Travelers 2006 Annual Report Download - page 193

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
181
3. INVESTMENTS (Continued)
Changes in net unrealized gains (losses) on investment securities that are included as a separate
component of accumulated other changes in equity from nonowner sources were as follows:
(at and for the year ended December 31, in millions)2006 2005 2004
Change in net unrealized investment gains (losses)
Fixed maturities....................................................... $55 $ ( 885 ) $ (315)
Equity securities....................................................... (4 )(31 ) 11
Venture capital........................................................ 19 78 11
Other investments(excluding venture capital) ............................. 125 (14 ) 3
195 (852 ) (290)
Related taxes.......................................................... 69 (311 ) (98)
Change in net unrealized gains (losses) on investment securities ........... 126 (541 ) (192)
Balance, beginning of year.............................................. 327 868 1,060
Balance, end of year ................................................. $453
$ 327 $ 868
4. REINSURANCE
The Company’s consolidated financial statements reflect the effects of assumed and ceded
reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that
other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance
risks (along with the related written and earned premiums) the Company has underwritten to other
insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to
protect the Company, at a cost, from volatility in excess of the amount itis prepared to accept.
Reinsurance is placed on both a quota-share andexcess of loss basis. Cededreinsurance arrangements do
not discharge the Company as the primary insurer, except for cases involving a novation.
The Company evaluates and monitors the financial condition of its reinsurers under voluntary
reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies. In
addition, in the ordinary course of business, the Company may become involved in coverage disputes with
its reinsurers. Some of these disputes could result in lawsuits and arbitrations brought by or against the
reinsurers to determine the Company’s rights and obligations under the various reinsurance agreements.
The Company employs dedicated specialists and strategies to manage reinsurance collections and disputes.
The Company is also required to participate in various involuntary reinsurance arrangements through
assumed reinsurance, principally with regard to residual market mechanisms in workers’ compensation.
The Company provides services for several of these involuntary arrangements (“mandatory pools and
associations”) under which it writes such residual market business directly, then cedes 100% of this
business to the mandatory pool. Such servicing arrangements are arranged to protect the Company from
any credit risk, as any cededbalances are jointly backed by all the pool members.
The Company assumed 100% of the workers’ compensation premiums previously written by the
Accident Department of its former affiliate, The Travelers Insurance Company.
Certain of the assumed reinsurance contracts that the Company has entered into with non-affiliated
companies on an excess of loss basis do not transfer insurance risk. These contracts, which totaled