Travelers 2012 Annual Report Download - page 40

Rating Agency Actions
The following rating agency actions were taken with respect to the Company from February 16,
2012 (the date on which the Company filed its Form 10-K for the year ended December 31, 2011),
through February 19, 2013:
• On May 4, 2012, Moody’s affirmed all ratings of the Company. The outlook for all ratings is
stable.
• On May 10, 2012, A.M. Best affirmed all ratings of the Company. The outlook for all ratings is
stable.
• On June 15, 2012, Fitch affirmed all ratings of the Company. The outlook for all ratings is
stable.
• On October 3, 2012, S&P affirmed its ‘‘3’’ Lloyd’s Syndicate assessment on Travelers Syndicate
Management—Syndicate 5000, and subsequently withdrew the assessment at the Company’s
request.
• On November 21, 2012, A.M. Best affirmed the financial strength rating of Travelers Insurance
Company Limited. The outlook is stable.
• On December 19, 2012, Fitch affirmed all ratings of the Company. The outlook for all ratings is
stable.
• On January 24, 2013, S&P assigned its ‘‘AA’’ financial strength rating to Travelers Insurance
Company of Canada. The outlook is stable.
INVESTMENT OPERATIONS
The 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 Company closely monitors the duration of its fixed maturity
investments, and the Company’s investment purchases and sales are executed with the objective of
having adequate funds available to satisfy its insurance and debt obligations. Generally, the expected
principal and interest payments produced by the Company’s fixed maturity portfolio adequately fund
the estimated runoff of the Company’s insurance reserves. The Company’s management of the duration
of the fixed maturity investment portfolio, including its use of Treasury futures, has produced a
duration that is less than the estimated duration of the Company’s net insurance liabilities. In recent
periods, the estimated average effective duration of the Company’s portfolio of fixed maturity and
short-term security investments has declined, primarily due to the impact of declining market yields and
tightening investment spreads on existing holdings of mortgage-backed securities (both of which impact
the assumptions related to optional pre-payments), an increase in pre-refunded municipal bonds and
general portfolio management decisions. 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 has also recently experienced an increase in the estimated average
duration of its net insurance liabilities, primarily reflecting the impact of declining market interest rates
and, to a lesser degree, an increase in the proportion of workers’ compensation insurance reserves as a
component of total insurance reserves. The substantial amount by which the fair value of the fixed
maturity portfolio exceeds the value of the net insurance liabilities, as well as the positive cash flow
from newly sold policies and the large amount of high quality liquid bonds, contributes to the
Company’s ability to fund claim payments without having to sell illiquid assets or access credit facilities.
The Company also invests much smaller amounts in equity securities, real estate, private equity
limited partnerships, hedge funds, real estate partnerships, real estate and insurance 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 involve varying
degrees of risk, including less stable rates of return and less liquidity.
See note 3 of notes to the Company’s consolidated financial statements for additional information
regarding the Company’s investment portfolio.
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