The Hartford 2015 Annual Report Download - page 18

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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, the amount of additional capital our insurance
subsidiaries must hold to support business growth, the amount of dividends or distributions taken out of our insurance subsidiaries,
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, the impact of internal reinsurance arrangements, admissibility of deferred tax assets 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 would generally be expected to increase. However, as a result of a number of factors and market conditions,
including the level of hedging costs and other risk transfer activities, statutory reserve requirements for death and living benefit
guarantees and increases in RBC requirements, surplus and RBC ratios may not increase when equity markets increase. 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 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 (including its assessment of the strategic importance of the rated company to the insurance group), 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 altered these models. Changes to
the models, general economic conditions, or other circumstances outside our control could impact a rating agency's judgment of its
internal rating and the publicly issued 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.
Our credit ratings also affect our cost of capital. A downgrade or a potential downgrade of our credit ratings could make it more difficult
or costly to refinance maturing debt obligations, to support business growth at our insurance subsidiaries and to maintain or improve the
financial strength ratings of our principal insurance subsidiaries. Downgrades could begin to trigger potentially material collateral calls
on certain of our derivative instruments and counterparty rights to terminate derivative relationships, both of which could limit our
ability to purchase additional derivative instruments. These events could materially adversely affect our business, financial condition,
results of operations and liquidity. For a further discussion of potential impacts of ratings downgrades on derivative instruments,
including potential collateral calls, see Part II, Item 7, MD&A - Capital Resources and Liquidity - Derivative Commitments.
Losses due to nonperformance or defaults by others, including issuers of investment securities, mortgage loans or reinsurance and
derivative instrument counterparties, could have a material adverse effect on the value of our investments, business, financial
condition, results of operations and liquidity.
Issuers or borrowers whose securities or loans we hold, customers, trading counterparties, counterparties under swaps and other
derivative contracts, reinsurers, clearing agents, exchanges, clearing houses and other financial intermediaries and guarantors may
default on their obligations to us due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud,
government intervention or other reasons. Such defaults could have a material adverse effect on the value of our investments, business,
financial condition, results of operations and liquidity. Additionally, the underlying assets supporting our structured securities or loans
may deteriorate causing these securities or loans to incur losses.
Our investment portfolio includes securities backed by real estate assets, the value of which may be adversely impacted if conditions in
the real estate market significantly deteriorate, including declines in property values and increases in vacancy rates, delinquencies and
foreclosures, ultimately resulting in a reduction in expected future cash flows for certain securities.