Travelers 2007 Annual Report Download - page 193

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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) 2007 2006 2005
Change in net unrealized investment gains (losses)
Fixed maturities ............................................... $346 $ 55 $(885)
Equity securities ............................................... (22) (4) (31)
Venture capital ................................................ (91) 19 78
Other investments (excluding venture capital) .......................... 25 125 (14)
258 195 (852)
Related taxes ................................................. 91 69 (311)
Change in net unrealized gains (losses) on investment securities ........... 167 126 (541)
Balance, beginning of year ........................................ 453 327 868
Balance, end of year .......................................... $620 $453 $ 327
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 it is prepared to accept.
Reinsurance is placed on both a quota-share and excess of loss basis. Ceded reinsurance 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 ceded balances are jointly backed by all the pool
members.
The Company utilizes a general catastrophe reinsurance treaty with unaffiliated reinsurers to
manage its exposure to losses resulting from catastrophes. In addition to the coverage provided under
this treaty, the Company also utilizes a catastrophe bond program, as well as a Northeast catastrophe
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