Travelers 2005 Annual Report Download - page 171

THE ST. PAUL TRAVELERS COMPANIES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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6. INVESTMENTS (Continued)
•The Company also has a significant variable interest in Camperdown UK Limited, which SPC sold
in December 2003. The Company’s variable interest results from an agreement to indemnify the
purchaser in the event a specified reserve deficiency develops, a reserve-related foreign exchange
impact occurs, or a foreign tax adjustment is imposed on a pre-sale reporting period. The maximum
amount of this indemnification obligation is $172 million. The fair value of this obligation as of
December 31, 2005 and 2004 was $66 million and $44 million, respectively. See “Guarantees”
section of note 17.
•The Company has a significant variable interest in two private equity funds. These investments are
held for the purpose of generating long-term investment returns. The combined carrying value of
these entities was immaterial at December 31, 2005 and 2004. The Company has an unfunded
commitment of $12million associated with one of these funds. The Company’s exposure to loss is
limited to the investment carrying amounts reported in the consolidated balance sheet and the
unfunded commitment amount.
•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,
funds or pools that may invest and trade in many different markets, strategies and instruments
(including securities, non-securities and derivatives). As of December 31, 2005, one hedge fundwas
determined to be a significant VIE. The value for all investors combined of the hedge fund that was
determined to be a significant VIE was approximately $53 million at December 31, 2005. The
Company’s share of this fund had a carrying value of approximately $11 million at December 31,
2005. The Company’s involvement with this fundbegan in the third quarter of 2003. The Company
does not have any unfunded commitments related to this fund. The Company’s exposure to loss is
limited to the investment carrying amounts reported in the consolidated balance sheet.
At December 31, 2004, three hedge funds were determined to be significant VIEs and had a total
value for all investors combined of approximately $175million. The Company’s share of these funds
has a carrying value of approximately $54million at December 31, 2004. The Company’s
involvement with these funds began in the third quarter of 2002. The Company does not have any
unfunded commitments related to these funds. The Company’s exposure to loss is limited to the
investment carrying amounts reported in the consolidated balance sheet.
There are various purposes for the Company’s 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 and warrants;
•to buy and sell U.S. and non-U.S. assets with primary focus on a diversified pool of structured
mortgage and asset-backed securities offering attractive and relative value; and
•to sell securities short primarily to exploit arbitrage opportunities in a broad range of equity
and fixed income markets.