The Hartford 2008 Annual Report Download - page 45

Table of Contents
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 a significant or material adverse effect on the business, financial condition,
operating results 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.
We have been materially adversely affected by conditions in the global financial markets and economic conditions
generally, and may be materially adversely affected if these conditions persist or deteriorate further in 2009 or if our
planned initiatives are not effective.
Markets in the United States and elsewhere have experienced extreme volatility and disruption for more than 12 months, due
largely to the stresses affecting the global banking system, which accelerated significantly in the second half of 2008. The
United States, Europe and Japan have entered a severe recession that is likely to persist well into and perhaps through and
even beyond 2009, despite past and expected governmental intervention in the world’s major economies. These
circumstances have exerted significant downward pressure on prices of equity securities and virtually all other asset classes
and have resulted in substantially increased market volatility, severely constrained credit and capital markets, particularly for
financial institutions, and an overall loss of investor confidence. Economic conditions have continued to deteriorate in early
2009.
Like other financial institutions and particularly life insurers, which face significant financial and capital markets risk in
their operations, we have been adversely affected, to a significant extent, by these conditions. Among other effects, we
incurred significant investment losses and other charges in 2008, notably with respect to deferred acquisition costs and
goodwill associated with our variable annuity and international businesses, which resulted in a net loss for the fourth quarter
and the full year. Our unrealized loss position also increased substantially in 2008. The unanticipated, severe decline in the
equity markets also caused material increases to our liabilities in connection with certain annuity products, a line of business
in which we have significant concentration. Concerns related to investment losses, liabilities arising from variable annuity
products and capital pressures, which led to severe pressure on our stock price in 2008, are continuing in 2009. As detailed
in the following risk factors, we expect to continue to face significant challenges and uncertainties that could materially
adversely affect our results, financial condition and prospects.
Our capital position declined in 2008 relative to 2007, notwithstanding our capital-raising transaction with Allianz SE in
October 2008. We expect continued pressure on our capital position in 2009. Further significant declines in our capital
position could impair our ability to support the scale of our business as currently constituted and to absorb continuing
operating losses and liabilities under our customer contracts and our overall competitiveness. We have taken a number of
steps to preserve capital and mitigate risk, among them launching a range of initiatives to reduce risks associated with our
various lines of business, applying for federal funds under the Emergency Economic Stabilization Act of 2008 (“EESA”)
and looking across the enterprise for additional opportunities to reduce risk. These initiatives include modifying product
features, adjusting our hedging activities and mitigating risks in our investment portfolio, and could also include
discontinuing or restructuring certain business lines. Like other companies, we are also evaluating our expense base in light
of expected contractions in certain of our business lines and have further reduced our dividend rate. Taken as a whole, these
actions may not be effective, especially if the global economy experiences further shocks. Even if effective, certain
measures may have unintended consequences. For example, rebalancing our hedging program may better protect our
statutory surplus, but may also result in greater U.S. GAAP earnings volatility. These actions may also entail additional
costs or result in further impairment or other charges or adversely affect our ability to compete successfully in an
increasingly difficult consumer market.
On February 6, 2009, Moody’s Investor Services downgraded our long-term debt rating to “Baa1” and the financial strength
ratings of our principal subsidiaries to “A1”. On February 9, 2009, Fitch Ratings downgraded our long-term debt rating to
“BBB” and the financial strength ratings of our principal subsidiaries to “A” (in the case of our life subsidiaries) and “A+”
(in the case of our property and casualty subsidiaries) and Standard & Poor’s downgraded our counterparty credit rating to
“A-”. If our planned initiatives fail to mitigate the impacts on the Company of the current recession, or if the current
recession is even more severe than expected, we may also experience further downgrades of our financial strength and credit
ratings. See Ratings within Capital Resources and Liquidity of the MD&A. While reductions in ratings may ease pressure on
our capital position, it could also have negative implications for our competitive position. We may also need to raise
additional capital or consider other transactions to manage our capital position and liquidity or further reduce our exposure
to market and financial risks. We may not be able to raise sufficient capital as and when required if the financial markets
remain in turmoil, and any capital we raise may be on terms that are dilutive to existing shareholders or otherwise
unfavorable to us. Any sales of securities or other assets that we may carry out may be completed on unfavorable terms or
cause us to incur charges, and we would lose the potential for market upside on those assets in a market recovery. If our
business continues to experience significant challenges, we may face other pressures, such as employee retention issues and
potential loss of distributors for our products.
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009