Travelers 2012 Annual Report Download - page 72

holding companies, including insurance companies, if they are designated by a two-thirds vote of a
Financial Stability Oversight Council (the Council) as ‘‘systemically important financial institutions’’
(SIFI). Based on rules and interpretive guidance adopted by the Council, we do not expect that we will
be designated as a SIFI. Nonetheless, it is possible that the Council may change its rules or
interpretations in the future and conclude that we are a SIFI. If we were designated as ‘‘systemically
important,’’ the Federal Reserve’s supervisory authority could include the ability to impose heightened
financial regulation and could impact requirements regarding our capital, liquidity and leverage as well
as our business and investment conduct. As a result of the foregoing, the Dodd-Frank Act, or other
additional federal regulation that is adopted in the future, could impose significant burdens on us,
including impacting the ways in which we conduct our business, increasing compliance costs and
duplicating state regulation, and could result in a competitive disadvantage, particularly relative to
other insurers that may not be subject to the same level of regulation.
Even if we are not subject to additional regulation by the federal government, significant financial
sector regulatory reform, including the Dodd-Frank Act, could have a significant impact on us. For
example, regulatory reform could have an unexpected impact on our rights as a creditor or on our
competitive position. In particular, the Dodd-Frank Act authorizes assessments to pay for the resolution
of systemically important financial institutions that have become insolvent. We (as a financial company
with more than $50 billion in assets) could be assessed, and, although any such assessment is required
to be risk weighted (i.e., riskier firms pay more), such costs could be material to us and are not
currently estimable.
Other potential changes in U.S. federal legislation, regulation and/or administrative policies,
including the potential repeal of the McCarran-Ferguson Act (which exempts insurance from most
federal regulation) and potential changes in federal taxation, could also significantly harm the insurance
industry, including us.
A downgrade in our claims-paying and financial strength ratings could adversely impact our
business volumes, adversely impact our ability to access the capital markets and increase our
borrowing costs. Claims-paying and financial strength ratings are important to an insurer’s competitive
position. Rating agencies periodically review insurers’ ratings and change their ratings criteria;
therefore, our current ratings may not be maintained in the future. A downgrade in one or more of our
ratings could negatively impact our business volumes because demand for certain of our products may
be reduced, particularly because many customers may require that we maintain minimum ratings to
enter into or renew business with us. Additionally, we may find it more difficult to access the capital
markets and we may incur higher borrowing costs. If significant losses, including, but not limited to,
those resulting from one or more major catastrophes, or significant reserve additions or significant
investment losses were to cause our capital position to deteriorate significantly, or if one or more rating
agencies substantially increase their capital requirements, we may need to raise equity capital in the
future (which we may not be able to do at a reasonable cost or at all, especially at a time of financial
market disruption) in order to maintain our ratings or limit the extent of a downgrade. A continued
trend of more frequent and severe weather-related catastrophes or a prolonged financial market
disruption or economic downturn may lead rating agencies to substantially increase their capital
requirements. See also ‘‘During or following a period of financial market disruption or economic
downturn, our business could be materially and adversely affected.’’ For further discussion about our
ratings, see, ‘‘Item 1—Business—Ratings.’’
The inability of our insurance subsidiaries to pay dividends to our holding company in sufficient
amounts would harm our ability to meet our obligations, pay future shareholder dividends or make
future share repurchases. Our holding company relies on dividends from our insurance subsidiaries to
meet our obligations for payment of interest and principal on outstanding debt, to pay dividends to
shareholders, to make contributions to our qualified domestic pension plan, to pay other corporate
expenses and to make share repurchases. The ability of our insurance subsidiaries to pay dividends to
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