Travelers 2009 Annual Report Download - page 206

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVESTMENTS (Continued)
Changes in net unrealized gains (losses) on investment securities that are included as a separate
component of accumulated other changes in equity from nonowner sources were as follows:
(at and for the year ended December 31, in millions) 2009 2008 2007
Change in net unrealized investment gains (losses)
Fixed maturities................................ $2,830 $(1,062) $346
Equity securities ............................... 160 (97) (22)
Venture capital ................................ 6(9) (91)
Other investments .............................. 87 (23) 25
3,083 (1,191) 258
Related tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . 1,078 (427) 91
Change in net unrealized gain (loss) on investment
securities ................................. 2,005 (764) 167
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . (144) 620 453
Balance, end of year........................... $1,861 $ (144) $620
Derivative Financial Instruments
The Company uses U.S. Treasury note futures transactions to modify the effective duration of
specific assets within the investment portfolio and 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 $350 million and
$380 million at December 31, 2009 and 2008, respectively. Net realized investment gains (losses) in
2009, 2008 and 2007 included net gains of $23 million, net losses of $53 million and net losses of
$8 million, respectively, related to U.S. Treasury futures contracts which are settled daily.
The Company owns six million non-public stock purchase warrants of Platinum Underwriters
Holdings, Ltd., a publicly-held company. These warrants are not designated and do not qualify for
hedge accounting and as such the mark-to-market changes in fair value are reflected in net realized
investment gains (losses). In 2009, 2008 and 2007, the Company recorded net realized investment gains
of $7 million, $10 million and $21 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. The
Company recorded a net realized investment gain of $1 million in 2009, a net realized investment loss
of $77 million in 2008 and a net realized investment loss of $23 million in 2007 related to these
embedded derivatives. The Company divested substantially all of its holdings in convertible debt
securities in 2008.
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