Travelers 2007 Annual Report Download - page 43

DERIVATIVES
See notes 1 and 14 of notes to the Company’s consolidated financial statements for a discussion of
the policies and transactions related to the Company’s derivative financial instruments.
REGULATION
State and Federal Regulation
TRV’s insurance subsidiaries are subject to regulation in the various states and jurisdictions in
which they transact business. The extent of regulation varies, but generally derives from statutes that
delegate regulatory, supervisory and administrative authority to a department of insurance in each state.
The regulation, supervision and administration relate, among other things, to standards of solvency that
must be met and maintained, the licensing of insurers and their agents, the nature of and limitations on
investments, premium rates, restrictions on the size of risks that may be insured under a single policy,
reserves and provisions for unearned premiums, losses and other obligations, deposits of securities for
the benefit of policyholders, approval of policy forms and the regulation of market conduct, including
the use of credit information in underwriting as well as other underwriting and claims practices. In
addition, many states have enacted variations of competitive ratemaking laws, which allow insurers to
set certain premium rates for certain classes of insurance without having to obtain the prior approval of
the state insurance department. State insurance departments also conduct periodic examinations of the
financial condition and market conduct of insurance companies and require the filing of financial and
other reports on a quarterly and annual basis. TRV’s insurance subsidiaries are collectively licensed to
transact insurance business in all U.S. states, the District of Columbia, Guam, Puerto Rico, Bermuda
and the U.S. Virgin Islands.
Agent and Broker Compensation. As part of ongoing, industry-wide investigations, the Company
has received subpoenas and written requests for information from U.S. government agencies and
authorities, including 21 states and the SEC. The areas of inquiry addressed to the Company include
the method by which brokers and agents are compensated. The Company is cooperating with these
subpoenas and requests for information. The Company has entered into agreements with several of
these states to resolve issues related to broker and agent compensation. The Company discontinued
paying contingent commissions in the United States on excess casualty and umbrella business effective
September 30, 2006. In addition, the Company discontinued paying contingent commissions in the
United States for all of its personal insurance business (including homeowners multi-peril, private
passenger automobile physical damage, private passenger automobile no-fault, other private passenger
automobile liability, personal articles floaters, personal insurance boats and yachts, dwelling fire and
personal umbrellas) and for its boiler and machinery and financial guaranty insurance lines effective
January 1, 2007, and for its fidelity insurance line effective January 1, 2008. The Company has
developed alternative compensation arrangements for these lines of business that compensate brokers
and agents in a manner that differentiates for business performance and is consistent with all applicable
laws. Beginning January 1, 2007, the Company offered an optional fixed commission program in the
U.S. for most commercial insurance lines.
Insurance Regulation Concerning Dividends. TRV’s principal insurance subsidiaries are domiciled
in the states of Connecticut and Minnesota. The insurance holding company laws of both states
applicable to TRV’s subsidiaries require 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.
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