitalization requirements based on risk-based capital formulas for both life and
property and casualty companies. The RBC formula for life companies establishes capital requirements relating to insurance, business, asset and interest rate
risks, including equity, interest rate and expense recovery risks associated with variable annuities and group annuities that contain death benefits or certain
living benefits. The RBC formula for property and casualty companies adjusts statutory surplus levels for certain underwriting, asset, credit and off-balance
sheet risks. Our international operations are subject to regulation in the relevant jurisdiction in which they operate, which in many ways is similar to the state
regulation outlined above, with similar related restrictions and obligations.
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors, including the amount of
statutory income or losses generated by our insurance subsidiaries (which itself is sensitive to equity market and credit market conditions), the amount of
additional capital our insurance subsidiaries must hold to support business growth, changes in equity market levels, the value of certain fixed-income and
equity securities in our investment portfolio, the value of certain derivative instruments, changes in interest rates and foreign currency exchange rates, the
impact of internal reinsurance arrangements, and changes to the NAIC RBC formulas. Most of these factors are outside of the Company's control. The
Company's financial strength and credit ratings are significantly influenced by the statutory surplus amounts and RBC ratios of our insurance company
subsidiaries. In addition, rating agencies may implement changes to their internal models that have the effect of increasing the amount of statutory capital we
must hold in order to maintain our current ratings. Also, in extreme scenarios of equity market declines and other capital market volatility, the amount of
additional statutory reserves that we are required to hold for our variable annuity guarantees increases at a greater than linear rate. This reduces the statutory
surplus used in calculating our RBC ratios. When equity markets increase, surplus levels and RBC ratios will generally increase. This may be offset,
however, as a result of a number of factors and market conditions, including the level of hedging costs and other risk transfer activities, reserve requirements
for death and living benefit guarantees and RBC requirements could also increase, lowering RBC ratios. For example, while our property and casualty
companies are expected to generate statutory surplus in 2013, our life companies' statutory surplus, excluding the statutory surplus gain from the dispositions
of Individual Life and Retirement Plans, is expected to be flat to positive in 2013, which while an improvement over 2012 is challenged due to continued low
interest rates and high loss cost trends in Group Benefits. Due to these factors, projecting statutory capital and the related RBC ratios is complex. If our
statutory capital resources are insufficient to maintain a particular rating by one or more rating agencies, we may seek to raise capital through public or private
equity or debt financing. If we were not to raise additional capital, either at our discretion or because we were unable to do so, our financial strength and credit
ratings might be downgraded by one or more rating agencies.
Downgrades in our financial strength or credit ratings, which may make our products less attractive, could increase our cost of capital and
inhibit our ability to refinance our debt, which would have a material adverse effect on our business, financial condition, results of operations
and liquidity.
Financial strength and credit ratings, including commercial paper ratings, are important in establishing the competitive position of insurance companies.
Rating agencies assign ratings based upon several factors. While most of the factors relate to the rated company, some of the factors relate to the views of the
rating agency, general economic conditions, and circumstances outside the rated company's control. In addition, rating agencies may employ different models
and formulas to assess the financial strength of a rated company, and from time to time rating agencies have, at their discretion, altered these models. Changes
to the models, general economic conditions, or circumstances outside our control could impact a rating agency's judgment of its rating and the rating it assigns
us. We cannot predict what actions rating agencies may take, or what actions we may take in response to the actions of rating agencies, which may adversely
affect us.
Our financial strength ratings, which are intended to measure our ability to meet policyholder obligations, are an important factor affecting public confidence
in most of our products and, as a result, our competitiveness. A downgrade or a potential downgrade in the rating of our financial strength or of one of our
principal insurance subsidiaries could affect our competitive position and reduce future sales of our products.
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