Travelers 2010 Annual Report Download - page 172

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
are depreciated on a straight-line basis over the shorter of the expected useful life of the building or
39 years. Real estate held for sale is carried at lower of cost or fair value, less estimated cost to sell.
Short-term Securities
Short-term securities have an original maturity of less than one year and are carried at amortized
cost, which approximates fair value.
Other Investments
Investments in Private Equity Limited Partnerships, Hedge Funds and Real Estate Partnerships
The Company uses the equity method of accounting for private equity limited partnerships, hedge
funds and real estate partnerships. The partnerships and the hedge funds generally report investments
on their balance sheet at fair value. The financial statements prepared by the investee are received by
the Company on a lag basis, with the lag period generally dependent upon the type of underlying
investments. The private equity and real estate partnerships provide financial information quarterly
which is generally available to investors, including the Company, within three to six months following
the date of the reporting period. The hedge funds provide financial information monthly, which is
generally available to investors within one month following the date of the reporting period. The
Company regularly requests financial information from the partnerships prior to the receipt of the
partnerships’ financial statements, and records any material information obtained from these requests
in its financial statements.
Common Stock with Transfer Restrictions and Other
Included in other are investments in common stock with transfer restrictions, non-public common
and preferred equities, mortgage loans, trading securities and derivatives. Common stock with transfer
restrictions and non-public common and preferred equities are reported at fair value with changes in
fair value, net of income tax, charged or credited to accumulated other changes in equity from
non-owner sources. Mortgage loans are carried at amortized cost. Trading securities are marked to
market with the change in fair value recognized in net investment income during the current period.
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 and mortgage loans is recognized based on the constant
effective yield method which includes an adjustment for estimated principal repayments, 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) and venture capital investments are
recognized in income when declared. Rental income on real estate is recognized on a straight-line basis
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