Travelers 2008 Annual Report Download - page 184

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
in the consolidated balance sheet in contractholder payables and contractholder receivables,
respectively.
Goodwill and Other Intangible Assets
The Company performs a review, on at least an annual basis, of goodwill held by the reporting
units which are the Company’s three operating and reportable segments: Business Insurance; Financial,
Professional & International Insurance; and Personal Insurance. The Company estimates the fair value
of its reporting units and compares it to their carrying value, including goodwill. If the carrying values
of the reporting units exceed their fair value, the amount of the impairment is calculated and goodwill
is adjusted accordingly.
In 2008, the Company changed its methodology for estimating the fair value of its reporting units
from a multiple of earnings model to a discounted cash flow model. This change was made as a result
of the effects of a severe disruption of the credit and equity markets and significant changes in the
insurance industry that caused disparities between the multiple of earnings of the Company and the
observed multiple of earnings of its competitors. The discounted cash flow model is an income
approach to valuation that is based on a more detailed analysis for deriving a current fair value of
reporting units and is more representative of the Company’s current and expected future financial
performance. The discounted cash flow model relies on the Company’s assumptions of its future
operating earnings, discounted utilizing an estimate of the Company’s cost of equity. Other indefinite-
lived intangible assets held by the Company are also reviewed for impairment on at least an annual
basis. The classification of the asset as indefinite-lived is reassessed, and an impairment is recognized if
the carrying amount of the asset exceeds its fair value.
Intangible assets that are deemed to have finite useful life are amortized over their useful lives.
The carrying amount of intangible assets with a finite useful life is regularly reviewed for indicators of
impairment in value. Impairment is recognized only if the carrying amount of the intangible asset is not
recoverable from its undiscounted cash flows and is measured as the difference between the carrying
amount and the fair value of the asset.
The Company’s review did not result in an impairment of its indefinite-lived or finite-lived
intangible assets for the years ended December 31, 2008, 2007 and 2006.
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 $2.25 billion and $2.09 billion at December 31, 2008 and
2007, respectively, were discounted using a rate of 5% at both December 31, 2008 and 2007. Reserves
totaling $33 million for certain assumed reinsurance business at December 31, 2007 were discounted
using a rate of 7%. No reserves for such business were discounted at December 31, 2008.
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
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