The Hartford 2008 Annual Report Download - page 392

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
The following table presents the fair value of the significant asset sectors within the SFAS 157 Level 3 securities
classification as of December 31, 2008.
% of Total
Fair Value Fair Value
ABS
Below Prime $ 1,643 13.3%
Collateralized Loan Obligations (CLOs) 2,131 17.3%
Other 560 4.5%
Corporate
Matrix priced private placements 4,641 37.6%
Other 1,755 14.2%
Commercial mortgage-backed securities (“CMBS”) 802 6.5%
Preferred stock 337 2.7%
Other 482 3.9%
Total Level 3 securities $ 12,351 100%
• ABS below prime primarily represents sub-prime and Alt-A securities which are classified as Level 3 due to the lack of
liquidity in the market.
• ABS CLOs represent senior secured bank loan CLOs which are primarily priced by independent brokers.
• ABS Other primarily represents broker priced securities.
• Corporate-matrix priced represents private placement securities that are thinly traded and priced using a pricing matrix
which includes significant non-observable inputs.
• Corporate other primarily represents broker-priced public securities and private placement securities qualified for sale
under rule 144A, and long dated fixed maturities where the term of significant inputs may not be sufficient to be
deemed observable.
• CMBS primarily represents CMBS bonds and commercial real estate collateralized debt obligations (“CRE CDOs”)
which were either fair valued by the Company or by independent brokers due to the illiquidity of this sector.
• Preferred stock primarily represents lower quality preferred securities that are less liquid due to market conditions.
Derivative Instruments, including embedded derivatives within investments
Derivative instruments are reported on the consolidated balance sheets at fair value and are reported in Other Investments
and Other Liabilities. Embedded derivatives are reported with the host instruments on the consolidated balance sheet.
Derivative instruments are fair valued using pricing valuation models, which utilize market data inputs or independent
broker quotations. Excluding embedded derivatives, as of December 31, 2008, 94% of derivatives based upon notional
values were priced by valuation models, which utilize independent market data. The remaining derivatives were priced by
broker quotations. The derivatives are valued using mid-market inputs that are predominantly observable in the market.
Inputs used to value derivatives include, but are not limited to, interest swap rates, foreign currency forward and spot rates,
credit spreads and correlations, interest and equity volatility and equity index levels. The Company performs a monthly
analysis on derivative valuations which includes both quantitative and qualitative analysis. Examples of procedures
performed include, but are not limited to, review of pricing statistics and trends, back testing recent trades, analyzing the
impacts of changes in the market environment, and review of changes in market value for each derivative including those
derivatives priced by brokers.
Derivative instruments classified as Level 1 include futures and certain option contracts which are traded on active exchange
markets.
Derivative instruments classified as Level 2 primarily include interest rate, currency and certain credit default swaps. The
derivative valuations are determined using pricing models with inputs that are observable in the market or can be derived
principally from or corroborated by observable market data.
Derivative instruments classified as Level 3 include complex derivatives, such as equity options and swaps, interest rate
derivatives which have interest rate optionality, certain credit default swaps, and long-dated interest rate swaps. Also
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009