Travelers 2014 Annual Report Download - page 125

Table of Contents
U.S. Treasury futures contracts to manage the duration of its fixed maturity portfolio. At December 31, 2014, the Company had $350 million notional
value of open U.S. Treasury futures contracts. The Company continually evaluates its investment alternatives and mix. Currently, the majority of
the Company's investments are comprised of a widely diversified portfolio of high
- quality, liquid taxable U.S. government, tax - exempt U.S.
municipal and taxable corporate and U.S. agency mortgage - backed bonds.
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. These investment classes have the potential for higher returns but also the potential for higher degrees of
risk, including less stable rates of return and less liquidity.
Net investment income is a material contributor to the Company's results of operations. Interest rates remain at very low levels by historical
standards. Based on the current interest rate environment, the Company estimates that the impact of lower reinvestment yields on the Company's
fixed maturity portfolio could, for 2015, result in approximately $25 million of lower after
- tax net investment income from that portfolio on a quarterly
basis as compared to the corresponding quarters of 2014. Given recent general economic and investment market conditions, the Company expects
investment income from the non
- fixed maturity portfolio during 2015 will be lower than in 2014. If general economic conditions and/or investment
market conditions deteriorate during 2015, the Company could also experience a further reduction in net investment income and/or significant
realized investment losses, including impairments.
The Company had a net pre
- tax unrealized investment gain of $2.67 billion ($1.75 billion after - tax) in its fixed maturity investment portfolio at
December 31, 2014. While the Company does not attempt to predict future interest rate movements, a rising interest rate environment would reduce
the market value of fixed maturity investments and, therefore, reduce shareholders' equity, and a declining interest rate environment would have the
opposite effects.
For further discussion of the Company's investment portfolio, see "Investment Portfolio." For a discussion of the risks to the Company's
business during or following a financial market disruption and risks to the Company's investment portfolio, see the risk factors entitled "During or
following a period of financial market disruption or economic downturn, our business could be materially and adversely affected" and "Our
investment portfolio may suffer reduced returns or material realized or unrealized losses" included in "Part I—
Item 1A —Risk Factors." For a
discussion of the risks to the Company's investments from foreign currency exchange rate fluctuations, see the risk factor entitled "We are subject
to a number of risks associated with our business outside the United States" and see "Part I—
Item 7A —Quantitative and Qualitative Disclosure
About Market Risk—Foreign Currency Exchange Rate Risk."
Capital Position. The Company believes it has a strong capital position and, as part of its ongoing efforts to create shareholder value,
expects to continue to return capital not needed to support its business operations to its shareholders. The Company expects that, generally over
time, the combination of dividends to common shareholders and common share repurchases will likely not exceed operating income. In addition, the
timing and actual number of shares to be repurchased in the future will depend on a variety of additional factors, including the Company's financial
position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company's desired ratings from independent
rating agencies, funding of the Company's qualified pension plan, capital requirements of the Company's operating subsidiaries, legal requirements,
regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other
factors. For information regarding the Company's common share repurchases in 2014, see "Liquidity and Capital Resources."
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