<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 1-14328
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1445591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(Address of principal executive offices) (Zip Code)
(860) 277-0111
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE:
<TABLE>
<CAPTION>
COMMON STOCK OUTSTANDING AS OF OCTOBER 31,1996:
<S> <C>
CLASS A 71,775,469
CLASS B 328,020,170
</TABLE>
<PAGE> 2
TRAVELERS/AETNA PROPERTY CASUALTY CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Part I - Financial Information
<TABLE>
Item 1. Financial Statements: Page No.
--------
<S> <C> <C>
Condensed Consolidated Statement of Operations (Unaudited) -
Three and Nine Months Ended September 30, 1996 and 1995 3
Condensed Consolidated Balance Sheet -
September 30, 1996 (Unaudited) and December 31, 1995 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity (Unaudited) -
Nine Months Ended September 30, 1996 5
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements - (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II - Other Information
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
Exhibit Index 26
Signatures 27
</TABLE>
2
<PAGE> 3
TRAVELERS/AETNA PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums $1,818 $ 846 $ 4,311 $2,590
Net investment income 493 180 1,161 523
Fee income 120 110 338 355
Realized investment gains (losses) 2 35 (31) 35
Other revenues 19 4 27 13
------ ------ ------- ------
2,452 1,175 5,806 3,516
------ ------ ------- ------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 1,442 725 3,979 2,273
Amortization of deferred acquisition costs 279 128 649 369
Interest expense 40 -- 78 --
General and administrative expenses 338 178 983 513
------ ------ ------- ------
2,099 1,031 5,689 3,155
------ ------ ------- ------
Income before federal income taxes 353 144 117 361
Federal income taxes (benefit) 106 34 (12) 77
------ ------ ------- ------
Net income $ 247 $ 110 $ 129 $ 284
====== ====== ======= ======
Net income per share of common stock $ 0.62 $ 0.37 $ 0.35 $ 0.96
====== ====== ======= ======
Weighted average number of common
and equivalent shares outstanding 400.0 294.5 356.2 294.5
====== ====== ======= ======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
TRAVELERS/AETNA PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except shares)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at market (cost, $23,389; $10,534) $ 23,455 $10,908
Equity securities, at market (cost, $807; $565) 838 603
Mortgage loans 1,009 213
Real estate held for sale 157 23
Short-term securities 2,862 786
Other investments 489 287
-------- -------
Total investments 28,810 12,820
-------- -------
Cash 99 51
Investment income accrued 360 165
Premium balances receivable 3,062 2,213
Reinsurance recoverables 10,032 5,407
Deferred acquisition costs 423 202
Deferred federal income taxes 1,648 650
Contractholder receivables 1,680 1,154
Other assets 3,511 1,400
-------- -------
Total assets $ 49,625 $24,062
======== =======
LIABILITIES
Claims and claim adjustment expense reserves $ 31,797 $15,460
Unearned premium reserves 3,474 1,695
Contractholder payables 1,680 1,154
Long-term debt 900 --
Commercial paper 388 --
Other liabilities 4,438 2,152
-------- -------
Total liabilities 42,677 20,461
-------- -------
TAP - Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trusts
holding solely Junior Subordinated Debt Securities 900 --
STOCKHOLDERS' EQUITY
Common stock:
Class A, $.01 par value, 700 million shares authorized,
71,979,829 shares issued 1 --
Class B, $.01 par value, 700 million shares authorized,
328,020,170 shares issued and outstanding 3 --
Common stock, $100 par value, 150,000 shares authorized,
100,000 shares issued and outstanding -- 10
Additional paid-in capital 5,455 2,889
Retained earnings 518 422
Treasury stock, at cost (shares, 57,400; 0) (2) --
Unrealized investment gains, net of taxes 73 280
-------- -------
Total stockholders' equity 6,048 3,601
-------- -------
Total liabilities and stockholders' equity $ 49,625 $24,062
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
TRAVELERS/AETNA PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(in millions, except shares)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1996
Amount Shares
------ --------------------------------------------
COMMON STOCK AND ADDITIONAL
PAID-IN CAPITAL Class A Class B
------- -------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 2,899 100,000 -- --
Capitalization of Travelers/Aetna
Property Casualty Corp. 2,560 (100,000) 71,979,829 328,020,170
------- -------- ---------- -----------
Balance, end of period 5,459 -- 71,979,829 328,020,170
------- -------- ---------- -----------
RETAINED EARNINGS
Balance, beginning of period 422
Net income 129
Dividends (33)
-------
Balance, end of period 518
-------
TREASURY STOCK (at cost)
Balance, beginning of period -- --
Treasury stock acquired (2) (57,400)
------- --------
Balance, end of period (2) (57,400)
------- --------
UNREALIZED INVESTMENT GAINS
(LOSSES), NET OF TAXES
Balance, beginning of period 280
Net change in unrealized investment gains and
losses, net of taxes (207)
-------
Balance, end of period 73
------- -------- ---------- -----------
Total stockholders' equity and
shares outstanding $ 6,048 -- 71,922,429 328,020,170
======= ======== ========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
TRAVELERS/AETNA PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
INCREASE (DECREASE) IN CASH
(in millions)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30,
-------------
1996 1995
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 903 $ 1,129
-------- -------
Cash flows from investing activities:
Investment repayments
Fixed maturities 982 494
Mortgage loans 20 14
Proceeds from sales of investments, including real estate held for sale
Fixed maturities 11,162 4,283
Equity securities 403 101
Mortgage loans 23 15
Real estate held for sale 15 16
Investments in
Fixed maturities (12,389) (4,588)
Equity securities (504) (323)
Mortgage loans -- (40)
Short-term securities, (purchases) sales, net (1,594) (987)
Other investments, net (108) 3
Business acquisition (4,160) --
Securities transactions in course of settlement 550 17
-------- -------
Net cash used in investing activities (5,600) (995)
-------- -------
Cash flows from financing activities:
Issuance of commercial paper, net 388 --
Issuance of long-term debt 900 --
Borrowings on revolving line of credit 2,650 --
Payments on revolving line of credit (2,650) --
Contribution from parent 1,138 --
Private offering of common stock 525 --
Initial public offering of common stock 928 --
Issuance of mandatorily redeemable preferred securities 900 --
Issuance of Series Z preferred stock 540 --
Redemptions of Series Z preferred stock (540) --
Dividends on Series Z preferred stock (4) --
Dividend to parent (25) (73)
Dividends to minority shareholders (5) --
-------- -------
Net cash provided by (used in) financing activities 4,745 (73)
-------- -------
Net increase in cash 48 61
Cash at beginning of period 51 32
-------- -------
Cash at end of period $ 99 $ 93
======== =======
Supplemental disclosure of cash flow information:
Income taxes refunded $ 104 $ 50
======== =======
Interest paid $ 53 $ --
======== =======
Supplemental disclosure of business acquisition:
Fair value of investments acquired $ 13,894 --
Fair value of other assets acquired 10,006 --
Claims and claim adjustment expense reserves assumed (16,809) --
Other liabilities assumed (2,931) --
-------- -------
Business acquisition $ 4,160 $ --
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
TRAVELERS/AETNA PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. General
The interim condensed consolidated financial statements include the
accounts of Travelers/Aetna Property Casualty Corp. (TAP) (a direct
majority-owned subsidiary of The Travelers Insurance Group Inc. (TIGI) and
an indirect majority-owned subsidiary of Travelers Group Inc.) and its
subsidiaries (collectively, the Company), are prepared in conformity with
generally accepted accounting principles (GAAP) and are unaudited. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments necessary for a fair presentation, have been reflected. The
accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
for the year ended December 31, 1995 included in the Company's Form S-1
registration statement, which was declared effective on April 22, 1996
(Registration No. 333-2254).
Earnings per common share is based on the weighted average number of common
shares outstanding during the period. For purposes of the computation of
earnings per share, the weighted average number of shares was computed by
treating the common stock issued within a one-year period prior to the
initial filing of the registration statement relating to the initial public
offering (IPO) as outstanding for all reported periods. This amount was
then reduced by the dilutive effect of such issuances of stock prior to the
IPO determined by using the actual proceeds and the number of shares that
could have been repurchased using the IPO price as the repurchase price for
all periods presented.
Certain financial information that is normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles, but that is not required for interim reporting purposes, has
been condensed or omitted. Certain prior year amounts have been
reclassified to conform with the 1996 presentation.
2. Acquisition
On April 2, 1996, TAP purchased from Aetna Life and Casualty Company
(Aetna) all of the outstanding capital stock of The Aetna Casualty and
Surety Company and The Standard Fire Insurance Company (collectively, Aetna
P&C) for approximately $4.16 billion in cash. The acquisition was treated
as a purchase and, accordingly, the financial results of Aetna P&C are
included in these condensed consolidated financial statements effective
April 2, 1996.
To finance the $4.16 billion purchase price including transaction costs,
plus capital contributions totaling $710 million to Aetna P&C, TAP borrowed
$2.65 billion from a syndicate of banks under a five-year revolving credit
facility that expires on March 15, 2001 (the Credit Facility) and sold
approximately 33 million shares of its Class A Common Stock representing
approximately 9% of its outstanding common stock (at that time) to four
private investors, including Aetna, for an aggregate of $525 million. TIGI
acquired approximately 328 million shares of Class B Common Stock of TAP in
exchange for contributing the outstanding capital stock of The Travelers
Indemnity Company and a capital contribution of approximately $1.14
billion. In addition, Travelers Group Inc. purchased from TAP $540 million
of Series Z Preferred Stock of TAP. Approximately $18 million of the
purchase price was funded through the settlement of receivables from Aetna.
7
<PAGE> 8
TRAVELERS/AETNA PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
2. Acquisition, Continued
On April 23, 1996, TAP sold in a public offering approximately 39 million
shares of its Class A Common Stock, representing approximately 9.75% of its
outstanding common stock, for total proceeds of $928 million. On April 24,
1996, TAP sold in a public offering $500 million of 6-3/4% Notes due April
15, 2001 and $200 million of 7-3/4% Notes due April 15, 2026. On April 26,
1996, Travelers P&C Capital I, a wholly owned subsidiary trust of TAP,
issued $800 million of 8.08% Trust Preferred Securities in a public
offering. On May 10, 1996, Travelers P&C Capital II, a wholly owned
subsidiary trust of TAP, issued $100 million of 8.00% Trust Preferred
Securities in a public offering. These Trust Preferred Securities, which
are fully and unconditionally guaranteed by TAP, have a liquidation value
of $25 per Trust Preferred Security and are mandatorily redeemable under
certain circumstances. Dividends on the Trust Preferred Securities have
been classified as interest expense in the condensed consolidated statement
of operations. The aggregate proceeds from the above offerings of $2.528
billion together with the proceeds from the issuance by TAP of
approximately $700 million of commercial paper were used to repay in full
the borrowings under the Credit Facility and to redeem in full TAP's Series
Z Preferred Stock.
The assets and liabilities of Aetna P&C are reflected in the condensed
consolidated balance sheet at September 30, 1996 on a fully consolidated
basis at management's best estimate of their fair values, based on
currently available information. Evaluation and appraisal of assets and
liabilities is continuing, including: adjustments to investments; deferred
acquisition costs; financial guarantee obligations which the Company
expects to assume, designate as held for sale and actively market; claim
reserves to conform the accounting policy regarding discounting to that
historically used by the Company; liabilities for lease and severance costs
relating to a restructuring plan for the business acquired; other assets
and liabilities and related deferred income tax amounts; and allocation of
the purchase price may be adjusted. The excess of the purchase price over
the estimated fair value of net assets is approximately $1.14 billion and
is being amortized over 40 years.
During the second quarter of 1996, the Company recorded charges related to
the acquisition and integration of Aetna P&C. These charges resulted
primarily from anticipated costs of the merger and the application of the
Company's strategies, policies and practices to Aetna P&C reserves and
include: $323 million after tax ($497 million before tax) in reserve
increases, net of reinsurance, related primarily to cumulative injury
claims other than asbestos (CIOTA) as well as insurance products involving
financial guarantees, and assumed reinsurance; $45 million after tax ($69
before tax) in uncollectible reinsurance and other receivables; and a $23
million after-tax ($35 million before tax) provision for lease and
severance costs of The Travelers Indemnity Company related to the
restructuring plan for the merger.
3. Aetna P&C Acquisition - Pro Forma Results of Operations
The following unaudited pro forma information presents the results of
operations of the Company and Aetna P&C for the nine months ended September
30, 1996 and 1995, with pro forma adjustments as if the acquisition and
transactions related to the funding of the acquisition had been consummated
as of the beginning of the periods presented. This pro forma information is
not necessarily indicative of what would have occurred had the acquisition
and related transactions been made on the dates indicated, or of future
results of the Company.
8
<PAGE> 9
TRAVELERS/AETNA PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
3. Aetna P&C Acquisition - Pro Forma Results of Operations, Continued
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
(in millions, except per share data) September 30,
-------------
1996 1995(*)
---- ------
<S> <C> <C>
Revenues $7,414 $ 7,337
Net income (loss) 322 (51)
Net income (loss) per common share 0.81 (0.13)
</TABLE>
(*) Historical results of Aetna P&C include a charge of $750 million ($488
million after tax) representing an addition to environmental-related
claims reserves in the second quarter of 1995.
Excluding the acquisition-related charges outlined in Note 2, pro forma net
income would have been $713 million or $1.78 per share for the nine months
ended September 30, 1996.
4. Changes in Accounting Principles
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". This statement
requires a write down to fair value when long-lived assets to be held and
used are impaired. The statement also requires long-lived assets to be
disposed of (e.g. real estate held for sale) to be carried at the lower of
cost or fair value less cost to sell, and does not allow such assets to be
depreciated. The adoption of this standard did not have a material impact
on the Company's financial condition, results of operations or liquidity.
5. Capital and Debt
As discussed in Note 2, during the first quarter of 1996, TAP entered into
a five-year revolving credit facility in the amount of $2.65 billion with a
syndicate of banks. This facility was used to finance the purchase of Aetna
P&C. As of April 30, 1996, all borrowings under this facility had been
repaid in full and the amount of the facility was subsequently reduced to
$600 million, none of which is currently utilized. Under this facility TAP
is required to maintain a certain level of consolidated stockholders'
equity (as defined in the agreement). At September 30, 1996, this
requirement was exceeded by approximately $2.6 billion. In addition this
facility places restrictions on the amount of consolidated debt TAP can
incur. TAP also issues commercial paper directly to investors and maintains
unused credit availability under the revolving credit facility at least
equal to the amount of commercial paper outstanding. At September 30, 1996,
TAP had $388 million outstanding under its commercial paper program. On
September 9, 1996, TAP sold $200 million of 6-3/4% Notes due September 1,
1999 in a public offering. TAP also currently has available to it a $200
million line of credit for working capital and other general corporate
purposes from a subsidiary of Travelers Group Inc. The lender has no
obligation to make any loan to TAP under this line of credit.
9
<PAGE> 10
TRAVELERS/AETNA PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
5. Capital and Debt, Continued
The Junior Subordinated Debt Securities, which are the sole assets of
Travelers P&C Capital I and II and are eliminated in consolidation, were as
follows at September 30, 1996:
<TABLE>
<CAPTION>
(in millions) Amount Interest Rate Maturity Date
------ ------------- -------------
<S> <C> <C> <C>
Travelers P&C Capital I $800 8.08% 4/30/36
Travelers P&C Capital II 100 8.00% 5/15/36
</TABLE>
The Company's insurance subsidiaries are subject to various regulatory
restrictions that limit the maximum amount of dividends available to be
paid to their parent without prior approval of insurance regulatory
authorities. Dividend payments to TAP from its insurance subsidiaries are
limited to $299 million in 1996 without prior approval of the Connecticut
Insurance Department. The Company has received $199 million of dividends
from its insurance subsidiaries during the first nine months of 1996.
6. Commitments and Contingencies
Lloyd's of London (Lloyd's) has substantially completed a restructuring to
solidify its capital base and to segregate claims for years before 1993.
The Company is in arbitration with underwriters at Lloyd's in New York
State to enforce reinsurance contracts with respect to recoveries for
certain asbestos claims. The dispute involves the Company's ability to
aggregate asbestos claims under a market agreement between Lloyd's and the
Company or under the applicable reinsurance treaties.
