The Hartford 2012 Annual Report Download - page 68

Table of Contents
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, 2012, 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 $58, relating mostly to foreign net operating losses, as of December 31, 2012 and was $83
as of December 31, 2011. 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.
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.
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