Travelers 2014 Annual Report Download - page 157

Table of Contents
forced transaction. The estimated fair value of a financial instrument may differ from the amount that could be realized if the security was sold in an
immediate sale, e.g., a forced transaction. Additionally, the valuation of investments is more subjective when markets are less liquid due to the lack
of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an
actual transaction would occur.
For investments that have quoted market prices in active markets, the Company uses the unadjusted quoted market prices as fair value and
includes these prices in the amounts disclosed in Level 1 of the hierarchy. The Company receives the quoted market prices from third party,
nationally recognized pricing services. When quoted market prices are unavailable, the Company utilizes these pricing services to determine an
estimate of fair value. The fair value estimates provided from these pricing services are included in the amount disclosed in Level 2 of the hierarchy.
If quoted market prices and an estimate from a pricing service are unavailable, the Company produces an estimate of fair value based on internally
developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3.
The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third
- party market participant would be
willing to pay in an arm's length transaction.
Fixed Maturities
The Company utilized a pricing service to estimate fair value measurements for approximately 98% of its fixed maturities at both December 31,
2014 and 2013. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed
maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value
measurements for these securities using its proprietary pricing applications, which include available relevant market information, benchmark curves,
benchmarking of like securities, sector groupings and matrix pricing. Additionally, the pricing service uses an Option Adjusted Spread model to
develop prepayment and interest rate scenarios.
The pricing service evaluates each asset class based on relevant market information, relevant credit information, perceived market movements
and sector news. The market inputs utilized in the pricing evaluation, listed in the approximate order of priority, include: benchmark yields, reported
trades, broker/dealer quotes, issuer spreads, two
- sided markets, benchmark securities, bids, offers, reference data, and industry and economic
events. The extent of the use of each market input depends on the asset class and the market conditions. Depending on the security, the priority of
the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.
The pricing service utilized by the Company has indicated that it will only produce an estimate of fair value if there is objectively verifiable
information to produce a valuation. If the pricing service discontinues pricing an investment, the Company would be required to produce an
estimate of fair value using some of the same methodologies as the pricing service but would have to make assumptions for any market
- based
inputs that were unavailable due to market conditions.
The fair value estimates of most fixed maturity investments are based on observable market information rather than market quotes.
Accordingly, the estimates of fair value for such fixed maturities, other than U.S. Treasury securities, provided by the pricing service are included in
the amount disclosed in Level 2 of the hierarchy. The estimated fair value of U.S. Treasury securities is included in the amount disclosed in Level 1
as the estimates are based on unadjusted market prices.
The Company reviews the estimates of fair value provided by the pricing service and compares the estimates to the Company's knowledge of
the market to determine if the estimates obtained are representative of the prices in the market. In addition, the Company has periodic discussions
with the pricing service to discuss any changes in their process and reactions to overall markets. The Company
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