Travelers 2004 Annual Report Download - page 103

with other distributions made within the preceding twelve months, exceeds the greater of 10% of the insurer’s
surplus as of the preceding December 31, or the insurer’s net income for the twelve-month period ending the
preceding December 31, in each case determined in accordance with statutory accounting practices. (In the case
of Minnesota, net income excludes realized investment gains for purposes of the calculation of the 10%
threshold). This declaration or payment is further limited by adjusted unassigned surplus, as determined in
accordance with statutory accounting practices.
The insurance holding company laws of other states in which the Company’s subsidiaries are domiciled
generally contain similar, although in some instances somewhat more restrictive, limitations on the payment of
dividends. A maximum of $2.61 billion is available by the end of 2005 for such dividends without prior approval
of the Connecticut Insurance Department for Connecticut-domiciled subsidiaries and the Minnesota Department
of Commerce for Minnesota-domiciled subsidiaries. The Company received $2.09 billion of dividends from its
insurance subsidiaries in 2004.
Risk-Based Capital
The NAIC adopted RBC requirements for property casualty companies to be used as minimum capital
requirements by the NAIC and states to identify companies that merit further regulatory action. The formulas
have not been designed to differentiate among adequately capitalized companies that operate with levels of
capital higher than RBC requirements. Therefore, it is inappropriate and ineffective to use the formulas to rate or
to rank these companies. At December 31, 2004, all of the Company’s insurance subsidiaries had adjusted capital
in excess of amounts requiring any company or regulatory action.
Off-Balance Sheet Arrangements
The Company has entered into certain contingent obligations for guarantees related to agency loans and
letters of credit, issuance of debt securities, third party loans related to venture capital investments and various
indemnifications related to the sale of business entities to third parties. See note 17 to the Company’s
consolidated financial statements. The Company does not expect these arrangements to have a material effect on
the Company’s financial condition, changes in financial condition, revenues and expenses, results of operations,
liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING ESTIMATES
The Company considers its most significant accounting estimates to be those applied to claim and claim
adjustment expense reserves and related reinsurance recoverables, and investment impairments.
Claim and Claim Adjustment Expense Reserves
Claim and claim adjustment expense reserves (loss reserves) represent management’s estimate of ultimate
unpaid costs of losses and loss adjustment expenses for claims that have been reported and claims that have been
incurred but not yet reported. Loss reserves do not represent an exact calculation of liability, but instead represent
management estimates, generally utilizing actuarial expertise and projection techniques, at a given accounting
date. These loss reserve estimates are expectations of what the ultimate settlement and administration of claims
will cost upon final resolution in the future, based on the Company’s assessment of facts and circumstances then
known, review of historical settlement patterns, estimates of trends in claims severity and frequency, expected
interpretations of legal theories of liability and other factors. In establishing reserves, the Company also takes
into account estimated recoveries, reinsurance, salvage and subrogation. The reserves are reviewed regularly by a
qualified actuary employed by the Company.
The process of estimating loss reserves involves a high degree of judgment and is subject to a number of
variables. These variables can be affected by both internal and external events, such as changes in claims
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