Travelers 2012 Annual Report Download - page 179

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other
Also included in other investments are non-public common and preferred equities, mortgage loans,
trading securities and derivatives. 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 other comprehensive
income. 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.
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.
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