Travelers 2009 Annual Report Download - page 246

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)
Assumptions and Health Care Cost Trend Rate Sensitivity
(at and for the year ended December 31,) 2009 2008
Assumptions used to determine benefit obligations
Discount rate ...................................................... 5.55% 6.30%
Future compensation increase rate....................................... 4.00% 4.00%
Assumptions used to determine net periodic benefit cost
Discount rate ...................................................... 6.30% 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 . . . . . . . . . . . 5.00% 5.25%
Assumed health care cost trend rates
Following year...................................................... 8.50% 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 2017
The discount rate assumption used to determine the benefit obligation for 2009 and 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.
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 $26 million at December 31, 2009, and
the aggregate of the service and interest cost components of net postretirement benefit expense by
$2 million for the year ended December 31, 2009. Decreasing the assumed health care cost trend rate
by 1% would have decreased the accumulated postretirement benefit obligation at December 31, 2009
by $22 million and the aggregate of the service and interest cost components of net postretirement
benefit expense by $1 million for the year ended December 31, 2009.
Plan Assets
Pension plan assets are invested for the exclusive benefit of the plan participants and beneficiaries
and are intended, over time, to satisfy the benefit obligations under the plan. Risk tolerance is
established through consideration of plan liabilities, plan funded status, and corporate financial
position. The asset mix guidelines have been established and are reviewed quarterly. These guidelines
are intended to serve as tools to facilitate the investment of plan assets to maximize long-term total
return and the ongoing oversight of the plan’s investment performance. Investment risk is measured
and monitored on an ongoing basis through daily and monthly investment portfolio review, annual
liability measurements, and periodic asset/liability studies.
The Company’s overall investment strategy is to achieve a mix of approximately 85% to 90% of
investments for long-term growth and 10% to 15% for near-term benefit payments with a wide
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