Progressive 2015 Annual Report Download - page 26

We also review data assumptions as supplied by our sources to determine if that data is relevant to current market
conditions. In addition, we independently review each sector for transaction volumes, new issuances, and changes in
spreads, as well as the overall movement of interest rates along the yield curve to determine if sufficient activity and liquidity
exists to provide a credible source for our market valuations.
During each valuation period, we create internal estimations of portfolio valuation (performance returns), based on current
market-related activity (i.e., interest rate and credit spread movements and other credit-related factors) within each major
sector of our portfolio. We compare our internally generated portfolio results with those generated based on quotes we
received externally and research material valuation differences. We compare our results to index returns for each major
sector adjusting for duration and credit quality differences to better understand our portfolio’s results. Additionally, we review
on a monthly basis our external sales transactions and compare the actual final market sales price to a previous market
valuation price. This review provides us further validation that our pricing sources are providing market level prices, since
we are able to explain significant price changes (i.e., greater than 2%) as known events occur in the marketplace and affect
a particular security’s price at sale.
This analysis provides us with additional comfort regarding each source’s process, the quality of its review, and its
willingness to improve its analysis based on feedback from clients. We believe this effort helps ensure that we are reporting
the most representative fair values for our securities.
Except as described below, our Level 3 securities are also priced externally; however, due to several factors (e.g., nature of
the securities, level of inactivity, and lack of similar securities trading to obtain observable market level inputs), these
valuations are more subjective in nature. Certain private equity investments and fixed-income investments included in the
Level 3 category are valued using external pricing supplemented by internal review and analysis.
After all the valuations are received and our review is complete, if the inputs used by vendors are determined to not contain
sufficient observable market information, we will reclassify the affected security valuations to Level 3. At December 31, 2015
and 2014, securities in our fixed-maturity portfolio listed as Level 3 were comprised substantially of securities that were
either: (i) private placements, (ii) thinly held and/or traded securities, or (iii) non-investment-grade or non-rated securities
with little liquidity. Based on these factors, it was difficult to independently verify observable market inputs that were used to
generate the external valuations we received. Despite the lack of sufficient observable market information for our Level 3
securities, we believe the valuations received, in conjunction with our procedures for evaluating third-party prices, support
the fair values reported in the financial statements.
We did not hold any internally-priced securities at December 31, 2015. At December 31, 2014, we held one internally-priced
security, a private preferred equity security (our 5% equity interest in ARX) with a value of $69.3 million.
We review the prices from our external sources for reasonableness using internally developed assumptions to derive prices
for the securities, which are then compared to the prices we received. During 2015 or 2014, there were no material assets
or liabilities measured at fair value on a nonrecurring basis. Based on our review, all the prices received from external
sources remain unadjusted.
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