The Hartford 2015 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, such as
changes in interest rates, credit spreads, equity prices, market volatility, foreign exchange rates, commodities prices and real estate
market deterioration, may have a material adverse effect on our business, financial condition, results of operations, and liquidity.
The Company’s investment portfolio and insurance liabilities are sensitive to changes in global capital market conditions. Stressed
conditions or disruptions in global capital markets can directly impact our business, financial condition, results of operations, and
liquidity as well as impact the economic environment. Weak economic conditions, such as high unemployment, low labor force
participation, lower family income, higher tax rates, lower business investment and lower consumer spending may have adversely
affected or may in the future adversely affect the demand for insurance and financial products, as well as their profitability in some
cases. Global economic conditions may result in the persistence of a low interest rate environment as well as volatility in other global
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 variable annuities, where fee income is earned based upon the fair value of the assets under management.
Should 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 when 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.
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. New and renewal business for our property and casualty and group benefits products is
priced based on prevailing interest rates. As interest rates decline, pricing targets will tend to increase to offset the lower anticipated
investment income earned on invested premiums. Conversely, as interest rates rise, pricing targets will tend to decrease to reflect higher
anticipated investment income. Our ability to effectively react to such changes in pricing may affect our competitiveness in the
marketplace, and in turn, written premium and earnings margin achieved. In addition, due to the long-term nature of the liabilities within
our Group Benefits and 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 certain products within our Talcott Resolution segment 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 assets 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.
Our exposure to credit spreads primarily relates to changes in market price of fixed income instruments associated with changes in credit
spreads. If issuer credit spreads widen significantly and remain at wide levels over an extended period of time, other-than-temporary
impairments and decreases in the market value of our investment portfolio will likely result. In addition, losses may also occur due to
volatility in credit spreads. When credit spreads widen, we incur losses associated with credit derivatives where the Company assumes
exposure. When credit spreads tighten, we incur losses associated with derivatives where the Company has purchased credit protection.
If credit spreads tighten significantly, the Company's net investment income associated with new purchases of fixed maturities may be
reduced.