Travelers 2013 Annual Report Download - page 134

the Company to price Quantum Auto 2.0 more competitively while generating an expected appropriate
return. The new product was launched in 18 states by December 31, 2013 and is expected to be
eventually offered in all but three states before the end of 2014. The Company currently intends that,
in approved states, all new accounts will be on the new product; in addition, the product will also be
available to agents at their discretion for existing accounts.
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 3.7 (3.9 excluding short-term
securities) at December 31, 2013. From time to time, the Company enters into short positions in U.S.
Treasury futures contracts 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, and real estate partnerships and joint ventures. 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,
the Company estimates that the impact of lower reinvestment yields on the Company’s fixed maturity
portfolio could, in 2014, result in approximately $25 million of lower after-tax net investment income
from that portfolio on a quarterly basis as compared to the corresponding prior year quarter. Given
recent general economic and investment market conditions, the Company expects investment income
from the non-fixed maturity portfolio in 2014 will be lower than in 2013. If general economic conditions
and/or investment market conditions deteriorate during 2014, the Company could also experience a
further reduction in net investment income and/or significant realized investment losses, including
impairments. Future actions or inactions of the United States government, such as a failure to increase
the government debt limit or a shutdown of the federal government, could increase the actual or
perceived risk that the U.S. may not ultimately pay its obligations when due and may disrupt financial
markets. The carrying value of the Company’s investments in U.S. Treasury securities and obligations of
U.S. government and government agencies and authorities was $2.32 billion at December 31, 2013.
Additionally, the carrying value of the Company’s investments in obligations of states, municipalities
and political subdivisions included pre-refunded bonds of $9.52 billion at December 31, 2013.
Pre-refunded bonds are bonds for which states or municipalities have established irrevocable trusts,
almost exclusively comprised of U.S. Treasury securities, which were created to satisfy their
responsibility for payments of principal and interest. For further discussion of the Company’s
investment portfolio, see ‘‘Investment Portfolio.’’ For a discussion of the risks to the Company’s
business during or following a financial market disruption and risks to the Company’s 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
‘‘Part I—Item 1A—Risk Factors.’’
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. The Company expects that, generally over time, the
combination of dividends to common shareholders and common share repurchases will likely not
exceed operating income. In addition, the timing and actual number of shares to be repurchased in the
future will depend on a variety of additional factors, including the Company’s financial position,
earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s
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