Travelers 2004 Annual Report Download - page 131

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
guidance on the dilutive effect of contingently convertible debt instruments. EITF 04-8 requires that contingently
convertible debt instruments are included in diluted earnings per share, under the if-converted method, regardless
of whether the market price trigger has been met. Under FAS 128, Earnings Per Share, contingently convertible
debt instruments which contain market price triggers were excluded from the computation of diluted earnings per
share until the market trigger conditions were met.
The Company has $893 million of 4.50% convertible junior subordinated notes outstanding which are
subject to the new EITF 04-8 guidance. These convertible junior subordinated notes mature on April 15, 2032
unless earlier redeemed, repurchased or converted. The notes are convertible into approximately 17 million
shares of the Company’s common stock at the option of the holder after March 27, 2003 and prior to April 15,
2032 if at any time certain contingency conditions are met. On or after April 18, 2007, the notes may be
redeemed at the Company’s option.
EITF 04-8 is effective for fiscal years ended after December 15, 2004 and requires restatement of prior
period earnings per share for comparative periods. Accordingly, the Company has restated diluted earnings per
share for prior periods to include the impact of the convertible junior subordinated notes where the impact of
including these securities was dilutive. See note 7 for the impact on earnings per share.
Consolidation of Variable Interest Entities
In December 2003, the FASB issued Revised Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46R). FIN 46R, along with its related interpretations, 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 that are considered 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. The Company adopted FIN 46R effective December
31, 2003.
The Company holds significant interests in hedge fund investments that are accounted for under the equity
method of accounting and are included in other investments in the consolidated balance sheet. Hedge funds are
unregistered private investment partnerships, limited liability companies (LLC), funds or pools that may invest
and trade in many different markets, strategies and instruments (including securities, non-securities and
derivatives). Three hedge funds were determined to be significant VIEs and have a total value for all investors
combined of approximately $175 million and $326 million as of December 31, 2004 and 2003, respectively. The
Company’s share of these funds has a carrying value of approximately $54 million and $93 million at December
31, 2004 and 2003, respectively. The Company’s involvement with these funds began in the third quarter of 2002.
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