Travelers 2004 Annual Report Download - page 120

privately-held, early-stage venture investments, events giving rise to impairment can occur in a brief period of
time (e.g., the entity has been unsuccessful in securing additional financing, other investors decide to withdraw
their support, complications arise in the product development process, etc.), and decisions are made at that point
in time, based on the specific facts and circumstances, with respect to a recognition of “other-than-temporary”
impairment or sale of the investment.
Non-Publicly Traded Investments
The Company’s investment portfolio includes non-publicly traded investments, such as venture capital
investments, private equity limited partnerships, joint ventures, other limited partnerships, and certain fixed
income securities. Venture capital investments owned directly are consolidated in the Company’s financial
statements. The Company uses the equity method of accounting for joint ventures, limited partnerships and
certain private equity securities. Certain other private equity investments, including venture capital investments,
are not subject to the provisions of Statement of Financial Accounting Standards (FAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities, but are reported at estimated fair value in accordance with
FAS 60, Accounting and Reporting by Insurance Enterprises. The fair value of the venture capital investments is
based on an estimate determined by an internal valuation committee for securities for which there is no public
market. The internal valuation committee reviews such factors as recent filings, operating results, balance sheet
stability, growth, and other business and market sector fundamental statistics in estimating fair values of specific
investments.
The following is a summary of the approximate carrying value of the Company’s non-publicly traded
securities at December 31, 2004:
(in millions) Carrying Value
Investment partnerships, including hedge funds ........................................ $1,883
Fixed income securities ........................................................... 328
Equity investments ............................................................... 355
Real estate partnerships and joint ventures ............................................ 155
Venture capital .................................................................. 441
Total ..................................................................... $3,162
OTHER MATTERS
On July 23, 2004, the Company announced that it was seeking guidance from the staff of the Division of
Corporation Finance of the Securities Exchange Commission with respect to the appropriate purchase accounting
treatment for certain second quarter 2004 adjustments totaling $1.63 billion ($1.07 billion after-tax). The
Company recorded these adjustments as charges in its income statement in the second quarter of 2004. Through
an informal comment process, the staff of the Division of Corporation Finance has subsequently asked for further
information relating to these adjustments, and the dialogue is ongoing. Specifically, the staff has asked for
information concerning the Company’s adjustments to certain of SPC’s insurance reserves and reserves for
reinsurance recoverables and premiums due from policyholders, and how those adjustments may relate to SPC’s
reserves for periods prior to the merger. After reviewing the staff’s questions and comments and discussions with
the Company’s independent auditors, the Company continues to believe that its accounting treatment for these
adjustments is appropriate. If, however, the staff disagrees, some or all of the adjustments being discussed may
not be recorded as charges in the Company’s income statement, thereby increasing net income for the second
quarter and full year 2004 and increasing shareholders’ equity at December 31, 2004, in each case by the
approximate after-tax amount of the change. The effect on tangible shareholders’ equity (adjusted for the effects
of deferred taxes associated with goodwill and intangible assets) at December 31, 2004 would not be material.
Increases to goodwill and deferred tax liabilities would be reflected on the Company’s balance sheet as of
April 1, 2004, either due to purchase accounting or adjustment of SPC’s reserves prior to the merger.
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