Travelers 2013 Annual Report Download - page 66

notwithstanding that we typically seek to invest in high-credit-quality securities (including those with
structural protections such as being secured by dedicated or pledged sources of revenue), our municipal
bond portfolio could be subject to default or impairment. In particular:
• The prolonged economic downturn that began in 2008, and the limited economic recovery that
has followed, has resulted in many states and local governments operating under deficits or
projected deficits. The severity and duration of these deficits could have an adverse impact on
the collectability and valuation of our municipal bond portfolio. These deficits may be
exacerbated by the impact of unfunded pension plan obligations and other postretirement
obligations or by declining municipal tax bases and revenues in times of financial stress.
• Some issuers may be unwilling to increase tax rates, or to reduce spending, to fund interest or
principal payments on their municipal bonds, or may be unable to access the municipal bond
market to fund such payments. The risk of widespread defaults may increase if some issuers
voluntarily choose to default, instead of implementing difficult fiscal measures, and the actual or
perceived consequences (such as reduced access to capital markets) are less severe than
expected.
• The risk of widespread defaults may also increase if there are changes in legislation that permit
states, municipalities and political subdivisions to file for bankruptcy protection where they were
not permitted before. In addition, the collectability and valuation of municipal bonds may be
adversely affected if there are judicial interpretations in a bankruptcy or other proceeding that
lessen the value of structural protections. For example, debtors may challenge the effectiveness
of structural protections thought to be provided by municipal securities backed by a dedicated
source of revenue. The collectability and valuation may also be adversely affected if there are
judicial interpretations in a bankruptcy or other proceeding that question the payment priority of
municipal bonds.
A substantial portion of our fixed maturity portfolio will mature within the next few years.
Approximately 40% of the fixed maturity portfolio is expected to mature over the next three years (this
includes the early redemption of bonds, assuming interest rates (including credit spreads) do not rise
significantly by applicable call dates). For a schedule of the contractual maturities of our fixed maturity
portfolio by year for the next several years, see ‘‘Item 7—Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Investment Portfolio.’’ Of that maturing portfolio, a
substantial amount includes municipal bonds that have been pre-refunded with U.S. treasury securities.
As a result, even if our investment strategy does not significantly change over the next few years, the
overall yield on and composition of our portfolio could be meaningfully impacted by the types of
investments available for reinvestment with the proceeds of matured bonds. For example, if yields
remain low when we reinvest such proceeds, our future net investment income would be adversely
affected. In addition, depending on the specific bonds available for purchase at the time of
re-investment, the mix of specific issuers in our fixed-income and municipal bond portfolio will change.
As a result, the overall credit profile and other aspects of our portfolio could be adversely impacted.
Also, a decrease in municipal bonds that have been pre-refunded with U.S. Treasury securities could
reduce the credit quality of our portfolio.
Our portfolio has benefited from tax exemptions and certain other tax laws, including, but not
limited to, those governing dividends-received deductions and tax credits (such as foreign tax credits).
Changes in these laws could adversely impact the value of our investment portfolio. See ‘‘Changes in
U.S. tax laws or in the tax laws of other jurisdictions in which we operate could adversely impact us’’
below.
Our investment portfolio includes: residential mortgage-backed securities; collateralized mortgage
obligations; pass-through securities and asset-backed securities collateralized by sub-prime mortgages;
commercial mortgage-backed securities; and wholly-owned real estate and real estate partnerships, all
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