Travelers 2004 Annual Report Download - page 135

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
using the retrospective method. The effective yield used to determine amortization is calculated based upon
actual historical and projected future cash flows, which are obtained from a widely-accepted securities data
provider. Fixed maturities, including instruments subject to securities lending agreements, are classified as
available for sale and are reported at fair value, with unrealized investment gains and losses, net of income taxes,
credited or charged directly to other comprehensive income.
Equity securities, which include common and nonredeemable preferred stocks, are classified as available for
sale and carried at fair value based on quoted market prices. Changes in fair values of equity securities, net of
income tax, are charged or credited directly to shareholders’ equity.
Mortgage loans are carried at amortized cost. A mortgage loan is considered impaired when it is probable
that the Company will be unable to collect principal and interest amounts due. For mortgage loans that are
determined to be impaired, a reserve is established for the difference between the amortized cost and fair market
value of the underlying collateral. In estimating fair value, the Company uses interest rates reflecting the current
real estate financing market returns. Impaired loans were not significant at December 31, 2004 and 2003.
The Company’s real estate investments include warehouses and office buildings and other commercial land
and properties that are directly owned. Real estate properties are carried at cost less accumulated depreciation.
Buildings are depreciated on a straight line basis over the shorter of the expected useful life of the building or 39
years. Accumulated depreciation on real estate held for investment purposes was $22 million and $0 at December
31, 2004 and 2003, respectively.
The carrying value of real estate properties are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. The review for impairment includes an
estimate of the undiscounted cash flows expected to result from the use and eventual disposition of the real estate
property. An impairment loss is recognized if the expected future undiscounted cash flows exceed the carrying
value of the real estate property.
Rental income is recognized on a straight line basis over the lease term. See note 6.
Real estate held for sale is carried at the lower of cost or fair value less estimated costs to sell. Fair value is
established at the time of acquisition by internal analysis or external appraisers, using discounted cash flow
analyses and other acceptable techniques. Thereafter, impairment is taken if the carrying value of the property
exceeds its current fair value less estimated costs to sell. The Company had no real estate held for sale at
December 31, 2004, and the amount held for sale at December 31, 2003 was not significant.
Accrual of income is suspended on fixed maturities or mortgage loans that are in default, or on which it is
likely that future payments will not be made as scheduled. Interest income on investments in default is
recognized only as payment is received. Investments included in the consolidated balance sheet that were not
income-producing for the preceding 12 months were not significant.
Short-term securities, consisting primarily of money market instruments and other debt issues purchased
with a maturity of less than one year, are carried at amortized cost, which approximates fair value.
Other investments include: venture capital investments, through direct ownership and limited partnerships;
private equity limited partnerships; joint ventures, other limited partnerships, and trading securities. Venture
capital investments owned directly are consolidated in the Company’s financial statements. The Company uses
the equity method of accounting for joint ventures, limited partnerships and certain private equity securities.
Undistributed income is reported in net investment income. Trading securities are marked to market with the
change in fair value recognized in net investment income during the current period.
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