Travelers 2009 Annual Report Download - page 168

market risk sensitive instruments, including derivatives, are primarily entered into for purposes other
than trading.
The carrying value of the Company’s investment portfolio at December 31, 2009 and 2008 was
$74.97 billion and $70.74 billion, respectively, of which 88% and 87% was invested in fixed maturity
securities, respectively. At December 31, 2009 and 2008, approximately 5.8% and 5.5%, 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, 2009 and 2008 included asset-
backed securities collateralized by sub-prime mortgages and collateralized mortgage obligations backed
by alternative documentation mortgages with a collective fair value of $270 million and $206 million,
respectively (comprising approximately 0.4% and 0.3% 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
$74 million and $47 million of such securities in 2009 and 2008, 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 ‘‘A3’’ and ‘‘Aa2’’ at December 31, 2009 and 2008, respectively. Approximately
$114 million and $81 million of asset-backed securities collateralized by sub-prime and alternative
documentation mortgages were downgraded in 2009 and 2008, respectively.
The Company’s fixed maturity investment portfolio at December 31, 2009 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
98% were rated at A3 or above, and approximately 80% were rated at Aa3 or above, without the
benefit of insurance. 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, 2009. The average credit rating
of the entire municipal bond portfolio was ‘‘Aa1’’ at December 31, 2009 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.
On April 2, 2009, municipal securities issued by local governments within the United States were
assigned a negative outlook by Moody’s Investors Service. Notwithstanding the relatively low historical
rates of default on many of these obligations, during an economic downturn, the Company’s municipal
bond portfolio could be subject to a higher risk of default or impairment due to declining municipal tax
bases and revenue. The prolonged economic downturn that began in 2008 has resulted in many states
and local governments operating under deficits or projected deficits. The severity and duration of these
deficits could have an adverse impact on the collectability and valuation of the Company’s municipal
bond portfolio. In addition, some issuers have been unable or may be unwilling to increase tax revenue,
or to reduce spending, to fund maturing municipal bonds.
156