<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 JUNE 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:
COMMON STOCK OUTSTANDING AS OF AUGUST 5, 1996:
CLASS A 71,979,829
CLASS B 328,020,170
<PAGE> 2
TRAVELERS/AETNA PROPERTY CASUALTY CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Part I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements: Page No.
--------
<S> <C>
Condensed Consolidated Statement of Operations (Unaudited) -
Three and Six Months Ended June 30, 1996 and 1995 3
Condensed Consolidated Balance Sheet -
June 30, 1996 (Unaudited) and December 31, 1995 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity (Unaudited) -
Six Months Ended June 30, 1996 5
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 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 24
Item 6. Exhibits and Reports on Form 8-K 24
Exhibit Index 25
Signatures 26
</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 Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1996 1995 1996 1995
------- ------ ------- ------
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 1,667 $ 878 $ 2,493 $1,744
Net investment income 472 175 668 343
Fee income 112 120 211 244
Realized investment gains (losses) (59) 6 (33) --
Other revenues 10 4 15 14
------- ------ ------- ------
2,202 1,183 3,354 2,345
------- ------ ------- ------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 1,807 764 2,537 1,548
Amortization of deferred acquisition costs 237 124 357 247
Interest expense 38 -- 38 --
General and administrative expenses 481 168 658 333
------- ------ ------- ------
2,563 1,056 3,590 2,128
------- ------ ------- ------
Income (loss) before federal income taxes (361) 127 (236) 217
Federal income taxes (benefit) (145) 28 (118) 43
------- ------ ------- ------
Net income (loss) $ (216) $ 99 $ (118) $ 174
======= ====== ======= ======
Net income (loss) per share of common stock $ (0.59) $ 0.34 $ (0.36) $ 0.59
======= ====== ======= ======
Weighted average number of common
and equivalent shares outstanding 374.2 294.5 334.3 294.5
======= ====== ======= ======
</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>
June 30, December 31,
1996 1995
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at market
(cost, $23,293; $10,534) $23,222 $10,908
Equity securities, at market (cost, $717; $565) 771 603
Mortgage loans 1,035 213
Real estate held for sale 159 23
Short-term securities 1,922 786
Other investments 483 287
------- -------
Total investments 27,592 12,820
------- -------
Cash 147 51
Investment income accrued 373 165
Premium balances receivable 3,254 2,213
Reinsurance recoverables 10,474 5,407
Deferred acquisition costs 406 202
Deferred federal income taxes 1,740 650
Contractholder receivables 1,627 1,154
Other assets 4,773 1,400
------- -------
Total assets $50,386 $24,062
======= =======
LIABILITIES
Claims and claim adjustment expense reserves $32,347 $15,460
Unearned premium reserves 3,432 1,695
Contractholder payables 1,627 1,154
Long-term debt 700 --
Commercial paper 631 --
Other liabilities 4,989 2,152
------- -------
Total liabilities 43,726 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 and outstanding 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 5,456 2,889
Retained earnings 300 422
Unrealized investment gains, net of taxes -- 280
------- -------
Total stockholders' equity 5,760 3,601
------- -------
Total liabilities and stockholders' equity $50,386 $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>
Six Months Ended June 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
Other 1 -- -- --
------- -------- ---------- -----------
Balance, end of period 5,460 -- 71,979,829 328,020,170
------- -------- ---------- -----------
RETAINED EARNINGS
Balance, beginning of period 422
Net loss (118)
Dividends (4)
-------
Balance, end of period 300
-------
UNREALIZED INVESTMENT GAINS
(LOSSES), NET OF TAXES
Balance, beginning of period 280
Net change in unrealized investment gains and
losses, net of taxes (280)
-------
Balance, end of period --
------- -------- ---------- -----------
Total stockholders' equity $ 5,760 -- 71,979,829 328,020,170
======= ======== ========== ===========
</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>
Six Months Ended
----------------
June 30,
--------
1996 1995
-------- -------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (152) $ 607
-------- -------
Cash flows from investing activities:
Investment repayments
Fixed maturities 613 305
Mortgage loans 19 13
Proceeds from sales of investments, including real
estate held for sale
Fixed maturities 7,440 3,120
Equity securities 296 69
Mortgage loans 17 12
Real estate held for sale 1 12
Investments in
Fixed maturities (8,163) (2,692)
Equity securities (328) (162)
Mortgage loans -- (5)
Short-term securities, (purchases) sales, net (654) (1,084)
Other investments, net (133) (11)
Business acquisition (4,160) --
Securities transactions in course of settlement 482 (137)
-------- -------
Net cash used in investing activities (4,570) (560)
-------- -------
Cash flows from financing activities:
Issuance of commercial paper, net 631 --
Issuance of long-term debt 700 --
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 -- (46)
-------- -------
Net cash provided by (used in) financing activities 4,818 (46)
