Travelers 2015 Annual Report Download - page 196

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVESTMENTS (Continued)
Changes in net unrealized gains on investment securities that are included as a separate
component of other comprehensive income (loss) were as follows:
(at and for the year ended December 31, in millions) 2015 2014 2013
Changes in net unrealized investment gains
Fixed maturities .............................. $ (893) $ 913 $(2,804)
Equity securities ............................. (143) 63 74
Other investments ............................ 22(1)
Change in net pretax unrealized gains on investment
securities ............................... (1,034) 978 (2,731)
Related tax expense (benefit) .................... (357) 334 (950)
Change in net unrealized gains on investment
securities ............................... (677) 644 (1,781)
Balance, beginning of year ...................... 1,966 1,322 3,103
Balance, end of year ......................... $ 1,289 $1,966 $ 1,322
Derivative Financial Instruments
From time to time, the Company enters into U.S. Treasury note futures contracts to modify the
effective duration of specific assets within the investment portfolio. U.S. Treasury futures contracts
require a daily mark-to-market and settlement with the broker. At December 31, 2015 and 2014, the
Company had $400 million and $350 million notional value of open U.S. Treasury futures contracts,
respectively. Net realized investment gains in 2015, 2014 and 2013 included net losses of $5 million, net
losses of $1 million and net gains of $115 million, respectively, related to U.S. Treasury futures
contracts.
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. Derivatives embedded in convertible debt securities are reported on a
combined basis with their host instrument and are classified as fixed maturities. The Company also sells
a small amount of U.S. equity index put option contracts that are settled for cash upon their expiration
or when they are rolled over. Net realized investment gains (losses) related to these derivatives in 2015,
2014 and 2013 were not significant.
4. FAIR VALUE MEASUREMENTS
The Company’s estimates of fair value for financial assets and financial liabilities are based on the
framework established in the fair value accounting guidance. The framework is based on the inputs
used in valuation, gives the highest priority to quoted prices in active markets and requires that
observable inputs be used in the valuations when available. The disclosure of fair value estimates in the
fair value accounting guidance hierarchy is based on whether the significant inputs into the valuation
are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest
priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable
inputs that reflect the Company’s significant market assumptions. The level in the fair value hierarchy
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