Travelers 2008 Annual Report Download - page 124

investment, increased significantly. This resulted in a decline in the market value of existing other than
short-term fixed maturity investments, and therefore, shareholders’ equity. The Company had a net
pretax unrealized loss of $294 million in its fixed maturities portfolio at December 31, 2008, compared
with a net pretax unrealized gain of $768 million at December 31, 2007.
The market disruption that occurred in the second half of 2008 resulted in a lack of liquidity in
certain sectors of the credit markets and a widening of credit spreads generally. At December 31, 2008,
the Company had unrealized investment losses of $744 million on securities for which fair value was
less than 80% of cost of the security. Approximately $592 million of the unrealized investment losses
had continuously been in an unrealized loss position of greater than 20% of cost for less than three
months. If the market disruption continues and interest rates (inclusive of credit spreads) remain steady
or rise, the amount of securities in an unrealized loss of greater than 20% may age and significant
additional unrealized investment losses could occur in the portfolio. These circumstances may result in
significant realized losses through sales of securities or other-than-temporary impairment charges in
2009.
At December 31, 2008, approximately 5% of the Company’s invested assets were comprised of
equity securities, private equity limited partnerships, hedge funds, real estate partnerships, joint
ventures, mortgage loans, venture capital investments and trading securities, which are subject to
greater volatility than fixed maturity investments. General economic conditions, stock market conditions
and many other factors beyond the Company’s control may affect the value of these non-fixed maturity
investments and the realization of net investment income. For example, reduced liquidity in the capital
markets could adversely impact the Company’s investment portfolio, particularly investments in private
equity limited partnerships, real estate partnerships and hedge funds, resulting in a decline in
transaction volume in these asset classes, and as a result, lower net investment income. For the year
ended December 31, 2008, these non-fixed maturity investments collectively produced negative
investment income. If the current unfavorable economic environment persists in 2009, the Company
may continue to experience negative returns from these investments. The Company is not able to
predict future market conditions or their impact on net investment income.
Net investment income is an important contributor to the Company’s results of operations, and the
Company expects the investment environment to remain challenging in 2009, particularly with respect
to its non-fixed maturity investment portfolio.
For a discussion of potential risks that could impact the Company’s financial condition or results of
operations, see ‘‘Item 1A—Risk Factors’’ in this report.
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