Travelers 2008 Annual Report Download - page 186

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 amount of the assets received in an RITC is equal to the accepted claims including incurred
but not reported (IBNR) claims and is undiscounted for the time value of money. Accordingly, there is
no gain or loss at the time the assets and liabilities are acquired and recognized by the subsequent year
of account. In addition, there is no impact on reported premiums and losses as a result of an RITC
transaction.
Fee Income
Fee income includes servicing fees from carriers and revenues from large deductible policies and
service contracts and is recognized pro rata over the contract or policy periods.
Other Revenues
Other revenues include revenues from premium installment charges, which are recognized as
collected, revenues of noninsurance subsidiaries other than fee income and gains and losses on
dispositions of assets and redemption of debt, and other miscellaneous revenues.
Income Taxes
The Company recognizes deferred income tax assets and liabilities for the expected future tax
effects attributable to temporary differences between the financial statement and tax return bases of
assets and liabilities, based on enacted tax rates and other provisions of the tax law. The effect of a
change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period in
which such change is enacted. Deferred tax assets are reduced by a valuation allowance if it is more
likely than not that all or some portion of the deferred tax assets will not be realized.
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