Travelers 2005 Annual Report Download - page 84

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determining uncollectible amounts to the recoverables acquired in the merger. General and administrative
expenses in 2004 also included $29 million of restructuring charges related to the merger.
Other 2004 Claims and Expenses. Other items increasing the 2004 claims and expenses compared to
2003 include $296 million of charges to increase the allowances for estimated amounts due from
reinsurance recoverables, policyholders receivables, and co-surety participations on a specific construction
contractor claim. The increase in the allowance for uncollectible reinsurance recoverables recognized a
change in estimated disputes with reinsurers and is based upon the Company’s reinsurance strategy of
reduced reinsurance utilization, including the cessation of ongoing business relationships with certain of
SPC’s reinsurers, and aggressive collection of reinsurance recoverables. A charge was also recorded to
increase the estimated uncollectible amounts due from policyholders for loss sensitive business (primarily
high deductible business). This increase recognized a change in estimated uncollectible amounts due and
resulted from applying the Company’s credit based methodology for determining uncollectible amounts to
the recoverables acquired in the merger. Because reinsurance recoverables and amounts due from
policyholders for loss sensitive business are insurance contract-related assets, these assets are subject to the
same types of estimation variables as loss reserves. Also during the second quarter of 2004, a participating
co-surety on a contract surety exposure announced that insurance regulators had approved its submitted
run-off plan. Based upon industry knowledge of the co-surety’s run-off plan and an analysis of the co-
surety’s financial condition, the Company concluded that it was unlikely to collect the full amount
projected to be owed by the co-surety and established an appropriate level of reserves.
Interest Expense
The $50million increase in interest expense in2005over 2004 primarily reflected the impact of a full
year of interest expense on SPC debt assumed in the merger on April 1, 2004. The Company’s debt
outstanding at December 31, 2005 declined by a net $463 million compared with year-end 2004. In 2004,
the $69 million increase in interest expense over 2003 reflected the incremental expense associated with
SPC debt assumed in the merger.
Effective Tax Rate
The Company’s effective tax rate on income from continuing operations was22.8%, 7.3% and 24.1%
in 2005, 2004 and 2003, respectively. The 2005 and 2003 effective rate reflected a higher level of pretax
income associated with profitable underwriting performance. The low 2004 effective rate primarily
reflected the impact of an increase in nontaxable investment income on a lower level of pretax income.
GAAP combined ratios
Catastrophe losses accounted for 10.3 points of the 2005 loss and loss adjustment expense ratio,
compared with4.0 points in 2004. The loss and loss adjustment expense ratio in2005 included a 1.6 point
impact of net unfavorable prior year reserve development, whereas the 2004 ratio included a 12.6 point
impact of net unfavorable prior year reserve development. The 2005 loss and loss adjustment expense ratio
also reflected an improvement in current accident year non-catastrophe loss experience, compared with
2004, primarily reflecting reduced claim activity. The 1.1 point increase in the 2005 underwritingexpense
ratio compared with 2004 reflected the impact of reinstatement premiums, state assessments, earned
premium declines in the Commercial segment, increased commission expenses inthe Personal segment
and investments made for process re-engineering and to support business growth and product
development, primarily in the Personal segment. These factors were partially offset by expense efficiencies
realized since the completion of the merger.