Travelers 2013 Annual Report Download - page 209

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. FAIR VALUE MEASUREMENTS (Continued)
While the vast majority of the Company’s municipal bonds and corporate bonds are included in
Level 2, the Company holds a number of municipal bonds and corporate bonds which are not valued
by the pricing service and estimates the fair value of these bonds using an internal pricing matrix with
some unobservable inputs that are significant to the valuation. Due to the limited amount of observable
market information, the Company includes the fair value estimates for these particular bonds in
Level 3. The fair value of the fixed maturities for which the Company used an internal pricing matrix
was $94 million and $102 million at December 31, 2013 and 2012, respectively. Additionally, the
Company holds a small amount of other fixed maturity investments that have characteristics that make
them unsuitable for matrix pricing. For these fixed maturities, the Company obtains a quote from a
broker (primarily the market maker). The fair value of the fixed maturities for which the Company
received a broker quote was $161 million and $128 million at December 31, 2013 and 2012,
respectively. 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. When current market quotes in active markets are
unavailable for certain non-redeemable preferred stocks held by the Company, 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
The Company holds investments in various publicly-traded securities which are reported in other
investments. These investments include securities in the Company’s trading portfolio, mutual funds and
other small holdings. The $19 million and $46 million fair value of these investments at December 31,
2013 and 2012, respectively, was disclosed in Level 1. At December 31, 2013 and 2012, the Company
held investments in non-public common and preferred equity securities, with fair value estimates of
$34 million and $54 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, 2013 and 2012 in the amount disclosed in Level 3.
Derivatives
At December 31, 2013 and 2012, the Company held $8 million and $21 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.
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