Travelers 2014 Annual Report Download - page 158

Table of Contents
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, accordingly, 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 and corporate bonds are included in Level 2, the Company holds a number of
municipal bonds and corporate 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. The fair value of the fixed maturities for which the Company used
an internal pricing matrix was $92 million and $94 million at December 31, 2014 and 2013, respectively. 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 (primarily the market maker). The fair value of the fixed maturities for which the Company received a broker
quote was $140 million and $161 million at December 31, 2014 and 2013, respectively. 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.
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