The outcomes of the restructuring of Lloyd's and the arbitration referred
to above are uncertain and the impact, if any, on collectibility of amounts
recoverable by the Company from Lloyd's cannot be quantified at this time.
The Company believes that it is possible that an unfavorable resolution of
these matters could have a material adverse effect on the Company's
operating results in a future period. However, the Company believes that it
is not likely that the outcome of these matters could have a material
adverse effect on the Company's financial condition or liquidity. The
Company carries an allowance for uncollectible reinsurance which is not
allocated to any specific proceedings or disputes, whether for financial
impairments or coverage defenses. The Company believes that such allowance
properly reflects the net receivable from reinsurance contracts.
In relation to submitted and future asbestos and environmental-related
claims, the Company carries on a continuing review of its overall position,
its reserving techniques and its reinsurance recoverables. In each of these
areas of exposure, the Company has endeavored to litigate individual cases
and settle claims on favorable terms. Given the vagaries of court coverage
decisions, plaintiffs' expanded theories of liability, the risks inherent
in major litigation and other uncertainties, it is not presently possible
to quantify the ultimate exposure or range of exposure represented by these
claims to the Company's financial condition, results of operations or
liquidity. The Company believes that it is reasonably possible that the
outcome of the uncertainties regarding environmental and asbestos claims
could result in a liability exceeding the reserves by an amount that would
be material to operating results in a future period. However, the Company
believes that it is not likely that these claims will have a material
adverse effect on the Company's financial condition or liquidity.
In the ordinary course of business, the Company is a defendant or
codefendant in various litigation matters other than environmental and
asbestos claims. Although there can be no assurances, as of September 30,
1996, the Company believes, based on information currently available, that
the ultimate resolution of these legal proceedings would not likely have a
material adverse effect on its results of operations, financial condition
or liquidity.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Results of Operations reflect the consolidated results of operations of
Travelers/Aetna Property Casualty Corp. (TAP) and its subsidiaries (the
Company).
As discussed in Note 2 of Notes to the Condensed Consolidated Financial
Statements, on April 2, 1996, TAP completed the acquisition of the domestic
property and casualty insurance subsidiaries of Aetna Life and Casualty Company
(Aetna P&C) for approximately $4.16 billion in cash. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
condensed consolidated financial statements include the results of Aetna P&C's
operations only from the date of acquisition.
The Company provides a wide range of commercial and personal property and
casualty insurance products and services to businesses, associations and
individuals throughout the United States.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 1996 AND 1995
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
(in millions, except per share data) September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $2,452 $1,175 $5,806 $3,516
====== ====== ====== ======
Net income $ 247 $ 110 $ 129 $ 284
====== ====== ====== ======
EARNINGS PER SHARE:
Net income $ 0.62 $ 0.37 $0.35 $ 0.96
====== ====== ===== ======
Weighted average number of common
shares outstanding 400.0 294.5 356.2 294.5
------ ------ ----- ------
</TABLE>
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
AND 1995
Net income for the third quarter of 1996 was $247 million, or $0.62 per share,
compared to net income of $110 million, or $0.37 per share, in the third quarter
of 1995. The increase in net income was primarily the result of the acquisition
of Aetna P&C and expense-reduction initiatives associated with the integration
of the two companies. In addition, the increase in net income reflects higher
net investment income and favorable loss experience in personal auto lines.
Revenues of $2.452 billion in the third quarter of 1996 increased $1.277 billion
from the third quarter of 1995 revenues of $1.175 billion. This increase was
primarily attributable to a $972 million increase in earned premiums and a $313
million increase in net investment income. The earned premium and net investment
income increases are primarily the result of the acquisition of Aetna P&C.
Commercial Lines earned premiums increased $609 million to $1.151 billion for
the third quarter of 1996 from $542 million for the third quarter of 1995. The
increase in Commercial Lines earned premiums is net of continued declines
resulting from the Company's selective renewal activity in response to the
competitive pricing environment. Personal Lines earned premiums for the third
quarter of 1996 of $666 million increased $345 million from $321 million for the
third quarter of 1995.
Net investment income was $493 million for the third quarter of 1996, an
increase of $313 million from the third quarter of 1995, primarily due to the
acquisition of Aetna P&C. Realized investment gains of $2 million decreased by
$33 million in the third quarter of 1996 from $35 million in the third quarter
of 1995.
11
<PAGE> 12
Fee income is significantly impacted by National Accounts within Commercial
Lines because the recorded revenue from premium equivalents is primarily
reflected in fees. Premium equivalents represent estimates of premiums that
customers would have been charged under a fully insured arrangement and do not
represent actual premium revenues. Fee income for the third quarter of 1996 was
$120 million, a $10 million increase from the third quarter of 1995. This
increase was the result of the acquisition of Aetna P&C, mostly offset by the
depopulation of involuntary pools as the loss experience of workers'
compensation improves and insureds move to voluntary markets, and the Company's
selective renewal activity to address the competitive pricing environment.
Claims and expenses of $2.099 billion for the third quarter of 1996 increased
$1.068 billion from the third quarter of 1995. The increase was primarily
attributable to the claims and expenses related to the newly acquired Aetna P&C
business.
The Company's effective tax rate was 30% for the third quarter of 1996 and 24%
for the third quarter of 1995. These rates were lower than the statutory tax
rate in both periods primarily due to municipal bond interest not being taxed
for federal income tax purposes. The 1996 third quarter effective rate was
higher than the 1995 third quarter effective rate due primarily to a
proportionately greater level of taxable income included in pre-tax income.
The overall statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Statutory:
Loss and LAE ratio......................................................... 75.7% 77.4%
Underwriting expense ratio................................................. 31.0 26.6
Combined ratio before policyholder dividends............................... 106.7 104.0
Combined ratio............................................................. 107.4 104.7
GAAP:
Loss and LAE ratio......................................................... 73.8% 74.4%
Underwriting expense ratio................................................. 30.4 29.6
Combined ratio before policyholder dividends............................... 104.2 104.0
Combined ratio............................................................. 104.8 104.7
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
gross up for GAAP reporting purposes of revenues and expenses related to service
business, including servicing of residual market pools and deductible policies.
The increases in the 1996 third quarter overall statutory and GAAP combined
ratios compared to the 1995 third quarter overall combined ratios were primarily
attributable to the inclusion in 1996 of Aetna P&C's results. Aetna P&C has
historically had a higher underwriting expense ratio partially offset by a lower
loss ratio, which reflects the mix of business including the favorable effect of
the lower loss ratio of the Bond business. In addition, 1996 combined ratios
are higher due to increased catastrophe losses, primarily from Hurricane Fran.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND 1995
Net income for the nine months ended September 30, 1996 was $129 million, or
$0.35 per share, compared to net income of $284 million, or $0.96 per share, for
the nine months ended September 30, 1995. Core operating income which excludes
realized gains (losses) and $391 million in acquisition-related charges incurred
by the Company in the second quarter of 1996 was $540 million, or $1.51 per
share, for the first nine months of 1996, up $279 million from $261 million, or
$0.89 per share, for the first nine months of 1995. The increase in core
operating income was primarily the result of the acquisition of Aetna P&C. In
addition, the increase reflects strong net investment income and the emerging
benefits of expense-reduction initiatives associated with the merger.
12
<PAGE> 13
The Company's effective tax rate was (10)% for the nine months ended September
30, 1996 and 21% for the nine months ended September 30, 1995. The 1996 tax rate
reflects a tax benefit on pre-tax income due to non-taxable net investment
income. The 1995 tax rate reflects tax expense on pre-tax income and is less
than the statutory rate primarily due to non-taxable investment income.
The overall statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Statutory:
Loss and LAE ratio......................................................... 89.8% 80.7%
Underwriting expense ratio................................................. 31.4 25.8
Combined ratio before policyholder dividends............................... 121.2 106.5
Combined ratio............................................................. 121.7 107.1
GAAP:
Loss and LAE ratio......................................................... 85.3% 76.2%
Underwriting expense ratio................................................. 33.1 28.3
Combined ratio before policyholder dividends............................... 118.4 104.5
Combined ratio............................................................. 118.8 105.0
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
gross up for GAAP reporting purposes of revenues and expenses related to service
business, including servicing of residual market pools and deductible policies.
In addition, in the 1996 period purchase accounting adjustments recorded for
GAAP in connection with the Aetna P&C acquisition resulted in a charge to
statutory expenses.
The increase in the first nine months of 1996 overall statutory and GAAP
combined ratios compared to the first nine months of 1995 was primarily
attributable to charges taken in the second quarter of 1996 related to the
acquisition and integration of Aetna P&C. Excluding these amounts, the statutory
and GAAP combined ratios before policyholder dividends for the nine months ended
September 30, 1996 would have been 107.5% and 106.2%, respectively. The increase
in the first nine months of 1996 statutory and GAAP combined ratios excluding
acquisition-related charges compared to the first nine months of 1995 statutory
and GAAP combined ratios is generally due to the inclusion in 1996 of Aetna
P&C's results. Aetna P&C has historically had a higher underwriting expense
ratio, partially offset by a lower loss ratio, which reflects the mix of
business including the favorable effect of the lower loss ratio of the Bond
business.
The other consolidated operating trends for the nine months ended September 30,
1996 and 1995 are substantially the same as noted above for the quarters then
ended.
SEGMENT RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
COMMERCIAL LINES
(in millions) Three Months Ended Three Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Revenues........................................................................ $1,669 $815
Net income...................................................................... $ 203 $ 98
</TABLE>
Commercial Lines net income for the 1996 third quarter was $203 million compared
to net income of $98 million in the 1995 third quarter. This increase was due to
the acquisition of Aetna P&C, as well as the emerging benefits of
expense-reduction initiatives associated with the integration of the two
companies and strong net investment income.
13
<PAGE> 14
Commercial Lines net written premiums for the third quarter of 1996 totaled
$1.217 billion, up $621 million from $596 million for the third quarter of 1995,
reflecting the acquisition of Aetna P&C, offset somewhat by the highly
competitive conditions in the marketplace and the Company's continuing focus on
profitability. The Commercial Lines marketplace continues to be highly
competitive, although the broader industry and product line expertise of the
combined company contributed to solid performance in the specialty and small
account market segments. Premium equivalents for the third quarter of 1996
totaled $470 million, down $235 million from $705 million for the third quarter
of 1995, reflecting a highly competitive marketplace combined with a
depopulation of involuntary pools as the loss experience of workers'
compensation improves and insureds move to voluntary markets. Premium
equivalents, which are associated largely with National Accounts, represent
estimates of premiums that customers would have been charged under a fully
insured arrangement and do not represent actual premium revenues.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Commercial Lines net written premiums for
the third quarter of 1996 totaled $1.217 billion, down $37 million from $1.254
billion for the third quarter of 1995. On a combined total basis including Aetna
P&C, premium equivalents for the third quarter of 1996 totaled $470 million,
down $381 million from $851 million for the third quarter of 1995. The decrease
in premium equivalents reflects a depopulation of involuntary pools as the loss
experience of workers' compensation improves and insureds move to voluntary
markets, combined with a highly competitive marketplace.
A significant component of Commercial Lines is National Accounts, which works
with national brokers and regional agents providing insurance coverages and
services, primarily workers' compensation, mainly to large corporations.
National Accounts net written premiums of $241 million for the third quarter of
1996 increased $49 million from the third quarter of 1995. This increase
reflects the acquisition of Aetna P&C, partially offset by an ongoing shift from
risk-bearing business into non risk-bearing business and the competitive
marketplace. National Accounts premium equivalents of $452 million for the third
quarter of 1996 were $242 million below the third quarter of 1995. The decrease
in premium equivalents reflects a depopulation of involuntary pools as the loss
experience of workers' compensation improves and insureds move to voluntary
markets, combined with a highly competitive marketplace, slightly offset by the
ongoing shift from risk-bearing business into non risk-bearing business.
For the third quarter of 1996, National Accounts new business, including both
premiums and premium equivalents, was $70 million compared to $89 million for
the third quarter of 1995. This decrease is due to the highly competitive
marketplace. National Accounts renewed business for the third quarter of 1996 of
$373 million decreased $125 million below the 1995 levels, reflecting the
National Accounts policy of maintaining its product pricing and underwriting
standards in an extremely competitive pricing environment as insurers compete to
retain business. The National Accounts business retention ratio was 75% for the
third quarter of 1996 and 93% for the third quarter of 1995.
Commercial Accounts serves mid-sized businesses through a network of independent
agencies and brokers. Commercial Accounts net written premiums were $451 million
in the 1996 third quarter compared to $194 million in the 1995 third quarter,
and Commercial Accounts premium equivalents were $18 million in the 1996 third
quarter, $7 million above the 1995 third quarter. These increases reflect the
acquisition of Aetna P&C, marginally offset by the highly competitive market,
where Commercial Accounts has continued to be more selective in renewal
activity. Programs designed to leverage underwriting experience in specific
industries have demonstrated continued growth. For the third quarter of 1996,
new premium and premium equivalent business in Commercial Accounts was $125
million compared to $69 million for the third quarter of 1995, reflecting the
acquisition of Aetna P&C. The Commercial Accounts business retention ratio was
77% for the third quarter of 1996 and 1995. Commercial Accounts continues to
focus on the retention of existing business while maintaining its product
pricing standards and its selective underwriting policy.
14
<PAGE> 15
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums of $345 million for the third quarter of
1996 were $213 million above the third quarter of 1995 premium levels,
reflecting the acquisition of Aetna P&C. New premium business in Select Accounts
was $82 million in the 1996 third quarter compared to $57 million in the 1995
third quarter, which was due to the acquisition of Aetna P&C. The Select
Accounts business retention ratio was 79% in the 1996 third quarter compared to
72% in the comparable 1995 period, reflecting the broader industry and product
line expertise of the combined company.
Specialty Accounts addresses unique risks that typically require specialized
underwriting. Specialty Accounts net written premiums were $180 million for the
1996 third quarter compared to $77 million in the 1995 third quarter. The growth
is primarily attributable to the acquisition of the Aetna P&C Bond business.
Claims and expenses of $1.380 billion for the third quarter of 1996 increased
$694 million from the third quarter of 1995. This increase was primarily
attributable to the acquisition of Aetna P&C.
Catastrophe losses, net of taxes and reinsurance, were $16 million and $0
million in the 1996 and 1995 third quarters, respectively. The 1996 catastrophe
losses were primarily from Hurricane Fran.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Statutory:
Loss and LAE ratio......................................................... 76.8% 79.3%
Underwriting expense ratio................................................. 32.2 24.5
Combined ratio before policyholder dividends............................... 109.0 103.8
Combined ratio............................................................. 110.1 104.9
GAAP:
Loss and LAE ratio......................................................... 74.8% 75.1%
Underwriting expense ratio................................................. 32.6 29.3
Combined ratio before policyholder dividends............................... 107.4 104.4
Combined ratio............................................................. 108.3 105.4
</TABLE>
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the gross up for GAAP reporting purposes of revenues and
expenses related to service business, including servicing of residual market
pools and deductible policies.
The increases in the 1996 third quarter statutory and GAAP combined ratios for
Commercial Lines were primarily attributable to the inclusion in 1996 of Aetna
P&C's results. Aetna P&C has historically had a higher underwriting expense
ratio, partially offset by a lower loss ratio, which reflects the mix of
business including the favorable effect of the lower loss ratio of the Bond
business. In addition, losses from Hurricane Fran increased the 1996 statutory
and GAAP combined ratios by 2.1 and 1.9 percentage points, respectively.
PERSONAL LINES
<TABLE>
<CAPTION>
(in millions) Three Months Ended Three Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Revenues........................................................................ $781 $376
Net income...................................................................... $ 72 $ 32
</TABLE>
Net income for the third quarter of 1996 of $72 million increased $40 million
from $32 million for the third quarter of 1995. This increase primarily reflects
the acquisition of Aetna P&C, strong net investment income, continued favorable
prior year loss reserve development in personal auto lines and emerging benefits
of expense reduction initiatives.
