Travelers 2006 Annual Report Download - page 215

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
203
10. INCOME TAXES (Continued)
The net deferred tax asset comprises the tax effects of temporary differences related to the following
assets and liabilities:
(at December 31, in millions) 2006 2005
Deferred tax assets
Claims and claim adjustmentexpense reserves ................ $1,488 $ 1 ,615
Unearned premiumreserves ................................ 648 647
Alternative minimum tax credit carryforward ................. —376
Other .................................................... 764 701
Total gross deferred tax assets.......................... 2,900 3,339
Less valuation allowance................................. 82 98
Net deferred tax assets................................. 2,818 3,241
Deferred tax liabilities
Deferred acquisition costs .................................. 515 488
Investments............................................... 458 352
Intangible assets........................................... 49 88
Internally-developed software............................... 78 46
Other.................................................... 182 205
Total gross deferred tax liabilities....................... 1,282 1,179
Total deferred income taxes ............................ $1,536 $ 2 ,062
If the Company determines that any of its deferred tax assets will not result in future tax benefits, a
valuation allowance must be established for the portion of these assets that are not expected to be realized.
The net decreases in the valuation allowance for deferred tax assets were $16 million and $30 million at
December 31, 2006 and 2005, respectively, relating in each year to foreign operations. Based upon a review
of the Company’s anticipated future taxable income, and also including all other available evidence, both
positive and negative, the Company’s management concluded that it is more likely than not that the net
deferred tax assets will be realized.
For tax return purposes, as of December 31, 2006, the Company had a U.S. net operating loss (NOL)
carryforward that expires, if unused, in 2017-2018. The amount and timing of realizing the benefit of NOL
carryforwards depends on future taxable income and limitations imposed by tax laws. The approximate
amounts of those NOLs on a regular tax basis and an alternative minimum tax (AMT) basis were
$103 million and $70 million, respectively. The benefit of the NOL carryforward has been recognized in the
consolidated financial statements.
The Company’s intercompany tax sharing agreement was amended to include the SPC companies
effective with their acquisition on April 1, 2004.
U.S. income taxes have not been provided on $245 million of the Company’s foreign operations’
undistributed earnings as of December 31, 2006, as suchearnings are intended to be permanently
reinvested in those operations. Furthermore, any taxes paid to foreign governments on these earnings may
be used as credits against the U.S. tax on any dividend distributions from such earnings.