Travelers 2007 Annual Report Download - page 175

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
policyholders in accordance with contract provisions. Net written premiums for participating dividend
policies were approximately 1% of total Company net written premiums for each of the years ended
December 31, 2007, 2006 and 2005. Policyholder dividends are accrued against earnings using best
available estimates of amounts to be paid. The liability accrued for policyholder dividends totaled
$39 million and $29 million at December 31, 2007 and 2006, respectively.
Treasury Stock
Treasury stock represents the cost of common stock repurchased by the Company, which stock
represents authorized and unissued shares of the Company under the Minnesota Business Corporation
Act.
Statutory Accounting Practices
The Company’s insurance subsidiaries, domiciled principally in the states of Connecticut and
Minnesota, prepare statutory financial statements in accordance with the accounting practices
prescribed or permitted by the insurance departments of the states of domicile. Prescribed statutory
accounting practices are those practices that are incorporated directly or by reference in state laws,
regulations, and general administrative rules applicable to all insurance enterprises domiciled in a
particular state. Permitted statutory accounting practices include practices not prescribed by the
domiciliary state, but allowed by the domiciliary state regulatory authority. The impact of any permitted
accounting practices on statutory surplus of the Company is not material.
Premiums and Unearned Premium Reserves
Premiums are recognized as revenues pro rata over the policy period. Unearned premium reserves
represent the unexpired portion of policy premiums. Accrued retrospective premiums are included in
premium balances receivable. Premium balances receivable are reported net of an allowance for
estimated uncollectible premium amounts.
Ceded premiums are charged to income over the applicable term of the various reinsurance
contracts with third party reinsurers. Prepaid reinsurance premiums represent the unexpired portion of
premiums ceded to reinsurers and are reported as part of other assets.
Reinsurance to Close
Under the accounting conventions used by Lloyd’s members, each underwriting account is normally
kept open for three years and the underwriting results determined at the end of the third year when
the account is closed, although a longer period may be required in order to determine reserves at the
required degree of accuracy/confidence for exposures having significant uncertainty. When a year of
account is closed, a reinsurance contract (the ‘‘reinsurance to close’’ or RITC) is entered into with a
subsequent year of account (normally the following year of account) in consideration for which all
subsequent underwriting transactions resulting from the closing year and all previous years reinsured
therein are brought forward to (accepted by) the subsequent year of account. The RITC, which is
calculated by the underwriter and approved by the managing agent, comprises an estimate of all net
outstanding liabilities of the closing year and all previous years.
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