The Hartford 2014 Annual Report Download - page 23

The Dodd-Frank Act was enacted on July 21, 2010, mandating changes to the regulation of the financial services industry. Implementation of the Dodd-Frank
Act is ongoing and may affect our operations and governance in ways that could adversely affect our financial condition and results of operations. The Dodd-
Frank Act requires central clearing of, and imposes new margin requirements on, certain derivatives transactions, which increases the costs of our hedging
program. Other provisions in the Dodd-Frank Act that may impact us include: the new “Federal Insurance Office” within Treasury; the possible adverse
impact on the pricing and liquidity of the securities in which we invest resulting from the proprietary trading and market making limitation of the Volcker
Rule; the possible adverse impact on the market for insurance-linked securities, including catastrophe bonds, resulting from the limitations of banking entity
involvement in and ownership of certain asset-backed securities transactions; and enhancements to corporate governance, especially regarding risk
management.
The Dodd-Frank Act vests the Financial Stability Oversight Council (“FSOC”) with the power to designate “systemically important” institutions, which will
be subject to special regulatory supervision and other provisions intended to prevent, or mitigate the impact of, future disruptions in the U.S. financial
system. Based on its most current financial data, The Hartford is below the quantitative thresholds used by the FSOC to determine which nonbank companies
merit consideration. However, the FSOC has indicted it will review on a quarterly basis whether nonbank financial institutions meet the metrics for further
review. If we were to be designated as a systemically important institution, we could be subject to heightened regulation under the Federal Reserve, which
could impact requirements regarding our capital, liquidity and leverage as well as our business and investment conduct. In addition, we could be subject to
assessments to pay for the orderly liquidation of other systemically important financial institutions that have become insolvent. As a result of these
requirements, we could incur substantial costs and suffer other negative consequences, all of which may have a material adverse effect on our business,
financial condition, results of operations and liquidity.
We may experience unfavorable judicial or legislative developments involving claim litigation that could have a material adverse effect on our business,
financial condition, results of operations and liquidity.
The Hartford is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending or providing indemnity for third-
party claims brought against insureds and as an insurer defending coverage claims brought against it. The Hartford accounts for such activity through the
establishment of unpaid loss and loss adjustment expense reserves. The Company is also involved in legal actions that do not arise in the ordinary course of
business, some of which assert claims for substantial amounts. Pervasive or significant changes in the judicial environment relating to matters such as trends
in the size of jury awards, developments in the law relating to the liability of insurers or tort defendants, and rulings concerning the availability or amount of
certain types of damages could cause our ultimate liabilities to change from our current expectations. Changes in federal or state tort litigation laws or other
applicable law could have a similar effect. It is not possible to predict changes in the judicial and legislative environment and their impact on the future
development of the adequacy of our loss reserves, particularly reserves for longer-tailed lines of business, including asbestos and environmental reserves, and
how those changes might adversely affect our ability to price our products appropriately. Our business, financial condition, results of operations and liquidity
could also be adversely affected if judicial or legislative developments cause our ultimate liabilities to increase from current expectations.
Potential changes in regulation may increase our business costs and required capital levels, which could have a material adverse effect on our business,
financial condition, results of operations and liquidity.
We are subject to extensive laws and regulations that are complex, subject to change and often conflicting in their approach or intended outcomes.
Compliance with these laws and regulations is costly and can affect our strategy, as well as the demand for and profitability of the products we offer.
State insurance laws regulate most aspects of our insurance businesses, and our insurance subsidiaries are regulated by the insurance departments of the states
in which they are domiciled, licensed or authorized to conduct business. These regulatory regimes are generally designed to protect the interests of
policyholders rather than insurers, their shareholders and other investors. U.S. state laws grant insurance regulatory authorities broad administrative powers
with respect to, among other things, licensing and authorization for lines of business, statutory capital and reserve requirements, limitations on the types and
amounts of certain investments, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of
other financial and non-financial components of an insurer's business.
In addition, future regulatory initiatives could be adopted at the federal or state level that could impact the profitability of our businesses. For example, the
NAIC and state insurance regulators are continually reexamining existing laws and regulations, specifically focusing on modifications to statutory
accounting principles, interpretations of existing laws and the development of new laws and regulations. The NAIC has undertaken a Solvency
Modernization Initiative focused on updating the U.S. insurance solvency regulation framework, including capital requirements, governance and risk
management, group supervision, accounting and financial reporting and reinsurance. Any proposed or future legislation or NAIC initiatives, if adopted, may
be more restrictive on our ability to conduct business than current regulatory requirements or may result in higher costs or increased statutory capital and
reserve requirements.
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