Travelers 2010 Annual Report Download - page 201

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. The estimated fair value of stocks having transfer
restrictions that expire within one year was determined by adjusting the observed market price of the
securities for a liquidity discount which takes into consideration the restrictions that existed at
December 31, 2010 and 2009 and is based on market observable inputs. As a result of adjusting the
market price to reflect the impact of the transfer restrictions on estimated fair value, the Company
discloses these holdings in Level 2. 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
At December 31, 2009, the Company held common stocks with transfer restrictions that were
scheduled to expire after one year. The Company estimated the fair value of these stocks at
December 31, 2009 using the same methodology described above for common stock restrictions that
expire within a year, and disclosed the fair value in Level 2. In 2010, the Company sold substantially all
of these shares.
At December 31, 2010 and 2009, the Company held investments in non-public common and
preferred equity securities, with fair value estimates of $57 million and $60 million, respectively,
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, 2010 and 2009 in the amount disclosed in Level 3. The Company holds investments in
various publicly-traded securities which are reported in other investments. The $42 million and
$46 million fair value of these investments at December 31, 2010 and 2009, respectively, is disclosed in
Level 1. These investments include securities in the Company’s trading portfolio, mutual funds and
other small holdings.
Derivatives
At December 31, 2010 and 2009, the Company held $37 million and $39 million, respectively, of
convertible bonds containing embedded conversion options that are valued separately from the host
bond contract in the amount disclosed in Level 2—fixed maturities. At December 31, 2009, the
Company held non-public stock warrants in a public company for which it estimated fair value using an
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