Travelers 2009 Annual Report Download - page 209

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. FAIR VALUE MEASUREMENTS (Continued)
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 fair
value estimate for these non-redeemable preferred stocks in the amount disclosed in Level 2.
Other Investments
Common Stock with Transfer Restrictions and Other
The Company holds one public common stock with transfer restrictions with a fair value of
$213 million. At December 31, 2009, the fair value of this common stock was determined by adjusting
the observed market price of the security for a liquidity discount which takes into consideration the
restriction on the common stock that existed at December 31, 2009 and is based on market observable
inputs. As a result of adjusting the market price to consider the transfer restriction, the Company
discloses this security in Level 2. The Company holds investments in non-public common and preferred
equity securities, with a fair value estimate of $60 million at December 31, 2009, 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. 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, 2009 in the
amount disclosed in Level 3. The Company holds investments in various publicly-traded securities
which are reported in other investments. The $46 million fair value of these investments at
December 31, 2009 is disclosed in Level 1. These investments include securities in the Company’s
trading portfolio ($24 million), mutual funds ($15 million) and other small holdings ($7 million).
Derivatives
The Company holds non-public warrants in a public company and has convertible bonds containing
embedded conversion options that are valued separately from the host bond contract. 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 $94 million at December 31, 2009 in the
amount disclosed in Level 3—other investments.
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