15
<PAGE> 16
Net written premiums in the 1996 third quarter were $668 million, compared to
$305 million in the third quarter of 1995. This increase reflects the
acquisition of Aetna P&C. On a combined total basis including Aetna P&C (for
periods prior to April 2, 1996 for comparative purposes only), Personal Lines
net written premiums for the third quarter of 1996 totaled $668 million compared
to $655 million for the third quarter of 1995. Excluding the effect of changes
in reinsurance coverage, both automobile and homeowners lines grew modestly.
This underlying strength reflected growth in target markets, partially offset by
reductions due to catastrophe management strategies.
Claims and expenses of $672 million for the 1996 third quarter increased $341
million from the 1995 third quarter. This increase was primarily attributable to
the acquisition of Aetna P&C. Catastrophe losses, after taxes and reinsurance,
were $20 million in the third quarter of 1996 compared to $5 million in the
third quarter of 1995. The increase in catastrophe losses in the third quarter
of 1996 was primarily a result of Hurricane Fran.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Statutory:
Loss and LAE ratio......................................................... 73.9% 74.0%
Underwriting expense ratio................................................. 28.6 30.7
Combined ratio............................................................. 102.5 104.7
GAAP:
Loss and LAE ratio......................................................... 72.1% 73.1%
Underwriting expense ratio................................................. 26.3 30.2
Combined ratio............................................................. 98.4 103.3
</TABLE>
The decrease in the combined ratios in 1996 was due to the favorable loss
experience in personal auto lines and expense reductions, partially offset by
the higher level of catastrophe losses.
CORPORATE AND OTHER
<TABLE>
<CAPTION>
(in millions) Three Months Ended Three Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Revenues........................................................................ $ 2 $(16)
Net income (loss)............................................................... $(28) $(20)
</TABLE>
The primary component of net income (loss) for the 1996 third quarter was
interest expense of $26 million after tax, reflecting financing costs associated
with the acquisition. In addition, the Company's Corporate and Other operations
reflect the accident and health business written by certain affiliated companies
and reinsured by the Company.
SEGMENT RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
COMMERCIAL LINES
<TABLE>
<CAPTION>
(in millions) Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Revenues........................................................................ $3,889 $2,428
Net income...................................................................... $ 42 $ 224
</TABLE>
16
<PAGE> 17
Net income for the first nine months of 1996 was $42 million compared to net
income of $224 million for the first nine months of 1995. Excluding realized
gains (losses) and the acquisition-related charges, Commercial Lines core
operating earnings were $441 million for the nine months ended September 30,
1996 compared to $203 million for the nine months ended September 30, 1995. This
increase was due to the acquisition of Aetna P&C, as well as the emerging
benefits of expense-reduction initiatives associated with the merger and strong
net investment income.
Commercial Lines net written premiums for the first nine months of 1996 totaled
$2.935 billion (excluding a one-time adjustment associated with a reinsurance
transaction), up $1.194 billion from $1.741 billion for the first nine months of
1995, reflecting the acquisition of Aetna P&C, offset in part by the highly
competitive conditions in the Commercial Lines marketplace and the Company's
continuing focus on profitability. Premium equivalents for the first nine months
of 1996 totaled $1.986 billion, down $277 million from $2.263 billion for the
first nine months of 1995 reflecting the competitive environment.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Commercial Lines net written premiums for
the first nine months of 1996 totaled $3.541 billion, down $396 million from
$3.937 billion for the first nine months of 1995, reflecting the highly
competitive conditions in the Commercial Lines marketplace and the Company's
continuing focus on profitability. In addition, Commercial Lines continues to
re-evaluate its exposure to certain segments of the middle market. On a combined
total basis including Aetna P&C, premium equivalents for the first nine months
of 1996 totaled $2.102 billion, down $655 million from $2.757 billion for the
first nine months of 1995. The decrease in premium equivalents reflects a
depopulation of involuntary pools as the loss experience of workers'
compensation improves and insureds move to voluntary markets.
National Accounts net written premiums of $594 million (excluding a one-time
adjustment associated with a reinsurance transaction) for the first nine months
of 1996 increased $81 million from the first nine months of 1995. This increase
reflects the acquisition of Aetna P&C, partially offset by an ongoing shift from
risk-bearing business into non risk-bearing business and the competitive
marketplace. National Accounts premium equivalents of $1.940 billion for the
first nine months of 1996 were $291 million below the first nine months of 1995.
The decrease in premium equivalents reflects a depopulation of involuntary pools
as the loss experience of workers' compensation improves and insureds move to
voluntary markets, partially offset by an ongoing shift from risk-bearing
business into non risk-bearing business. For the first nine months of 1996,
National Accounts new business, including both premiums and premium equivalents,
was $298 million compared to $345 million for the first nine months of 1995. For
the first nine months of 1996, National Accounts renewed business, including
both premiums and premium equivalents, was $1.707 billion compared to $1.639
billion for the first nine months of 1995, reflecting the acquisition of Aetna
P&C, partially offset by National Accounts policy of maintaining its product
pricing and underwriting standards in a highly competitive pricing environment
as insurers compete to retain business. National Accounts business retention
ratio was 81% for the first nine months of 1996 compared to 84% for the first
nine months of 1995.
Commercial Accounts net written premiums were $1.033 billion in the first nine
months of 1996 compared to $564 million in the first nine months of 1995, and
Commercial Accounts premium equivalents were $46 million in the first nine
months of 1996, $14 million higher than the first nine months of 1995. These
increases were primarily attributable to the acquisition of Aetna P&C. In this
highly competitive market, Commercial Accounts has continued to be more
selective in renewal activity. Programs designed to leverage underwriting
experience in specific industries have demonstrated continued growth. For the
first nine months of 1996, new premium and premium equivalent business in
Commercial Accounts was $252 million compared to $205 million for the first nine
months of 1995. The Commercial Accounts business retention ratio was 71% for the
first nine months of 1996, down from 76% for the first nine months of 1995.
Commercial Accounts continues to focus on the retention of existing business
while maintaining its product pricing standards and its selective underwriting
policy.
17
<PAGE> 18
Select Accounts net written premiums of $855 million for the first nine months
of 1996 were $446 million higher than the first nine months of 1995, primarily
attributable to the acquisition of Aetna P&C. New premium business in Select
Accounts was $198 million in the first nine months of 1996 compared to $117
million in the first nine months of 1995 due to the acquisition of Aetna P&C.
The Select Accounts business retention ratio was 78% in the first nine months of
1996 compared to 75% in the comparable 1995 period, reflecting the broader
industry and product line expertise of the combined company.
Specialty Accounts net written premiums were $454 million for the first nine
months of 1996 compared to $256 million for the first nine months of 1995. The
growth is primarily attributable to the acquisition of the Aetna P&C Bond
business.
Claims and expenses of $3.894 billion for the first nine months of 1996
increased $1.748 billion from the first nine months of 1995. This increase was
primarily attributable to the acquisition of Aetna P&C and the
acquisition-related charges of $589 million recorded during the second quarter
of 1996.
Catastrophe losses, net of taxes and reinsurance, were $23 million and $7
million in the first nine months of 1996 and 1995, respectively. The increase in
the 1996 catastrophe losses compared to 1995 was primarily due to Hurricane
Fran.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Statutory:
Loss and LAE ratio......................................................... 100.1% 84.4%
Underwriting expense ratio................................................. 32.9 23.8
Combined ratio before policyholder dividends............................... 133.0 108.2
Combined ratio............................................................. 133.8 109.1
GAAP:
Loss and LAE ratio......................................................... 92.9% 77.8%
Underwriting expense ratio................................................. 36.0 28.4
Combined ratio before policyholder dividends............................... 128.9 106.2
Combined ratio............................................................. 129.6 107.0
</TABLE>
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the gross up for GAAP reporting purposes of revenues and
expenses related to service business, including servicing of residual market
pools and deductible policies. In addition, in the 1996 period purchase
accounting adjustments recorded for GAAP in connection with the Aetna P&C
acquisition resulted in a charge to statutory expenses.
The increase in the first nine months of 1996 statutory and GAAP combined ratios
for Commercial Lines compared to the first nine months of 1995 was primarily
attributable to charges taken in the second quarter of 1996 related to the
acquisition and integration of Aetna P&C. Excluding these amounts, the statutory
and GAAP combined ratios before policyholder dividends for the nine months ended
September 30, 1996 would have been 110.7% and 109.9%, respectively. The increase
in the first nine months of 1996 statutory and GAAP combined ratios excluding
acquisition-related charges compared to the first nine months of 1995 statutory
and GAAP combined ratios is generally due to the inclusion in 1996 of Aetna
P&C's results. Aetna P&C has historically had a higher underwriting expense
ratio, partially offset by a lower loss ratio, which reflects the mix of
business including the favorable effect of the lower loss ratio of the Bond
business. In addition, losses from Hurricane Fran increased the 1996 statutory
and GAAP combined ratios by .9 and .8 percentage points, respectively.
18
<PAGE> 19
PERSONAL LINES
<TABLE>
<CAPTION>
(in millions) Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Revenues........................................................................ $1,903 $1,096
Net income...................................................................... $ 146 $ 78
</TABLE>
Net income for the first nine months of 1996 of $146 million increased $68
million from $78 million for the first nine months of 1995. Excluding realized
gains (losses) and the acquisition-related charges, Personal Lines core
operating income was $158 million in the first nine months of 1996 compared to
$76 million in the first nine months of 1995. These increases primarily reflect
the acquisition of Aetna P&C, strong net investment income, continued favorable
prior year loss reserve development in personal auto lines and emerging benefits
of expense-reduction initiatives.
Net written premiums in the first nine months of 1996 were $1.685 billion,
compared to $978 million in the first nine months of 1995. This increase
primarily reflects the acquisition of Aetna P&C and, to a lesser extent, growth
in target markets, marginally offset by reductions due to catastrophe management
strategies. On a combined total basis including Aetna P&C (for periods prior to
April 2, 1996 for comparative purposes only), Personal Lines net written
premiums for the first nine months of 1996 totaled $2.001 billion, up $115
million from $1.886 billion for the first nine months of 1995. Excluding the
effect of changes in reinsurance coverage, both automobile and homeowners lines
grew modestly. This underlying strength reflected growth in target markets,
partially offset by reductions due to catastrophe management strategies.
Claims and expenses of $1.689 billion for the first nine months of 1996
increased $699 million from the first nine months of 1995. This increase was
primarily attributable to the acquisition of Aetna P&C. Catastrophe losses,
after taxes and reinsurance, were $52 million in the first nine months of 1996
compared to $8 million in the first nine months of 1995. The increase in 1996
catastrophe losses was primarily due to Hurricane Fran, as well as first quarter
winter storms and second quarter hail and wind storms.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Statutory:
Loss and LAE ratio......................................................... 73.3% 74.4%
Underwriting expense ratio................................................. 28.8 29.3
Combined ratio............................................................. 102.1 103.7
GAAP:
Loss and LAE ratio......................................................... 71.9% 73.0%
Underwriting expense ratio................................................. 27.7 28.0
Combined ratio............................................................. 99.6 101.0
</TABLE>
The decrease in the combined ratios in 1996 was due to the favorable loss
experience in personal auto lines and expense reductions, partially offset by
the higher level of catastrophe losses.
CORPORATE AND OTHER
<TABLE>
<CAPTION>
(in millions) Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Revenues........................................................................ $ 14 $ (8)
Net income (loss)............................................................... $(59) $(18)
</TABLE>
19
<PAGE> 20
The primary component of net income (loss) for the nine months ended September
30, 1996 was interest expense of $51 million after tax, reflecting financing
costs associated with the acquisition. In addition, the Company's Corporate and
Other operations reflect the accident and health business written by certain
affiliated companies and reinsured by the Company.
ENVIRONMENTAL CLAIMS
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process. This bulk
reserve is established and adjusted based upon the aggregate volume of
in-process environmental claims and the Company's experience in resolving such
claims. Until the dispute is resolved, the estimated amounts for disputed
coverage claims are carried in a bulk reserve. At September 30, 1996,
approximately 20% of the net environmental loss reserve (i.e., approximately
$250 million) is case reserves. The balance, approximately 80% of the net
aggregate reserve (i.e., approximately $1.026 billion), is carried in a bulk
reserve together with incurred but not yet reported environmental claims for
which the Company has not received any specific claims.
The following table displays activity for environmental losses and loss expenses
and reserves for the nine months ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
ENVIRONMENTAL LOSSES
(millions) Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------- ------------------
<S> <C> <C>
Beginning reserves (1):
Direct ........................ $ 454 $ 482
Ceded ......................... (50) (11)
------- -----
Net ........................... 404 471
Acquisition of Aetna P&C:
Direct ........................ 938 --
Ceded ......................... (24) --
Incurred losses and loss expenses:
Direct ........................ 82 110
Ceded ......................... (31) (61)
Losses paid:
Direct ........................ 113 136
Ceded ......................... (20) (22)
Ending reserves:
Direct ........................ 1,361 456
Ceded ......................... (85) (50)
------- -----
Net ......................... $ 1,276 $ 406
======= =====
</TABLE>
(1) Includes, for 1995, the termination of certain agreements with TIGI whereby
TIGI had assumed certain reserves from the Company.
ASBESTOS CLAIMS
The following table displays activity for asbestos losses and loss expenses and
reserves for the nine months ended September 30, 1996 and 1995. At September 30,
1996, approximately 25% of the net aggregate reserve (i.e., approximately $265
million) is case reserves. The balance, approximately 75% (i.e., approximately
$795 million) of the net asbestos reserves, represents incurred but not yet
reported losses.
20
<PAGE> 21
<TABLE>
<CAPTION>
ASBESTOS LOSSES
(millions) Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Beginning reserves (1):
Direct ........................ $ 695 $ 702
Ceded ......................... (293) (319)
------- -----
Net ........................... 402 383
Acquisition of Aetna P&C:
Direct ........................ 776 --
Ceded ......................... (116) --
Incurred losses and loss expenses:
Direct ........................ 83 98
Ceded ......................... (8) (68)
Losses paid:
Direct ........................ 135 77
Ceded ......................... (58) (71)
Ending reserves:
Direct ........................ 1,419 723
Ceded ......................... (359) (316)
------- -----
Net ......................... $ 1,060 $ 407
======= =====
</TABLE>
(1) Includes, for 1995, the termination of certain agreements with TIGI whereby
TIGI had assumed certain reserves from the Company.
In relation to these asbestos and environmental-related claims, the Company
carries on a continuing review of its overall position, its reserving techniques
and reinsurance recoverables. In each of these areas of exposure, the Company
has endeavored to litigate individual cases and settle claims on favorable
terms. Given the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties, it is not presently possible to quantify the ultimate exposure or
range of exposure represented by these claims to the Company's financial
condition, results of operations or liquidity. The Company believes that it is
reasonably possible that the outcome of the uncertainties regarding
environmental and asbestos claims could result in a liability exceeding reserves
by an amount that would be material to the Company's operating results in a
future period. However, the Company believes that it is not likely that these
claims will have a material adverse effect on the Company's financial condition
or liquidity.
CUMULATIVE INJURY OTHER THAN ASBESTOS
Cumulative injury other than asbestos (CIOTA) claims are generally submitted to
the Company under general liability policies and often involve an allegation by
a claimant against an insured that the claimant has suffered injuries as a
result of long-term or continuous exposure to harmful products or substances.
Such harmful products or substances include, but are not limited to, lead paint,
pesticides, pharmaceutical products, silicone-based personal products, solvents
and other deleterious substances.
Due to claimants' allegations of long-term bodily injury in CIOTA claims,
numerous complex issues regarding such claims are presented. The claimants'
theories of liability must be evaluated, evidence pertaining to a causal link
between injury and exposure to a substance must be reviewed, the potential role
of other causes of injury must be analyzed, the liability of other defendants
must be explored, and assessment of a claimant's damages must be made and the
law of the jurisdiction must be applied. In addition, the Company must review
the number of policies issued by the Company to the insured and whether such
policies are triggered by the allegations, the terms and limits of liability of
such policies, the obligations of other insurers to respond to the claim, and
the applicable law in each jurisdiction.
