Travelers 2013 Annual Report Download - page 75

financial institutions’’ (SIFI). The FSOC, chaired by the Secretary of the Treasury, is a group of federal
financial regulators, a state insurance regulator and an independent insurance expert. The FSOC
finalized its first set of SIFI designations in July and September 2013 and, based upon the FSOC’s
rules and interpretive guidance, the Company was not included in the designated companies.
Nonetheless, it is possible that the Council may change its rules or interpretations in the future and
conclude that we are a SIFI. If we were designated as a SIFI, the Federal Reserve’s supervisory
authority could include the ability to impose heightened financial regulation and could impact
requirements regarding our capital, liquidity and leverage as well as our business and investment
conduct. As a result of the foregoing, the Dodd-Frank Act, or other additional federal regulation that is
adopted in the future, could impose significant burdens on us, including impacting the ways in which
we conduct our business, increasing compliance costs and duplicating state regulation, and could result
in a competitive disadvantage, particularly relative to other insurers that may not be subject to the
same level of regulation. Changes in the U.S. regulatory framework could impact the overall
competitive environment by imposing additional burdens on us and allowing other competitors not
subject to these same burdens to enter or expand their insurance businesses.
Even if we are not subject to additional regulation by the federal government, significant financial
sector regulatory reform, including the Dodd-Frank Act, could have a significant impact on us. For
example, regulatory reform could have an unexpected impact on our rights as a creditor or on our
competitive position. In particular, the Dodd-Frank Act authorizes assessments to pay for the resolution
of systemically important financial institutions that have become insolvent. We (as a financial company
with more than $50 billion in assets) could be assessed, and, although any such assessment is required
to be risk weighted (i.e., riskier firms pay more), such costs could be material to us and are not
currently estimable.
Other potential changes in U.S. federal legislation, regulation and/or administrative policies,
including the potential repeal of the McCarran-Ferguson Act (which exempts insurance from most
federal regulation) and potential changes in federal taxation, could also significantly harm the insurance
industry, including us.
A downgrade in our claims-paying and financial strength ratings could adversely impact our
business volumes, adversely impact our ability to access the capital markets and increase our
borrowing costs. Claims-paying and financial strength ratings are important to an insurer’s competitive
position. Rating agencies periodically review insurers’ ratings and change their ratings criteria;
therefore, our current ratings may not be maintained in the future. A downgrade in one or more of our
ratings could negatively impact our business volumes because demand for certain of our products may
be reduced, particularly because many customers may require that we maintain minimum ratings to
enter into or renew business with us. Additionally, we may find it more difficult to access the capital
markets and we may incur higher borrowing costs. If significant losses, including, but not limited to,
those resulting from one or more major catastrophes, or significant reserve additions or significant
investment losses were to cause our capital position to deteriorate significantly, or if one or more rating
agencies substantially increase their capital requirements, we may need to raise equity capital in the
future (which we may not be able to do at a reasonable cost or at all, especially at a time of financial
market disruption) in order to maintain our ratings or limit the extent of a downgrade. A continued
trend of more frequent and severe weather-related catastrophes or a prolonged financial market
disruption or economic downturn may lead rating agencies to substantially increase their capital
requirements. See also ‘‘During or following a period of financial market disruption or economic
downturn, our business could be materially and adversely affected.’’ For further discussion about our
ratings, see, ‘‘Item 1—Business—Ratings.’’
The inability of our insurance subsidiaries to pay dividends to our holding company in sufficient
amounts would harm our ability to meet our obligations, pay future shareholder dividends or make
future share repurchases. Our holding company relies on dividends from our U.S. insurance
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