Travelers 2007 Annual Report Download - page 128

Dividend Availability
The Company’s principal insurance subsidiaries are domiciled in the states of Connecticut and
Minnesota. The insurance holding company laws of both states applicable to the Company’s subsidiaries
requires notice to, and approval by, the state insurance commissioner for the declaration or payment of
any dividend that, together with other distributions made within the preceding twelve months, exceeds
the greater of 10% of the insurer’s capital and surplus as of the preceding December 31, or the
insurer’s net income for the twelve-month period ending the preceding December 31, in each case
determined in accordance with statutory accounting practices and by state regulation. This declaration
or payment is further limited by adjusted unassigned surplus, as determined in accordance with
statutory accounting practices.
The insurance holding company laws of other states in which the Company’s subsidiaries are
domiciled generally contain similar, although in some instances somewhat more restrictive, limitations
on the payment of dividends. A maximum of $4.02 billion is available by the end of 2008 for such
dividends without prior approval of the Connecticut Insurance Department for Connecticut-domiciled
subsidiaries and the Minnesota Department of Commerce for Minnesota-domiciled subsidiaries. The
Company received $2.73 billion of dividends from its insurance subsidiaries in 2007.
Risk-Based Capital
The NAIC adopted RBC requirements for property casualty companies to be used as minimum
capital requirements by the NAIC and states to identify companies that merit further regulatory action.
The formulas have not been designed to differentiate among adequately capitalized companies that
operate with levels of capital higher than RBC requirements. Therefore, it is inappropriate and
ineffective to use the formulas to rate or to rank these companies. At December 31, 2007, all of the
Company’s insurance subsidiaries had adjusted capital in excess of amounts requiring any company or
regulatory action.
Off-Balance Sheet Arrangements
The Company has entered into certain contingent obligations for guarantees related to agency
loans and letters of credit, issuance of debt securities, third party loans related to venture capital
investments and various indemnifications related to the sale of business entities to third parties. See
note 15 of notes to the Company’s consolidated financial statements. The Company does not expect
these arrangements to have a material effect on the Company’s financial position, changes in financial
position, revenues and expenses, results of operations, liquidity, capital expenditures or capital
resources.
CRITICAL ACCOUNTING ESTIMATES
The Company considers its most significant accounting estimates to be those applied to claims and
claim adjustment expense reserves and related reinsurance recoverables, investment impairments and
goodwill impairments.
Claims and Claim Adjustment Expense Reserves
Claims and claim adjustment expense reserves (loss reserves) represent management’s estimate of
ultimate unpaid costs of losses and loss adjustment expenses for claims that have been reported and
claims that have been incurred but not yet reported. Loss reserves do not represent an exact calculation
of liability, but instead represent management estimates, generally utilizing actuarial expertise and
projection techniques, at a given accounting date. These loss reserve estimates are expectations of what
the ultimate settlement and administration of claims will cost upon final resolution in the future, based
on the Company’s assessment of facts and circumstances then known, review of historical settlement
116