Travelers 2005 Annual Report Download - page 151

THE ST. PAUL TRAVELERS COMPANIES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
139
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont inued)
3.5% to 5% at December 31, 2004. Reserves related to certain fixed and determinable asbestos-related
settlements, where all payment amounts and their timing are known, totaled $34 million and $67 million at
December 31, 2005 and 2004, respectively. These reserves were discounted using a rate of 2.6% at
December 31, 2005, and a range of rates from 2.3% to2.6% at December 31, 2004. Reserves for certain
assumed reinsurance business acquired in the merger were discounted using a range of rates from 5% to
7.5%, and totaled $79 million and $126 million at December 31, 2005 and 2004, respectively.
In determining claims and claim adjustment expense reserves, the Company carries on a continuing
review of its overall position, its reserving techniques and its reinsurance. The reserves are also reviewed
periodically by a qualified actuary employed by the Company. These reserves represent the estimated
ultimate cost of all incurred claims and claim adjustment expenses. Since the reserves are based on
estimates, the ultimate liability may be more or less than such reserves. The effects of changes in such
estimated reserves are included in the results of operations in the period in which the estimates are
changed. Such changes may be material to the results of operations and financial condition and could
occur in a future period.
Securities Lending Payable
The Company engages in securities lending activities from which it generates net investment income
from the lending of certain of its investments to other institutions for short periods of time. Effective
April 1, 2004, the Company entered into a new securities lending agreement. Borrowers of these securities
provide collateral equal to at least 102% of the market value of the loaned securities plus accrued interest.
This collateral is held by a third-party custodian, and the Company has the right to access the collateral
only in the event that the institution borrowing the Company’s securities is in default under the lending
agreement. Therefore, the Company does not recognize the receipt of the collateral held by the third-party
custodian or the obligation to return the collateral. The loaned securities remain a recorded asset of the
Company.
Other Liabilities
Included in other liabilities in the consolidated balance sheet is the Company’s estimate of its liability
for guaranty fund and other insurance-related assessments. The liability for expected state guaranty fund
and other premium-based assessments is recognized as the Company writes or becomes obligated to write
or renew the premiums on which the assessments are expected to be based. The liability for loss-based
assessments is recognized as the related losses are incurred. At December 31, 2005 and 2004, the Company
had a liability of $278 million and $249 million, respectively, for guaranty fund and other assessments and
related recoverables of $12 million and $31 million, respectively. The liability for such assessments and the
related recoverables are not discounted for the time value of money. The assessments are expected to be
paid over a period ranging from one year to the life expectancy of certain workers’ compensation claimants
and the recoveries are expected to occur over the same period of time.
Also included in other liabilities is an accrual for policyholder dividends. Certain insurance contracts,
primarily workers’ compensation, are participating whereby dividends are paid to policyholders in
accordance with contract provisions. Net written premiums for participating dividend policies were
approximately 1% of total Company net written premiums for each of the years ended December 31, 2005,
2004 and 2003. Policyholder dividends are accrued against earnings using best available estimates of