Travelers 2006 Annual Report Download - page 231

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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12. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)
To finance the preferred stock purchase for future allocation to qualified employees, the SOP
borrowed $150 million at 9.4% from a primary U.S. underwriting subsidiary. As the principal and interest
of the trust’s loan was paid, a pro rata amount of preferred stock was released for allocation to
participating employees. Each share of preferred stock pays a dividend of $11.72 annually and iscurrently
convertible into eight shares of the Company’s common stock. Preferred stock dividends on all sharesheld
by the trust were used to pay a portion of the SOP obligation. In addition to dividends paid to the trust,
additional cash contributions were made to the SOP as necessary in order to meet the SOP’s debt
obligation. The SOP’s debt obligation was paid off in January 2005 with a final payment of $5 million;
consequently, all preferred stock dividends are now paid to preferred stockholders. The SOP allocated the
final 71,346 preferred shares in 2004. The SOP has no preferred shares available for future allocations.
All common shares and the common stock equivalent of all preferred shares held by the SOP are
considered outstanding for diluted EPS computations and dividends paid on all shares are charged to
retained earnings.
The Company follows the provisions of Statement of Position 76-3, “Accounting Practices for Certain
Employee Stock Ownership Plans,” and related interpretations in accounting for this plan. The Company
recorded an expense of $5million in 2004.
13. LEASES
Rent expense was $238 million, $219 million and $207 million in 2006, 2005 and 2004, respectively.
Future minimum annual rental payments under noncancellable operating leases are $185 million,
$165 million, $133 million, $87 million, $66 million and $272 million for 2007, 2008, 2009, 2010, 2011 and
2012 and thereafter, respectively. Future sublease rental income aggregating approximately $55 million will
partially offset these commitments.
14. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
Derivative Instruments Designated as Hedging Instruments
The Company has foreign currencyhedges of net investments in foreign operations in which
derivatives (foreign currency forward contracts) hedge the foreign currency exposure. The effective portion
of the change in fair value of the derivative hedging the net investment, including any forward premium or
discount, isreflected in the accumulated other changes in equity from nonowner sources as part of the
foreign currency translation adjustment. For the years ended December 31, 2006 and 2005, the amount
included in changes inequity from nonowner sources was a loss of less than$1 million in 2006 and a loss of
$2 million in 2005. During2006, the Company incurred net realized investment losses of approximately
$8 million resulting from the dissolution of a designated hedging relationship. During 2006 and 2005, the
Company incurred netrealized investment losses of less than $1 million from hedge ineffectiveness.
Derivative Instruments not Designated as Hedging Instruments
Derivatives that are not designated or do not qualify as hedges are carried at fair value with changes in
value reflected in net realized investment gains (losses). The Company has certain U.S. treasury futures