-------- -------
Net increase in cash 96 1
Cash at beginning of period 51 32
-------- -------
Cash at end of period $ 147 $ 33
======== =======
Supplemental disclosure of cash flow information:
Income taxes paid (refunded) $ 103 $ (65)
======== =======
Interest paid $ 15 $ --
======== =======
Supplemental disclosure of business acquisition:
Fair value of investments acquired $ 13,884
Fair value of other assets acquired 10,019
Claims and claim adjustment expense reserves assumed 16,809
Other liabilities assumed 2,934
--------
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. 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 June 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 six months ended June 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>
Six Months Ended
----------------
(in millions, except per share data) June 30,
--------
1996 1995 *
------ ------
<S> <C> <C>
Revenues $4,962 $4,886
Net income (loss) 75 (223)
Net income (loss) per common share 0.19 (0.56)
</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 $466 million or $1.17 per share for the six months
ended June 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 $1.2
billion, none of which is currently utilized. 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 July 31, 1996, TAP had $637 million outstanding under
its commercial paper program. TAP had $1.3 billion available for debt
offerings under its shelf registration statement at July 31, 1996. 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 June 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.
6. Commitments and Contingencies
Lloyd's of London (Lloyd's) is currently undergoing 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 states
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.
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 June 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
TRAVELERS/AETNA PROPERTY CASUALTY CORP. AND SUBSIDIARIES
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 SIX MONTHS ENDED JUNE 30,
1996 AND 1995
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
(in millions, except per share data) June 30, June 30,
-------- --------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues $2,202 $1,183 $3,354 $2,345
====== ====== ====== ======
Net income (loss) $ (216) $ 99 $ (118) $ 174
====== ====== ====== ======
EARNINGS PER SHARE:
Net income (loss) $(0.59) $ 0.34 $(0.36) $ 0.59
====== ====== ====== ======
Weighted average number of common
shares outstanding 374.2 294.5 334.3 294.5
------ ------ ------ ------
</TABLE>
Consolidated Results of Operations
The net loss for the second quarter of 1996 was $216 million or $0.59 per share
compared to net income of $99 million or $0.34 per share in the second quarter
of 1995. This $315 million decrease in net income was due to the $391 million in
previously anticipated acquisition-related charges incurred by the Company in
the second quarter of 1996. These acquisition-related charges include $323
million in reserve increases, net of reinsurance, for cumulative injury claims
other than asbestos, insurance products involving financial guarantees, and
assumed reinsurance, $45 million in uncollectible reinsurance and other
receivables, and $23 million in lease and severance costs related to the
restructuring plan for the merger. Partially offsetting the acquisition-related
charges and higher catastrophe losses in the second quarter of 1996 were strong
net investment income, favorable loss experience in personal auto lines,
improvement in certain workers' compensation lines and residual markets and the
emerging benefits of expense-reduction initiatives associated with the merger.
Core earnings, which exclude realized gains (losses) and acquisition-related
charges, were $213 million or $0.56 per share in the second quarter of 1996, an
increase of $118 million from the second quarter of 1995. The increase in core
earnings was primarily the result of the acquisition of Aetna P&C. In addition,
the increase in core earnings reflects strong net investment income, favorable
loss experience in personal auto lines, improvement in certain workers'
compensation lines and residual markets and the emerging benefits of
expense-reduction initiatives associated with the merger, marginally offset by
higher catastrophe losses.
11
<PAGE> 12
Revenues of $2.202 billion in the second quarter of 1996 increased $1.019
billion compared to the second quarter of 1995 revenues of $1.183 billion. This
increase was primarily attributable to a $789 million increase in premiums and a
$297 million increase in net investment income, partially offset by lower fee
income and realized investment gains. The earned premium and net investment
income increases are primarily the result of the acquisition of Aetna P&C.
Commercial Lines earned premiums increased $452 million to $1.005 billion for
the second quarter of 1996 from $553 million for the second quarter of 1995.
Personal Lines earned premiums for the second quarter of 1996 of $655 million
increased $337 million compared to $318 million for the second quarter of 1995.
The increase in Commercial Lines premium revenue is net of continued declines
resulting from the Company's selective renewal activity in response to the
competitive pricing environment.
