Travelers 2010 Annual Report Download - page 173

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
over the lease term. See note 3 for further discussion. Investments in private equity limited
partnerships, hedge funds, real estate partnerships and joint ventures are accounted for using the equity
method of accounting, whereby the Company’s share of the investee’s earnings or losses in the fund 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.
Accrual of income is suspended on non-securitized 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 when payments are received. Investments included in the
consolidated balance sheet that were not income-producing for the preceding 12 months were not
material.
For fixed maturities where the Company records an other-than-temporary impairment, a
determination is made as to the cause of the impairment and whether the Company expects a recovery
in the value. For fixed maturities where the Company expects a recovery in value, not necessarily to
par, the constant effective yield method is utilized and the investment is amortized to the expected
recovery amount.
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 other than
those investments accounted for using the equity method of accounting as described in the ‘‘Investment
Impairments’’ section that follows.
Investment Impairments
The Company conducts a periodic review to identify and evaluate invested assets having
other-than-temporary impairments. Some of the factors considered in identifying other-than-temporary
impairments include: (1) for fixed maturity investments, whether the Company intends to sell the
investment or whether it is more likely than not that the Company will be required to sell the
investment prior to an anticipated recovery in value; (2) for non-fixed maturity investments, the
Company’s ability and intent to retain the investment for a reasonable period of time sufficient to allow
for an anticipated recovery in value; (3) the likelihood of the recoverability of principal and interest for
fixed maturity securities (i.e., whether there is a credit loss) or cost for equity securities; (4) the length
of time and extent to which the fair value has been less than amortized cost for fixed maturity
securities or cost for equity securities; and (5) the financial condition, near-term and long-term
prospects for the issuer, including the relevant industry conditions and trends, and implications of
rating agency actions and offering prices.
Reporting of Other-Than-Temporary Impairments
For fixed maturity investments that the Company does not intend to sell or for which it is more
likely than not that the Company would not be required to sell before an anticipated recovery in value,
the Company separates the credit loss component of the impairment from the amount related to all
other factors and reports the credit loss component in net realized investment gains (losses). The
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