Travelers 2013 Annual Report Download - page 183

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 (including
those with transfer restrictions) are recognized in income when declared. Rental income on real estate
is recognized on a straight-line basis 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 were marked to
market with the change in fair value recognized in net investment income during the current period.
The Company sold all of its remaining trading securities in 2013.
Accrual of income is suspended on non-securitized fixed maturities 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.
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