Travelers 2005 Annual Report Download - page 119

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requires notice to, and approval by, the state insurance commissioner for the declaration or payment of
any dividend, that together withother distributions made within the preceding twelve months, exceeds the
greater of 10% of the insurer’s capital and 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 and by state regulation. 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$2.56 billion is available by the end of 2006 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 $968 million of dividends from its insurance subsidiaries in2005.
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, 2005, 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 accountingestimates 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.