Travelers 2008 Annual Report Download - page 39

Reserves on Statutory Accounting Basis
At December 31, 2008, 2007 and 2006, claims and claim adjustment expense reserves (net of
reinsurance) shown in the preceding table, which are prepared in accordance with U.S. generally
accepted accounting principles (GAAP reserves), were $5 million higher, $30 million higher and
$104 million lower, respectively, than those reported in the Company’s respective annual reports filed
with insurance regulators, which are prepared in accordance with statutory accounting practices
(statutory reserves). The differences between GAAP and statutory reserves are primarily due to the
differences in GAAP and statutory accounting for two items, (1) fees associated with billing of required
reimbursements under large deductible business, and (2) the accounting for retroactive reinsurance. For
large deductible business, the Company pays the deductible portion of a casualty insurance claim and
then seeks reimbursement from the insured, plus a fee. This fee is reported as fee income for GAAP
reporting, but as an offset to claim expenses paid for statutory reporting. Retroactive reinsurance
balances result from reinsurance placed to cover losses on insured events occurring prior to the
inception of a reinsurance contract. For GAAP reporting, retroactive reinsurance balances are included
in reinsurance recoverables and result in lower net reserve amounts. Statutory accounting practices
require retroactive reinsurance balances to be recorded in other liabilities as contra-liabilities rather
than in loss reserves.
Asbestos and Environmental Claims
Asbestos and environmental claims are segregated from other claims and are handled separately by
the Company’s Special Liability Group, a separate unit staffed by dedicated legal, claim, finance and
engineering professionals. For additional information on asbestos and environmental claims, see
‘‘Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Asbestos Claims and Litigation’’ and ‘‘—Environmental Claims and Litigation.’’
INTERCOMPANY REINSURANCE POOLING ARRANGEMENTS
Most of the Company’s insurance subsidiaries are members of an intercompany property and
casualty reinsurance pooling arrangement. Pooling arrangements permit the participating companies to
rely on the capacity of the entire pool’s capital and surplus rather than just on its own capital and
surplus. Under such arrangements, the members share substantially all insurance business that is
written and allocate the combined premiums, losses and expenses.
On October 1, 2007, retroactive to January 1, 2007, the Northland Pool was commuted and
terminated. Four members of the former Northland Pool, consisting of Northland Insurance Company,
Northfield Insurance Company, Northland Casualty Company and American Equity Specialty Insurance
Company, became members of the Travelers Reinsurance Pool. The fifth member of the former
Northland Pool, American Equity Insurance Company, became a 100% reinsured affiliate of the
Travelers Reinsurance Pool. Additionally, the individual 100% quota share reinsurance agreements for
three former 100% reinsured affiliated companies of the Travelers Reinsurance Pool (St. Paul Guardian
Insurance Company, St. Paul Mercury Insurance Company and Fidelity and Guaranty Insurance
Underwriters, Inc.) were commuted and terminated. These three companies also became members of
the Travelers Reinsurance Pool. All of these transactions were retroactive to January 1, 2007. In
addition, on October 1, 2007, Discover Reinsurance Company was merged into The Travelers
Indemnity Company.
RATINGS
Ratings are an important factor in setting the Company’s competitive position in the insurance
industry. The Company receives ratings from the following major rating agencies: A.M. Best Company
(A.M. Best), Fitch Ratings (Fitch), Moody’s Investors Service (Moody’s) and Standard & Poor’s Corp.
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