Travelers 2004 Annual Report Download - page 146

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. MERGER AND ACQUISITION, Continued
The primary reasons for the acquisition were, among other things, a) to create a stronger company that will
provide significant benefits to shareholders and to customers alike; b) to capitalize on a common strategic focus
on delivering the highest value to customers, agents and brokers and, working together, to expand future
opportunities and capture new efficiencies; and c) to strengthen the combined company’s position as a leading
provider of property and casualty insurance products.
Allocation of the Purchase Price
The purchase price has been allocated based on an estimate of the fair value of the assets acquired and
liabilities assumed as of April 1, 2004, as follows:
(in millions)
Net tangible assets (1) ................................................................. $5,351
Total investments (2) .................................................................. 439
Deferred policy acquisition costs (3) ...................................................... (100)
Deferred federal income taxes (4) ........................................................ (207)
Goodwill (5) ......................................................................... 2,849
Other intangible assets, including the fair value adjustment of claim and claim adjustment expense
reserves and reinsurance recoverables of $191 (6) (7) ....................................... 1,377
Other assets (2) ....................................................................... (103)
Claims and claim adjustment expense reserves (3) ........................................... (26)
Debt (2) ............................................................................ (339)
Other liabilities (2) .................................................................... (485)
Allocated purchase price ............................................................... $8,756
(1) Reflects SPC’s shareholders’ equity of $6,439, less SPC’s historical goodwill of $950 and intangible assets
of $138.
(2) Represents adjustments for fair value.
(3) Represents adjustments to conform SPC’s accounting policies to those of TPC’s.
(4) Represents a deferred tax liability associated with adjustments to fair value of all assets and liabilities
included herein excluding goodwill, as this transaction is not treated as a purchase for tax purposes.
(5) Represents the excess of the purchase price (cost) over the amounts assigned to the assets acquired and
liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. See notes 4 and 11.
(6) Represents identified finite and indefinite life intangible assets, primarily customer-related insurance
intangibles and management contracts and customer relationships associated with Nuveen Investments,
Inc.’s (Nuveen Investments) asset management business. See note 4.
(7) An adjustment has been applied to SPC’s claims and claim adjustment expense reserves and reinsurance
recoverables at the acquisition date to estimate their fair value. The fair value adjustment of $191 million
was based on management’s estimate of nominal claim and claim expense reserves and reinsurance
recoverables (after adjusting for conformity with the acquirer’s accounting policy on discounting of
workers’ compensation reserves), expected payment patterns, the April 1, 2004 U.S. Treasury spot rate yield
curve, a leverage ratio assumption (reserves to statutory surplus), and a cost of capital expressed as a spread
over risk-free rates. The method used calculates a risk adjustment to a risk-free discounted reserve that will,
if reserves run off as expected, produce results that yield the assumed cost-of-capital on the capital
134