Travelers 2013 Annual Report Download - page 41

• On May 30, 2013, A.M. Best affirmed all ratings of the Company. The outlook for all ratings of
the Company was revised to positive from stable (except the outlooks for The Premier Insurance
Company of Massachusetts, First Trenton Indemnity Company and First Florida Auto and Home
Insurance Company, all of which remained stable).
• On June 10, 2013, Fitch affirmed all ratings of the Company. The outlook for all ratings is
stable.
• On October 1, 2013, A.M. Best withdrew its ‘‘A’’ financial strength rating and ‘‘a’’ issuer credit
rating for First Trenton Indemnity Company (First Trenton) as a result of First Trenton’s merger
into an affiliate company, The Travelers Indemnity Company, a member of the Travelers
Reinsurance Pool.
• On November 15, 2013, A.M. Best affirmed the financial strength rating of ‘‘A’’ for Travelers
Insurance Company Limited. The outlook for this rating is stable.
• On January 16, 2014, Fitch affirmed all ratings of the Company. The outlook for all ratings 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 at times, has produced a
duration that is less than the estimated duration of the Company’s net insurance liabilities. In 2013, the
estimated average effective duration of the Company’s portfolio of fixed maturity and short-term
security investments increased, primarily reflecting the impact of an increase in interest rates during the
year. By the end of the second quarter of 2013, based upon the outlook for interest rates as compared
to the carrying cost of its short positions in U.S. Treasury futures, the Company closed all of these
positions, which it had used to manage the duration of its fixed maturity portfolio to reduce the
Company’s exposure to a decrease in its book value resulting from an increase in interest rates. During
the second half of 2013, the Company did not enter into any U.S. Treasury futures contracts. 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, and real estate partnerships and joint ventures. 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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