Travelers 2006 Annual Report Download - page 173

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
161
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
in the claims and claim adjustment expense reserves in the consolidated balance sheet are certain reserves
discounted to the present value of estimated future payments. The liabilities for losses for some long-term
disability payments under workers’ compensation insurance and workers’ compensation excess insurance,
which totaled $1.98 billion and$1.92 billion at December 31, 2006 and 2005, respectively, were discounted
using a rate of 5% at December 31, 2006 and 2005. Reserves related to certain fixed and determinable
asbestos-related settlements, where all payment amounts and their timing are known, totaled $34 million at
December 31, 2005, and were discounted using a rate of 2.6% at that date. There were no such reserves at
December 31, 2006. Reserves for certain assumed reinsurance business were discounted using a rate of 7%
and a range of rates from 5% to 7.5% at December 31,2006 and 2005, respectively, and totaled $37 million
and $79 million at December 31, 2006 and 2005, respectively.
In determining claims and claim adjustment expense reserves, the Company performs a continuing
review of its overall position, its reservingtechniques and its reinsurance. The reserves are also reviewed
periodically by qualified actuaries 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 andfinancial condition and could
occur in a future period.
Securities Lending
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. Borrowers of
thesesecurities 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, 2006 and 2005, the Company
had a liability of $263 million and $278 million, respectively, for guaranty fund and other assessments and
related recoverables of $11 million and$12 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