Travelers 2006 Annual Report Download - page 153

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest
rates, foreign currency exchange rates, and other relevantmarket rate or price changes. Market risk is
directly influenced by the volatility and liquidity in the markets in which the related underlying assets are
traded. The following is a discussion of the Company’s primary market risk exposures and how those
exposures are managed as of December 31, 2006. The Company’s market risk sensitive instruments,
including derivatives, are primarily entered into for purposes other than trading.
The carrying value of the Company’s investment portfolio as of December 31, 2006 and 2005 was
$72.27 billion and $68.29 billion, respectively, of which 87% and 86% was invested in fixed maturity
securities, respectively. At December 31, 2006 and2005, approximately 6% of theCompany’s invested
assets were denominated in foreign currencies. The Company’s exposure to equity price risk is not
significant. The Company has no directcommodity 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 note 7 to the Company’s
consolidated financial statements as well as the Liquidity and Capital Resources section of Management’s
Discussion and Analysis.
The Company’s foreignexchange marketrisk 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 theprimary 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 2.8% and
2.4% of the total invested assets at December 31, 2006 and 2005, respectively. No other individual foreign
currency accountedfor more than 1.8% of the Company’s invested assets at December 31, 2006 or 2005.
There were no other significant changes in the Company’s primary market risk exposures or in how
those exposures were managed for the year endedDecember 31, 2006 compared to the year ended
December 31, 2005. 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.