The Hartford 2013 Annual Report Download - page 42

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CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America
(“U.S. GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ, and in the past have differed, from those estimates.
The Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a
significant degree of variability:
• property and casualty insurance product reserves, net of reinsurance;
• estimated gross profits used in the valuation and amortization of assets and liabilities associated with variable annuity and other
universal life-type contracts;
• evaluation of other-than-temporary impairments on available-for-sale securities and valuation allowances on mortgage loans;
• living benefits required to be fair valued (in other policyholder funds and benefits payable);
• goodwill impairment;
• valuation of investments and derivative instruments;
• valuation allowance on deferred tax assets; and
• contingencies relating to corporate litigation and regulatory matters.
Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or
equity markets could have a material impact on the Consolidated Financial Statements. In developing these estimates management
makes subjective and complex judgments that are inherently uncertain and subject to material change as facts and circumstances
develop. Although variability is inherent in these estimates, management believes the amounts provided are appropriate based upon the
facts available upon compilation of the financial statements.
Property and Casualty Insurance Product Reserves, Net of Reinsurance
The Hartford establishes reserves on its property and casualty insurance products to provide for the estimated costs of paying claims
under insurance policies written by the Company. These reserves include estimates for both claims that have been reported and those that
have not yet been reported, and include estimates of all expenses associated with processing and settling these claims. Incurred but not
reported (“IBNR”) reserves represent the difference between the estimated ultimate cost of all claims and the actual reported loss and
loss adjustment expenses (“reported losses”). Reported losses represent cumulative loss and loss adjustment expenses paid plus case
reserves for outstanding reported claims. Company actuaries evaluate the total reserves (IBNR and case reserves) on an accident year
basis. An accident year is the calendar year in which a loss is incurred, or, in the case of claims-made policies, the calendar year in which
a loss is reported.
Reserve estimates can change over time because of unexpected changes in the external environment. Potential external factors include
(1) changes in the inflation rate for goods and services related to covered damages such as medical care, hospital care, auto parts, wages
and home repair; (2) changes in the general economic environment that could cause unanticipated changes in the claim frequency per
unit insured; (3) changes in the litigation environment as evidenced by changes in claimant attorney representation in the claims
negotiation and settlement process; (4) changes in the judicial environment regarding the interpretation of policy provisions relating to
the determination of coverage and/or the amount of damages awarded for certain types of damages; (5) changes in the social
environment regarding the general attitude of juries in the determination of liability and damages; (6) changes in the legislative
environment regarding the definition of damages; and (7) new types of injuries caused by new types of injurious exposure: past
examples include lead paint, construction defects and tainted Chinese-made drywall.
Reserve estimates can also change over time because of changes in internal Company operations. Potential internal factors include
(1) periodic changes in claims handling procedures; (2) growth in new lines of business where exposure and loss development patterns
are not well established; or (3) changes in the quality of risk selection in the underwriting process.
In the case of assumed reinsurance, all of the above risks apply. In addition, changes in ceding company case reserving and reporting
patterns can create additional factors that need to be considered in estimating the reserves. Due to the inherent complexity of the
assumptions used, final claim settlements may vary significantly from the present estimates, particularly when those settlements may not
occur until well into the future.