The Hartford 2008 Annual Report Download - page 54

Table of Contents
Additionally, our management considers a wide range of factors about the security issuer and uses their best judgment in
evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery.
Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its
future earnings potential. Considerations in the impairment evaluation process include, but are not limited to: (i) the length
of time and the extent to which the market value has been less than cost or amortized cost; (ii) the potential for impairments
of securities when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire
industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations;
(v) the potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type
of loss or has exhausted natural resources; (vi) our intent and ability to retain the investment for a period of time sufficient to
allow for the recovery of its value; (vii) unfavorable changes in forecasted cash flows on mortgage-backed and asset-backed
securities; and (viii) other subjective factors, including concentrations and information obtained from regulators and rating
agencies. During the year ended December 31, 2008, the Company concluded that approximately $4.0 billion of unrealized
losses were other than temporarily impaired. Additional impairments may need to be taken in the future, which could have a
material adverse effect on our results of operations and financial condition.
Losses due to nonperformance or defaults by others, including issuers of investment securities (which include structured
securities such as commercial mortgage backed securities and residential mortgage backed securities or other high
yielding bonds) or reinsurance and derivative instrument counterparties, could have a material adverse effect on the
value of our investments, results of operations, financial condition and cash flows.
Issuers or borrowers whose securities or loans we hold, customers, trading counterparties, counterparties under swaps and
other derivative contracts, reinsurers, clearing agents, exchanges, clearing houses and other financial intermediaries and
guarantors may default on their obligations to us due to bankruptcy, insolvency, lack of liquidity, adverse economic
conditions, operational failure, fraud government intervention or other reasons. Such defaults could have a material adverse
effect on our results of operations, financial condition and cash flows. Additionally, the underlying assets supporting our
structured securities may deteriorate causing these securities to incur losses. For example, during the year ended
December 31, 2008, the Company incurred losses of $46 on derivative instruments due to counterparty default related to the
bankruptcy of Lehman Brothers Holding, Inc.
Our investment portfolio includes investment securities in the financial services sector that have experienced
nonperformance or defaults recently. Further nonperformance or defaults could have a material adverse effect on our results
of operations, financial condition and cash flows. In addition, the value of our investments in hybrid securities, perpetual
preferred securities, or other equity securities in the financial services sector may be significantly impaired if the issuers of
such securities defer the payment of optional coupons or dividends, are forced to accept government support or intervention,
or grant majority equity stakes to their respective governments.
The Company is not exposed to any credit concentration risk of a single issuer greater than 10% of the Company’s
stockholders’ equity other than U.S. government and U.S. government agencies backed by the full faith and credit of the
U.S. government and the Japanese government. However, if the Company’s creditors are acquired, merge or otherwise
consolidate with other creditors of the Company’s, the Company’s credit concentration risk could increase above the 10%
threshold, for a period of time, until the Company is able to sell securities to get back in compliance with the established
investment credit policies.
The availability of the Company’s commercial paper program is dependent upon a variety of factors including the
Company’s ratings and market conditions.
The Company’s maximum borrowings available under its commercial paper program are $2.0 billion. The Company’s
ability to borrow under its commercial paper program is dependent upon market conditions. On October 7, 2008, The
Federal Reserve Board authorized the Commercial Paper Funding Facility (“CPFF”) to improve liquidity in short-term
funding markets by increasing the availability of term commercial paper funding to issuers and by providing greater
assurance to both issuers and investors that firms will be able to roll over their maturing commercial paper. The Company
registered with the CPFF in order to sell up to a maximum of $375 to the facility, of which it has issued the full amount as of
December 31, 2008. The Company’s commercial paper must be rated A-1/P-1/F1 by at least two ratings agencies to be
eligible for the program. Moody’s, S&P and Fitch all recently downgraded our commercial paper rating, rendering the
Company ineligible to sell additional commercial paper under the CPFF program going forward. As a result, we will be
required to pay the maturing commercial paper issued under the CPFF program from existing sources of liquidity. Future
deterioration of our capital position at a time when we are unable to access the commercial paper markets due to prevailing
market conditions could have a material adverse effect on our liquidity.
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Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009