Travelers 2006 Annual Report Download - page 171

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
159
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Loans
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 material at December 31, 2006 and 2005.
Venture Capital Investments and Non-Publicly Traded Investments
Venture capital investments and non-publicly traded investments are reviewed quarterly for other-
than-temporary impairment by the external fund manager and the Company’s portfolio managers. An
impairment loss is recognized if, based on the specific facts and circumstances, it is probable that the
Company will not be able to recover all of the cost of an individual holding. For a further discussion, please
see the “venture capital investments” and “non-publicly traded investments” sections under the “Valuation
of Investments” above.
Net Investment Income
Investment income from fixed maturities and mortgage loans is recognized based on the constant
effective yield method includingestimated principal repayments, if any. The effective yield used to
determine amortization for fixed maturities subject to prepayment risk (e.g., asset-backed, loan-backed
and structured securities) is recalculated and adjusted periodically based upon actual historical and/or
projected future cash flows, which are obtained from a widely-accepted securities data provider. The
adjustments to the yield for highly rated prepayable fixed maturities are accounted for using the
retrospective method. The adjustments to the yield for non-highly rated prepayable fixed maturities are
accounted for using the prospective method. Dividends on equity securities are recognized in income
when declared. Rental income on real estate is recognizedon a straight-line basis over the lease term. See
note 3 for further discussion. Undistributed income for equity method investments is reported in net
investment income.
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 preceding12 months were not material.
Investment Gains and Losses
Net realized investment gains and losses are included as a component of pretax revenues based upon
specific identification of the investments sold on the trade date. Included in net realized investment gains
(losses) are other-than-temporary impairment losses on invested assets as described above in the
“Investment Impairment” section above.
Reinsurance Recoverables
Amounts recoverable from reinsurers are estimated in a manner consistent with the associated claim
liability. The Company reports its reinsurance recoverables net of an allowance for estimated uncollectible