Travelers 2008 Annual Report Download - page 157

maker). 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.
Equities—Public Common and Preferred
For public common and preferred stocks, the Company receives prices from a nationally
recognized pricing service that are based on observable market transactions and includes these
estimates in the amount disclosed in Level 1. Infrequently, current market quotes in active markets are
unavailable for certain non-redeemable preferred stocks held by the Company. In these instances, the
Company receives an estimate of fair value from the pricing service that provides fair value estimates
for the Company’s fixed maturities. The service utilizes some of the same methodologies to price the
non-redeemable preferred stocks as it does for the fixed maturities. The Company includes the estimate
in the amount disclosed in Level 2.
Other Investments
Venture Capital Investments and Non-Public Common and Preferred Equity Securities
The Company holds investments in venture capital investments and non-public common and
preferred stocks, with a fair value estimate of $224 million, reported in other investments, where the
fair value estimate is determined either internally or by an external fund manager based on recent
filings, operating results, balance sheet stability, growth and other business and market sector
fundamentals. The Company holds shares of common stock of one private company with a fair value
estimate of $162 million at December 31, 2008, for which the estimate of fair value is provided by a
third party appraiser on behalf of the investee and adjusted for a liquidity discount which takes into
consideration the transfer restrictions on the common stock. Due to the significant unobservable inputs
in these valuations, the Company includes the total fair value estimate for all of these investments at
December 31, 2008 in the amount disclosed in Level 3.
Derivatives
The Company uses derivatives generally to hedge its net investment in a foreign subsidiary. The
Company also holds non-public warrants in a public company and has convertible bonds containing
embedded conversion options that are reported separately from the host bond contract. For the
derivatives used to hedge the net investment of a foreign subsidiary, the Company uses quoted market
prices to estimate fair value and includes the fair value estimate, which was in a liability position of
approximately $2 million at December 31, 2008, in Level 1. The Company estimates fair value for the
warrants using an option pricing model with observable market inputs. Because the warrants are not
market traded and information concerning market participants is not available, the Company includes
the fair value estimate of $87 million at December 31, 2008 in the amount disclosed in Level 3—other
investments. The Company separately values the embedded conversion options based on observable
market inputs and includes the estimate of fair value in Level 2.
Valuation of Investments Not Reported at Fair Value in Financial Statements
Short-term Securities
The Company’s short-term investments consist mainly of high-quality commercial paper (primarily
A1/P1) with an average of 39 days to maturity at December 31, 2008. Additionally, it is the Company’s
policy to not invest in structured products for its short-term investments. The Company believes that
there is insignificant credit risk in its short-term portfolio and that amortized cost approximates fair
value. The Company includes short-term investments in its impairment monitoring to identify any credit
issues.
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