The Hartford 2013 Annual Report Download - page 22

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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 business, financial condition,
results of operations and liquidity.
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 or restrict an insurer's ability to offer or enforce specific policy deductibles. In these markets,
we may be compelled to underwrite significant amounts of business at lower than desired rates or accept additional risk not
contemplated in our existing rates, participate in the operating losses of residual market plans or pay assessments to fund operating
deficits of state-sponsored funds, possibly leading to unacceptable returns on equity. The laws and regulations of many states also limit
an insurer's ability to withdraw from one or more lines of insurance in the state, except pursuant to a plan that is approved by the state's
insurance department. Additionally, certain states require insurers to participate in guaranty funds for impaired or insolvent insurance
companies. These funds periodically assess losses against all insurance companies doing business in the state. Any of these factors could
have a material adverse effect on our business, financial condition, results of operations or liquidity.
Additionally, the property and casualty insurance market is historically cyclical, experiencing periods characterized by relatively high
levels of price competition, less restrictive underwriting standards and relatively low premium rates, followed by periods of relatively
low levels of competition, more selective underwriting standards and relatively high premium rates. Prices tend to increase for a
particular line of business when insurance carriers have incurred significant losses in that line of business in the recent past or when the
industry as a whole commits less of its capital to writing exposures in that line of business. Prices tend to decrease when recent loss
experience has been favorable or when competition among insurance carriers increases. In all of our property and casualty insurance
product lines and states, there is a risk that the premium we charge may ultimately prove to be inadequate as reported losses emerge. In
addition, there is a risk that regulatory constraints, price competition or incorrect pricing assumptions could prevent us from achieving
targeted returns. Inadequate pricing could have a material adverse effect on our results of operations.
Our adjustment of our risk management program relating to products we offered with guaranteed benefits to emphasize protection of
economic value will likely result in greater statutory and U.S. GAAP volatility in our earnings and potentially material charges to net
income (loss).
Some of the in-force business within our Talcott Resolution operations, especially variable annuities, offer guaranteed benefits which, in
the event of a decline in equity markets, would not only result in lower earnings, but will also increase our exposure to liability for
benefit claims. We are also subject to equity market volatility related to these benefits, including the guaranteed minimum withdrawal
GMWB, guaranteed minimum accumulation benefit (“GMAB”), guaranteed minimum death benefit (“GMDB”) and GMIB associated
with in-force variable annuities. We use reinsurance structures and have modified benefit features to mitigate the exposure associated
with GMDB. We also use reinsurance in combination with a modification of benefit features and derivative instruments to attempt to
minimize the claim exposure and to reduce the volatility of net income associated with the GMWB liability. However, due to the severe
economic conditions experienced in recent years, we adjusted our risk management program to place greater relative emphasis on the
protection of economic value. This shift in relative emphasis has resulted in greater statutory and U.S. GAAP earnings volatility and,
based upon the types of hedging instruments used, can result in potentially material charges to net income (loss) in periods of rising
equity market pricing levels, higher interest rates, declines in volatility and weakening of the yen against other currencies. While we
believe that these actions have improved the efficiency of our risk management related to these benefits, we remain liable for the
guaranteed benefits in the event that reinsurers or derivative counterparties are unable or unwilling to pay and, in turn, may need
additional capital to support in-force business. We are also subject to the risk that these management procedures prove ineffective or that
unanticipated policyholder behavior, combined with adverse market events, produces economic losses beyond the scope of the risk
management techniques employed, which individually or collectively may have a material adverse effect on our business, financial
condition, results of operations and liquidity.