Travelers 2011 Annual Report Download - page 184

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
fund and other insurance-related assessments and related recoverables of $19 million and $24 million,
respectively. The liability for such assessments and the related recoverables are not discounted for the
time value of money. The loss-based assessments are expected to be paid over a period ranging from
one year to the life expectancy of certain workers’ compensation claimants and the recoveries are
expected to occur over the same period of time.
Also included in other liabilities is an accrual for policyholder dividends. Certain insurance
contracts, primarily workers’ compensation, are participating whereby dividends are paid to
policyholders in accordance with contract provisions. Net written premiums for participating dividend
policies were approximately 1% of total Company net written premiums for each of the years ended
December 31, 2011, 2010 and 2009. Policyholder dividends are accrued against earnings using best
available estimates of amounts to be paid. The liability accrued for policyholder dividends totaled
$54 million and $45 million at December 31, 2011 and 2010, respectively.
Treasury Stock
Treasury stock represents the cost of common stock repurchased by the Company, which stock
represents authorized and unissued shares of the Company under the Minnesota Business Corporation
Act.
Statutory Accounting Practices
The Company’s insurance subsidiaries, domiciled principally in the state of Connecticut, prepare
statutory financial statements in accordance with the accounting practices prescribed or permitted by
the insurance departments of the states of domicile. Prescribed statutory accounting practices are those
practices that are incorporated directly or by reference in state laws, regulations, and general
administrative rules applicable to all insurance enterprises domiciled in a particular state. Permitted
statutory accounting practices include practices not prescribed by the domiciliary state, but allowed by
the domiciliary state regulatory authority. The impact of any permitted accounting practices on
policyholders’ surplus of the Company is not material.
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
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