Travelers 2007 Annual Report Download - page 233

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)
SOP’s debt obligation. The SOP’s debt obligation was paid off in January 2005 with a final payment of
$5 million; consequently, all preferred stock dividends are now paid to preferred stockholders. The SOP
has no preferred shares available for future allocations.
All common shares and the common stock equivalent of all preferred shares held by the Savings
Plan are considered outstanding for diluted EPS computations and dividends paid on all shares are
charged to retained earnings.
13. LEASES
Rent expense was $237 million, $238 million and $219 million in 2007, 2006 and 2005, respectively.
Future minimum annual rental payments under noncancellable operating leases are $203 million,
$184 million, $129 million, $97 million, $77 million and $193 million for 2008, 2009, 2010, 2011, 2012
and 2013 and thereafter, respectively. Future sublease rental income aggregating approximately
$40 million will partially offset these commitments.
14. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
Derivative Instruments Designated as Hedging Instruments
The Company has foreign currency hedges of net investments in foreign operations in which
derivatives (foreign currency forward contracts) hedge the foreign currency exposure. The effective
portion of the change in fair value of the derivative hedging the net investment, including any forward
premium or discount, is reflected in the accumulated other changes in equity from nonowner sources as
part of the foreign currency translation adjustment. For the years ended December 31, 2007 and 2006,
the amount included in changes in equity from nonowner sources was a gain of $1 million in 2007 and
a loss of less than $1 million in 2006. During 2006, the Company incurred net realized investment
losses of approximately $8 million resulting from the dissolution of a designated hedging relationship.
With regard to hedge ineffectiveness, in 2007, the Company had no realized gains or losses, and in
2006, the Company incurred net realized investment losses of less than $1 million.
Derivative Instruments not Designated as Hedging Instruments
Derivatives that are not designated or do not qualify as hedges are carried at fair value with
changes in value reflected in net realized investment gains (losses). The Company has certain U.S.
Treasury futures contracts and foreign currency forward contracts, which are not designated as hedges
at December 31, 2007 and 2006.
The Company engaged in U.S. Treasury note futures transactions to modify the duration of specific
assets within the investment portfolio. The Company enters into 90-day futures contracts on 2-year,
5-year, 10-year and 30-year U.S. Treasury notes which require a daily mark-to-market settlement with
the broker. The notional value of the open U.S. Treasury futures contracts was $250 million and
$350 million at December 31, 2007 and 2006, respectively. These derivative instruments are not
designated and do not qualify as hedges under FAS 133 and as such the daily mark-to-market changes
in fair value are reflected in net realized investment gains (losses). Net realized investment gains in
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