The Hartford 2012 Annual Report Download - page 176

Table of Contents
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A description of additional inputs used in the Company’s Level 2 and Level 3 measurements is listed below:
Level 2 The fair values of most of the Company’s Level 2 investments are determined by management after considering prices received from third party
pricing services. These investments include most fixed maturities and preferred stocks, including those reported in separate account assets, as
well as certain limited partnerships and other alternative investments.
•ABS, CDOs, CMBS and RMBS — Primary inputs also include monthly payment information, collateral performance, which varies
by vintage year and includes delinquency rates, collateral valuation loss severity rates, collateral refinancing assumptions, credit
default swap indices and, for ABS and RMBS, estimated prepayment rates.
•Corporates, including investment grade private placements — Primary inputs also include observations of credit default swap
curves related to the issuer.
•Foreign government/government agencies - Primary inputs also include observations of credit default swap curves related to the
issuer and political events in emerging markets.
•Municipals — Primary inputs also include Municipal Securities Rulemaking Board reported trades and material event notices, and
issuer financial statements.
•Short-term investments — Primary inputs also include material event notices and new issue money market rates.
•Equity securities, trading — Consist of investments in mutual funds. Primary inputs include net asset values obtained from third
party pricing services.
•Credit derivatives — Significant inputs primarily include the swap yield curve and credit curves.
•Foreign exchange derivatives — Significant inputs primarily include the swap yield curve, currency spot and forward rates, and
cross currency basis curves.
•Interest rate derivatives — Significant input is primarily the swap yield curve.
•Limited partnerships and other alternative investments — Primary inputs include a NAV for investment companies with no
redemption restrictions as reported on their U.S. GAAP financial statements.
Level 3 Most of the Company's securities classified as Level 3 include less liquid securities such as lower quality ABS, CMBS, commercial real estate
("CRE") CDOs and RMBS primarily backed by below-prime loans. Securities included in level 3 are primarily valued based on broker prices
or broker spreads, without adjustments. Primary inputs for non-broker priced investments, including structured securities, are consistent with
the typical inputs used in Level 2 measurements noted above, but are Level 3 due to their less liquid markets. Additionally, certain long-dated
securities are priced based on third party pricing services, including municipal securities, foreign government/government agencies, bank loans
and below investment grade private placement securities. Primary inputs for these long-dated securities are consistent with the typical inputs
used in Level 1 and Level 2 measurements noted above, but include benchmark interest rate or credit spread assumptions that are not observable
in the marketplace. Level 3 investments also include certain limited partnerships and other alternative investments measured at fair value where
the Company does not have the ability to redeem the investment in the near-term at the NAV. Also included in Level 3 are certain derivative
instruments that either have significant unobservable inputs or are valued based on broker quotations. Significant inputs for these derivative
contracts primarily include the typical inputs used in the Level 1 and Level 2 measurements noted above, but also may include the following:
•Credit derivatives — Significant unobservable inputs may include credit correlation and swap yield curve and credit curve extrapolation
beyond observable limits.
•Equity derivatives — Significant unobservable inputs may include equity volatility.
•Interest rate contracts — Significant unobservable inputs may include swap yield curve extrapolation beyond observable limits and
interest rate volatility.
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