Travelers 2011 Annual Report Download - page 130

fixed maturity investments. Short-term interest rates are expected to remain at or near historically low
levels during 2012. Given recent unfavorable general economic and investment market conditions, the
Company expects investment income from the non-fixed maturity portfolio in 2012 to be lower than in
2011. If general economic conditions and/or investment market conditions deteriorate in 2012, the
Company could also experience further reduction in net investment income and/or significant realized
investment losses, including impairments. For further discussion of the Company’s investment portfolio,
see ‘‘Item 7—Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Investment Portfolio’’ in this report. For a discussion of the risks to our business during or
following a financial market disruption and risks to our investment portfolio, see the risk factors
entitled ‘‘During or following a period of financial market disruption or economic downturn, our
business could be materially and adversely affected’’ and ‘‘Our investment portfolio may suffer reduced
returns or material realized or unrealized losses’’ included in ‘‘Risk Factors’’ in Part I, Item 1A of this
report.
Capital Position. The Company believes it has a strong capital position and, as part of its ongoing
efforts to create shareholder value, expects to continue to return capital not needed to support its
business operations to its shareholders. In recent years, the Company has returned capital to its
shareholders, comprising dividends to common shareholders and common share repurchases, in
amounts that have exceeded its operating income. In 2012, the Company expects that the combination
of dividends to common shareholders and common share repurchases will likely not exceed operating
income. In addition, actual amounts of common share repurchases will also depend on a variety of
additional factors, including corporate and regulatory requirements, maintaining capital levels
commensurate with the Company’s existing ratings from independent rating agencies, share price,
funding of the Company’s qualified pension plan, strategic initiatives and other market conditions. For
information regarding the Company’s common share repurchases in 2011, see ‘‘Liquidity and Capital
Resources—Share Repurchases’’ in this report.
The Company had a net after-tax unrealized investment gain of $2.77 billion in its fixed maturity
investment portfolio at December 31, 2011. While the Company does not attempt to predict future
interest rate movements, a rising interest rate environment would reduce the market value of fixed
maturity investments and, therefore, reduce shareholders’ equity, and a declining interest rate
environment would have the opposite effects.
Many of the statements in this ‘‘Outlook’’ section are forward-looking statements, which are
subject to risks and uncertainties that are often difficult to predict and beyond the Company’s control.
Actual results could differ materially from those expressed or implied by such forward-looking
statements. Further, such forward-looking statements speak only as of the date of this report and the
Company undertakes no obligation to update them. See ‘‘—Forward Looking Statements.’’ For a
discussion of potential risks and uncertainties that could impact the Company’s results of operations or
financial position, see ‘‘Item 1A—Risk Factors’’ and ‘‘Item 7—Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Critical Accounting Estimates’’ in this report.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the short-
and long-term cash requirements of its business operations. The liquidity requirements of the
Company’s business have been met primarily by funds generated from operations, asset maturities and
income received on investments. Cash provided from these sources is used primarily for claims and
claim adjustment expense payments and operating expenses, and in recent years, for common share
repurchases. The timing and amount of catastrophe claims are inherently unpredictable. Such claims
increase liquidity requirements. The timing and amount of reinsurance recoveries may be affected by
reinsurer solvency and reinsurance coverage disputes. Additionally, the variability of asbestos-related
claim payments, as well as the volatility of potential judgments and settlements arising out of litigation,
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