Travelers 2014 Annual Report Download - page 124

Table of Contents
other changes in current period circumstances, may result in the Company revising current year loss estimates upward or downward in future
periods of the current year.
It is possible that the steps taken by the federal government, particularly the Federal Reserve, to stabilize financial markets and improve
economic conditions could lead to higher inflation than the Company had anticipated, which could in turn lead to an increase in the Company's
loss costs. The impact of inflation on loss costs could be more pronounced for those lines of business that are considered "long tail", such as
general liability, as they require a relatively long period of time to finalize and settle claims for a given accident year. For a further discussion, see
"Part I—
Item 1A —Risk Factors—If actual claims exceed our claims and claim adjustment expense reserves, or if changes in the estimated level of
claims and claim adjustment expense reserves are necessary, our financial results could be materially and adversely affected."
In Business and International Insurance, the Company expects underlying underwriting margins during 2015 that will be modestly higher than
in 2014. In making this comparison, the Company has assumed that non
- catastrophe weather - related losses and what the Company defines as large
losses will be at lower levels than what the Company experienced in 2014, particularly in the second half of that year.
In Bond & Specialty Insurance, the Company expects underlying underwriting margins during 2015 that will be broadly consistent with those
in 2014.
In Personal Insurance, the Company anticipates underlying underwriting margins in 2015 will be lower than in 2014. In Agency Automobile, the
Company expects underlying underwriting margins in 2015 that will be slightly lower than in 2014 due to the impact of an expected higher mix of
new business versus renewal business. In Agency Homeowners and Other, the Company anticipates underlying underwriting margins in 2015 that
will be lower than in 2014, reflecting normalized levels of non
- catastrophe weather - related losses. Also in Personal Insurance, the Company's direct
to consumer initiative, the distribution channel that the Company launched in 2009, while intended to enhance the Company's long
- term ability to
compete successfully in a consumer
- driven marketplace, is expected to remain modest with respect to premium volume and remain unprofitable for a
number of years as this book of business grows and matures.
The Agency Automobile line of business has been negatively impacted by various factors, including the use of price comparison technology
by agents and brokers as discussed above. The Company's actions in response to these factors have included, among other things, the reduction
of certain claim adjustment and other insurance expenses, with the majority of the impact in the Agency Automobile line of business. At
December 31, 2014, these actions to reduce costs have resulted in an expected annual decrease of $140 million in pre
- tax expenses in 2015 when
compared with expense levels prior to their implementation. Additionally, in the fourth quarter of 2013, the Company launched its newest private
passenger automobile product, Quantum Auto 2.0. This product, in addition to incorporating the cost savings described above, has a lower base
commission rate than the Company's existing Quantum Auto 1.0 product. These changes in cost structure enabled the Company to price Quantum
Auto 2.0 more competitively while maintaining expected returns at appropriate levels. By December 31, 2014, the Company offered Quantum Auto
2.0 in approximately 90% of the states where it plans to offer the product, and the Company currently expects that, by the end of 2015, it will offer
the product in all of those states. The Company intends that, in approved states, all new accounts will be written using Quantum Auto 2.0. In
addition, Quantum Auto 2.0 is available to agents at their discretion for existing accounts.
Investment Portfolio. The Company expects to continue to focus its investment strategy on maintaining a high
- quality investment portfolio
and a relatively short average effective duration. The average effective duration of fixed maturities and short
- term securities was 3.5 (3.7 excluding
short
- term securities) at December 31, 2014. From time to time, the Company enters into short positions in
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