The Hartford 2011 Annual Report Download - page 155

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F-20
4. Fair Value Measurements (continued)
December 31, 2010
Total
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Liabilities accounted for at fair value on a recurring basis
Other policyholder funds and benefits payable
U.S. guaranteed withdrawal benefits
$
(1,611)
$
—
$
—
$
(1,611)
International guaranteed withdrawal benefits
(36)
—
—
(36)
International other guaranteed living benefits
3
—
—
3
Equity linked notes
(9)
—
—
(9)
Total other policyholder funds and benefits payable
(1,653)
—
—
(1,653)
Derivative liabilities
Credit derivatives
(482)
—
(71)
(411)
Equity derivatives
2
—
—
2
Foreign exchange derivatives
(34)
—
(34)
—
Interest rate derivatives
(266)
—
(249)
(17)
U.S. GMWB hedging instruments
128
—
(11)
139
International program hedging instruments
(2)
(2)
—
—
Total derivative liabilities [3]
(654)
(2)
(365)
(287)
Other liabilities
(37)
—
—
(37)
Consumer notes [4]
(5)
—
—
(5)
Total liabilities accounted for at fair value on a recurring basis
$
(2,349)
$
(2)
$
(365)
$
(1,982)
[1] Includes over-the-counter derivative instruments in a net asset value position which may require the counterparty to pledge collateral to the
Company. As of December 31, 2011 and 2010, $1.4 billion and $968, respectively, of cash collateral liability was netted against the derivative
asset value in the Consolidated Balance Sheet and is excluded from the table above. See footnote 3 below for derivative liabilities.
[2] Approximately $4.0 and $6.0 billion of investment sales receivable that are not subject to fair value accounting are excluded as of December 31,
2011 and 2010, respectively.
[3] Includes over-the-counter derivative instruments in a net negative market value position (derivative liability). In the Level 3 roll-forward table
included below in this Note 4, the derivative asset and liability are referred to as “freestanding derivatives” and are presented on a net basis.
[4] Represents embedded derivatives associated with non-funding agreement-backed consumer equity linked notes.
Determination of Fair Values
The valuation methodologies used to determine the fair values of assets and liabilities under the “exit price” notion, reflect market-
participant objectives and are based on the application of the fair value hierarchy that prioritizes relevant observable market inputs over
unobservable inputs. The Company determines the fair values of certain financial assets and financial liabilities based on quoted market
prices where available and where prices represent a reasonable estimate of fair value. The Company also determines fair value based on
future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the
Company’ s default spreads, liquidity and, where appropriate, risk margins on unobservable parameters. The following is a discussion of
the methodologies used to determine fair values for the financial instruments listed in the above tables.
The fair valuation process is monitored by the Valuation Committee, which is a cross-functional group of senior management within
HIMCO that meets at least quarterly. The Valuation Committee is co-chaired by the Heads of Investment Operations and Accounting,
and has representation from various investment sector professionals, accounting, operations, legal, compliance and risk management.
The purpose of the committee is to oversee the pricing policy and procedures by ensuring objective and reliable valuation practices and
pricing of financial instruments, as well as addressing fair valuation issues and approving changes to valuation methodologies and
pricing sources. There is also a Fair Value Working Group (“Working Group”) which includes the Heads of Investment Operations and
Accounting, as well as other investment, operations, accounting and risk management professionals that meet monthly to review market
data trends, pricing and trading statistics and results, and any proposed pricing methodology changes described in more detail in the
following paragraphs.