Travelers 2015 Annual Report Download - page 53

may increase or claim frequency and/or severity may otherwise be adversely impacted. The estimation
of claims and claim adjustment expense reserves may also be more difficult during times of adverse or
uncertain economic conditions due to unexpected changes in behavior of claimants and policyholders,
including an increase in fraudulent reporting of exposures and/or losses, reduced maintenance of
insured properties, increased frequency of small claims or delays in the reporting of claims.
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, 2015. 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 2015, the net pretax unrealized gain in our fixed income portfolio decreased from
$2.67 billion to $1.78 billion as interest rates increased. It is possible that future increases in interest
rates (inclusive of credit spreads) could result in a further decline in that unrealized gain position or 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
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