Travelers 2012 Annual Report Download - page 129

would continue to be adversely impacted if significant catastrophe and other weather-related losses
were to occur during 2013.
For the last several years, the Company’s results have included significant amounts of net favorable
prior year reserve development, although at lower levels in some recent years, driven by better than
expected loss experience in all of the Company’s segments. The lower level of net favorable prior year
reserve development in a number of recent periods may have been in part due to the Company’s
reserve estimation process incorporating those factors that led to the higher levels of net favorable
prior year reserve development in previous years. If that trend continues, the better than expected loss
experience may continue at these recent lower levels, or even lower levels. However, given the inherent
uncertainty in estimating claims and claim adjustment expense reserves, loss experience could develop
such that the Company recognizes higher or lower levels of favorable prior year reserve development,
no favorable prior year reserve development or unfavorable prior year reserve development in future
periods. In addition, the ongoing review of prior year claims and claim adjustment expense reserves, or
other changes in current period circumstances, may result in the Company revising current year loss
estimates upward or downward in future periods of the current year.
In Business Insurance, the Company expects that the anticipated impact of increases in renewal
premium changes, partially offset by an expected modest increase in underlying losses, and assuming
weather patterns consistent with the Company’s expectations, will likely result in underlying
underwriting margins during 2013 that are higher than in 2012. In Financial, Professional &
International Insurance, the Company expects that the anticipated impact of lower underlying losses
due to recent underwriting actions in the segment and increases in renewal premium changes in
Bond & Financial Products will likely result in underlying underwriting margins during 2013 that are
modestly higher than in 2012. In Personal Insurance, the Company anticipates underlying underwriting
margins during 2013 that are broadly consistent with 2012. In Agency Automobile, the Company
anticipates an improvement in underlying underwriting margins during 2013 due to the anticipated
impact of continued positive renewal premium changes, partially offset by loss cost trends. In Agency
Homeowners and Other, the Company anticipates a decline in underlying underwriting margins during
2013, reflecting a return to non-catastrophe weather-related loss levels consistent with the Company’s
expectations. Also in Personal Insurance, the Company’s direct to consumer initiative, as discussed
above, while intended to enhance the Company’s long-term ability to compete successfully in a
consumer-driven marketplace, is expected to remain unprofitable for a number of years as this book of
business grows and matures.
Investment Portfolio. The Company expects to continue to focus its investment strategy on
maintaining a high-quality investment portfolio and a relatively short average effective duration. The
average effective duration of fixed maturities and short-term securities was 3.2 (3.4 excluding short-term
securities) at December 31, 2012. In 2013, subject to market conditions, the Company plans to increase
its short position in U.S. Treasury futures, which it uses to manage the duration of its fixed maturity
portfolio. The Company continually evaluates its investment alternatives and mix. Currently, the
majority of the Company’s investments are comprised of 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 Company also invests much smaller amounts in equity securities, real estate, private equity
limited partnerships, hedge funds, real estate partnerships, joint ventures, mortgage loans, venture
capital (through direct ownership and limited partnerships) and trading securities. These investment
classes have the potential for higher returns but also the potential for higher degrees of risk, including
less stable rates of return and less liquidity.
Net investment income is a material contributor to the Company’s results of operations. Interest
rates remain at very low levels by historical standards. Based on the current interest rate environment,
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