Travelers 2007 Annual Report Download - page 42

• On June 18, 2007, A.M. Best affirmed all ratings of the Company. The outlook was stable.
• On June 25, 2007, S&P assigned its interactive Lloyd’s Syndicate Assessment (LSA) of ‘‘3’’ to
The St. Paul Travelers Syndicate Management—Syndicate 5000. The outlook was stable.
• On October 2, 2007, A.M. Best upgraded the financial strength ratings to ‘‘A+’’ from ‘‘A’’ and
issuer credit ratings to ‘‘aa’’ from ‘‘a’’ for Northland Insurance Company, Northfield Insurance
Company, Northland Casualty Company, American Equity Specialty Insurance Company and
American Equity Insurance Company, formerly members of the Northland Pool. In addition,
Fidelity and Guaranty Insurance Underwriters, Inc., St. Paul Guardian Insurance Company and
St. Paul Mercury Insurance Company financial strength ratings of ‘‘A+’’ and issuer credit ratings
of ‘‘aa’’ were affirmed. The outlook for all ratings was stable. Concurrently, A.M. Best
withdrew the financial strength rating of ‘‘A’’ and issuer credit rating of ‘‘a’’ and assigned a
category NR-5 (Not Formally Followed) to the Former Northland Pool. A.M. Best also withdrew
the financial strength rating of ‘‘A’’ and the issuer credit rating of ‘‘a’’ of Discover
Reinsurance Company in connection with the merger of Discover Reinsurance Company into
Travelers Indemnity Company.
• On October 17, 2007, A.M. Best affirmed the financial strength rating of ‘‘A’’ and issuer credit
rating of ‘‘a+’’ of St. Paul Travelers Insurance Company Limited. The ratings outlook remained
stable.
• On November 20, 2007, Moody’s announced that it was reviewing its ratings of the Company for
a possible upgrade.
INVESTMENT OPERATIONS
A significant majority of funds available for investment are deployed in a widely diversified
portfolio of high quality, liquid intermediate-term taxable U.S. government, corporate and mortgage
backed bonds and tax-exempt U.S. municipal bonds. The Company closely monitors the duration of its
fixed maturity 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 estimated duration of the Company’s net insurance liabilities.
The primary goals of the Company’s asset liability management 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 investments
(through direct ownership and limited partnerships), private equity limited partnerships, joint ventures,
other limited partnerships, mortgage loans and trading securities. These investment classes have the
potential for higher returns but also involve varying degrees 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.
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