For these reasons, the Company has long considered CIOTA to be a separate and
distinct type of claim which requires special handling. Approximately 10 years
ago the Company established a separate department to focus on CIOTA claims that
has enabled it to better estimate CIOTA liabilities based on historical data.
21
<PAGE> 22
To the extent disputes exist between the Company and a policyholder regarding
the coverage available for CIOTA claims, the Company resolves the disputes,
where feasible, through settlements with the policyholder or through coverage
litigation. Generally, the terms of a settlement agreement set forth the nature
of the Company's participation in resolving CIOTA claims, the scope of coverage
to be provided by the Company and contain the appropriate indemnities and hold
harmless provisions to protect the Company. These settlements generally
eliminate uncertainties for the Company regarding the risks extinguished,
including the risk that losses would be greater than anticipated due to evolving
theories of tort liability or unfavorable coverage determinations. The Company's
approach also has the effect of determining losses at a date earlier than would
have occurred in the absence of such settlement agreements. On the other hand,
in cases where future developments are favorable to insurers, this approach
could have the effect of resolving claims for amounts in excess of those that
would ultimately have been paid had the claims not been settled in this manner.
No inference should be drawn that because of the Company's method of dealing
with CIOTA claims, its reserves for such claims are more conservatively stated
than those of other insurers.
Aetna P&C did not distinguish CIOTA from other general liability claims or treat
CIOTA claims as a special class of claims. In addition, there were substantial
differences in claim approach and resolution between the Company and Aetna P&C
regarding CIOTA claims.
During the second quarter, the Company completed its review of Aetna P&C's
exposure to CIOTA claims in order to determine an appropriate level of reserves
using the Company's approach as described above. Based on the results of that
review, the Company's general liability insurance reserves were increased $360
million, net of reinsurance ($234 million after tax).
LIQUIDITY AND CAPITAL RESOURCES
On April 2, 1996, TAP acquired the domestic property and casualty insurance
subsidiaries of Aetna for approximately $4.16 billion in cash. TAP is a holding
company and has no direct operations. TAP's principal asset is the capital stock
of its insurance subsidiaries.
To finance the $4.16 billion purchase price including transaction costs, plus
capital contributions totaling $710 million to Aetna P&C, TAP borrowed $2.65
billion from a syndicate of banks under a five-year revolving credit facility
that expires on March 15, 2001 (the Credit Facility) and sold approximately 33
million shares of its Class A Common Stock representing approximately 9% of its
outstanding common stock (at that time) to four private investors, including
Aetna, for an aggregate of $525 million. TIGI acquired approximately 328 million
shares of Class B Common Stock of TAP in exchange for contributing the
outstanding capital stock of Travelers Indemnity Company and a capital
contribution of approximately $1.14 billion. In addition, Travelers Group Inc.
purchased from TAP $540 million of Series Z Preferred Stock of TAP.
Approximately $18 million of the purchase price was funded through the
settlement of receivables from Aetna.
On April 23, 1996, TAP sold in a public offering approximately 39 million shares
of its Class A Common Stock, representing approximately 9.75% of its outstanding
common stock, for total proceeds of $928 million. On April 24, 1996, TAP sold in
a public offering $500 million of 6-3/4% Notes due April 15, 2001 and $200
million of 7-3/4% Notes due April 15, 2026. On April 26, 1996, Travelers P&C
Capital I, a wholly owned subsidiary trust of TAP, issued $800 million of 8.08%
Trust Preferred Securities in a public offering. On May 10, 1996, Travelers P&C
Capital II, a wholly owned subsidiary trust of TAP, issued $100 million of 8.00%
Trust Preferred Securities in a public offering. These Trust Preferred
Securities, which are fully and unconditionally guaranteed by TAP, have a
liquidation value of $25 per Trust Preferred Security and are mandatorily
redeemable under certain circumstances. Dividends on the Trust Preferred
Securities have been classified as interest expense in the condensed
consolidated statement of operations. The aggregate proceeds from the above
offerings of $2.528 billion together with the proceeds from the issuance by TAP
of approximately $700 million of commercial paper were used to repay in full the
borrowings under the Credit Facility and to redeem in full TAP's Series Z
Preferred Stock.
22
<PAGE> 23
The liquidity requirements of the Company's business have been met primarily by
funds generated from operations, asset maturities and income received on
investments. Cash provided from these sources is used primarily for claims and
claim adjustment expense payments and operating expenses. Catastrophe claims,
the timing and amount of which are inherently unpredictable, may create
increased liquidity requirements. Additional sources of cash flow include the
sale of invested assets and financing activities. The Company believes that its
future liquidity needs will be met from all of the above sources.
Net cash flows are generally invested in marketable securities. The Company
closely monitors the duration of these investments, and investment purchases and
sales are executed with the objective of having adequate funds available to
satisfy the Company's maturing liabilities. As the Company's investment strategy
focuses on asset and liability durations, and not specific cash flows, asset
sales may be required to satisfy liability obligations and/or rebalance asset
portfolios.
At September 30, 1996, the combined carrying value of the Company's investment
portfolio was $28.8 billion, of which 81.4% was invested in fixed maturity
investments, 4.0% in mortgage loans and real estate held for sale, 2.9% in
common stocks and other equity securities and 11.7% in short-term and other
investments. The average duration of the fixed maturity portfolio, including
short-term investments, was 5.4 years at such date. Non-investment grade
securities totaled $602 million, representing approximately 2.6% of the
Company's fixed income investments as of September 30, 1996. The following table
reflects the average yield (annualized) of the investment portfolio:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average Yield (Annualized) (1) 7.5% 6.1% 7.0% 6.2%
</TABLE>
(1) Excluding unrealized and realized capital gains and losses.
Cash flow needs at TAP will include stockholder dividends and debt service. TAP
anticipates that its cash flow needs will be met primarily through dividends
from operating subsidiaries. In addition, TAP currently has available to it a
$200 million line of credit for working capital and other general corporate
purposes from a subsidiary of Travelers Group Inc. The lender has no obligation
to make any loan to TAP under this line of credit. Moreover, TAP will continue
to be able to make borrowings under the Credit Facility, which it has reduced to
$600 million, none of which is currently utilized. Under the Credit Facility TAP
is required to maintain a certain level of consolidated stockholders' equity (as
defined in the agreement). At September 30, 1996, this requirement was exceeded
by approximately $2.6 billion. In addition, the Credit Facility places
restrictions on the amount of consolidated debt TAP can incur. TAP also issues
commercial paper directly to investors and maintains unused credit availability
under the Credit Facility at least equal to the amount of commercial paper
outstanding. At September 30, 1996, TAP had $388 million outstanding under its
commercial paper program.
In September 1996 TAP sold in a public offering $200 million of 6-3/4% Notes due
September 1, 1999 and in October an additional $200 million of 6-1/4% Notes due
October 1, 1999.
At November 5, 1996, TAP had $900 million available for debt offerings under its
shelf registration statement.
The Company's insurance subsidiaries are subject to various regulatory
restrictions that limit the maximum amount of dividends available to be paid to
their parent without prior approval of insurance regulatory authorities. The
Company has received $199 million of dividends from its insurance subsidiaries
during the first nine months of 1996. Dividend payments to TAP from its
insurance subsidiaries are limited to $299 million in 1996 without prior
approval of the Connecticut Insurance Department.
23
<PAGE> 24
On July 24, 1996, TAP's Board of Directors authorized the expenditure of up to
$100 million for the repurchase of common stock. The repurchases may be made
from time to time in the open market or through negotiated transactions and will
be used primarily for the issuance of stock for employee benefit and director
compensation plans. At September 30, 1996, the Company had repurchased 57,400
shares of its common stock pursuant to the repurchase program.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(FAS 123), is effective for 1996 reporting. This statement addresses the
accounting for the cost of stock-based compensation, such as stock options and
restricted stock. FAS 123 permits either expensing the value of stock-based
compensation over the period earned or disclosing in the financial statement
footnotes the pro forma impact to net income as if the value of stock-based
compensation awards had been expensed. The value of awards would be measured at
the grant date based upon estimated fair value, using option pricing models. The
Company has selected the disclosure alternative which requires that such pro
forma disclosures be included in annual financial statements.
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS
125 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. These standards are based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered
and derecognizes liabilities when extinguished. FAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The requirements of FAS 125 would be
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively; however, the FASB has announced its intention to delay until
January 1, 1998 the effective date for certain provisions. Earlier or
retroactive application is not permitted. The Company is currently evaluating
the impact of this statement.
24
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning actions filed against several insurance companies and
industry organizations relating to service fee charges and premium calculations
on certain workers' compensation insurance, see the descriptions that appear in
the paragraph that begins on page 90 and ends on page 91 of the Company's
Prospectus dated April 22, 1996, and in the first paragraph on page 24 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
which descriptions are incorporated by reference herein. A copy of the pertinent
paragraphs of such filings is included as an exhibit to this Form 10-Q. In
October 1996, certain subsidiaries of the Company were named as defendants in a
purported class action filed in the District Court of Wyandotte County, Kansas,
Civil Court Department under the name Amundson & Associates Art Studio Ltd. v.
NCCI, et al. The plaintiffs make allegations and seek damages that are similar
to those in the cases referred to above.
For information concerning the appeal of a Memorandum of Decision issued by the
Connecticut Department of Insurance approving the acquisition by the Company of
The Aetna Casualty and Surety Company and The Standard Fire Insurance Company
and their subsidiaries, see the description that appears in the second full
paragraph on page 91 of the Company's Prospectus dated April 22, 1996, which
description is incorporated by reference herein. A copy of the pertinent
paragraph of such filing is included as an exhibit to this Form 10-Q. In October
1996, the court dismissed the appeal. Plaintiffs have appealed the dismissal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
See Exhibit Index.
(b) REPORTS ON FORM 8-K:
On September 11, 1996, the Company filed a Current Report on Form 8-K, dated
September 9, 1996, filing certain exhibits under Item 7 thereof relating to the
offer and sale of the Company's 6-3/4% Notes due September 1, 1999.
No other reports on Form 8-K have been filed by the Company during the quarter
ended September 30, 1996; however on October 8, 1996, the Company filed a
Current Report on Form 8-K, dated October 4, 1996, filing certain exhibits under
Item 7 thereof relating to the offer and sale of the Company's 6-1/4% Notes due
October 1, 1999.
25
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
<S> <C> <C>
3.01 Restated Certificate of Incorporation of Travelers/Aetna Property
Casualty Corp. ("TAP"), incorporated by reference to Exhibit 3.1
to Amendment No. 5 of the Registration Statement on Form S-1 of
TAP (No. 333-2254) ("TAP's Form S-1").
3.02 Certificate of Designations, Powers, Preferences and Rights of 7.5%
Redeemable Preferred Stock, Series Z of TAP, incorporated by
reference to Exhibit 3.3 of TAP's Form S-1.
3.03 Restated By-Laws of TAP, effective March 29, 1996,
incorporated by reference to Exhibit 3.2 of TAP's
Form S-1.
10.01 Capital Accumulation Plan of TAP (as amended through Electronic
September 1, 1996).
10.02 1996 Deferred Compensation Plan for Non-Employee Directors of Electronic
TAP (as amended through September 25, 1996).
10.03 TAP 1996 Executive Option Plan. Electronic
10.04 Travelers Group Capital Accumulation Plan (as amended through
September 25, 1996), incorporated by reference to Exhibit 10.03 to
the Quarterly Report on Form 10-Q of Travelers Group Inc. for the
fiscal quarter ended September 30, 1996 (File No. 1-9924) (the
"TRV 9/30/96 10-Q").
10.05 Travelers Group Stock Option Plan (as amended through September
27, 1995), incorporated by reference to Exhibit 10.01 to the
Quarterly Report on Form 10-Q of Travelers Group Inc. for the
fiscal quarter ended September 30, 1995 (File No. 1-9924).
10.06 Amendment No. 14 to the Travelers Group Stock Option Plan,
incorporated by reference to Exhibit 10.01 to the TRV 9/30/96 10-Q.
10.07 Travelers Group 1996 Stock Incentive Plan, incorporated by
reference to Exhibit 10.03 to the Quarterly Report on Form 10-Q
of Travelers Group Inc. for the fiscal quarter ended March 31,
1996 (File No. 1-9924).
10.08 Amendment No. 1 to the Travelers Group 1996 Stock Incentive Plan,
incorporated by reference to Exhibit 10.04 to the TRV 9/30/96 10-Q.
10.09 Amendment No. 2 to the Travelers Group 1996 Stock Incentive Plan,
incorporated by reference to Exhibit 10.05 to the TRV 9/30/96 10-Q.
11.01 Computation of Earnings Per Share. Electronic
12.01 Computation of Ratio of Earnings to Fixed Charges. Electronic
27.01 Financial Data Schedule. Electronic
99.01 The paragraph that begins on page 90 and ends on page 91 of TAP's Electronic
Prospectus dated April 22, 1996 and the first paragraph on page 24
of TAP's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1996.
99.02 The second full paragraph on page 91 of TAP's Prospectus dated Electronic
April 22, 1996.
The total amount of securities authorized pursuant to
any instrument defining rights of holders of
long-term debt of TAP does not exceed 10% of the
total assets of TAP and its consolidated
subsidiaries. TAP will furnish copies of any such
instrument to the Commission upon request.
</TABLE>
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
Date: November 12, 1996 By /s/ William P. Hannon
------------------------------------
William P. Hannon
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1996 By /s/ Christine B. Mead
------------------------------------
Christine B. Mead
Chief Accounting Officer
(Principal Accounting Officer)
27
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
<S> <C> <C>
3.01 Restated Certificate of Incorporation of Travelers/Aetna Property
Casualty Corp. ("TAP"), incorporated by reference to Exhibit 3.1
to Amendment No. 5 of the Registration Statement on Form S-1 of
TAP (No. 333-2254) ("TAP's Form S-1").
3.02 Certificate of Designations, Powers, Preferences and Rights of 7.5%
Redeemable Preferred Stock, Series Z of TAP, incorporated by
reference to Exhibit 3.3 of TAP's Form S-1.
3.03 Restated By-Laws of TAP, effective March 29, 1996,
incorporated by reference to Exhibit 3.2 of TAP's
Form S-1.
10.01 Capital Accumulation Plan of TAP (as amended through Electronic
September 1, 1996).
10.02 1996 Deferred Compensation Plan for Non-Employee Directors of Electronic
TAP (as amended through September 25, 1996).
10.03 TAP 1996 Executive Option Plan. Electronic
10.04 Travelers Group Capital Accumulation Plan (as amended
through September 25, 1996), incorporated by reference to
Exhibit 10.03 to the Quarterly Report on Form 10-Q of Travelers
Group Inc. for the fiscal quarter ended September 30, 1996
(File No. 1-9924) (the "TRV 9/30/96 10-Q").
10.05 Travelers Group Stock Option Plan (as amended through September
27, 1995), incorporated by reference to Exhibit 10.01 to the
Quarterly Report on Form 10-Q of Travelers Group Inc. for the
fiscal quarter ended September 30, 1995 (File No. 1-9924).
10.06 Amendment No. 14 to the Travelers Group Stock Option Plan,
incorporated by reference to Exhibit 10.01 to the TRV 9/30/96 10-Q.
10.07 Travelers Group 1996 Stock Incentive Plan, incorporated by
reference to Exhibit 10.03 to the Quarterly Report on Form 10-Q
of Travelers Group Inc. for the fiscal quarter ended March 31,
1996 (File No. 1-9924).
10.08 Amendment No. 1 to the Travelers Group 1996 Stock Incentive Plan,
incorporated by reference to Exhibit 10.04 to the TRV 9/30/96 10-Q.
10.09 Amendment No. 2 to the Travelers Group 1996 Stock Incentive Plan,
incorporated by reference to Exhibit 10.05 to the TRV 9/30/96 10-Q.
11.01 Computation of Earnings Per Share. Electronic
12.01 Computation of Ratio of Earnings to Fixed Charges. Electronic
27.01 Financial Data Schedule. Electronic
99.01 The paragraph that begins on page 90 and ends on page 91 of TAP's Electronic
Prospectus dated April 22, 1996 and the first paragraph on page 24
of TAP's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1996.
99.02 The second full paragraph on page 91 of TAP's Prospectus dated Electronic
April 22, 1996.
