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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A-2
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
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COMMISSION FILE NUMBER 1-14328
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TRAVELERS PROPERTY CASUALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 06-1445591
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION IDENTIFICATION NO.)
OR ORGANIZATION)
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ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(860) 277-0111
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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CLASS A COMMON STOCK, PAR VALUE $ .01 PER NEW YORK STOCK EXCHANGE
SHARE
6-3/4% NOTES DUE APRIL 15, 2001 NEW YORK STOCK EXCHANGE
8.08% TRUST PREFERRED SECURITIES OF NEW YORK STOCK EXCHANGE
SUBSIDIARY TRUST (AND REGISTRANT'S
GUARANTY WITH RESPECT THERETO)
8% TRUST PREFERRED SECURITIES OF NEW YORK STOCK EXCHANGE
SUBSIDIARY TRUST (AND REGISTRANT'S
GUARANTY WITH RESPECT THERETO)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT AS OF MARCH 5, 1997 WAS APPROXIMATELY $2.56 BILLION.
AS OF MARCH 5, 1997, 72,176,747 SHARES OF THE REGISTRANT'S CLASS A COMMON STOCK,
PAR VALUE $ .01 PER SHARE, AND 328,020,170 SHARES OF THE REGISTRANT'S CLASS B
COMMON STOCK, PAR VALUE $.01 PER SHARE, WERE OUTSTANDING.
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
(FORMER NAME OF REGISTRANT)
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996 ARE INCORPORATED BY REFERENCE INTO PART II
OF THIS FORM 10-K/A-2.
CERTAIN PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 1997 ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD ON APRIL 23, 1997 ARE INCORPORATED BY REFERENCE INTO
PART III OF THIS FORM 10-K/A-2.
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EXPLANATORY NOTE
This Form 10-K/A-2 is being filed to revise the sections entitled "Reserves" and
"Environmental, Asbestos and Cumulative Injury Claims" in Item 1, and to make
certain revisions to information incorporated in Items 7 and 8. To reflect
those changes we have revised Exhibit 13.01 which is being refiled in its
entirety, and have amended Item 14 accordingly. There have been no other
changes to the text of the Form 10-K, which speaks as of the date of its
original filing.
PART I
ITEM 1. BUSINESS.
Travelers Property Casualty Corp. (formerly Travelers/Aetna Property
Casualty Corp.) is a property-casualty insurance holding company engaged,
through its subsidiaries, principally in two business segments: Commercial
Lines, which includes Specialty Accounts, and Personal Lines. The Company
provides a wide range of commercial and personal property and casualty
insurance products and services to businesses, government units, associations
and individuals. Except as the context otherwise requires, as used herein
the "Company" refers to Travelers Property Casualty Corp. and its
consolidated subsidiaries.
Travelers Property Casualty Corp. was formed in January 1996 to hold the
property and casualty insurance subsidiaries (collectively, "Travelers P&C") of
The Travelers Insurance Group Inc. ("TIGI"), a wholly owned subsidiary of
Travelers Group Inc. ("Travelers Group"). On April 2, 1996, the Company
purchased from Aetna Services Inc. (formerly Aetna Life and Casualty Company)
("Aetna") all of the outstanding capital stock of The Aetna Casualty and Surety
Company ("Aetna Casualty") and The Standard Fire Insurance Company ("Standard
Fire"), Aetna's property and casualty insurance subsidiaries (collectively,
"Aetna P&C"), for approximately $4.16 billion in cash. The acquisition of Aetna
P&C (the "Acquisition") was treated as a purchase and, accordingly, the
Company's consolidated financial statements include the results of Aetna P&C's
operations only from the date of the Acquisition. As part of the financing of
the Acquisition, the Company 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 the Company's Class B
Common Stock in exchange for its contribution of the outstanding capital stock
of The Travelers Indemnity Company ("Travelers Indemnity") and a capital
contribution of approximately $1.14 billion. In April 1996, the Company sold in
a public offering approximately 39 million shares of its Class A Common Stock
(representing approximately 9.75% of its outstanding common stock at that time)
for total proceeds of $928 million. For additional information about the
Acquisition, the public offering and other related transactions, see Note 2 of
Notes to Consolidated Financial Statements.
Pursuant to an agreement with Aetna, the Company was required to
discontinue its use of the name "Aetna" as part of its corporate name by
December 31, 1997. Effective March 7, 1997, the Company changed its corporate
name to Travelers Property Casualty Corp.
Travelers Group owns approximately 82% of the Company's outstanding common
stock. Travelers Group is a financial services holding company engaged, through
its subsidiaries, principally in four business segments: (i) Investment
Services; (ii) Consumer Finance Services; (iii) Life Insurance Services; and
(iv) Property & Casualty Insurance
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Services (through the Company). The periodic reports of Travelers Group provide
additional business and financial information concerning that company and its
consolidated subsidiaries.
The principal executive offices of the Company are located at One Tower
Square, Hartford, Connecticut 06183; telephone number (860) 277-0111.
This discussion of the Company's business is organized as follows: (i) a
description of each of the Company's two business segments and related services;
(ii) a description of the Corporate and Other segment; and (iii) certain other
information. A glossary of insurance terms is included beginning on page 44.
COMMERCIAL LINES
The Company is the third largest writer of commercial lines insurance in
the United States based on 1995 direct written premiums published by A.M. Best
Company ("A.M. Best"), after giving effect to the Acquisition and recent
industry consolidation. The Company's Commercial Lines offers a broad array of
property and casualty insurance and insurance-related services. Commercial Lines
is organized into four marketing and underwriting groups that are designed to
focus on a particular client base or industry segment to provide products and
services that specifically address customers' needs: National Accounts,
primarily serving large national corporations; Commercial Accounts, serving
mid-size businesses; Select Accounts, serving small businesses and individuals
with commercial exposures; and Specialty Accounts, providing a variety of
specialty coverages. The Company also has a dedicated group within Commercial
Lines that serves the construction industry. The Company distributes its
commercial products through approximately 4,600 brokers and independent agencies
located throughout the United States.
The commercial coverages marketed by the Company include workers'
compensation, general liability (including product liability), commercial
multi-peril, commercial automobile, property (including fire and allied lines)
and several other miscellaneous coverages. The Company also underwrites
specialty coverages through three separate units, Travelers Specialty, Gulf
Specialty and Bond Specialty, which have historically focused on unique risks
that typically require specialized underwriting. Coverages offered by Travelers
Specialty include general liability for selected product liability risks,
medical malpractice and umbrella and excess liability. Coverages offered by Gulf
Specialty include directors' and officers' liability and errors and omissions
insurance for various professions, umbrella insurance, insurance for
municipalities, hard to place coverages sold on an excess and surplus lines
basis and fidelity and surety coverage. Coverages offered by Bond Specialty
include fidelity and surety, fiduciary liability insurance, directors' and
officers' and other professional liability insurance and other related coverages
such as kidnap and ransom and mail insurance. In addition, the Company offers
various risk management services, generally including claims settlement, loss
control and engineering services, to businesses that choose to self-insure
certain exposures, to state funds and insurance carriers that participate in
state involuntary workers' compensation pools and to employers seeking to manage
workers' compensation medical and disability costs. In 1996, Commercial Lines
generated combined net written
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premiums of $4.7 billion and combined premium equivalents of $2.7 billion. As
used herein, unless the context otherwise requires, "combined" refers to the
operations of both Travelers P&C and Aetna P&C, without regard to the date of
the Acquisition.
SELECTED PRODUCT AND MARKET INFORMATION
The following table sets forth by product line and market net written
premiums and premium equivalents for Commercial Lines for the periods indicated.
For a description of the product lines and markets referred to in the table
below, see "-- Product Lines" and "--Principal Markets and Methods of
Distribution," respectively.
Over the past several years, National Accounts customers have moved
increasingly from traditional insurance coverages to service-type products,
primarily for workers' compensation coverage and to a lesser extent in general
liability and commercial automobile coverages. These types of products include
risk management services such as claims settlement, loss control and
engineering. The volume of business handled by the Company in servicing
relationships is measured by "premium equivalents." Premium equivalents do not
represent actual premium revenues. Premium equivalents are determined in the
pricing process and represent the Company's estimates of premiums that its
customers would have been charged under a fully insured arrangement, based on
expected losses associated with non-risk-bearing components of each account.
Because the Acquisition occurred on April 2, 1996, the Company's results
of operations for periods prior to April 2, 1996 do not include the results of
Aetna P&C. Accordingly, premium and other operational information provided for
the Company's combined businesses prior to such time is for informational
purposes only.
COMBINED NET WRITTEN PREMIUMS AND PREMIUM EQUIVALENTS
(Dollars in millions)
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PERCENTAGE OF
TOTAL NET
WRITTEN
YEAR ENDED DECEMBER 31, PREMIUMS AND
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PREMIUM
EQUIVALENTS
YEAR ENDED
DECEMBER 31,
1996 1995 1994 1996
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NET WRITTEN PREMIUMS BY
PRODUCT LINE:
Workers' compensation $1,223 $1,312 $1,617 16.6%
General liability 836 815 876 11.3
Commercial multi-peril 1,223 1,188 1,069 16.6
Commercial automobile 806 888 883 10.9
Property 342 457 437 4.7
Fidelity and surety 215 233 184 2.9
Other 23 251 136 0.3
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Net written premiums(1) $4,668 $5,144 $5,202 63.3%
Premiums equivalents(2) 2,712 3,458 2,990 36.7
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Total Commercial Lines $7,380 $8,602 $8,192 100.0%
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(see footnotes on following page)
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PERCENTAGE OF
TOTAL NET
WRITTEN
YEAR ENDED DECEMBER 31, PREMIUMS AND
------------------------------
PREMIUM
EQUIVALENTS
YEAR ENDED
DECEMBER 31,
1996 1995 1994 1996
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(Dollars in millions)
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NET WRITTEN PREMIUMS
AND PREMIUM EQUIVALENTS
BY MARKET:
National Accounts $3,477 $4,550 $ 4,463 47.1%
Commercial Accounts 1,812 1,962 2,039 24.6
Select Accounts 1,412 1,466 1,293 19.1
Specialty Accounts 679 624 397 9.2
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Total Commercial
Lines (2) $7,380 $8,602 $ 8,192 100.0%
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(1) The decreases in net written premiums during the periods shown reflect the
highly competitive marketplace and the Company's selective underwriting
practices.
(2) Premium equivalents for the year ended December 31, 1994 are provided for
Travelers P&C only. Historically, Aetna P&C did not track premium
equivalents and such amounts are not available for that period. The
decreases in premium equivalents during the periods shown reflect a
depopulation of involuntary pools as the loss experience of workers'
compensation improves and insureds move to voluntary markets, the Company's
selective renewal activity to address the competitive pricing environment
and its continued success in lowering workers' compensation losses of
customers.
PRODUCT LINES
The Company writes a broad range of commercial property and casualty
insurance for risks of all sizes. The core products in the Company's Commercial
Lines are as follows:
WORKERS' COMPENSATION provides coverage for employers' liability for
injuries to employees under common law as well as the obligation of an employer
under state or federal law to provide its employees with specified benefits for
work-related injuries, deaths and diseases, regardless of fault. In addition to
the liability exposure that may arise under common law, there are typically four
types of benefits payable under workers' compensation policies: medical
benefits, disability benefits, death benefits and vocational rehabilitation
benefits. Workers' compensation policies are often written in conjunction with
other commercial policies. The Company offers two types of workers' compensation
products: (i) insurance products, including guaranteed cost policies, in which
policy premiums charged are fixed and do not vary as a result of the insured's
loss experience, and loss sensitive plans, including retrospectively rated
policies, in which premiums are adjusted based on actual loss experience of the
insured during the policy period, and large deductible plans, in which the
customer bears the insurance risk up to its deductible amount, and (ii) service
programs, which are generally sold to the Company's larger National Accounts,
where the Company receives fees for providing loss prevention, risk management,
claims administration and benefit administration services to organizations
pursuant to service agreements. The Company also participates in state assigned
risk pools servicing workers' compensation policies as a servicing carrier and
pool participant. The Company emphasizes managed care cost containment
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strategies (which involve employers, employees and care providers in a
cooperative effort that focuses on the injured employee's early return to work),
cost-effective quality care, and customer service in this market. Workers'
compensation comprehensive claim and managed care cost containment services are
integrated through the Company's claims management system to maximize cost
savings on both service delivery and loss payout. For the year ended December
31, 1996, the Company's workers' compensation line generated $1.2 billion of
combined net written premiums and $2.2 billion of combined premium equivalents.
GENERAL LIABILITY provides coverage for liability exposures including
bodily injury and property damage arising from products sold and general
business operations. General liability also includes coverage for directors' and
officers' liability arising in their official capacities, fiduciary liability
for trustees and sponsors of pension, health and welfare and other employee
benefit plans, errors and omissions insurance for employees, agents,
professionals and others arising from acts or failures to act under specified
circumstances, as well as medical malpractice, umbrella and excess insurance.
For the year ended December 31, 1996, the Company's general liability line
generated $836 million of combined net written premiums and $299 million of
combined premium equivalents.
COMMERCIAL MULTI-PERIL provides a combination of property and liability
coverage for businesses and business property for damages such as that caused by
fire, wind, hail, water, theft and vandalism, and protects businesses from
financial loss due to business interruption. It also insures businesses against
third-party liability from accidents occurring on their premises or arising out
of their operations, such as injuries sustained from products sold. For the year
ended December 31, 1996, the Company's commercial multi-peril line generated
$1.2 billion of combined net written premiums.
COMMERCIAL AUTOMOBILE provides coverage for businesses against losses
incurred from personal bodily injury, bodily injury to third parties, property
damage to an insured's vehicle, and property damage to other vehicles and other
property resulting from the ownership, maintenance or use of automobiles and
trucks in a business. For the year ended December 31, 1996, the Company's
commercial automobile line generated $806 million of combined net written
premiums and $240 million of combined premium equivalents.
PROPERTY provides coverage for loss or damage to buildings, inventory and
equipment from natural disasters, including hurricanes, windstorms, earthquakes,
hail, explosions, severe winter weather and other events such as theft and
vandalism, fires and storms and financial loss due to business interruption.
Property also includes inland marine, which provides coverage for goods in
transit and unique, one-of-a-kind exposures. For the year ended December 31,
1996, the Company's property line generated $342 million of combined net written
premiums.
FIDELITY AND SURETY provides fidelity insurance coverage which protects an
insured for loss due to embezzlement or misappropriation of funds by an
employee. Surety is a three-party agreement whereby the insurer agrees to pay a
second party or make complete an obligation in response to the default, acts or
omissions of a third party. Surety is generally
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provided for construction performance, legal matters such as appeals, trustees
in bankruptcy and probate and other performance bonds. For the year ended
December 31, 1996, the Company's fidelity and surety line generated $215 million
of combined net written premiums.
OTHER coverages include boiler and machinery insurance, which provides
coverage for loss or damage resulting from the malfunction of boilers and
machinery, as well as miscellaneous assumed reinsurance. For the year ended
December 31, 1996, these other coverages generated $23 million of combined net
written premiums.
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
The Company's Commercial Lines are organized into four marketing groups
that are designed to focus on a particular client base or industry segment to
provide products and services that specifically address customers' needs:
National Accounts, primarily serving large national corporations; Commercial
Accounts, serving mid-size businesses; Select Accounts, serving small
businesses; and Specialty Accounts, providing a variety of specialty coverages.
The Company also has a dedicated group within Commercial Lines that serves the
construction industry.
The Company distributes its commercial products primarily through
approximately 4,600 brokers and independent agencies located throughout the
United States that are serviced by 99 field offices. The Company seeks to
establish relationships with well-established, independent insurance agencies
and brokers. In selecting new independent agencies and brokers to distribute the
Company's products, the Company considers each agency's or broker's
profitability, financial stability, staff experience and strategic fit with the
Company's operating and marketing plans. Once an agency or broker is appointed,
the Company carefully monitors its performance.
NATIONAL ACCOUNTS
The Company's National Accounts serves large companies, as well as
employee groups, associations and franchises. The Company's National Accounts
also includes the Company's alternative market business (the "Alternative
Market"), which primarily covers workers' compensation products and services to
voluntary and involuntary state pools. National Accounts customers typically
generate annual direct written premiums and premium equivalents of over $1
million per account and generally select products under retrospectively rated
plans, large self-insured retentions or some other loss-responsive arrangement.
National Accounts programs involve both traditional insurance (risk transfer)
and risk service (claims settlement, loss control and risk management).
Customers are usually national in scope and range in size from businesses with
sales of approximately $10 million per year to Fortune 2000 corporations.
Products are marketed through national brokers and regional agents with offices
throughout the United States. Based on combined net written premiums of $852
million and combined premium equivalents of $2.6 billion, National Accounts
constituted approximately 47% of the Commercial Lines business in 1996.
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National Accounts customers often demand risk service programs where the
ultimate cost is based on their own loss experience. Programs offered by the
Company include claims settlement, loss control and risk management services and
are generally offered in connection with a retrospectively rated insurance
policy, a large deductible plan or a self-insured program. Workers' compensation
accounted for approximately 76% of the products sold in 1996 to National
Accounts customers, based on combined net written premiums and premium
equivalents.
The Alternative Market business of the Company's National Accounts sells
claims and policy management services to workers' compensation and automobile
assigned risk plans, self-insurance pools throughout the United States and to
niche voluntary markets. Since 1993, most state assigned workers' compensation
risk plan contracts have been awarded through a formal state-by-state bid
process. Contracts, which are generally for three-year terms, are awarded by
state agencies based on quality of service and price. The Company has emerged as
the largest workers' compensation assigned risk plan servicing insurer in the
industry with approximately 28% share of the market in 1996. Assigned risk plan
contracts generated approximately $456 million in combined premium equivalents
in 1996 for the Company.
The Company also services self-insurance groups, sells excess workers'
compensation coverage to these groups and markets various workers' compensation
specialty programs. Self-insurance groups and these specialty programs generated
combined net written premiums and premium equivalents of $89 million in 1996.
National Accounts also participates in various involuntary assigned risk pools,
which provide insurance coverage to individuals or other entities that otherwise
are unable to purchase such coverage in the voluntary market. Participation in
these pools in most states is generally in proportion to voluntary writings of
related lines of business in that state.
COMMERCIAL ACCOUNTS
The Company's Commercial Accounts sells a broad range of property and
casualty insurance products through a large network of independent agents and
brokers. Commercial Accounts targets businesses with 75 to 1,000 employees that
generate between $50,000 and $1 million in annual direct written premiums and
premium equivalents. The Company offers a full line of products to its
Commercial Accounts customers, with an emphasis on guaranteed cost products. The
Company also offers retrospectively rated or large deductible programs to these
customers. Based on combined net written premiums of $1.7 billion and combined
premium equivalents of $87 million, Commercial Accounts constituted
approximately 25% of the Commercial Lines business in 1996.
Commercial Accounts targets certain industries in which the Company has
claims, engineering and underwriting expertise and to which the Company has
established dedicated operations. Industry segments include from the
manufacturing sector: advanced technology, metal products, mineral products,
plastic and rubber products manufacturing and wood products. Also targeted are
colleges and universities, transportation, retail, financial, property
management and the wholesale industry. The Company continues to develop new
industry-
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targeted programs both on a national and local level. Specific industry
knowledge enables the Company to select, as customers, better managed companies
in an industry segment, to tailor specialized coverages for those companies, and
to link price to the individual exposure and to control risk. Instead of relying
on rating bureaus to establish rates for products, the Company generally uses
its proprietary data, which it has compiled from many years of data generated by
its extensive underwriting and pricing experience. Accordingly, subject to
applicable state insurance regulations, prices are derived from those
proprietary rates and numerous variables that apply to specific risks. The
Company believes that relying on extensive proprietary data to assess individual
risk characteristics, rather than relying on data from industry rating bureaus,
provides it with a competitive advantage in pricing and underwriting commercial
risks. The Company uses components of this approach specifically in connection
with loss control and claims management processing. Through a network of field
offices, the Company's marketing and underwriting specialists, who have point of
sale authority, work closely with local brokers and agents to tailor insurance
coverage to individual customer needs.
Construction. The Company has established dedicated operations that
exclusively target the construction industry, providing insurance and risk
management services for virtually all areas of construction, including general
contractors, heavy construction (including street and road) and special trade
contractors, except artisan or smaller trade contractors. The Company offers all
product lines to midsize and national customers in the construction market,
including both guaranteed cost and loss-responsive products, with general
liability, workers' compensation, commercial auto, commercial property and
inland marine coverages. The dedicated construction operations provide
specialized service and underwriting, with local market expertise and national
capability, that enable the Company to tailor specialized coverages, have
competitive pricing and control risk. This includes local underwriters who
understand their state's laws and claim climates, engineering and loss control
specialists, professional claim management and legal personnel with extensive
construction experience. Construction's products are distributed through
independent agents and brokers throughout the United States.
SELECT ACCOUNTS
Select Accounts serves individuals who have commercial exposures and firms
typically with one to 75 employees, typically generating up to $50,000 in annual
direct written premiums per account. Products offered to Select Accounts are
generally guaranteed cost policies, often a packaged product covering property
and liability exposures. Products are sold through independent agents, who are
often the same agents that sell the Company's Commercial Accounts and Personal
Lines products. Based on combined net written premiums of $1.4 billion, Select
Accounts constituted approximately 19% of the Commercial Lines business in 1996.
Personnel in the Company's field offices and other points of local
service, which are located throughout the United States, work closely with
agents to ensure a strong local presence in the marketplace. The Company
utilizes a marketing and underwriting approach
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based on agency automation and defined underwriting criteria. Agency automation
allows agents access to the Company's price quotation and policy issuance
systems and enables agents to provide faster and more cost-effective service to
customers with supervision and underwriting control. Agents that do not utilize
the automated quotation and policy issuance systems work with the Company's
sales and marketing representatives who have point of sale authority. Agents
serving Select Accounts are given greater control and discretion over
underwriting decisions, within predefined parameters, than brokers selling to
larger accounts. Because underwriting criteria and pricing tend to be more
standardized for smaller businesses, Select Accounts uses a standard industry
classification (S.I.C.) based process to allow agents and field marketing
representatives to make underwriting and pricing decisions within predetermined
classifications. Business in other classes is subject to consultative review by
in-house underwriters. The Company believes that its breadth of products, highly
qualified field staff and its technology offer distinct competitive advantages.
SPECIALTY ACCOUNTS
Specialty Accounts markets products to national, midsize and small
customers, as well as individuals, and distributes them through both wholesale
brokers and retail agents and brokers throughout the United States. The
Company's fast response time on underwriting decisions, industry expertise and
quality service are important to maintaining relationships with Specialty
Accounts insureds and producers. The Company believes that it has a competitive
advantage with respect to many of these products based on its reputation for
clear, timely decision-making, underwriting and industry expertise and strong
producer and customer relationships as well as its ability to cross-sell with
National Accounts, Commercial Accounts and Select Accounts. Based on combined
net written premiums of $679 million, Specialty Accounts constituted
approximately 9% of the Commercial Lines business in 1996.
The Company has three separate marketing and underwriting groups within
Specialty Accounts:
Travelers Specialty provides a broad range of products targeting risks
that do not fall within the underwriting guidelines of the other Commercial
Lines segments and that require highly specialized underwriting. The core
products include general liability for select product liability risks, umbrella
and excess liability, medical malpractice, various types of professional
liability, errors and omissions liability, primary and excess property, and
various coverages that target the transportation industry.
Gulf Specialty focuses on many non-traditional lines of business with a
particular emphasis on the financial services market. Products include
directors' and officers' liability insurance, errors and omissions coverage for
bankers, investment counselors and mutual fund advisors, and fidelity and surety
coverage for related classes. In addition, Gulf Specialty offers errors and
omissions coverage for professionals and non-professionals such as lawyers,
architects and engineers, insurance agents, podiatrists and chiropractors. Gulf
Specialty also writes umbrella coverage for various industries, provides
insurance products to the entertainment industry and to municipalities and
provides insurance products for other industry
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specific programs. In addition, Gulf Specialty has developed a book of excess
and surplus lines business through its non-admitted company.
Bond Specialty's range of products includes fidelity and surety bonds,
directors' and officers' and other professional liability insurance, fiduciary
liability insurance and other related coverages. The customer base ranges from
large financial services companies and commercial entities to small businesses
and individuals. Products and services are distributed primarily through agents
and brokers. Bond is organized around four broad customer segments: Financial
Services, Construction, National Risk (customers with more than $500 million in
revenues) and Commercial Risk (companies with less than $500 million in revenues
and individuals). Bond's agency agreement with Executive Risk Management
Associates ("ERMA"), a partnership owned by Executive Risk, Inc., was
restructured effective January 1, 1997. The restructured agreement replaces the
prior exclusive underwriter status of ERMA for directors' and officers'
liability insurance written by Aetna Casualty with a non-exclusive agreement.
PRICING AND UNDERWRITING
Pricing levels for property and casualty insurance products by the
Company's Commercial Lines are generally developed based upon the frequency and
severity of estimated losses, the expenses of producing business and
administering claims, and a reasonable allowance for profit. The Company's
strategy emphasizes a profit-oriented approach rather than a premium volume or
market share-oriented approach to underwriting. The Company's National Accounts
business, which sells primarily risk management services and loss sensitive
products, continues to be very competitive on price. Commercial Accounts and
Select Accounts primarily sell guaranteed cost products.
A significant portion of Commercial Lines business is written with
retrospectively rated insurance policies as well as large deductible policies in
which the ultimate cost of insurance for a given policy year is dependent on the
loss experience of the insured. Retrospectively rated policies are primarily
used in workers' compensation coverage. Although the payment terms and long-term
nature of the loss development reduces insurance risk, it introduces some
additional credit risk. Receivables from holders of retrospectively rated and
large deductible policies totaled approximately $755 million at December 31,
1996. Collateral, primarily letters of credit and, to a lesser extent, cash
collateral, is generally requested for contracts that provide for deferred
collection of ultimate premiums. The amount of collateral requested is
predicated upon the creditworthiness of the customer and the nature of the
insured risks. Commercial Lines continually monitors the credit exposure on
individual accounts and the adequacy of collateral.
Under certain workers' compensation insurance contracts with deductible
features, the Company is obligated to pay the claimant the full amount of the
claim. The Company is subsequently reimbursed by the contractholder for the
deductible amount, and is subject to credit risk until such reimbursement is
made. At December 31, 1996, contractholder receivables and payables were
approximately $1.8 billion.
10
<PAGE> 12
The Company has developed an underwriting methodology that incorporates
underwriting, claims, engineering, actuarial and product development disciplines
for particular industries. This approach is designed to maintain high quality
underwriting and pricing discipline. This approach utilizes proprietary data
gathered and analyzed by the Company with respect to its Commercial Lines
business over many years. The underwriters and engineers use this information to
assess and evaluate risks prior to quotation. This information provides
specialized knowledge about industry segments and catastrophe management and
helps analyze risk based on account characteristics and pricing parameters
designed to ensure that the Company does not compromise its underwriting
integrity. This process is linked with strong underwriting interaction and
review at the Company's and agents' locations.
The Company is also a member of and participates in the underwriting
operations of insurance and reinsurance pools and associations, several of which
make independent underwriting decisions on behalf of their members. These pools
insure specialized risks such as exposures related to the aviation and nuclear
power industries.
The Company continually reviews its exposure to catastrophic losses and
attempts to mitigate such exposure. See "Reinsurance." The Company uses
sophisticated computer modeling techniques to assess underwriting risks and
renewal of business in catastrophe-prone areas.
GEOGRAPHIC DISTRIBUTION
The following table shows the distribution of Commercial Lines' direct
written premiums for the states that accounted for the majority of combined
premium volume for the year ended December 31, 1996:
<TABLE>
<CAPTION>
STATE % OF TOTAL
----- ----------
<S> <C>
New York 13.5%
California 8.8
Texas 5.9
Massachusetts 5.9
Pennsylvania 4.5
Florida 4.5
New Jersey 4.1
Illinois 4.0
Connecticut 3.7
North Carolina 3.1
All Others (1) 42.0
------
TOTAL 100.0%
======
</TABLE>
- ---------------------
(1) No other single state accounted for 3.0% or more of the total combined
direct written premiums written in 1996 by the Company.
11
<PAGE> 13
PERSONAL LINES
The Company is the largest writer of personal lines insurance through
independent agents and the seventh largest writer of personal lines insurance
overall in the United States based on 1995 direct written premiums published by
A.M. Best, after giving effect to the Acquisition and recent industry
consolidation. In 1996, Personal Lines generated combined net written premiums
of approximately $2.7 billion. Personal Lines primarily offers personal
automobile and homeowners insurance.
