Travelers 2005 Annual Report Download - page 63

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property and casualty shared market mechanisms or pooling arrangements, which provide various types of
insurance coverage to individuals or other entities that otherwise are unable to purchase that coverage
from private insurers. The effect of these assessments and mandatory shared-market mechanisms or
changes in them could reduce our profitability in any given period or limit our ability to grow our business.
A downgrade in our claims-paying and financial strength ratings could significantly reduce our
business volumes,adversely impact our ability to access the capital markets and increase our borrowing
costs.Claims-paying and financial strength ratings have become increasingly important to an insurer’s
competitive position. Rating agencies review their ratings periodically, and our current ratings may not be
maintained in the future. A downgrade in one or more of our ratings could negatively impact our business
volumes, because demand for certain of our products in certain markets may be reduced or our ratings
could fall below minimum levels required to maintain existing business. Additionally, we may find it more
difficult to access the capital markets andhigher borrowing costs may be incurred. If our capital position
were to deteriorate or one or more rating agencies were to substantially increase their capital
requirements, we may need to raise equity capital in the future in order to maintain our ratings or limit the
extent of a downgrade. For example, the frequency or severity of weather-related catastrophes in the last
two years may lead rating agencies to substantially increase their capital requirements. The ratings are not
in any way a measure of protection offered to investors in our securities and should not be relied upon with
respect to making an investment in our securities. For further discussion about our ratings, see, “Item 1
Business—Ratings”.
Our investment portfolio may suffer reduced returns or losses which could reduce our profitability.
Investment returns are an important part of our overall profitability. Accordingly, fluctuations inthe fixed
income or equity markets could impair our profitability, financial condition or cash flows.
Fluctuationsin interest rates affect our returns on, and the market value of, fixed income and short-
term investments, which comprised approximately 93% of the market value of our investment portfolio as
of December 31, 2005. In addition, defaults by third parties, primarily from investments in liquid corporate
and municipal bonds, who fail to pay or perform on their obligations could reduce our net investment
income and net realized investment gains or result in investment losses.
We invest a portion of our assets in equity investments, which are subject to greater volatility than
fixed income investments. General economic conditions, stock market conditions and many other factors
beyond our control can adversely affect the value of our equity investments and our ability to control the
timing of the realization of net investmentincome. As a result of these factors, we may not realize an
adequate return onour investments, may incur losses on sales of our investments and may be required to
write down the value of our investments,which would reduce our profitability.
The intense competition that we face could harm our ability to maintain or increase our profitability
and premium volume. The property and casualty insurance industry is highly competitive and we believe
that it will remain highly competitive in the foreseeable future. We compete with both domestic and
foreign insurers, some of which have greater financialresources than we do. In addition, several property
and casualty insurers writing commercial lines of business now offer products for alternative forms of risk
protection, including large deductible programs and various forms of self-insurance that utilize captive
insurance companies and risk retention groups. Continued growth in alternative forms of risk protection
could reduce our premium volume. Following the terrorist attack on September 11, 2001 and again
following the hurricane activity in 2004 and 2005, a number of new insurers and reinsurers were formed to
compete in the industry, and a number of existing market participants have raised new capital which may
enhance their ability to compete. Financial institutions are now able to offer services similar to us as a
result of the Gramm-Leach-Bliley Act, which repealed U.S. laws that separated commercial banking,
investment banking and insurance activities.