The total amount of securities authorized pursuant to
any instrument defining rights of holders of
long-term debt of TAP does not exceed 10% of the
total assets of TAP and its consolidated
subsidiaries. TAP will furnish copies of any such
instrument to the Commission upon request.
</TABLE>
<PAGE> 1
EXHIBIT 10.01
ANNEX A
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
CAPITAL ACCUMULATION PLAN
AS AMENDED THROUGH SEPTEMBER 1, 1996
SECTION 1. PURPOSE OF THE PLAN.
The name of this plan is TRAVELERS/AETNA PROPERTY CASUALTY CORP. CAPITAL
ACCUMULATION PLAN (the "Plan"). The purpose of the Plan is to enable
TRAVELERS/AETNA PROPERTY CASUALTY CORP. (the "Company") and its Subsidiaries to
attract, retain and motivate officers and certain other employees, to compensate
them for their contributions to the growth and profits of the Company and to
encourage ownership of stock in the Company on the part of such personnel. The
Plan provides incentives to participating officers and certain other employees
which are linked directly to increases in stockholder value and will therefore
inure to the benefit of all stockholders of the Company.
SECTION 2. DEFINITIONS.
For purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "BOARD" means the Board of Directors of the Company.
(b) "CAUSE" shall mean (1) failure by a Participant to perform
substantially his or her duties with the Company or a Subsidiary, after
reasonable notice to the Participant of such failure; (2) conduct by a
Participant that is in material competition with the Company or a
Subsidiary or (3) conduct by a Participant that breaches his or her duty
of loyalty to the Company or a Subsidiary, or that is materially injurious
to the Company or a Subsidiary, monetarily or otherwise, which conduct
shall include, but not be limited to (i) disclosing or misusing any
confidential information pertaining to the Company or a Subsidiary; (ii)
any attempt, directly or indirectly to induce any employee, agent,
insurance agent, insurance broker or broker-dealer of the Company or any
Subsidiary to be employed or perform services elsewhere or (iii) any
attempt by a Participant directly or indirectly to solicit the trade of
any customer or supplier or prospective customer or supplier of the
Company or any Subsidiary or (iv) disparaging the Company, any Subsidiary
or any of their respective officers or directors. The determination of
whether any conduct, action or failure to act constitutes "Cause" shall be
made by the Committee.
(c) "CODE" means the Internal Revenue Code of 1986, as amended from time
to time.
1
<PAGE> 2
(d) "COMMITTEE" shall mean, with respect to Section 16(a) Persons, the
Incentive Compensation Subcommittee, and with respect to all other
Participants, either the Nominations and Compensation Committee or the
Incentive Compensation Subcommittee, as the case may be.
(e) "COMMON STOCK" means the Class A common stock, par value $.01 per
share, of the Company.
(f) "DISABILITY" shall mean a disability that renders an individual unable
to be occupied within his or her business or profession for a specified
period of time, as determined by the Committee, or its designee.
(g) "ELIGIBLE EMPLOYEE" means an employee of the Company or any
Subsidiary as described in Section 3.
(h) "INCENTIVE COMPENSATION SUBCOMMITTEE" shall mean a subcommittee of the
Nominations and Compensation Committee, appointed by the Nominations and
Compensation Committee, the composition of which subcommittee shall
satisfy the requirements of Rule 16b-3 under the Securities Exchange Act
of 1934, as amended (the "1934 Act"), with respect to grants made to
Section 16(a) Persons, and who also qualify, and remain qualified, as
"outside directors" as defined in Section 162(m) of the Code.
(i) "INCREMENTAL SHARES" shall have the meaning set forth in Section
6(i).
(j) "NOMINATIONS AND COMPENSATION COMMITTEE" shall mean the Nominations
and Compensation Committee appointed by the Board.
(k) "OPTIONS" mean non-qualified stock options to purchase shares of
Common Stock which are not incentive stock options under Section 422 of
the Code and which are granted under Section 6 herein.
(l) "PARTICIPANT" means an Eligible Employee selected by the Committee,
pursuant to the Committee's authority in Section 7, to receive an award of
Restricted Stock.
(m) "RELATED EMPLOYMENT" means the employment of an individual by an
employer which is neither the Company nor a Subsidiary provided (i) such
employment is undertaken by the individual at the request of the Company
or a Subsidiary, (ii) immediately prior to undertaking such employment,
the individual was an officer or employee of the Company or a Subsidiary,
or was engaged in Related Employment as herein defined and (iii) such
employment is recognized by the Committee, in its discretion, as Related
Employment for purposes of this Plan. The death or Disability of an
individual during a period of Related Employment as herein defined shall
be treated, for purposes of this Plan, as if the death or
2
<PAGE> 3
onset of Disability had occurred while the individual was an officer or
employee of the Company or a Subsidiary.
(n) "RESTRICTED STOCK" means an award of shares of Common Stock that is
subject to the restrictions set forth in Section 5.
(o) "RETIREMENT" means no longer being occupied in one's business or
profession and terminating active employment with the Company or a
Subsidiary after either (i) reaching age 65, or (ii) reaching age 60 and
having 30 years of employment with the Company or a Subsidiary.
(p) "SECTION 16(A) PERSON" means any officer or director of the Company or
any Subsidiary who is subject to the reporting requirements of Section
16(a) of the 1934 Act.
(q) "SUBSIDIARY" means any entity at least one-half of whose outstanding
voting stock, or beneficial ownership for entities other than
corporations, is owned, directly or indirectly, by the Company, or which
is otherwise controlled directly or indirectly by the Company.
SECTION 3. ELIGIBILITY AND PARTICIPATION.
Officers and certain other employees of the Company and its Subsidiaries
who are responsible for or contribute to the management, growth and/or
profitability of the Company or its Subsidiaries shall be eligible to
participate in the Plan. The Participants under the Plan shall be selected from
time to time by the Committee, in its discretion, from among Eligible Employees.
SECTION 4. AMOUNT AND FORM OF AWARDS.
(a) Awards under the Plan shall be determined by the Committee and will be
granted at such time as the Committee may in its discretion determine. The
Committee may also, in its discretion, provide for alternative methods for
grants of awards. A Participant will receive such award in Restricted Stock or,
if permitted by the Committee and so elected by the Participant pursuant to
Section 6, a portion of such award may be received in Options.
(b) The number of shares of Common Stock which may be issued under the
Plan shall be equal to the lesser of (i) the number of shares of Common Stock
repurchased by the Company on or after April 23, 1996 or (ii) four million
(4,000,000) shares of Common Stock, in each case subject to adjustment as
provided in Section 8. The Committee may, in its discretion, modify or eliminate
the repurchase limitation set forth in the preceding sentence. The shares issued
hereunder may be authorized but unissued shares, or previously issued shares
reacquired by the Company, or both. In the event Restricted Stock is forfeited,
or an outstanding Option is terminated, expires or is canceled, prior to the end
of the period during which the restrictions on Restricted Stock expire, or the
Options can be exercised, the shares of Common Stock called for by such award of
Restricted Stock or the unexercised portion of the Option award will become
available for future awards.
3
<PAGE> 4
SECTION 5. RESTRICTED STOCK.
(a) The number of shares of Restricted Stock awarded to a Participant
under the Plan will be determined by a formula or formulas approved by the
Committee. In order to reflect the impact of the restrictions on the value of
the Restricted Stock, as well as the possibility of forfeiture of Restricted
Stock, the fair market value of Common Stock shall be discounted at a rate of
25% in determining the number of shares of Restricted Stock to be awarded. The
Committee may, where it deems appropriate, and in its discretion, provide for an
alternative discount rate. For purposes of this Plan, the fair market value of
Common Stock for an award will be the average of the Common Stock's closing
prices on the Composite Tape of the New York Stock Exchange, Inc. ("NYSE") for
the five trading days prior to the date of the award. The dollar value of an
award will be divided by the discounted market value to determine the number of
shares of Restricted Stock in an award. The value of fractional shares will be
paid in cash. In the event the Committee provides for alternative methods for
grants of awards, the Committee, in its discretion, may provide for alternative
methods of determining the fair market value of the Common Stock for such
awards, and may also provide for alternative forfeiture provisions.
(b) Unless the Committee determines otherwise, a Participant shall not
have any rights with respect to an award, unless or until such Participant has
executed an agreement evidencing the award (a "Restricted Stock Award
Agreement") and has delivered a fully executed copy thereof to the Company. Each
Participant who is awarded Restricted Stock may, but need not, be issued a stock
certificate in respect of such shares of Restricted Stock. A "book entry" (i.e.,
a computerized or manual entry) shall be made in the records of the Company to
evidence an award of shares of Restricted Stock to a Participant where no
certificate is issued in the name of the Participant. Such Company records
shall, absent manifest error, be binding on the Participants. Each certificate,
if any, registered in the name of a Participant shall bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to such award,
substantially in the following form:
"The transferability of the certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the Travelers/Aetna Property Casualty Corp. Capital
Accumulation Plan and a Restricted Stock Award Agreement entered into
between the registered owner and Travelers/Aetna Property Casualty Corp.
Copies of such Plan and Agreement are on file in the offices of
Travelers/Aetna Property Casualty Corp."
The Committee shall require that any stock certificate issued in the name
of a Participant evidencing shares of Restricted Stock be held in the custody of
the Company until the restrictions thereon shall have lapsed, and that, as a
condition of such issuance of a certificate for Restricted Stock, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the shares covered by such certificate.
(c) The shares of Restricted Stock awarded pursuant to this Section 5
shall be subject to the following restrictions and conditions:
4
<PAGE> 5
(i) Subject to the provisions of the Plan and the Restricted Stock
Award Agreements, during the three-year period (together with any
extensions thereof approved as provided herein) commencing on the date of
the award (the "Restricted Period"), the Participant shall not be
permitted to sell, transfer, pledge or assign shares of Restricted Stock
awarded under the Plan. The Committee may, in its discretion, (x)
initially provide for an alternative Restricted Period or alter the
three-year Restricted Period for a previously granted award (provided that
the Committee may not extend the Restricted Period for a previously
granted award without the Participant's written consent), (y) during any
extension of such Restricted Period, provide for alternative restrictions
and (z) provide for the lapse of any such restrictions in installments and
accelerate or waive any such restrictions in whole or in part based on
such factors and such circumstances as the Committee may determine, in its
discretion, including, but not limited to, the Participant's Retirement,
termination, death or Disability.
(ii) Unless the Committee in its discretion shall determine
otherwise at or prior to the time of the grant of any award, the
Participant shall have the right to direct the vote of his shares of
Restricted Stock during the Restricted Period, in accordance with
paragraph (e) of this Section 5. The Participant shall have the right to
receive any regular dividends on such shares of Restricted Stock. The
Committee shall in its discretion determine the Participant's rights with
respect to extraordinary dividends or distributions on the shares of
Restricted Stock.
(iii) Shares of Common Stock shall be delivered to the Participant
either in certificate form or by crediting the Participant's brokerage
account at Smith Barney Inc. promptly after, and only after, the
Restricted Period shall expire (or such earlier time as the restrictions
may lapse in accordance with paragraph (c)(i) of this Section 5) without
forfeiture in respect of such shares of Restricted Stock.
(d) Subject to the provisions of paragraph (c)(i) of this Section 5, the
following provisions shall apply to a Participant's shares of Restricted Stock
prior to the end of the Restricted Period (including extensions and Related
Employment):
(i) Upon the death of a Participant, the restrictions on his or her
Restricted Stock shall immediately lapse. In the event of a Participant's
Disability prior to the termination of employment, awards of Restricted
Stock shall continue to vest as originally scheduled, provided (a) the
Participant continues to meet the conditions prescribed by the Committee
for determination of Disability and has not voluntarily terminated his or
her employment or (b) the Disability is discontinued and the Participant
resumes employment upon the discontinuance of the Disability or, if
applicable, the completion of any related leave of absence as permitted
under the Company's policies governing family and medical leave.
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(ii) If a Participant voluntarily terminates employment or if a
Participant is involuntarily terminated for Cause, such Participant shall
forfeit his or her Restricted Stock.
(iii) If a Participant is involuntarily terminated without Cause or
retires from employment (as defined below), but does not fall within the
definition of Retirement, such Participant shall forfeit his or her
Restricted Stock and receive in return a cash payment equal to
seventy-five percent (75%) of the fair market value of the number of
shares of Restricted Stock forfeited, calculated as of the date of the
award.
(iv) Upon Retirement, a Participant shall receive his or her
Restricted Stock upon completion of the Restricted Period, unless the
Committee determines that such Participant shall forfeit the Restricted
Stock and receive instead, a cash payment equal to seventy-five percent
(75%) of the fair market value of the number of shares of Restricted Stock
forfeited, calculated as of the date of the award.
(e) Unless the Committee in its discretion shall determine otherwise at or
prior to the time of the grant of any award, during the Restricted Period the
shares of Restricted Stock shall be voted by the Company's senior administrative
officer in charge of administering the Plan, or such other person as the
Committee may designate (the "Plan Administrator"), and the Plan Administrator
shall vote such shares in accordance with instructions received from
Participants (unless to do so would constitute a violation of the Plan
Administrator's fiduciary duties). Shares as to which no instructions are
received shall be voted by the Plan Administrator proportionately in accordance
with instructions received from Participants in the Plan (unless to do so would
constitute a violation of the Plan Administrator's fiduciary duties).
(f) In any instance where the vesting of an award of Restricted Stock or
the vesting and/or exercisability of an Option or reload option extends past the
date of termination of a Participant's employment, either pursuant to the terms
of the Plan or by action of the Committee, the Restricted Stock as well as any
rights of continued vesting and exercisability with respect to Options and
reload options shall be forfeited, if, in the determination of the Committee,
the Participant, at any time within any such remaining period of continued
vesting or exercisability engages in any of the conduct described in
subparagraphs (2) or (3) of the definition of "Cause" under this Plan. In
addition, if, in the determination of the Committee, the Participant engages in
any of the conduct described in subparagraph (3) of the definition of "Cause"
under this Plan, while holding any Incremental Shares which remain subject to
restrictions on transferability, at the option of the Committee, the Participant
shall forfeit such Incremental Shares and receive instead a cash payment,
without interest, equal to the original exercise price for the Option or reload
option under which the Incremental Shares were issued, multiplied by the number
of Incremental Shares forfeited.
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SECTION 6. ELECTION OF OPTIONS.
(a) The Company does not intend to grant Options under the Plan. However,
the Committee may, at such times and under such circumstances as the Committee
in its discretion may deem to be appropriate, permit a Participant to elect to
receive up to a maximum of one-third (1/3) of his or her award in the form of
Options. The Committee shall determine the number of Options to be awarded in
lieu of each share of Restricted Stock given up and may alter the maximum
percentage of Restricted Stock which may be exchanged for Options. Such election
shall be made within a period of 60 days after the grant of the award (or such
other period after the date of the award as the Committee may specify). In the
absence of such an election, the award will be paid entirely in shares of
Restricted Stock.
(b) Options will be granted with an exercise price equal to the fair
market value of Common Stock, which will be the average of the Common Stock's
closing prices on the Composite Tape of the NYSE on the five trading days prior
to the grant date. The Committee in its discretion shall determine the
expiration date of the Options, provided that in no event shall the expiration
date be later than ten years from the date of the award. Options granted under
the Plan shall vest pursuant to a schedule determined by the Committee, in its
discretion, prior to the Participant's election to receive Options.
(c) In order to evidence acceptance of an Option, the Committee may
require recipients of Options to enter into a stock option agreement with the
Company, in such form as the Committee shall determine, which agreement shall
set forth, among other things, the exercise price of the Option, the term of the
Option and provisions regarding exercisability of the Option granted thereunder.
(d) If an Option is exercised by a Participant, then, at the discretion of
the Committee, the Participant may receive a replacement or reload option, on
such terms, conditions and limitations as determined by the Committee. Reload
Options may also be granted under other benefit plans of the Company, as
determined by the Committee.
(e) Options, reload options, and, during any period of restrictions on
transferability, Incremental Shares may not be sold, assigned, pledged,
hypothecated or otherwise transferred by the Participant other than by will or
the laws of descent and distribution, except as provided in this Section 6(e).
