Travelers 2006 Annual Report Download - page 172

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
160
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
reinsurance recoverables. The allowance is based upon the Company’s ongoing review of amounts
outstanding, length of collection periods, changes in reinsurer credit standing, disputes, applicable
coverage defenses and other relevant factors. Amounts deemed to be uncollectible, including amounts due
fromknown insolvent reinsurers, are written off against the allowance for estimated uncollectible
reinsurance recoverables. Any subsequent collections of amounts previously written off are reported as
partof claim and claim adjustment expenses. The Company evaluates and monitors the financial condition
of its reinsurers under voluntary reinsurance arrangements to minimize its exposure to significant losses
from reinsurer insolvencies.
Deferred Acquisition Costs
Amounts which vary with and are primarily related to the production of new insurance contracts,
primarily commissions and premium-related taxes, are deferred and amortized pro rata over the contract
periods in which the related premiums are earned. Deferred acquisition costs are reviewed to determine if
they are recoverable from future income and, if not, are charged to expense. Future investment income
attributable to related premiums is taken into account in measuring the recoverability of the carrying value
of thisasset. All other acquisition expenses are charged to operations as incurred.
Contractholder Receivables and Payables
Under certain workers’ compensation insurance contracts with deductible features, the Company is
obligated to pay the claimant for the full amount of the claim. The Company is subsequently reimbursed by
the policyholder for the deductible amount. These amounts are included on a gross basis in the
consolidated balance sheet in contractholder payables and contractholder receivables, respectively.
Goodwill and Other Intangible Assets
A review is performed on at least an annual basis, of goodwill held by the reporting units, which are
the Company’s three operating and reportable segments: Business Insurance; Financial, Professional &
International Insurance; and Personal Insurance.
The impairment test is a two-step process. The first step is to identify any potential impairment using a
multiple-of-earnings approach to estimate the fair value of the reporting units. The fair values of the
reporting units are then compared to their carrying value, including goodwill. If the carrying amounts of
the reporting units exceed their fair value, a second step is performed to measure the amount of
impairment, if any.
Other intangible assets that are not deemed to have an indefinite useful life are amortized over their
useful lives. The carrying amount of intangible assets that are not deemed to have an indefinite useful life
is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying
amount of the intangible asset is not recoverable from its undiscounted cash flows and is measured as the
difference between the carrying amount and thefair value of the asset.
Claims and Claim Adjustment Expense Reserves
Claims and claim adjustment expense reserves represent estimates for both reported and unreported
claims incurred and related expenses. The reserves are adjusted regularly based upon experience. Included