The Hartford 2010 Annual Report Download - page 145

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-17
4. Fair Value Measurements –Financial Instruments Excluding Guaranteed Living Benefits
The following financial instruments are carried at fair value in the Company’ s Consolidated Financial Statements: fixed maturity and
equity securities, available-for-sale (“AFS”), fixed maturities at fair value using fair value option (“FVO”), equity securities, trading,
short-term investments, freestanding and embedded derivatives, separate account assets and certain other liabilities.
The following section and Note 4a apply the fair value hierarchy and disclosure requirements for the Company’ s financial instruments
that are carried at fair value. The fair value hierarchy prioritizes the inputs in the valuation techniques used to measure fair value into
three broad Levels (Level 1, 2 or 3).
Level 1 Observable inputs that reflect quoted prices for identical assets or liabilities in active markets that the Company has the
ability to access at the measurement date. Level 1 securities include highly liquid U.S. Treasuries, money market funds and
exchange traded equity securities, open-ended mutual funds reported in separate account assets and derivative securities,
including futures and certain option contracts.
Level 2 Observable inputs, other than quoted prices included in Level 1, for the asset or liability or prices for similar assets and
liabilities. Most fixed maturities and preferred stocks, including those reported in separate account assets, are model priced
by vendors using observable inputs and are classified within Level 2. Also included in the Level 2 category are exchange
traded equity securities, investment grade private placement securities and derivative instruments that are priced using
models with significant observable market inputs, including interest rate, foreign currency and certain credit default swap
contracts and have no significant unobservable market inputs.
Level 3 Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including
assumptions about risk). Level 3 securities include less liquid securities such as lower quality asset-backed securities
(“ABS”), commercial mortgage-backed securities (“CMBS”), commercial real estate (“CRE”) CDOs, residential mortgage-
backed securities (“RMBS”) primarily backed by below-prime loans and below investment grade private placement
securities. Also included in Level 3 are guaranteed product embedded and reinsurance derivatives and other complex
derivative securities, including customized guaranteed minimum withdrawal benefit (“GMWB”) hedging derivatives (see
Note 4a for further information on GMWB product related financial instruments), equity derivatives, long dated derivatives,
swaps with optionality, certain complex credit derivatives and certain other liabilities. Because Level 3 fair values, by their
nature, contain one or more significant unobservable inputs as there is little or no observable market for these assets and
liabilities, considerable judgment is used to determine the Level 3 fair values. Level 3 fair values represent the Company’ s
best estimate of an amount that could be realized in a current market exchange absent actual market exchanges.
In many situations, inputs used to measure the fair value of an asset or liability position may fall into different levels of the fair value
hierarchy. In these situations, the Company will determine the level in which the fair value falls based upon the lowest level input that
is significant to the determination of the fair value. Transfers of securities among the levels occur at the beginning of the reporting
period. Transfers between Level 1 and Level 2 were not material for the year ended December 31, 2010. In most cases, both observable
(e.g., changes in interest rates) and unobservable (e.g., changes in risk assumptions) inputs are used in the determination of fair values
that the Company has classified within Level 3. Consequently, these values and the related gains and losses are based upon both
observable and unobservable inputs. The Company’ s fixed maturities included in Level 3 are classified as such as they are primarily
priced by independent brokers and/or within illiquid markets.