Travelers 2011 Annual Report Download - page 163

pricing service to discuss any changes in their process and reactions to overall markets. The Company
produces a report monthly that lists all price changes from the previous month in excess of 10%. The
Company reviews the report and will challenge any prices deemed not to be representative of fair
value. In addition, the Company has implemented various other processes including randomly selecting
purchased or sold securities and comparing execution prices to the estimates from the pricing service as
well as reviewing reports that contain securities whose valuation did not change from their previous
valuation (stale price review). The Company also uses an additional independent pricing service to
further test the primary pricing service’s valuation of the Company’s fixed maturity portfolio. These
processes have not highlighted any significant issues with the fair value estimates received from the
pricing service.
The Company also holds certain fixed maturity investments which are not priced by the pricing
service and estimates the fair value of such fixed maturities using an internal matrix that is based on
market information regarding interest rates, credit spreads and liquidity. The underlying source data for
calculating the matrix of credit spreads relative to the U.S. Treasury curve are the BofA Merrill Lynch
U.S. Corporate Index and the BofA Merrill Lynch High Yield BB Rated Index. The Company includes
the fair value estimates of these corporate bonds in Level 2, since all significant inputs are market
observable.
While the vast majority of the Company’s municipal bonds are included in Level 2, the Company
holds a small number of municipal bonds which are not valued by the pricing service and estimates the
fair value of these bonds using an internal pricing matrix with some unobservable inputs that are
significant to the valuation. Due to the limited amount of observable market information, the Company
includes the fair value estimates for these particular bonds in Level 3. Additionally, the Company holds
a small amount of other fixed maturity investments that have characteristics that make them unsuitable
for matrix pricing. For these fixed maturities, the Company obtains a quote from a broker (typically a
market maker). Due to the disclaimers on the quotes that indicate that the price is indicative only, the
Company includes these fair value estimates in Level 3.
Non-Fixed Maturities and Other Investments Not Reported at Fair Value
See note 4 of notes to the Company’s consolidated financial statements for a discussion of the
determination of fair value of non-fixed maturities and valuation of investments not reported at fair
value in the financial statements.
Investment Impairments
The Company conducts a periodic review to identify and evaluate invested assets having
other-than-temporary impairments. Some of the factors considered in identifying other-than-temporary
impairments include: (1) for fixed maturity investments, whether the Company intends to sell the
investment or whether it is more likely than not that the Company will be required to sell the
investment prior to an anticipated recovery in value; (2) for non-fixed maturity investments, the
Company’s ability and intent to retain the investment for a reasonable period of time sufficient to allow
for an anticipated recovery in value; (3) the likelihood of the recoverability of principal and interest for
fixed maturity securities (i.e., whether there is a credit loss) or cost for equity securities; (4) the length
of time and extent to which the fair value has been less than amortized cost for fixed maturity
securities or cost for equity securities; and (5) the financial condition, near-term and long-term
prospects for the issuer, including the relevant industry conditions and trends, and implications of
rating agency actions and offering prices.
Reporting of Other-Than-Temporary Impairments
For fixed maturity investments that the Company does not intend to sell or for which it is more
likely than not that the Company would not be required to sell before an anticipated recovery in value,
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