The Hartford 2012 Annual Report Download - page 66

Table of Contents
Valuation of Investments and Derivative Instruments
Available-for-Sale Securities, Fixed Maturities, FVO, Equity Securities, Trading, and Short-term Investments
The fair value of AFS securities, fixed maturities, at fair value using the fair value option (“FVO”), equity securities, trading, and short-term investments in
an active and orderly market (i.e., not distressed or forced liquidation) is determined by management after considering one of three primary sources of
information: third-party pricing services, independent broker quotations or pricing matrices. Security pricing is applied using a “waterfall” approach whereby
prices are first sought from third-party pricing services, the remaining unpriced securities are submitted to independent brokers for prices, or lastly, securities
are priced using a pricing matrix. Typical inputs used by these pricing methods include, but are not limited to, reported trades, benchmark yields, issuer
spreads, bids, offers, and/or estimated cash flows, prepayments speeds and default rates. Based on the typical trading volumes and the lack of quoted market
prices for fixed maturities, third-party pricing services will normally derive the security prices through recent reported trades for identical or similar securities
making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recent reported trades, the
third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based
upon collateral performance and discounted at an estimated market rate. For further discussion, see the Available-for-Sale, Fixed Maturities, FVO, Equity
Securities, Trading, and Short-Term Investments Section in Note 5 of the Notes to Consolidated Financial Statements.
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 fair value hierarchy level based upon trading activity and the observability of market inputs. For further
discussion of fair value measurement, see Note 5 of the Notes to Consolidated Financial Statements.
Valuation of 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. The fair value
of derivative instruments is determined using pricing valuation models, which utilize market data inputs or independent broker quotations. Excluding
embedded and reinsurance related derivatives, as of December 31, 2012 and 2011, 97% and 98%, respectively, 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 level inputs that are predominantly observable in the market with the exception of the customized swap contracts that hedge
guaranteed minimum withdrawal benefits (“GMWB”) liabilities. Inputs used to value derivatives include, but are not limited to, swap interest rates, foreign
currency forward and spot rates, credit spreads and correlations, interest and equity volatility and equity index levels. For further discussion, see the
Derivative Instruments, including embedded derivatives within the investments section in Note 5 of the Notes to Consolidated Financial Statements.
Limited partnerships and other alternative investments
Limited partnerships and other alternative investments include hedge funds where investment company accounting has been applied to a wholly-owned fund
of funds whose assets are measured at fair value. These funds are fair valued using the net asset value per share or equivalent (“NAV”). The NAV is
calculated on a monthly basis and is the amount at which a unit or shareholder may redeem their investment, if redemption is allowed, and includes an
assessment of current market conditions and the investee's liquidity. For further discussion of fair value measurement, see Note 5 of the Notes to Consolidated
Financial Statements.
Pension and Other Postretirement Benefit Obligations
The Company maintains The Hartford Retirement Plan for U.S. Employees, a U.S. qualified defined benefit pension plan (the “Plan”)that covers
substantially all U.S. employees hired prior to January 1, 2013, as well as unfunded excess plans to provide benefits in excess of amounts permitted to be
paid to participants of the Plan under the provisions of the Internal Revenue Code. The Company has also entered into individual retirement agreements with
certain retired directors providing for unfunded supplemental pension benefits. In addition, the Company provides certain health care and life insurance
benefits for eligible retired employees. The Company maintains international plans which represent an immaterial percentage of total pension assets, liabilities
and expense and, for reporting purposes, are combined with domestic plans.
Pursuant to accounting principles related to the Company's pension and other postretirement obligations to employees under its various benefit plans, the
Company is required to make a significant number of assumptions in order to calculate the related liabilities and expenses each period. The two economic
assumptions that have the most impact on pension and other postretirement expense are the discount rate and the expected long-term rate of return on plan
assets. In determining the discount rate assumption, the Company utilizes a discounted cash flow analysis of the Company's pension and other postretirement
obligations and currently available market and industry data. The yield curve utilized in the cash flow analysis is comprised of bonds rated Aa or higher with
maturities primarily between zero and thirty years. Based on all available information, it was determined that 4.00% and 3.50% were the appropriate discount
rates as of December 31, 2012 to calculate the Company’s pension and other postretirement obligations, respectively. Accordingly, the 4.00% and 3.50%
discount rates will also be used to determine the Company’s 2013 pension and other postretirement expense, respectively. At December 31, 2011, the discount
rate was 4.75% and 4.50% for pension and other postretirement expense, respectively.
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