Personal Lines distributes products primarily through approximately 5,000
independent agents located throughout the United States. The Company is also
pursuing a number of initiatives to broaden its distribution of Personal Lines
products, including targeted marketing to affinity groups, employee groups and
other sponsoring organizations and establishing co-marketing arrangements with
other insurers. In 1994, the Company began a pilot program to market personal
automobile and homeowners insurance through the independent agents of Primerica
Financial Services ("PFS"), a unit of Travelers Group. The product is sold under
the name Secure-SM-, and the program has expanded to reach 37 states. Over 6,300
PFS agents were licensed to sell Secure-SM- products by the end of 1996, and
approximately 5,000 new automobile and homeowners policies are now being sold
through this program each month.
SELECTED PRODUCT INFORMATION
The following table sets forth by product line net written premiums for
Personal Lines for the periods indicated. For a description of the product lines
referred to in the table below, see "-- Product Lines."
Because the Acquisition occurred on April 2, 1996, the Company's results
of operations for periods prior to April 2, 1996 do not include the results of
Aetna P&C. Accordingly, premium and other operational information provided for
the Company's combined businesses prior to such time is for informational
purposes only.
COMBINED NET WRITTEN PREMIUMS
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL NET
WRITTEN
PREMIUMS YEAR
YEAR ENDED DECEMBER 31, ENDED
-------------------------- DECEMBER 31,
1996 1995 1994 1996
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
NET WRITTEN PREMIUMS BY
PRODUCT LINE:
Personal automobile $1,851 $1,822 $1,969 69.2%
Homeowners and other 824 721 773 30.8
------ ------ ------ ------
Total Personal Lines $2,675 $2,543 $2,742 100.0%
====== ====== ====== ======
</TABLE>
12
<PAGE> 14
PRODUCT LINES
The Company writes virtually all types of property and casualty insurance
covering personal risks. Personal Lines had approximately 4.2 million policies
in force at December 31, 1996. The primary coverages in Personal Lines are
personal automobile and homeowners insurance sold to individuals.
PERSONAL AUTOMOBILE provides coverage for liability to others for both
bodily injury and property damage and for physical damage to an insured's own
vehicle from collision and various other perils. In addition, many states
require policies to provide first-party personal injury protection, frequently
referred to as no-fault coverage. For the year ended December 31, 1996, the
Company's personal automobile policies generated $1.9 billion of combined net
written premiums.
HOMEOWNERS AND OTHER provides protection against losses to dwellings and
contents from a wide variety of perils, as well as coverage for liability
arising from ownership or occupancy. The Company writes homeowners insurance for
dwellings, condominiums, mobile homes and rental property contents. Other
products include coverage for boats, personal articles such as jewelry, and
umbrella liability protection. For the year ended December 31, 1996, the
Company's homeowners and other policies generated $824 million of combined net
written premiums.
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
The Company's Personal Lines products are distributed primarily through
approximately 5,000 independent agents located throughout the United States,
supported by a network of 23 field marketing offices and five customer service
centers. The principal markets for Personal Lines insurance are in states along
the East Coast, in the South, and in the Midwest. In the states of Florida, New
Jersey and Massachusetts, the Company operates stand-alone domestic companies to
enhance its competitive capability in these highly regulated markets. Separate
business units within Personal Lines market to affinity groups and through the
sales force of PFS.
Insurance companies generally market personal automobile and homeowners
insurance through one of two distribution systems: independent agents or direct
writing. The independent agents that distribute the Company's Personal Lines
products usually represent several unrelated property and casualty companies. In
contrast, direct writing companies operate either by mail or through exclusive
agents or sales representatives. Due in part to the expense advantage that
direct writers may have relative to companies using independent agents, the
direct writing companies have gradually expanded their market share in recent
years.
The Company's Personal Lines continues to focus on the independent agency
distribution system, recognizing the service and underwriting advantages the
agent can deliver. In addition to its agency distribution system, the Company is
pursuing a number of initiatives
13
<PAGE> 15
to broaden its distribution of Personal Lines products, including targeted
marketing to affinity groups, employee groups and other sponsoring organizations
and establishing co-marketing arrangements with other insurers. In 1994, the
Company began writing personal automobile and homeowners insurance through the
independent agents of PFS, an affiliate of the Company, in order to broaden the
distribution of its Personal Lines products. This program is now available in 37
states. The PFS sales force primarily sells life insurance products issued by
affiliates of the Company, as well as mutual funds and other Travelers Group
products.
In 1995, Aetna P&C entered into a marketing agreement with GEICO to write
the majority of GEICO's homeowners business, and to receive referrals from GEICO
for new homeowners business. This agreement added historically profitable
business and helped geographically diversify the homeowners line of business.
New business referrals began in July 1995 and, on January 1, 1996, Personal
Lines began writing renewal policies. This marketing agreement provides for
limits on Personal Lines' obligation to write new and renewal business in
certain catastrophe-prone areas.
The Company believes that its focus on service, including prompt and
efficient claims handling, a high level of automation and development of
long-term relationships with individual agents gives it a competitive advantage
in the Personal Lines market. In addition, the Company is leveraging its
service, claims handling and automation experience in the expansion of its
distribution channels through its PFS and affinity marketing initiatives.
PRICING AND UNDERWRITING
Pricing for personal automobile insurance is driven by changes in the
relative frequency of claims and by inflation in the cost of automobile repairs,
medical care and litigation of liability claims. As a result, the profitability
of the business is largely dependent on promptly identifying and rectifying
disparities between premium levels and expected claim costs, and obtaining
approval of the state regulatory authorities for indicated rate increases.
Premiums charged for physical damage coverage reflect insured car values and,
accordingly, premium levels are somewhat related to the volume of new car sales.
Pricing in the homeowners business is also driven by changes in the
frequency of claims and by inflation in building supplies, labor costs and
household possessions. Most homeowners policies offer (but do not require)
automatic increases in coverage to reflect growth in replacement costs and
property values. In addition to the normal risks associated with any multiple
peril coverage, the profitability and pricing of homeowners insurance is
affected by the incidence of natural disasters, particularly hurricanes, winter
storms, earthquakes and tornadoes. The high level of catastrophe losses in
recent years has resulted in a reduced availability of homeowners insurance and
has led to higher prices for homeowners policies in some markets. In order to
reduce its exposure to catastrophe losses, the Company has limited the writing
of new homeowners business and selectively non-renewed existing homeowners
business in certain markets, tightened underwriting standards and implemented
price increases in certain hurricane-prone areas, subject to restrictions
imposed by insurance regulatory authorities. In California, the Company has
introduced an endorsement that reduces
14
<PAGE> 16
its exposure to catastrophic earthquake claims by increasing the deductible and
limiting other policy coverages in the event of an earthquake loss. The Company
uses computer modeling techniques to assess its level of exposure to loss in
catastrophe-prone areas. Changes to methods of marketing and underwriting in
coastal areas of Florida and New York and in California are subject to
state-imposed restrictions, the general effect of which is to make it more
difficult for an insurer to reduce exposures.
Insurers writing property-casualty policies are generally unable to
increase rates until some time after the costs associated with coverage have
increased, primarily as a result of state insurance rate regulation laws. The
pace at which an insurer can change rates in response to competition or to
increased costs depends, in part, on whether the applicable rate regulation law
requires prior approval of a rate increase or notification to the regulator
either before or after a rate increase is imposed. In states having prior
approval laws, a rate must be approved by the regulator before it may be used by
the insurer. In states having "file-and-use" laws, the insurer must file the
rate with the regulator, but does not need to wait for approval before using it.
A "use-and-file" law requires an insurer to file rates within a certain period
of time after the insurer begins using the new rate. Approximately one-half of
the states, including New York and Pennsylvania, require prior approval of rate
increases.
Underwriting of Personal Lines products is conducted primarily by
independent agents. Agents underwrite Personal Lines policies under strict
underwriting guidelines established and monitored by the Company. Each agent is
assigned to a specific employee of the Company or team of employees responsible
for working with the agent on business plan development, marketing, and overall
growth and profitability. The Company uses agency level management information
to analyze and understand results and to identify problems and opportunities.
GEOGRAPHIC DISTRIBUTION
The following table shows the distribution of Personal Lines' direct
written premiums for the states that accounted for the majority of combined
premium volume for the year ended December 31, 1996:
<TABLE>
<CAPTION>
STATE % OF TOTAL
- ----- ----------
<S> <C>
New York 23.2%
Pennsylvania 9.0
New Jersey 8.6
Florida 8.5
Texas 8.3
Massachusetts 6.9
Connecticut 6.1
Virginia 3.8
All others (1) 25.6
-----
TOTAL 100.0%
=====
</TABLE>
(See footnote on following page)
15
<PAGE> 17
- ---------------------
(1) No other single state accounted for 3.0% or more of the total combined
direct written premiums written in 1996 by the Company.
CLAIMS ADMINISTRATION
The Company employs approximately 8,900 claims employees located
throughout the United States. These employees include telephone and road
adjusters, appraisers, litigation specialists, staff attorneys, regional and
home office management and support staff. The Company handles over 90% of its
claims internally and employs external adjusters primarily where geographic
location makes it impractical to use the Company's own adjusters. The Company
has an investigative unit that handles claims that the Company suspects may be
fraudulent. The Company also employs a staff of lawyers who are responsible for
the management of the Company's claims litigation. The Company's claims handlers
include professionals with the technical expertise necessary to deal with more
complex coverage, liability and damage issues.
In its handling of claims, the Company strives to balance customer
expectations of service with its business objectives of effectively managing
loss exposure and controlling claims expense. In an effort to resolve claims
efficiently, the Company matches claims settlement authority to the ability of
its claims personnel and matches its in-house expertise with the issues involved
in the claim. The Company's workers' compensation claim adjudication process is
being re-engineered to encompass a higher level of nursing/medical intervention,
a more effective use of preferred provider networks to better manage medical and
lost-time claims, and a renewed emphasis on prompt and thorough investigations.
The Company's new Personal Lines claims workstation implemented in 1995
and workers' compensation claim workstation implemented in 1994 have improved
the speed and quality of both Personal Lines and Commercial Lines claims
service, and have helped loss payout performance. Use of technology such as VRUs
(voice response units) has lowered the cost of settling claims and shortened the
time to claim payment. The claim department also provides automated feedback
from claim handlers to underwriters to help with risk assessment and accurate
pricing information. Since the date of the Acquisition, significant progress has
been made in converting all of the Company's claims processing to this
technology. In Personal Lines, all new automobile and homeowners notices are now
entered into the Company's claims database through the new workstation which
provides access to data for both Aetna P&C and Travelers P&C sourced customers
through one professional claim workstation. In Commercial Lines workers'
compensation, all first reports of injury have been converted to the new
telephone reporting system and a conversion of all open claims to utilize the
new workstation is under way.
The home office claims department periodically conducts internal file
reviews of claims offices to monitor adherence to claims policies and
procedures, the adequacy of case reserves, claims loss control, claims expense
control, productivity and service standards. Regional claims management
periodically audits sample files of claims representatives as part of their
supervisory process.
16
<PAGE> 18
Environmental, asbestos and cumulative injury claims are segregated from
other claims and are handled separately by the Company's Special Liability
Group, a special unit staffed by dedicated legal, claim, finance and engineering
professionals. See "Environmental, Asbestos and Cumulative Injury Claims."
REINSURANCE
The Company reinsures a portion of the risks it underwrites in order to
control its exposure to losses, stabilize earnings and protect surplus. The
Company cedes to reinsurers a portion of these risks and pays premiums based
upon the risk and exposure of the policies subject to such reinsurance.
Reinsurance is subject to collectibility in all cases and to aggregate loss
limits. Although the reinsurer is liable to the Company to the extent of the
reinsurance ceded, the Company remains primarily liable as the direct insurer on
all risks reinsured. Reinsurance recoverables are reported after allowances for
uncollectible amounts. The Company also holds collateral, including escrow funds
and letters of credit, under certain reinsurance agreements. The Company
monitors the financial condition of reinsurers on an ongoing basis, and reviews
its reinsurance arrangements periodically. Reinsurers are selected based on
their financial condition, business practices and the price of their product
offerings. For additional information concerning reinsurance, see Note 5 of
Notes to Consolidated Financial Statements.
The Company utilizes a variety of reinsurance agreements to control its
exposure to large property and casualty losses. The Company utilizes the
following types of reinsurance: (i) facultative reinsurance, in which
reinsurance is provided for all or a portion of the insurance provided by a
single policy and each policy reinsured is separately negotiated; (ii) treaty
reinsurance, in which reinsurance is provided for a specified type or category
of risks; and (iii) catastrophe reinsurance, in which the ceding company is
indemnified for an amount of loss in excess of a specified retention with
respect to losses resulting from a catastrophic event.
The Company's top five reinsurers, except Lloyd's of London ("Lloyd's")
(which is not rated), are rated "A" or higher by A.M. Best. The ratings and
reinsurance recoverable at December 31, 1996 follow (in millions):
<TABLE>
<CAPTION>
REINSURANCE
REINSURER RECOVERABLE A.M. BEST RATING OF REINSURER
--------- ----------- -----------------------------
<S> <C> <C>
General Reinsurance Corporation $483 A++ highest of 15 ratings
American Re-Insurance Company 262 A+ 2nd highest of 15 ratings
Executive Risk Indemnity Inc. 193 A 3rd highest of 15 ratings
Employers Reinsurance Corporation 96 A++ highest of 15 ratings
NAC Reinsurance Corporation 75 A 3rd highest of 15 ratings
</TABLE>
As of December 31, 1996, the Company had ceded to Lloyd's and General
Reinsurance Corporation, two reinsurers with which the Company does the most
business, approximately $488 million and $483 million, respectively, of
insurance losses and loss adjustment expenses. In 1996, Lloyd's restructured its
operations with respect to claims for years prior to 1993.
17
<PAGE> 19
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 that constitute a portion of the total reinsurance recoverable referred
to above. The dispute involves the ability of the Company to aggregate asbestos
claims under a market agreement between Lloyd's and the Company or under the
applicable reinsurance treaties. See Item 3, "Legal Proceedings."
The outcome of the arbitration referred to above is 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 this matter 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 could have a
material adverse effect on the Company's financial condition or liquidity.
The Company participates in pools with other insurers to provide capacity
for unique and high-valued risks such as exposures related to the aviation and
nuclear power industries. The Company's maximum net exposure to this type of
business at December 31, 1996 was $29 million per risk. For policies written on
or after January 1, 1997, the exposure was reduced to $15 million per risk.
At December 31, 1996, the Company had $9.7 billion in reinsurance
recoverables. Of this amount, $4.2 billion is for pools and associations which
relate primarily to workers' compensation service business and have the strength
of the participating insurance companies on a joint basis supporting these
cessions. Of the remaining $5.5 billion ceded to reinsurers at December 31,
1996, $497 million was environmental and asbestos-related and the remainder
principally reflects reinsurance in support of ongoing business. In addition, at
December 31, 1996, $465 million was collateralized by letters of credit against
the asset. The descriptions below relate to reinsurance arrangements of the
Company in effect at January 1, 1997.
Net Retention Policy. Currently, for third-party liability, including
automobile no-fault, the reinsurance agreements used by Commercial Accounts,
Select Accounts and Construction limit the net retention to a maximum of $4
million per insured, per occurrence. For Travelers Specialty, the reinsurance
agreements for third-party liability, including professional and healthcare
liability, limit the Company's net retention to a maximum of $4 million per
policy, per occurrence. Gulf Specialty utilizes various reinsurance mechanisms
and has limited its net retention to $4 million for any line of business. For
commercial property insurance, there is a $5 million maximum retention per
insured with 100% reinsurance coverage for risks with higher limits. The
reinsurance agreement in place for workers' compensation policies written by
Commercial Accounts, Select Accounts, Construction, Travelers Specialty and some
segments of Alternative Markets covers 100% of each loss between $2 million and
$10 million. For National Accounts, reinsurance arrangements are typically
tiered, or layered, such that only levels of risk acceptable to the Company are
retained. The reinsurance agreement in place for Personal Lines umbrella
policies covers 100% of each loss between $1 million and $5 million. The
reinsurance agreements in place for Personal Lines property policies covers 100%
of each loss between $1
18
<PAGE> 20
million and $6 million. For surety protection, Bond has reinsurance coverage for
95% of up to $50 million of liability in excess of $50 million of liability. In
addition, Bond's accident year results are protected by an aggregate excess of
loss treaty that provides 93.85% of approximately $52 million of reinsurance
coverage in excess of a $119 million retention.
Catastrophe Reinsurance. The Company utilizes reinsurance agreements with
nonaffiliated reinsurers to control its exposure to losses resulting from one
occurrence. For the accumulation of net property losses arising out of one
occurrence, reinsurance agreements cover 75% of total losses between $250
million and $650 million. For multiple workers' compensation losses arising from
a single occurrence, reinsurance agreements cover 100% of losses between $10
million and $250 million and, for workers' compensation losses caused by
property perils, reinsurance agreements cover 75% of losses between $250 million
and $650 million.
For commercial property insurance sold through Commercial Accounts, Select
Accounts, Construction and certain National Accounts, 10% of all losses are
reinsured in 1997, subject to an occurrence limitation of $275 million. For
Personal Lines homeowners insurance, in 1997, 25% of losses in states along the
East Coast are reinsured up to a maximum recovery of $180 million per
occurrence. The covered territory of this Homeowners Quota Share includes Maine,
New Hampshire, Massachusetts, Rhode Island, Connecticut, New York, New Jersey,
Delaware, Maryland, Virginia, North Carolina, South Carolina, Georgia, Florida
and Washington, D.C.
REINSURANCE FUND
The Company also participates in the Florida Hurricane Catastrophe Fund
("FHCF"), which is a state-mandated catastrophe reinsurance fund. FHCF is
primarily funded by premiums from insurance companies that write residential
property business in Florida and, if insufficient, assessments on insurance
companies that write other property and casualty insurance, excluding workers'
compensation. FHCF's resources are limited to these contributions and to its
borrowing capacity at the time of a significant catastrophe. There can be no
assurance that these resources will be sufficient to meet the obligations of
FHCF.
The Company's recovery of less than contracted amounts from FHCF could
have a material adverse effect on the Company's results of operations in the
event of a significant catastrophe in Florida.
RESERVES
Property and casualty claim reserves are established to account for the
estimated ultimate costs of claims and claim adjustment expenses for claims that
have been reported but not yet settled and claims that have been incurred but
not reported. The Company establishes reserves by line of business, coverage and
year.
19
<PAGE> 21
The process of estimating claim reserves is imprecise due to a number of
variables. These variables are affected by both internal and external events
such as changes in claims handling procedures, inflation, judicial trends and
legislative changes. Many of these items are not directly quantifiable,
particularly on a prospective basis. Additionally, there may be significant
reporting lags between the occurrence of the insured event and the time it is
actually reported to the insurer. The Company continually refines reserve
estimates in a regular ongoing process as experience develops and further claims
are reported and settled. The Company reflects adjustments to reserves in the
results of operations in the periods in which the estimates are changed. In
establishing reserves, the Company takes into account estimated recoveries for
reinsurance, salvage and subrogation.
The Company derives estimates for unreported claims and development on
reported claims principally from actuarial analyses of historical patterns of
claims development by accident year for each line of business and market
segment. Similarly, the Company derives estimates of unpaid claim adjustment
expenses principally from actuarial analyses of historical development patterns
of the relationship of claim adjustment expenses to losses for each line of
business and market segment. For a description of the Company's reserving
methods for environmental and asbestos claims, see "Environmental, Asbestos and
Cumulative Injury Claims."
Discounting. The liability for losses for certain long-term disability
payments under workers' compensation insurance and workers' compensation excess
insurance has been discounted using a maximum interest rate of 5%. At December
31, 1996, 1995 and 1994 the combined amounts of discount for the Company were
$1.012 billion, $1.206 billion and $1.120 billion, respectively.
For a reconciliation of beginning and ending property and casualty
insurance claims and claim adjustment expense reserves of the Company for each
of the last three years, see Note 6 of Notes to Consolidated Financial
Statements.
The following table sets forth the year-end reserves from 1986 through
1996 and the subsequent changes in those reserves, presented on a historical
basis for the Company. Accordingly, the original estimates, cumulative amounts
paid and reestimated reserves in the table for the years 1986-1995 have not been
restated to include Aetna P&C's business. Beginning in 1996, the table includes
the reserve activity of Aetna P&C. The data in the table are presented in
accordance with reporting requirements of the Securities and Exchange
Commission. Care must be taken to avoid misinterpretation by those unfamiliar
with such information or familiar with other data commonly reported by the
insurance industry. The following data is not accident year data, but rather a
display of 1986-1996 year-end reserves and the subsequent changes in those
reserves.
For instance, the "cumulative deficiency or redundancy" shown in the
following table for each year represents the aggregate amount by which original
estimates of reserves as of that year-end have changed in subsequent years.
Accordingly, the cumulative deficiency for a year relates only to reserves at
that year-end and such amounts are not additive. Expressed another way, if the
original reserves at the end of 1986 included $4 million for a loss that is
finally settled in 1996 for $5 million, the $1 million deficiency (the excess of
the actual
20
<PAGE> 22
settlement of $5 million over the original estimate of $4 million) would be
included in the cumulative deficiencies in each of the years 1986-1995 shown in
the following table.
Certain factors may distort the re-estimated reserves and cumulative
deficiency or redundancy shown in the following table. For example, a
substantial portion of the cumulative deficiencies in each of the years
1986-1996 arises from claims on policies written prior to the mid-1970s
involving liability exposures such as environmental, asbestos and cumulative
injury claims. In the post-1984 period, the Company has developed more stringent
underwriting standards and policy exclusions and has significantly contracted or
terminated the writing of such risks. See "Environmental, Asbestos and
Cumulative Injury Claims." General conditions and trends that have affected the
development of these liabilities in the past will not necessarily recur in the
future.
Other factors that affect the data in the following table include the
discounting of workers' compensation reserves and the use of retrospectively
rated insurance policies. To the extent permitted under applicable accounting
practices, workers' compensation reserves are discounted to reflect the time
value of money, due to the relatively long time period over which these claims
are to be paid. Apparent deficiencies will continue to occur as the discount on
these workers' compensation reserves is accreted at the appropriate interest
rates. Also, a significant portion of National Accounts business is underwritten
with retrospectively rated insurance policies in which the ultimate loss
experience is primarily borne by the insured. Increases in loss experience
result in an increase in reserves, and an offsetting increase in amounts
recoverable from insureds. These amounts recoverable mitigate the impact of the
cumulative deficiencies but are not reflected in the following table.
Retrospective rating is particularly significant for National Accounts business
for workers' compensation, and to a lesser extent in general liability and
commercial automobile coverages. This mechanism affords the Company a
significant financial protection against adverse development on a large block of
net reserves.
Because of these and other factors, it is difficult to develop meaningful
extrapolation of estimated future redundancies or deficiencies in loss reserves
from the data in the following table.
The differences between the reserves for claims and claim adjustment
expenses shown in the following table, which is prepared in accordance with
GAAP, and those reported in the annual statements of the Company filed with
state insurance departments, which are prepared in accordance with statutory
accounting practices, were: $14 million, $(7) million and $(26) million for the
years 1996, 1995 and 1994, respectively.
21
<PAGE> 23
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1986(a) 1987(a) 1988(a) 1989(a) 1990(a) 1991(a) 1992(a)
-------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Reserves for Loss and LAE
Originally Estimated: $5,743 $ 6,569 $ 6,954 $ 7,729 $ 8,022 $ 8,360 $ 8,955
Cumulative amounts paid as of
ONE YEAR LATER 1,578 2,061 1,828 2,091 2,135 1,869 2,005
TWO YEARS LATER 2,804 3,132 3,101 3,488 3,422 3,161 3,199
THREE YEARS LATER 3,495 4,003 4,063 4,415 4,351 4,041 4,063
FOUR YEARS LATER 4,079 4,666 4,710 5,095 4,996 4,706 4,662
FIVE YEARS LATER 4,550 5,141 5,227 5,597 5,492 5,182
SIX YEARS LATER 4,903 5,550 5,620 5,995 5,887
SEVEN YEARS LATER 5,235 5,870 5,952 6,333
EIGHT YEARS LATER 5,512 6,152 6,251
NINE YEARS LATER 5,759 6,421
TEN YEARS LATER 5,999
RESERVES REESTIMATED AS OF
ONE YEAR LATER 5,846 6,732 7,080 7,832 8,128 8,362 9,058
TWO YEARS LATER 6,062 6,890 7,243 7,929 8,197 8,637 9,139
THREE YEARS LATER 6,227 7,057 7,405 8,077 8,592 8,906 9,183
FOUR YEARS LATER 6,465 7,246 7,585 8,560 9,003 9,026 9,189
FIVE YEARS LATER 6,607 7,466 8,098 8,991 9,159 9,123
SIX YEARS LATER 6,828 7,988 8,531 9,189 9,295
SEVEN YEARS LATER 7,379 8,411 8,715 9,328
EIGHT YEARS LATER 7,763 8,567 8,871
NINE YEARS LATER 7,936 8,732
TEN YEARS LATER 8,057
CUMULATIVE DEFICIENCY
(REDUNDANCY) 2,314 2,163 1,917 1,599 1,273 763 234
Gross liability--end of year
Reinsurance recoverables
Net liability--end of year
Gross reestimated
liability--latest
Reestimated reinsurance
recoverables--latest
Net reestimated
liability--latest
Gross cumulative
deficiency (redundancy)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993(a) 1994(a) 1995(a) 1996(a)
----------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Reserves for Loss and LAE
Originally Estimated: $ 9,319 $ 9,712 $10,090 $21,816
Cumulative amounts paid as of
ONE YEAR LATER 1,706 1,595 1,521
TWO YEARS LATER 2,843 2,631
THREE YEARS LATER 3,610
FOUR YEARS LATER
FIVE YEARS LATER
SIX YEARS LATER
SEVEN YEARS LATER
EIGHT YEARS LATER
NINE YEARS LATER
TEN YEARS LATER
Reserves reestimated as of
ONE YEAR LATER 9,270 9,486 9,848
TWO YEARS LATER 9,234 9,310
THREE YEARS LATER 9,108
FOUR YEARS LATER
FIVE YEARS LATER
SIX YEARS LATER
SEVEN YEARS LATER
EIGHT YEARS LATER
NINE YEARS LATER
TEN YEARS LATER
Cumulative deficiency
(redundancy) (211) (402) (242)
Gross liability--end of year $14,638 $15,013 $15,213 $30,969
Reinsurance recoverables 5,319 5,301 5,123 9,153
----------------------------------------------------
Net liability--end of year $ 9,319 $ 9,712 $10,090 $21,816
====================================================
Gross reestimated
liability--latest $14,495 $14,941 $14,894
Reestimated reinsurance
recoverables--latest 5,387 5,631 5,046
------- ------- -------
Net reestimated
liability--latest $ 9,108 $ 9,310 $ 9,848
======= ======= =======
Gross cumulative
deficiency (redundancy) $ (143) $ (72) $ (319)
======= ======= =======
</TABLE>
(a) Reflects reserves of Travelers P&C, excluding Aetna P&C reserves which were
acquired on April 2, 1996. Accordingly, the reserve development (net reserves
for loss and LAE recorded at the end of the year, as originally estimated, less
net reserves reestimated as of subsequent years) relates only to the operations
of Travelers P&C and does not include Aetna P&C.
(b) Includes Aetna P&C gross reserves of $16,775 million and net reserves of
$11,752 million acquired on April 2, 1996 and subsequent development thereon.
STATUTORY COMBINED RATIO INFORMATION
The following table sets forth the statutory loss and LAE ratios,
underwriting expense ratios and combined ratios for the periods indicated for
the Company
The statutory combined ratio is an industry measurement of the results of
property and casualty insurance underwriting. This ratio is the sum of the ratio
of incurred losses and loss adjustment expenses to net premiums earned (the
"loss and LAE ratio"), the ratio of underwriting expenses incurred to net
premiums written (the "underwriting expense ratio") and, where applicable, the
ratio of dividends to policyholders to net premiums earned. A combined ratio
under 100% generally indicates an underwriting profit; a combined ratio over
100% generally indicates an underwriting loss. However, investment income,
federal income taxes and other non-underwriting income (e.g., service fee
income) or expenses are not reflected in the combined ratio. The profitability
of property and casualty insurance companies depends on income from
underwriting, investment and service operations. Lines of
22
<PAGE> 24
business where claims are paid out over a longer period of time, such as
workers' compensation, also provide investment income over a longer period of
time and therefore can be profitable at higher combined ratios than lines where
claims are paid out over a shorter period. Insurers with a high proportion of
long-tail policies will generally have higher combined ratios than insurers with
more short-tail business.
