Travelers 2014 Annual Report Download - page 200

Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. FAIR VALUE MEASUREMENTS (Continued)
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 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.
Equity Securities—Public Common Stock and Non
- Redeemable Preferred Stock
For public common stock and non
- redeemable preferred stocks, the Company receives prices from pricing services that are based on
observable market transactions and includes these estimates in the amount disclosed in Level 1. When current market quotes in active markets are
unavailable for certain
199