Travelers 2007 Annual Report Download - page 174

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Claims and Claim Adjustment Expense Reserves
Claims and claim adjustment expense reserves represent estimates for both reported and
unreported claims incurred and related expenses. The reserves are adjusted regularly based upon
experience. Included in the claims and claim adjustment expense reserves in the consolidated balance
sheet are certain reserves discounted to the present value of estimated future payments. The liabilities
for losses for most long-term disability payments under workers’ compensation insurance and workers’
compensation excess insurance, which totaled $2.09 billion and $1.98 billion at December 31, 2007 and
2006, respectively, were discounted using a rate of 5% at both December 31, 2007 and 2006. Reserves
for certain assumed reinsurance business were discounted using a rate of 7% at both December 31,
2007 and 2006, and totaled $33 million and $37 million at December 31, 2007 and 2006, respectively.
In determining claims and claim adjustment expense reserves, the Company performs a continuing
review of its overall position, its reserving techniques and its reinsurance. The reserves are also
reviewed regularly by qualified actuaries employed by the Company. These reserves represent the
estimated ultimate cost of all incurred claims and claim adjustment expenses. Since the reserves are
based on estimates, the ultimate liability may be more or less than such reserves. The effects of
changes in such estimated reserves are included in the results of operations in the period in which the
estimates are changed. Such changes in estimates could occur in a future period and may be material
to the Company’s results of operations and financial position in such period.
Securities Lending
The Company engages in securities lending activities from which it generates net investment
income from the lending of certain of its investments to other institutions for short periods of time.
Borrowers of these securities provide collateral equal to at least 102% of the market value of the
loaned securities plus accrued interest. This collateral is held by a third-party custodian, and the
Company has the right to access the collateral only in the event that the institution borrowing the
Company’s securities is in default under the lending agreement. Therefore, the Company does not
recognize the receipt of the collateral held by the third-party custodian or the obligation to return the
collateral. The loaned securities remain a recorded asset of the Company.
Other Liabilities
Included in other liabilities in the consolidated balance sheet is the Company’s estimate of its
liability for guaranty fund and other insurance-related assessments. The liability for expected state
guaranty fund and other premium-based assessments is recognized as the Company writes or becomes
obligated to write or renew the premiums on which the assessments are expected to be based. The
liability for loss-based assessments is recognized as the related losses are incurred. At December 31,
2007 and 2006, the Company had a liability of $278 million and $263 million, respectively, for guaranty
fund and other assessments and related recoverables of $11 million at each date. The liability for such
assessments and the related recoverables are not discounted for the time value of money. The
assessments are expected to be paid over a period ranging from one year to the life expectancy of
certain workers’ compensation claimants and the recoveries are expected to occur over the same period
of time.
Also included in other liabilities is an accrual for policyholder dividends. Certain insurance
contracts, primarily workers’ compensation, are participating whereby dividends are paid to
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