Net investment income was $472 million for the second quarter of 1996, an
increase of $297 million from the second quarter of 1995, primarily due to the
acquisition of Aetna P&C. Realized investment gains decreased by $65 million to
a loss of $59 million in the second quarter of 1996 compared to the second
quarter of 1995.
Fee income is significantly impacted by National Accounts within Commercial
Lines because the recorded revenue from premium equivalents is primarily
reflected in fees. Fee income for the second quarter of 1996 was $112 million,
an $8 million decrease from the second quarter of 1995. This decrease in fee
income was due to 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 $2.563 billion for the second quarter of 1996 increased
$1.507 billion from the second quarter of 1995. The increase was primarily
attributable to the claims and expenses related to the newly acquired Aetna P&C
business including financing costs and the previously anticipated
acquisition-related adjustments. These acquisition-related charges totaled
approximately $602 million pretax.
The Company's effective tax rate was 40% for the second quarter of 1996 and 22%
for the second quarter of 1995. The tax rate on the net loss for the second
quarter of 1996 reflects a tax benefit that is greater than the statutory rate
of 35% primarily due to non-taxable net investment income. The tax rate on net
income for the second quarter of 1995 is less than the statutory rate primarily
due to non-taxable investment income.
The net loss for the six months ended June 30, 1996 was $118 million or $0.36
per share compared to net income of $174 million or $0.59 per share for the six
months ended June 30, 1995. Excluding realized gains (losses) and
acquisition-related charges, core operating income was $294 million or $0.87 per
share for the first six months of 1996, up $120 million compared to $174 million
or $0.59 per share for the first six 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.
The other consolidated operating trends for the six months ended June 30, 1996
and 1995 are substantially the same as noted above for the quarters then ended.
SEGMENT RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
Commercial Lines
<TABLE>
<CAPTION>
(in millions) Three Months Ended Three Months Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Revenues.............................................. $1,445 $ 816
Net income (loss)..................................... $ (237) $ 72
</TABLE>
12
<PAGE> 13
Commercial Lines net loss for the 1996 second quarter was $237 million compared
to net income of $72 million in the 1995 second quarter. This decrease was due
to the acquisition-related charges of $383 million, partially offset by the
benefits of expense-reduction initiatives associated with the merger and strong
net investment income. Excluding realized gains (losses) and the
acquisition-related charges, Commercial Lines core operating income was $178
million in the second quarter of 1996 compared to $67 million in the second
quarter of 1995, primarily reflecting 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 second quarter of 1996 totaled
$1.100 billion (excluding a one-time adjustment associated with a reinsurance
transaction in 1996), up $561 million compared to $539 million for the second
quarter of 1995, reflecting the acquisition of Aetna P&C, offset in small part
by the highly competitive conditions in the marketplace and the Company's
continuing focus on profitability. Premium equivalents for the second quarter of
1996 totaled $752 million, up $78 million compared to $674 million for the
second quarter of 1995, reflecting the acquisition of Aetna P&C. 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) and excluding a one-time adjustment
associated with a reinsurance transaction in 1996, Commercial Lines net written
premiums for the second quarter of 1996 totaled $1.100 billion, down $192
million compared to $1.292 billion for the second quarter of 1995, reflecting
the highly competitive conditions in the Commercial Lines marketplace and the
Company's continuing focus on profitability. On a combined total basis including
Aetna P&C, premium equivalents for the second quarter of 1996 totaled $752
million, down $120 million compared to $872 million for the second 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.
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 $179 million (excluding a one-time
adjustment associated with a reinsurance transaction) for the second quarter of
1996 increased $25 million from the second quarter of 1995. This increase
reflects the acquisition of Aetna P&C, largely offset by an ongoing shift from
risk-bearing business into non risk-bearing business and the competitive
marketplace. National Accounts premium equivalents of $736 million for the
second quarter of 1996 were $71 million above the second quarter of 1995. The
increase in premium equivalents reflects the acquisition of Aetna P&C, partially
offset by a depopulation of involuntary pools as the loss experience of workers'
compensation improves and insureds move to voluntary markets.
For the second quarter of 1996, National Accounts new business, including both
premiums and premium equivalents, was $180 million compared to $88 million for
the second quarter of 1995. This increase primarily reflects the addition of one
large account in the second quarter of 1996. National Accounts renewed business
for the second quarter of 1996 of $612 million increased $109 million above the
1995 levels, reflecting the acquisition of Aetna P&C, partially offset by the
National Accounts policy of maintaining its product pricing and underwriting
standards in a highly competitive pricing environment as insurers compete to
retain business. The National Accounts business retention ratio was 91% for the
second quarter of 1996 and 93% for the second quarter of 1995.
