Travelers 2006 Annual Report Download - page 43

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investments, and investment purchases and sales are executed with the objective of having adequate funds
available to satisfy the Company’s insurance and debt obligations. The Company’s management of the
duration of the fixed income investment portfolio generally produces a duration that modestly exceeds the
duration of the Company’s net insurance liabilities.
The primary goals of the Company’s asset liability manage ment process are to satisfy the insurance
liabilities, manage the interest rate risk embedded in those insurance liabilities, and maintain sufficient
liquidity to cover fluctuations in projected liability cash flows. Generally, the expected principal and
interest payments produced by the Company’s fixed income portfolio adequately fund the estimated runoff
of the Company’s insurance reserves. Although this is not an exact cash flow match in each period, the
substantial degree by which the market value of the fixed income portfolio exceeds the present value of the
net insurance liabilities, plus the positive cash flow from newly sold policies and the large amount of high
quality liquid bonds provides assurance of the Company’s ability to fund the payment of claims without
having to sell illiquid assets or access credit facilities.
The Company also invests much smaller amounts in equity securities, venture capital and real estate.
These investment classes have the potential for higher returns but also involve varyingdegrees of risk,
including less stable rates of return and less liquidity.
See note 3 of notes to the Company’s consolidated financial statements for additional information
regarding the Company’s investment portfolio.
DERIVATIVES
See notes 1 and 14 of notes to the Company’s consolidated financial statements for a discussion of the
policies and transactions related to the Company’s derivative financial instruments.
REGULATION
State and Federal Regulation
TRV’s insurance subsidiaries are subject to regulation in the various states and jurisdictions in which
they transact business. The extent of regulation varies, but generally derives from statutes that delegate
regulatory, supervisory and administrative authority to a department of insurance ineach state. The
regulation, supervision and administration relate, among other things, to standards of solvency that must
be met and maintained, the licensing of insurers and their agents, the nature of and limitations on
investments, premium rates, restrictions on thesize of risks that may be insured under a single policy,
reserves and provisions for unearned premiums, losses and other obligations, deposits of securities for the
benefit of policyholders, approval of policy forms and the regulation of market conduct, including the use
of credit information in underwriting as well as other underwriting and claims practices. In addition, many
states have enacted variations of competitive ratemaking laws, which allow insurers to set certain premium
rates for certain classes of insurance without having to obtain the prior approval of the state insurance
department. State insurance departments also conduct periodic examinations of the financial condition
and market conduct of insurance companies and require the filing of financial and other reports on a
quarterly andannual basis. TRV’s insurance subsidiaries are collectively licensed totransact insurance
business in all states, the District of Columbia, Guam, Puerto Rico, Bermuda and the U.S. VirginIslands.
Agent and Broker Compensation
As part of ongoing, industry-wide investigations, the Company has received subpoenas and written
requests for information from government agencies and authorities, including 21 states and the SEC. The
areas of inquiry addressed to the Company include the method by which brokers and agents are
compensated. The Company is cooperating with these subpoenas and requests for information. As
described in more detail in “Part I, Item 3—Legal Proceedings” herein, in August 2006, the Company