Travelers 2014 Annual Report Download - page 57

Table of Contents
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 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.
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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