AOCI - AOCI, net of tax, decreased by $6.7 billion as of December 31, 2008 compared with December 31, 2007. The decrease in AOCI, net of tax, includes unrealized losses on securities of $7.1 billion, primarily due to widening credit spreads associated with fixed maturities, partially offset by gains on cash-flow hedging instruments of $784, change in foreign currency translation adjustments of $196, and pension and other postretirement plan adjustments of $(515). Because The Hartford’s investment portfolio has a duration of approximately 5 years, a 100 basis point parallel movement in rates would result in approximately a 5% change in fair value. Movements in short-term interest rates without corresponding changes in long-term rates will impact the fair value of our fixed maturities to a lesser extent than parallel interest rate movements.
For a discussion of the potential impact of the equity markets on capital and liquidity, see “Ratings” below.
On December 23, 2008, A.M. Best affirmed the financial strength rating of A+ of the key life and property/casualty subsidiaries and downgraded the senior debt ratings to a- from a. The outlook assigned to the ratings is negative.
On February 9, 2009, S&P lowered its debt rating on The Hartford Financial Services Group Inc. to A- from A. At the same time, it placed all ratings, including the financial strength ratings, on credit watch with negative implications.
The table below sets forth statutory surplus for the Company’s insurance companies. The statutory surplus amounts as of December 31, 2007 in the table below are based on actual statutory filings with the applicable regulatory authorities. The statutory surplus amounts as of December 31, 2008 are estimates, as the respective 2008 statutory filings have not yet been made.
The Company’s stockholders’ equity, as prepared using U.S. GAAP was $9.3 billion as of December 31, 2008. The Company’s estimated aggregate statutory capital and surplus, as prepared in accordance with the National Association of Insurance Commissioners’ Accounting Practices and Procedures Manual (“US STAT”) was $13.8 billion as of December 31, 2008. Significant differences between U.S. GAAP stockholders’ equity and aggregate statutory capital and surplus prepared in accordance with US STAT include the following:
Temporary differences between the book and tax basis of an asset or liability which are recorded as deferred tax assets are evaluated for recoverability under U.S. GAAP while those amounts deferred are subject to limitations under US STAT.
Certain assumptions used in the determination of Life benefit reserves are prescribed under US Stat and are intended to be conservative, while the assumptions used under U.S. GAAP are generally the Company’s best estimates. In addition, the methodologies used for determining life reserve amounts are different between US Stat and U.S. GAAP. Annuity reserving and cash-flow testing for death and living benefit reserves under US STAT are generally addressed by the Commissioners’ Annuity Reserving Valuation Methodology and the related Actuarial Guidelines. Under these Actuarial Guidelines, in general, future cash flows associated with the variable annuity business are included in these methodologies with estimates of future fee revenues, claim payments, expenses, reinsurance impacts and hedging impacts. At December 31, 2008, in determining the cash-flow impacts related to future hedging, assumptions were made in the scenarios that generate reserve requirements, about the potential future decreases in the hedge benefits and increases in hedge costs which resulted in increased reserve requirements. Reserves for death and living benefits under U.S. GAAP are either considered embedded derivatives and recorded at fair value or they may be considered SOP 03-1 reserves.
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending upon a variety of factors. The amount of change in the statutory surplus or RBC ratios can vary based on individual factors and may be compounded in extreme scenarios or if multiple factors occur at the same time. At times the impact of changes in certain market factors or a combination of multiple factors on RBC ratios can be varied and in some instances counterintuitive. Factors include:
Statutory capital at the Property & Casualty subsidiaries has historically been maintained at or above the capital level required to meet “AA level” ratings from rating agencies. Statutory capital generated by the Property & Casualty subsidiaries in excess of the capital level required to meet “AA level” ratings is available for use by the enterprise or for corporate purposes, subject to regulatory dividend limitations. The amount of statutory capital can increase or decrease depending on a number of factors affecting Property & Casualty results including, among other factors, the level of catastrophe claims incurred, the amount of reserve development, the effect of changes in interest rates on investment income and the discounting of loss reserves, and the effect of realized gains and losses on investments.
Legal Proceedings - For a discussion regarding contingencies related to The Hartford’s legal proceedings, please see Item 3, “Legal Proceedings”.
Tax proposals, proposals related to the CPP and regulatory initiatives which have been or are being considered by Congress and/or the United States Treasury Department could have a material effect on the insurance business. These proposals and initiatives include, or could include, changes pertaining to the income tax treatment of insurance companies and life insurance products and annuities, repeal or reform of the estate tax and comprehensive federal tax reform. The nature and timing of any Congressional or regulatory action with respect to any such efforts is unclear.