Travelers 2006 Annual Report Download - page 197

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
185
5. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
(At December 31 2005, in millions)
Gross
Carrying
Amount
Accumulated
Amortization Net
Intangibles subject to amortization
Customer-related .................................................$ 1 ,036 $ 403$ 6 33
Marketing-related................................................ 20 17 3
Fair value adjustment on claims and claim adjustment expense reserves
and reinsurance recoverables(1) ..................................191 (70) 261
Totalintangible assetssubject to amortization....................1,247 350897
Intangible assets not subject to amortization
Contract-based ................................................... 20 —20
Total intangible assets not subject to amortization ................20— 20
Totalintangibleassets. ........................................$ 1 ,267 $ 350$
9 17
(1) The fair value adjustment of $191 million was recorded in connection with the merger in 2004 and was
based on management’s estimate of nominal claim and claim expense reserves andreinsurance
recoverables (after adjusting for conformity with the acquirer’s accounting policy on discounting of
workers’ compensation reserves), expected payment patterns, the April 1, 2004 U.S. Treasury spot
rate yield curve, a leverage ratio assumption (reserves to statutory surplus), and a cost of capital
expressed as a spread over risk-free rates. The method used calculates a risk adjustment to a risk-free
discounted reserve that will, if reserves run off as expected, produce results that yield the assumed
cost-of-capital on the capital supporting the loss reserves. The fair value adjustment is reported as an
intangible asset on the consolidated balance sheet, and the amounts measured in accordance with the
acquirer’s accounting policies for insurance contracts are reported as part of the claims and claim
adjustment expense reserves and reinsurance recoverables. The intangible asset will be recognized
into income over the expected payment pattern. Because the time value of money and the risk
adjustment (cost of capital) components of the intangible asset run off at different rates, the amount
recognized in income may be a net benefit in some periods and a net expense in other periods.
The following presents a summary of the Company’s amortization expense for intangible assets by
major assetclass:
(for the yearended December 31, in millions)2006 2005 2004
Customer-related ........................................................ $ 1 34 $151 $132
Marketing-related....................................................... 3 10 7
Fair value adjustment on claims and claim adjustment expense reserves and
reinsurance recoverables................................................ 16 (12 ) (58)
Total amortization expense ........................................... $ 1 53 $149 $81
Intangible asset amortization expense is estimated to be $146 million in 2007, $126 million in 2008,
$100 million in 2009, $86 million in 2010 and $69 million in 2011.