Travelers 2008 Annual Report Download - page 163

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, 2008 and 2007 was
$70.74 billion and $74.82 billion, respectively, of which 87% was invested in fixed maturity securities at
both dates. At December 31, 2008 and 2007, approximately 5.5% and 6.5%, respectively, of the
Company’s invested assets were denominated in foreign currencies. The Company’s exposure to equity
price risk is not significant. The Company has no direct commodity risk and is not a party to any credit
default swaps.
The Company’s fixed maturity investment portfolio at December 31, 2008 and 2007 included asset-
backed securities collateralized by sub-prime mortgages and collateralized mortgage obligations backed
by alternative documentation mortgages with a collective market value of $206 million and
$286 million, respectively (comprising approximately 0.3% and 0.4% of the Company’s total fixed
maturity investments, respectively). The disruption in secondary investment markets for mortgage-
backed securities provided the Company with the opportunity to selectively acquire additional asset-
backed securities collateralized by sub-prime mortgages at discounted prices. The Company purchased
$47 million and $89 million of such securities in 2008 and the fourth quarter of 2007, respectively. The
Company defines sub-prime mortgage-backed securities as investments in which the underlying loans
primarily exhibit one or more of the following characteristics: low FICO scores, above-prime interest
rates, high loan-to-value ratios or high debt-to-income ratios. Alternative documentation securitizations
are those in which the underlying loans primarily meet the government-sponsored entity’s requirements
for credit score but do not meet the government-sponsored entity’s guidelines for documentation,
property type, debt and loan-to-value ratios. The average credit rating on these securities and
obligations held by the Company was ‘‘Aa2’’ and ‘‘Aaa’’ at December 31, 2008 and 2007, respectively.
Approximately $81 million of asset-backed securities collateralized by sub-prime and alternative
documentation mortgages were downgraded in 2008.
The Company’s fixed maturity investment portfolio at December 31, 2008 included securities issued
by numerous states, municipalities and political subdivisions (collectively referred to as the municipal
bond portfolio), a number of which were enhanced by third-party insurance for the payment of
principal and interest in the event of an issuer default. The downgrade of credit ratings of insurers of
these securities has resulted in a corresponding downgrade in the ratings of the securities to the
underlying rating of the respective security. Of the insured municipal bond portfolio, approximately
99% were rated at A3 or above, and approximately 81% were rated at Aa3 or above, without the
benefit of insurance. If economic conditions continue to deteriorate and adversely impact the financial
condition and/or revenues of states, municipalities and political subdivisions, the value of the
Company’s holdings could be adversely impacted. However, the Company believes, based on current
market conditions, that a further 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 average credit rating of the underlying issuers of these securities was ‘‘Aa3’’ at
December 31, 2008. The average credit rating of the entire municipal bond portfolio was ‘‘Aa1’’ at
December 31, 2008 with and without the third-party insurance and includes pre-funded and escrowed
to maturity securities, as well as securities issued without third-party insurance.
The primary market risk to the investment portfolio is interest rate and credit 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 Company’s tax-exempt fixed maturity investment portfolio totaled $38.79 billion and
$38.55 billion at December 31, 2008 and 2007, respectively. Federal and/or state tax legislation could be
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