Travelers 2013 Annual Report Download - page 185

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
debt to be incurred pre- or post-bankruptcy/restructuring, the ability to shift existing or new debt to
different priority layers, the amount of restructuring/bankruptcy expenses, the size and priority of
unfunded pension obligations, litigation or other contingent claims, the treatment of intercompany
claims and the likely outcome with respect to inter-creditor conflicts.
For structured fixed maturity securities (primarily residential and commercial mortgage-backed
securities and asset-backed securities), the Company estimates the present value of the security by
projecting future cash flows of the assets underlying the securitization, allocating the flows to the
various tranches based on the structure of the securitization and determining the present value of the
cash flows using the effective yield of the security at the date of acquisition (or the most recent implied
rate used to accrete the security if the implied rate has changed as a result of a previous impairment or
changes in expected cash flows). The Company incorporates levels of delinquencies, defaults and
severities as well as credit attributes of the remaining assets in the securitization, along with other
economic data, to arrive at its best estimate of the parameters applied to the assets underlying the
securitization. In order to project cash flows, the following assumptions are applied to the assets
underlying the securitization: (1) voluntary prepayment rates, (2) default rates and (3) loss severity. The
key assumptions made for the Prime, Alt-A and first-lien Sub-Prime mortgage-backed securities at
December 31, 2013 were as follows:
(at December 31, 2013) Prime Alt-A Sub-Prime
Voluntary prepayment rates ........................ 4% - 34% 0% - 15% 1% - 9%
Percentage of remaining pool liquidated due to defaults .... 1% - 45% 19% - 69% 23% - 74%
Loss severity ................................... 30% - 60% 50% - 75% 65% - 100%
Real Estate Investments
On at least an annual basis, the Company obtains independent appraisals for substantially all of its
real estate investments. In addition, the carrying value of all real estate investments is reviewed for
impairment on a quarterly basis or when events or changes in circumstances indicate that the carrying
amount may not be recoverable. The review for impairment considers the valuation from the
independent appraisal, when applicable, and incorporates an estimate of the undiscounted cash flows
expected to result from the use and eventual disposition of the real estate property. An impairment loss
is recognized if the expected future undiscounted cash flows are less than the carrying value of the real
estate property. The impairment loss is the amount by which the carrying amount exceeds fair value.
Other Investments
Investments in Private Equity Limited Partnerships, Hedge Funds and Real Estate Partnerships
The Company reviews its investments in private equity limited partnerships, hedge funds and real
estate partnerships 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.
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