The Hartford 2008 Annual Report Download - page 61

Table of Contents
State insurance regulators and the National Association of Insurance Commissioners, or NAIC, regularly re-examine
existing laws and regulations applicable to insurance companies and their products. Our international operations are subject
to regulation in the relevant jurisdictions in which they operate, which in many ways is similar to the state regulation
outlined above, with similar related restrictions. Our asset management businesses are also subject to extensive regulation in
the various jurisdictions where they operate. These laws and regulations are primarily intended to protect investors in the
securities markets or investment advisory clients and generally grant supervisory authorities broad administrative powers.
Changes in these laws and regulations, or in the interpretations thereof, are often made for the benefit of the consumer at the
expense of the insurer and thus could have a material adverse effect on our business, consolidated operating results, financial
condition and liquidity. Compliance with these laws and regulations is also time consuming and personnel-intensive, and
changes in these laws and regulations may increase materially our direct and indirect compliance costs and other expenses of
doing business, thus having an adverse effect on our business, consolidated operating results, financial condition and
liquidity.
We may experience difficulty in marketing and distributing products through our current and future distribution
channels.
We distribute our annuity, life and certain property and casualty insurance products through a variety of distribution
channels, including brokers, independent agents, broker-dealers, banks, wholesalers, affinity partners, our own internal sales
force and other third-party organizations. In some areas of our business, we generate a significant portion of our business
through individual third-party arrangements. For example, we generated approximately 71% of our personal lines earned
premium in 2008 under an exclusive licensing arrangement with AARP that continues until January 1, 2020. We
periodically negotiate provisions and renewals of these relationships, and there can be no assurance that such terms will
remain acceptable to us or such third parties. An interruption in our continuing relationship with certain of these third parties
could materially affect our ability to market our products and could have a material adverse effect on our business, operating
results and financial condition.
Our business, results of operations, financial condition and liquidity may be adversely affected by the emergence of
unexpected and unintended claim and coverage issues.
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues may either extend coverage beyond our underwriting intent
or increase the frequency or severity of claims. In some instances, these changes may not become apparent until some time
after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability under our
insurance contracts may not be known for many years after a contract is issued, and this liability may have a material
adverse effect on our business, results of operations, financial condition and liquidity at the time it becomes known.
Limits on the ability of our insurance subsidiaries to pay dividends to us could have a material adverse effect on our
liquidity.
The Hartford Financial Services Group, Inc. is a holding company with no significant operations. Our principal asset is the
stock of our insurance subsidiaries. State insurance regulatory authorities limit the payment of dividends by insurance
subsidiaries. These restrictions and other regulatory requirements affect the ability of our insurance subsidiaries to make
dividend payments. Limits on the ability of the insurance subsidiaries to pay dividends could have a material adverse effect
on our liquidity, including our ability to pay dividends to shareholders and service our debt.
As a property and casualty insurer, the premium rates we are able to charge and the profits we are able to obtain are
affected by the actions of state insurance departments that regulate our business, the cyclical nature of the business in
which we compete and our ability to adequately price the risks we underwrite, which may have a material adverse effect
on our consolidated results of operations, financial condition and cash flows.
Pricing adequacy depends on a number of factors, including the ability to obtain regulatory approval for rate changes, proper
evaluation of underwriting risks, the ability to project future loss cost frequency and severity based on historical loss
experience adjusted for known trends, our response to rate actions taken by competitors, and expectations about regulatory
and legal developments and expense levels. We seek to price our property and casualty insurance policies such that
insurance premiums and future net investment income earned on premiums received will provide for an acceptable profit in
excess of underwriting expenses and the cost of paying claims.
State insurance departments that regulate us often propose premium rate changes for the benefit of the consumer at the
expense of the insurer and may not allow us to reach targeted levels of profitability. In addition to regulating rates, certain
states have enacted laws that require a property and casualty insurer conducting business in that state to participate in
assigned risk plans, reinsurance facilities, joint underwriting associations and other residual market plans, or to offer
coverage to all consumers and often restrict an insurer’s ability to charge the price it might otherwise charge. In these
markets, we may be compelled to underwrite significant amounts of business at lower than desired rates, participate in the
operating losses of residual market plans or pay assessments to fund operating deficits of state-sponsored funds, possibly
leading to an unacceptable returns on equity. The laws and regulations of many states also limit an insurer’s ability to
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009