The Hartford 2008 Annual Report Download - page 57

Table of Contents
Our consolidated results of operations, financial condition and cash flows may be materially adversely affected by
unfavorable loss development.
Our success, in part, depends upon our ability to accurately assess the risks associated with the businesses that we insure.
We establish loss reserves to cover our estimated liability for the payment of all unpaid losses and loss expenses incurred
with respect to premiums earned on the policies that we write. Loss reserves do not represent an exact calculation of
liability. Rather, loss reserves are estimates of what we expect the ultimate settlement and administration of claims will cost,
less what has been paid to date. These estimates are based upon actuarial and statistical projections and on our assessment of
currently available data, as well as estimates of claims severity and frequency, legal theories of liability and other factors.
Loss reserve estimates are refined periodically as experience develops and claims are reported and settled. Establishing an
appropriate level of loss reserves is an inherently uncertain process. Because of this uncertainty, it is possible that our
reserves at any given time will prove inadequate. Furthermore, since estimates of aggregate loss costs for prior accident
years are used in pricing our insurance products, we could later determine that our products were not priced adequately to
cover actual losses and related loss expenses in order to generate a profit. To the extent we determine that losses and related
loss expenses are emerging unfavorably to our initial expectations, we will be required to increase reserves. Increases in
reserves would be recognized as an expense during the period or periods in which these determinations are made, thereby
adversely affecting our results of operations for the related period or periods. Depending on the severity and timing of any
changes in these estimated losses, such determinations could have a material adverse effect on our consolidated results of
operations, financial condition and cash flows.
We are particularly vulnerable to losses from the incidence and severity of catastrophes, both natural and man-made, the
occurrence of which may have a material adverse effect on our financial condition, consolidated results of operations
and liquidity.
Our property and casualty insurance operations expose us to claims arising out of catastrophes. Catastrophes can be caused
by various unpredictable events, including earthquakes, hurricanes, hailstorms, severe winter weather, fires, tornadoes,
explosions and other natural or man-made disasters. We also face substantial exposure to losses resulting from acts of
terrorism, disease pandemics and political instability. The geographic distribution of our business subjects us to catastrophe
exposure for natural events occurring in a number of areas, including, but not limited to, hurricanes in Florida, the Gulf
Coast, the Northeast and the Atlantic coast regions of the United States, and earthquakes in California and the New Madrid
region of the United States. We expect that increases in the values and concentrations of insured property in these areas will
continue to increase the severity of catastrophic events in the future. In the aftermath of the 2004 and 2005 hurricane season,
third-party catastrophe loss models for hurricane loss events were updated to incorporate medium-term forecasts of
increased hurricane frequency and severity. In addition, changing climate conditions, primarily rising global temperatures,
may be increasing, or may in the future increase, the frequency and severity of natural catastrophes such as hurricanes. Our
life insurance operations are also exposed to risk of loss from catastrophes. For example, natural or man-made disasters or a
disease pandemic such as could arise from avian flu, could significantly increase our mortality and morbidity experience.
Policyholders may be unable to meet their obligations to pay premiums on our insurance policies or make deposits on our
investment products. Our liquidity could be constrained by a catastrophe, or multiple catastrophes, which could result in
extraordinary losses or a further downgrade of our debt or financial strength ratings from their levels as of
February 10, 2009. In addition, in part because accounting rules do not permit insurers to reserve for such catastrophic
events until they occur, claims from catastrophic events could have a material adverse effect on our financial condition,
consolidated results of operations and cash flows.
Competitive activity may adversely affect our market share and financial results, which could have a material adverse
effect on our business, results of operations and financial condition.
The insurance industry is highly competitive. Our competitors include other insurers and, because many of our products
include an investment component, securities firms, investment advisers, mutual funds, banks and other financial institutions.
In recent years, there has been substantial consolidation and convergence among companies in the insurance and financial
services industries resulting in increased competition from large, well-capitalized insurance and financial services firms that
market products and services similar to ours. The current economic environment has only served to further increase
competition. Many of these firms also have been able to increase their distribution systems through mergers or contractual
arrangements. These competitors compete with us for producers such as brokers and independent agents and for our
employees. Larger competitors may have lower operating costs and an ability to absorb greater risk while maintaining their
financial strength ratings, thereby allowing them to price their products more competitively. These highly competitive
pressures could result in increased pricing pressures on a number of our products and services, particularly as competitors
seek to win market share, and may harm our ability to maintain or increase our profitability. In addition, as actual or
potential future downgrades occur, and if our competitors have not been similarly downgraded, sales of our products could
be significantly reduced. Because of the highly competitive nature of the insurance industry, there can be no assurance that
we will continue to effectively compete with our industry rivals, or that competitive pressure will not have a material
adverse effect on our business, results of operations and financial condition.
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009