The ratios shown in the table below are computed based upon statutory
accounting practices, not GAAP. For information on GAAP combined ratios, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
STATUTORY COMBINED RATIOS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Commercial Lines:
Loss and LAE ratio 96.2% 80.6% 104.2%
Underwriting expense ratio 32.7 24.4 24.0
Combined ratio before
policyholder dividends 128.9 (1) 105.0 128.2 (2)
Combined ratio 129.6 106.3 126.2
Personal Lines:
Loss and LAE ratio 68.7 74.5 71.0
Underwriting expense ratio 28.9 29.9 29.4
Combined ratio 97.6 (3) 104.4 100.4
Total:
Loss and LAE ratio 85.5 78.2 90.2
Underwriting expense ratio 31.3 26.4 26.2
Combined ratio before
policyholder dividends 116.8 104.6 116.4
Combined ratio 117.2 105.4 115.3
</TABLE>
- ---------------------
(1) Includes the effect of charges associated with the Acquisition and also
includes statutory charges made to conform accounting policies and Company
strategies in connection with the Acquisition (but not for GAAP reporting
purposes due to purchase accounting). The combined ratio excluding such
charges was 110.0%.
(2) Includes statutory reserve increases for environmental claims and a
reduction of ceded reinsurance balances amounting to $225 million by the
Company. The combined ratio excluding this item was 114.2%.
(3) Includes the effect of the Company's review of reserves associated with the
Acquisition. The combined ratio excluding this item was 100.1%.
ENVIRONMENTAL, ASBESTOS AND CUMULATIVE INJURY CLAIMS
Environmental, asbestos and cumulative injury claims are segregated from
other claims and are handled separately by the Company's Special Liability
Group, a special unit staffed by dedicated legal, claim, finance and engineering
professionals.
23
<PAGE> 25
ENVIRONMENTAL CLAIMS
As a result of various state and federal regulatory efforts aimed at
environmental remediation, the insurance industry has been, and continues to be,
involved in extensive litigation involving policy coverage and liability issues.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") was first enacted in 1980, and significantly expanded in 1984. CERCLA
enables private parties and the federal and state governments to take action
with respect to releases and threatened releases of hazardous substances and to
recover their response costs from certain liable parties or such parties may be
ordered to undertake remedial action directly. Liability under CERCLA may be
joint and several with other responsible persons. In addition to the regulatory
pressures, the Company believes that certain court decisions have expanded
insurance coverage beyond the original intent of the insurers and insureds,
frequently involving policies that were issued prior to the mid-1970s. The
results of court decisions affecting the industry's coverage positions continue
to be inconsistent. Accordingly, the ultimate responsibility and liability for
environmental remediation costs remain uncertain.
The Company continues to receive claims alleging liability exposures
arising out of insureds' alleged disposition of toxic substances. These claims
when submitted rarely indicate the monetary amount being sought by the claimant
from the insured and the Company does not keep track of the monetary amount
being sought in those few claims which indicated such a monetary amount.
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, until the
dispute is resolved. 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. Environmental loss and loss expense
reserves of the Company at December 31, 1996 were $1.242 billion, net of
reinsurance of $127 million. Approximately 12% of such loss and loss expense
reserves (i.e., approximately $146 million) were case reserves for resolved
claims. The balance, approximately 88% of the net aggregate reserve (i.e.,
approximately $1.096 billion), is carried in a bulk reserve and
24
<PAGE> 26
includes incurred but not yet reported environmental claims for which the
Company has not received any specific claims.
The Company's reserving methodology is preferable to one based on
"identified claims" since the resolution of environmental exposures by the
Company generally occurs on an insured-by-insured basis as opposed to a
claim-by-claim basis. The nature of the resolution is through coverage
litigation, which often pertains to more than one claim, as well as through
a settlement with an insured. Generally, the settlement between the Company
and the insured extinguishes any obligation the Company may have under any
policy issued to the insured for past, present and future environmental
liabilities. This form of settlement is commonly referred to as a "buy-back"
of policies for future environmental liability. Additional provisions of these
agreements include the appropriate indemnities and hold harmless provisions to
protect the Company. The Company's general purpose in executing such
agreements is to reduce its potential environmental exposure and eliminate
both the risks presented by coverage litigation with the insured and the cost
of such litigation.
The reserving methodology includes an analysis by the Company of the
exposure presented by each insured and the anticipated cost of resolution, if
any, for each insured. This analysis is completed by the Company on a quarterly
basis. In the course of its analysis, an assessment of the probable liability,
available coverage, judicial interpretations and historical value of similar
exposures is considered by the Company. In addition, due consideration is
given to the many variables presented, such as the nature of the alleged
activities of the insured at each site; the allegations of environmental
damage at each site; the number of sites; the total number of potentially
responsible parties at each site; the nature of environmental harm and the
corresponding remedy at a site; the nature of government enforcement
activities at each site; the ownership and general use of each site; the
overall nature of the insurance relationship between the Company and the
insured; the identification of other insurers; the potential coverage
available, if any, including number of years of coverage, if any; and the
applicable law in each jurisdiction. Analysis of these and other factors,
including the potential for future claims, results in the establishment
of the bulk reserve.
The duration of the Company's investigation and review of such claims and
the extent of time necessary to determine an appropriate estimate, if any, of
the value of the claim to the Company, varies significantly and is dependent
upon a number of factors. These factors include, but are not limited to, the
cooperation of the insured in providing claim information, the pace of
underlying litigation or claim processes, the pace of coverage litigation
between the insured and the Company and the willingness of the insured and the
Company to negotiate, if appropriate, a resolution of any dispute between them
pertaining to such claims. Since the foregoing factors vary from claim to claim
and insured by insured, the Company cannot provide a meaningful average of the
duration of an environmental claim. However, based upon the Company's experience
in resolving such claims, the duration may vary from months to several years.
The property and casualty insurance industry does not have a standard
method of calculating claim activity for environmental losses. Generally for
environmental claims, Travelers P&C establishes a claim file for each insured on
a per site, per claimant basis. If there is more than one claimant such as a
federal and a state agency, this method will result in two claims being set up
for a policyholder at that one site. Similarly, if one hundred claimants file a
lawsuit against ten policyholders alleging injury as a result of the discharge
of wastes or pollutants, one thousand claims would be established. Travelers P&C
adheres to this method of calculating claim activity on all
environmental-related claims, whether such claims are tendered on primary,
excess or umbrella policies.
As of December 31, 1996, Travelers P&C had approximately 30,800 pending
environmental-related claims tendered by 664 active policyholders. The pending
environmental-related claims represent federal or state EPA-type claims as well
as plaintiffs' claims alleging bodily injury and property damage due to the
discharge of waste or pollutants. In 1996, the pending inventory increased by
approximately 20,000 claims as a result of several lawsuits being filed in the
states of Louisiana and Texas. These lawsuits, filed against one or more
policyholders of Travelers P&C, allege that the plaintiffs were injured or
damaged as a result of either alleged waste disposal or the alleged release of
deleterious substances from ongoing business operations which have taken place
near the plaintiffs' residences. Claims of this nature have historically been
considered in the level of TAP's environmental reserves. To date, Travelers P&C
has resolved environmental-related claims on behalf of 1,628 policyholders.
The Company is preparing a claims system conversion which when completed
will apply Travelers P&C's method of establishing claim files to Aetna P&C's
environmental-related claims. The Company anticipates that this process should
be completed in 1997. As of December 31, 1996, Aetna P&C had pending
environmental-related claims tendered by approximately 948 active policyholders.
Approximately 129 of these 948 active policyholders are also included in the 664
active Travelers P&C policyholders. Aetna P&C's policyholders, like those of
Travelers P&C, have tendered both EPA-type claims and individual claims
25
<PAGE> 27
alleging injury or damage as a result of the discharge of wastes or pollutants.
To date, Aetna P&C has resolved environmental-related claims on behalf of 1,870
policyholders.
To date, the Company generally has been successful in resolving its
coverage litigation and continues to reduce its potential exposure through
favorable settlements with certain insureds. These settlement agreements with
certain insureds are based on the variables presented in each piece of coverage
litigation. Generally the settlement dollars paid in disputed coverage claims
are a percentage of the total coverage sought by such insureds. Based upon
the Company's reserving methodology and the experience of its historical
resolution of environmental exposures, it believes that the environmental
reserve provision is appropriate. As of December 31, 1996, the Company, for
approximately $1 billion, has resolved the environmental liabilities presented
by 3,498 of the 4,981 policyholders who have tendered environmental claims to
the Company. This resolution comprises 70% of the policyholders who have
tendered such claims. The Company has reserves of approximately $950 million
included in its bulk reserve relating to the remaining 1,483 policyholders
(30% of the total) with unresolved environmental claims, as well as for any
other policyholder which may tender an environmental claim in the future.
ASBESTOS CLAIMS
In the area of asbestos claims, the Company believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to the 1980s. The Company continues to receive
asbestos claims alleging insureds' liability from claimants' asbestos-related
injuries. These claims, when submitted, rarely indicate the monetary amount
being sought by the claimant from the insured and the Company does not keep
track of the monetary amount being sought in those few claims which indicated
such a monetary amount. Originally the cases involved mainly plant workers and
traditional asbestos manufacturers and distributors. However, in the mid-1980s,
a new group of plaintiffs, whose exposure to asbestos was less direct and whose
injuries were often speculative, began to file lawsuits in increasing numbers
against the traditional defendants as well as peripheral defendants who had
produced products that may have contained small amounts of some form of
encapsulated asbestos. These claims continue to arise and on an individual basis
generally involve smaller companies with smaller limits of potential coverage.
Also, there has emerged a group of non-product claims by plaintiffs,
mostly independent labor union workers, mainly against companies, alleging
exposure to asbestos while working at these companies' premises. In addition,
various insurers, including the Company, remain defendants in an action brought
in Philadelphia regarding potential consolidation and resolution of future
asbestos bodily injury claims.
In summary, various classes of asbestos defendants, such as major product
manufacturers, peripheral and regional product defendants as well as premises
owners, are tendering asbestos-related claims to the industry. Because each
insured presents different
26
<PAGE> 28
liability and coverage issues, the Company evaluates those issues on an
insured-by-insured basis.
The Company's evaluations have not resulted in any meaningful data from
which an average asbestos defense or indemnity payment may be determined. The
varying defense and indemnity payments made by the Company on behalf of its
insureds have also precluded the Company from deriving any meaningful data by
which it can predict whether its defense and indemnity payments for asbestos
claims (on average or in the aggregate) will remain the same or change in the
future. Based upon the Company's experience with asbestos claims, the duration
period of an asbestos claim from the date of submission to resolution is
approximately two years.
At December 31, 1996, asbestos claims reserves of the Company were $1.073
billion, net of reinsurance of $370 million. Approximately 25% of the net
aggregate reserve (i.e., approximately $263 million) is for pending asbestos
claims. The balance, approximately 75% (i.e., approximately $810 million), of
the net asbestos reserves represents incurred but not yet reported losses for
which the Company has not received any specific claims.
UNCERTAINTY REGARDING ADEQUACY OF ENVIRONMENTAL AND ASBESTOS RESERVES
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are not
used to estimate such reserves.
For environmental claims, the Company estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim, as discussed above.
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and deductibles;
an analysis of each policyholder's potential liability; jurisdictional
involvement; past and projected future claim activity; past settlement values of
similar claims; allocated claim adjustment expense; potential role of other
insurance, and applicable coverage defenses, if any. Once the gross ultimate
exposure for indemnity and allocated claim adjustment expense is determined for
a policyholder by policy year, a ceded projection is calculated based on any
applicable facultative and treaty reinsurance. In addition, a similar review is
conducted for asbestos property damage claims. However, due to the relatively
minor claim volume, these reserves have remained at a constant level.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1996 are the Company's best
estimate of ultimate claims
27
<PAGE> 29
and claim adjustment expenses based upon known facts and current law. However,
the environment surrounding the final resolution of these claims continues to
change. Currently, it is not possible to predict changes in the legal and
legislative environment and their impact on the future development of asbestos
and environmental claims. Such development will be affected by future court
decisions and interpretations and changes in Superfund and other legislation.
Because of these future unknowns, additional liabilities may arise for amounts
in excess of the current reserves. These additional amounts, or a range of these
additional amounts, cannot now be reasonably estimated, and 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 potentially harmful
products or substances. Such potentially 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.
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
28
<PAGE> 30
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).
At December 31, 1996, CIOTA claims reserves of the Company were $1.114
billion, net of reinsurance of $446 million. Approximately 19% of the net
aggregate reserve (i.e., approximately $215 million) is for pending CIOTA
claims. The balance, approximately 81% (i.e., approximately $899 million), of
the net CIOTA reserves represents incurred but not yet reported losses for which
the Company has not received any specific claims.
INSURANCE POOLS
Most of the Company's insurance subsidiaries are members of one of three
separate intercompany property and casualty reinsurance pooling arrangements:
the Travelers Indemnity pool, the Aetna Insurance pool and the Gulf pool. Each
of these insurance pools permits the participating companies to rely on the
capacity of the entire pool rather than on its own capital and surplus. Under
the arrangements of each insurance pool, the members share substantially all
insurance business that is written and prorate the combined premiums, losses and
expenses.
RATINGS
Insurance companies are rated by rating agencies to provide both industry
participants and insurance consumers with meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and a
strong ability to pay claims. These ratings are based upon factors relevant to
policyholders and are not directed toward protection of investors. Such ratings
are neither a rating of securities nor a recommendation to buy, hold or sell any
security and may be revised or withdrawn at any time. Ratings focus primarily on
the following factors: capital resources, financial strength, demonstrated
management expertise in the insurance business, credit analysis, systems
development, market segment position and growth opportunities, marketing, sales
conduct practices, investment operations, minimum policyholders' surplus
requirements and capital sufficiency to meet projected growth, as well as access
to such traditional capital as may be necessary to continue to meet standards
for capital adequacy.
29
<PAGE> 31
The following table summarizes the current claims-paying and financial
strength ratings of the Company's property-casualty insurance pools and Aetna
Casualty and Surety Company of America ("Aetna C&S of America") by A. M. Best,
Duff & Phelps Corp. ("Duff & Phelps"), Moody's Investor's Service Inc.
("Moody's") and Standard & Poor's Ratings Group ("Standard & Poor's"). The table
also presents the position of each rating in the applicable agency's rating
scale.
<TABLE>
<CAPTION>
STANDARD &
A.M. BEST DUFF & PHELPS MOODY'S POOR'S
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Travelers Indemnity pool(1) A (3rd of 15) AA- (4th of 18) A1 (5th of 19) A+ (5th of 18)
Aetna Insurance pool (2) A- (4th of 15) A+ (5th of 18) A1 (5th of 19) A+ (5th of 18)
Gulf pool (3) A+ (2nd of 15) -- -- AA (3rd of 18)
Aetna C&S of America A (3rd of 15) A+ (5th of 18) A1 (5th of 19) A+ (5th of 18)
</TABLE>
- -------------------
(1)The Travelers Indemnity pool consists of Travelers Indemnity, The Phoenix
Insurance Company, The Charter Oak Fire Insurance Company, The Travelers
Indemnity Company of Connecticut, The Travelers Indemnity Company of America,
The Travelers Indemnity Company of Missouri, The Travelers Indemnity Company
of Illinois, TravCo Insurance Company and The Travelers Home and Marine
Insurance Company.
(2)The Aetna Insurance pool consists of Aetna Casualty, Standard Fire, Aetna
Casualty & Surety Company of Illinois, The Farmington Casualty Company, The
Automobile Insurance Company of Hartford, Connecticut, Aetna Casualty Company
of Connecticut, Aetna Commercial Insurance Company, Aetna Insurance Company,
Aetna Insurance Company of Illinois and Aetna Personal Security Insurance
Company.
(3)The Gulf pool consists of Gulf Insurance Company, Gulf Underwriters
Insurance Company, Select Insurance Company, Atlantic Insurance Company and
Gulf Group Lloyds.
INVESTMENTS
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common equity securities, real
estate mortgages and real estate.
The Company's investment policies are determined by its Board of Directors
and are reviewed on a regular basis. At December 31, 1996, the carrying value of
the Company's investment portfolio was $29.4 billion, of which 91.1% was
invested in fixed maturity investments and short-term investments, 4.0% in
mortgage loans and real estate held for sale, 2.6% in common stocks and other
equity securities and 2.3% in other investments. The average duration of the
fixed maturity portfolio, including short-term investments, was 5.3 years at
such date. Non-investment grade securities totaled $599 million, representing
approximately 2.4% of the Company's fixed maturity investment portfolio as of
December 31, 1996.
For additional information regarding these investment portfolios, see Note
4 of Notes to Consolidated Financial Statements, the discussion of Investment
Portfolio in Item 7 of this Form 10-K and Note 3 of Notes to the 1995 Combined
Financial Statements of Aetna P&C.
30
<PAGE> 32
The following table sets forth information regarding the investments of
the Company. It reflects the average amount of investments, net investment
income earned and the yield thereon for the years ended December 31, 1996, 1995
and 1994. The table includes information on the investments of Aetna P&C for
periods prior to April 2, 1996 (the date of the Acquisition). See Note 4 of
Notes to Consolidated Financial Statements and Note 3 of Notes to the 1995
Combined Financial Statements of Aetna P&C for information regarding the
investment portfolio of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
--------- --------- ---------
(Dollars in millions)
<S> <C> <C> <C>
Average investments $28,018.7 $24,824.9 $24,068.0
Net investment income $ 1,898.6 $ 1,611.8 $ 1,397.3
Average yield (1) 7.2% 6.4% 6.0%
Average tax equivalent yield (1) 7.7% 6.9% 6.5%
Average tax equivalent yield
excluding real estate (1) 7.6% 6.8% 6.3%
</TABLE>
- ---------
(1) Excluding realized and unrealized capital gains and losses.
MORTGAGE LOANS AND REAL ESTATE HELD FOR SALE
At December 31, 1996, the mortgage loan and real estate held for sale
portfolios of the Company consisted of approximately $1.0 billion and $157
million, respectively. The 1996 increase in mortgage loans and real estate held
for sale is primarily attributable to the Acquisition.
Management evaluates the real estate portfolio on an ongoing basis,
assessing the probabilities of loss with respect to a comprehensive series of
projections, including a host of variables relating to the borrower, the
property, the term of the loan, the tenant composition, rental rates, other
supply and demand factors, and overall economic conditions.
The following table summarizes by property type the mortgage loan
portfolio and real estate held for sale included in the investment portfolio of
the Company as of December 31, 1996, 1995 and 1994. For informational purposes
only, the table includes the investments of Aetna P&C for all periods presented.
31
<PAGE> 33
<TABLE>
<CAPTION>
---------------------------- ---------------------------
MORTGAGE LOANS REAL ESTATE
---------------------------- ---------------------------
(Dollars in millions)
1996 1995 1994 1996 1995 1994
-------- -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Property Type:
Commercial:
Office $ 503.4 $ 591.0 $ 764.2 $ 69.2 $ 139.7 $ 133.1
Apartment 181.6 243.3 269.1 7.7 4.8 19.8
Hotel 26.6 74.4 147.0 35.8 56.8 46.3
Retail 210.8 285.4 415.8 19.6 20.2 24.4
Industrial 47.8 51.9 55.6 21.9 22.6 22.2
Other 26.0 52.1 62.7 0.6 41.5 38.5
-------- -------- -------- ------ ------ ------
Total commercial 996.2 1,298.1 1,714.4 154.8 285.3 284.3
Agriculture 9.4 20.8 26.3 1.9 2.2 7.4
Residential - - 7.3 - - 0.2
Less: valuation
reserve (1) - (44.4) (58.5) - - -
-------- -------- -------- ------ ------ ------
Total $1,005.6 $1,274.5 $1,689.5 $156.7 $287.5 $291.9
======== ======== ======== ====== ====== ======
</TABLE>
- ---------------------
(1) In 1996, reflects purchase accounting adjustments related to the
Acquisition.
For additional information regarding the mortgage loan and real estate
held for sale portfolios of the Company, see Note 4 of Notes to Consolidated
Financial Statements and Notes 3 and 15 of Notes to the 1995 Combined Financial
Statements of Aetna P&C. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay loans with or without
prepayment penalties. The Company's combined unscheduled payments and sales of
mortgage loans were $163 million in 1996 and $227 million in 1995. The average
remaining life of the mortgage portfolio is five years.
DERIVATIVES
See Note 12 of Notes to Consolidated Financial Statements for a discussion
of the policies and transactions related to derivatives of the Company.
COMPETITION
The property and casualty insurance industry is highly competitive in the
areas of price, service, product offerings, agent relationships and, in the case
of personal property and casualty business, method of distribution (i.e., use of
independent agents, captive agents and/or salaried employees). There are
approximately 3,400 property-casualty insurance companies in the United States.
Of those companies, approximately 800 operate in all or most states and write
the vast majority of the business in the industry while approximately 2,600
offer one or more personal or commercial lines property-casualty products
similar to those marketed by the Company. In addition, an increasing amount of
commercial risks are covered
32
<PAGE> 34
by purchaser self-insurance, large deductibles, risk-purchasing groups,
risk-retention groups and captive companies.
COMMERCIAL LINES. The insurance industry is represented in the commercial
lines marketplace by many insurance companies of varying size. The industry is
comprised of small local firms, large regional firms and large national firms,
as well as self-insurance programs or captive insurers. Market competition works
to set the price charged for insurance products and the level of service
provided within the insurance regulatory framework. Growth is driven by a
company's ability to provide insurance and services at a price that is
reasonable and acceptable to the customer. In addition, the marketplace is
affected by available capacity of the insurance industry as measured by
policyholders' surplus. Surplus expands and contracts primarily in conjunction
with profit levels generated by the industry. Growth in premium and service
business is also measured by a company's ability to retain existing customers
and to attract new customers.
The National Accounts market is highly competitive. Competition is based
primarily on quality and service and, to a lesser extent, on the basis of price.
National Accounts business is generally written through national brokers and
regional agents. The Company also competes for state contracts to provide claims
and policy management services. These contracts, which generally have three-year
terms, are selected by state agencies through a bid process based on quality of
service and price. The Company has emerged as the largest assigned risk plan
service insurer in the industry with approximately 28% of the market in 1996.
The Commercial Accounts market is highly competitive. Commercial Accounts
business has historically been written through independent agents and brokers,
although some companies use direct writing. Competitors in this market are
primarily national property-casualty insurance companies willing to write most
classes of business using traditional products and pricing and, to a lesser
extent, regional insurance companies and companies that have developed niche
programs for specific industry segments. Companies compete on price, product
offerings, response time in policy issuance and claim and loss prevention
services. Additionally, reduced overhead and improved efficiency through
automation and response time to customer needs are key to success in this
market.
The Construction market has become a focused industry segment for several
large insurance companies. Construction market business is written through
agents and brokers. Insurance companies compete in this market based upon price,
product offering and claims service. The Company utilizes its specialized
underwriters and engineers who have extensive experience and knowledge of the
construction industry to work with agents and brokers to compete effectively in
this market.
The Select Accounts market is highly competitive and is typically written
through independent agents and, to a lesser extent, regional brokers. Both
national and regional property-casualty insurance companies compete in the
Select Accounts market which is generally comprised of low risk, "main street"
business customers. Risks are underwritten
33
<PAGE> 35
and priced using standard industry practices and a combination of proprietary
and standard industry product offerings. Competition in this market is primarily
based on price, product offerings and response time in policy services. The
Company has established a strong marketing relationship with its distribution
network and has provided it with defined underwriting policies, competitive
prices and efficient automated environments.
The market in which Specialty Accounts competes includes small to
mid-sized niche companies that target certain lines of insurance and larger,
multi-line companies that focus on various segments of the Specialty Accounts
market. Specialty Accounts business is generally written through wholesale
brokers and retail agents and brokers throughout the United States. Gulf
Specialty derives a competitive advantage through its underwriting practices,
low expense levels and broad product offering base. Bond Specialty's reputation
for clear, timely decision-making, underwriting and industry expertise and
strong producer and customer relationships as well as its ability to offer its
customers a full range of financial services products, enable it to compete
effectively. Its ability to cross-sell Bond products to customers of National
Accounts, Commercial Accounts, Select Accounts and through other Travelers Group
units provides further competitive advantages for the Company.
PERSONAL LINES. Personal lines insurance is written by hundreds of
insurance companies of varying sizes. Although national companies write the
majority of the business, the Company also faces competition from local or
regional companies which often have a competitive advantage because of their
expense structure or because they specialize in providing coverage to particular
risk groups. The Company believes that the principal competitive factors are
price, service, perceived stability of the insurer and name recognition. The
Company also competes for business within each of the independent agencies
representing it, because these agencies also offer policies of competing
independent agency companies. At the agency level, the Company believes that
competition is primarily based on the level of service, including claims
handling, level of automation and the development of long-term relationships
with the individual agents. The Company also competes with insurance companies
that use captive agents or salaried employees to sell their products. Because
these companies generally pay lower commissions than independent agency
companies, they may be able to generate business at a lower cost than the
Company. Due to this expense advantage, the direct writing companies have
gradually expanded their market share in recent years. However, in addition to
its traditional independent agency distribution, Personal Lines is pursuing a
number of initiatives to broaden its distribution of Personal Lines products,
including marketing through the PFS sales force, marketing to affinity groups
and establishing co-marketing arrangements with other insurers.
REGULATION
STATE REGULATION
The Company's insurance subsidiaries are subject to regulation and
supervision in the various states and jurisdictions in which they transact
business. The extent of regulation varies but generally has its source in
statutes that delegate regulatory, supervisory and administrative
34
<PAGE> 36
authority to a department of insurance of each state. The regulation,
supervision and administration relate, among other things, to the standards of
solvency that must be met and maintained, the licensing of insurers and their
agents, the nature of and limitations on investments, premium rates,
restrictions on the size of risks that may be insured under a single policy,
reserves and provisions for unearned premiums, losses and other obligations,
deposits of securities for the benefit of policyholders, approval of policy
forms and the regulation of market conduct including underwriting and claims
practices. In addition, many states have enacted variations of competitive
rate-making laws which allow insurers to set certain premium rates for certain
classes of insurance without having to obtain the prior approval of the state
insurance department. State insurance departments also conduct periodic
examinations of the affairs of insurance companies and require the filing of
annual and other reports relating to the financial condition of companies and
other matters.
At the present time, the Company's insurance subsidiaries are collectively
licensed to transact insurance business in all states, the District of Columbia,
Guam, Puerto Rico, and the U.S. Virgin Islands, as well as Canada and the United
Kingdom.
Although the Company is not regulated as an insurance company, it is the
owner of the capital stock of its insurance subsidiaries and as such is subject
to state insurance holding company statutes, as well as certain other laws, of
each of the states of domicile of its insurance subsidiaries. All holding
company statutes, as well as certain other laws, require disclosure and, in some
instances, prior approval of material transactions between an insurance company
and an affiliate. The holding company statutes, as well as certain other laws,
also require, among other things, prior approval of an acquisition of control of
a domestic insurer and the payment of extraordinary dividends or distributions.
The Company's insurance subsidiaries are subject to various state
statutory and regulatory restrictions in each company's state of domicile, which
limit the amount of dividends or distributions by an insurance company to its
stockholders. As a holding company whose principal assets are the capital stock
of Travelers Indemnity, Aetna Casualty and Standard Fire, the Company relies
primarily on dividends from these subsidiaries to meet its obligations for
payment of interest and principal on outstanding debt obligations, dividends to
stockholders and corporate expenses. The ability of these subsidiaries to pay
dividends to the Company in the future will depend on their statutory surplus,
future earnings and regulatory restrictions. Dividend payments to the Company
from its insurance subsidiaries are limited to $647 million in 1997 without
prior approval of the Connecticut Insurance Department.
The Company's principal insurance subsidiaries are domiciled in the State
of Connecticut. The insurance holding company law of Connecticut requires notice
to, and approval by, the state insurance commissioner for the declaration or
payment of any dividend, which together with other distributions made within the
preceding twelve months, exceeds the greater of (i) 10% of the insurer's surplus
or (ii) the insurer's net income for the twelve-month period ending the
preceding December 31st, in each case determined in accordance with statutory
accounting practices. Such declaration or payment is further limited by adjusted
unassigned funds (surplus), as determined in accordance with statutory
accounting practices.
35
<PAGE> 37
The insurance holding company laws of other states in which the Company's
insurance subsidiaries are domiciled generally contain similar (although in
certain instances somewhat more restrictive) limitations on the payment of
dividends.