The Committee may permit (on such terms, conditions and limitations as it shall
establish) Options and reload options to be transferred one time to a trust or
similar vehicle for the benefit of the Participant's immediate family members
(the "Permitted Transferee"). Except to the extent required by law, no right or
interest of any Participant in the Plan or any award granted hereunder shall be
subject to any lien, levy, attachment, pledge, obligation, liability or
bankruptcy of the Participant. All rights with respect to awards granted to a
Participant shall be exercisable during his or her lifetime only by the
Participant, or if applicable, the Permitted Transferee.
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<PAGE> 8
(f) An Option shall not be exercisable unless payment in full is made for
the shares being acquired thereunder at the time of exercise; such payment shall
be made (A) in United States dollars by cash or check, (B) in lieu thereof,
unless the Committee shall in its discretion determine otherwise, by tendering
to the Company Common Stock owned by the person exercising the Option (or owned
by the person exercising the Option and his or her spouse, jointly) and acquired
at least six months prior to such tender, including shares of Restricted Stock
awarded hereunder at least six months prior to such tender, and having a fair
market value equal to the cash exercise price applicable to such Option, such
fair market value to be determined in such reasonable manner as may be provided
for from time to time by the Committee or as may be required in order to comply
with or to conform to the requirements of any applicable or relevant laws or
regulations, (C) by a combination of United States dollars and Common Stock as
aforesaid, or (D) if permitted by the Committee, by authorizing the Company to
sell, on behalf of the Participant, the appropriate number of shares otherwise
issuable to the Participant upon the exercise of the Option with the proceeds of
sale applied to pay the exercise price.
(g) An Option shall not be exercisable unless the person exercising the
Option has been, at all times during the period beginning with the date of grant
of the Option and ending on the date of such exercise, an officer or employee of
the Company or a Subsidiary, except that:
(i) if such person shall cease to be an officer or employee of the Company
or a Subsidiary solely by reason of a period of Related Employment, he or
she may, during such period of Related Employment, exercise the Option as
if he or she continued to be such an officer or employee; or
(ii) if such person shall cease to be such an officer or employee on
account of an involuntary termination of employment for Cause, or on
account of a voluntary termination of employment (which voluntary
termination of employment is not considered to be "retirement" as provided
in subsection (v) below or "Retirement" as defined above), all unvested
and unexercised Options shall be forfeited on the last day of employment.
If such person shall cease to be such an officer or employee on account of
an involuntary termination (other than for Cause, and which is not
considered to be "retirement" or "Retirement"), while holding a vested
Option which has not expired and has not been exercised, such person may,
for a period of thirty (30) days following termination of employment, but
in no event after the Option has expired under the provisions of 6(b)
hereof) exercise such Option with respect to any shares as to which he or
she could have exercised the Option on the date he or she terminated
employment; or
(iii)(A) In the event of a Participant's death prior to the termination of
employment, the Committee may permit unvested Options to continue to vest
as scheduled. Vested Options (or vested portions thereof) that have not
been exercised and have not expired at the time of death may be exercised
by the Participant's executors, administrators, heirs or distributees at
any time prior to the expiration date of the Option. If a Participant dies
at any time after a termination of employment, the provisions relating to
the particular conditions of such
8
<PAGE> 9
termination of employment shall govern the vesting and exercisability of
Options granted to such Participant, except that if a Participant dies
within thirty (30) days of an involuntary termination (other than for
Cause), the provisions of subsection (vi) below shall apply; or
(iii)(B) In the event of a Participant's Disability prior to the
termination of employment, vested Options (or vested portions thereof)
that have not been exercised and have not expired may be exercised at any
time prior to the expiration date of the Option, provided the Participant
continues to meet the conditions prescribed by the Committee for
determination of Disability. The Committee shall determine a Participant's
rights with respect to unvested Options at the time of determination of
Disability. However, unless the Committee determines otherwise, if a
Participant holds any unvested Options at the time of determination of
Disability no further vesting shall occur unless and until the Participant
resumes employment with the Company or a Subsidiary upon the earlier to
occur of (a) the end of the period of Disability (or any related leave of
absence as permitted under the Company's policies governing family and
medical leave), or (b) twelve (12) months (or such other time period as
determined by the Committee) after the determination of the Disability. If
the Participant resumes employment with the Company or a Subsidiary within
the applicable time limits, then vesting shall resume, effective on the
return-to-work date, without any credit given for the time during which
the Participant was unable to work as a result of the Disability, or the
related leave. If the Participant does not resume employment with the
Company or a Subsidiary within the applicable time limits or, if at any
time prior to the end of any remaining period of vesting and/or
exercisability of Options, the Participant no longer meets the conditions
prescribed by the Committee for the determination of Disability, all
unvested and unexercised Options shall be forfeited; or
(iv) if such person shall cease to be such an officer or employee by
reason of Retirement while holding an Option that has not expired and has
not been fully exercised, such person may exercise the Option with respect
to any shares as to which he or she could have exercised the Option on the
date he or she ceased to be such an officer or employee at any time within
three years of the date he or she ceased to be such an officer or employee
(but in no event after the Option has expired under the provisions of
Section 6(b) hereof); or
(v) if such person shall cease to be an officer or employee because he or
she has "retired" from employment (i.e., such person is no longer occupied
within his or her business or profession and has terminated active
employment with the Company or a Subsidiary after reaching age 55 and
having completed at least five years of employment with the Company or a
Subsidiary, or after reaching a certain age and completing a certain
number of years of service, as determined by the Committee) but has not
met the definition of "Retirement", while holding an Option that has not
expired and has not been fully exercised, such person may exercise the
Option with respect to any shares as to which he or she could have
exercised the Option on the date he or she ceased to be such an officer or
employee at any time within three years of the date he or she ceased to be
such an officer or employee (but in no event after the Option has expired
under the provisions of Section 6(b) hereof); or
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<PAGE> 10
(vi) If a Participant shall die or become Disabled within thirty (30) days
of his or her involuntary termination of employment other than for Cause,
vested Options (or vested portions thereof) which have not been exercised
and have not expired or been forfeited may be exercised by the Participant
or his or her executors, administrators, heirs or distributees, as the
case may be, at any time within one (1) year after the date of such event,
but in no event after the Option has expired; or
(vii) notwithstanding the foregoing provisions of this Section 6(g), the
Committee shall have the authority, on a case by case basis, in its
discretion, to alter and/or waive the period of vesting and/or
exercisability, however such periods may not be changed to the detriment
of the Participant after the date of grant without the Participant's
written consent.
(h) If the exercise price of an Option is paid by delivery of a number of
shares of Restricted Stock, then the Participant shall receive, in connection
with the exercise, an equal number of identically restricted shares of Common
Stock; the Incremental Shares of Common Stock issued upon such exercise shall
contain any applicable restrictions that are set forth in the Participant's
stock option agreement and/or in the Plan. In such event, the fair market value
of shares of Restricted Stock delivered or withheld, for purposes of this Plan,
shall not take into account the restrictions on such shares.
(i) The Incremental Shares issued as a result of the exercise of an Option
may not be sold, assigned, pledged, hypothecated or otherwise transferred by the
Participant, except as specifically permitted pursuant to Section 6(e) above,
for a period of one (1) year following the date of exercise if no reload option
is granted in connection with such exercise or for a period of two (2) years if
a reload option is granted in connection with such exercise, or such other
shorter or longer periods of restriction on transferability as may be determined
by the Committee. For purposes of the Plan, the term "Incremental Shares" shall
mean those shares of Common Stock actually issued to a Participant upon the
exercise of an Option. The number of Incremental Shares will equal the number of
Option shares exercised minus the sum of (a) the number of shares of Common
Stock surrendered by the Participant or sold by the Company on behalf of the
Participant to pay the exercise price and (b) the number of shares of Common
Stock withheld by the Company, at the Participant's election, to pay the
applicable withholding taxes arising as a result of the Option exercise.
SECTION 7. ADMINISTRATION.
The Plan shall be administered by the Committee.
The Committee shall have the power and authority to grant Restricted Stock
or Options to Participants, pursuant to the terms of the Plan.
In particular, the Committee shall have the authority:
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(a) to select those employees of the Company and its Subsidiaries who
are Eligible Employees;
(b) to determine whether and to what extent Restricted Stock or
Options are to be granted to Participants hereunder;
(c) to determine the number of shares of Common Stock to be covered by
each such award granted hereunder;
(d) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder; and
(e) to determine the terms and conditions, not inconsistent with the terms
of the Plan, which shall govern all written instructions evidencing the
Options and Restricted Stock.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan; and to otherwise supervise the
administration of the Plan. All decisions made by the Committee pursuant to the
provisions of the Plan shall be final and binding on all persons, including the
Company and the Participants. The Committee may delegate some or all of its
authority over the administration of the Plan to any other committee, with
approval by the Board, but only with respect to persons who are not Section
16(a) Persons.
SECTION 8. ADJUSTMENTS UPON A CHANGE IN COMMON STOCK.
In the event of any change in the outstanding Common Stock of the Company
by reason of any stock split, stock dividend, distribution, recapitalization,
merger, consolidation, reorganization, combination or exchange of shares or
other similar event if such change equitably requires an adjustment in the
number or kind of shares that may be issued under the Plan pursuant to Section
4(b), or in the number or kind of shares subject to, or the option price per
share under, any outstanding Option which has been granted to any Participant,
such adjustment shall be made by the Committee and shall be conclusive and
binding for all purposes of the Plan. In no event shall the excess of the
aggregate fair market value of the Common Stock subject to the Options
immediately after any substitution, exchange or adjustment over the aggregate
option price for such Common Stock be more than the excess of the aggregate fair
market value of all of the Common Stock subject to the Option immediately before
any such substitution, exchange or adjustment over the aggregate option price of
such Common Stock nor shall the adjusted Option give the holder thereof any
additional benefits he or she did not have under the old Option.
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SECTION 9. AMENDMENT AND TERMINATION.
The Plan may be amended or terminated at any time and from time to time by
the Board, but no amendment which increases the aggregate number of shares of
Common Stock which may be issued pursuant to the Plan (except as provided in
Section 8) shall be effective unless and until the same is approved by the
stockholders of the Company. Neither an amendment to the Plan nor the
termination of the Plan shall adversely affect any right of any Participant with
respect to any Restricted Stock or Option theretofore granted without such
Participant's written consent. Subject to the foregoing limitations, the
Committee shall have the authority to amend certain Plan provisions to the
extent necessary to permit participation in the Plan by employees who are
employed outside of the United States on terms and conditions which are
comparable to those afforded to employees located within the United States.
SECTION 10. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing shares pursuant to an
Option to represent and agree with the Company in writing that such person is
acquiring the shares without a view to distribution thereof. The certificates
for such shares may include any legend which the Committee deems appropriate to
reflect any restriction on transfer. All certificates for shares of Common Stock
delivered under the Plan shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations,
and other requirements of the Securities and Exchange Commission, any stock
exchange upon which the Common Stock is then listed, and any applicable federal
or state securities law.
(b) Nothing contained in the Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases. The adoption of the Plan shall
not confer upon any employee of the Company or any Subsidiary any right to
continued employment with the Company or a Subsidiary, as the case may be, nor
shall it interfere in any way with the right of the Company or a Subsidiary to
terminate the employment of any of its employees at any time.
(c) No member of the Board or the Committee, nor any officer or employee
of the Company acting on behalf of the Board or the Committee, shall be
personally liable for any action, determination, or interpretation taken or made
in good faith with respect to the Plan, and all members of the Board and the
Committee and each and any officer or employee of the Company acting on their
behalf shall, to the extent permitted by law, be fully indemnified and protected
by the Company in respect of any such action, determination or interpretation.
(d) A Participant's rights and interest under the Plan may not be assigned
or transferred in whole or in part either directly or by operation of law or
otherwise (except in the event of a Participant's death or as provided in
Section 6(e) above) including, but not by way of limitation, execution, levy,
garnishment, attachment, pledge, bankruptcy or in any other manner and no such
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right or interest of any Participant in the Plan shall be subject to any
obligation or liability of such Participant. A Participant may designate one or
more beneficiaries to succeed to the rights of the Participant with respect to
awards granted under the Plan in the event of the death of the Participant, by
providing written notice of such designation to the Committee, on such form as
may be prescribed by the Committee. If no such notice is received, the
Participant's estate shall succeed to the rights of the Participant with respect
to awards granted under the Plan.
(e) The Company and its Subsidiaries shall have the right to deduct from
any payment made under the Plan any federal, state or local income or other
taxes required by law to be withheld with respect to such payment. It shall be a
condition to the obligation of the Company to issue Common Stock upon the lapse
of restrictions on Restricted Stock or upon exercise of an Option that the
Participant (or any beneficiary or person entitled to exercise the Option) pay
to the Company, upon its demand, such amount as may be requested by the Company
for the purpose of satisfying any liability to withhold federal, state or local
income or other taxes. If the amount requested is not paid, the Company may
refuse to issue shares. Unless the Committee shall in its discretion determine
otherwise, payment for taxes required to be withheld may be made in whole or in
part by an election by a Participant, in accordance with rules adopted by the
Committee from time to time (A) to have the Company withhold Common Stock
otherwise issuable pursuant to the Plan having a fair market value equal to such
tax liability and/or (B) to tender to the Company shares of Common Stock owned
by the Participant or the person exercising the Option and acquired more than
six months prior to such tender (excluding shares of Restricted Stock awarded
hereunder) and having a fair market value equal to such tax liability, such fair
market value (in the case of clause (A) or (B)), to be determined in such
reasonable manner as may be provided for from time to time by the Committee or
as may be required in order to comply with or to conform to the requirements of
any applicable or relevant laws or regulations.
(f) Notwithstanding anything to the contrary contained herein, upon a
"Change of Control" (defined below), the restrictions on each award of
Restricted Stock shall immediately lapse, and all outstanding Options and reload
options shall become immediately exercisable with respect to one hundred percent
(100%) of the Common Stock subject thereto. "Change of Control" shall mean the
occurrence of any of the following, unless such occurrence shall have been
approved or ratified by at least a two-thirds (2/3) vote of the Continuing
Directors (defined below): (A) any person within the meaning of Sections 13(d)
and 14(d) of the 1934 Act, shall have become the beneficial owner, within the
meaning of Rule 13d-3 under the 1934 Act, of shares of stock of the Company
having twenty five percent (25%) or more of the total number of votes that may
be cast for election of the directors of the Company, or (B) there shall have
been a change in the composition of the Board such that at any time a majority
of the Board shall have been members of the Board for less than twenty-four (24)
months, unless the election of each new director who was not a director at the
beginning of the period was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who were directors at the beginning of such
period, or who were approved as directors pursuant to the provisions of this
paragraph (the "Continuing Directors").
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(g) All claims and disputes between a Participant and the Company or any
Subsidiary arising out of the Plan or any award granted hereunder shall be
submitted to arbitration in accordance with the then current arbitration policy
of the Company or the Subsidiary with whom the Participant is employed. Notice
of demand for arbitration shall be given in writing to the other party and shall
be made within a reasonable time after the claim or dispute has arisen. The
award rendered by the arbitrator shall be made in accordance with the Plan,
shall be final, and judgment may be entered upon it in accordance with
applicable law in any court having jurisdiction thereof. The provisions of this
Section 10(g) shall be specifically enforceable under applicable law in any
court having jurisdiction thereof.
(h) The validity, construction, interpretation, administration and effect
of the Plan and of its rules and regulations, and rights relating to the Plan,
shall be determined solely in accordance with the laws of the State of Delaware.
(i) No Common Stock or other securities shall be issued hereunder unless
counsel for the Company shall be satisfied that such issuance will be in
compliance with all applicable Federal, state and international securities
statutes, rules and regulations. The appropriate officers of the Company or its
Subsidiaries shall cause to be filed any reports, returns or other information
regarding awards or Common Stock issued under the Plan as may be required by
Section 13 or 15(d) of the 1934 Act or any other applicable statute, rule or
regulation.
(j) If any term or provision of this Plan or the application thereof to
any person or circumstances shall, to any extent, be invalid or unenforceable,
then the remainder of the Plan, or the application of such term or provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and provision hereof
shall be valid and be enforced to the fullest extent permitted by applicable
law.
