The Hartford 2013 Annual Report Download - page 14

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Item 1A. RISK FACTORS
Investing in The Hartford involves risk. In deciding whether to invest in The Hartford, you should carefully consider the following risk
factors, any of which could have an adverse effect on the business, financial condition, results of operations, or liquidity of The Hartford
and could also impact the trading price of our securities. The Hartford may also be subject to other risks and uncertainties that are not
specifically described below, which may have an adverse effect on the business, financial condition, results of operations, or liquidity of
The Hartford. This information should be considered carefully together with the other information contained in this report and the other
reports and materials filed by The Hartford with the Securities and Exchange Commission (“SEC”). The following risk factors have been
organized by category for ease of use, however many of the risks may have impacts in more than one category. These categories,
therefore, should be viewed as a starting point for understanding the significant risks facing us and not as a limitation on the potential
impact of the matters discussed. Risk factors are not necessarily listed in order of importance.
Risks Relating to Economic, Market and Political Conditions
Unfavorable conditions in our operating environment, including general economic and global capital market conditions, and
financial and capital markets risks, including changes in interest rates, credit spreads, equity prices, market volatility, foreign
exchange rates and real estate market deterioration, may have a material adverse effect on our business, financial condition, results
of operations, and liquidity.
Despite the rise in U.S. equity markets in 2013, there continues to be uncertainty regarding the timing and strength of an economic
recovery, which may adversely affect our business, financial condition, results of operations and liquidity in 2014. Weak economic
conditions, such as continued high unemployment, low labor force participation, lower family income, higher tax rates, including on
small business owners, lower business investment and lower consumer spending have adversely affected or may in the future adversely
affect the demand for financial and insurance products, as well as their profitability in some cases. These weak economic conditions are
also likely to result in the persistence of a sustained low interest rate environment as well as volatility in other capital market conditions,
which will continue to pressure our investment results.
One important exposure to equity risk relates to the potential for lower earnings associated with our operations in Mutual Funds and
Talcott Resolution, such as U.S. and Japan variable annuities, where fee income is earned based upon the fair value of the assets under
management. Should global equity markets decline from current levels, assets under management and related fee income will be
reduced. Certain of our products have guaranteed benefits that increase our potential obligation and statutory capital exposure should
equity markets decline. Sustained declines in equity markets may result in the need to utilize significant additional capital to support
these products and adversely affect our ability to support our other businesses.
While interest rates in recent periods continue to be near historically low levels, recent increases in market rates have marginally reduced
our reinvestment risk. However, further reductions in market rates or a sustained low interest rate environment would pressure our net
investment income and could result in lower margins and lower estimated gross profits on certain products. In addition, due to the long-
term nature of the liabilities within our Talcott Resolution operations, such as structured settlements and guaranteed benefits on variable
annuities, sustained declines in long-term interest rates subjects us to reinvestment risks, increased hedging costs, spread compression
and capital volatility. A rise in interest rates, in the absence of other countervailing changes, will reduce the market value of our
investment portfolio and, if long-term interest rates were to rise dramatically within a six-to-twelve month time period, certain products
within our Talcott Resolution division might be exposed to disintermediation risk. Disintermediation risk refers to the risk that our
policyholders may surrender their contracts in a rising interest rate environment, requiring us to liquidate in an unrealized loss position.
An increase in interest rates can also impact our tax planning strategies and in particular our ability to utilize tax benefits to offset certain
previously recognized realized capital losses. Assets supporting the liabilities within our property & casualty and group benefits
businesses are largely invested in fixed income securities. Changes in interest rates will affect the value of these assets and expose the
company to reinvestment risk and disintermediation risk if cash flows differ materially from our projections. Additionally, new and
renewal business for these products is priced based on prevailing interest rates. As interest rates decline, pricing targets will increase to
offset the lower anticipated investment income earned on invested premiums. Conversely, as interest rates rise, pricing targets will
decrease to reflect higher anticipated investment income. Such changes in pricing may affect our competitiveness in the marketplace,
and in turn, written premium and earnings margin achieved.