Virtually all states require insurers licensed to do business in their
state to bear a portion of the loss suffered by certain insureds as a result of
the insolvency of other insurers. Depending upon state law, insurers can be
assessed an amount that is generally equal to between 1% and 2% of premiums
written for the relevant lines of insurance in that state each year to pay the
claims of an insolvent insurer. Most of these payments are recoverable through
premium rates, premium tax credits or policy surcharges. Significant increases
in assessments could limit the ability of the Company's insurance subsidiaries
to recover such assessments through tax credits. In addition, there have been
some legislative efforts to limit or repeal the tax offset provisions, which
efforts, to date, have been generally unsuccessful. These assessments may
increase or decrease in the future depending upon the rate of insolvencies of
insurance companies.
The Company also participates in FHCF, which is a state-mandated
catastrophe reinsurance fund that provides reimbursement to insurers for a
portion of their future catastrophic hurricane losses. FHCF is primarily funded
by premiums from the insurance companies that write residential property
business in Florida and, if insufficient, assessments on insurance companies
that write other property and casualty insurance in Florida, excluding workers'
compensation. FHCF's resources are limited to these contributions and to its
borrowing capacity at the time of a significant catastrophe in Florida.
The Company's insurance subsidiaries are also required to participate in
various involuntary assigned risk pools, principally involving workers'
compensation and automobile insurance, which provide various insurance coverages
to individuals or other entities that otherwise are unable to purchase such
coverage in the voluntary market. Participation in these pools in most states is
generally in proportion to voluntary writings of related lines of business in
that state. The underwriting results of these pools traditionally have been
unprofitable, although the effect of their performance has been partially
mitigated in certain lines of insurance by the states' allowance of increases in
rates for business voluntarily written by pool participants in such states.
Combined earned premiums related to such pools and assigned risks for the
Company were $379 million, $315 million and $509 million in 1996, 1995 and 1994,
respectively. The related combined underwriting losses for the Company were $39
million, $152 million and $300 million in 1996, 1995 and 1994, respectively.
Proposed legislation and regulatory changes have been introduced in the
states from time to time that would modify certain laws and regulations
affecting the financial services industry, including the provisions governing
relationships among insurance companies and agents, investment banks and
commercial banks. The potential impact of such legislation on the Company's
businesses cannot be predicted at this time.
36
<PAGE> 38
INSURANCE REGULATIONS CONCERNING CHANGE OF CONTROL
Many state insurance regulatory laws intended primarily for the protection
of policyholders contain provisions that require advance approval by state
agencies of any change in control of an insurance company that is domiciled (or,
in some cases, having such substantial business that it is deemed to be
commercially domiciled) in that state. The Company owns, directly or indirectly,
all of the shares of stock of certain property and casualty insurance companies
domiciled in the States of Connecticut, Florida, Georgia, Illinois, Indiana,
Massachusetts, Missouri, New Jersey and Texas. "Control" is generally presumed
to exist through the ownership of 10% or more of the voting securities of a
domestic insurance company or of any company that controls a domestic insurance
company. Any purchaser of shares of Common Stock representing 10% or more of the
voting power of the Company will be presumed to have acquired control of the
Company's domestic insurance subsidiaries unless, following application by such
purchaser in each insurance subsidiary's state of domicile, the relevant
Insurance Commissioner determines otherwise. In addition, many state insurance
regulatory laws contain provisions that require prenotification to state
agencies of a change in control of a nondomestic admitted insurance company in
that state. While such prenotification statutes do not authorize the state
agency to disapprove the change of control, such statutes do authorize issuance
of a cease and desist order with respect to the nondomestic admitted insurer if
certain conditions exist such as undue market concentration. Any future
transactions that would constitute a change in control of the Company would
generally require prior approval by the insurance departments of the states in
which the Company's insurance subsidiaries are domiciled or commercially
domiciled and may require preacquisition notification in those states that have
adopted preacquisition notification provisions and in which such insurance
subsidiaries are admitted to transact business.
Certain insurance subsidiaries of the Company are authorized to conduct
insurance business in the United Kingdom. Authorized insurers in the United
Kingdom are subject to certain change of control restrictions in the Insurance
Companies Act of 1982 which require the approval of The Department of Trade and
Industry if any person is to become a "controller" (which is defined as a person
entitled to exercise control of 15% or more of the voting power) of an
authorized insurance company.
Certain other insurance subsidiaries of the Company are authorized to
conduct insurance business in Canada. Authorized insurers in Canada are subject
to certain change of control restrictions in Section 407 of the Insurance
Companies Act, which requires the approval of the Minister of Finance if any
person acquires a "significant interest" (beneficial ownership, directly or
through one or more entities controlled by such person, of 10% of the
outstanding shares of such Company) in an authorized insurance company.
Such requirements may deter, delay or prevent certain transactions
affecting the control of or the ownership of Common Stock, including
transactions that could be advantageous to the stockholders of the Company.
37
<PAGE> 39
Insurance Regulatory Information System
The NAIC has developed a set of financial relationships or "tests" called
the Insurance Regulatory Information System ("IRIS") that were designed for
early identification of companies that may require special attention by
insurance regulatory authorities. These tests were developed primarily to assist
state insurance departments in executing their statutory mandate to oversee the
financial condition of insurance companies. Insurance companies submit data on
an annual basis to the NAIC, which in turn analyzes the data using ratios
covering twelve categories of financial data with defined "usual ranges" for
each category.
Falling outside the usual range of IRIS ratios is not considered a failing
result; rather, unusual values are viewed as part of the regulatory early
monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall out of the usual range for one or
more ratios because of specific transactions that are in themselves immaterial.
Generally, an insurance company will become subject to regulatory scrutiny if it
falls outside the usual ranges of four or more of the ratios. In normal years,
15% of the companies included in the IRIS system are expected by the NAIC to be
outside the usual range on four or more ratios.
In each of the last three years, certain of the Company's insurance
subsidiaries have been outside of the usual range for certain IRIS ratios. In
all such instances, the regulators have been satisfied upon follow-up that there
is no solvency problem. It is possible that similar events could occur this
year, and management believes that the resolution would be the same. No
regulatory action has been taken by any state insurance department or the NAIC
with respect to IRIS ratios of any of the Company's insurance subsidiaries for
the three years ended December 31, 1996.
For 1996, Travelers Indemnity did not have any IRIS ratios outside the
usual range. However, both the two-year overall operating ratio and the two-year
reserve development to surplus ratios were outside the usual range for Aetna
Casualty and Standard Fire because of actions taken during 1996 and 1995 to
strengthen reserves for environmental and asbestos-related claims. In addition,
the change in writings ratio produced an unusual value for Standard Fire and the
estimated current reserve deficiency to surplus ratio was outside the usual
range for Aetna C&S of America, both as a result of management's decision in
1995 to combine its two intercompany pooling arrangements (one for Personal
Lines and one for Commercial Lines) into one pool. If these two ratios were
recalculated to have all items reflect the new agreement, the ratios would not
produce unusual values. Concurrent with the change in the intercompany pooling
arrangements, capital was reallocated among Aetna P&C insurers, which resulted
in an unusual value in the change in surplus ratio for Standard Fire.
38
<PAGE> 40
The following table sets forth information regarding the premium to
surplus ratios of the Company. For informational purposes only, the table
includes Aetna P&C for all periods presented.
SCHEDULE OF PREMIUM TO SURPLUS RATIOS (STATUTORY BASIS)(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Net written premiums $7,343 $7,701 $7,981
Capital and surplus 5,423 5,231 4,659
Ratio of net written premiums
to capital and surplus 1.35x 1.47x 1.71x
</TABLE>
- ------
(1) Including accident and health business.
RISK-BASED CAPITAL (RBC) REQUIREMENTS
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement RBC requirements for most property
and casualty insurance companies, which is designed to assess minimum capital
requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. The RBC requirements are to be used as
early warning tools by the NAIC and states to identify companies that merit
further regulatory action. The RBC formula for property and casualty insurance
companies measures four major areas of risk facing property and casualty
insurers: (i) underwriting, which encompasses the risk of adverse loss
developments and inadequate pricing; (ii) declines in asset values arising from
credit risk; (iii) declines in asset values arising from investment risks; and
(iv) off-balance sheet risk arising from adverse experience from non-controlled
assets, guarantees for affiliates or other contingent liabilities and reserve
and premium growth. Pursuant to the law, insurers having less statutory surplus
than that required by the RBC calculation will be subject to varying degrees of
regulatory action, depending on the level of capital inadequacy.
The RBC law provides for four levels of regulatory action. The extent of
regulatory intervention and action increases as the level of surplus to RBC
falls. The first level, the Company Action Level (as defined by the NAIC),
requires an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The Regulatory Action Level (as
defined by the NAIC) requires an insurer to submit a plan containing corrective
actions and permits the relevant Insurance Commissioner to perform an
examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) allows the relevant Insurance Commissioner to rehabilitate or liquidate an
insurer in addition to the aforementioned actions if surplus falls below 100% of
the RBC amount. The fourth action level is the Mandatory Control Level (as
defined by the NAIC) which requires the relevant Insurance Commissioner to
rehabilitate or liquidate the insurer if surplus falls below 70% of
39
<PAGE> 41
the RBC amount. Based on the foregoing formula, at December 31, 1996, the RBC
ratios of the Company's insurance subsidiaries were in excess of levels that
would require company or regulatory action.
The formulas have not been designed to differentiate among adequately
capitalized companies which operate with higher levels of capital. Therefore, it
is inappropriate and ineffective to use the formulas to rate or to rank such
companies. At December 31, 1996, all of the Company's property-casualty
insurance companies had adjusted capital in excess of amounts requiring
regulatory action at any of the four levels.
FEDERAL REGULATION
Although the federal government does not directly regulate the business of
insurance, other than flood insurance, federal initiatives often have an impact
on the insurance industry. Legislation has been introduced in Congress during
the past several sessions that, if enacted, would result in substantially
greater federal regulation of the insurance business. Current and proposed
federal measures that may affect the property and casualty industry may include
possible changes to CERCLA and the tax laws governing property and casualty
insurance companies, proposed limits to product liability lawsuits and other
tort reform proposals. In addition, proposed legislation has been introduced in
Congress from time to time that would modify certain laws and regulations
affecting the financial services industry, including the provisions regarding
affiliations among insurance companies, investment banks and commercial banks.
It is not possible to predict whether such proposed legislation will be
enacted, what form such legislation might take when enacted, or the potential
effects of such legislation on the Company and its competitors.
CORPORATE AND OTHER OPERATIONS
In addition to its two business segments, the Company's Corporate and
Other segment consists primarily of financing costs associated with the
Acquisition.
OTHER INFORMATION
GENERAL BUSINESS FACTORS
In the judgment of the Company, no material part of the business of the
Company and its subsidiaries is dependent upon a single customer or group of
customers, the loss of any one of which would have a materially adverse effect
on the Company, and no one customer or group of affiliated customers accounts
for as much as 10% of the Company's consolidated revenues.
40
<PAGE> 42
At December 31, 1996, the Company had approximately 20,600 full-time and
670 part-time employees. The Company believes that its employee relations are
satisfactory. None of the Company's employees is subject to collective
bargaining agreements.
SOURCE OF FUNDS
For a discussion of the Company's sources of funds and maturities of the
long-term debt of the Company, see Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources," and Note 7 of Notes to Consolidated Financial Statements.
TAXATION
For a discussion of tax matters affecting the Company and its operations,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Note 8 of Notes to Consolidated Financial
Statements.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For financial information regarding industry segments of the Company, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and Note 3 of Notes to Consolidated Financial Statements.
EXECUTIVE OFFICERS OF THE COMPANY
The current executive officers of the Company are indicated below. Ages
are given as of March 5, 1997.
<TABLE>
<CAPTION>
Officer
Name Age Positions Since
- ---- --- --------- -------
<S> <C> <C> <C>
Robert I. Lipp 58 Chairman of the Board, President and 1996
Chief Executive Officer
Jay S. Fishman 44 Vice Chairman and Chief Administrative 1996
Officer; President and Chief Operating
Officer - Commercial Lines
Stanton F. Long 55 Vice Chairman 1997
Jon C. Madonna 53 Vice Chairman 1997
Charles J. Clarke 61 Chairman and Chief Executive Officer - 1996
Commercial Lines
Joseph P. Kiernan 56 Chairman and Chief Executive Officer - 1996
Bond
Robert P. Restrepo, 46 Chairman and Chief Executive Officer - 1996
Jr. Personal Lines
</TABLE>
41
<PAGE> 43
<TABLE>
<CAPTION>
Officer
Name Age Positions Since
- ---- --- --------- -------
<S> <C> <C> <C>
Ronald E. Foley 51 Chairman and Chief Executive Officer - 1996
Risk Management
William P. Hannon 48 Chief Financial Officer 1996
Glenn D. Lammey 35 Senior Vice President 1996
James M. Michener 44 Senior Vice President, General 1996
Counsel and Secretary
Thomas P. Shugrue 39 Vice President and Chief Accounting 1996
Officer
</TABLE>
Mr. Lipp has been Chairman of the Board, President and Chief Executive
Officer of the Company since January 1996. Mr. Lipp has been a director of
Travelers Group since 1991 and is a Vice Chairman of Travelers Group. Mr. Lipp
has been Chairman of the Board and Chief Executive Officer of The Travelers
Insurance Group Inc. since December 1993. From 1991 to 1993, he was Chairman and
Chief Executive Officer of Travelers Group's Consumer Finance Services group.
From April 1986 through September 1991, he was an Executive Vice President of
Travelers Group and its corporate predecessor. Prior to joining Travelers Group
in 1986, he was a President and a director of Chemical New York Corporation and
Chemical Bank where he held senior executive positions for more than five years
prior thereto. Mr. Lipp is a director of The New York City Ballet, Wadsworth
Atheneum and the Massachusetts Museum of Contemporary Art and Chairman of
Dance-On Inc., a private foundation.
Mr. Fishman has been President and Chief Operating Officer of Commercial
Lines since October 1996. In addition, he has been Vice Chairman and Chief
Administrative Officer of the Company since January 1996. Mr. Fishman has served
as Senior Vice President of Travelers Group since October 1991. He has also
served as Vice Chairman of TIGI since September 1995 and as Chief Financial
Officer of that company since December 1993. Mr. Fishman was Treasurer of
Travelers Group from 1991 to December 1993. Prior thereto, he held various other
positions with Travelers Group and its subsidiaries since 1989, when he joined
that company from Shearson Lehman Brothers Inc., where he was Senior Vice
President of Merchant Banking.
Mr. Long was elected Vice Chairman of the Company in January 1997. Prior
to joining the Company, Mr. Long was Vice President of American International
Group since 1992. From 1988 to 1992, he was President and Chief Executive
Officer of SAIF Corporation. Prior to his association with SAIF Corporation in
1988, Mr. Long was an attorney in private practice for 20 years.
42
<PAGE> 44
Mr. Madonna joined the Company in February 1997 as Vice Chairman and also
serves as Vice Chairman of Travelers Group. Prior to joining the Company, Mr.
Madonna was Chairman of KPMG International since October 1995. From 1990 to
1996, he was Chairman and Chief Executive Officer of KPMG Peat Marwick LLP.
Mr. Clarke has been Chairman and Chief Executive Officer--Commercial Lines
of the Company since January 1996. From 1990 to January 1996, Mr. Clarke was
Chairman of Commercial Lines of Travelers P&C. Prior thereto, Mr. Clarke was
Senior Vice President of the National Accounts and the Reinsurance business
units of Travelers P&C. Mr. Clarke has served in several positions at Travelers
P&C since 1958.
Mr. Kiernan has been Chairman and Chief Executive Officer--Bond of the
Company since March 1996. From 1989 to March 1996, Mr. Kiernan was Vice
President of Aetna's bond business and has worked in the bond business lines at
Aetna since 1963. From June 1995 to March 1996, Mr. Kiernan was Vice President
of Standard Commercial Accounts of Aetna.
Mr. Restrepo has been Chairman and Chief Executive Officer--Personal Lines
of the Company since March 1996. Mr. Restrepo was Senior Vice President of the
Personal Auto and Homeowners business units of Aetna from 1995 to 1996 and was
head of the Homeowners business unit of Aetna from 1993 to 1996. Prior thereto,
Mr. Restrepo served in a variety of property/casualty business areas of Aetna.
Mr. Foley has been Chairman and Chief Executive Officer--Risk Management
of the Company since January 1996. Mr. Foley served as Chairman of Personal
Lines of Travelers P&C from 1994 until his present appointment and from 1987 to
1991 and served as Chief Financial Officer of The Travelers Corporation from
1991 through 1993.
Mr. Hannon has been Chief Financial Officer of the Company since January
1996. Prior to joining the Company, Mr. Hannon served as Deputy Managing Partner
of the Financial Services practice of KPMG Peat Marwick LLP, which he joined in
1969, and also served as a member of the firm's Securities and Exchange
Commission reviewing partner's committee.
Mr. Lammey has been Senior Vice President of the Company since October
1996. Mr. Lammey served as Vice President of Travelers P&C from 1992 until his
present appointment and has served in several positions at Travelers P&C since
1988.
Mr. Michener has been Senior Vice President, General Counsel and Corporate
Secretary of the Company since July 1996. Prior to joining the Company, Mr.
Michener was General Counsel of The MetraHealth Companies, Inc. from January
1995 to October 1995 and Deputy General Counsel of United HealthCare Corporation
from October 1995 to May 1996. From August 1977 to December 1994, Mr. Michener
served in several positions at TIGI.
43
<PAGE> 45
Mr. Shugrue has been Vice President and Controller of the Company since
October 1996 and Chief Accounting Officer of the Company since November 1996.
Mr. Shugrue has served in several positions at TIGI since 1983.
GLOSSARY OF INSURANCE TERMS
<TABLE>
<S> <C>
Accident year................. The annual accounting period in which loss
events occurred, regardless of when the losses
are actually reported, booked or paid.
Adjusted unassigned surplus... Unassigned surplus as of the most recent
statutory annual report reduced by twenty-five
percent of that year's unrealized appreciation
in value or revaluation of assets or unrealized
profits on investments, as defined in such
report.
Admitted insurer.............. A company licensed to transact insurance
business within a state.
Alternative market............ The segment of the insurance market which has
developed in response to volatility in cost and
availability of traditional commercial
insurance coverage and consists of various risk
financing mechanisms, including self insurance,
captive insurance companies, risk retention
groups and residual market business.
Annuity....................... A contract that pays a periodic income benefit
for the life of a person (the annuitant), the
lives of two or more persons or for a specified
period of time.
Assigned risk pools........... Reinsurance pools which cover risks for those
unable to purchase insurance in the voluntary
market because the risk is too great or rate
inadequacy has reduced the supply of insurance.
The costs of the risks associated with these
pools are charged back to insurance carriers in
proportion to their direct writings.
Assumed reinsurance........... Insurance liabilities acquired from a ceding
company.
Assumption reinsurance........ A transaction whereby the ceding company
transfers its entire obligation under the
policy to the reinsurer, who becomes directly
liable to the policyholder in all respects,
including collecting premiums and paying
benefits. See "Reinsurance."
Attachment point.............. The amount of losses above which excess of loss
reinsurance becomes operative.
</TABLE>
44
<PAGE> 46
<TABLE>
<S> <C>
Broker................... One who negotiates contracts of insurance or reinsurance on behalf of an insured
party, receiving a commission from the insurer or reinsurer for placement and
other services rendered.
Capacity................. The percentage of surplus, or the dollar amount of exposure, that an insurer or
reinsurer is willing to place at risk. Capacity may apply to a single risk, a
program, a line of business or an entire book of business. Capacity may be
constrained by legal restrictions, corporate restrictions or indirect
restrictions.
Captive company.......... An insurance company formed to insure the risks of its parent entity or entities.
Case reserves............ Loss reserves, established with respect to specific, individual reported claims.
Casualty insurance....... Insurance which is primarily concerned with the losses caused by injuries to
third persons (i.e., not the insured) and the legal liability imposed on the
insured resulting therefrom. It includes, but is not limited to, employers'
liability, workers' compensation, public liability, automobile liability,
personal liability and aviation liability insurance. It excludes certain types
of losses that by law or custom are considered as being exclusively within the
scope of other types of insurance, such as fire or marine.
Catastrophe.............. A severe loss, usually involving risks such as fire, earthquake, windstorm,
explosion and other similar events.
Catastrophe loss......... Loss and directly identified loss adjustment expenses from catastrophes.
Catastrophe reinsurance.. A form of excess of loss property reinsurance which,
subject to a specified limit, indemnifies the ceding
company for the amount of loss in excess of a
specified retention with respect to an accumulation
of losses resulting from a catastrophic event. The
actual reinsurance document is called a "catastrophe
cover."
Cede; ceding company..... When an insurer reinsures its liability with another insurer (a "cession"), it
"cedes" business and is referred to as the "ceding company."
</TABLE>
45
<PAGE> 47
<TABLE>
<S> <C>
Ceded reinsurance........ Risks transferred to another company as reinsurance. See "Reinsurance."
Claim.................... Request by an insured for indemnification by an insurance company for loss
incurred from an insured peril.
Claim adjustment expense. See "Loss adjustment expense."
Claims and claim
adjustment expense.. See "Loss and loss adjustment expenses."
Claims and claim
adjustment
expense reserves.... See "Loss reserves."
Clash cover.............. An excess of loss agreement with a retention higher than the limits on any one
reinsured policy. The agreement is thus only exposed to loss when two or more
policies (perhaps from different lines of business) are involved in a common
occurrence in an amount greater than the clash cover retention. Also known as
contingency cover.
Combined ratio........... The sum of the loss and LAE ratio, the underwriting expense ratio and, where
applicable, the ratio of dividends to policyholders to net premiums earned. A
combined ratio under 100% generally indicates an underwriting profit. A combined
ratio over 100% generally indicates an underwriting loss.
Commercial lines......... The various kinds of insurance which are written for businesses.
Commutation agreement.... An agreement between a reinsurer and a
ceding company whereby the reinsurer pays an agreed
upon amount in exchange for a complete discharge of
all obligations, including future obligations,
between the parties for reinsurance losses incurred.
Deductible............... The amount of loss that an insured retains.
Deferred acquisition
costs .............. Commissions and premium taxes, which vary with and are primarily related to the
production of new business, are deferred and
amortized to achieve a matching of revenues and
expenses when reported in financial statements
prepared in accordance with GAAP.
</TABLE>
46
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<TABLE>
<S> <C>
Direct written premiums.. The amounts charged by a primary
insurer to insureds in exchange for coverages
provided in accordance with the terms of an insurance
contract.
Earned premiums or
premiums earned..... That portion of property-liability premiums written that applies to the expired
portion of the policy term. Earned premiums are recognized as revenues under
both SAP and GAAP.
Excess liability......... Additional casualty coverage above the first layer.
Excess of loss
reinsurance ........ Reinsurance that indemnifies the
reinsured against all or a specified portion of
losses under reinsured policies in excess of a
specified dollar amount or "retention."
Expense ratio............ See "Underwriting expense ratio."
Extra contractual
obligations losses... Losses incurred by an insurer, beyond those that would have been incurred as
specified in the insurance agreement with an insured, due to monetary awards
required by a court of law against the insurer for its negligence to or bad
faith in dealing with its insured.
Facultative reinsurance.. The reinsurance of all or a portion of
the insurance provided by a single policy. Each
policy reinsured is separately negotiated.
Fidelity and surety
programs ............ Insurance which guarantees performance of an obligation or indemnifies for loss
due to embezzlement or wrongful abstraction of money,
securities or other property.
Guaranteed cost products. An insurance policy where the premiums
charged will not be adjusted for actual loss
experience during the covered period.
Guaranty fund............ State-regulated mechanism which is financed by assessing insurers doing business
in those states. Should insolvencies occur, these funds are available to meet
some or all of the insolvent insurer's obligations to policyholders.
Incurred but not reported
("IBNR") reserves... Reserves for estimated losses and LAE which have been incurred but not yet
reported to the insurer.
</TABLE>
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<TABLE>
<S> <C>
Indemnity reinsurance.... A transaction whereby the reinsurer
agrees to indemnify the ceding company against all or
part of the loss that the latter may sustain under
the policies it issued that are being reinsured. The
ceding company remains primarily liable as the direct
insurer on all risks ceded. See "reinsurance."
Inland marine............ A broad type of insurance generally covering articles that may be transported
from one place to another, as well as bridges, tunnels and other
instrumentalities of transportation. It includes goods in transit (generally
other than transoceanic) and may include policies for movable objects such as
personal effects, personal property, jewelry, furs, fine art and others.
IRIS ratios.............. Financial ratios calculated by the NAIC to assist state insurance departments in
monitoring the financial condition of insurance companies.
Large deductible policy.. An insurance policy where the
customer assumes at least $25,000 or more of each
loss.
Loss..................... An occurrence that is the basis for submission and/or payment of a claim.
Losses may be covered, limited or excluded from coverage, depending on the terms
of the policy.
Loss adjustment expense
("LAE")............. The expenses of settling claims, including legal and other fees and the portion
of general expenses allocated to claim settlement costs.
Loss and LAE ratio....... For SAP it is the ratio of incurred losses and loss adjustment expenses to net
premiums earned. For GAAP it is the ratio of incurred losses and loss
adjustment expenses to net premiums earned plus fee income.
Loss reserves............ Liabilities established by insurers and reinsurers to reflect the estimated cost
of claims incurred that the insurer or reinsurer will ultimately be required to
pay in respect of insurance or reinsurance it has written. Reserves are
established for losses and for LAE, and consist of case reserves and IBNR
reserves.
Losses and loss adjustment
expenses............ The sum of losses incurred and loss adjustment expenses.
</TABLE>
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<TABLE>
<S> <C>
Losses incurred.......... The total losses sustained by an insurance company under a policy or policies, whether
paid or unpaid. Incurred losses includes a provision
for IBNR.
Multi-peril policies..... Refers to policies which cover both property and third party liability exposures.
National Association
of Insurance
Commissioners
("NAIC")............ An organization of the insurance commissioners or directors of all 50 states and
the District of Columbia organized to promote consistency of regulatory practice
and statutory accounting standards throughout the United States.
Net written premiums..... Direct written premiums plus assumed reinsurance less premiums ceded to
reinsurers.
Non-admitted coverage.... Insurance coverage written in a given state by an insurer not licensed in that
state.
Novation................. A transaction in which the original direct insurer's obligations are completely
extinguished, resulting in no further exposure to loss arising on the business
novated.
Personal lines........... Types of insurance written for individuals or families, rather than for
businesses.
Pool..................... An organization of insurers or reinsurers through which particular types of
risks are underwritten with premiums, losses and expenses being shared in agreed
percentages.
Premium equivalents...... Premium equivalents represent estimates of premiums that customers would have
been charged under a fully insured arrangement, based on expected losses
associated with non-risk-bearing components of each account, as determined in
the pricing process. Premium equivalents are indicative of the volume of
business handled by an insurer in servicing relationships. Premium equivalents
do not represent actual premium revenues.
Premiums................. The amount charged during the year on policies and contracts issued, renewed or
reinsured by an insurance company.
Producer................. Contractual entity which directs insureds to the insurer for coverage. See
"Broker."
</TABLE>
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<TABLE>
<S> <C>
Property insurance....... Insurance that provides coverage to
a person with an insurable interest in tangible
property for that person's property loss, damage or
loss of use.
Quota share reinsurance.. Reinsurance wherein the insurer
cedes an agreed fixed percentage of liabilities,
premiums and losses for each policy covered on a pro
rata basis.
Rate of renewal/retention
ratio............... Current period renewal accounts or policies as a percentage of expired accounts
or policies.
Rates.................... Amounts charged per unit of insurance.
Reinsurance.............. The practice whereby one insurer, called the reinsurer, in consideration of a
premium paid to such insurer, agrees to indemnify another insurer, called the
ceding company, for part or all of the liability assumed by the ceding company
under one or more policies or contracts of insurance which it has issued.
Reinsurance agreement.... A contract specifying the terms of a reinsurance transaction.
Residual market
(involuntary
business)........... Insurance market which provides coverage for risks unable to purchase insurance
in the voluntary market either because the risk is too great or rate inadequacy
has reduced the supply of insurance. Residual markets are frequently created by
state legislation either because of lack of available coverage such as property
coverage in a windstorm prone area or protection of the accident victim as in
the case of workers' compensation. The costs of the residual market are usually
charged back to the direct insurance carriers in proportion to the carriers'
voluntary market shares for the type of coverage involved.
Retention................ The amount of exposure an insurance company retains on any one risk or group of
risks.
Retrospective premiums... Premiums related to retrospectively rated policies.
Retrospective rating..... A plan or method which permits adjustment of the final premium or commission on
the basis of actual loss experience, subject to certain minimum and maximum
limits.
</TABLE>
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<TABLE>
<S> <C>
Risk-based capital
("RBC") ............. A measure adopted by the NAIC for
assessing the minimum statutory capital and surplus
requirements of insurers.
