Travelers 2007 Annual Report Download - page 217

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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) 2007 2006
Deferred tax assets
Claims and claim adjustment expense reserves ................ $1,352 $1,488
Unearned premium reserves ............................. 661 648
Other ............................................. 700 764
Total gross deferred tax assets ........................ 2,713 2,900
Less valuation allowance .............................. 36 82
Net deferred tax assets ............................. 2,677 2,818
Deferred tax liabilities
Deferred acquisition costs .............................. 578 515
Investments ......................................... 704 458
Internally-developed software ............................ 77 78
Other ............................................. 111 231
Total gross deferred tax liabilities ...................... 1,470 1,282
Total deferred income taxes .......................... $1,207 $1,536
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 $46 million and
$16 million at December 31, 2007 and 2006, 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, 2007, the Company had a net operating loss (NOL)
carryforward that expires, if unused, in 2017 and 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 $92 million and $58 million, respectively. The benefit of the NOL carryforward has been
recognized in the consolidated financial statements.
U.S. income taxes have not been provided on $362 million of the Company’s foreign operations’
undistributed earnings as of December 31, 2007, as such earnings 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.
On October 22, 2004, Congress enacted the American Jobs Creation Act (AJCA), which provided a
temporary incentive for U.S. corporations to repatriate earnings previously reinvested in foreign
subsidiaries to obtain an 85% dividends received deduction. In December 2005, the Company
repatriated $158 million of cumulative foreign earnings invested outside of the United States, which
resulted in an increase in income tax expense of $8 million for the year ended December 31, 2005.
205