Travelers 2007 Annual Report Download - page 154

from ‘‘Aaa’’ to the underlying rating of the respective security without giving effect to the benefit of
insurance. Of the total $14.10 billion of insured municipal securities in the Company’s investment
portfolio, approximately 96% were rated at A3 or above, and approximately 76% were rated at Aa3 or
above, without the benefit of insurance. The Company believes that a loss of the benefit of insurance
would not result in a material adverse impact on the Company’s results of operations, financial position
or liquidity, due to the underlying credit strength of the issuers of the securities, as well as the
Company’s ability and intent to hold the securities.
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 of notes 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 foreign exchange 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 2.9%
and 2.8% of the total invested assets at December 31, 2007 and 2006, respectively. No other individual
foreign currency accounted for more than 2.2% of the Company’s invested assets at December 31, 2007
or 2006.
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, 2007 compared to the year ended
December 31, 2006. 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.
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