Risk retention........... The amount or portion of a risk an insurer retains for its own account after
ceded reinsurance. Losses above the stated retention level are collectible from
the reinsurer. The retention level may be stated as a percentage or dollar
amount.
Salvage.................. The amount of money an insurer recovers through the sale of property transferred
to the insurer as a result of a loss payment.
Second injury fund....... The employer of an injured, impaired worker is responsible only for the workers'
compensation benefit for the most recent injury; the second injury fund would
cover the cost of any additional benefits for aggravation of a prior condition.
The cost is shared by the insurance industry, funded through assessments to
insurance companies based on either premiums or losses.
Self-insured retentions.. That portion of the risk retained by a person for its own account.
Servicing carrier........ An insurance company that provides,
for a fee, various services including policy
issuance, claims adjusting and customer service for
insureds in a reinsurance pool.
Standard policy forms.... Self-contained pre-printed policy language used when a large number of insureds
face similar loss exposures.
Statutory accounting
practices ("SAP")... The rules and procedures prescribed or permitted by United States state
insurance regulatory authorities for recording transactions and preparing
financial statements. Statutory accounting practices generally reflect a
modified going concern basis of accounting.
Statutory surplus........ As determined under SAP, the amount remaining after all liabilities, including
loss reserves, are subtracted from all admitted assets. Admitted assets are
assets of an insurer prescribed or permitted by a state to be recognized on the
statutory balance sheet. Statutory surplus is also referred to as "surplus" or
"surplus as regards policyholders" for statutory accounting purposes.
</TABLE>
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<TABLE>
<S> <C>
Structured settlements... Periodic payments to an injured person
or survivor for a determined number of years or for
life, typically in settlement of a claim under a
liability policy, usually funded through the purchase
of an annuity.
Subrogation.............. A principle of law incorporated in insurance policies, which enables an
insurance company, after paying a loss to its insured, to recover the amount of
the loss from another who is legally liable for it.
Third party liability.... A liability owed to a claimant (or "third party") who is not one of the two
parties to the insurance contract. Insured liability claims are referred to as
third party claims.
Treaty reinsurance....... The reinsurance of a specified type or category of risks defined in a
reinsurance agreement (a "treaty") between a primary insurer or other reinsured
and a reinsurer. Typically, in treaty reinsurance, the primary insurer or
reinsured is obligated to offer and the reinsurer is obligated to accept a
specified portion of all such type or category of risks originally written by
the primary insurer or reinsured.
Umbrella coverage........ A form of insurance protection against losses in excess of amounts covered by other
liability insurance policies or amounts not covered
by the usual liability policies.
Unassigned funds
(surplus) ........... The undistributed and unappropriated amount of statutory surplus.
Underwriter.............. An employee of an insurance company who examines, accepts or rejects risks and
classifies accepted risks in order to charge an appropriate premium for each
accepted risk. The underwriter is expected to select business that will produce
an average risk of loss no greater than that anticipated for the class of
business.
Underwriting............. The insurer's or reinsurer's process of reviewing applications for insurance
coverage, and the decision whether to accept all or part of the coverage and
determination of the applicable premiums; also refers to the acceptance of such
coverage.
Underwriting expense
ratio ............. For SAP it is the ratio of underwriting
expenses incurred to net premiums written. For GAAP
it is the ratio of underwriting expenses incurred to
net premiums written plus fee income.
</TABLE>
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<TABLE>
<S> <C>
Underwriting profit or
underwriting loss... The pre-tax profit or loss experienced by a
property and casualty insurance company after
deducting loss and loss adjustment expenses and
operating expenses from net earned premiums. This
profit or loss calculation includes reinsurance
assumed and ceded but excludes investment income.
Unearned premium......... The portion of premiums written that is allocable to the unexpired portion of
the policy term.
Voluntary market......... The market in which a person seeking
insurance obtains coverage without the assistance of
residual market mechanisms.
Wholesale broker......... An independent or exclusive agent that represents both admitted and non admitted
insurers in market areas which include standard, non-standard, specialty and
excess and surplus lines of insurance. The wholesaler does not deal directly
with the insurance consumer. The wholesaler deals with the retail agent or
broker.
Workers' compensation.... A system (established under state and federal laws) under which employers provide
insurance for benefit payments to their employees for
work-related injuries, deaths and diseases,
regardless of fault.
</TABLE>
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to Consolidated Financial Statements
and Schedules on page F-1 hereof. Also filed as a part of this report
are the combined financial statements of Aetna P&C as of December 31,
1995 and 1994 and for the years ended December 31, 1995, December 31,
1994 and December 31, 1993, together with the notes thereto and the
related report of Independent Accountants. See Exhibit 99.01.
(2) Financial Statement Schedules. See Index to Consolidated Financial
Statements and Schedules on page F-1 hereof.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
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.
On November 14, 1996, the Company filed a Current Report on Form 8-K
dated November 12, 1996, filing certain exhibits under Item 7 thereof
relating to the offer and sale of the Company's 6 3/4% Notes due
November 15, 2006.
No other reports on Form 8-K were filed during the fourth quarter of
1996; however, on January 21, 1997, the Company filed a Current Report
on Form 8-K dated January 21, 1997, reporting under Item 5 thereof
certain additional financial information for the three months and the
year ended December 31, 1996, and on February 10, 1997, the Company
filed a Current Report on Form 8-K dated February 10, 1997, reporting
under Item 5 thereof certain additional financial information as of
December 31, 1996.
54
<PAGE> 56
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
3.01 Restated Certificate of Incorporation of Travelers Property
Casualty Corp. (formerly Travelers/Aetna Property Casualty
Corp.) (the "Company"), Certificate of Designations, Powers,
Preferences and Rights of 7.5% Redeemable Preferred Stock,
Series Z, of the Company, and Certificate of Amendment to the
Restated Certificate of Incorporation.
3.02 Restated By-Laws of the Company, effective March 29, 1996,
incorporated by reference to Exhibit 3.2 to the Company's Form
S-1.
4.01 Intercompany Agreement, dated as of April 2, 1996, between
Travelers Group Inc. and the Company, incorporated by
reference to Exhibit 4.1 to the Company's Form S-1.
4.02 Shareholders Agreement, dated as of April 2, 1996, by and
among the Company, Aetna Life and Casualty Company, J.P.
Morgan Capital Corporation, The Trident Partnership L.P. and
Fund American Enterprises Holdings, Inc., incorporated by
reference to Exhibit 4.2 to the Company's Form S-1.
10.01.1 Stock Purchase Agreement, dated as of November 28, 1995,
between The Travelers Insurance Group Inc. and Aetna Life and
Casualty Company, incorporated by reference to Exhibit 10.1 to
the Annual Report on Form 10-K of Aetna Life and Casualty
Company for the fiscal year ended December 31, 1995 (File No.
1-5704).
10.01.2 Assignment of Stock Purchase Agreement, dated as of March 22,
1996, between the Company and The Travelers Insurance Group
Inc., incorporated by reference to Exhibit 2.2 to the
Company's Form S-1.
10.01.3 Amendment to Stock Purchase Agreement, dated as of April 2,
1996, between the Company and Aetna Life and
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
Casualty Company, incorporated by reference to Exhibit 2.3 to
the Company's Form S-1.
10.02* Travelers Property Casualty Corp. Capital Accumulation Plan
(as amended through September 1, 1996), incorporated by
reference to Exhibit 10.01 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 1996
(File No. 1-14328) (the "Company's 9/30/96 10-Q").
10.03* Travelers Property Casualty Corp. 1996 Executive Option Plan
(as amended through March 7, 1997).
10.04* Travelers Property Casualty Corp. Executive
Performance Compensation Plan (as amended through
March 7, 1997).
10.05* Travelers Property Casualty Corp. 1996 Deferred Compensation
Plan for Non-Employee Directors (as amended through September
25, 1996), incorporated by reference to Exhibit 10.02 to the
Company's 9/30/96 10-Q.
10.06* 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").
10.07.1* Travelers Group Stock Option Plan (as amended
and restated as of April 24, 1996),
incorporated by reference to Exhibit 10.02.1 to
the Annual Report on Form 10-K of Travelers
Group Inc. for the fiscal year ended December
31, 1996 (File No. 1-9924).
10.07.2* 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.
10.08* Travelers Group 1996 Stock Incentive Plan (as
amended
</TABLE>
56
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
through November 22, 1996), incorporated by reference to
Exhibit 10.03 to the Annual Report on Form 10-K of Travelers
Group Inc. for the fiscal year ended December 31, 1996 (File
No. 1-9924).
10.09* Retirement Benefit Equalization Plan of Travelers Group Inc.
(as amended and restated as of January 1, 1994) incorporated
by reference to Exhibit 10.04 to the Annual Report on
Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1996 (File No. 1-9924).
10.10 License Agreement, dated November 28, 1995, by and between
Aetna Life and Casualty Company and The Aetna Casualty and
Surety Company and The Standard Fire Insurance Company,
incorporated by reference to Exhibit 10.7 to the Company's
Form S-1.
10.11* The Travelers Corporation Supplemental Benefit Plan, effective
December 20, 1992, incorporated by reference to Exhibit 10(d)
to the Annual Report on Form 10-K of The Travelers Corporation
("old Travelers") for the fiscal year ended December 31, 1992
(File No. 1-5799).
10.12 TAPC Tax Allocation Agreement, effective as of
January 1, 1996 between Travelers Group Inc.
and the Company, incorporated by reference to
Exhibit 10.9 to the Company's Form S-1.
10.13 Lease for office space at City Place, dated March 28, 1996, by
and between Aetna Life and Casualty Company and The Travelers
Indemnity Company, incorporated by reference to Exhibit 10.10
to the Company's Form S-1.
10.14 Lease for office space in Hartford,
Connecticut, dated as of April 2, 1996, by and
between The Travelers Insurance Company and The
Travelers Indemnity Company.
10.15* Letter Agreement, dated November 17, 1996,
between the Company and Stanton F. Long.
10.16* Letter Agreement, dated April 12, 1996, between the Company
and James M. Michener, incorporated by reference to Exhibit
10.01 to the Company's Quarterly
</TABLE>
57
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
Report on Form 10-Q for the
fiscal quarter ended June 30, 1996 (File No. 1-14328).
10.17* Letter Agreement, dated as of December 12, 1995, between
Travelers Insurance Companies and William Hannon, incorporated
by reference to Exhibit 10.12 to the Company's Form S-1.
10.18* Employment Agreement, dated as of October 27, 1995, between
Aetna Life and Casualty Company and Robert P. Restrepo, as
assumed by the Company, incorporated by reference to Exhibit
10.13 to the Company's Form S-1.
10.19* Employment Agreement, dated as of October 27, 1995, between
Aetna Life and Casualty Company and Joseph P. Kiernan, as
assumed by the Company, incorporated by reference to Exhibit
10.14 to the Company's Form S-1.
10.20* Employment Agreement, dated as of December 31,
1993, between The Travelers Insurance Group,
Inc. and Ronald E. Foley, incorporated by
reference to Exhibit 10.15 to the Company's
Form S-1.
10.21* The Travelers Corporation TESIP Restoration and Non-Qualified
Savings Plan, effective January 1, 1991, incorporated by
reference to Exhibit 10(e) to the Annual Report on Form 10-K
of old Travelers for the fiscal year ended December 31, 1991
(File No. 1-5799).
11.01 Computation of Earnings Per Share.
12.01 Computation of Ratio of Earnings to Fixed
Charges.
13.01*** Pages 17 through 55 of the 1996 Annual Report to
Stockholders of the Company (pagination of exhibit does not
correspond to pagination in the 1996 Annual Report to
Stockholders). Electronic
21.01 Subsidiaries of the Registrant.
23.01*** Consent of KPMG Peat Marwick LLP, Independent Certified Electronic
Public Accountants.
23.02*** Consent of KPMG Peat Marwick LLP, Independent Certified Electronic
Public Accountants.
</TABLE>
58
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
23.03** Accountants' consent to incorporation by reference of
report filed with Exhibit 99.05.
24.01 Powers of Attorney.
27.01 Financial Data Schedule.
99.01 Combined Financial Statements of The Aetna
Casualty and Surety Company and The Standard
Fire Insurance Company as of December 31, 1995
and 1994 and for the years ended December 31, 1995,
December 31, 1994 and December 31, 1993, together
with the notes thereto and the related reports of
Independent Accountants.
99.02 The fifth full paragraph on page 90 of the
Company's Prospectus dated April 22, 1996.
99.03 The paragraph that begins on page 90 and ends
on page 91 of the Company's Prospectus dated
April 22, 1996, the first paragraph on page 24
of the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996 and
the first paragraph on page 25 of the Company's
9/30/96 10-Q.
99.04 The second full paragraph on page 91 of the
Company's Prospectus dated April 22, 1996.
99.05** 1996 Financial Statements of Travelers Group 401(k)
Savings Plan, incorporated by reference to Exhibit
99.07 to the Annual Report on Form 10-K/A-1 of
Travelers Group Inc. for the fiscal year ended
December 31, 1996 (File No. 1-9924).
</TABLE>
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the Commission upon request.
The financial statements required by Form 11-K for 1996 for the Travelers Group
401(k) Savings Plan were filed as an exhibit to Form 10-K/A-1 pursuant to Rule
15d-21 of the Securities Exchange Act of 1934, as amended.
Copies of any of the exhibits referred to above will be furnished at a cost of
$.25 per page (although no charge will be made for the 1996 Annual Report on
Form 10-K) to security holders who make written request therefor to Corporate
Communications, Travelers Property Casualty Corp., One Tower Square, Hartford,
Connecticut 06183.
- -------------------
* Denotes a management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
** Filed with Form 10-K/A-1.
*** Filed with Form 10-K/A-2.
Except as otherwise indicated, all other exhibits were filed with the initial
filing of the Form 10-K.
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<PAGE> 61
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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, on the 24th day of
October, 1997.
TRAVELERS PROPERTY CASUALTY CORP.
(Registrant)
By: /s/ Thomas P. Shugrue
--------------------------------------
Thomas P. Shugrue
Chief Accounting Officer
60
<PAGE> 62
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
3.01 Restated Certificate of Incorporation of Travelers Property
Casualty Corp. (formerly Travelers/Aetna Property Casualty
Corp.) (the "Company"), Certificate of Designations, Powers,
Preferences and Rights of 7.5% Redeemable Preferred Stock,
Series Z, of the Company, and Certificate of Amendment to the
Restated Certificate of Incorporation.
3.02 Restated By-Laws of the Company, effective March 29, 1996,
incorporated by reference to Exhibit 3.2 to the Company's Form
S-1.
4.01 Intercompany Agreement, dated as of April 2, 1996, between
Travelers Group Inc. and the Company, incorporated by
reference to Exhibit 4.1 to the Company's Form S-1.
4.02 Shareholders Agreement, dated as of April 2, 1996, by and
among the Company, Aetna Life and Casualty Company, J.P.
Morgan Capital Corporation, The Trident Partnership L.P. and
Fund American Enterprises Holdings, Inc., incorporated by
reference to Exhibit 4.2 to the Company's Form S-1.
10.01.1 Stock Purchase Agreement, dated as of November 28, 1995,
between The Travelers Insurance Group Inc. and Aetna Life and
Casualty Company, incorporated by reference to Exhibit 10.1 to
the Annual Report on Form 10-K of Aetna Life and Casualty
Company for the fiscal year ended December 31, 1995 (File No.
1-5704).
10.01.2 Assignment of Stock Purchase Agreement, dated as of March 22,
1996, between the Company and The Travelers Insurance Group
Inc., incorporated by reference to Exhibit 2.2 to the
Company's Form S-1.
10.01.3 Amendment to Stock Purchase Agreement, dated as of April 2,
1996, between the Company and Aetna Life and
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
Casualty Company, incorporated by reference to Exhibit 2.3 to
the Company's Form S-1.
10.02* Travelers Property Casualty Corp. Capital Accumulation Plan
(as amended through September 1, 1996), incorporated by
reference to Exhibit 10.01 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 1996
(File No. 1-14328) (the "Company's 9/30/96 10-Q").
10.03* Travelers Property Casualty Corp. 1996 Executive Option Plan
(as amended through March 7, 1997).
10.04* Travelers Property Casualty Corp. Executive
Performance Compensation Plan (as amended through
March 7, 1997).
10.05* Travelers Property Casualty Corp. 1996 Deferred Compensation
Plan for Non-Employee Directors (as amended through September
25, 1996), incorporated by reference to Exhibit 10.02 to the
Company's 9/30/96 10-Q.
10.06* 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").
10.07.1* Travelers Group Stock Option Plan (as amended
and restated as of April 24, 1996),
incorporated by reference to Exhibit 10.02.1 to
the Annual Report on Form 10-K of Travelers
Group Inc. for the fiscal year ended December
31, 1996 (File No. 1-9924).
10.07.2* 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.
10.08* Travelers Group 1996 Stock Incentive Plan (as
amended
</TABLE>
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
through November 22, 1996), incorporated by reference to
Exhibit 10.03 to the Annual Report on Form 10-K of Travelers
Group Inc. for the fiscal year ended December 31, 1996 (File
No. 1-9924).
10.09* Retirement Benefit Equalization Plan of Travelers Group Inc.
(as amended and restated as of January 1, 1994) incorporated
by reference to Exhibit 10.04 to the Annual Report on
Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1996 (File No. 1-9924).
10.10 License Agreement, dated November 28, 1995, by and between
Aetna Life and Casualty Company and The Aetna Casualty and
Surety Company and The Standard Fire Insurance Company,
incorporated by reference to Exhibit 10.7 to the Company's
Form S-1.
10.11* The Travelers Corporation Supplemental Benefit Plan, effective
December 20, 1992, incorporated by reference to Exhibit 10(d)
to the Annual Report on Form 10-K of The Travelers Corporation
("old Travelers") for the fiscal year ended December 31, 1992
(File No. 1-5799).
10.12 TAPC Tax Allocation Agreement, effective as of
January 1, 1996 between Travelers Group Inc.
and the Company, incorporated by reference to
Exhibit 10.9 to the Company's Form S-1.
10.13 Lease for office space at City Place, dated March 28, 1996, by
and between Aetna Life and Casualty Company and The Travelers
Indemnity Company, incorporated by reference to Exhibit 10.10
to the Company's Form S-1.
10.14 Lease for office space in Hartford,
Connecticut, dated as of April 2, 1996, by and
between The Travelers Insurance Company and The
Travelers Indemnity Company.
10.15* Letter Agreement, dated November 17, 1996,
between the Company and Stanton F. Long.
10.16* Letter Agreement, dated April 12, 1996, between the Company
and James M. Michener, incorporated by reference to Exhibit
10.01 to the Company's Quarterly
</TABLE>
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
Report on Form 10-Q for the
fiscal quarter ended June 30, 1996 (File No. 1-14328).
10.17* Letter Agreement, dated as of December 12, 1995, between
Travelers Insurance Companies and William Hannon, incorporated
by reference to Exhibit 10.12 to the Company's Form S-1.
10.18* Employment Agreement, dated as of October 27, 1995, between
Aetna Life and Casualty Company and Robert P. Restrepo, as
assumed by the Company, incorporated by reference to Exhibit
10.13 to the Company's Form S-1.
10.19* Employment Agreement, dated as of October 27, 1995, between
Aetna Life and Casualty Company and Joseph P. Kiernan, as
assumed by the Company, incorporated by reference to Exhibit
10.14 to the Company's Form S-1.
10.20* Employment Agreement, dated as of December 31,
1993, between The Travelers Insurance Group,
Inc. and Ronald E. Foley, incorporated by
reference to Exhibit 10.15 to the Company's
Form S-1.
10.21* The Travelers Corporation TESIP Restoration and Non-Qualified
Savings Plan, effective January 1, 1991, incorporated by
reference to Exhibit 10(e) to the Annual Report on Form 10-K
of old Travelers for the fiscal year ended December 31, 1991
(File No. 1-5799).
11.01 Computation of Earnings Per Share.
12.01 Computation of Ratio of Earnings to Fixed
Charges.
13.01*** Pages 17 through 55 of the 1996 Annual Report to
Stockholders of the Company (pagination of exhibit does not
correspond to pagination in the 1996 Annual Report to
Stockholders). Electronic
21.01 Subsidiaries of the Registrant.
23.01*** Consent of KPMG Peat Marwick LLP, Independent Certified Electronic
Public Accountants.
23.02*** Consent of KPMG Peat Marwick LLP, Independent Certified Electronic
Public Accountants.
</TABLE>
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
23.03** Accountants' consent to incorporation by reference of
report filed with Exhibit 99.05.
24.01 Powers of Attorney.
27.01 Financial Data Schedule.
99.01 Combined Financial Statements of The Aetna
Casualty and Surety Company and The Standard
Fire Insurance Company as of December 31, 1995
and 1994 and for the years ended December 31, 1995,
December 31, 1994 and December 31, 1993, together
with the notes thereto and the related reports of
Independent Accountants.
99.02 The fifth full paragraph on page 90 of the
Company's Prospectus dated April 22, 1996.
99.03 The paragraph that begins on page 90 and ends
on page 91 of the Company's Prospectus dated
April 22, 1996, the first paragraph on page 24
of the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996 and
the first paragraph on page 25 of the Company's
9/30/96 10-Q.
99.04 The second full paragraph on page 91 of the
Company's Prospectus dated April 22, 1996.
99.05** 1996 Financial Statements of Travelers Group 401(k)
Savings Plan, incorporated by reference to Exhibit
99.07 to the Annual Report on Form 10-K/A-1 of
Travelers Group Inc. for the fiscal year ended
December 31, 1996 (File No. 1-9924).
</TABLE>
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the Commission upon request.
The financial statements required by Form 11-K for 1996 for the Travelers Group
401(k) Savings Plan were filed as an exhibit to Form 10-K/A-1 pursuant to Rule
15d-21 of the Securities Exchange Act of 1934, as amended.
Copies of any of the exhibits referred to above will be furnished at a cost of
$.25 per page (although no charge will be made for the 1996 Annual Report on
Form 10-K) to security holders who make written request therefor to Corporate
Communications, Travelers Property Casualty Corp., One Tower Square, Hartford,
Connecticut 06183.
- -------------------
* Denotes a management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
** Filed with Form 10-K/A-1.
*** Filed with Form 10-K/A-2.
Except as otherwise indicated, all other exhibits were filed with the initial
filing of the Form 10-K.
<PAGE> 1
EXHIBIT 13.01
TAP's Annual Report to Stockholders of the Company
Pages 17-55
(pagination of exhibit does not
correspond to pagination in the
1996 Annual Report to Stockholders)
<PAGE> 2
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Selected Consolidated Financial Data
- --------------------------------------------------------------------------------------------------------------------
(at and for the year ended December 31,
in millions except per share amounts) (1) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 8,197 $4,569 $ 4,168 $4,715 $ 5,245
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting changes $ 391 $ 419 $ 188 $ 167 $ (186)
Cumulative effect of accounting changes (2) - - - - (71)
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 391 $ 419 $ 188 $ 167 $ (257)
- -----------------------------------------------------------------------------------------------------------------
Total assets $49,779 $24,062 $22,481 $21,416 $20,842
Long-term debt 1,249 - - - -
TAP-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debt securities of TAP 900 - - - -
Stockholders' equity (3) 6,480 3,601 2,581 2,977 2,600
Per common share data:
Income (loss) before cumulative effect of
accounting changes $ 1.05 $ 1.42 $ 0.64 $ 0.57 $ (0.63)
Cumulative effect of accounting changes - - - - (0.24)
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) (4) $ 1.05 $ 1.42 $ 0.64 $ 0.57 $ (0.87)
- --------------------------------------------------------------------------------------------------------------------
Cash dividends $ 0.15 N/A N/A N/A N/A
Book value 16.22 N/A N/A N/A N/A
Book value excluding FAS 115 adjustment 15.50 N/A N/A N/A N/A
Other data:
Average number of common shares and equivalents (4) 367.1 294.5 294.5 294.5 294.5
Year-end common shares outstanding (5) 399.6 N/A N/A N/A N/A
</TABLE>
(1) Includes amounts related to Aetna P&C from April 2, 1996, the date of the
acquisition. GAAP financial data related to balance sheet data as of
December 31, 1993 and subsequent, and income statement data related to
periods ended after December 31, 1993, are presented on a purchase
accounting basis.
(2) Included in net income for 1992 is an after-tax charge of $130 million
resulting from the adoption of Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions" and an after-tax benefit of $59 million resulting from the
adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
(3) Stockholders' equity at December 31, 1996, 1995 and 1994 reflects $285
million, $280 million and ($443) million, respectively, of net unrealized
gains (losses) on investment securities pursuant to the adoption of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" in 1994.
(4) Net income per common share is computed after recognition of preferred
stock dividend requirements and is based on the weighted average number of
common shares and common share equivalents outstanding during the period.
For purposes of the computation of net income per share, the weighted
average number of common shares and common share equivalents 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.
(5) In April 1996, in conjunction with the acquisition of Aetna P&C, the
Company issued common stock through its IPO. See note 2.
1
<PAGE> 3
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Results of Operations reflect the consolidated results of operations of
Travelers Property Casualty Corp. (formerly Travelers/Aetna Property Casualty
Corp.) (TAP) and its subsidiaries (the Company).
CONSOLIDATED OVERVIEW
On April 2, 1996, TAP purchased from Aetna Services Inc. (formerly 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 $4.2 billion in cash. To finance the
$4.2 billion purchase price, including transaction costs, plus capital
contributions totaling $710 million to Aetna P&C, TAP borrowed $2.7 billion from
a syndicate of banks under a five-year revolving credit facility, as amended,
that expires on December 19, 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. The Travelers Insurance Group Inc.
(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 (Travelers Indemnity) and a capital contribution of
approximately $1.1 billion. In addition, Travelers Group Inc. (Travelers Group)
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. The acquisition was accounted for under
the purchase method of accounting and, accordingly, the consolidated financial
statements include the results of Aetna P&C's operations only from the date of
acquisition.
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 $2.5 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.
Prior to the acquisition, the Company was a wholly owned subsidiary of TIGI,
which is an indirect wholly owned subsidiary of Travelers Group.
On December 31, 1994, the Company acquired the remaining 50% of Gulf Insurance
Company (Gulf) which it did not already own from Travelers Group for
approximately $150 million. The effects of this transaction were not
significant.
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.
2
<PAGE> 4
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues (millions) $8,197 $4,569 $4,168
Net income (millions) $ 391 $ 419 $ 188
Preferred dividends (millions) 4 -- --
------ ------ ------
Net income available to common
stockholders (millions) $ 387 $ 419 $ 188
====== ====== ======
Net income per share $ 1.05 $ 1.42 $ 0.64
Weighted average number of common
shares outstanding and common stock
equivalents (millions) 367.1 294.5 294.5
</TABLE>
Net income of $391 million in 1996 decreased $28 million from 1995. The decrease
in 1996 from 1995 was primarily due to $423 million of net charges related to
the acquisition and integration of Aetna P&C. This was mostly offset by the
post-acquisition results of operations of Aetna P&C. These net
acquisition-related charges include, on an after-tax basis, $318 million in
reserve increases, net of reinsurance, related primarily to cumulative injury
claims other than asbestos, insurance products involving financial guarantees,
reserve strengthening, and assumed reinsurance, $55 million in additional
asbestos liabilities pursuant to an existing settlement agreement with a
customer of Aetna P&C, $39 million in charges related to premium collection
issues on loss sensitive programs, specifically large deductible products,
$27 million provision for uncollectibility of reinsurance recoverables of
Aetna P&C determined by applying the Company's normal guidelines for
estimating collectibility of such accounts, and $23 million in lease and
severance costs related to the restructuring plan for the acquisition,
partially offset by $39 million in decreases in Personal Lines automobile
reserves. Net income of $419 million in 1995 increased $231 million over
1994. The increase in 1995 from 1994 was the result of the increases in
realized investment gains and net investment income, as well as improved loss
trends in the workers' compensation line of business and expense reduction
initiatives, partially offset by an after-tax gain of $19 million from
the 1994 sale of Bankers and Shippers Insurance Company (Bankers and Shippers).
Excluding realized investment gains and losses in all years, net
acquisition-related charges of $423 million described above and the 1994 gain on
the sale of Bankers and Shippers, the Company's earnings were $802 million, $373
million and $266 million in 1996, 1995 and 1994, respectively. The increase in
1996 was due to the inclusion of Aetna P&C from April 2, 1996. The increase also
reflects strong net investment income, favorable loss experience in personal
auto lines and the benefits of expense-reduction initiatives associated with the
acquisition, marginally offset by higher catastrophe losses.
