Travelers 2014 Annual Report Download - page 162

Table of Contents
and 2.4% of total invested assets at December 31, 2014 and 2013, respectively. Invested assets denominated in other currencies at December 31,
2014 and 2013 were not material.
There were no other significant changes in the Company's primary market risk exposures or in how those exposures were managed for the year
ended December 31, 2014 compared to the year ended December 31, 2013. The Company does not currently anticipate significant changes in its
primary market risk exposures or in how those exposures are managed in future reporting periods based upon what is known or expected to be in
effect in future reporting periods.
SENSITIVITY ANALYSIS
Sensitivity analysis is defined as the measurement of potential loss in future earnings, fair values or cash flows of market sensitive instruments
resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a selected period of time. In the
Company's sensitivity analysis model, a hypothetical change in market rates is selected that is expected to reflect reasonably possible near
- term
changes in those rates. "Near - term" means a period of time going forward up to one year from the date of the consolidated financial statements.
Actual results may differ from the hypothetical change in market rates assumed in this disclosure, especially since this sensitivity analysis does not
reflect the results of any actions that would be taken by the Company to mitigate such hypothetical losses in fair value.
Interest Rate Risk
In this sensitivity analysis model, the Company uses fair values to measure its potential loss. The sensitivity analysis model includes the
following financial instruments entered into for purposes other than trading: fixed maturities, non
- redeemable preferred stocks, mortgage loans,
short
- term securities, debt and derivative financial instruments. The primary market risk to the Company's market sensitive instruments is interest
rate risk (inclusive of credit spreads). The sensitivity analysis model uses various basis point changes in interest rates to measure the hypothetical
change in fair value of financial instruments included in the model.
For invested assets with primary exposure to interest rate risk, estimates of portfolio duration and convexity are used to model the loss of fair
value that would be expected to result from a parallel increase in interest rates. Durations on invested assets are adjusted for call, put and interest
rate reset features. Durations on tax
- exempt securities are adjusted for the fact that the yields on such securities do not normally move in lockstep
with changes in the U.S. Treasury curve. Fixed maturity portfolio durations are calculated on a market value weighted basis, including accrued
interest, using holdings as of December 31, 2014 and 2013.
For debt, the change in fair value is determined by calculating hypothetical December 31, 2014 and 2013 ending prices based on yields adjusted
to reflect a 100 basis point change, comparing such hypothetical ending prices to actual ending prices, and multiplying the difference by the par or
securities outstanding.
The sensitivity analysis model used by the Company produces a loss in fair value of market sensitive instruments of approximately
$1.77 billion and $1.90 billion based on a 100 basis point increase in interest rates at December 31, 2014 and 2013, respectively.
The loss estimates do not take into account the impact of possible interventions that the Company might reasonably undertake in order to
mitigate or avoid losses that would result from emerging interest rate trends. In addition, the loss value only reflects the impact of an interest rate
increase on the fair value of the Company's financial instruments.
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