13
<PAGE> 14
Commercial Accounts serves mid-sized businesses through a network of independent
agencies and brokers. Commercial Accounts net written premiums were $380 million
in the 1996 second quarter compared to $163 million in the 1995 second quarter,
and Commercial Accounts premium equivalents were $16 million in the 1996 second
quarter, $7 million above the 1995 second 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 second quarter of 1996,
new premium and premium equivalent business in Commercial Accounts was $65
million compared to $39 million for the second quarter of 1995. The Commercial
Accounts business retention ratio was 70% for the second quarter of 1996 and 71%
for the second quarter of 1995. Commercial Accounts continues to focus on the
retention of existing business while maintaining its product pricing standards
and its selective underwriting policy.
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums of $369 million for the second quarter of
1996 were $227 million above the second quarter of 1995 premium levels,
reflecting the acquisition of Aetna P&C. New premium business in Select Accounts
was $75 million in the 1996 second quarter compared to $33 million in the 1995
second quarter. The Select Accounts business retention ratio was 78% in the 1996
second quarter compared to 74% in the comparable 1995 period.
Specialty Accounts addresses unique risks that typically require specialized
underwriting. Specialty Accounts net written premiums were $172 million for the
1996 second quarter compared to $81 million in the 1995 second quarter. The
growth is primarily attributable to the acquisition of the Aetna P&C Bond
Specialty business.
Claims and expenses of $1.834 billion for the second quarter of 1996 increased
$1.108 billion from the second quarter of 1995. This increase was primarily
attributable to the acquisition of Aetna P&C and the acquisition-related charges
of $589 million.
Catastrophe losses, net of taxes and reinsurance, were $1 million and $6 million
in the 1996 and 1995 second quarters, respectively.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Statutory:
Loss and LAE ratio ......................... 133.2% 85.8%
Underwriting expense ratio ................. 37.9 23.6
Combined ratio before policyholder dividends 171.1 109.4
Combined ratio ............................. 171.9 110.2
GAAP:
Loss and LAE ratio ......................... 119.9% 77.6%
Underwriting expense ratio ................. 42.3 30.2
Combined ratio before policyholder dividends 162.2 107.8
Combined ratio ............................. 163.1 108.5
</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 statutory charge.
14
<PAGE> 15
The increases in the 1996 second quarter statutory and GAAP combined ratios for
Commercial Lines were primarily attributable to charges related to the
acquisition and integration of Aetna P&C. Excluding these amounts, the statutory
and GAAP combined ratios before policyholder dividends for the three months
ended June 30, 1996 would have been 111.5% and 110.8%, respectively. The
increase in the 1996 second quarter statutory and GAAP combined ratios excluding
acquisition-related charges compared to the 1995 second quarter statutory and
GAAP combined ratios is due generally 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.
Personal Lines
<TABLE>
<CAPTION>
(in millions) Three Months Ended Three Months Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Revenues.............................................. $ 750 $ 361
Net income............................................ $ 51 $ 24
</TABLE>
Net income for the second quarter of 1996 of $51 million increased $27 million
compared to $24 million for the second quarter of 1995. Excluding realized gains
(losses) and the acquisition-related charges, Personal Lines core operating
income was $65 million in the second quarter of 1996 compared to $25 million in
the second quarter of 1995. These increases primarily reflect the acquisition of
Aetna P&C, strong net investment income and continued favorable prior year loss
reserve development in personal auto lines.
Net written premiums in the 1996 second quarter were $676 million, compared to
$319 million in the second 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 second quarter of 1996 totaled $676 million, up $35
million compared to $641 million for the second 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 $675 million for the 1996 second quarter increased $346
million from the 1995 second quarter. This increase was primarily attributable
to the acquisition of Aetna P&C. Catastrophe losses, after taxes and
reinsurance, were $14 million in the second quarter of 1996 compared to $2
million in the second quarter of 1995. The increase in catastrophe losses in the
second quarter of 1996 is a result of the acquisition of Aetna P&C and hail and
wind storms in the second quarter.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Statutory:
Loss and LAE ratio ....... 71.0% 74.7%
Underwriting expense ratio 29.1 29.2
Combined ratio ........... 100.1 103.9
GAAP:
Loss and LAE ratio ....... 71.6% 74.7%
Underwriting expense ratio 29.1 28.7
Combined ratio ........... 100.7 103.4
</TABLE>
The decrease in the combined ratios in 1996 was due to the favorable loss
experience in personal auto lines, partially offset by the higher level of
catastrophe losses.
