Travelers 2014 Annual Report Download - page 56

Table of Contents
We continually refine our claims and claim adjustment expense reserve estimates in a regular, ongoing process as historical loss experience
develops, additional claims are reported and settled, and the legal, regulatory and economic environment evolves. Business judgment is applied
throughout the 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, 2014. 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 2014, the net unrealized gain in our fixed income portfolio increased from $1.76 billion to $2.67 billion
as interest rates decreased. It is possible that future increases in interest rates (inclusive of credit spreads) could result in a decline in that
unrealized gain position or even result in an unrealized loss, thereby adversely impacting our book value. 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. Rapid changes in commodity prices, such as a significant decline in oil and gas prices, could also subject certain of our
investments to a higher risk of default.
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