Travelers 2003 Annual Report Download - page 93

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Adoption of New Accounting Standards
Consolidation of Variable Interest Entities
In December 2003, the Financial Accounting Standards Board (FASB) issued Revised Interpretation No. 46,
“Consolidation of Variable Interest Entities” (FIN 46R). FIN 46R clarifies the application of Accounting
Research Bulletin No. 51, “Consolidated Financial Statements”, to certain entities in which equity investors do
not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated financial support. FIN 46R separates entities into two
groups: (1) those for which voting interests are used to determine consolidation and (2) those for which variable
interests are used to determine consolidation. FIN 46R clarifies how to identify a variable interest entity (VIE)
and how to determine when a business enterprise should include the assets, liabilities, non-controlling interests
and results of activities of a VIE in its consolidated financial statements. A company that absorbs a majority of a
VIE’s expected losses, receives a majority of a VIE’s expected residual returns, or both, is the primary
beneficiary and is required to consolidate the VIE into its financial statements. FIN 46R also requires disclosure
of certain information where the reporting company is the primary beneficiary or holds a significant variable
interest in a VIE (but is not the primary beneficiary).
FIN 46R is effective for public companies that have interests in VIEs or potential VIEs that are special-purpose
entities for periods ending after December 15, 2003. Application by public companies for all other types of
entities is required for periods ending after March 15, 2004. Travelers has chosen to adopt FIN 46R effective
December 31, 2003.
The adoption of FIN 46R did not have any impact on Travelers consolidated financial condition or results of
operations as no consolidation was required. However, Travelers holds interests in hedge fund investments that
are considered significant under FIN 46R, and the hedge funds are accounted for under the equity method of
accounting and are included in other invested assets in the consolidated balance sheet.
Hedge funds are unregistered private investment partnerships, funds or pools that may invest and trade in many
different markets, using a variety of strategies and instruments (including securities, non-securities and
derivatives). The three hedge funds that were determined to be significant VIEs have a total value for all
investors combined of approximately $326.2 million at December 31, 2003. Travelers share of these funds has a
carrying value of approximately $93.0 million at December 31, 2003. Travelers involvement with these funds
began in the third quarter of 2002. There are various purposes of Travelers involvement in these funds,
including but not limited to the following:
• To seek capital appreciation by investing and trading in securities, including, without limitation, investments
in common stock, bonds, notes, debentures, investment contracts, partnership interests, options, warrants.
• To buy and sell U.S. and non-U.S. assets with a primary focus on a diversified pool of structured mortgage
and asset-backed securities offering attractive and relative value.
• To exploit arbitrage opportunities in a broad range of equity and fixed income markets.
Travelers does not have any unfunded commitments associated with these hedge fund investments, and its
exposure to loss is limited to the investment carrying amounts reported in the consolidated balance sheet.