15
<PAGE> 16
Corporate and Other
<TABLE>
<CAPTION>
(in millions) Three Months Ended Three Months Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Revenues ........ $ 7 $6
Net income (loss) $(30) $3
</TABLE>
The primary component of net income (loss) for the 1996 second quarter was
interest expense of $25 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 SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Commercial Lines
<TABLE>
<CAPTION>
(in millions) Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
<S> <C> <C>
Revenues ........ $ 2,220 $1,617
Net income (loss) $ (161) $ 126
</TABLE>
The net loss for the first six months of 1996 was $161 million compared to net
income of $126 million for the first six months of 1995. Excluding realized
gains (losses) and the acquisition-related charges, Commercial Lines core
operating earnings were $237 million for the six months ended June 30, 1996
compared to $123 million for the six months ended June 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 six months of 1996 totaled
$1.719 billion (excluding a one-time adjustment associated with a reinsurance
transaction in 1996), up $573 million compared to $1.146 billion for the first
six months of 1995, reflecting the acquisition of Aetna P&C, offset in small
part by the highly competitive conditions in the Commercial Lines marketplace
and the Company's continuing focus on profitability. Premium equivalents for the
first six months of 1996 totaled $1.516 billion, down $42 million compared to
$1.558 billion for the first six 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 six months of 1996 totaled $2.331 billion, down $352 million compared
to $2.683 billion for the first six months of 1995, reflecting the highly
competitive conditions in the Commercial Lines marketplace and the Company's
continuing focus on profitability. On a combined total basis including Aetna
P&C, premium equivalents for the first six months of 1996 totaled $1.632
billion, down $274 million compared to $1.906 billion for the first six 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.
16
<PAGE> 17
National Accounts net written premiums of $353 million (excluding a one-time
adjustment associated with a reinsurance transaction) for the first six months
of 1996 increased $32 million compared to the first six 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 $1.488 billion
for the first six months of 1996 were $49 million below the first six 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 six months of 1996,
National Accounts new business, including both premiums and premium equivalents,
was $229 million compared to $260 million for the first six months of 1995. For
the first six months of 1996, National Accounts renewed business, including both
premiums and premium equivalents, was $1.334 billion compared to $1.179 billion
for the first six 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 83% for the first six months of 1996 compared to 81% for the first six
months of 1995.
Commercial Accounts net written premiums were $582 million in the first six
months of 1996 compared to $369 million in the first six months of 1995, and
Commercial Accounts premium equivalents were $28 million in the first six months
of 1996, $7 million higher than the first six months of 1995, 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 six months of 1996, new
premium and premium equivalent business in Commercial Accounts was $102 million
compared to $89 million for the first six months of 1995. The Commercial
Accounts business retention ratio was 71% for the first six months of 1996, down
slightly from the first six 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.
Select Accounts net written premiums of $510 million for the first six months of
1996 were $233 million higher than the first six months of 1995 premium levels
primarily attributable to the acquisition of Aetna P&C. New premium business in
Select Accounts was $116 million in the first six months of 1996 compared to $60
million in the first six months of 1995. The Select Accounts business retention
ratio was 78% in the first six months of 1996 compared to 74% in the comparable
1995 period.
Specialty Accounts net written premiums were $274 million for the first six
months of 1996 compared to $179 million in the first six months of 1995. The
growth is primarily attributable to the acquisition of the Aetna P&C Bond
Specialty business.
Claims and expenses of $2.514 billion for the first six months of 1996 increased
$1.049 billion from the first six months of 1995. This increase was primarily
attributable to the acquisition of Aetna P&C and the acquisition-related charges
of $589 million.
Catastrophe losses, net of taxes and reinsurance, were $6 million and $7 million
in the first six months of 1996 and 1995, respectively. The catastrophes were
primarily due to winter storms.
17
<PAGE> 18
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Statutory:
Loss and LAE ratio ......................... 117.9% 86.9%
Underwriting expense ratio ................. 33.4 23.4
Combined ratio before policyholder
dividends ................................ 151.3 110.3
Combined ratio ............................. 151.9 111.2
GAAP:
Loss and LAE ratio ......................... 106.3% 79.6%
Underwriting expense ratio ................. 36.4 28.3
Combined ratio before policyholder
dividends ................................ 142.7 107.9
Combined ratio ............................. 143.4 108.6
</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 statutory charge.
The increases in the first six months of 1996 statutory and GAAP combined ratios
for Commercial Lines compared to the first six months of 1995 were primarily
attributable to charges related to the acquisition and integration of Aetna P&C.
