Travelers 2006 Annual Report Download - page 228

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
216
12. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)
Assumptions and Health Care Cost Trend Rate Sensitivity
(at and forthe year ended December 31,) 2006 2005
Assumptions used to determine benefit obligations
Discount rate................................................................. 6.00 %5.75%
Future compensation increase rate .............................................. 4.00 %4.00%
Assumptions used to determine net periodic benefitcost
Discount rate................................................................. 5.75 %6.00%
Expected long-term rate of return on assets...................................... 8.00 %8.00%
Assumed health care cost trend rates
Following year:
Medical (before age 65)..................................................... 8.00 %9.00%
Medical (age 65 and older). .................................................. 10.00 %11.00%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate) ......... 5.00 %5.00%
Year that the rate reaches the ultimate trend rate:
Medical (before age 65)..................................................... 2010
2010
Medical (age 65 and older). .................................................. 2012 2012
The discount rate assumption used to determine the benefit obligation is based on the Moody’s Aa
Corporate Bond index adjusted by 25 basis points to reflect the long duration nature of the pension
obligation and adjusted to the nearest quarter rate. The discount rate is then back-tested by comparison to
a yield curve that reflects the hypothetical portfolio of high quality bonds (rated Aa or higher by a
recognized rating agency) for which the timing and amount of cash outflows approximates the estimated
payouts of the Plan.
In choosing the expected long-term rate of return, the Company’s Pension Plan Investment
Committee considered the historical returns of equity and fixed income markets in conjunction with
today’s economic and financial market conditions.
As an indicator of sensitivity, increasing the assumed health care cost trend rate by 1% would have
increased the accumulated postretirement benefit obligation by $29 million at December 31, 2006, and the
aggregate of the service and interest cost components of net postretirement benefit expense by $2 million
for the year ended December 31, 2006. Decreasing the assumed health care cost trend rate by 1% would
have decreased the accumulatedpostretirement benefit obligation at December 31, 2006 by $28 million
and the aggregate of the service and interest cost components of net postretirement benefit expense by $2
million for the year ended December 31, 2006.