Travelers 2010 Annual Report Download - page 63

risk of default. The value of our fixed maturity and short-term investments is subject to the risk that
certain investments may default or become impaired due to a deterioration in the financial condition of
one or more issuers of the securities held in our portfolio, or due to a deterioration in the financial
condition of an insurer that guarantees an issuer’s payments of such investments. Such defaults and
impairments could reduce our net investment income and result in realized investment losses.
We invest a portion of our assets in equity securities, private equity limited partnerships, hedge
funds, and real estate partnerships, all of which are subject to greater volatility in their investment
returns than fixed maturity investments. General economic conditions, changes in applicable tax laws
and many other factors beyond our control can adversely affect the value of our non-fixed maturity
investments and the realization of net investment income, and/or result in realized investment losses.
As a result of these factors, we may realize reduced returns on these investments, we may incur losses
on sales of these investments and we may be required to write down the value of these investments,
which could reduce our net investment income and result in realized investment losses.
Our investment portfolio is also subject to increased valuation uncertainties when investment
markets are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby
increasing the risk that the estimated fair value (i.e., the carrying amount) of the portion of the
investment portfolio that is carried at fair value as reflected in our financial statements is not reflective
of prices at which actual transactions could occur.
Our fixed maturity investment portfolio is invested, in substantial part, in obligations of states,
municipalities and political subdivisions (collectively referred to as the municipal bond portfolio).
Notwithstanding the relatively low historical rates of default on many of these obligations and
notwithstanding that we typically seek to invest in high-credit-quality securities (including those with
structural protections such as being secured by dedicated or pledged sources of revenue), during or
following an economic downturn, our municipal bond portfolio could be subject to a higher risk of
default or impairment due to declining municipal tax bases and revenue. The prolonged economic
downturn that began in 2008 has resulted in many states and local governments operating under
deficits or projected deficits. The severity and duration of these deficits could have an adverse impact
on the collectability and valuation of our municipal bond portfolio. In addition, some issuers may be
unwilling to increase tax rates, or to reduce spending, to fund interest or principal payments on their
municipal bonds, or may be unable to access the municipal bond market to fund such payments. The
risk of widespread defaults may increase if some issuers voluntarily choose to default, instead of
implementing difficult fiscal measures, and the actual or perceived consequences (such as reduced
access to capital markets) are less severe than expected. The risk may also increase if there are changes
in legislation that permit states, or additional municipalities and political subdivisions, to file for
bankruptcy protection or if there are judicial interpretations that, in a bankruptcy or other proceeding,
lessen the value of structural protections. Our portfolio has also benefited from tax exemptions and
certain other tax laws, including, but not limited to, those governing dividends-received deductions and
tax credits (such as foreign tax credits). Federal and/or state tax legislation could be enacted in
connection with deficit reduction or various types of fundamental tax reform that would lessen or
eliminate some or all of the tax advantages currently benefiting us and could adversely affect the value
of our investment portfolio.
Our investment portfolio includes residential mortgage-backed securities, collateralized mortgage
obligations, pass-through securities, and asset-backed securities collateralized by sub-prime mortgages;
commercial mortgage-backed securities; and wholly-owned real estate, real estate partnerships and
mortgage loans, all of which could be adversely impacted by further declines in real estate valuations
and/or financial market disruption. In addition, the potential for protracted disruption and/or
suspension of foreclosure practices could also impact the returns on certain of these portfolios.
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