SECTION 11. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on the date it is adopted by the Board and the
Company's stockholder and shall remain effective until terminated by the Board
in accordance with Section 9.
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EXHIBIT 10.02
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
1996 DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS (THE "PLAN")
AS AMENDED THROUGH SEPTEMBER 25, 1996
Section 1. ELIGIBILITY. Each member of the Board of Directors of
Travelers/Aetna Property Casualty Corp. (the "Company") who is not an
employee of the Company or any of its affiliates (an "Eligible Director") is
eligible to participate in the Plan.
Section 2. ADMINISTRATION. The Plan shall be administered, construed and
interpreted by the Board of Directors of the Company. Pursuant to such
authorization, the Board of Directors shall have the responsibility for carrying
out the terms of the Plan, including but not limited to the determination of the
annual retainer to be paid to all Eligible Directors (the "Annual Fixed Director
Compensation"). To the extent permitted under the securities laws applicable to
compensation plans (including, without limitation, the requirements of Section
16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
or under the Internal Revenue Code of 1986, as amended (the "Code"), the
Nominations and Compensation Committee of the Board of Directors, or a
subcommittee of the Nominations and Compensation Committee, may exercise the
discretion granted to the Board under the Plan, provided that the composition of
such Committee or subcommittee shall satisfy the requirements of Rule 16b-3
under the Exchange Act, or any successor rule or regulation. The Board of
Directors may also designate a plan administrator to manage the record keeping
and other routine administrative duties under the Plan.
Section 3. COMPENSATION. Annual Fixed Director Compensation payable to
Eligible Directors for services rendered as a director during a calendar year,
if not deferred pursuant to paragraph 4 of the Plan, shall be paid partly in
shares of Class A common stock, par value $.01 per share (the "Common Stock"),
of the Company and partly in cash. Payment shall be made quarterly, on the first
business day following the end of the quarter for which the compensation is
payable, to each Eligible Director who served as a director during at least
one-half of such quarter and who was a director on the last day of such quarter.
The percentage of such payment to be made in cash shall approximate the maximum
Federal income tax liability that could be incurred by the Eligible Director in
respect of receipt of the shares of Common Stock as compensation, which amount
shall be determined from time to time by the Board of Directors, with the advice
of tax counsel. The number of shares of the Company's Common Stock to be
transferred to the Eligible Director in payment of the balance of such quarterly
installment of Annual Fixed Director Compensation shall be determined in the
manner set forth in paragraph 5(a), and such shares shall not be transferred or
sold by such Eligible Director for a period of six months following the date of
grant.
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Section 4. ELECTION TO DEFER.
(a) TIME OF ELECTION. As soon as practicable prior to the beginning
of a calendar year, an Eligible Director may elect to defer compensation to be
received pursuant to the Plan by directing that all of the Annual Fixed Director
Compensation which otherwise would have been payable in accordance with
paragraph 3 above during such calendar year and succeeding calendar years shall
be credited to a deferred compensation account (the "Director's Account"). Under
a valid election, such deferred Compensation shall be payable entirely in shares
of Common Stock, determined in accordance with paragraph 5(a) below. Any person
who shall become an Eligible Director during any calendar year, and who was not
an Eligible Director of the Company prior to the beginning of such calendar
year, may elect, within 30 days after his or her term begins, to defer payment
of all his or her Annual Fixed Director Compensation earned during the remainder
of such calendar year and for succeeding calendar years.
(b) FORM AND DURATION OF ELECTION. An election to defer Annual Fixed
Director Compensation shall be made by written notice executed by the Eligible
Director and filed with the Secretary of the Company. Such election shall
continue until the Eligible Director terminates such election by subsequent
written notice filed with the Secretary of the Company. Any such election to
terminate deferral shall become effective beginning with the calendar quarter
following receipt of the election form by the Company and shall only be
effective with respect to Annual Fixed Director Compensation payable for
services rendered as an Eligible Director thereafter. Amounts credited to the
Director's Account prior to the effective date of termination shall not be
affected by such termination and shall be distributed only in accordance with
the terms of the Plan.
(c) CHANGE OF ELECTION. An Eligible Director who has terminated his
or her election to defer compensation hereunder may thereafter make another
election in accordance with paragraph 4(a) to defer such compensation for the
calendar year subsequent to the filing of such election and succeeding calendar
years.
Section 5. THE DIRECTOR'S ACCOUNT. All Annual Fixed Director Compensation
that an Eligible Director has elected to defer under the Plan shall be credited
to the Director's Account as follows:
(a) As of the date a quarterly installment of the Annual Fixed
Director Compensation would otherwise be payable, there shall be credited to the
Director's Account the number of full shares of the Company's Common Stock
obtained by dividing the amount of the Annual Fixed Director Compensation for
the calendar quarter by the average of the closing price of the Company's Common
Stock on the Composite Tape of the New York Stock Exchange Inc. on the last ten
trading days of the calendar quarter for which such Compensation is otherwise
payable. If the amount of the Annual Fixed Director Compensation for the
calendar quarter is not evenly divisible by such average closing price of the
Company's Common Stock, the balance shall be credited to the Director's Account
in cash.
2
<PAGE> 3
(b) At the end of each calendar quarter, there shall be credited to
the Director's Account an amount equal to the cash dividends that would have
been paid on the number of shares of Common Stock credited to the Director's
Account as of the dividend record date, if any, occurring during such calendar
quarter as if such shares had been shares of issued and outstanding Common Stock
on such record date, and such amount shall be treated as reinvested in
additional shares of Common Stock on the dividend payment date.
(c) Cash amounts credited to the Director's Account pursuant to
subparagraphs (a) and (b) above shall accrue interest commencing from the date
the cash amounts are credited to the Director's Account at a rate per annum to
be determined from time to time by the Company. Amounts credited to the
Director's Account shall continue to accrue interest until distributed in
accordance with the Plan.
(d) An Eligible Director shall not have any interest in the cash or
Common Stock in his or her Director's Account until such cash or Common Stock is
distributed in accordance with the Plan.
Section 6. DISTRIBUTION FROM ACCOUNTS.
(a) FORM OF ELECTION. At the time an Eligible Director makes an
election to defer receipt of Annual Fixed Director Compensation pursuant to
paragraphs 5(a) or 5(c), such Director shall also file with the Secretary of the
Company a written election with respect to the distribution of the aggregate
amount of cash and shares credited to the Director's Account pursuant to such
election. An Eligible Director may elect to receive such amount in one lump-sum
payment or in a number of approximately equal annual installments (provided the
payout period does not exceed 15 years). The lump-sum payment or the first
installment shall be paid as of (i) the first business day of any calendar year
subsequent to the date the Annual Fixed Director Compensation would otherwise be
payable, as specified by the Director, (ii) the first business day of the
calendar quarter immediately following the cessation of the Eligible Director's
service as a director of the Company or (iii) the earlier of (i) or (ii), as the
Eligible Director may elect. Subsequent installments shall be paid as of the
first business day of each succeeding annual installment period until the entire
amount credited to the Director's Account shall have been paid. A cash payment
will be made with the final installment for any fraction of a share of Common
Stock credited to the Director's Account.
(b) ADJUSTMENT OF METHOD OF DISTRIBUTION. An Eligible Director
participating in the Plan may, prior to the beginning of any calendar year, file
another written election with the Secretary of the Company electing to change
the date and/or method of distribution of the aggregate amount of cash and
shares of Common Stock credited to the Director's Account for services rendered
as a director commencing with such calendar year. Amounts credited to the
Director's Account prior to the effective date of such change (the "Prior
Amounts") shall not be affected by such change and shall be distributed only in
accordance with the election in effect at the time the Prior Amounts were
credited to the Director's Account; provided, however, that an Eligible Director
may elect to change the time at which Prior Amounts are to be paid, if (i) a
3
<PAGE> 4
written election to effect such change is filed with the Secretary of the
Company at least one year before the earliest scheduled payment of the Prior
Amounts and (ii) such change would not accelerate the Eligible Director's
receipt of the Prior Amounts. Notwithstanding the foregoing, in the event an
Eligible Director suffers a severe financial hardship outside the control of
such Director, as determined by the Company, the Eligible Director may elect to
advance or defer the date of distribution of his or her Director's Account or
change the method of distribution thereof.
(c) Notwithstanding anything to the contrary contained herein, upon
a "Change of Control" (as defined below), the full number of shares of Common
Stock and cash in each Director's Account shall be immediately funded and be
distributable on the later of the date six months and one day following the
"Change of Control" or the distribution date(s) previously elected by an
Eligible Director. For purposes of this Plan, a Change in Control shall mean the
occurrence of any of the following unless such occurrence shall have been
approved or ratified by a two-thirds (2/3) vote of the Continuing Directors
(defined below): (i) any person within the meaning of Sections 13(d) and 14(d)
of the Exchange Act, shall have become the beneficial owner, within the meaning
of Rule 13d-3 under the Exchange Act, of shares of stock of the Company having
twenty-five percent (25%) or more of the total number of votes that may be cast
for election of the directors of the Company, unless each transaction by which
such twenty-five percent (25%) or more was acquired was approved or ratified by
a vote of at least two-thirds (2/3) of the directors of the Company; or (ii)
there shall have been a change in the composition of the Board of Directors such
that at any time a majority of the Board of Directors shall have been members of
the Board for less than twenty-four (24) months, unless the election of each new
director who was not a director at the beginning of the period was approved by a
vote of at least two-thirds (2/3) of the directors then still in office who were
directors at the beginning of such period, or who were approved as directors
pursuant to the provisions of this paragraph (the "Continuing Directors").
Section 7. DISTRIBUTION ON DEATH. If an Eligible Director should die
before all amounts credited to the Director's Account shall have been paid in
accordance with the election referred to in paragraph 6, the balance in such
Director's Account as of the date of such Director's death shall be paid
promptly following such Director's death, in accordance with the method of
payment elected by the Eligible Director, to the beneficiary designated in
writing by such Director. Such balance shall be paid to the estate of the
Eligible Director if (a) no such designation has been made or (b) the designated
beneficiary shall have predeceased the Director and no further beneficiary
designation has been made.
Section 8. MISCELLANEOUS.
(a) The right of an Eligible Director to receive any amount in the
Director's Account shall not be transferable or assignable by such Director,
except by will or by the laws of descent and distribution, and no part of such
amount shall be subject to attachment or other legal process.
4
<PAGE> 5
(b) Except as otherwise set forth herein, the Company shall not be
required to reserve or otherwise set aside funds or shares of Common Stock for
the payment of its obligations hereunder. The Company shall make available as
and when required a sufficient number of shares of Common Stock to meet the
requirements arising under the Plan.
(c) The establishment and maintenance of, or allocation and credits
to, the Director's Account shall not vest in the Eligible Director or his
beneficiary any right, title or interest in and to any specific assets of the
Company. An Eligible Director shall not have any dividend or voting rights or
any other rights of a stockholder (except as expressly set forth in paragraph
5(b) with respect to dividends and as provided in subparagraph (f) below) until
the shares of Common Stock credited to a Director's Account are distributed. The
rights of an Eligible Director to receive payments under this Plan shall be no
greater than the right of an unsecured general creditor of the Company.
(d) The Plan shall expire on April 24, 2006, unless sooner
terminated by the Board of Directors. The Board of Directors may at any time
amend or terminate the Plan; provided, however, that (i) no amendment or
termination shall impair the rights of an Eligible Director with respect to
amounts then credited to the Director's Account; (ii) the provisions of the Plan
relating to eligibility, the amount and price of securities to be awarded, the
timing of and the amount of Annual Fixed Director Compensation awards shall not
be amended more than once every six months, other than to comport with changes
in the Internal Revenue Code of 1986, as amended, the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder; and (iii) no
amendment shall become effective without approval of the stockholders of the
Company if such stockholder approval is required to enable the Plan to satisfy
applicable state or Federal statutory or regulatory requirements.
(e) Each Eligible Director participating in the Plan will receive an
annual statement indicating the amount of cash and number of shares of Common
Stock credited to the Director's Account as of the end of the preceding calendar
year.
(f) If adjustments are made to outstanding shares of Common Stock as
a result of stock dividends, stock splits, recapitalizations, mergers,
consolidations and similar transactions, an appropriate adjustment shall be made
in the number of shares of Common Stock credited to the Director's Account.
(g) The aggregate number of shares of Common Stock that may be
granted under the Plan shall not exceed 100,000, subject to adjustment upon the
occurrence of adjustments to the outstanding Common Stock described in paragraph
8(f) hereof. Any shares to be granted hereunder will be purchased by the
Company.
(h) The validity, construction, interpretation, administration and
effect of the Plan and of its rules and regulations, and rights relating to the
Plan, shall be determined solely in accordance with the laws of the State of
Delaware.
5
<PAGE> 6
(i) All claims and disputes between an Eligible Director and the
Company arising out of the Plan shall be submitted to arbitration in accordance
with the then current arbitration policy of the Company. Notice of demand for
arbitration shall be given in writing to the other party and shall be made
within a reasonable time after the claim or dispute has arisen. The award
rendered by the arbitrator shall be final, and judgment may be entered upon it
in accordance with applicable law in any court having jurisdiction thereof. The
provisions of this Section 8(i) shall be specifically enforceable under
applicable law in any court having jurisdiction thereof.
(j) If any term or provision of this Plan or the application thereof
to any person or circumstances shall, to any extent, be invalid or
unenforceable, then the remainder of the Plan, or the application of such term
or provision to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby, and each term and
provision hereof shall be valid and be enforced to the fullest extent permitted
by applicable law.
6
<PAGE> 1
EXHIBIT 10.03
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
1996 EXECUTIVE OPTION PLAN
as amended through September 1, 1996
1. Purpose. The purpose of the Travelers/Aetna Property Casualty
Corp. 1996 Executive Option Plan (the "Plan") is to advance the interests of
the Company, its Subsidiaries and stockholders by providing incentives in the
form of options to purchase shares of common stock of Travelers Group Inc.
("Travelers") to Executive Officers Travelers/Aetna Property Casualty Corp.
("the Company") and its Subsidiaries. Option grants will be made under the
Travelers Group 1996 Stock Incentive Plan, as the same may be amended from
time to time ("SIP").
2. Definitions. For purposes of the Plan, the capitalized terms
used, but not defined herein, shall have the meanings set forth in SIP, and
the following terms shall have the following meanings:
"Board" shall mean the Board of Directors of the Company.
"Committee" shall mean a subcommittee of the Nominations and Compensation
Committee of the Company, appointed by such Nominations and Compensation
Committee, consisting of at least two (2) persons, the composition of
which subcommittee shall satisfy the requirements of Rule 16b-3 under the
1934 Act (with respect to grants to Section 16(a) Persons) and who also
qualify, and shall remain qualified as "outside directors" as defined in
Section 162(m) of the Code.
"Common Stock" shall mean the common stock of Travelers, par value $.01
per share.
"Company" shall mean Travelers/Aetna Property Casualty Corp., a
Delaware corporation.
"Executive Officers" shall mean (a) executive officers of the Company who
hold the office of vice-president or higher, and/or who are subject to the
reporting requirements of Section 16 of the 1934 Act and who contribute
significantly to the long term performance and growth of the Company and
(b) executive officers of Subsidiaries who hold the office of Senior Vice
President or higher and who contribute significantly to the long-term
performance and growth of the Company or its Subsidiaries.
"Nominations and Compensation Committee" shall mean the Nominations and
Compensation Committee appointed by the Board.
1
<PAGE> 2
"Plan" shall mean the Travelers/Aetna Property Casualty Corp. 1996
Executive Option Plan, as the same may be amended from time to time.
"SIP" shall mean the Travelers Group 1996 Stock Incentive Plan, as the
same may be amended from time to time.
"SIP Committee" shall mean the Incentive Compensation Subcommittee of the
Nominations and Compensation Committee of Travelers, or such other
committee that may, from time to time, have the power and authority to
grant awards under SIP to Section 16(a) Persons.
"Subsidiary" shall mean any entity at least one-half of whose outstanding
voting stock, or beneficial ownership for entities other than
corporations, is owned, directly or indirectly, by the Company, or which
is otherwise controlled directly or indirectly by the Company.