Excluding these amounts, the statutory and GAAP combined ratios before
policyholder dividends for the six months ended June 30, 1996 would have been
112.0% and 109.7%, respectively. The increase in the first six months of 1996
statutory and GAAP combined ratios excluding acquisition-related charges
compared to the first six months of 1995 statutory and GAAP combined ratios is
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.
Personal Lines
<TABLE>
<CAPTION>
(in millions) Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Revenues ........ $1,122 $720
Net income ...... $ 74 $ 46
</TABLE>
The net income for the first six months of 1996 of $74 million increased $28
million compared to $46 million for the first six months of 1995. Excluding
realized gains (losses) and the acquisition-related charges, Personal Lines core
operating income was $87 million in the first six months of 1996 compared to $49
million in the first six months of 1995. These increases primarily reflect the
acquisition of Aetna P&C, strong net investment income and continued favorable
prior year loss reserve development in personal auto lines.
Net written premiums in the first six months of 1996 were $1.017 billion,
compared to $673 million in the first six 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 six months of 1996 totaled $1.333 billion up $102 million
compared to $1.231 billion for the first six 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.
18
<PAGE> 19
Claims and expenses of $1.017 billion for the first six months of 1996 increased
$358 million from the first six months of 1995. This increase was primarily
attributable to the acquisition of Aetna P&C. Catastrophe losses, after taxes
and reinsurance, were $32 million in the first half of 1996 compared to $4
million in the first half of 1995. The increase in 1996 catastrophe losses was
primarily due to the acquisition of Aetna P&C, 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>
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Statutory:
Loss and LAE ratio ....... 73.0% 74.5%
Underwriting expense
ratio .................. 28.9 28.6
Combined ratio ........... 101.9 103.1
GAAP:
Loss and LAE ratio ....... 73.4% 74.5%
Underwriting expense
ratio .................. 28.5 27.7
Combined ratio ........... 101.9 102.2
</TABLE>
The decrease in the combined ratios in 1996 was due to the favorable loss
experience in personal auto lines, partially offset by the higher level of
catastrophe losses.
Corporate and Other
<TABLE>
<CAPTION>
(in millions) Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
---------------- ----------------
<S> <C> <C>
Revenues ........ $ 12 $8
Net income (loss) $(31) $2
</TABLE>
The primary component of net income (loss) for the six months ended June 30,
1996 was interest expense of $25 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 June 30, 1996, approximately
16% of the net environmental loss reserve (i.e., approximately $216 million) is
case reserves. The balance, approximately 84% of the net aggregate reserve
(i.e., approximately $1.095 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.
19
<PAGE> 20
The following table displays activity for environmental losses and loss expenses
and reserves for the six months ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Environmental Losses
(millions) Six Months Ended Six Months Ended
June 30, 1996 June 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 ......................... 38 31
Ceded .......................... (2) (1)
Losses paid:
Direct ......................... 63 52
Ceded .......................... (20) (1)
Ending reserves:
Direct ......................... 1,367 461
Ceded .......................... (56) (11)
------- -----
Net ........................... $ 1,311 $ 450
======= =====
</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 six months ended June 30, 1996 and 1995. At June 30, 1996,
approximately 26% of the net aggregate reserve (i.e., approximately $285
million) is case reserves. The balance, approximately 74% (i.e., approximately
$813 million) of the net asbestos reserves, represents incurred but not yet
reported losses.
<TABLE>
<CAPTION>
Asbestos Losses
(millions) Six Months Ended Six Months Ended
June 30, 1996 June 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 ......................... 49 71
Ceded .......................... 16 (51)
Losses paid:
Direct ......................... 65 50
Ceded .......................... (36) (72)
Ending reserves:
Direct ......................... 1,455 723
Ceded .......................... (357) (298)
------- -----
Net ........................... $ 1,098 $ 425
======= =====
</TABLE>
(1) Includes, for 1995, the termination of certain agreements with TIGI whereby
TIGI had assumed certain reserves from the Company.
20
<PAGE> 21
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 (CIOTA)
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 claimant's allegations of long-term bodily injury in CIOTA claims,
numerous complex issues regarding such claims are presented. The claimant's
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.
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).
21
<PAGE> 22
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 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. 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 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 June 30, 1996, the combined carrying value of the Company's investment
portfolio was $27.6 billion, of which 84.2% was invested in fixed maturity
investments, 4.3% in mortgage loans and real estate held for sale, 2.8% in
common stocks and other equity securities and 8.7% in short-term and other
investments. The average duration of the fixed maturity portfolio, including
short-term investments, was 5.2 years at such date. Non-investment grade
securities totaled $685 million, representing approximately 3.0% of the
Company's fixed income investments as of June 30, 1996. The following table
reflects the average yield (annualized) of the investment portfolio:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Yield (Annualized) (1) 7.3% 6.2% 7.0% 6.4%
</TABLE>
(1) Excluding unrealized and realized capital gains and losses.
