Travelers 2005 Annual Report Download - page 148

THE ST. PAUL TRAVELERS COMPANIES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
136
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont inued)
or to employees that become retirement eligible before an award’s vesting date for which the right to
receive or retain equity shares is no longer contingent on the satisfaction of a market performance or
service condition. The Company does not expect the impact of adopting FAS 123R to have a significant
effect on operations, financial condition or liquidity.
Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection withModifications or
Exchanges of Insurance Contracts
In September 2005, the Accounting Standards Executive Committee (AcSEC) issued Statement Of
Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with
Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting
by insurance enterprises for deferred acquisition costs (DAC) on internal replacements of insurance and
investment contracts other than those specifically described in FAS 97, Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments. SOP 05-1 defines an internal replacement as a modification in product benefits, features,
rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment,
endorsement, or rider to a contract, or by the election of a feature or coverage within a contract.
SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15,
2006, with earlier adoption encouraged. The Company does not expect the impact of adopting SOP 05-1 to
have a significant effect on operations, financial condition or liquidity.
Accounting Policies
Investments
Fixed maturities include bonds, notes and redeemable preferred stocks. Fixed maturities are valued
based upon quoted market prices or dealer quotes, or if quoted market prices or dealer quotes are not
available, discounted expected cash flows using market rates commensurate with the credit quality and
maturity of the investment. Also included infixed maturities are loan-backed and structured securities,
which are amortized 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 other comprehensive income.
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 estimatingfair value, the Company uses interest
rates reflecting the current real estate financing market returns. Impaired loans were not significant at
December 31, 2005 and 2004.