Travelers 2006 Annual Report Download - page 46

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Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual
ranges of four or more of the ratios.
Based on preliminary 2006 IRIS ratios calculated by the Company, Discover Reinsurance Company
had results outside the normal range for two of the IRIS ratios, due to reserve strengthening actions taken
in 2005. In2005, most of the Company’s insurance subsidiaries in theTravelers Reinsurance pool had
results outside the normal range for one of the IRIS ratios, due to reserve strengthening actions that
occurred in 2004 and the combining of the two pools that occurred in 2005. In addition, Discover
Reinsurance Company had results outside the normal range for three of the IRIS ratios, due to reserve
strengthening actions in 2005 and 2004.
Management does not anticipate regulatory action as a result of the 2006 IRIS ratio results. In all
instances in prior years, regulators have been satisfied upon follow-up that no regulatory action was
required. It is possible that similar results could occur in the future. Nostate insurance department has
taken any regulatory action with respect to the IRIS ratios of any of TRV’s insurance subsidiaries for the
yearended December 31, 2005.
Risk-Based Capital (RBC) Requirements
The NAIC has an RBC requirement for most property and casualty insurance companies. The RBC
requirement determines minimum capital requirements and is intended to raise the level of protection for
policyholder obligations. Under laws adopted by individual states, insurers having total adjusted capital
less than that required by the RBC calculation will be subject to varying degrees of regulatory action,
depending on the level of capital inadequacy.
The formulas have not been designed to differentiate among adequately capitalized companies that
operate with higher levels of capital. Therefore, it is inappropriate and ineffective to use the formulas to
rate or to rank these companies. At December 31, 2006, all of TRV’s insurance subsidiaries had total
adjusted capital in excess of the RBC requirement.
Investment Regulation
Insurance company investments must comply with applicable laws and regulations which prescribe the
kind, quality and concentration of investments. In general, these laws and regulations permit investments
in federal, state and municipal obligations, corporate bonds, preferred and common equity securities,
mortgage loans, real estate and certain other investments, subject to specified limits and certain other
qualifications.
International Regulation
TRV’s insurance underwriting subsidiary based in the United Kingdom, St. Paul Travelers Insurance
Company Limited, is regulated by the Financial Services Authority (FSA). The FSA’s principal objectives
are to maintain market confidence, promote public understanding of the financial system, protect
consumers, and to fight financial crime. TRV’s Lloyd’s syndicates are also regulated by the FSA, which has
delegated certain regulatory responsibilities to the Council of Lloyd’s. Through Lloyd’s, TRV is licensed to
write business in over 70 countries throughout the world by virtue of Lloyd’s international licenses. In each
such country TRV is subject to the laws and insurance regulation of that country. In Canada, the conduct
of TRV’s insurance business is regulated under provisions of the Insurance Companies Act, which requires
insurance companies to maintain certain levels of capital depending on the type and amount of insurance
policies in force. In Australia, TRV’s branch in runoff is regulated by the Australian Prudential Regulation
Authority.