Travelers 2013 Annual Report Download - page 65

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, 2013. 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, thereby negatively impacting our
book value. During 2013, the net unrealized gain in our fixed income portfolio declined from
$4.56 billion to $1.76 billion as interest rates increased. It is possible that further increases in interest
rates (inclusive of credit spreads) could result in further declines in that unrealized gain position or
even result in an unrealized loss, thereby adversely impacting our book value. Notwithstanding
increases in interest rates in 2013, interest rates in recent years have been and remain at very low levels
relative to historical experience, 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 also 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.
Our fixed maturity investment portfolio is invested, in substantial part, in obligations of states,
municipalities and political subdivisions (collectively referred to as the municipal bond portfolio).
Notwithstanding the relatively low historical rates of default on many of these obligations and
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