Revenues of $8.197 billion in 1996 increased $3.628 billion from 1995. Revenues
of $4.569 billion in 1995 increased $401 million from 1994. The 1996 increase
was primarily attributable to the acquisition of Aetna P&C and includes a $2.713
billion increase in earned premiums and a $946 million increase in net
investment income. The increase in revenues in 1995 compared to 1994 is
primarily attributable to an increase in realized investment gains of $203
million, an increase in net investment income of $137 million and an increase in
earned premiums of $137 million.
Commercial Lines earned premiums increased $1.678 billion to $3.695 billion for
1996 primarily reflecting the acquisition of Aetna P&C. The increase in
Commercial Lines earned premiums is net of continued decreases resulting from
the Company's selective underwriting and the highly competitive marketplace.
Personal Lines earned premiums of $2.323 billion for 1996 increased $1.039
billion from $1.284 billion in 1995, primarily reflecting the acquisition of
Aetna P&C. In addition, the increase in Personal Lines earned premiums is due to
growth in targeted automobile and homeowners markets, partially offset by
reductions in catastrophe-prone areas.
3
<PAGE> 5
Net investment income was $1.656 billion in 1996, an increase of $946 million
from 1995, primarily due to the acquisition of Aetna P&C, increased funds
available for investment and a higher return on investments. Net investment
income was $710 million in 1995, an increase of $137 million from 1994. The
increase in 1995 compared to 1994 is primarily due to increased funds available
for investment and a higher return on investments.
National Accounts within Commercial Lines is the primary source of fee income
due to its service business. Fee income of $455 million in 1996 was virtually
the same as in 1995. Fee income was $456 million in 1995, a $40 million decrease
from 1994. Fee income in both 1996 and 1995 was negatively impacted by the
depopulation of involuntary pools as the loss experience of workers'
compensation improved and insureds moved to voluntary markets, the Company's
selective renewal activity to address the competitive pricing environment and
its continued success in lowering workers' compensation losses of customers. The
negative impact of the above factors on 1996 was mostly offset by the
acquisition of Aetna P&C.
Claims and expenses of $7.710 billion in 1996 increased $3.692 billion from
1995. The increase was primarily attributable to the claims and expenses related
to the Aetna P&C business and financing costs associated with the acquisition of
Aetna P&C, partially offset by expense reductions. Claims and expenses of $4.018
billion in 1995 increased $60 million from 1994. In 1995, the decrease in claims
and expenses due to expense reduction initiatives and improved loss trends in
the workers' compensation line of business was more than offset by the
consolidation of Gulf.
The Company's effective tax rate was 20%, 24% and 10% for 1996, 1995 and 1994,
respectively. These rates differed from the statutory tax rate in those years
primarily due to municipal bond interest not taxed for federal income tax
purposes. The 1996 effective rate was lower than 1995 due to an increased level
of tax-exempt income and lower pre-tax income, partially offset by higher
goodwill amortization resulting from the acquisition of Aetna P&C. The 1995
effective rate was higher than 1994 due to approximately the same level of
tax-exempt income and higher pre-tax income.
The overall statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory:
Loss and Loss Adjustment Expense (LAE) ratio .. 85.5% 78.2% 90.2%
Underwriting expense ratio .................... 31.3 26.4 26.2
Combined ratio before policyholder dividends .. 116.8 104.6 116.4
Combined ratio ................................ 117.2 105.4 115.3
GAAP:
Loss and LAE ratio ............................ 81.0 74.6 78.6
Underwriting expense ratio .................... 33.6 29.0 27.7
Combined ratio before policyholder dividends .. 114.6 103.6 106.3
Combined ratio ................................ 115.2 104.3 105.3
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
differences in reporting of revenues and expenses related to service business,
including servicing fees from carriers, large deductible policies and service
contracts. In addition, certain 1996 purchase accounting adjustments recorded in
connection with the Aetna P&C acquisition resulted in a charge to statutory
expenses, but not GAAP expenses.
4
<PAGE> 6
The increase in the 1996 overall statutory and GAAP combined ratios compared to
1995 was primarily attributable to charges taken in 1996 related to the
acquisition and integration of Aetna P&C. Excluding these charges, the statutory
and GAAP combined ratios before policyholder dividends for 1996 would have been
106.3% and 105.5%, respectively. The increase in the 1996 statutory and GAAP
combined ratios excluding acquisition-related charges compared to the 1995
statutory and GAAP combined ratios is primarily due to the inclusion in 1996 of
Aetna P&C's results. Aetna P&C historically has had a higher underwriting
expense ratio, partially offset by a lower loss and LAE ratio, which reflects
the mix of business including the favorable effect of the lower loss and LAE
ratio of the Bond business. The 1994 statutory combined ratio includes a
statutory charge of $225 million for reserve increases for environmental claims
and for a reduction of ceded reinsurance balances. Excluding this charge, the
statutory combined ratio before policyholder dividends for 1994 was 109.4%.
RESULTS OF OPERATIONS BY SEGMENT
<TABLE>
<CAPTION>
Commercial Lines
(in millions)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues...............................$5,497 $3,070 $2,626
Net income.............................$ 197 $ 329 $ 93
</TABLE>
Net income of $197 million in 1996 decreased $132 million from 1995. The 1996
decrease compared to 1995 is primarily due to $453 million of after-tax charges
related to the acquisition of Aetna P&C, partially offset by higher premiums and
net investment income due to the acquisition of Aetna P&C. These
acquisition-related charges include $318 million in reserve increases, net of
reinsurance, principally for cumulative injury other than asbestos, insurance
products involving financial guarantees, reserve strengthening and assumed
reinsurance, $55 million provision for an additional asbestos liability
related to an existing settlement agreement with a policyholder of Aetna P&C,
$39 million charge related to premium collection issues, $22 million
provision for uncollectibility of reinsurance recoverables and $19 million in
lease and severance costs related to the restructuring plan for the
acquisition. Net income of $329 million in 1995 increased $236 million
compared to 1994. The increase in 1995 from 1994 reflected a $112 million
after-tax increase in realized investment gains, higher net investment income,
benefits from expense reduction initiatives and improved loss trends in the
workers' compensation line.
Excluding realized investment gains and losses in all years and the 1996
acquisition-related charges, Commercial Lines' earnings were $633 million, $288
million and $164 million in 1996, 1995 and 1994, respectively. The increase in
1996 was primarily the result of the acquisition of Aetna P&C, combined with
higher net investment income and the benefits of expense-reduction initiatives.
Commercial Lines net written premiums totaled $4.062 billion for 1996 (excluding
a one-time adjustment associated with a reinsurance transaction), up $1.753
billion compared to 1995, reflecting the acquisition of Aetna P&C. The net
written premiums in 1995 of $2.309 billion reflect an increase of $197 million
from $2.112 billion in 1994, primarily reflecting the consolidation of Gulf.
Premium equivalents for 1996 totaled $2.596 billion, down $225 million compared
to $2.821 billion in 1995, which was down $169 million from $2.990 billion in
1994. 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.
5
<PAGE> 7
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
totaled $4.668 billion for 1996, down $476 million from $5.144 billion for 1995,
which was down $58 million from $5.202 billion for 1994. These decreases reflect
the highly competitive marketplace and the Company's selective underwriting. On
a combined total basis including Aetna P&C, premium equivalents totaled $2.712
billion for 1996, down $746 million from $3.458 billion for 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, the Company's selective renewal activity to address the competitive
pricing environment and its continued success in lowering workers' compensation
losses of customers. Premium equivalents of $2.990 billion for 1994 does not
include Aetna P&C. (Historically, Aetna P&C did not track premium equivalents
and such amounts are not available for 1994).
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 also includes the alternative market business which covers
primarily workers' compensation products and services. On a combined total basis
including Aetna P&C (for periods prior to April 2, 1996 for comparative purposes
only), National Accounts net written premiums of $852 million in 1996 decreased
$340 million from 1995. Net written premiums of $1.192 billion in 1995 decreased
$312 million from 1994. The 1996 and 1995 decreases reflect the Company's
selective renewal activity and the highly competitive marketplace. On a combined
total basis including Aetna P&C (for periods prior to April 2, 1996 for
comparative purposes only), National Accounts premium equivalents of $2.625
billion for 1996 were $733 million below 1995. The decrease in premium
equivalents in 1996 reflects a depopulation of involuntary pools as the loss
experience of workers' compensation improves and insureds move to voluntary
markets, the Company's selective renewal activity to address the competitive
pricing environment and its continued success in lowering workers' compensation
losses of customers.
National Accounts premium equivalents of $2.780 billion for Travelers Indemnity
and its subsidiaries (Travelers P&C) in 1995 were $179 million below 1994. The
1995 decrease reflected Travelers P&C's selective renewal activity in response
to the competitive pricing environment, continued success in lowering workers'
compensation losses of customers and a depopulation of involuntary pools as the
loss experience of workers' compensation improves and insureds move to voluntary
markets.
For 1996, National Accounts new business, including both premiums and premium
equivalents, was $389 million compared to $444 million in 1995, and $325 million
in 1994. This decrease, despite the Aetna acquisition, is due to the highly
competitive marketplace. Retention ratios dropped to 82% in 1996 from 84% in
1995 and 88% in 1994. These new business and retention ratio declines in 1996
reflect the Company's selective renewal activity and the highly competitive
marketplace.
Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. On a combined total basis including Aetna P&C (for periods
prior to April 2, 1996 for comparative purposes only), Commercial Accounts net
written premiums of $1.725 billion for 1996 were $137 million below 1995 premium
levels, which were $146 million below 1994 premium levels. The decrease in 1996
and 1995 in net written premiums is due to the highly competitive marketplace,
the Company's selective underwriting and the continued softness in guaranteed
cost products. The decrease in 1995 compared to 1994 in net written premiums was
partly offset by the continued growth in Commercial Accounts' industry-specific
programs and in retrospectively rated policies and other loss-responsive
products. On a combined total basis including Aetna P&C (for periods prior to
April 2, 1996 for comparative purposes only), Commercial Accounts premium
equivalents of $87 million in 1996 were $13 million below 1995 due to the
competitive marketplace.
6
<PAGE> 8
For 1996, new business in Commercial Accounts was $360 million compared to $269
million in 1995, and $207 million in 1994. The 1996 increase in new business is
due to the acquisition of Aetna P&C. The Commercial Accounts business retention
ratio was 72% in 1996, 73% in 1995 and 79% in 1994. These retention ratios
reflect Commercial Accounts selective underwriting policy. Commercial Accounts
continues to focus on industry specific programs which meet strict underwriting
guidelines.
Select Accounts serves small businesses through a network of independent agents.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Select Accounts net written premiums of
$1.412 billion for 1996 were $54 million lower than 1995. This decrease reflects
the highly competitive marketplace and the Company's selective underwriting.
Select Accounts net written premiums of $1.466 billion for 1995 were $173
million above 1994 premium levels, due primarily to an increase in new business.
New business in Select Accounts was $276 million, $131 million and $112 million
in 1996, 1995 and 1994, respectively. The 1996 increase in new premium business
is due to the acquisition of Aetna P&C. The Select Accounts business retention
ratio was 78%, 75% and 73% in 1996, 1995 and 1994, respectively. The increase in
the 1996 business retention ratio reflects the industry and product line
expertise of the combined company.
Specialty Accounts markets products to national, midsize and small customers and
distributes them through both wholesale brokers and retail agents and brokers
throughout the United States. On a combined total basis including Aetna P&C (for
periods prior to April 2, 1996 for comparative purposes only), Specialty
Accounts net written premiums of $679 million for 1996 were $55 million higher
than 1995, which was $227 million above 1994. The 1996 increase compared to 1995
is due to increases in directors' and officers' liability insurance and errors
and omissions coverages. The 1995 increase compared to 1994 primarily reflects
consolidation of Gulf following the acquisition of the 50% of Gulf that the
Company did not already own. Gulf's net written premiums were $176 million for
1995.
Commercial Lines claims and expenses of $5.292 billion in 1996 increased $2.646
billion from 1995, and increased $103 million from 1994 to 1995. The 1996
increase was primarily attributable to the acquisition of Aetna P&C and the net
acquisition-related charges of $697 million recorded during the second and
fourth quarters of 1996, offset in part by benefits from expense reduction
initiatives associated with the integration of Aetna P&C and cost efficiencies
in operations and in competitive workers' compensation managed care delivery
programs. Excluding the effects of consolidating Gulf in 1995, claims and
expenses decreased $20 million from 1994 to 1995. This decrease was primarily
attributable to favorable current year loss development in certain workers'
compensation lines and residual markets in 1995.
Catastrophe losses, net of tax and reinsurance, were $31 million, $7 million and
$30 million in 1996, 1995 and 1994, respectively. Catastrophe losses in 1996
were primarily due to Hurricane Fran and December storms on the West Coast.
Effective April 1, 1995, the threshold of losses incurred to qualify a specific
event as a catastrophe was increased. In 1994, catastrophe losses were primarily
comprised of winter storms in the first quarter.
7
<PAGE> 9
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory:
Loss and LAE ratio.......................................................96.2% 80.6% 104.2%
Underwriting expense ratio...............................................32.7 24.4 24.0
Combined ratio before policyholder dividends ...........................128.9 105.0 128.2
Combined ratio..........................................................129.6 106.3 126.2
GAAP:
Loss and LAE ratio.......................................................89.0 74.6 82.3
Underwriting expense ratio...............................................36.9 28.9 27.4
Combined ratio before policyholder dividends ...........................125.9 103.5 109.7
Combined ratio..........................................................126.8 104.6 108.1
</TABLE>
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to differences in reporting of revenues and expenses related to
service business, including servicing of residual market pools and deductible
policies. In addition, in 1996, GAAP combined ratios for Commercial Lines differ
from statutory combined ratios due to certain purchase accounting adjustments
recorded in connection with the Aetna P&C acquisition resulting in a charge to
statutory expenses, but not GAAP expenses.
The increase in the 1996 statutory and GAAP combined ratios for Commercial Lines
compared to 1995 was primarily attributable to the charges taken in 1996 related
to the acquisition and integration of Aetna P&C. Excluding these amounts, the
statutory and GAAP combined ratios before policyholder dividends for 1996 both
would have been 110.0%. The increase in the 1996 statutory and GAAP combined
ratios excluding acquisition-related charges compared to the 1995 statutory and
GAAP combined ratios is primarily due to the inclusion in 1996 of Aetna P&C's
results. Aetna P&C historically has had a higher underwriting expense ratio,
partially offset by a lower loss and LAE ratio that reflects the mix of business
including the favorable effect of the lower loss and LAE ratio of the Bond
business. The 1994 statutory combined ratio includes a statutory charge of $225
million for reserve increases for environmental claims and for a reduction of
ceded reinsurance balances. Excluding this charge, the statutory combined ratio
for 1994 was 114.2%. The improvement in the 1995 combined ratios compared to the
adjusted 1994 combined ratios was due to the first quarter 1994 catastrophe
losses and favorable loss development in certain workers' compensation lines and
residual markets in 1995.
<TABLE>
<CAPTION>
Personal Lines
(in millions)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues..................................$2,685 $1,481 $1,519
Net income................................$ 282 $ 107 $ 97
</TABLE>
Net income of $282 million in 1996 increased $175 million from $107 million in
1995, which increased $10 million from $97 million in 1994. The 1996 increase
was primarily attributable to the post-acquisition results of operations of
Aetna P&C (including $30 million principally resulting from a review of Aetna
P&C reserves), as well as approximately $70 million of favorable prior year loss
development primarily in the automobile bodily injury line, the continued
benefit of expense reduction initiatives and higher net investment income. The
increase in 1995 from 1994 was attributable to higher net investment income and
higher realized investment gains as well as expense reduction initiatives,
largely offset by benefits from favorable prior year loss reserve development in
1994 in the personal automobile line of business, a one-time contribution of $9
million from the favorable resolution of the New Jersey Market Transition
Facility (MTF) deficit and the earnings from Bankers and Shippers (which was
sold in October 1994).
8
<PAGE> 10
Net written premiums were $2.359 billion for 1996 compared to $1.298 billion in
1995 and $1.433 billion in 1994. The 1996 increase compared to 1995 primarily
reflects the acquisition of Aetna P&C and, to a lesser extent, growth in target
markets, partially offset by reductions due to catastrophe management
strategies. The 1995 decline of $135 million compared to 1994 was attributable
to the sale of Bankers and Shippers in October 1994. Excluding Bankers and
Shippers business, net written premiums for 1995 were up approximately 8% from
1994, reflecting reduced insurance ceded and targeted growth in sales through
independent agents.
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
1996 totaled $2.675 billion, up $132 million from $2.543 billion in 1995. This
increase on a combined basis reflects continued growth in targeted automobile
and homeowners markets, partially offset by reductions due to catastrophe
management strategies.
Personal Lines claims and expenses of $2.267 billion in 1996 increased $932
million from 1995. This increase was primarily attributable to the acquisition
of Aetna P&C, partially offset by favorable prior year loss development
primarily in the automobile bodily injury line in 1996 and the continued benefit
of expense reduction initiatives. Claims and expenses of $1.335 billion in 1995
decreased $49 million from 1994. The decline was primarily attributable to
expense reduction initiatives. In addition, 1995 reflected lower expenses due to
the October 1994 sale of Bankers and Shippers, while 1994 benefited from the
resolution of the MTF deficit and favorable reserve development on prior years'
business.
Included in 1996 are after-tax catastrophe losses, net of reinsurance, of $58
million compared to $12 million in 1995 and $26 million in 1994. Catastrophe
losses in 1996 were primarily due to Hurricane Fran, severe first quarter winter
storms and second quarter hail and wind storms. Effective April 1, 1995, the
threshold of losses incurred to qualify a specific event as a catastrophe was
increased. Catastrophe losses in 1994 were primarily due to the severe winter
storms in the Northeast during the first quarter.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory:
Loss and LAE ratio...........................68.7% 74.5% 71.0%
Underwriting expense ratio...................28.9 29.9 29.4
Combined ratio...............................97.6 104.4 100.4
GAAP:
Loss and LAE ratio...........................67.2 74.5 72.2
Underwriting expense ratio...................27.7 29.1 28.3
Combined ratio...............................94.9 103.6 100.5
</TABLE>
In 1996, GAAP combined ratios for Personal Lines differ from statutory combined
ratios primarily due to certain purchase accounting adjustments recorded in
connection with the Aetna P&C acquisition resulting in a charge to statutory
expenses, but not GAAP expenses.
The 1996 statutory and GAAP combined ratios for Personal Lines include a benefit
resulting from the Company's review of reserves associated with the acquisition
of Aetna P&C. Excluding this item, the 1996 statutory and GAAP combined ratios
were 100.1% and 97.4%, respectively. The decrease in the 1996 statutory and GAAP
combined ratios excluding this item is predominantly due to the favorable prior
year loss development, primarily in the automobile bodily injury line, partially
offset by higher catastrophe losses. The lower ratio in 1994 compared to 1995
was primarily due to the benefit of favorable loss reserve development and the
favorable resolution of the MTF deficit in 1994.
9
<PAGE> 11
<TABLE>
<CAPTION>
Corporate and Other
(in millions)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues..............................$ 15 $ 18 $23
Net loss..............................$(88) $(17) $(2)
</TABLE>
The primary component of net loss for 1996 was interest expense of $77 million
after tax, reflecting financing costs associated with the acquisition of Aetna
P&C.
Environmental Claims
The Company continues to receive claims alleging liability exposures arising out
of insureds' alleged disposition of toxic substances. These claims when
submitted rarely indicate the monetary amount being sought by the claimant from
the insured and the Company does not keep track of the monetary amount being
sought in those few claims which indicated such a monetary amount.
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, until the
dispute is resolved. 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. At December 31, 1996, approximately 12% of
the net environmental loss reserve (i.e., approximately $146 million) consists
of case reserve for resolved claims. The balance, approximately 88% of the net
aggregate reserve (i.e., approximately $1.096 billion), is carried in a bulk
reserve and includes incurred but not yet reported environmental claims for
which the Company has not received any specific claims.
The Company's reserving methodology is preferable to one based on "identified
claims" since the resolution of environmental exposures by the Company generally
occurs on an insured-by-insured basis as opposed to a claim-by-claim basis. The
nature of the resolution is through coverage litigation, which often pertains to
more than one claim, as well as through a settlement with an insured. Generally,
the settlement between the Company and the insured extinguishes any obligation
the Company may have under any policy issued to the insured for past, present
and future environmental liabilities. This form of settlement is commonly
referred to as a "buy-back" of policies for future environmental liability.
Additional provisions of these agreements include the appropriate indemnities
and hold harmless provisions to protect the Company. The Company's general
purpose in executing such agreements is to reduce its potential environmental
exposure and eliminate both the risks presented by coverage litigation with the
insured and the cost of such litigation.
The reserving methodology includes an analysis by the Company of the exposure
presented by each insured and the anticipated cost of resolution, if any, for
each insured. This analysis is completed by the Company on a quarterly basis. In
the course of its analysis, an assessment of the probable liability, available
coverage, judicial interpretations and historical value of similar exposures is
considered by the Company. In addition, due consideration is given to the many
variables presented, such as the nature of the alleged activities of the insured
at each site; the allegations of environmental damage at each site; the number
of sites; the total number of potentially responsible parties at each site; the
nature of environmental harm and the corresponding remedy at a site; the nature
of government enforcement activities at each site; the ownership and general use
of each site; the overall nature of the insurance relationship between the
Company and the insured; the identification of other insurers; the potential
coverage available, if any, including number of years of coverage, if any; and
the applicable law in each jurisdiction. Analysis of these and other factors,
including the potential for future claims, results in the establishment of the
bulk reserve.
10
<PAGE> 12
The following table displays activity for environmental losses and loss expenses
and reserves for 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Environmental Losses
(in millions) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning reserves:
Direct...............................................$ 454 $ 449 $ 466
Ceded................................................. (50) (8) (7)
------- ------- -------
Net................................................. 404 441 459
Acquisition of Aetna P&C:
Direct................................................ 968 - -
Ceded................................................. (39) - -
Incurred losses and loss expenses:
Direct................................................ 114 117 45
Ceded................................................. (52) (61) (4)
Losses paid:
Direct ............................................... 167 145 65
Ceded................................................. (14) (22) (4)
Other:
Direct................................................ - 33 3
Ceded................................................. - (3) (1)
------- ------- -------
Ending reserves:
Direct................................................ 1,369 454 449
Ceded................................................. (127) (50) (8)
------- ------- -------
Net................................................$ 1,242 $ 404 $ 441
======== ======== ========
</TABLE>
In the above table, "Other" represents (i) the 1994 acquisition by the Company
of the remaining 50% of Gulf that it did not already own and (ii) the
termination in 1995 of certain agreements with TIGI whereby TIGI had assumed
certain reserves from the Company.
The duration of the Company's investigation and review of such claims and the
extent of time necessary to determine an appropriate estimate, if any, of the
value of the claim to the Company, varies significantly and is dependent upon a
number of factors. These factors include, but are not limited to, the
cooperation of the insured in providing claim information, the pace of
underlying litigation or claim processes, the pace of coverage litigation
between the insured and the Company and the willingness of the insured and the
Company to negotiate, if appropriate, a resolution of any dispute between them
pertaining to such claims. Since the foregoing factors vary from claim to claim
and insured by insured, the Company cannot provide a meaningful average of the
duration of an environmental claim. However, based upon the Company's experience
in resolving such claims, the duration may vary from months to several years.
The industry does not have a standard method of calculating claim activity for
environmental losses. Generally for environmental claims, Travelers P&C
establishes a claim file for each insured on a per site, per claimant basis. If
there is more than one claimant such as a federal and a state agency, this
method will result in two claims being set up for a policyholder at that one
site. Similarly, if one hundred claimants file a lawsuit against ten
policyholders alleging injury as a result of the discharge of wastes or
pollutants, one thousand claims would be established. Travelers P&C adheres to
this method of calculating claim activity on all environmental-related claims,
whether such claims are tendered on primary, excess or umbrella policies.
11
<PAGE> 13
As of December 31, 1996, Travelers P&C had approximately 30,800 pending
environmental-related claims tendered by 664 active policyholders. The pending
environmental-related claims represent federal or state EPA-type claims as well
as plaintiffs' claims alleging bodily injury and property damage due to the
discharge of waste or pollutants. In 1996, the pending inventory increased by
approximately 20,000 claims as a result of several lawsuits being filed in the
States of Louisiana and Texas. These lawsuits, filed against one or more
policyholders of Travelers P&C allege that the plaintiffs were injured or
damaged as a result of either alleged waste disposal or the alleged release of
deleterious substances from ongoing business operations which have taken place
near the plaintiffs' residences. Claims of this nature have historically been
considered in the level of TAP's environmental reserves. To date, Travelers P&C
has resolved environmental-related claims on behalf of 1,628 policyholders.
The Company is preparing a claims system conversion which when completed will
apply Travelers P&C's method of establishing claim files to Aetna P&C's
environmental-related claims. The Company anticipates that this process should
be completed in 1997. As of December 31, 1996, Aetna P&C had pending
environmental-related claims tendered by approximately 948 active policyholders,
approximately 129 of these 948 active policyholders are also included in the 664
active Travelers P&C policyholders. Aetna P&C's policyholders, like those of
Travelers P&C, have tendered both EPA-type claims and individual claims alleging
injury or damage as a result of the discharge of wastes or pollutants. To date,
Aetna P&C has resolved environmental-related claims on behalf of 1,870
policyholders.
To date, the Company generally has been successful in resolving its coverage
litigation and continues to reduce its potential exposure through favorable
settlements with certain insureds. These settlement agreements with certain
insureds are based on the variables presented in each piece of coverage
litigation. Generally the settlement dollars paid in disputed coverage claims
are a percentage of the total coverage sought by such insureds. Based upon the
Company's reserving methodology and the experience of its historical resolution
of environmental exposures, it believes that the environmental reserve provision
is appropriate. As of December 31, 1996, the Company, for approximately $1
billion, has resolved the environmental liabilities presented by 3,498 of the
4,981 policyholders who have tendered environmental claims to the Company. This
resolution comprises 70% of the policyholders who have tendered such claims. The
Company has reserves of approximately $950 million included in its bulk reserve
relating to the remaining 1,483 policyholders (30% of the total) with unresolved
environmental claims, as well as for any other policyholder which may tender an
environmental claim in the future.
Asbestos Claims
In the area of asbestos claims, the Company believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to the 1980s. The Company continues to receive
asbestos claims alleging insureds' liability from claimants' asbestos-related
injuries. These claims, when submitted, rarely indicate the monetary amount
being sought by the claimant from the insured and the Company does not keep
track of the monetary amount being sought in those few claims which indicated
such a monetary amount. Originally the cases involved mainly plant workers and
traditional asbestos manufacturers and distributors. However, in the mid-1980s,
a new group of plaintiffs, whose exposure to asbestos was less direct and whose
injuries were often speculative, began to file lawsuits in increasing numbers
against the traditional defendants as well as peripheral defendants who had
produced products that may have contained small amounts of some form of
encapsulated asbestos. These claims continue to arise and on an individual basis
generally involve smaller companies with smaller limits of potential coverage.
Also, there has emerged a group of non-product claims by plaintiffs, mostly
independent labor union workers, mainly against companies, alleging exposure to
asbestos while working at these companies' premises. In addition, various
insurers, including the Company, remain defendants in an action brought in
Philadelphia regarding potential consolidation and resolution of future asbestos
bodily injury claims.
12
<PAGE> 14
In summary, various classes of asbestos defendants, such as major product
manufacturers, peripheral and regional product defendants as well as premises
owners, are tendering asbestos-related claims to the industry. Because each
insured presents different liability and coverage issues, the Company evaluates
those issues on an insured-by-insured basis.
The Company's evaluations have not resulted in any meaningful data from which an
average asbestos defense or indemnity payment may be determined. The varying
defense and indemnity payments made by the Company on behalf of its insureds
have also precluded the Company from deriving any meaningful data by which it
can predict whether its defense and indemnity payments for asbestos claims (on
average or in the aggregate) will remain the same or change in the future. Based
upon the Company's experience with asbestos claims, the duration period of an
asbestos claim from the date of submission to resolution is approximately two
years.
At December 31, 1996, approximately 25% of the net aggregate reserve (i.e.,
approximately $263 million) is for pending asbestos claims. The balance,
approximately 75% (i.e., approximately $810 million) of the net asbestos
reserves represents incurred but not yet reported losses for which the Company
has not received any specific claims.
The following table displays activity for asbestos losses and loss expenses and
reserves for 1996, 1995 and 1994. In general, the Company posts case reserves
for pending asbestos claims within approximately 30 business days of receipt of
such claims.
