Travelers 2009 Annual Report Download - page 39

Reserves on Statutory Accounting Basis
At December 31, 2009, 2008 and 2007, 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 $18 million higher, $5 million higher and
$30 million higher, 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.
Effective January 1, 2009, Seaboard Surety Company was merged into Travelers C&S Company of
America. Prior to that merger, Seaboard Surety Company was 90% reinsured by The Travelers
Indemnity Company, a member of the Travelers Reinsurance Pool.
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.
(S&P). Rating agencies typically issue two types of ratings: claims-paying (or financial strength) ratings
which assess an insurer’s ability to meet its financial obligations to policyholders and debt ratings which
assess a company’s prospects for repaying its debts and assist lenders in setting interest rates and terms
for a company’s short- and long-term borrowing needs. Agency ratings are not a recommendation to
buy, sell or hold any security, and they may be revised or withdrawn at any time by the rating agency.
Each agency’s rating should be evaluated independently of any other agency’s rating. The system and
the number of rating categories can vary widely from rating agency to rating agency. Customers usually
focus on claims-paying ratings, while creditors focus on debt ratings. Investors use both to evaluate a
company’s overall financial strength. The ratings issued on the Company or its subsidiaries by any of
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