Travelers 2008 Annual Report Download - page 42

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 bonds, tax-exempt U.S.
municipal bonds, and taxable corporate and U.S. agency mortgage-backed 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 (through
direct ownership and limited partnerships), private equity limited partnerships, joint ventures, real
estate and real estate partnerships, hedge funds, 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.
DERIVATIVES
See notes 1 and 3 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
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