Travelers 2015 Annual Report Download - page 159

securities portfolio at December 31, 2015 included $274 million of holdings directly related to the
energy sector, with the majority of holdings concentrated in the energy infrastructure sector. Included
in other investments at December 31, 2015 were energy-focused private equity funds totaling
$330 million, which are diversified across 52 separate private equity funds. The energy sector has been
under pressure due to the lower price of oil. A prolonged downturn in the energy sector could impact
the value of the Company’s investment portfolio, reduce net investment income and could result in
realized and/or unrealized investment losses on these holdings.
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, 2015 and 2014.
For debt, the change in fair value is determined by calculating hypothetical December 31, 2015 and
2014 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 $2.00 billion and $1.77 billion based on a 100 basis point
increase in interest rates at December 31, 2015 and 2014, 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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