The Hartford 2014 Annual Report Download - page 161

Table of Contents
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The following section applies 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 exchange-traded derivative instruments.
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 are hedge funds where investment company accounting guidance has been applied to a wholly-owned
fund of funds measured at fair value where an investment can be redeemed, or substantially redeemed, at the NAV at the measurement date or in
the near-term, not to exceed 90 days. Derivative instruments classified within Level 2 are priced using observable market inputs such as swap
yield curves and credit default swap curves.
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, guaranteed product embedded and reinsurance derivatives and other complex derivative
instruments, as well as hedge fund investments carried at fair value, consistent with investment company accounting guidance, that cannot be
redeemed in the near-term at the NAV. 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. The amount of transfers from Level 1 to Level 2 was $2.5
billion, and $1.3 billion, for the years ended December 31, 2014 and 2013, respectively, which represented previously on-the-run U.S. Treasury securities that
are now off-the-run. For the years ended December 31, 2014 and 2013, there were no transfers from Level 2 to Level 1. 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 because these securities are primarily priced by independent brokers and/or are within
illiquid markets.
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