Travelers 2010 Annual Report Download - page 73

sophisticated as those we use in existing markets or with existing products. This, in turn, could
lead to losses in excess of our expectations.
• Models underlying automated underwriting and pricing decisions may not be effective.
• Efforts to develop new products or markets have the potential to create or increase distribution
channel conflict, such as described above under ‘‘—Disruptions to our relationships with our
independent agents and brokers could adversely affect us.’’
• In connection with the conversion of existing policyholders to a new product, some
policyholders’ pricing may increase, while the pricing for other policyholders may decrease, the
net impact of which could negatively impact retention and margins.
• To develop new products or markets, we may need to make substantial capital and operating
expenditures, which may also negatively impact results in the near term.
If our efforts to develop new products or expand in targeted markets are not successful, our results
of operations could be materially and adversely affected.
Our net deferred tax assets could be adversely affected by a reduction in the U.S. Federal
corporate income tax rate. Federal tax legislation could be enacted to reduce the existing statutory
U.S. Federal corporate income tax rate from 35%, which would, accordingly, reduce our net deferred
tax asset. The amount of our net deferred tax assets is volatile and significantly impacted by changes in
unrealized investment gains and losses in our investment portfolio. The effect of a reduction in a tax
rate on net deferred tax assets is required to be recognized, in full, as a reduction of income from
continuing operations in the period when enacted and, therefore, could materially and adversely affect
our results of operations.
We may be adversely affected if our pricing and capital models are inaccurate. The profitability
of our property and casualty business substantially depends on the extent to which our actual claims
experience is consistent with the assumptions we use in pricing our policies. We utilize models to help
us price business in a manner that is intended to be consistent, over time, with actual results and return
objectives. We also use various methods, including predictive modeling, forecasting and sophisticated
simulation modeling techniques, to analyze loss trends and the risks associated with our assets and
liabilities. We also use these analyses and methods in making underwriting, pricing and reinsurance
decisions as part of managing our exposure to catastrophes and other extreme adverse events. These
models incorporate numerous assumptions and forecasts about the future level and variability of:
interest rates, inflation, capital requirements, and frequency and severity of losses, among others, that
are difficult to make and may be materially wrong. Future experience may be materially different from
past and current experience incorporated in a model’s forecasts or simulations. This includes the
likelihood of events occurring or continuing or the correlation among events. If we fail to appropriately
price the risks we insure, or fail to change our pricing model to appropriately reflect our current
experience, or if our claims experience is more frequent or severe than our underlying risk assumptions,
our profit margins may be negatively affected. If we underestimate the frequency and/or severity of
extreme adverse events occurring, our financial condition may be adversely affected. If we overestimate
the risks we are exposed to, we may overprice our products, and new business growth and retention of
our existing business may be adversely affected. Further, as we expand into different markets and
geographies, we will write more policies in markets and geographical areas where we have less data
specific to these new markets and geographies, and, accordingly, we may be more susceptible to error
in our models and strategy.
We are subject to a number of risks associated with our business outside the United States. We
conduct business outside the United States primarily in the United Kingdom, Canada and the Republic
of Ireland. In addition, we entered into an agreement to commence a joint venture in Brazil and may
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