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1 <br />LIBERTY MUTUAL HOLDING COMPANY INC. <br />Notes to Consolidated Financial Statements <br />(dollars in millions) <br />Unaudited <br />(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES <br />Basia of Presentation <br />The accompanying consolidated financial statements include the accounts of Liberty Mumal Holding Company Inc. and its subsidiades (co0ectively <br />"LMHC" or the "Company'. Cettaln redassihcations have been made to the 2004 consolidated financial statements to conform with the 2005 <br />presentation. All material intercompany transactions and balances have been eliminated. <br />The accompanyring consolidated financial statements have been prepared in conformity with accounting princlples brenerally accepted in the United <br />States ("GAAP'~. The preparation of fnanual statements in confoaniry with GAAP requires management to make estimates and assumptions that <br />affect the repotted amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the <br />repotted amounts of revenues and expenses during the reporting period. The Company's principal estimates include (1) unpaid losses and lass <br />expense reserves, including asbestos and environmental reserves, (2) allowance for un<ollectible reinsurance and policyholder receivables, (3) other <br />than temporary impairments to the fair value of the investment portfolio, (4) deferced acquisidon costs, (5) the valuation of goodwill and intangible <br />assets, and (6) valuation allowance on deferced taxes. While manafement believes that the amounts included in the consolidated Enancial statements <br />reflect their best estimates and assumptions, these amounts could ultimately be materially different from the amounts currendy provided for in the <br />consolidated financial statements. <br />Significant Accounting Policies <br />See Note 1 of the Notes to Consolidated Financial Statements included in the Company's 2004 Annual Repon for a description of accounting <br />policies. <br />Accumulated Other Comprehensive Income <br />Other comprehensive income consists of Foreign currency translation adjustments, minimum pension liability and unrealized gains and losses on <br />cercaln investments in debt and equity securities. <br />The components of accumulated other comprebensive income, net of related deferred acquisition costs and taxes, are as fo0ows: <br />Unrealized gains on securities <br />Foreign currency translation <br />adjustments <br />Minimum pension liability <br />Accumulated ocher comprehensive <br />income <br />2005 2004 <br />$ 656 $ 1,167 <br />68 117 <br />(332) (2G) <br />$ 392 $ 1,258 <br />(2) DIVESTITURES AND DISCONTINUED OPERATIONS <br />Divestitures <br />On April 1, 2004, the Company completed dte sale of its Canadian personal lines business, consisting of pmate passenger automobile, homeowners <br />and personal property insurance, to Meloche Monnex, Inc., a member of TD Bank Financial Group ("Meloche Monnex"). The transaction resulted in <br />the transfer of approximately 350,W0 automobile and homeowners insurance polities and approximately $300 (C$390) in direct written premiums m <br />Meloche Monnex. Neither party has disclosed the financial terms of the transaction, which the Company believes is not material to its business, <br />financial condition or results of operations. <br />Discontinued Operations <br />In December 2004, the Company's managremene approved a plan to sell the pension extemaliaadon business of Seguros Genesis S.A operations. The <br />Company completed the disposition in December 2005. The operations were a net gain of $0 and a net loss of $12 Eor the three months and year <br />ended December 31, 2005, respectively. <br />(3) ACQUISITIONS AND GOODWILL <br />Effective January 9, 2004, the Company acquired MetLife's Spanish operations, including its non-life subsidiary, Genesis Seguros Generates, S.A., and <br />its life subsidiary, Seguros Genesis, S.A (collectively refereed to as "Genesis ). The transacdon resulted in goodwill oF$74. <br />Effective August 19, 2W4, the Company acquired 100% of the outstanding shares of AGF AOianx Chile $.A., a unit of France's AGF, which is in rum <br />a division of Gemaany's Allianz AG. The transaction resulted in goodwill of $t3. The results of operation for the acquired business are included <br />subsequent ro August 2004. <br />F.Efecdve April 12, 2005, the Company acquired the insurance operations of ING Seguros Generates in Chile. The transaction resulted in goodwill of <br />$14. <br />