2006 Annual Report

14 | SELF-INSURANCE RESERVE FOR LOSSES AND
14 | LOSS ADJUSTMENT EXPENSES
The activity in the reserve for losses and loss adjustment
expenses is summarized as follows:
($ in millions) 2006 2005
Balance at beginning of year $264 $234
Less: reinsurance recoverable (24) (23)
Net balance at beginning of year
Incurred related to:
240 211
Current Year 122 139
Prior year (20) (26)
Total incurred
Paid related to:
102 113
Current Year (37) (24)
Prior year (50) (60)
Total paid (87) (84)
Net balance at end of year 255 240
Add: reinsurance recoverable 16 24
Balance at end of year $271 $264
The provision for unpaid loss and loss adjustment expenses
decreased by $20 million and $26 million in 2006 and 2005,
respectively, as a result of changes in estimates from insured
events of the prior years due to changes in underwriting experience
and frequency and severity trends. The year-end 2006 selfinsurance
reserve of $271 million is comprised of a current
portion of $87 million and a long-term portion of 184 million.
The year-end 2005 self-insurance reserve of $264 million is comprised
of a current portion of $84 million and a long-term portion
of $180 million.
15 | SHAREHOLDERS’ EQUITY
Eight hundred million shares of our Class A Common Stock, with
a par value of $.01 per share, are authorized, and 10 million
shares of preferred stock, without par value, are authorized. As of
the 2006 fiscal year-end, there were 389.5 million shares of our
Class A Common Stock outstanding and no shares of our preferred
stock were outstanding.
On March 27, 1998, our Board of Directors adopted a shareholder
rights plan under which one preferred stock purchase
right was distributed for each share of our Class A Common
Stock. Each right entitles the holder to buy 1/1000th of a share
of a newly issued series of junior participating preferred stock of
the Company at an exercise price of $175. The rights may not
presently be exercised, but will be exercisable 10 days after a
person or group acquires beneficial ownership of 20 percent or
more of our Class A Common Stock or begins a tender or
exchange for 30 percent or more of our Class A Common Stock.
Shares owned by a person or group on March 27, 1998, and held
continuously thereafter, are exempt for purposes of determining
beneficial ownership under the rights plan. The rights are nonvoting
and will expire on March 27, 2008, the tenth anniversary
of the adoption of the shareholder rights plan unless previously
exercised or redeemed by us for $.01 each. If we are involved in
a merger or certain other business combinations not approved
by the Board of Directors, each right entitles its holder, other
than the acquiring person or group, to purchase common stock
56 | MARRIOTT INTERNATIONAL, INC. 2006
of either the Company or the acquirer having a value of twice
the exercise price of the right.
Accumulated other comprehensive income of $44 million at
year-end 2006 primarily consisted of gains totaling $35 million
associated with available-for-sale securities and gains totaling
$12 million associated with foreign currency translation adjustments.
Accumulated other comprehensive loss of $11 million at
year-end 2005 consisted primarily of losses totaling $16 million
associated with foreign currency translation adjustments which
were partially offset by gains totaling $8 million associated with
available-for-sale securities.
16 | FAIR VALUE OF FINANCIAL INSTRUMENTS
We believe that the fair values of current assets and current
liabilities approximate their reported carrying amounts. The fair
values of non-current financial assets, liabilities and derivatives
are shown in the following table.
2006 2005
Carrying Fair Carrying Fair
($ in millions)
Notes and other
Amount Value Amount Value
long-term assets
Long-term debt and other
$ 993 $ 996 $1,374 $1,412
long-term liabilities $1,816 $1,847 $1,636 $1,685
Derivative instruments $ 6 $ 6 $ 6 $ 6
We value notes and other receivables based on the expected
future cash flows discounted at risk-adjusted rates. We determine
valuations for long-term debt and other long-term liabilities
based on quoted market prices or expected future
payments discounted at risk-adjusted rates.
17 | DERIVATIVE INSTRUMENTS
During 2003, we entered into an interest rate swap agreement
under which we receive a floating rate of interest and pay a fixed
rate of interest. The swap modifies our interest rate exposure by
effectively converting a note receivable with a fixed rate to a
floating rate. The aggregate notional amount of the swap is
$92 million and it matures in 2010. The swap is classified as a
fair value hedge under FAS No. 133,“Accounting for Derivative
Instruments and Hedging Activities” (“FAS No. 133”), and the
change in the fair value of the swap, as well as the change in the
fair value of the underlying note receivable, is recognized in
interest income. The fair value of the swap was a $1 million asset
at year-end 2006 and 2005, and a $3 million liability at year-end
2004. The hedge is highly effective and, therefore, no net gain or
loss was reported during 2006, 2005, and 2004.
During 2006, we entered into an interest rate swap agreement
to manage the volatility of the U.S. Treasury component of
the interest rate risk associated with the forecasted issuance of
our Series H Notes. During 2005, we entered into two similar
instruments in conjunction with the forecasted issuance of our
Series F Notes and the exchange of our Series C and E Notes for
new Series G Notes. All three swaps were designated as cash
flow hedges under FAS No. 133 and were terminated upon pricing
of the notes. All three swaps were highly effective in offsetting
fluctuations in the U.S. Treasury component. Thus, there was
no net gain or loss reported in earnings during 2006 or 2005.
The net losses for these swaps of $2 million in 2006 associated
with the Series H Notes and $2 million in 2005 associated with