Travelers 2004 Annual Report Download - page 123

The carrying value of the Company’s investment portfolio as of December 31, 2004 and 2003 was $64.71
billion and $38.65 billion, respectively, of which 84% and 85% was invested in fixed maturity securities,
respectively. At December 31, 2004, approximately 7% of the Company’s invested assets were denominated in
foreign currencies. The Company’s exposure to foreign exchange risk was not significant at December 31, 2003.
The Company’s exposure to equity price risk is not significant. The Company has no direct commodity risk.
The primary market risk to the investment portfolio is interest rate risk associated with investments in fixed
maturity securities. The portfolio duration relative to the liabilities’ duration is primarily managed through cash
market transactions and treasury futures transactions.
The primary market risk for all of the Company’s debt is interest rate risk at the time of refinancing. The
Company monitors the interest rate environment and evaluates refinancing opportunities as maturity dates
approach. For additional information regarding the Company’s debt see notes 10 and 11 to the Company’s
consolidated financial statements as well as the Liquidity and Capital Resources section of Management’s
Discussion and Analysis.
As a result of the merger, changes in the Company’s exposure to foreign exchange risk have occurred since
December 31, 2003. This market risk exposure is concentrated in the Company’s invested assets, and insurance
reserves, denominated in foreign currencies. Cash flows from the Company’s foreign operations are the primary
source of funds for the purchase of investments denominated in foreign currencies. The Company purchases
these investments primarily to fund insurance reserves and other liabilities denominated in the same currency,
effectively reducing its foreign currency exchange rate exposure. Invested assets denominated in the British
Pound Sterling comprised approximately 3.5% of the total invested assets at December 31, 2004. No other
individual foreign currency accounted for more than 1.5% of the Company’s invested assets at December 31,
2004.
There were no other significant changes in the Company’s primary market risk exposures or in how those
exposures were managed for the year ended December 31, 2004 compared to the year ended December 31, 2003.
The Company does not currently anticipate significant changes in its primary market risk exposures or in how
those exposures are managed in future reporting periods based upon what is known or expected to be in effect in
future reporting periods.
SENSITIVITY ANALYSIS
Sensitivity analysis is defined as the measurement of potential loss in future earnings, fair values or cash
flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates
and other market rates or prices over a selected time. In the Company’s sensitivity analysis model, a hypothetical
change in market rates is selected that is expected to reflect reasonably possible near-term changes in those rates.
“Near-term” means a period of time going forward up to one year from the date of the consolidated financial
statements. Actual results may differ from the hypothetical change in market rates assumed in this disclosure,
especially since this sensitivity analysis does not reflect the results of any actions that would be taken by the
Company to mitigate such hypothetical losses in fair value.
Interest Rate Risk
In this sensitivity analysis model, the Company uses fair values to measure its potential loss. The sensitivity
analysis model includes the following financial instruments entered into for purposes other than trading: fixed
maturities, non-redeemable preferred stocks, mortgage loans, short-term securities, debt and derivative financial
instruments. The primary market risk to the Company’s market sensitive instruments is interest rate risk. The
sensitivity analysis model uses a 100 basis point change in interest rates to measure the hypothetical change in
fair value of financial instruments included in the model.
111