Travelers 2013 Annual Report Download - page 182

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Investments
The Company’s real estate investments include warehouses, office buildings and other commercial
land and properties that are directly owned. Real estate is recorded on the purchase date at the
purchase price, which generally represents fair value, and is supported by internal analysis or external
appraisals that use discounted cash flow analyses and other acceptable valuation techniques. Real estate
held for investment purposes is subsequently carried at cost less accumulated depreciation.
Buildings 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
costs 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 consolidated financial statements.
Other
Also included in other investments are non-public common and preferred equities, 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.
Trading securities are marked to market with the change in fair value recognized in net investment
income during the current period. The Company sold all of its remaining trading securities during 2013.
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 repayments, if any. The effective yield
used to determine amortization for fixed maturities subject to prepayment risk (e.g., asset-backed,
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