Travelers 2010 Annual Report Download - page 176

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
for impairment no less frequently than quarterly and monitors the performance throughout the year
through discussions with the managers/general partners. If the Company becomes aware of an
impairment of a partnership’s investments at the balance sheet date prior to receiving the partnership’s
financial statements, it will recognize an impairment by recording a reduction in the carrying value of
the partnership with a corresponding charge to net investment income.
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 the fair market value of the
underlying collateral. In estimating fair value, the Company uses interest rates reflecting the current
real estate financing market returns.
Securities Lending
The Company has engaged in securities lending activities from which it generates net investment
income by lending certain of its investments to other institutions for short periods of time. Borrowers
of these securities provide collateral equal to at least 102% of the market value of the loaned securities
plus accrued interest. This collateral is held by a third-party custodian, and the Company has the right
to access the collateral only in the event that the institution borrowing the Company’s securities is in
default under the lending agreement. Therefore, the Company does not recognize the receipt of the
collateral held by the third-party custodian or the obligation to return the collateral. The loaned
securities remain a recorded asset of the Company. The Company accepts only cash as collateral for
securities on loan and restricts the manner in which that cash is invested.
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 reinsurance recoverables. The allowance is based upon the Company’s ongoing review of
amounts outstanding, length of collection periods, changes in reinsurer credit standing, disputes,
applicable coverage defenses and other relevant factors. Amounts deemed to be uncollectible, including
amounts due from known insolvent reinsurers, are written off against the allowance for estimated
uncollectible reinsurance recoverables. Any subsequent collections of amounts previously written off are
reported as part of claims and claim adjustment expenses. The Company evaluates and monitors the
financial condition of its reinsurers under voluntary reinsurance arrangements to minimize its exposure
to significant losses from reinsurer insolvencies.
Deferred Acquisition Costs
Amounts which vary with and are primarily related to the production of new insurance contracts,
consisting of commissions and premium-related taxes, are deferred and amortized pro rata over the
contract periods in which the related premiums are earned. Deferred acquisition costs are reviewed to
determine if they are recoverable from future income and, if not, are charged to expense. Future
investment income attributable to related premiums is taken into account in measuring the
recoverability of the carrying value of this asset. All other acquisition expenses are charged to
operations as incurred.
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