"Travelers" shall mean Travelers Group Inc., a Delaware corporation and
currently, the majority stockholder of the Company.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
3. Committee Powers and Authority.
(a) Granting of Awards. Awards under SIP may be granted to Executive
Officers by the Committee, as authorized by the SIP Committee. Awards granted
hereunder shall be governed by the terms of SIP and this Plan. No Award shall be
granted hereunder to any member of the Committee. The Committee shall have the
power and authority, subject to any limitations which may be specifically set
forth in SIP or in this Plan, and as authorized by the SIP Committee, to
determine the type, the Exercise Price and the number of shares exercisable in
connection with each Option and Reload Option, to determine the terms,
conditions and limitations applicable to the vesting and exercisability of
Awards, to determine the time when Awards will be granted and paid and whether
payment of any Award may be deferred, to determine whether Options should be
transferable and whether any conditions should be imposed on such transfer, to
establish objectives and conditions for earning Awards, to determine whether
such objectives or conditions have been met, to determine the payment provisions
applicable to the exercise of Options and Reload Options, to determine, modify,
waive, extend or accelerate the terms and conditions for vesting, exercisability
and forfeiture of Awards, to determine whether payment of an Award should be
reduced or eliminated, to determine whether the Common Stock issued pursuant to
Awards should be restricted in any manner, and the nature, terms and conditions
of any such restrictions and to interpret the provisions of the Plan and all
Awards granted thereunder to Executive Officers. At the discretion of the
Committee, and as authorized by the SIP Committee, an Executive Officer may also
be eligible to receive a Reload Option in connection with an Option exercise,
subject to the terms, conditions and limitations set forth in SIP.
2
<PAGE> 3
(b) Administration of the Plan. The Committee shall have the power
and authority to administer the Plan in connection with Awards made to Executive
Officers, and, as authorized by the SIP Committee, to establish, amend and
rescind such rules, regulations and administrative guidelines relating to the
Executive Officers who are granted Awards under the Plan, to correct any defect,
supply any omission or clarify any inconsistency in the Plan and/or in any Award
Agreement and to take such actions and make such administrative determinations
that the Committee deems necessary or advisable. Any decision of the Committee
in the administration of the Plan, as described herein, shall be conclusive and
binding on all parties concerned, including the Company, its stockholders and
Subsidiaries and all Executive Officers.
(c) Delegation of Authority. The Committee may not delegate
its authority over the administration of the Plan.
(d) Committee Action. The Committee may act in writing by a majority
of its members in office. The members of the Committee may authorize any one or
more of the members of the Committee or any officer of the Company to execute
and deliver documents on behalf of such Committee. No member of the Committee
shall be personally liable for anything done or omitted to be done by him or her
or by any other member of the Committee in connection with the Plan, except for
his or her own willful misconduct or as expressly provided by statute.
4. Participation by Subsidiaries. Upon approval by the Board or a
committee authorized by the Board, Subsidiaries of the Company may participate
in the Plan. A Subsidiary's participation in the Plan may be terminated at any
time by the Board or an authorized committee. If the participation in the Plan
of a Subsidiary shall terminate, such termination shall not relieve it of any
obligations theretofore incurred by it under the Plan, except with the approval
of the Board or a committee authorized by the Board.
5. Maximum Number of Shares Issuable to any One Executive Officer. The
aggregate number of shares of Common Stock that may be granted to any one
Executive Officer pursuant to Awards made under this Plan between the
effective date of this Plan and April 23, 2006 shall not exceed four million
(4,000,000) shares, subject to adjustment as provided in Section 15 of SIP.
6. Award Agreements. Awards granted under the Plan shall be evidenced in
the manner prescribed by the Committee, as authorized by the SIP Committee from
time to time in accordance with SIP, and shall be governed by the terms,
conditions, restrictions and limitations of SIP. The Committee may require that
an Executive Officer execute and deliver an Award Agreement to the Company in
order to evidence an Executive Officer's acceptance of an Award.
7. Incentive Stock Options. The terms and conditions of any Incentive
Stock Options granted to Executive Officers shall be subject to and shall be
designed to comply with the provisions of Section 422 of the Code, and any other
administrative procedures adopted by Travelers or the Committee, from time to
time. Incentive Stock Options may not be granted
3
<PAGE> 4
hereunder to any person who is not an employee of the Company or a Subsidiary at
the time of grant.
8. Income and Withholding Taxes. The Company and it Subsidiaries shall
have the right to deduct from all amounts paid to an Executive Officer (or his
or her beneficiaries or any Permitted Transferee) under the Plan any Federal,
state or local income or other taxes required by law to be withheld with respect
to such payment. It shall be a condition to the obligation of Travelers to issue
Common Stock upon exercise of an Option or Reload Option that the Executive
Officer (or any beneficiary or person entitled to act on behalf of the Executive
Officer) pay to the Company, upon demand, such amount as may be requested by the
Company for the purpose of satisfying any liability to withhold Federal, state
or local income or other taxes. If the amount requested is not paid, Travelers
may refuse to issue shares. Unless the Committee shall in its discretion
determine otherwise, and provided same is permitted under SIP, payment for taxes
required to be withheld may be made in whole or in part by an Executive
Officer's election, in accordance with rules adopted by Travelers or the
Committee from time to time, (a) to have shares of Common Stock otherwise
issuable pursuant to the Plan having a Fair Market Value equal to such tax
liability withheld to satisfy such tax obligation and/or (b) to tender shares of
Common Stock of Travelers owned by the Executive Officer (or the person
exercising the Option), including Common Stock of Travelers owned jointly with
his or her spouse, and acquired at least six (6) months prior to such tender
(excluding restricted shares of Common Stock of Travelers awarded under The
Travelers Group Capital Accumulation Plan or the Travelers Group Employee
Incentive Plan) and having a Fair Market Value equal to such tax liability.
9. No Rights to Awards or Employment. No Executive Officer shall have any
claim or right to be granted an Award under the Plan. There shall be no
obligation of uniformity of treatment of Executive Officers under the Plan.
Neither the Plan nor any action taken thereunder shall be construed as giving
any Executive Officer any right to employment with the Company or any
Subsidiary. In addition, the Company and each Subsidiary expressly reserve the
right at any time to dismiss an Executive Officer free from liability, or any
claim under the Plan, except as provided herein or in an Award Agreement.
10. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan and of its rules and regulations, and
rights relating to the Plan, shall be determined solely in accordance with
the laws of the State of Delaware.
11. Expenses of the Plan. The expenses of the administration of the
Plan shall be borne by the Company and its participating Subsidiaries.
12. Arbitration. All claims and disputes between an Executive Officer,
Travelers, the Company and/or any Subsidiary arising out of the Plan or any
Award granted hereunder shall be submitted to arbitration in accordance with the
then current arbitration policy of the Company or the Subsidiary with whom the
Executive Officer is employed. Notice of demand for arbitration shall be given
in writing to the other party and shall be made within a reasonable time after
the
4
<PAGE> 5
claim or dispute has arisen. The award rendered by the arbitrator shall be made
in accordance with the provisions of the Plan, shall be final, and judgment may
be entered upon it in accordance with applicable law in any court having
jurisdiction thereof. The provisions of this Section shall be specifically
enforceable under applicable law in any court having jurisdiction thereof.
13. Termination; Amendment. The Plan shall terminate on the earlier to
occur of (a) a resolution of the Board of Directors terminating the Plan, (b)
April 23, 2006 or (c) termination of SIP. The Plan may be amended or suspended
at any time and from time to time by the Board, provided that no amendment shall
be made without the approval of the Board of Directors of Travelers, and no
amendment shall be made without stockholder approval, if stockholder approval by
the Company's stockholders is required under applicable law. No termination,
amendment or suspension of the Plan shall adversely affect any right of any
Executive Officer with respect to any Award theretofore granted, as determined
by the Committee, without such Executive Officer's written consent. Subject to
the foregoing limitations, and as authorized by the SIP Committee, the Committee
shall have the authority to amend certain Plan provisions to the extent
necessary to permit participation in the Plan by Executive Officers who are
employed outside of the United States on terms and conditions which are
comparable to those afforded to Executive Officers located within the United
States.
14. Partial Invalidity. If any term or provision of this Plan or the
application thereof to any person or circumstances shall, to any extent, be
invalid or unenforceable, then the remainder of the Plan, or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby, and each
term and provision hereof shall be valid and be enforced to the fullest extent
permitted by applicable law.
15. Deferrals. If authorized by the SIP Committee, the Committee may
postpone the exercising of Awards, the issuance or delivery of Common Stock
under any Award or any action permitted under the Plan to prevent the Company or
any Subsidiary from being denied a Federal income tax deduction with respect to
any Award other than an Incentive Stock Option. In addition, the Committee may,
as authorized by the SIP Committee, determine that all or a portion of a payment
to an Executive Officer, whether to be made in cash, shares of Common Stock or a
combination thereof, shall be deferred. Deferrals shall be for such periods and
upon such terms and conditions as the Committee shall determine, as authorized
by the SIP Committee.
16. Effective Date. The Plan shall become effective on July 24,
1996. No Award shall be granted hereunder unless and until the Plan has been
so adopted.
5
<PAGE> 1
Exhibit 11.01
Travelers/Aetna Property Casualty Corp. and Subsidiaries
Computation of Earnings Per Share
(In millions, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings:
Net income $ 247 $ 110 $ 129 $ 284
Preferred Dividends:
7.5% Preferred Stock - Series Z - - (4) -
-------- --------- -------- ---------
$ 247 $ 110 $ 125 $ 284
======== ========= ======== =========
Average shares:
Common 400.0 294.5 356.2 294.5
======== ========= ======== =========
Earnings per share $ 0.62 $ 0.37 $ 0.35 $ 0.96
======== ========= ======== =========
</TABLE>
Earnings per common share is based on the weighted average number of common
shares outstanding during the period. For purposes of the computation of
earnings per share, the weighted average number of shares was computed by
treating the common stock issued within a one-year period prior to the initial
filing of the registration statement relating to the initial public offering
(IPO) as outstanding for all reported periods. This amount was then reduced by
the dilutive effect of such issuances of stock prior to the IPO determined by
using the actual proceeds and the number of shares that could have been
repurchased using the IPO price as the repurchase price for all periods
presented.
<PAGE> 1
Exhibit 12.01
Travelers/Aetna Property Casualty Corp. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(In millions of dollars, except for ratio)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
Income before income taxes $ 353 $ 117
Interest 40 78
Portion of rentals deemed to be interest 9 27
----------- -----------
Earnings available for fixed charges $ 402 $ 222
=========== ===========
Fixed charges:
Interest $ 40 $ 78
Portion of rentals deemed to be interest 9 27
----------- -----------
Total fixed charges $ 49 $ 105
=========== ===========
Ratio of earnings to fixed charges 8.20x 2.11x
=========== ===========
</TABLE>
The ratio of earnings to fixed charges is computed by dividing income before
income taxes and fixed charges by the fixed charges. For purposes of these
ratios, fixed charges consist of interest expense and that portion of rentals
deemed representative of the appropriate interest factor.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTANS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1996 FINANCIAL STATEMENTS OF TRAVELERS/AETNA PROPERTY CASUALTY
CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001010551
<NAME> TRAVELERS/AETNA PROPERTY CASUALTY CORP.
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 23,455
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 838
<MORTGAGE> 1,009
<REAL-ESTATE> 157
<TOTAL-INVEST> 28,810
<CASH> 99
<RECOVER-REINSURE> 10,032
<DEFERRED-ACQUISITION> 423
<TOTAL-ASSETS> 49,625
<POLICY-LOSSES> 31,797
<UNEARNED-PREMIUMS> 3,474
<POLICY-OTHER> 1,680
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,288
0
0
<COMMON> 4
<OTHER-SE> 6,044
<TOTAL-LIABILITY-AND-EQUITY> 49,625
4,311
<INVESTMENT-INCOME> 1,161
<INVESTMENT-GAINS> (31)
<OTHER-INCOME> 27
<BENEFITS> 3,979
<UNDERWRITING-AMORTIZATION> 649
<UNDERWRITING-OTHER> 983
<INCOME-PRETAX> 117
<INCOME-TAX> (12)
<INCOME-CONTINUING> 129
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 129
<EPS-PRIMARY> .35
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.01
TAP's Prospectus
April 22, 1996
Pages 90-91
A number of cases have been filed against several insurance companies and
industry organizations relating to service fee charges and premium calculations
on certain workers' compensation insurance. Certain subsidiaries of the Company
are defendants in South Carolina ex rel. Medlock v. National Council on
Compensation Insurance ("NCCI"), an action filed by the Attorney General of
South Carolina in August 1994 in the Court of Common Pleas, County of
Greenville, South Carolina; Four Way Plant Farm v. NCCI, a purported class
action filed in September 1994 in the Circuit Court for Bullock County, Alabama,
and NC Steel, Inc. v. NCCI, a purported class action filed in November 1993 in
the Superior Court Division of the General Court of Justice, Wake County, North
Carolina. In these cases, the plaintiffs generally allege that the
administration of each state's workers' compensation assigned risk pool
conspired with servicing carriers for the pool to collect excessive fees in
violation of state antitrust and/or unfair trade practice laws. The plaintiffs
seek unspecified compensatory, treble and/or punitive damages and injunctive
relief. The Company believes it has meritorious defenses and intends to contest
the allegations. In NC Steel, Inc. v. NCCI, the defendants' motion to dismiss
was granted in February 1995, and the plaintiffs have appealed to the North
Carolina Court of Appeals. In April 1994, certain subsidiaries of [the Company]
were named as additional defendants in a purported class action pending in the
116th District of Dallas County, Texas, entitled Weatherford Roofing Company v.
Employers National Insurance Company. The plaintiffs in this case allege that
the workers' compensation carriers in Texas have conspired to collect excessive
or improper premiums in violation of state insurance laws, antitrust laws and/or
state unfair trade practices laws. The plaintiffs seek compensatory, treble
and/or punitive damages as well as declaratory and injunctive relief. In a
statutory demand letter, plaintiffs' counsel allege classwide compensatory
damages, including interest through October 1994, of approximately $572 million.
Since that time, court-approved settlements with certain other insurers have
been based on single damage, or alleged overcharge, calculations which, if
applied to Company-issued policies of class members, would yield single damages
of $50 million or less. The Company believes it has meritorious defenses and
intends to contest the allegations unless an attractive settlement opportunity
arises.
<PAGE> 2
TAP's Form 10-Q
June 30, 1996
Page 24
For information concerning actions filed against several insurance companies and
industry organizations relating to service fee charges and premium calculations
on certain workers' compensation insurance, see the description that appears in
the paragraph beginning on page 90 and continuing on page 91 of the Company's
Prospectus dated April 22, 1996, which description is incorporated by reference
herein. A copy of the pertinent paragraph of such filing is included as an
exhibit to this Form 10-Q. Two of such actions, Four Way Plant Farm v. NCCI and
Weatherford Roofing Company v. Employees National Insurance Company, have been
settled, subject to approval of the court. In another such action, NC Steel,
Inc. v. NCCI, the North Carolina Court of Appeals affirmed the trial court's
dismissal in part, reversed in part and remanded for further proceedings.
<PAGE> 1
EXHIBIT 99.02
TAP's Prospectus
April 22, 1996
Pages 91
On April 2, 1996, individual and institutional plaintiffs, on their own behalf
and also purporting to represent a putative class of similarly situated persons
who may lose their employment as a result of the Acquisition, filed an appeal
captioned Capital Region Conference of Churches, et al. vs. State of Connecticut
Department of Insurance, et al., ( Judicial District of Hartford/New Britain at
Hartford, Superior Court of the State of Connecticut) (the "Appeal"), from the
Memorandum of Decision issued by the Deputy Commissioner of the State of
Connecticut Department of Insurance approving the Acquisition. The Appeal
alleges procedural defects in the approval process. However, the Appeal does not
seek a specific remedy. TIGI believes the Appeal is without merit and plans
vigorously to oppose it. On April 9, 1996, TIGI, Aetna Casualty and Standard
Fire moved for dismissal of the Appeal.
