Travelers 2007 Annual Report Download - page 116

Loss Cost Trends. Loss cost trends are primarily driven by changes in claim frequency and claim
severity. The industry has generally experienced unprecedented low levels of non-catastrophe related
claim frequency over the last several years. The Company expects this trend in claim frequency to
continue in 2008 in certain lines of business, while claim frequency is expected to increase modestly in
other lines of business. The Company also expects severity to increase modestly for non-catastrophe
related claims.
The Company believes that the overall trend of increased frequency and severity of catastrophic
Gulf and Atlantic Coast storms experienced in recent years may continue for the foreseeable future,
although the trend was not evident in the United States in 2007 and 2006. Given the potential increase
in frequency and severity of storms, the Company will continue to reassess its definition of, and
exposure to, coastal risks. These risks will be reflected in the pricing and terms and conditions it will
offer in coastal areas. Due in part to the increased frequency and severity of the Gulf and Atlantic
Coast storms, there has been some disruption in the market for coastal wind insurance, most
significantly in personal lines, as insurers, including the Company, have reduced capacity and increased
prices. The continued disruption in market conditions, along with the potential for increased frequency
and severity of coastal storms, could result in a decrease in the amount of coastal wind coverage that
the Company is able or willing to write.
In recent periods, the Company has recorded net favorable prior year reserve development,
primarily driven by better than expected loss experience in all of the Company’s segments for prior loss
years. If better than expected loss experience continues, the Company may record additional net
favorable prior year reserve development in 2008. In that case, the Company may also concurrently
revise favorably its current year loss estimates. However, better than expected loss experience may not
continue or may reverse, in which case the Company may record no favorable prior year reserve
development or net unfavorable prior year reserve development in future periods. In that case, the
Company may revise current year loss estimates upward in future periods.
Investment Returns. Changes in the general interest rate environment affect the returns available
on new investments. While a rising interest rate environment enhances the returns available on new
fixed income investments, thereby favorably impacting net investment income, it reduces the market
value of existing fixed maturity investments, and therefore, shareholders’ equity. A decline in interest
rates reduces the returns available on new investments, thereby negatively impacting net investment
income, but increases the market value of existing investments and therefore, shareholders’ equity. In
2007, short-term and long-term interest rates declined. A downward trend in interest rates may
continue into 2008.
At December 31, 2007, approximately 6% of the Company’s invested assets were comprised of
equity securities, venture capital investments, private equity limited partnerships, joint ventures, other
limited partnerships and trading securities, which are subject to greater volatility than fixed income
investments. General economic conditions, stock market conditions and many other factors beyond the
Company’s control may affect the value of these non-fixed income investments and the realization of
net investment income. The Company is not able to predict future market conditions or their impact on
net investment income.
Net investment income is an important contributor to the Company’s results of operations, and the
Company expects the investment environment to become more challenging in 2008, particularly with
respect to its non-fixed income investment portfolio.
For a discussion of potential risks that could impact the Company’s financial condition or results of
operations, see Item 1A—‘‘Risk Factors’’ in this report.
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