Travelers 2006 Annual Report Download - page 175

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The amount of the assets received in an RITC is equal to the accepted claims including incurred but
not reported (IBNR) claims and is undiscounted for the time value of money. Accordingly, there is no gain
or loss at the time the assets and liabilities are acquired and recognized by the subsequent year of account.
In addition, there is no impact on reported premiums and losses as a result of an RITC transaction.
In February 2006, following approval by the respecti ve managing agencies, the 2003 and prior years of
account of Lloyd’s Syndicates 5000 and779 closed through reinsurance to close (RITC) into the 2004 year
of account, for which the Company is the capital provider through its 100% ownership of Lloyd’s members
F&G UK Underwriters, Ltd. and Aprilgrange, Ltd. The RITC was effective January 1, 2006. The RITC
resulted in the Company acquiring $538 million of net claimand claim adjustment expense reserves (net of
$243 million of reinsurance recoverables), $470 million of investments, $29 million of cash and other net
assets during the first quarter of 2006. There was no impact on the Company’s results of operations at the
time the RITC was recorded.
Fee Income
Fee income includes servicing fees from carriers and revenues from large deductible policies and
service contracts and is recognized pro rata over the contract or policy periods.
Other Revenues
Other revenues include revenues from premium installment charges, which are recognized as
collected, revenues of noninsurance subsidiaries other than fee income andgains and losses on dispositions
of assets and redemption of debt, and other miscellaneous revenues.
Income Taxes
The Company recognizes deferred income tax assets and liabilities for the expected future tax effects
attributable to temporary differences between the financial statementand tax return bases of assets and
liabilities, based onenacted tax rates andother provisions of the tax law. Theeffect of a change in tax laws
or rates on deferred tax assets and liabilities is recognized in income in the period in which such change is
enacted. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or
some portion of the deferred tax assets will not be realized.
Foreign Currency Translation
The Company assigns functional currencies to its foreign operations, which are generally the
currenciesof the local operating environment. Foreign currency amounts are remeasured to the functional
currency, and the resulting foreign exchange gains or losses are reflected in earnings. Functional currency
amounts are then translated into U.S. dollars. The change in unrealized foreign currency translation gain
or loss during the year, net of tax, is a component of accumulated other changes in equity from nonowner
sources. The foreign currency remeasurement and translation are calculated usingcurrent exchange rates
for items reported in the balance sheets and averageexchange rates for items recorded in earnings.