<TABLE>
<CAPTION>
Asbestos Losses
(in millions) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning reserves:
Direct............................................$ 695 $ 614 $ 683
Ceded............................................. (293) (278) (336)
-------- -------- --------
Net............................................. 402 336 347
Acquisition of Aetna P&C:
Direct............................................ 801 - -
Ceded............................................. (121) - -
Incurred losses and loss expenses:
Direct............................................ 120 109 52
Ceded............................................. (35) (66) (9)
Losses paid:
Direct ........................................... 173 116 121
Ceded............................................. (79) (92) (67)
Other:
Direct............................................ - 88 -
Ceded............................................. - (41) -
-------- -------- --------
Ending reserves:
Direct............................................ 1,443 695 614
Ceded............................................. (370) (293) (278)
-------- -------- --------
Net.............................................$ 1,073 $ 402 $ 336
======== ======== ========
</TABLE>
In the above table, "Other" represents the termination in 1995 of certain
agreements with TIGI whereby TIGI had assumed certain reserves from the Company.
The largest reinsurer of the Company's asbestos risks is Lloyd's of London
(Lloyd's). In 1996, Lloyd's restructured its operations with respect to claims
for years prior to 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 ability of the
Company to aggregate asbestos claims under a market agreement between Lloyd's
and the Company or under the applicable reinsurance treaties.
13
<PAGE> 15
The outcome of the arbitration referred to above is 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 this matter 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 this matter could have a
material adverse effect on the Company's financial condition or liquidity.
Uncertainty Regarding Adequacy of Environmental and Asbestos Reserves
It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties. Conventional actuarial techniques are not used to estimate such
reserves.
For environmental claims, the Company estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim, as discussed above.
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and deductibles;
an analysis of each policyholder's potential liability; jurisdictional
involvement; past and projected future claim activity; past settlement values of
similar claims; allocated claim adjustment expense; potential role of other
insurance, and applicable coverage defenses, if any. Once the gross ultimate
exposure for indemnity and allocated claim adjustment expense is determined for
a policyholder by policy year, a ceded projection is calculated based on any
applicable facultative and treaty reinsurance. In addition, a similar review is
conducted for asbestos property damage claims. However, due to the relatively
minor claim volume, these reserves have remained at a constant level.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1996 are the Company's best
estimate of ultimate claims and claim adjustment expenses based upon known facts
and current law. However, the environment surrounding the final resolution of
these claims continues to change. Currently, it is not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. Such development will be
affected by future court decisions and interpretations and changes in Superfund
and other legislation. Because of these future unknowns, additional liabilities
may arise for amounts in excess of the current reserves. These additional
amounts, or a range of these additional amounts, cannot now be reasonably
estimated, and 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) Claims
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 potentially harmful products or substances. Such potentially 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.
14
<PAGE> 16
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 of 1996, 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 by $360 million, net of reinsurance ($234 million after tax).
At December 31, 1996, approximately 19% of the net aggregate reserve (i.e.,
approximately $215 million) is for pending CIOTA claims. The balance,
approximately 81% (i.e., approximately $899 million) of the net CIOTA reserves
represents incurred but not yet reported losses for which the Company has not
received any specific claims.
15
<PAGE> 17
The following table displays activity for CIOTA losses and loss expenses and
reserves for 1996, 1995 and 1994. In general, the Company posts case reserves
for pending CIOTA claims within approximately 30 business days of receipt of
such claims.
<TABLE>
<CAPTION>
CIOTA Losses
(in millions) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning reserves:
Direct.....................................$ 374 $ 355 $ 357
Ceded...................................... - - -
-------- -------- --------
Net...................................... 374 355 357
Acquisition of Aetna P&C:
Direct..................................... 709 - -
Ceded...................................... (293) - -
Incurred losses and loss expenses:
Direct..................................... 565 21 16
Ceded...................................... (155) - -
Losses paid:
Direct .................................... 88 22 18
Ceded...................................... (2) - -
Other:
Direct..................................... - 20 -
Ceded...................................... - - -
-------- -------- --------
Ending reserves:
Direct..................................... 1,560 374 355
Ceded...................................... (446) - -
-------- -------- --------
Net......................................$ 1,114 $ 374 $ 355
======== ======== ========
</TABLE>
In the above table, "Other" represents the termination in 1995 of certain
agreements with TIGI whereby TIGI had assumed certain reserves from the Company.
Investment Portfolio
At December 31, 1996, the carrying value of the Company's investment portfolio
was $29.4 billion, representing 59% of total assets of $49.8 billion. The
average yield (excluding realized and unrealized investment gains) was 7.0% and
6.2% in 1996 and 1995, respectively. Because the primary purpose of the
investment portfolio is to fund future policyholder benefits and claims
payments, the Company seeks to employ a conservative investment philosophy. The
Company's fixed maturity portfolio at December 31, 1996 totaled $24.4 billion,
comprised of $22.5 billion of publicly traded fixed maturities and $1.9 billion
of private fixed maturities. The weighted average quality ratings of the
Company's publicly traded fixed maturity portfolio and private fixed maturity
portfolio at December 31, 1996 were Aa3 and A3, respectively. Included in the
fixed maturity portfolio at such date were approximately $599 million of below
investment grade securities. The average duration of the fixed maturity
portfolio, including short-term investments, was 5.3 years at such date.
16
<PAGE> 18
The following table sets forth the Company's combined fixed maturity investment
portfolio classified by Moody's Investor's Service Inc. ratings as of December
31, 1996:
<TABLE>
<CAPTION>
At December 31, 1996
Percent of
Carrying Value Total Carrying Value
-------------- --------------------
(Dollars in Millions)
<S> <C> <C>
Quality Rating:
Aaa $10,532 43.1%
Aa 3,868 15.8
A 6,306 25.8
Baa 3,141 12.9
------- ------
Total investment grade 23,847 97.6
Non-investment grade 599 2.4
------- ------
Total fixed maturity investments $24,446 100.0%
======= ======
</TABLE>
The Company makes investments in collateralized mortgage obligations (CMOs).
CMOs typically have high credit quality, offer good liquidity, and provide a
significant advantage in yield and total return compared to U.S. Treasury
securities. The Company's investment strategy is to purchase CMO tranches which
are protected against prepayment risk, including planned amortization class
(PAC) tranches. Prepayment protected tranches are preferred because they provide
stable cash flows in a variety of scenarios. The Company does invest in other
types of CMO tranches if a careful assessment indicates a favorable risk/return
tradeoff. The Company does not purchase residual interests in CMOs.
At December 31, 1996, the Company held CMOs with a market value of $2.1 billion.
Approximately 81% of CMO holdings were fully collateralized by GNMA, FNMA or
FHLMC securities at such date, and the balance were fully collateralized by
portfolios of individual mortgage loans. In addition, the Company held $2.4
billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at
December 31, 1996. Virtually all of these securities were rated AAA.
The Company uses derivative financial instruments, including financial futures
contracts, forward contracts and interest rate swaps and caps, as a means of
hedging exposure to interest rate and foreign currency risk. The Company does
not hold or issue derivative instruments for trading purposes.
These derivative financial instruments have off-balance-sheet risk. Financial
instruments with off-balance-sheet risk involve, to varying degrees, elements of
credit and market risk in excess of the amount recognized in the balance sheet.
The contract or notional amounts of these instruments reflect the extent of
involvement the Company has in a particular class of financial instrument.
However, the maximum loss of cash flow associated with these instruments can be
less than these amounts. For forward contracts and interest rate swaps, credit
risk is limited to the amounts calculated to be due the Company on such
contracts. Financial futures contracts have very little credit risk since
organized exchanges are the counterparties.
The Company monitors creditworthiness of counterparties to these financial
instruments by using criteria of acceptable risk that are consistent with
on-balance-sheet financial instruments. The controls include credit approvals,
limits and other monitoring procedures.
The Company may occasionally enter into interest rate swaps in connection with
other financial instruments to provide greater risk diversification and to
better match an asset with a corresponding liability. Under interest rate swaps,
the Company agrees with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made by
either party. A single net payment is usually made by one counterparty at each
due date. Swaps are not exchange-traded so they are subject to the risk of
default by the counterparty.
17
<PAGE> 19
The Company uses exchange-traded financial futures to manage its exposure to
changes in interest rates arising from the need to reinvest proceeds from the
sale or maturity of investments. To hedge against adverse changes in interest
rates, the Company enters long positions in financial futures contracts which
offset asset price changes resulting from changes in market interest rates until
an investment is purchased.
Margin payments are required to enter a futures contract and contract gains or
losses are settled daily in cash. The contract amount of futures contracts
represents the extent of the Company's involvement, but not future cash
requirements, as open positions are typically closed out prior to the delivery
date of the contract.
At December 31, 1996 and 1995, the Company held financial futures contracts with
notional amounts of approximately $522 million and $220 million, respectively,
and a deferred loss of $2 million and a deferred gain of $3 million,
respectively. Total gains from financial futures of $15 million are deferred at
December 31, 1996 relating to anticipated investment purchases expected to occur
by the end of the second quarter of 1997. These deferred gains are reported in
other liabilities. At December 31, 1996 and 1995, the Company's futures
contracts had no fair value because these contracts are marked to market and
settled in cash.
At December 31, 1996, the Company held interest rate swaps with notional amounts
of $763 million. The fair value of these financial instruments was $12 million
(gain position) and $13 million (loss position) at December 31, 1996, which was
determined using a discounted cash flow method. The off-balance-sheet risks of
interest rate swaps were not significant at December 31, 1995.
The off-balance-sheet risks of forward contracts were not significant at
December 31, 1996 and 1995.
Outlook
A variety of factors continue to affect the property and casualty insurance
market and the Company's core business outlook, including the competitive
pressures affecting pricing and profitability, inflation in the cost of medical
care, litigation and losses from involuntary markets.
Commercial Lines will continue to focus on its core product lines and markets,
with particular emphasis on both product and industry specialization. This
includes specific industry program marketing efforts in Commercial Accounts and
product offerings in Specialty Accounts. In most of Commercial Lines, pricing
did not improve in 1996. For Commercial Accounts and Select Accounts, the soft
underwriting cycle continues to pressure the pricing of guaranteed cost
products, as pricing trends have not kept pace with loss cost inflation in
recent years. The Company's focus is to retain existing profitable business and
obtain new accounts where it can maintain its selective underwriting policy.
National Accounts premiums are primarily loss sensitive and therefore less
affected by these pricing pressures. The market for National Accounts guaranteed
cost products is very competitive and has resulted in a decline in the Company's
new business. The Company will continue to adhere to strict guidelines to
maintain high quality underwriting. The Company's adherence to its selective
underwriting criteria has had an adverse effect on premium levels during the
last two years and, if the competitive pressures on pricing do not improve in
1997, it may continue to affect future premium levels unfavorably. The Company
believes that the competitive pricing environment for Commercial Lines is not
likely to improve in 1997.
Personal Lines strategy includes the control of operating expenses to improve
competitiveness and profitability, growth in sales through independent agents in
target markets, expansion of alternative marketing channels to broaden the
distribution of Personal Lines products, and a reduction of exposure to
catastrophe losses. In order to reduce its exposure to catastrophe losses, the
Company has limited the writing of new homeowners business and selectively
non-renewed existing homeowners business in certain markets, tightened
underwriting standards and implemented price increases in certain
hurricane-prone areas, subject to restrictions imposed by insurance regulatory
authorities, and introduced new policy forms in certain markets to limit the
Company's exposure to earthquake losses.
18
<PAGE> 20
The property casualty insurance industry in the United States continues to
consolidate. The Company's strategic objectives are to enhance its position as a
consistently profitable market leader and to become a low-cost provider of
property and casualty insurance in the United States, as the industry
consolidates.
In relation to the Company's objective of being a low-cost provider of property
and casualty insurance, cost reductions and enhanced productivity efforts are
expected to continue. These efforts include reducing overhead expenses,
integrating Aetna P&C to make it more consistent with the decentralized,
streamlined structure of the Company, and eliminating redundant expenses between
the two companies. The Company is approximately two-thirds of the way toward its
objective of achieving $300 million in annual cost savings in the first two
years after the acquisition.
Changes in the general interest rate environment affect the return received on
newly invested and reinvested funds. While a rising interest rate environment
enhances the returns available, it reduces the market value of existing fixed
maturity investments and the availability of gains on disposition. A decline in
interest rates reduces the return available on investment of funds but could
create the opportunity for realized investment gains on disposition of fixed
maturity investments.
As required by various state laws and regulations, the Company's insurance
subsidiaries are subject to assessments from state-administered guaranty
associations, second injury funds and similar associations. Management believes
that such assessments will not have a material impact on the Company's results
of operations, financial condition or liquidity.
Certain social, economic and political issues have led to an increased number of
legislative and regulatory proposals aimed at addressing the cost and
availability of certain types of insurance. While most of these provisions have
failed to become law, these initiatives may continue as legislators and
regulators try to respond to public availability and affordability concerns and
the resulting laws, if any, could adversely affect the Company's ability to
write business with appropriate returns.
Liquidity and Capital Resources
TAP was formed in January 1996 to hold the property and casualty insurance
subsidiaries of TIGI. TIGI contributed to TAP all of the outstanding shares of
common stock of Travelers Indemnity on April 1, 1996. On April 2, 1996, TAP
acquired the domestic property and casualty insurance subsidiaries of Aetna for
approximately $4.2 billion. TAP is a holding company and has no direct
operations. TAP's principal asset is the capital stock of its insurance
subsidiaries. For a description of the acquisition and the manner in which it
was funded, see Note 2 of Notes to Consolidated Financial Statements.
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. The Company's combined invested assets at December 31, 1996 totaled
$29.4 billion and consisted primarily of highly liquid public debt securities of
$22.5 billion, readily marketable private debt securities of $1.9 billion,
mortgage loans and real estate of $1.2 billion, equity securities of $779
million, short-term investments of $2.3 billion and other investments of $666
million.
19
<PAGE> 21
Cash flow needs at TAP include stockholder dividends and debt service. TAP meets
its cash flow needs 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. The lender has no obligation to make any loan to TAP under this
line of credit. Moreover, the Company will continue to be able to make
borrowings under the Credit Facility, which it has reduced to $500 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 December 31, 1996, this requirement was exceeded by approximately
$2.8 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 December 31, 1996,
TAP had $25 million outstanding under its commercial paper program.
As more fully described in Note 2 of Notes to Consolidated Financial Statements,
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, in
connection with the acquisition of Aetna P&C. During the remainder of 1996, TAP
also sold $200 million of 6-3/4% Notes due September 1, 1999, $200 million of
6-1/4% Notes due October 1, 1999 and $150 million of 6-3/4% Notes due November
15, 2006. At December 31, 1996, TAP had issued a total of $1.25 billion of, and
had $750 million available for, debt offerings under its shelf registration
statement.
Because the principal operating subsidiaries of the Company are Connecticut
insurance companies, the amount of dividends that each entity may pay to the
parent company is restricted. The insurance holding company law of Connecticut
requires notice to, and approval by, the state insurance commissioner for the
declaration or payment of any dividend that together with other distributions
made within the preceding twelve months exceeds the greater of (i) 10% of the
insurer's surplus or (ii) the insurer's net income for the twelve-month period
ended the preceding December 31st, in each case determined in accordance with
statutory accounting practices. Such declaration or payment is further limited
by adjusted unassigned funds (surplus), as determined in accordance with
statutory accounting practices. The insurance holding company laws of other
states in which the Company's subsidiaries are domiciled generally contain
similar (although in certain instances somewhat more restrictive) limitations on
the payment of dividends. In 1997, dividend payments to TAP from its insurance
subsidiaries are limited to $647 million without prior approval of the
Connecticut Insurance Department.
In addition, pursuant to an intercompany agreement, TAP may not pay any
dividends on its common stock without the prior written consent of Travelers
Group, so long as Travelers Group maintains certain minimum beneficial ownership
requirements of the Common Stock. That agreement also limits the Company's
ability to incur indebtedness, issue equity securities and make certain capital
expenditures, among other things, without the prior written consent of Travelers
Group.
The National Association of Insurance Commissioners (NAIC) adopted risk-based
capital (RBC) requirements for property-casualty companies in December 1993,
effective with reporting for 1994. The RBC requirements are to be used as early
warning tools by the NAIC and states to identify companies that merit further
regulatory action. The formulas have not been designed to differentiate among
adequately capitalized companies that operate with levels of capital higher than
RBC requirements. Therefore, it is inappropriate and ineffective to use the
formulas to rate or to rank such companies. At December 31, 1996, all of the
Company's property-casualty companies had adjusted capital in excess of amounts
requiring any regulatory action.
20
<PAGE> 22
The Company has a net deferred tax asset of $1.6 billion at December 31, 1996
which relates to temporary differences that are expected to reverse as net
ordinary deductions for tax purposes. The Company will have to generate
approximately $4.5 billion of taxable income, before reversal of these temporary
differences, primarily over the next 10 to 15 years, to realize the deferred tax
assets. Management expects to realize the deferred tax asset based upon its
expectation of future positive taxable income, after reversal of these
deductible temporary differences, in the consolidated federal income tax return
of Travelers Group. The taxable income of the consolidated return of Travelers
Group, after reversal of the deductible temporary differences, is expected to be
at least $1.5 billion annually.
Certain of the Company's loss reserves are for environmental and asbestos
claims. 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.
See discussion of environmental and asbestos claims starting on page 10.
In connection with the 1992 sale of American Re-Insurance Company (Am Re) by
Aetna P&C, Am Re and Aetna P&C entered into a reinsurance agreement which
provides that to the extent Am Re incurred losses in 1991 and prior that were
still outstanding at January 1, 1992 in excess of $2.7 billion, Aetna P&C has an
80% participation in payments on those losses up to a maximum payment by Aetna
P&C of $500 million. In 1995, Am Re increased reserves for asbestos,
environmental and other latent liabilities. As a result of the increase, losses
of approximately $228 million ($120 million after discount), which were largely
workers' compensation life table indemnity claims, were ceded to Aetna P&C. This
agreement has been accounted for as a deposit and a liability has been
established for the present value of the expected payout under the agreement.
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 stock grants related to employee benefit and director
compensation plans. At December 31, 1996, the Company had repurchased 406,860
shares of its common stock for approximately $13 million pursuant to the
repurchase program.
Accounting Standards not yet Adopted
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 are effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and are to be applied
prospectively. However, in December 1996 the FASB issued Statement of Financial
Accounting Standards No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125," which delays until January 1, 1998 the
effective date for certain provisions. The adoption of the provisions of this
statement effective January 1, 1997 will not have a material impact on results
of operations, financial condition or liquidity.
21
<PAGE> 23
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(for the year ended December 31, in millions,
except per share amounts ) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $6,028 $3,315 $3,178
Net investment income 1,656 710 573
Fee income 455 456 496
Realized investment gains (losses) 18 71 (132)
Other 40 17 53
- ---------------------------------------------------------------------------------------------------
Total revenues 8,197 4,569 4,168
- ---------------------------------------------------------------------------------------------------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 5,282 2,817 2,819
Amortization of deferred acquisition costs 906 512 473
Interest expense 118 - -
General and administrative expenses 1,404 689 666
- ---------------------------------------------------------------------------------------------------
Total claims and expenses 7,710 4,018 3,958
- ---------------------------------------------------------------------------------------------------
Income before federal income taxes 487 551 210
- ---------------------------------------------------------------------------------------------------
Federal income taxes:
Current expense (benefit) (100) 160 (6)
Deferred expense (benefit) 196 (28) 28
- ---------------------------------------------------------------------------------------------------
Total federal income taxes 96 132 22
- ---------------------------------------------------------------------------------------------------
Net income $ 391 $ 419 $ 188
- ---------------------------------------------------------------------------------------------------
Net income per share of common stock $ 1.05 $ 1.42 $ 0.64
- ---------------------------------------------------------------------------------------------------
Weighted average number of common
and equivalent shares outstanding 367.1 294.5 294.5
- ---------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 24
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(at December 31, in millions, except shares) 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $24,052; $10,534) $24,446 $10,908
Equity securities, at fair value (cost, $756; $565) 779 603
Mortgage loans 1,005 213
Real estate held for sale 157 23
Short-term securities 2,311 786
Other investments 666 287
- -------------------------------------------------------------------------------------------------------------
Total investments 29,364 12,820
- -------------------------------------------------------------------------------------------------------------
Cash 106 51
Investment income accrued 381 165
Premium balances receivable 2,976 2,213
Reinsurance recoverables 9,714 5,407
Deferred acquisition costs 426 202
Deferred federal income taxes 1,583 650
Contractholder receivables 1,828 1,154
Goodwill 1,549 419
Other assets 1,852 981
- -------------------------------------------------------------------------------------------------------------
Total assets $49,779 $24,062
- -------------------------------------------------------------------------------------------------------------
LIABILITIES
Claims and claim adjustment expense reserves $31,177 $15,460
Unearned premium reserves 3,554 1,695
Contractholder payables 1,828 1,154
Commercial paper 25 -
Long-term debt 1,249 -
Other liabilities 4,566 2,152
- -------------------------------------------------------------------------------------------------------------
Total liabilities 42,399 20,461
- -------------------------------------------------------------------------------------------------------------
TAP-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding
solely junior subordinated debt securities of TAP 900 -
- -------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock:
Class A, $.01 par value, 700 million shares authorized,
71,979,829 shares issued in 1996 1 -
Class B, $.01 par value, 700 million shares authorized,
328,020,170 shares issued and outstanding in 1996 3 -
Common stock, $100 par value, 150,000 shares
authorized, 100,000 shares issued and outstanding in 1995 - 10
Additional paid-in capital 5,455 2,889
Retained earnings 749 422
Treasury stock, at cost (shares, 406,860; 0) (13) -
Unrealized gain on investment securities, net of tax 285 280
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 6,480 3,601
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $49,779 $24,062
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 25
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
All Common
Shares (in thousands)
- ------------------------------------------------------------------------------- ------------------------
(for the year ended December 31,
in millions) 1996 1995 1994 1996 1995 1994
- ------------------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK AND ADDITIONAL
PAID-IN CAPITAL
Balance, beginning of year $ 2,899 $ 2,921 $ 2,965 100 100 100
Capitalization of Travelers
Property Casualty Corp. 2,560 -- -- 399,900 -- --
Other -- (22) (44) -- -- --
- ------------------------------------------------------------------------------- ------------------------
Balance, end of year 5,459 2,899 2,921 400,000 100 100
- ------------------------------------------------------------------------------- ------------------------
RETAINED EARNINGS
Balance, beginning of year 422 103 --
Net income 391 419 188
Dividends (64) (100) (85)
- -------------------------------------------------------------------------------
Balance, end of year 749 422 103
- -------------------------------------------------------------------------------
TREASURY STOCK (at cost)
Balance, beginning of year -- -- -- -- -- --
Treasury stock acquired (13) -- -- (407) -- --
- ------------------------------------------------------------------------------- ------------------------
Balance, end of year (13) -- -- (407) -- --
- ------------------------------------------------------------------------------- ------------------------
UNREALIZED GAIN (LOSS) ON
INVESTMENT SECURITIES,
NET OF TAX
Balance, beginning of year 280 (443) 12
Net change in unrealized gains and losses
on investment securities, net of tax 5 723 (455)
- -------------------------------------------------------------------------------
Balance, end of year 285 280 (443)
- -------------------------------------------------------------------------------
Total stockholders' equity $ 6,480 $ 3,601 $ 2,581 399,593 100 100
- ------------------------------------------------------------------------------- ------------------------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 26
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 391 $ 419 $ 188
Adjustments to reconcile net income to net
cash provided by operating activities
Realized (gains) losses (18) (71) 132
Depreciation and amortization 40 15 5
Deferred federal income taxes 196 (28) 28
Amortization of deferred policy acquisition costs 906 512 473
Premium balances receivable 212 387 367
Reinsurance recoverables (159) 364 (8)
Deferred policy acquisition costs (935) (493) (474)
Insurance reserves 691 (18) 295
Other (143) 407 (332)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,181 1,494 674
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 1,567 684 638
Mortgage loans 133 15 33
Proceeds from sales of investments
Fixed maturities 12,606 4,871 1,806
Equity securities 558 157 121
Mortgage loans 23 36 32
Real estate held for sale 16 22 69
Purchases of investments
Fixed maturities (15,049) (6,497) (3,191)
Equity securities (785) (472) (141)
Mortgage loans (161) (40) (1)
Short-term securities, (purchases) sales, net (1,044) (211) 78
Other investments, net (90) 16 167
Business acquisitions (4,160) - (150)
Business divestments 1 - 135
Securities transactions in course of settlement 571 44 (178)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,814) (1,375) (582)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of commercial paper, net 25 - -
Issuance of long-term debt 1,249 - -
Borrowings on revolving line of credit 2,650 - -
Payments on revolving line of credit (2,650) - -
Contribution from TIGI 1,138 - -
Purchase of treasury stock (13) - -
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) - -
Dividends to TIGI (49) (100) (85)
Dividends to minority shareholders (11) - -
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 4,688 (100) (85)
- ---------------------------------------------------------------------------------------------------------------------
Net increase in cash 55 19 7
Cash at beginning of period 51 32 25
- ---------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 106 $ 51 $ 32
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes refunded $ 208 $ 28 $ 30
Interest paid $ 99 $ - $ -
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 27
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Travelers
Property Casualty Corp. (TAP), formerly Travelers/Aetna Property Casualty
Corp., (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). On April 2,
1996, TAP purchased from Aetna Services Inc., (formerly 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 $4.2 billion in cash. The
acquisition was accounted for under the purchase method of accounting
and, accordingly, the consolidated financial statements include the
results of Aetna P&C's operations only from the date of acquisition.
Significant intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and claims and
expenses during the reporting period. Actual results could differ from
those estimates.
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
Accounting Changes
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of
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 establishes accounting standards for the impairment of
long-lived assets and certain identifiable intangibles 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 that
long-lived assets to be disposed of (e.g. real estate held for sale) be
carried at the lower of cost or fair value less costs to sell and does
not allow such assets to be depreciated. The adoption of this standard
did not have a material impact on results of operations, financial
condition or liquidity.
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). FAS 123 establishes financial
accounting and reporting standards for stock-based employee compensation
plans as well as transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. This
statement defines a fair value-based method of accounting for employee
stock options or similar equity instruments, and encourages all entities
to adopt this method of accounting for all employee stock compensation
plans. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value-based method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). Entities electing to
remain with the accounting method prescribed in APB 25 must make pro
forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined by FAS 123 had been
26
<PAGE> 28
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
applied. FAS 123 is applicable to fiscal years beginning after December
15, 1995. The Company has elected to continue to account for its
stock-based compensation plans using the accounting method prescribed by
APB 25 and has included in the notes to consolidated financial statements
the pro forma disclosures required by FAS 123. See note 14.
Accounting Policies
Investments
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities are valued based upon quoted market prices, or if quoted
market prices are not available, discounted expected cash flows using
market rates commensurate with the credit quality and maturity of the
investment. Fixed maturities are classified as "available for sale" and
are reported at fair value, with unrealized investment gains and losses,
net of income taxes, charged or credited directly to stockholders'
equity.
Equity securities, which include common and nonredeemable preferred
stocks, are classified as available for sale and carried at fair value
based primarily on quoted market prices. Changes in fair values of equity
securities are charged or credited directly to stockholders' equity, net
of income taxes.
Mortgage loans are carried at amortized cost. A mortgage loan is
considered impaired when it is probable that the Company will be unable
to collect principal and interest amounts due. For mortgage loans that
are determined to be impaired, a reserve is established for the
difference between the amortized cost and fair market value of the
underlying collateral. In estimating fair value, the Company uses
interest rates reflecting the higher returns required in the current real
estate financing market. Impaired loans were not significant at December
31, 1996 and 1995.
Real estate held for sale is carried at the lower of cost or fair value
less estimated costs to sell. Fair value was established at time of
foreclosure by internal analysis or external appraisers, using discounted
cash flow analyses and other acceptable techniques. Thereafter, an
allowance for losses on real estate held for sale is established if the
carrying value of the property exceeds its current fair value less
estimated costs to sell. There was no such allowance at December 31, 1996
and 1995.
Accrual of income is suspended on fixed maturities or mortgage loans that
are in default, or on which it is likely that future payments will not be
made as scheduled. Interest income on investments in default is
recognized only as payment is received. Investments included in the
consolidated balance sheet that were non-income producing for the
preceding 12 months were not significant.
Short-term securities, consisting primarily of money market instruments
and other debt issues purchased with a maturity of less than one year,
are carried at amortized cost which approximates market.
Investment Gains and Losses
Realized investment gains and losses are included as a component of
pretax revenues based upon specific identification of the investments
sold on the trade date. Other than temporary declines in market value of
investments are included in realized investment gains and losses.
27
<PAGE> 29
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Reinsurance Recoverables
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured business. The
Company evaluates and monitors the financial condition of its reinsurers
under voluntary reinsurance arrangements to minimize its exposure to
significant losses from reinsurer insolvencies.
