Travelers 2011 Annual Report Download - page 178

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 consolidated financial statements.
Common Stock with Transfer Restrictions and Other
Also included in other investments are 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 taxes, charged or credited directly to accumulated other changes in
equity from nonowner 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
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 are marked to market with the change in fair
value recognized in net investment income during the current period.
Accrual of income is suspended on non-securitized fixed maturities or mortgage loans 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.
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