Travelers 2011 Annual Report Download - page 111

policyholders, whether through exhaustion of policy limits or through the insolvency of other
participating insurers. In addition, uncertainties arise from the insolvency or bankruptcy of
policyholders and other defendants. It is also not possible to predict changes in the legal, regulatory
and legislative environment and their impact on the future development of asbestos and environmental
claims. This environment could be affected by changes in applicable legislation and future court and
regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or
judicial reforms establishing medical criteria for the pursuit of asbestos claims. It is also difficult to
predict the ultimate outcome of complex 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. As
part of its continuing analysis of asbestos and environmental reserves, the Company continues to study
the implications of these and other developments. (Also see note 15 of notes to the consolidated
financial statements).
Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess
of the current related reserves. In addition, the Company’s estimate of 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
the Company’s operating results in future periods.
INVESTMENT PORTFOLIO
The Company’s invested assets at December 31, 2011 were $72.70 billion, of which 93% was
invested in fixed maturity and short-term investments, 1% in equity securities, 1% in real estate and
5% in other investments. Because the primary purpose of the investment portfolio is to fund future
claims payments, the Company employs a conservative investment philosophy. A significant majority of
funds available for investment are deployed in a widely diversified portfolio of high quality, liquid
taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and U.S. agency mortgage-
backed bonds.
The carrying value of the Company’s fixed maturity portfolio at December 31, 2011 was
$64.23 billion. The Company closely monitors the duration of its fixed maturity investments, and
investment purchases and sales are executed with the objective of having adequate funds available to
satisfy the Company’s insurance and debt obligations. The weighted average credit quality of the
Company’s fixed maturity portfolio, both including and excluding U.S. Treasury securities, was ‘‘Aa2’’ at
both December 31, 2011 and 2010. Standard & Poor’s recent downgrade of the credit rating of
securities issued by the U.S. government had minimal impact on the overall credit quality of the
Company’s fixed maturity portfolio at December 31, 2011. Below investment grade securities
represented 3.1% and 3.0% of the total fixed maturity investment portfolio at December 31, 2011 and
2010, respectively. The average effective duration of fixed maturities and short-term securities was 3.2
(3.4 excluding short-term securities) at December 31, 2011 and 3.6 (3.9 excluding short-term securities)
at December 31, 2010. The decline in duration reflected the impact of declining market yields on
existing holdings of municipal bonds and mortgage-backed securities (which impact the assumptions
related to optional pre-payments and the related estimate of effective duration for callable securities).
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