Travelers 2008 Annual Report Download - page 243

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)
estimated net loss (gain) or prior service cost for the postretirement benefit plans to be amortized from
other changes in equity from nonowner sources into net periodic benefit cost over the next fiscal year.
Assumptions and Health Care Cost Trend Rate Sensitivity
(at and for the year ended December 31,) 2008 2007
Assumptions used to determine benefit obligations
Discount rate ...................................................... 6.30% 6.00%
Future compensation increase rate ....................................... 4.00% 4.00%
Assumptions used to determine net periodic benefit cost
Discount rate ...................................................... 6.00% 6.00%
Expected long-term rate of return on pension plans’ assets ..................... 8.00% 8.00%
Expected long-term rate of return on postretirement benefit plans’ assets ........... 5.25% 5.50%
Assumed health care cost trend rates
Following year:
Medical (before age 65) ............................................. 9.00% 7.00%
Medical (age 65 and older) ........................................... 9.00% 9.00%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate) ........ 5.00% 5.00%
Year that the rate reaches the ultimate trend rate:
Medical (before age 65) ............................................. 2017 2010
Medical (age 65 and older) ........................................... 2017 2012
The discount rate assumption used to determine the benefit obligation for 2008 was based on a
yield-curve approach. Under this approach, a weighted average yield is determined from a hypothetical
portfolio of high quality fixed maturity corporate bonds (rated Aa or higher) available at the year-end
valuation date for which the timing and amount of cash outflows correspond with the timing and
amount of the estimated benefit payouts of the Company’s benefit plan. The 2007 discount rate
assumption was based on the Moody’s Aa Corporate Bond index increased by 25 basis points to reflect
the long duration nature of the pension obligation, adjusted to the nearest quarter rate, and then
back-tested by comparison to a yield curve approach. The Company changed its discount rate approach
as a result of the severe market disruptions that occurred during 2008 that caused the limited
population of bonds contained in the Moody’s Aa Corporate Bond index to no longer be representative
of a portfolio of high-quality debt instruments from which the Company would choose to provide the
necessary future cash flows to pay the pension benefits when due.
In choosing the expected long-term rate of return, the Company’s Pension Plan Investment
Committee considered the historical returns of equity and fixed maturity markets in conjunction with
today’s economic and financial market conditions.
As an indicator of sensitivity, increasing the assumed health care cost trend rate by 1% would have
increased the accumulated postretirement benefit obligation by $32 million at December 31, 2008, and
the aggregate of the service and interest cost components of net postretirement benefit expense by
$2 million for the year ended December 31, 2008. Decreasing the assumed health care cost trend rate
by 1% would have decreased the accumulated postretirement benefit obligation at December 31, 2008
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