The Hartford 2011 Annual Report Download - page 63

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Valuation Allowance on Deferred Tax Assets
Deferred tax assets represent the tax benefit of future deductible temporary differences and operating loss and tax credit carryforwards.
Deferred tax assets are measured using the enacted tax rates expected to be in effect when such benefits are realized if there is no change
in tax law. Under U.S. GAAP, we test the value of deferred tax assets for impairment on a quarterly basis at the entity level within each
tax jurisdiction, consistent with our filed tax returns. Deferred tax assets are reduced by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The determination
of the valuation allowance for our deferred tax assets requires management to make certain judgments and assumptions. In evaluating
the ability to recover deferred tax assets, we have considered all available evidence as of December 31, 2011, including past operating
results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income, and prudent and feasible
tax planning strategies. In the event we determine it is not more likely than not that we will be able to realize all or part of our deferred
tax assets in the future, an increase to the valuation allowance would be charged to earnings in the period such determination is made.
Likewise, if it is later determined that it is more likely than not that those deferred tax assets would be realized, the previously provided
valuation allowance would be reversed. Our judgments and assumptions are subject to change given the inherent uncertainty in
predicting future performance and specific industry and investment market conditions.
The Company has recorded a deferred tax asset valuation allowance that is adequate to reduce the total deferred tax asset to an amount
that will be more likely than not realized. The deferred tax asset valuation allowance was $95, relating mostly to foreign net operating
losses, as of December 31, 2011 and was $173 as of December 31, 2010. In assessing the need for a valuation allowance, management
considered future taxable temporary difference reversals, future taxable income exclusive of reversing temporary differences and
carryforwards, taxable income in open carry back years, as well as other tax planning strategies. These tax planning strategies include
holding a portion of debt securities with market value losses until recovery, altering the level of tax exempt securities held, selling
appreciated securities to offset capital losses, business considerations such as asset-liability matching, and the sales of certain corporate
assets. Management views such tax planning strategies as prudent and feasible, and would implement them, if necessary, to realize the
deferred tax asset. Based on the availability of additional tax planning strategies identified in the second quarter of 2011, the Company
released $86, or 100% of the valuation allowance associated with investment realized capital losses. Future economic conditions and
debt market volatility, including increases in interest rates, can adversely impact the Company’ s tax planning strategies and in particular
the Company’ s ability to utilize tax benefits on previously recognized realized capital losses.
Contingencies Relating to Corporate Litigation and Regulatory Matters
Management evaluates each contingent matter separately. A loss is recorded if probable and reasonably estimable. Management
establishes reserves for these contingencies at its “best estimate,” or, if no one number within the range of possible losses is more
probable than any other, the Company records an estimated reserve at the low end of the range of losses.
The Company has a quarterly monitoring process involving legal and accounting professionals. Legal personnel first identify
outstanding corporate litigation and regulatory matters posing a reasonable possibility of loss. These matters are then jointly reviewed
by accounting and legal personnel to evaluate the facts and changes since the last review in order to determine if a provision for loss
should be recorded or adjusted, the amount that should be recorded, and the appropriate disclosure. The outcomes of certain
contingencies currently being evaluated by the Company, which relate to corporate litigation and regulatory matters, are inherently
difficult to predict, and the reserves that have been established for the estimated settlement amounts are subject to significant changes.
Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated
losses, will not be material to the consolidated financial condition of the Company. In view of the uncertainties regarding the outcome
of these matters, as well as the tax-deductibility of payments, it is possible that the ultimate cost to the Company of these matters could
exceed the reserve by an amount that would have a material adverse effect on the Company’ s results of operations or liquidity in a
particular quarterly or annual period.