Primerica 2010 Annual Report - Direct Selling News

having similar tenors (e.g., sector, average lifeand quality rating) and liquidity and yield basedon quality rating, average life and treasuryyields. All data inputs come from observabledata corroborated by independent third-partydata. In the absence of sufficient observableinputs, we utilize non-binding broker quotes,which are reflected in our Level 3 classification.We perform internal reasonablenessassessments on fair value determinationswithin our portfolio. If a fair value appearsunusual, we will re-examine the inputs and maychallenge a fair value assessment made by thepricing service. If there is a known pricing error,we will request a reassessment by the pricingservice. If the pricing service is unable toperform the reassessment on a timely basis, wewill determine the appropriate price bycorroborating with an alternative pricingservice or other qualified source as necessary.We do not adjust quotes orprices except in a rarecircumstance to resolve aknown error.Because many fixed-maturitysecurities do not trade on a dailybasis, fair value is determinedusing industry- standardmethodologies by applyingavailable market informationthrough processes such as U.S.Treasury curves, benchmarkingof similar securities, sectorgroupings, quotes from marketparticipants and matrix pricing. Observableinformation is compiled and integrates relevantcredit information, perceived marketmovements and sector news. Additionally,security prices are periodically back-tested tovalidate and/or refine models as conditionswarrant. Market indicators and industry andeconomic events are also monitored as triggersto obtain additional data. For certain structuredsecurities with limited trading activity, industrystandardpricing methodologies use adjustedmarket information, such as index prices ordiscounting expected future cash flows, toestimate fair value. If these measures are notdeemed observable for a particular security,the security will be classified as Level 3 in thefair value hierarchy.Where specific market information isunavailable for certain securities, pricingmodels produce estimates of fair valueprimarily using Level 2 inputs along with certainLevel 3 inputs. These models include matrixpricing. The pricing matrix uses currenttreasury rates and credit spreads received fromthird-party sources to estimate fair value. Thecredit spreads incorporate the issuer’sindustry- or issuer-specific creditcharacteristics and the security’s time tomaturity, if warranted. Remaining un-pricedsecurities are valued using an estimate of fairvalue based on indicative market prices thatinclude significant unobservable inputs notbased on, nor corroborated by, marketinformation, including the utilization ofnon-binding broker quotes.The year-to-date roll forward of the Level 3asset category was as follows:Year endedDecember 31,2010 2009(In thousands)Level 3 assets, beginning of period $ 771,271 $739,409Net unrealized (losses) gains through othercomprehensive income (2,904) 12,818Net realized losses through realized investment gains(losses), including OTTI (28) —Purchases 11,250 7,085Sales (40,154) —Transfers into level 3 44,522 11,959Transfers out of level 3 (236,587) —Transfers due to funding of reinsurance transactions (522,372) —Level 3 assets, end of period $ 24,998 $ 771,271We obtain independent pricing quotes based onobservable inputs as of the end of the reportingperiod for all securities in Level 2. Those inputsinclude benchmark yields, reported trades,broker/dealer quotes, issuer spreads, two-sidedmarkets, benchmark securities, market bids/offers, and other relevant data. We monitorthese inputs for market indicators, industry andeconomic events. We recognize transfers intonew levels and out of previous levels as of theend of the reporting period, including interimreporting periods, as applicable. Invested assetsincluded in the transfer from Level 3 to Level 2were primarily non-agency mortgage-backedsecurities. Invested assets included in thetransfer from Level 2 to Level 3 primarily werefixed-maturity investments for which we werePrimerica 2010 Annual Report 135