Travelers 2015 Annual Report Download - page 158

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as
interest rates (inclusive of credit spreads), foreign currency exchange rates and other relevant market
rate or price changes. Market risk is directly influenced by the volatility and liquidity in the markets in
which the related underlying assets are traded. The following is a discussion of the Company’s primary
market risk exposures and how those exposures are managed as of December 31, 2015. The Company’s
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, 2015 and 2014 was
$70.47 billion and $73.26 billion, respectively, of which 86% and 87% was invested in fixed maturity
securities, respectively. At December 31, 2015 and 2014, approximately 7.4% and 8.7%, 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 primary market risks to the investment portfolio are interest rate risk and credit risk
associated with investments in fixed maturity securities. The portfolio duration is primarily managed
through cash market transactions and treasury futures transactions. For additional information
regarding the Company’s investments, see notes 3 and 4 of notes to the consolidated financial
statements herein as well as the ‘‘Investment Portfolio’’ and ‘‘Outlook’’ sections of ‘‘Item 7—
Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’
The primary market risk for all of the Company’s debt is interest rate risk at the time of
refinancing. The Company monitors the interest rate environment and evaluates refinancing
opportunities as maturity dates approach. For additional information regarding the Company’s debt see
note 8 of notes to the consolidated financial statements herein as well as the ‘‘Liquidity and Capital
Resources’’ section of ‘‘Item 7—Management’s Discussion and Analysis of Financial Condition and
Results of Operations.’’
The Company’s foreign exchange market risk exposure is concentrated in the Company’s invested
assets, insurance reserves and shareholders’ equity denominated in foreign currencies. Cash flows from
the Company’s foreign operations are the primary source of funds for the purchase of investments
denominated in foreign currencies. The Company purchases these investments primarily to fund
insurance reserves and other liabilities denominated in the same currency, effectively reducing its
foreign currency exchange rate exposure. Invested assets denominated in the Canadian dollar
comprised approximately 4.4% and 5.2% of the total invested assets at December 31, 2015 and 2014,
respectively. Invested assets denominated in the British Pound Sterling comprised approximately 2.1%
and 2.2% of total invested assets at December 31, 2015 and 2014, respectively. Invested assets
denominated in other currencies at December 31, 2015 and 2014 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, 2015 compared to the year ended
December 31, 2014. 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.
Included in the Company’s fixed maturity, equity security and other investment portfolios are
exposures to the energy sector. The Company’s fixed maturity portfolio at December 31, 2015 included
$1.70 billion of securities issued by companies in the energy sector. Approximately 92% of those fixed
maturity investments are rated at investment-grade with an average credit rating of ‘‘A2,’’ with
integrated oil and gas companies representing the largest single industry. The Company’s equity
158