Travelers 2007 Annual Report Download - page 234

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
2007 and 2006 included net losses of $8 million and net gains of $30 million, respectively, related to
U.S. Treasury futures contracts which are settled daily.
The Company owns six million stock purchase warrants of Platinum Underwriters Holdings, Ltd., a
publicly-held company. These warrants are not designated and do not qualify as hedges under FAS 133
and as such the mark-to-market changes in fair value are reflected in net realized investment gains
(losses). In 2007 and 2006, the Company recorded a net realized investment gain of $21 million and a
net realized investment loss of $22 million, respectively, related to the Company’s holdings of stock
purchase warrants of Platinum Underwriters Holdings, Ltd.
The Company purchases investments that have embedded derivatives, primarily convertible debt
securities. These embedded derivatives are carried at fair value with changes in value reflected in net
realized investment gains (losses). Derivatives embedded in convertible debt securities are reported on
a combined basis with their host instrument and are classified as fixed maturity securities.
Fair Value of Financial Instruments
The Company uses various financial instruments in the normal course of its business. The
Company’s insurance contracts are excluded from FAS 107, Disclosures about Fair Value of Financial
Instruments and, therefore, are not included in the amounts discussed below.
At December 31, 2007 and 2006, investments in fixed maturities had a fair value, which equaled
carrying value, of $64.92 billion and $62.67 billion, respectively. The fair value of investments in fixed
maturities for which an estimated market price from the pricing service or external broker quote is not
available was $489 million and $547 million at December 31, 2007 and 2006, respectively. See note 1.
The carrying values of cash, short-term securities, mortgage loans and investment income accrued
approximated their fair values. See notes 1 and 3.
The carrying values of $865 million and $876 million of financial instruments classified as other
assets approximated their fair values at December 31, 2007 and 2006, respectively. The carrying values
of $4.68 billion and $5.15 billion of financial instruments classified as other liabilities at December 31,
2007 and 2006, respectively, also approximated their fair values. Fair value is determined using various
methods including discounted cash flows, as appropriate for the various financial instruments.
The carrying value and fair value of the Company’s debt at December 31, 2007 was $6.24 billion
and $6.06 billion, respectively. The respective totals at December 31, 2006 were $5.76 billion and
$5.98 billion. The fair value of the Company’s debt is determined on a present value basis using the
most recent observed market yield.
The fair value of commercial paper included in debt outstanding at December 31, 2007 and 2006
approximated its book value because of its short-term nature. For other debt, the fair value estimate
was based upon the bid price at December 31, 2007 and 2006.
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