Travelers 2006 Annual Report Download - page 114

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case with policyholders in bankruptcy wherenegotiations often involve a largenumber of claimants and
other parties and require court approval to be effective. As part of its continuing analysis of asbestos
reserves, which includes an annual ground-up review of asbestos policyholders, the Company continues to
study the implications of these and other developments. The Company completed its most recent annual
ground-up review during thethird quarter of 2006. See “Part I—Item3, Legal Proceedings.”
Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of
the current related reserves. In addition, the Company’s estimate of claims and claim adjustment expenses
may change. These additional liabilities or increases in estimates, or a range of either, cannot now be
reasonably estimated and couldresult in income statement charges that could be material to the
Company’s operating results in futureperiods.
INVESTMENT PORTFOLIO
The Company’s invested assets at December31, 2006totaled $72.27 billion, of which 94% was
invested in fixed maturity and short-term investments, 1% in equity securities, 1% in real estate and4%in
other investments. Becausethe primary purpose of the investment portfolio is to fund future claims
payments, the Company employs a conservative investment philosophy. The Company’s fixed maturity
portfolio at December 31, 2006 totaled $62.67 billion, comprising $62.46 billion of publicly traded fixed
maturities and$208 million of private fixed maturities. The weighted average quality ratings of the
Company’s publicly traded fixed maturity portfolio and private fixed maturity portfolio at December 31,
2006 were AA1 and A3, respectively. Included in the fixed maturity portfolio at that date was
approximately $1.78 billion of below investment grade securities. During 2006, holdings of tax-exempt
securities were increased to $35.63 billion to take advantage of their relatively high credit quality and
attractive after-tax yields. The average effective duration of the fixed maturity portfolio, including short-
term investments, was 4.0 as of December 31, 2006 (4.3 excludingshort-term investments), compared with
3.9 as of December 31, 2005 (4.3 excluding short-term investments).
The following table sets forth the Company’s combined fixed maturity investmentportfolio classified
by Moody’s Investors Service ratings:
(at December 31, 2006, in millions)
Carrying
Value
Percent of Total
Carrying Value
Quality Rating:
Aaa. ............................................... $41,578 66.3%
Aa................................................. 11,82618.9
A 4,400 7.0
Baa................................................ 3,085 4.9
Total investmentgrade ........................... 60,88997.1
Non-investment grade ........................... 1,7772.9
Total fixed maturity investments. .................... $62,666100.0%
The Company makes investments in collateralized mortgage obligations (CMOs) that typically have
high credit quality, offer good liquidity, and are expected to provide an advantage in yield compared to
U.S. Treasury securities. The Company’s investment strategy is to purchase CMO tranches which offer the
most favorable returngiven the risks involved. One significantrisk evaluated is prepayment sensitivity.
While prepayment risk (either shortening or lengthening of duration) and its effect on total return cannot
be fully controlled, particularly when interest rates move dramatically, the investmentprocess generally
favors securities that control this risk within expected interest rate ranges. The Company does not purchase
residual interests in CMOs.
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