Travelers 2005 Annual Report Download - page 36

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Asbestos and Environmental Claims
Asbestos and environmental claims are segregated from other claims and are handled separately by
the Company’s Special Liability Group, aseparate 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 POOLING ARRANGEMENTS
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. During 2005, the Company combined the previously separate
St. Paul Insurance Group and Travelers Property Casualty pools, forming the new St. Paul Travelers
Reinsurance Pool effective July 1, 2005, retroactive to January 1, 2005. Travelers Indemnity Company is
the lead company of the new pool, which includes 28 companies. The Company also merged Gulf
Insurance Company, the lead company of the former Gulf Insurance Group, into Travelers Indemnity
Company effective July 1, 2005. As of December 31, 2005, there were two intercompany pooling
arrangements: the St. Paul Travelers Reinsurance Pool and the Northland Pool.
RATINGS
Ratings are an important factor in settingthe 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 insetting interest rates and terms for
a company’s short and longterm borrowing needs. Agency ratings are not a recommendation to buy, sell or
hold any security, and they may be revised or withdrawn at any time by the rating organization. Each
agency’s rating should be evaluated independently of any other agency’s rating. 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.
The following rating agency actions were taken with respect to the Company in 2005 and 2006:
•On January 6, 2005, A.M. Best affirmed the financial strength rating of “A” of St. Paul Guarantee
Insurance Company and withdrew the financial strength rating of “A+” of Travelers Casualty and
Surety Company of Canada (assigned an NR-5, not formerly followed rating). Both ratings were
removed from under review with developing implications. St. Paul Guarantee Insurance Company
was assigned a rating outlook of stable. These actions followed the January 1, 2005 completion of
the amalgamation of St. PaulGuarantee Insurance Company and Travelers Casualty and Surety
Company of Canada.