Travelers 2014 Annual Report Download - page 156

Table of Contents
The Company reports its reinsurance recoverables net of an allowance for estimated uncollectible reinsurance recoverables. The allowance is
based upon the Company's ongoing review of amounts outstanding, length of collection periods, changes in reinsurer credit standing, disputes,
applicable coverage defenses and other relevant factors. Accordingly, the establishment of reinsurance recoverables and the related allowance for
uncollectible reinsurance recoverables is also an inherently uncertain process involving estimates. From time to time, as a result of the long
- tailed
nature of the underlying liabilities, coverage complexities and potential for disputes, the Company considers the commutation of reinsurance
contracts. Changes in estimated reinsurance recoverables and commutation activity could result in additional income statement charges.
Recoverables attributable to structured settlements relate primarily to personal injury claims, of which workers' compensation claims comprise a
significant portion, for which the Company has purchased annuities and remains contingently liable in the event of a default by the companies
issuing the annuities. Recoverables attributable to mandatory pools and associations relate primarily to workers' compensation service business.
These recoverables are supported by the participating insurance companies' obligation to pay a pro rata share based on each company's voluntary
market share of written premium in each state in which it is a pool participant. In the event a member of a mandatory pool or association defaults on
its share of the pool's or association's obligations, the other members' share of such obligation increases proportionally.
For a discussion of a pending reinsurance dispute pertaining to a portion of the Company's reinsurance recoverable from the Munich Re
Group, see note 16 of notes to the consolidated financial statements.
Investment Valuation and Impairments
Fair Value Measurements
The Company's estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value
accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and
requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the fair value accounting
guidance hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which
the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs
that reflect the Company's significant market assumptions. The level in the fair value hierarchy within which the fair value measurement is reported
is based on the lowest level input that is significant to the measurement in its entirety. The three levels of the hierarchy are as follows:
•
Level 1 —Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to
access.
•
Level 2 —Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in
inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves,
prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
•
Level 3 —Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company's
own assumptions about the inputs that market participants would use.
Valuation of Investments Reported at Fair Value in Financial Statements
The fair value of a financial instrument is the estimated amount at which the instrument could be exchanged in an orderly transaction between
knowledgeable, unrelated, willing parties, i.e., not in a
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