Travelers 2010 Annual Report Download - page 205

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. FAIR VALUE MEASUREMENTS (Continued)
Transfers out of Level 3 during 2009 included a $230 million transfer resulting from a private
common stock holding undergoing an initial public offering. The new public security has transfer
restrictions and is reported in Level 2.
The Company had no financial assets or financial liabilities that were measured at fair value on a
non-recurring basis during the years ended December 31, 2010 and 2009.
Financial Instruments Disclosed, But Not Carried, At Fair Value
The Company uses various financial instruments in the normal course of its business. The
Company’s insurance contracts are excluded from fair value of financial instruments accounting
guidance and, therefore, are not included in the amounts discussed below.
The carrying values of cash, short-term securities and investment income accrued approximated
their fair values.
The carrying values of $647 million and $629 million of financial instruments classified as other
assets approximated their fair values at December 31, 2010 and 2009, respectively. The carrying values
of $3.75 billion and $3.89 billion of financial instruments classified as other liabilities at December 31,
2010 and 2009, 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, 2010 was $6.61 billion
and $7.20 billion, respectively. The respective totals at December 31, 2009 were $6.53 billion and
$6.82 billion. The Company utilized a pricing service to estimate fair value measurements for
approximately 94% and 96% of its debt, other than commercial paper, at December 31, 2010 and 2009,
respectively. The pricing service utilizes market quotations for debt that have quoted prices in active
markets. For the small amount of the Company’s debt securities for which a pricing service is not used,
the Company utilizes pricing estimates from a nationally recognized broker/dealer to estimate fair
value. If estimates of fair value are unavailable from the pricing service or the broker/dealer, the
Company produces an estimate of fair value based on internally developed valuation techniques which
are based on a discounted cash flow methodology and incorporates all available relevant observable
market inputs.
The fair value of commercial paper included in debt outstanding at December 31, 2010 and 2009
approximated its book value because of its short-term nature.
5. REINSURANCE
The Company’s consolidated financial statements reflect the effects of assumed and ceded
reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that
other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance
risks (along with the related written and earned premiums) the Company has underwritten to other
insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to
protect the Company, at a cost, from volatility in excess of the amount it is prepared to accept.
Reinsurance is placed on both a quota-share and excess of loss basis. Ceded reinsurance arrangements
do not discharge the Company as the primary insurer, except for instances where the primary policy or
policies have been novated.
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