The Hartford 2008 Annual Report Download - page 52

Table of Contents
Our business, results of operations and financial condition may be adversely affected by general domestic and
international economic and business conditions that are less favorable than anticipated.
Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital
markets, and inflation all affect the business and economic environment and, ultimately, the amount and profitability of
business we conduct. For example, in an economic downturn such as the current financial crisis characterized by higher
unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending,
the demand for financial and insurance products has been adversely affected. Further, given that we offer our products and
services in North America, Japan, Europe and South America, we are exposed to these risks in multiple geographic
locations. Our operations are subject to different local political, regulatory, business and financial risks and challenges,
which may affect the demand for our products and services, the value of our investment portfolio, the required levels of our
capital and surplus and the credit quality of local counterparties. These risks include, for example, political, social or
economic instability in countries in which we operate, fluctuations in foreign currency exchange rates, credit risks of our
local counterparties, lack of local business experience in certain markets and, in certain cases, risks associated with potential
incompatibility with partners. We may not succeed in developing and implementing policies and strategies that are effective
in each location where we do business, and we cannot guarantee that the inability to successfully address the risks related to
economic conditions in all of the geographic locations where we conduct business will not have a material adverse effect on
our business, results of operations and financial condition.
Our valuations of many of our financial instruments include methodologies, estimations and assumptions that are
subject to differing interpretations and could result in changes to investment valuations that may materially adversely
affect our results of operations and financial condition.
The following financial instruments are carried at fair value in the Company’s consolidated financial statements: fixed
maturities, equity securities, freestanding and embedded derivatives, and separate account assets. The Company has
categorized these securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation
technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). In many situations, inputs used to measure the
fair value of an asset or liability position may fall into different levels of the fair value hierarchy. In these situations, the
Company will determine the level in which the fair value falls based upon the lowest level input that is significant to the
determination of the fair value.
The determination of fair values are made at a specific point in time, based on available market information and judgments
about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit
standing of the issuer or counterparty. The use of different methodologies and assumptions may have a material effect on the
estimated fair value amounts.
During periods of market disruption such as we are currently experiencing, including periods of rapidly widening credit
spreads or illiquidity, it has been and will likely continue to be difficult to value certain of our securities, such as Alt-A,
subprime mortgage backed and CMBS securities, if trading becomes less frequent and/or market data becomes less
observable. There may be certain asset classes that were in active markets with significant observable data that become
illiquid due to the current financial environment. In such cases, more securities may fall to Level 3 and thus require more
subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or
require greater estimation thereby resulting in values which may differ materially from the value at which the investments
may be ultimately sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially
impact the valuation of securities as reported within our consolidated financial statements and the period-to-period changes
in value could vary significantly. Decreases in value could have a material adverse effect on our results of operations and
financial condition. As of December 31, 2008, 14%, 70% and 16% of our available for sale securities were considered to be
Level 1, 2 and 3, respectively.
Evaluation of available-for-sale securities for other than temporary impairment involves subjective determinations and
could materially impact our results of operations.
The evaluation of impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is
intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The
risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or future recovery
prospects, the effects of changes in interest rates or credit spreads and the expected recovery period. For securitized financial
assets with contractual cash flows, the Company currently uses its best estimate of cash flows over the life of the security
under severe recession scenarios. In addition, estimating future cash flows involves incorporating information received from
third party sources and making internal assumptions and judgments regarding the future performance of the underlying
collateral and assessing the probability that an adverse change in future cash flows has occurred. The determination of the
amount of other than temporary impairments is based upon our quarterly evaluation and assessment of known and inherent
risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new
information becomes available.
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009