Travelers 2004 Annual Report Download - page 35

Asbestos and Environmental Claims
Asbestos and environmental claims are segregated from other claims and are handled separately by the
Company’s Special Liability Group, a separate unit staffed by dedicated legal, claim, finance and engineering
professionals. For additional information on asbestos and environmental claims, see “Item 7—Management’s
Discussion and Analysis of Financial Conditions and Results of Operations.”
INTERCOMPANY REINSURANCE
Most of the Company’s insurance subsidiaries are members of intercompany property and casualty
reinsurance pooling arrangements. Pooling arrangements permit the participating companies to rely on the
capacity of the entire pool’s capital and surplus rather than just on its own capital and surplus. Under such
arrangements, the members share substantially all insurance business that is written, and allocate the combined
premiums, losses and expenses. As of December 31, 2004, there were three intercompany pooling arrangements:
the Travelers Property Casualty pool, the St. Paul Insurance Group pool, which was acquired in the merger, and
the Northland Pool. Pools permit the participating companies to rely on the capacity of the entire pool’s capital
and surplus rather than just on its own capital and surplus. Travelers Casualty and Surety Company of America
(Travelers C&S of America), which is dedicated to the Bond business, does not participate in any of the pools.
The Personal single state companies and Commercial Guaranty Casualty Insurance Company (see Ratings
below) are also not included in any of the pools. In 2004, the former Gulf intercompany pooling arrangement was
amended, thereby eliminating Gulf Insurance Company’s retrocession to the other former pool participants.
RATINGS
Ratings are an important factor in setting the Company’s competitive position in the insurance marketplace.
The Company receives ratings from the following major rating agencies: A.M. Best Company (A.M. Best), Fitch
Ratings (Fitch), Moody’s Investors Service (Moody’s) and Standard & Poor’s Corp. (S&P). Rating agencies
typically issue two types of ratings: claims-paying (or financial strength) ratings which assess an insurer’s ability
to meet its financial obligations to policyholders and debt ratings which assess a company’s prospects for
repaying its debts and assist lenders in setting interest rates and terms for a company’s short and long term
borrowing needs. The system and the number of rating categories can vary widely from rating agency to rating
agency. Customers usually focus on claims-paying ratings, while creditors focus on debt ratings. Investors use
both to evaluate a company’s overall financial strength. The ratings issued on the Company or its subsidiaries by
any of these agencies are announced publicly and are available on the Company’s website and from the agencies.
The Company’s insurance operations could be negatively impacted by a downgrade in one or more of the
Company’s financial strength ratings. If this were to occur, there could be a reduced demand for certain products
in certain markets. Additionally, the Company’s ability to access the capital markets could be impacted and
higher borrowing costs may be incurred.
In January 2004, A.M. Best placed the “A” financial strength rating of Gulf, a then majority-owned
subsidiary of the Company, under review with developing implications, and S&P indicated that its A+
counterparty credit and financial strength ratings on members of the Gulf Insurance Group are remaining on
CreditWatch with negative implications, pending the completion of a support arrangement between The
Travelers Indemnity Company and Gulf.
Also in January 2004, A.M. Best downgraded the financial strength rating of the Northland Pool from A+ to
A, removed the rating from under review and assigned a stable outlook.
23