Travelers 2015 Annual Report Download - page 173

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
in fair value, net of income taxes, charged or credited directly to other comprehensive income. The
Company’s derivative financial instruments are carried at fair value, with the changes in fair value
reflected in the consolidated statement of income in net realized investment gains (losses). For a
further discussion of the derivatives used by the Company, see note 3.
Net Investment Income
Investment income from fixed maturities is recognized based on the constant effective yield
method which includes an adjustment for estimated principal pre-payments, 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 (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.
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
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