Travelers 2006 Annual Report Download - page 174

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
162
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2006,
2005 and 2004. Policyholder dividends are accrued against earnings using best available estimates of
amounts to be paid. The liability accrued for policyholder dividends totaled $29 million and $30 million at
December 31, 2006 and 2005, respectively.
Treasury Stock
Treasury stock represents the cost of common stock repurchased by the Company, which stock
represents authorizedand unissued shares of the Company under theMinnesota Business Corporation
Act.
Statutory Accounting Practices
The Company’s insurance subsidiaries, domiciled principally in the states of Connecticut and
Minnesota, prepare statutory financial statements in accordance with the accounting practices prescribed
or permitted by the insurance departments of the states of domicile. Prescribed statutory accounting
practices are those practices that are incorporated directly or by reference in state laws, regulations, and
general administrative rules applicable to all insuranceenterprises domiciled in a particular state.
Permitted statutory accounting practices include practices not prescribed by the domiciliary state, but
allowed by the domiciliary state regulatory authority. The impact of any permitted accounting practices on
statutory surplus of the Company is not material.
Premiums and Unearned Premium Reserves
Premiums are recognized as revenues pro rata over the policy period. Unearned premium reserves
represent the unexpired portion of policy premiums. Accrued retrospective premiums are included in
premium balances receivable. Premium balances receivable are reported net of an allowance for estimated
uncollectible premium amounts.
Ceded premiums are charged to income over the applicable term of the various reinsurance contracts
with third party reinsurers. Prepaidreinsurance premiums represent the unexpiredportion of premiums
ceded to reinsurers and are reported as part of other assets.
Reinsurance to Close
Under the accounting conventions used by Lloyd’s members, each underwriting account is normally
kept open for three years and the underwriting results determined at the end of the third year when the
account is closed, although a longerperiod may be required in order to determine reserves at the required
degree of accuracy/confidence for exposures having significant uncertainty. When a year of account is
closed, a reinsurance contract (the “reinsurance to close” or RITC) is entered into with a subsequent year
of account (normally the following year of account) in consideration for which all subsequent underwriting
transactions resulting from the closing year and all previous years reinsured therein are brought forward to
(accept by) the subsequent year of account. TheRITC, which is calculated by the underwriter and
approved by the managingagent, comprises an estimate of all net outstanding liabilities of the closing year
and all previous years.