Travelers 2012 Annual Report Download - page 243

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)
Assumptions and Health Care Cost Trend Rate Sensitivity
(at and for the year ended December 31,) 2012 2011
Assumptions used to determine benefit obligations
Discount rate ....................................................... 4.15% 4.90%
Future compensation increase rate ........................................ 4.00% 4.00%
Assumptions used to determine net periodic benefit cost
Discount rate ....................................................... 4.90% 5.37%
Expected long-term rate of return on pension plans’ assets ...................... 7.50% 8.00%
Expected long-term rate of return on postretirement benefit plans’ assets ............ 5.00% 5.00%
Assumed health care cost trend rates
Following year ....................................................... 7.50% 8.00%
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 ............................. 2018 2018
The discount rate assumption used to determine the benefit obligation 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) 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 on plan assets, the Company selected the rate
that was set as the return objective by the Company’s Benefit Plans Investment Committee, which had
considered the historical returns of equity and fixed maturity markets in conjunction with prevailing
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 $22 million at December 31, 2012, and
the aggregate of the service and interest cost components of net postretirement benefit expense by
$1 million for the year ended December 31, 2012. Decreasing the assumed health care cost trend rate
by 1% would have decreased the accumulated postretirement benefit obligation at December 31, 2012
by $19 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, 2012.
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 reviews, annual
liability measurements, and periodic asset/liability studies.
231