The Hartford 2014 Annual Report Download - page 17

If our businesses do not perform well, we may be required to establish a valuation allowance against the deferred income tax asset or to recognize an
impairment of our goodwill, which could have a material adverse effect on our results of operations and financial condition.
Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed
periodically by management to determine if they are realizable. Factors in management's determination include the performance of the business, including
the ability to generate capital gains to offset previously recognized capital losses, from a variety of sources and tax planning strategies. If based on available
information, it is more likely than not that we are unable to recognize a full tax benefit on deferred tax assets, then a valuation allowance will be established
with a corresponding charge to net income (loss). Charges to increase our valuation allowance could have a material adverse effect on our results of
operations and financial condition.
Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of
acquisition. We test goodwill at least annually for impairment. Impairment testing is performed based upon estimates of the fair value of the “reporting unit”
to which the goodwill relates. The reporting unit is the operating segment or a business one level below that operating segment if discrete financial
information is prepared and regularly reviewed by management at that level. The fair value of the reporting unit is impacted by the performance of the
business and could be adversely impacted by any efforts made by the Company to limit risk. If it is determined that the goodwill has been impaired, the
Company must write down the goodwill by the amount of the impairment, with a corresponding charge to net income (loss). These write downs could have a
material adverse effect on our results of operations or financial condition.
It is difficult for us to predict our potential exposure for asbestos and environmental claims, and our ultimate liability may exceed our currently recorded
reserves, which may have a material adverse effect on our business, financial condition, results of operations and liquidity.
We continue to receive asbestos and environmental claims. Significant uncertainty limits the ability of insurers and reinsurers to estimate the ultimate
reserves necessary for unpaid losses and related expenses for both environmental and particularly asbestos claims. For some asbestos and environmental
claims, we believe that the actuarial tools and other techniques we employ to estimate the ultimate cost of claims for more traditional kinds of insurance
exposure are less precise in estimating reserves for our asbestos and environmental exposures. Accordingly, the degree of variability of reserve estimates for
these longer-tailed exposures is significantly greater than for other more traditional exposures. It is also not possible to predict changes in the legal and
legislative environment and their effect on the future development of asbestos and environmental claims. Because of the significant uncertainties that limit
the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses for both environmental and particularly
asbestos claims, the ultimate liabilities may exceed the currently recorded reserves. Increases in reserves would be recognized as an expense during the
periods in which these determinations are made, thereby adversely affecting our results of operations for the related periods. Depending on the scale of any
changes in these estimated losses, such determinations could have a material adverse effect on our business, financial condition, results of operations and
liquidity.
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The amount of statutory capital that we have, and the amount of statutory capital that we must hold to maintain our financial strength and credit ratings
and meet other requirements, can vary significantly from time to time and is sensitive to a number of factors outside of our control, including equity
market, credit market and interest rate conditions, changes in policyholder behavior, changes in rating agency models, and changes in regulations.
We conduct the vast majority of our business through licensed insurance company subsidiaries. Accounting standards and statutory capital and reserve
requirements for these entities are prescribed by the applicable insurance regulators and the National Association of Insurance Commissioners (“NAIC”).
Insurance regulators have established regulations that provide minimum capitalization requirements based on risk-based capital (“RBC”) formulas for both
life and property and casualty companies. The RBC formula for life companies establishes capital requirements relating to insurance, business, asset and
interest rate risks, including equity, interest rate and expense recovery risks associated with variable annuities and group annuities that contain death benefits
or certain living benefits. The RBC formula for property and casualty companies adjusts statutory surplus levels for certain underwriting, asset, credit and off-
balance sheet risks.
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