Travelers 2003 Annual Report Download - page 57

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55
UNCERTAINTY REGARDING ADEQUACY OF ASBESTOS AND ENVIRONMENTAL RESERVES
As a result of the processes and procedures described above, management believes that the reserves carried for
asbestos and environmental claims at December 31, 2003 are appropriately established based upon known facts,
current law and management’s judgment. However, the uncertainties surrounding the final resolution of these claims
continue, and it is presently not possible to estimate the ultimate exposure for asbestos and environmental claims and
related litigation. As a result, the reserve is subject to revision as new information becomes available. The continuing
uncertainties include, without limitation, the risks and lack of predictability inherent in major litigation, any impact
from the bankruptcy protection sought by various asbestos producers and other asbestos defendants, a further increase
or decrease in asbestos and environmental claims which cannot now be anticipated, the role of any umbrella or excess
policies Travelers has issued, the resolution or adjudication of some disputes pertaining to the amount of available
coverage for asbestos claims in a manner inconsistent with Travelers previous assessment of these claims, the number
and outcome of direct actions against Travelers and future developments pertaining to Travelers ability to recover
reinsurance for asbestos and environmental claims. It is also not possible to predict changes in the legal and legislative
environment and their impact on the future development of asbestos and environmental claims. This development will
be affected by future court decisions and interpretations, as well as changes in applicable legislation. It is also difficult
to predict the ultimate outcome of large coverage disputes until settlement negotiations near completion and significant
legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with
policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require
court approval to be effective. Also see “-Legal Proceedings.”
Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the current related
reserves. In addition, Travelers estimate of ultimate claims and claim adjustment expenses may change. These
additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result
in income statement charges that could be material to Travelers operating results and financial condition in future
periods.
INVESTMENT PORTFOLIO
Travelers invested assets at December 31, 2003 totaled $38.653 billion, including $348.8 million of securities in
process of settlement, of which 91% was invested in fixed maturity and short-term investments, 2% in common stocks
and other equity securities, 1% in mortgage loans and real estate held for sale and 6% in other investments. Excluding
the impact of securities lending, unrealized investment gains and losses, receivables for investment sales and payables
on investment purchases, the pretax average yield was 5.3%, 6.0% and 6.9% for the years ended December 31, 2003,
2002 and 2001, respectively, and the after tax average yield was 4.0%, 4.4% and 5.0% for the years ended December
31, 2003, 2002 and 2001, respectively.
Because the primary purpose of the investment portfolio is to fund future claims payments, Travelers employs a
conservative investment philosophy. Travelers fixed maturity portfolio at December 31, 2003 totaled $33.046 billion,
comprising $32.563 billion of publicly traded fixed maturities and $482.8 million of private fixed maturities. The
weighted average quality ratings of Travelers publicly traded fixed maturity portfolio and private fixed maturity
portfolio at December 31, 2003 were Aa2 and Baa1, respectively. Included in the fixed maturity portfolio at that date
was approximately $2.057 billion of below investment grade securities. During 2003, holdings of tax-exempt
securities were increased to $15.391 billion to take advantage of their relatively high credit quality and attractive after-
tax yields. The average effective duration of the fixed maturity portfolio, including short-term investments, was 4.1
years as of December 31, 2003 (4.3 years excluding short-term investments), as compared to 5.0 years at December
31, 2002.