22
<PAGE> 23
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
$1.2 billion, none of which is currently utilized. 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
July 31, 1996, TAP had $637 million outstanding under its commercial paper
program.
At July 31, 1996, TAP had $1.3 billion available for debt offerings under its
shelf registration statement.
On July 24, 1996, TAP's Board of Directors declared an initial dividend of $.075
per share on its Class A and Class B common stock payable August 23, 1996 to
stockholders of record August 5, 1996. In addition, 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 for the issuance of stock for
employee benefit and director compensation plans.
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 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. Earlier or retroactive application is not permitted. The Company
is currently evaluating the impact of this statement.
23
<PAGE> 24
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 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
See Exhibit Index.
(B) REPORTS ON FORM 8-K:
On April 25, 1996, the Company filed a Current Report on Form 8-K, dated April
24, 1996, filing certain exhibits under Item 7 thereof relating to the offer and
sale of its 6 3/4% Notes due April 15, 2001 and 7 3/4% Notes due April 15, 2026.
On May 14, 1996, the Company filed a Current Report on Form 8-K, dated May 10,
1996, filing certain exhibits under Item 7 thereof relating to the offer and
sale of the 8% Trust Preferred Securities of Travelers P&C Capital II, a
subsidiary of the Company, and the Company's 8% Junior Subordinated Deferrable
Interest Debentures due May 15, 2036.
On June 7, 1996, the Company filed a Current Report on Form 8-K, dated June 7,
1996, filing certain additional financial information under Item 5 thereof
related to the businesses of The Aetna Casualty and Surety Company and The
Standard Fire Insurance Company and their subsidiaries, which businesses were
acquired by the Company on April 2, 1996.
No other reports on Form 8-K have been filed by the Company during the quarter
ended June 30, 1996.
24
<PAGE> 25
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
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 Letter Agreement dated April 12, 1996
between TAP and James M. Michener. Electronic
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 beginning on page 90 and ending on page 91 of
TAP's Prospectus dated April 22, 1996, filed pursuant to
Rule 424(b) of the Securities Act of 1933 (File No.
333-2254). Electronic
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.
25
<PAGE> 26
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: August 13, 1996 By /s/ William P. Hannon
--------------------------
William P. Hannon
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 1996 By /s/ Christine B. Mead
-------------------------
Christine B. Mead
Chief Accounting Officer
26
<PAGE> 27
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
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 Letter Agreement dated April 12, 1996
between TAP and James M. Michener. Electronic
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 beginning on page 90 and ending on page 91 of
TAP's Prospectus dated April 22, 1996, filed pursuant to
Rule 424(b) of the Securities Act of 1933 (File No.
333-2254). Electronic
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.
<PAGE> 1
Exhibit 10.01
April 12, 1996
James M. Michener
11126 Elmview Place
Great Falls, VA 22066-3014
Dear Jim:
I am delighted to confirm our employment offer to you as Senior Vice President
and General Counsel - Corporate of the Travelers Aetna Property Casualty Corp.
reporting to Jay Fishman, Vice Chairman. In this position you will be
responsible for managing the corporate legal function and certain business line
legal functions. You will have a base salary annual rate of $250,000, which will
be paid on a semi-monthly basis. It is our understanding that you will start
employment with us on or about May 6, 1996.
In addition, you will be eligible for our bonus program with a targeted bonus
between 75-150% of your base salary. Bonuses are paid in the first quarter of
the year following the performance period and are dependent on both individual
and company performance. A portion of your bonus will be paid under the Capital
Accumulation Plan (CAP) in the form of restricted stock at a 25% discount. There
will be no proration of the bonus for the 1996 performance year.
In recognition of certain benefits you are forfeiting by leaving your current
employer, the Travelers Board of Directors has approved a grant of 7,000 shares
of Travelers Group common stock, subject to a four year cliff vesting. These
shares of stock will also vest if you are involuntarily terminated without cause
or voluntarily terminate with good reason (e.g. involuntary salary reduction,
relocation or significant decrease in responsibilities). You will receive
dividends on this grant during the vesting period.
<PAGE> 2
In addition, the Board has approved a grant of 10,000 TRV options which will
vest at the rate of 20% per year over five years. The strike price for these
options will be the closing price of the stock on the day prior to your first
day of employment with us.
