The Hartford 2008 Annual Report Download - page 102

Table of Contents
The Company performs a monthly analysis on the prices and credit spreads received from third parties to ensure that the
prices represent a reasonable estimate of the fair value. This process involves quantitative and qualitative analysis and is
overseen by investment and accounting professionals. Examples of procedures performed include, but are not limited to,
initial and on-going review of third party pricing services methodologies, review of pricing statistics and trends, back testing
recent trades and monitoring of trading volumes. In addition, the Company ensures whether prices received from
independent brokers represent a reasonable estimate of fair value through the use of internal and external cash flow models
developed based on spreads, and when available, market indices. As a result of this analysis, if the Company determines that
there is a more appropriate fair value based upon the available market data, the price received from the third party is
adjusted accordingly. At December 31, 2008, the Company made fair value determinations which lowered prices received
from third party pricing services and brokers by a total of $139. The securities adjusted had an amortized cost and fair value
after the adjustment of $623 and $232, respectively, and were primarily commercial mortgage-backed securities (“CMBS”).
In accordance with SFAS 157, the Company has analyzed the third party pricing services valuation methodologies and
related inputs, and has also evaluated the various types of securities in its investment portfolio to determine an appropriate
SFAS 157 fair value hierarchy level based upon trading activity and the observability of market inputs. The SFAS 157 fair
value hierarchy prioritizes the inputs in the valuation techniques used to measure fair value into three broad levels (Level 1
— quoted prices in active markets for identical assets, Level 2 — significant observable inputs, or Level 3 — significant
unobservable inputs). For further discussion of SFAS 157, see Note 4 of the Notes to the Consolidated Financial Statements.
Based on this, each price was classified into Level 1, 2, or 3. Most prices provided by third party pricing services are
classified into Level 2 because the inputs used in pricing the securities are market observable.
Due to a general lack of transparency in the process that brokers use to develop prices, most valuations that are based on
brokers’ prices are classified as Level 3. Some valuations may be classified as Level 2 if the price can be corroborated.
Internal matrix priced securities, primarily consisting of certain private placement debt, are also classified as Level 3. The
matrix pricing of certain private placement debt includes significant non-observable inputs, the internally determined credit
rating of the security and an externally provided credit spread.
The following table presents the fair value of fixed maturity, short-term and equity securities, available-for-sale, by pricing
source and SFAS 157 hierarchy level as of December 31, 2008.
Quoted Prices in
Active Markets Significant Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3) Total
Priced via third party pricing services $ 3,787 $ 50,252 $ 2,976 $ 57,015
Priced via independent broker
quotations — — 3,962 3,962
Priced via matrices — 180 4,693 4,873
Priced via other methods [1] — — 720 720
Short-term investments [2] 7,025 2,997 — 10,022
Total $ 10,812 $ 53,429 $ 12,351 $ 76,592
% of Total 14.1% 69.8% 16.1% 100.0%
[1] Represents securities for which adjustments were made to reduce prices received from third parties and certain private
equity investments that are carried at the Company’s determination of fair value from inception. [2] Short-term
investments are primarily valued at amortized cost, which approximates fair value.
[2] Short-term investments are primarily valued at amortized cost, which approximates fair value.
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction
between knowledgeable, unrelated willing parties using inputs, including assumptions and estimates, a market participant
would utilize. As the estimated fair value of a financial instrument utilizes assumptions and estimates, the amount that may
be realized may differ significantly.
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Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009