Travelers 2014 Annual Report Download - page 175

Table of Contents
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 investments in 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 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. 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 in 2013.
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
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