Travelers 2012 Annual Report Download - page 63

may be increased by the healthcare reform legislation. The estimation of claims and claim adjustment
expense reserves may also be more difficult during times of adverse or uncertain economic conditions
due to unexpected changes in behavior of claimants and policyholders, including an increase in
fraudulent reporting of exposures and/or losses, reduced maintenance of insured properties or increased
frequency of small claims or delays in the reporting of claims.
We continually refine our claims and claim adjustment expense reserve estimates in a regular,
ongoing process as historical loss experience develops, additional claims are reported and settled and
the legal, regulatory and economic environment evolves. Business judgment is applied throughout the
process, including the application of various individual experiences and expertise to multiple sets of
data and analyses. Different experts may choose different assumptions when faced with material
uncertainty, based on their individual backgrounds, professional experiences and areas of focus. Hence,
such experts may at times produce estimates materially different from each other. This risk may be
exacerbated in the context of an acquisition. Experts providing input to the various estimates and
underlying assumptions include actuaries, underwriters, claim personnel and lawyers, as well as other
members of management. Therefore, management may have to consider varying individual viewpoints
as part of its estimation of claims and claim adjustment expense reserves.
We attempt to consider all significant facts and circumstances known at the time claims and claim
adjustment expense reserves are established or reviewed. Due to the inherent uncertainty underlying
claims and claim adjustment expense reserve estimates, the final resolution of the estimated liability for
claims and claim adjustment expenses will likely be higher or lower than the related claims and claim
adjustment expense reserves at the reporting date. Therefore, actual paid losses in the future may yield
a materially different amount than is currently reserved.
Because of the uncertainties set forth above, additional liabilities resulting from one insured event,
or an accumulation of insured events, may exceed the current related reserves. In addition, our
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 materially and
adversely affect our results of operations and/or our financial position.
For a discussion of claims and claim adjustment expense reserves by product line, including
examples of common factors that can affect required reserves, see ‘‘Item 7—Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates—Claims
and Claim Adjustment Expense Reserves.’’
Our investment portfolio may suffer reduced returns or material realized or unrealized losses.
Investment returns are an important part of our overall profitability. Fixed maturity and short-term
investments comprised approximately 93% of the carrying value of our investment portfolio as of
December 31, 2012. Changes in interest rates caused by inflation or other factors (inclusive of credit
spreads) affect the carrying value of our fixed maturity investments and returns on our fixed maturity
and short-term investments. A decline in interest rates reduces the returns available on short-term
investments and new fixed maturity investments (including those purchased to re-invest maturities from
the existing portfolio), thereby negatively impacting our net investment income, while rising interest
rates reduce the market value of existing fixed maturity investments. Interest rates in recent periods
have been at or near historically low levels, and it is possible that rates may remain at low levels for a
prolonged period. The value of our fixed maturity and short-term investments is subject to the risk that
certain investments may default or become impaired due to a deterioration in the financial condition of
one or more issuers of the securities held in our portfolio, or due to a deterioration in the financial
condition of an insurer that guarantees an issuer’s payments of such investments. Such defaults and
impairments could reduce our net investment income and result in realized investment losses. During
an economic downturn, fixed maturity and short-term investments could be subject to a higher risk of
default.
51