Travelers 2013 Annual Report Download - page 124

collateralized by securities issued by GNMA, FNMA or FHLMC. The average credit rating of the
$790 million and $893 million of non-guaranteed CMO holdings at December 31, 2013 and 2012,
respectively, was ‘‘Ba3’’ and ‘‘B2,’’ respectively. The average credit rating of all of the above securities
was ‘‘A1’’ at both December 31, 2013 and 2012.
The Company makes investments in residential CMOs that are either guaranteed by GNMA,
FNMA or FHLMC, or if not guaranteed, are senior or super-senior positions within their respective
securitizations. Both guaranteed and non-guaranteed residential CMOs allocate the distribution of
payments from the underlying mortgages among different classes of bondholders. In addition,
non-guaranteed residential CMOs provide structures that allocate the impact of credit losses to
different classes of bondholders. Senior and super-senior CMOs are protected, to varying degrees, from
credit losses as those losses are initially allocated to subordinated bondholders. The Company’s
investment strategy is to purchase CMO tranches that are expected to offer the most favorable return
given the Company’s assessment of associated risks. The Company does not purchase residual interests
in CMOs.
Alternative Documentation Mortgages and Sub-Prime Mortgages
At December 31, 2013 and 2012, the Company’s fixed maturity investment portfolio included
collateralized mortgage obligations backed by alternative documentation mortgages and asset-backed
securities collateralized by sub-prime mortgages with a collective fair value of $293 million and
$347 million, respectively (comprising less than 1% of the Company’s total fixed maturity investments
at both dates). 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
entities’ requirements for credit score but do not meet the government-sponsored entities’ 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 ‘‘Ba2’’ and ‘‘Ba1’’ at December 31, 2013 and 2012,
respectively. The Company does not believe this portfolio exposes it to a material adverse impact on its
results of operations, financial position or liquidity, due to the portfolio’s relatively small size.
Commercial Mortgage-Backed Securities and Project Loans
At December 31, 2013 and 2012, the Company held commercial mortgage-backed securities
(including FHA project loans) of $475 million and $453 million, respectively. The Company does not
believe this portfolio exposes it to a material adverse impact on its results of operations, financial
position or liquidity, due to the portfolio’s relatively small size and the underlying credit strength of
these securities.
Equity Securities Available for Sale, Real Estate and Short-Term Investments
See note 1 of notes to the Company’s consolidated financial statements for further information
about these invested asset classes.
Other Investments
The Company also invests much smaller amounts in equity securities, real estate, private equity
limited partnerships, hedge funds, and real estate partnerships and joint ventures, which are subject to
more volatility than the Company’s fixed maturity investments. These asset classes have historically
provided a higher return than fixed maturities but are subject to more volatility. At December 31, 2013
and 2012, the carrying value of the Company’s other investments was $3.44 billion and $3.43 billion,
respectively.
114