Travelers 2007 Annual Report Download - page 155

For invested assets with primary exposure to interest rate risk, estimates of portfolio duration and
convexity are used to model the loss of fair value that would be expected to result from a parallel
increase in interest rates. Durations on invested assets are adjusted for call, put and interest rate reset
features. Durations on tax-exempt securities are adjusted for the fact that the yields on such securities
do not normally move in lockstep with changes in the U.S. Treasury curve. Fixed maturity portfolio
durations are calculated on a market value weighted basis, including accrued interest, using holdings as
of December 31, 2007 and 2006.
For debt, the change in fair value is determined by calculating hypothetical December 31, 2007 and
2006 ending prices based on yields adjusted to reflect a 100 basis point change, comparing such
hypothetical ending prices to actual ending prices, and multiplying the difference by the par or
securities outstanding.
The sensitivity analysis model used by the Company produces a loss in fair value of market
sensitive instruments of approximately $2.5 billion and $2.3 billion based on a 100 basis point increase
in interest rates as of December 31, 2007 and 2006, respectively.
The loss estimates do not take into account the impact of possible interventions that the Company
might reasonably undertake in order to mitigate or avoid losses that would result from emerging
interest rate trends. In addition, the loss value only reflects the impact of an interest rate increase on
the fair value of the Company’s financial instruments. As a result, the loss value excludes a significant
portion of the Company’s consolidated balance sheet, primarily claims and claim adjustment expense
reserves, which if included in the sensitivity analysis model, would mitigate the impact of the loss in fair
value associated with a 100 basis point increase in interest rates.
Foreign Currency Exchange Rate Risk
The Company uses fair values of investment securities to measure its potential loss from foreign
denominated investments. A hypothetical 10% reduction in value of foreign denominated investments is
used to estimate the impact on the market value of the foreign denominated holdings. The potential
loss is reduced by foreign currency forward transactions that are used to hedge a portion of the
Company’s exposure to foreign currencies. The Company’s analysis indicates that a hypothetical 10%
reduction in the value of foreign denominated investments would be expected to produce a loss in fair
value of approximately $485 million and $438 million at December 31, 2007 and 2006, respectively.
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