Travelers 2007 Annual Report Download - page 117

LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the short-
and long-term cash requirements of its business operations. The liquidity requirements of the
Company’s business have been met primarily by funds generated from operations, asset maturities and
income received on investments. Cash provided from these sources is used primarily for claims and
claim adjustment expense payments and operating expenses. The timing and amount of catastrophe
claims are inherently unpredictable. Such claims increase liquidity requirements. The timing and
amount of reinsurance recoveries may be affected by reinsurer solvency and reinsurance coverage
disputes. Additionally, the variability of asbestos-related claim payments, as well as the volatility of
potential judgments and settlements arising out of litigation, may also result in increased liquidity
requirements. It is the opinion of the Company’s management that the Company’s future liquidity
needs will be adequately met from all of the above sources. The Company also maintains liquidity at
the holding company level. At December 31, 2007, total cash, short-term invested assets and other
readily marketable securities aggregating $1.62 billion were held at the holding company. The assets
held at the holding company, combined with other sources of funds available, primarily additional
dividends from operating subsidiaries, are sufficient to meet the Company’s current liquidity
requirements. These liquidity requirements primarily include shareholder dividends and debt service.
The Company also has the ability to issue securities under its shelf registration statement with the
Securities and Exchange Commission and has access to liquidity through its $1 billion line of credit.
Operating Activities
Net cash flows provided by operating activities of continuing operations totaled $5.29 billion,
$4.77 billion and $3.59 billion in 2007, 2006 and 2005, respectively. Cash flows in each of 2007 and
2006, as compared to the preceding year, reflected higher levels of collected premiums and net
investment income, lower claim payments on catastrophe losses, as well as lower runoff claim payments.
Cash flows from operations in 2007 and 2006 benefited from significant collections on reinsurance
recoverables in both years, including those related to 2005 hurricane losses, operations in runoff
(primarily Gulf) and various commutation agreements. These factors were partially offset by an
increase in tax payments resulting from higher profitability, expenses related to increased business
volume and continued expenditures to support business growth and product development, and higher
interest payments. Cash flows in 2005 reflected an increase in loss and loss adjustment expense
payments primarily related to the catastrophe losses incurred during 2005 and 2004, and an increase in
tax payments resulting from higher profitability. The Company utilized $11 million, $11 million and
$2.00 billion of net operating loss (NOL) carryforwards during 2007, 2006 and 2005, respectively,
thereby reducing current regular tax payments by $4 million, $4 million and $698 million, respectively.
Net cash flows provided by operating activities for all three years were negatively impacted by
payments for asbestos and environmental liabilities, as well as by payments for claims related to the
Company’s runoff operations.
Investing Activities
Net cash flows used in investing activities of continuing operations totaled $2.53 billion,
$3.06 billion and $5.44 billion in 2007, 2006 and 2005, respectively. Fixed maturity securities accounted
for the majority of investment purchases in all three years. As discussed in more detail in ‘‘Part I—
Item 3, Legal Proceedings,’’ in 2007, the Company announced that it had entered into a settlement
agreement, subject to contingencies, to resolve fully all current and future asbestos-related coverage
claims relating to ACandS, Inc. As a result, the Company has placed $449 million into escrow. Upon
fulfillment of all settlement contingencies, including final court approval of a plan of reorganization for
ACandS and the issuance of the injunctions described in ‘‘Part I—Item 3, Legal Proceedings,’’ those
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