Travelers Aetna Property Casualty Corp. offers a comprehensive employee benefits
program which includes medical, dental, life insurance, disability insurance, a
retirement plan and a 401k plan. Detail of these programs will be provided to
you. Because of your recent past service with the Travelers, you will incur no
break in service and are immediately eligible for additional pension plan
accruals. You will continue to receive the additional three years of age and
service credit provided to your under your previous employment agreement with
the Travelers Insurance Company dated January 1, 1993. You are fully vested in
the pension plan. In addition, you may immediately participate in the 401k plan
and can roll over your 401k funds from your current employer to the Travelers
plan should you wish to do so.
In the event you are involuntarily terminated from Travelers Aetna Property
Casualty Corp. prior to January 1, 1998, you will receive a severance payment
equal to one year's base pay.
The Company will also relocate you to the Hartford area in accordance with our
relocation policy. In addition, as you and Jay discussed, we will pay your
housing costs in the Hartford area until your house in Virginia is sold.
Please note that the Federal government requires that you establish your
employment eligibility by completing and submitting form I-9 within three days
of your actual employment. Also, while Travelers remains committed to a
drug-free workplace, we will waive our drug test requirement in light of your
recent employment with us.
This letter describes the Company's offer of employment. Any other discussions
that you may have had that are not described in this letter or in the attached
Principles of Employment are not part of this offer. Also, nothing herein
constitutes a contract of employment for any particular period of time. The
employment relationship between yourself and the Travelers Aetna Property
Casualty Corp. is "at will", which allows either party to terminate the
relationship at any time for any or no reason not otherwise prohibited by law.
<PAGE> 3
Please acknowledge your acceptance of these terms by signing and returning to me
a signed copy of this offer letter.
Jim, we are very excited about having you as part of the senior management team.
We expect you will make valuable contributions and that your time at the company
will be mutually rewarding.
Sincerely,
/s/ W. Douglas Willett
- ----------------------
W. Douglas Willett
Agreed and Accepted:
/s/ James M. Michener
- ----------------------
James M. Michener
April 15, 1996
- --------------
Date
<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 Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Earnings:
Net income (loss) $ (216) $ 99 $ (118) $ 174
Preferred Dividends:
7.5% Preferred Stock - Series Z (4) -- (4) --
------ ------ ------ ------
$ (220) $ 99 $ (122) $ 174
====== ====== ====== ======
Average shares:
Common 374.2 294.5 334.3 294.5
====== ====== ====== ======
Earnings (loss) per share $(0.59) $ 0.34 $(0.36) $ 0.59
====== ====== ====== ======
</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 Six Months Ended
June 30, 1996 June 30, 1996
------------------ ----------------
<S> <C> <C>
Income (loss) before income taxes $ (361) $ (236)
Interest 38 38
Portion of rentals deemed to be interest 9 18
-------- -------
Earnings available for fixed charges $ (314) $ (180)
======== =======
Fixed charges:
Interest $ 38 $ 38
Portion of rentals deemed to be interest 9 18
-------- -------
Total fixed charges $ 47 $ 56
======== =======
Ratio of earnings to fixed charges N/A (a) N/A (b)
</TABLE>
(a) For the three months ended June 30, 1996, TAP's earnings were not sufficient
to cover fixed charges by $361 million.
(b) For the six months ended June 30, 1996, TAP's earnings were not sufficient
to cover fixed charges by $236 million.
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 this ratio,
fixed charges consist of that portion of rentals deemed representative of the
appropriate interest factor.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 23,222
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 771
<MORTGAGE> 1,035
<REAL-ESTATE> 159
<TOTAL-INVEST> 27,592
<CASH> 147
<RECOVER-REINSURE> 10,474
<DEFERRED-ACQUISITION> 406
<TOTAL-ASSETS> 50,386
<POLICY-LOSSES> 32,347
<UNEARNED-PREMIUMS> 3,432
<POLICY-OTHER> 1,627
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,331
0
0
<COMMON> 4
<OTHER-SE> 5,756
<TOTAL-LIABILITY-AND-EQUITY> 50,386
2,493
<INVESTMENT-INCOME> 668
<INVESTMENT-GAINS> (33)
<OTHER-INCOME> 15
<BENEFITS> 2,537
<UNDERWRITING-AMORTIZATION> 357
<UNDERWRITING-OTHER> 658
<INCOME-PRETAX> (236)
<INCOME-TAX> (118)
<INCOME-CONTINUING> (118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (118)
<EPS-PRIMARY> (0.36)
<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
Prospectus of the Company
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 insureres 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.
