The Hartford 2008 Annual Report Download - page 394

Table of Contents
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair Value Measurements (continued)
The Company utilizes derivative instruments to manage the risk associated with certain assets and liabilities. However, the
derivative instrument may not be classified with the same fair value hierarchy level as the associated assets and liabilities.
Therefore the realized and unrealized gains and losses on derivatives reported in Level 3 may not reflect the offsetting
impact of the realized and unrealized gains and losses of the associated assets and liabilities.
U.S. GMWB Reinsurance Derivative
The fair value of the U.S. GMWB reinsurance derivative is calculated as an aggregation of the components described in the
SFAS 157 Transition section of this Note. The fair value of the U.S. GMWB reinsurance derivative is modeled using
significant unobservable policyholder behavior inputs, identical to those used in calculating the underlying liability, such as
lapses, fund selection, resets and withdrawal utilization, and risk margins. As a result, the U.S. GMWB reinsurance
derivative is categorized as Level 3.
Separate Account Assets
Separate account assets are primarily invested in mutual funds but also have investments in fixed maturity and equity
securities. The separate account investments are valued in the same manner, and using the same pricing sources and inputs,
as the fixed maturity, equity security, and short-term investments of the Company. Open-ended mutual funds are included in
Level 1. Most debt securities and short-term investments are included in Level 2. Level 3 assets include less liquid
securities, such as highly structured and/or lower quality ABS and CMBS, ABS backed by sub-prime loans, and any
investment priced solely by broker quotes.
GMWB and GMAB Embedded Derivatives (in Other Policyholder Funds and Benefits Payable)
The fair value of GMWB and GMAB embedded derivatives, reported in Other Policyholder Funds and Benefits Payable on
the Company’s consolidated balance sheet, are calculated as an aggregation of the components described in the SFAS 157
Transition section of this Note. The fair value of GMWB and GMAB embedded derivatives are modeled using significant
unobservable policyholder behavior inputs, such as lapses, fund selection, resets and withdrawal utilization, and risk
margins. As a result, the GMWB and GMAB embedded derivatives are categorized as Level 3.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The table below provides a fair value roll forward for the twelve months ending December 31, 2008 for the financial
instruments for which significant unobservable inputs (Level 3) are used in the fair value measurement on a recurring basis.
The Company classifies the fair values of financial instruments within Level 3 if there are no observable markets for the
instruments or, in the absence of active markets, the majority of the inputs used to determine fair value are based on the
Company’s own assumptions about market participant assumptions. However, the Company prioritizes the use of
market-based inputs over entity-based assumptions in determining Level 3 fair values in accordance with SFAS 157.
Therefore, the gains and losses in the tables below include changes in fair value due partly to observable and unobservable
factors.
F-39
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009