Travelers 2013 Annual Report Download - page 39

(S&P). Rating agencies typically issue two types of ratings for insurance companies: claims-paying (or
financial strength) ratings which reflect the rating agency’s assessment of an insurer’s ability to meet its
financial obligations to policyholders and debt ratings which reflect the rating agency’s assessment of a
company’s prospects for repaying its debts and are considered by lenders in connection with the setting
of interest rates and terms for a company’s short- and long-term borrowings. Agency ratings are not a
recommendation to buy, sell or hold any security, and they may be revised or withdrawn at any time by
the rating agency. Each agency’s rating should be evaluated independently of any other agency’s rating.
The system and the number of rating categories can vary widely from rating agency to rating agency.
Customers usually focus on claims-paying ratings, while creditors focus on debt ratings. Investors use
both to evaluate a company’s overall financial strength. The ratings issued on the Company or its
subsidiaries by any of these agencies are announced publicly and are available on the Company’s
website and from the agencies.
A downgrade in one or more of the Company’s claims-paying ratings could negatively impact the
Company’s business volumes and competitive position because demand for certain of its products may
be reduced, particularly because some customers require that the Company maintain minimum ratings
to enter into or renew business with it.
Additionally, a downgrade in one or more of the Company’s debt ratings could adversely impact
the Company’s ability to access the capital markets and other sources of funds, including in the
syndicated bank loan market, and/or result in higher financing costs. For example, downgrades in the
Company’s debt ratings could result in higher interest expense under the Company’s revolving credit
agreement (under which the cost of borrowing could range from LIBOR plus 87.5 basis points to
LIBOR plus 150 basis points, depending on the Company’s debt ratings), the Company’s commercial
paper program, or in the event that the Company were to access the capital markets by issuing debt or
similar types of securities. See ‘‘Item 7—Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Liquidity and Capital Resources’’ for a discussion of the Company’s
revolving credit agreement and commercial paper program. The Company considers the level of
increased cash funding requirements in the event of a ratings downgrade as part of the evaluation of
the Company’s liquidity requirements. The Company currently believes that a one- to two-notch
downgrade in its debt ratings would not result in a material increase in interest expense under its
existing credit agreement and commercial paper programs. In addition, the Company considers the
impact of a ratings downgrade as part of the evaluation of its common share repurchases.
Claims—Paying Ratings
The following table summarizes the current claims-paying (or financial strength) ratings of the
Travelers Reinsurance Pool, Travelers C&S Co. of America, Travelers Personal single state companies,
Travelers C&S Co. of Europe, Ltd., Travelers Insurance Company of Canada and Travelers Insurance
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