Deferred Acquisition Costs
Commissions and premium taxes, which vary with and are primarily related
to the production of new business, are deferred and amortized pro rata
over the contract periods in which the related premiums are earned.
Future investment income attributable to related premiums is taken into
account in measuring the recoverability of the carrying value of this
asset. Deferred acquisition costs are reviewed to determine if they are
recoverable from future income, and if not, are charged to expense. All
other acquisition expenses are charged to operations as incurred.
Contractholder Receivables and Payables
Under certain workers' compensation insurance contracts with deductible
features, the Company is obligated to pay the claimant for the full
amount of the claim. The Company is subsequently reimbursed by the
policyholder for the deductible amount. These amounts are included on a
gross basis in the consolidated balance sheet in contractholder payables
and contractholder receivables, respectively.
Goodwill
Goodwill is amortized on a straight-line basis over a 40-year period.
The carrying amount is regularly reviewed for indicators of
other-than-temporary impairments in value. Impairments would be
recognized in operating results if a permanent diminution in value is
deemed to have occurred.
Claims and Claim Adjustment Expense Reserves
Claims and claim adjustment expense reserves represent estimated
provisions for both reported and unreported claims incurred and related
expenses. The reserves are adjusted regularly based on experience.
Included in the claims and claim adjustment expense reserves in the
consolidated balance sheet at December 31, 1996 and 1995 are $1.6
billion and $778 million, respectively, of reserves related to workers'
compensation that have been discounted using an interest rate of 5%.
In determining claims and claim adjustment expense reserves, the Company
carries on a continuing review of its overall position, its reserving
techniques and its reinsurance. These reserves represent the estimated
ultimate cost of all incurred claims and claim adjustment expenses.
Since the reserves are based on estimates, the ultimate liability may be
more or less than such reserves. The effects of changes in such
estimated reserves are included in the results of operations in the
period in which the estimates are changed. Such changes may be material
to the results of operations and could occur in a future period.
Permitted Statutory Accounting Practices
The Company's insurance subsidiaries, domiciled principally in
Connecticut, prepare statutory financial statements in accordance with
the accounting practices prescribed or permitted by the insurance
departments of the states of domicile. Prescribed statutory accounting
practices include certain publications of the National Association of
Insurance Commissioners as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. The impact of any permitted
accounting practices on statutory surplus of the Company is not
material.
28
<PAGE> 30
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Premiums and Unearned Premium Reserves
Premiums are recognized as revenues pro rata over the policy period.
Unearned premium reserves represent the unexpired portion of policy
premiums. Accrued retrospective premiums are included in premium
balances receivable.
Fee Income
Fee income includes servicing fees from carriers and revenues from large
deductible policies and service contracts and are recognized pro rata
over the contract or policy periods. Also included in fee income are
revenues from premium installment charges, which are recognized as
collected.
Other Revenues
Other revenues include gains and losses on dispositions of assets and
operations other than realized investment gains and losses, revenues of
noninsurance subsidiaries other than fee income and the pretax operating
results of real estate joint ventures.
Federal Income Taxes
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income
taxes arise from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and
liabilities.
Net Income Per Share
Net income per common share is computed after recognition of preferred
stock dividend requirements and is based on the weighted average number
of common shares and common share equivalents outstanding during the
period. For purposes of the computation of net income per share, the
weighted average number of common shares and common share equivalents
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. Fully
diluted net income per common share, assuming the dilutive effect of
common stock equivalents, has not been presented because the effects are
not significant.
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures contracts, forward contracts and interest rate swaps and caps,
as a means of hedging exposure to interest rate and foreign currency
risk. Hedge accounting is used to account for derivatives. To qualify
for hedge accounting the changes in value of the derivative must be
expected to substantially offset the changes in value of the hedged
item. Hedges are monitored to ensure that there is a high correlation
between the derivative instruments and the hedged investment.
Gains and losses arising from financial futures contracts are used to
adjust the basis of hedged investments and are recognized in net
investment income over the life of the investment.
Interest rate swaps are carried at market value and reported in other
invested assets. Unrealized gains and losses are reflected in
stockholders' equity. Swap payments are accrued and recognized in net
investment income.
29
<PAGE> 31
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Forward contracts and interest rate caps were not significant at
December 31, 1996 and 1995. Information concerning derivative financial
instruments is included in note 12.
Accounting Standards not yet Adopted
In June 1996, the 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 extinguishments 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 are
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and
are to be applied prospectively. However, in December 1996 the FASB
issued Statement of Financial Accounting Standards No. 127 "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125"
which delays until January 1, 1998 the effective date for certain
provisions. Earlier or retroactive application is not permitted. The
adoption of the provisions of this statement effective January 1, 1997
will not have a material impact on the Company's results of operations,
financial condition or liquidity.
Nature of Operations
The Company is comprised of two major business segments: Commercial
Lines and Personal Lines.
Commercial Lines
Commercial Lines is divided into four marketing groups that are designed
to focus on a particular client base or industry segment to provide
products and services that specifically address customers' needs:
National Accounts, Commercial Accounts, Select Accounts, and Specialty
Accounts. Protection is afforded to customers of Commercial Lines for
the risks of property loss such as fire and windstorm, financial loss
such as business interruption, liability claims arising from operations
and workers' compensation benefits through insurance products where risk
is transferred from the customer to Commercial Lines. Such coverages
include workers' compensation, general liability, commercial
multi-peril, commercial automobile, property, fidelity and surety and
several miscellaneous coverages.
National Accounts serves large companies, as well as employee groups,
associations and franchises. Products are marketed through national
brokers and regional agents. Programs offered by National Accounts
include risk transfer and risk service, such as claims settlement, loss
control and risk management services and are generally offered in
connection with a retrospectively rated insurance policy, a large
deductible plan or a self-insured program. National Accounts also
includes the Company's alternative market business, which primarily
covers workers' compensation products and services to voluntary and
involuntary state pools.
Commercial Accounts serves medium-sized businesses. Commercial Accounts
sells a broad range of property and casualty insurance products, with an
emphasis on guaranteed cost products, through a large network of
independent agents and brokers.
30
<PAGE> 32
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Select Accounts serves small businesses and individuals with commercial
exposures. Select Accounts products are generally guaranteed cost
policies, often a packaged product covering property and liability
exposures. The products are sold through independent agents.
Specialty Accounts markets products to national, mid-size and small
customers, including individuals. The principal products of Specialty
Accounts include professional liability insurance, directors' and
officers' liability insurance, fiduciary liability insurance, product
liability, fidelity and surety bonds, commercial umbrella and excess
liability, excess property insurance and coverages relating to the
entertainment industry and other industry specific programs. Its
products and services are distributed through both wholesale brokers and
retail agents and brokers.
Personal Lines
Personal Lines writes virtually all types of property and casualty
insurance covering personal risks. The primary coverages in Personal
Lines are personal automobile and homeowners insurance sold to
individuals.
Personal automobile policies provide coverage for liability to others
for both bodily injury and property damage, and for physical damage to
an insured's own vehicle from collision and various other perils. In
addition, many states require policies to provide first-party personal
injury protection, frequently referred to as no-fault coverage.
Homeowners policies are available for dwellings, condominiums, mobile
homes and rental property contents. Protection against losses to
dwellings and contents from a wide variety of perils is included in
these policies, as well as coverage for liability arising from ownership
or occupancy.
The Company has a geographic exposure to catastrophe losses in certain
North Atlantic states, California and South Florida. Catastrophes can be
caused by various events including hurricanes, windstorms, earthquakes,
hail, severe winter weather, explosions and fires. The incidence and
severity of catastrophes are inherently unpredictable. The extent of
losses from a catastrophe is a function of both the total amount of
insured exposure in the area affected by the event and the severity of
the event. Most catastrophes are restricted to small geographic areas;
however, hurricanes and earthquakes may produce significant damage in
large, heavily populated areas. The Company generally seeks to reduce
its exposure to catastrophe through individual risk selection and the
purchase of catastrophe reinsurance.
31
<PAGE> 33
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. ACQUISITION AND DISPOSITION OF SUBSIDIARIES
The Aetna Casualty and Surety Company and The Standard Fire Insurance
Company
As discussed in note 1, on April 2, 1996, TAP purchased from Aetna all
of the outstanding capital stock of Aetna P&C. To finance the $4.2
billion purchase price including transaction costs, plus capital
contributions totaling $710 million to Aetna P&C, TAP borrowed $2.7
billion from a syndicate of banks under a five-year revolving credit
facility (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 $1.1
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 consolidated statement of income. The aggregate
proceeds from the above offerings of $2.5 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
consolidated balance sheet at December 31, 1996 on a fully consolidated
basis at management's best estimate of their fair values at the
acquisition date, 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 has assumed, designated as held
for sale and actively markets; claims reserves to conform the accounting
policy regarding discounting to that historically used by the Company;
liabilities for lease and severance costs relating to the restructuring
plan for the business acquired; other assets and liabilities and related
deferred income tax amounts; and the allocation of the purchase price
may be adjusted. The excess of the purchase price over the estimated
fair value of net assets is approximately $1.2 billion and is being
amortized over 40 years.
During 1996, the Company recorded charges related to the acquisition and
integration of Aetna P&C. These charges resulted primarily from
anticipated costs of the acquisition and the application of the
Company's strategies, policies and practices to Aetna P&C reserves and
include: $279 million after tax ($430 million before tax) in reserve
increases, net of reinsurance, related primarily to cumulative injury
claims other than asbestos (CIOTA), insurance products involving
financial guarantees, and assumed reinsurance; $55 million after tax
($84 million before tax) provision for an additional asbestos liability
related to an existing settlement agreement with a policyholder of Aetna
P&C; $39 million after tax ($60 million before tax) charge related to
premium collection issues; $27 million after tax ($41 million before
tax) provision for uncollectibility of reinsurance recoverables; and $23
million after tax ($35 million before tax) in lease and severance costs
of The Travelers Indemnity Company related to the restructuring plan for
the acquisition.
32
<PAGE> 34
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. ACQUISITION AND DISPOSITION OF SUBSIDIARIES, Continued
The following unaudited pro forma information presents the results of
operations of the Company and Aetna P&C for the years ended December 31,
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.
<TABLE>
<CAPTION>
(for the year ended December 31, in millions, except per share amounts) 1996 1995*
---------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $9,805 $9,876
Net income 584 73
Earnings per common share 1.46 0.18
---------------------------------------------------------------------------------------------
</TABLE>
* Historical results of Aetna P&C include charges of $1.1 billion ($705
million after tax) representing an addition to environmental-related
and asbestos-related claims reserves.
Excluding the net acquisition-related charges outlined above, pro forma
net income would have been $1.0 billion or $2.52 per share for the year
ended December 31, 1996.
Supplemental Information to the Consolidated Statement of Cash Flows
Relating to the Acquisition of Aetna P&C
Noncash investing and financing transactions relating to the acquisition
of Aetna P&C that are not reflected in the consolidated statement of
cash flows follows:
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996
---------------------------------------------------------------------------------------------
<S> <C>
Fair value of investments acquired $ 13,899
Fair value of other assets acquired 10,409
Claims and claim adjustment expense reserves assumed (16,845)
Other liabilities assumed (3,303)
---------------------------------------------------------------------------------------------
Cash payment related to business acquisition $ 4,160
---------------------------------------------------------------------------------------------
</TABLE>
Bankers and Shippers Insurance Company
In October 1994, the Company sold Bankers and Shippers Insurance Company
(Bankers and Shippers) and received cash proceeds of $142 million. The
$30 million pretax gain on the sale is included in other revenues.
Bankers and Shippers' revenues, income before federal income taxes and
net income were $178 million, $14 million and $9 million, respectively,
for the year ended December 31, 1994.
33
<PAGE> 35
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
<TABLE>
<CAPTION>
3. SEGMENT INFORMATION
-----------------------------------------------------------------------------------------------------------------------
(at and for the year ended December 31, in millions)
Corporate
Commercial Personal and Other
Lines Lines Operations Consolidated
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Revenues
Premiums $ 3,695 $ 2,323 $ 10 $ 6,028
Net investment income 1,343 311 2 1,656
Fee income 399 56 - 455
Realized investment gains (losses) 26 (8) - 18
Other 34 3 3 40
-----------------------------------------------------------------------------------------------------------------------
Total revenues $ 5,497 $ 2,685 $ 15 $ 8,197
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes $ 205 $ 417 $ (135) $ 487
Net income (loss) 197(1) 282(2) (88) 391
Assets 42,345 7,030 404 49,779
-----------------------------------------------------------------------------------------------------------------------
1995
Revenues
Premiums $ 2,017 $ 1,284 $ 14 $ 3,315
Net investment income 548 161 1 710
Fee income 435 21 - 456
Realized investment gains 62 9 - 71
Other 8 6 3 17
-----------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,070 $ 1,481 $ 18 $ 4,569
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes $ 424 $ 146 $ (19) $ 551
Net income (loss) 329 107 (17) 419
Assets 20,168 3,617 277 24,062
-----------------------------------------------------------------------------------------------------------------------
1994
Revenues
Premiums $ 1,810 $ 1,353 $ 15 $ 3,178
Net investment income 444 128 1 573
Fee income 468 27 1 496
Realized investment gains (losses) (109) (27) 4 (132)
Other 13 38 2 53
-----------------------------------------------------------------------------------------------------------------------
Total revenues $ 2,626 $ 1,519 $ 23 $ 4,168
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes $ 83 $ 135 $ (8) $ 210
Net income (loss) 93 97 (2) 188
Assets 19,138 3,029 314 22,481
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Results of operations and assets include amounts related to Aetna P&C from
April 2, 1996, the date of the acquisition.
(1) Includes $453 million of acquisition-related charges.
(2) Includes $39 million of benefit related to the review of Aetna P&C's
insurance reserves, partially offset by $9 million of other
acquisition-related charges.
34
<PAGE> 36
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. INVESTMENTS
Fixed Maturities
The amortized cost and fair value of investments in fixed maturities
classified as available for sale were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
(at December 31, 1996, in millions) cost gains losses value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities -
CMOs and pass through securities $ 4,462 $ 75 $ 10 $ 4,527
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 2,403 51 3 2,451
Obligations of states, municipalities and
political subdivisions 5,127 123 31 5,219
Debt securities issued by foreign governments 581 16 1 596
All other corporate bonds 11,404 201 27 11,578
Redeemable preferred stock 75 - - 75
----------------------------------------------------------------------------------------------------------------
Total $ 24,052 $ 466 $ 72 $ 24,446
----------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
(at December 31, 1995, in millions) cost gains losses value
----------------------------------------------------------------------------------------------------------------
Mortgage-backed securities -
CMOs and pass through securities $ 1,518 $ 59 $ 3 $ 1,574
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,183 65 - 1,248
Obligations of states, municipalities and
political subdivisions 3,855 109 11 3,953
Debt securities issued by foreign governments 97 3 - 100
All other corporate bonds 3,792 164 12 3,944
Redeemable preferred stock 89 - - 89
----------------------------------------------------------------------------------------------------------------
Total $ 10,534 $ 400 $ 26 $ 10,908
----------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of fixed maturities by contractual
maturity are shown below. Actual maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
35
<PAGE> 37
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. INVESTMENTS, Continued
<TABLE>
<CAPTION>
Amortized Fair
(at December 31, 1996, in millions) cost value
---------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 951 $ 955
Due after 1 year through 5 years 5,906 5,967
Due after 5 years through 10 years 5,235 5,321
Due after 10 years 7,498 7,676
---------------------------------------------------------------------------------------------
19,590 19,919
Mortgage-backed securities 4,462 4,527
---------------------------------------------------------------------------------------------
Total $24,052 $24,446
---------------------------------------------------------------------------------------------
</TABLE>
The Company makes investments in collateralized mortgage obligations
(CMOs). CMOs typically have high credit quality, offer good liquidity,
and provide a significant advantage in yield and total return compared to
U.S. Treasury securities. The Company's investment strategy is to
purchase CMO tranches which are protected against prepayment risk,
including planned amortization class (PAC) tranches. Prepayment protected
tranches are preferred because they provide stable cash flows in a
variety of scenarios. The Company does invest in other types of CMO
tranches if a careful assessment indicates a favorable risk/return
tradeoff. The Company does not purchase residual interests in CMOs.
At December 31, 1996 and 1995, the Company held CMOs classified as
available for sale with a fair value of $2.1 billion and $956 million,
respectively. Approximately 81% and 90% of the Company's CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31,
1996 and 1995, respectively. In addition, the Company held $2.4 billion
and $618 million of GNMA, FNMA or FHLMC mortgage-backed pass-through
securities at December 31, 1996 and 1995, respectively. Virtually all of
these securities are rated AAA.
Proceeds from sales of fixed maturities classified as available for sale
were $12.6 billion, $4.9 billion and $1.8 billion in 1996, 1995 and 1994,
respectively. Gross gains of $82 million, $65 million and $12 million and
gross losses of $177 million, $90 million and $67 million, respectively,
were realized on those sales.
36
<PAGE> 38
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. INVESTMENTS, Continued
Equity Securities
The cost and fair value of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized Fair
(at December 31, 1996, in millions) Cost gains losses value
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks $164 $29 $17 $176
Nonredeemable preferred stocks 592 16 5 603
-----------------------------------------------------------------------------------------------
Total $756 $45 $22 $779
-----------------------------------------------------------------------------------------------
(at December 31, 1995, in millions)
Common stocks $171 $38 $ 6 $203
Nonredeemable preferred stocks 394 11 5 400
-----------------------------------------------------------------------------------------------
Total $565 $49 $11 $603
-----------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of equity securities were $558 million, $157 million
and $121 million in 1996, 1995 and 1994, respectively, resulting in gross
realized gains of $147 million, $28 million and $19 million and gross
realized losses of $28 million, $6 million and $1 million, respectively.
Real Estate Held for Sale and Mortgage Loans
Underperforming mortgage loans include delinquent loans, loans in the
process of foreclosure and loans modified at interest rates below
market.
The Company's real estate held for sale and mortgage loan portfolios
consisted of the following:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996 1995
---------------------------------------------------------------------------
<S> <C> <C>
Current mortgage loans $ 965 $ 201
Underperforming mortgage loans 40 12
---------------------------------------------------------------------------
Total mortgage loans 1,005 213
Real estate held for sale 157 23
---------------------------------------------------------------------------
Total $1,162 $ 236
---------------------------------------------------------------------------
</TABLE>
37
<PAGE> 39
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. INVESTMENTS, Continued
Aggregate annual maturities on mortgage loans are as follows:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996
----------------------------------------------------
<S> <C>
Past maturity $ 33
1997 163
1998 85
1999 245
2000 192
2001 53
Thereafter 234
----------------------------------------------------
Total $1,005
----------------------------------------------------
</TABLE>
Concentrations
At December 31, 1996 and 1995, the Company had concentrations of credit
risk in tax exempt investments of the State of Texas of $1.1 billion and
$602 million, respectively.
The Company participates in a short-term investment pool maintained by an
affiliate. See note 14.
Included in fixed maturities are below investment grade assets totaling
$599 million and $402 million at December 31, 1996 and 1995,
respectively. The Company defines its below investment grade assets as
those securities rated "Ba1" or below by external rating agencies, or the
equivalent by the internal analysts when a public rating does not exist.
Such assets include publicly traded below investment grade bonds and
certain other privately issued bonds that are classified as below
investment grade loans.
The Company also has significant concentrations of investments in the
following industries:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996 1995
---------------------------------------------------------------------------------------------
<S> <C> <C>
Financing $2,027 $ 599
Banking 2,001 575
Electric utilities 947 513
Oil and gas 882 454
Transportation 697 533
---------------------------------------------------------------------------------------------
</TABLE>
Below investment grade assets included in the preceding table, are as
follows:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996 1995
---------------------------------------------------------------------------------------------
<S> <C> <C>
Financing $ 13 $ 15
Banking - 1
Electric utilities 36 21
Oil and gas 10 55
Transportation 15 28
---------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 40
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. INVESTMENTS, Continued
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, limits and
other monitoring procedures. Collateral for fixed maturities often
includes pledges of assets, including stock and other assets, guarantees
and letters of credit.
Net Investment Income
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross investment income
Fixed maturities $1,344 $586 $528
Short-term securities 77 73 17
Mortgage loans 90 21 27
Other 197 49 26
---------------------------------------------------------------------------------------
1,708 729 598
Investment expenses 52 19 25
---------------------------------------------------------------------------------------
Net investment income $1,656 $710 $573
---------------------------------------------------------------------------------------
</TABLE>
Realized and Unrealized Investment Gains (Losses)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized
Fixed maturities $(95) $(40) $(147)
Equity securities 119 25 12
Real estate held for sale 3 1 -
Other (9) 85 3
--------------------------------------------------------------------------------------
Realized investment gains (losses) $ 18 $ 71 $(132)
---------------------------------------------------------------------------------------
</TABLE>
Changes in net unrealized investment gains (losses) that are included as
a separate component of stockholders' equity were as follows:
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized
Fixed maturities $ 20 $1,039 $(637)
Equity securities (15) 55 (25)
Other 1 20 (41)
----------------------------------------------------------------------------------------
6 1,114 (703)
Related taxes 1 391 (248)
----------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) 5 723 (455)
Balance beginning of year 280 (443) 12
----------------------------------------------------------------------------------------
Balance end of year $285 $ 280 $(443)
----------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 41
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. REINSURANCE
The Company participates in reinsurance in order to limit losses,
minimize exposure to large risks, provide additional capacity for future
growth and to effect business-sharing arrangements. In addition, the
Company assumes 100% of the workers' compensation premiums written by the
Accident Department of its affiliate, The Travelers Insurance Company
(TIC). The Company is also a member of and participates as a servicing
carrier for several pools and associations.
Reinsurance is placed on both a quota-share and excess of loss basis.
Reinsurance ceded arrangements do not discharge the Company as the
primary insurer, except for cases involving a novation.
Effective January 1, 1995, the Company terminated a reinsurance agreement
with TIGI whereby TIGI assumed 8% of the Company's business written prior
to 1991. Also, effective January 1, 1995, the Company terminated certain
agreements with TIGI whereby TIGI had assumed certain casualty reserves
subject to a stop loss arrangement. As a result of the termination of
these agreements, TIGI transferred $520 million of invested assets and of
insurance liabilities to the Company.
In connection with the 1992 sale of American Re-Insurance Company (Am Re)
by Aetna P&C, Am Re and Aetna P&C entered into a reinsurance agreement
which provides that to the extent Am Re incurred losses in 1991 and prior
that were still outstanding at January 1, 1992 in excess of $2.7 billion,
Aetna P&C has an 80% participation in payments on those losses up to a
maximum payment by Aetna P&C of $500 million. In 1995, Am Re increased
reserves for asbestos, environmental and other latent liabilities. As a
result of this increase, losses of approximately $228 million ($120
million after discount), which were largely workers' compensation life
table indemnity claims, were ceded to Aetna P&C. This agreement has been
accounted for as a deposit and a liability has been established for the
present value of the expected payout under the agreement.
In conjunction with its reserve addition for environmental-related
claims, Aetna P&C purchased reinsurance in 1995 which provided aggregate
protection of $335 million for the adverse loss development beyond
reserves held (net of existing reinsurance). Under this arrangement,
approximately $165 million of the existing reserves for such losses were
ceded at the time the contract was entered into. Substantially all of the
available statutory surplus protection was utilized during 1995. This
agreement was commuted in June 1996 after an evaluation of the
agreement's impact on statutory surplus. Due to the capital additions
made at acquisition, it was determined that the contract was no longer
cost-effective. The impact of the commutation of the agreement was not
significant.
Aetna P&C had in place in 1995 an aggregate excess of loss arrangement
with respect to all of its property-casualty lines for accident year
1995, providing up to approximately $250 million of additional net
protection. This agreement was commuted in June 1996 in order to conform
reinsurance strategies in conjunction with the acquisition of Aetna P&C.
The impact of the commutation of the agreement was not significant.
40
<PAGE> 42
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. REINSURANCE, Continued
A summary of reinsurance financial data reflected within the
consolidated statement of income is presented below:
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Written premiums:
Direct $ 7,585 $ 4,261 $ 4,036
Assumed from:
Affiliated companies 264 374 373
Non-affiliated companies 320 301 371
Ceded to:
Affiliated companies (58) (48) (61)
Non-affiliated companies (1,769) (1,267) (1,159)
---------------------------------------------------------------------------------------------------
Total net written premiums $ 6,342 $ 3,621 $ 3,560
---------------------------------------------------------------------------------------------------
Earned premiums:
Direct $ 7,263 $ 4,007 $ 3,738
Assumed from:
Affiliated companies 201 284 399
Non-affiliated companies 395 346 332
Ceded to:
Affiliated companies (58) (48) (61)
Non-affiliated companies (1,773) (1,274) (1,230)
---------------------------------------------------------------------------------------------------
Total net earned premiums $ 6,028 $ 3,315 $ 3,178
---------------------------------------------------------------------------------------------------
Percentage of amount assumed to net earned 9.9% 19.0% 23.0%
---------------------------------------------------------------------------------------------------
Ceded claims incurred $ 1,558 $ 1,245 $ 724
---------------------------------------------------------------------------------------------------
</TABLE>
Reinsurance recoverables, net of valuation allowance, include amounts
recoverable on unpaid and paid claims and were as follows:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996 1995
---------------------------------------------------------------------------
<S> <C> <C>
Reinsurance recoverables:
Property-casualty business:
Pools and associations $4,160 $2,775
Non-affiliated companies 4,553 1,713
Affiliated companies 793 675
Accident and health business:
Affiliated companies 208 244
----------------------------------------------------------------------------
Total reinsurance recoverables $9,714 $5,407
----------------------------------------------------------------------------
</TABLE>
41
<PAGE> 43
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. REINSURANCE, Continued
Amounts of reinsurance ceded claims and claim adjustment expenses
recoverable from unaffiliated insurers at December 31, 1996 and 1995
include $488 million and $289 million, respectively, recoverable from
Lloyd's of London (Lloyd's). In 1996, Lloyd's restructured its operations
with respect to claims for years prior to 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 ability of the Company to aggregate
asbestos claims under a market agreement between Lloyd's and the Company
or under the applicable reinsurance treaties.
The outcome of the arbitration referred to above is 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 this matter could have a
material adverse effect on the Company's results of operations in a
future period. However, the Company believes that it is not likely that
the outcome 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 coverages
defenses. The Company believes that such allowance properly states the
net receivable from reinsurance contracts.
42
<PAGE> 44
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. INSURANCE CLAIMS RESERVES
Claims and claim adjustment expense reserves were as follows:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996 1995
---------------------------------------------------------------------------------------
<S> <C> <C>
Claims and claim adjustment expense reserves:
Property-casualty $30,969 $15,213
Accident and health 208 247
---------------------------------------------------------------------------------------
Total $31,177 $15,460
---------------------------------------------------------------------------------------
</TABLE>
The table below is a reconciliation of beginning and ending
property-casualty reserve balances for claims and claim adjustment
expenses.
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Claims and claim adjustment expense
reserves at beginning of year $15,213 $15,013 $14,638
Less reinsurance recoverables on unpaid losses 5,123 5,301 5,319
------------------------------------------------------------------------------------------------------------
Net balance at beginning of year 10,090 9,712 9,319
------------------------------------------------------------------------------------------------------------
Provision for claims and claim adjustment expenses
for claims arising in the current year 4,839 2,903 3,041
Estimated claims and claim adjustment
expenses for claims arising in prior years 192 (226) (255)
Acquisitions 11,752 - 289
Termination of reinsurance agreements with TIGI (see note 5) - 520 -
Other - - (36)
------------------------------------------------------------------------------------------------------------
Total increases 16,783 3,197 3,039
------------------------------------------------------------------------------------------------------------
Claims and claim adjustment expense payments for claims arising in:
Current year 1,858 886 930
Prior years 3,199 1,933 1,716
------------------------------------------------------------------------------------------------------------
Total payments 5,057 2,819 2,646
------------------------------------------------------------------------------------------------------------
Net balance at end of year 21,816 10,090 9,712
Plus reinsurance recoverables on unpaid losses 9,153 5,123 5,301
------------------------------------------------------------------------------------------------------------
Claims and claim adjustment expense
reserves at end of year $30,969 $15,213 $15,013
------------------------------------------------------------------------------------------------------------
</TABLE>
In 1996, estimated claims and claim adjustment expenses for claims
arising in prior years included $238 million of net favorable
development in certain Commercial Lines and Personal Lines coverages.
Also included in 1996 is $430 million within Commercial Lines of
acquisition-related charges primarily for CIOTA, insurance products
involving financial guarantees, and assumed reinsurance. In addition, as
a result of the Company's review of Aetna P&C's insurance reserves,
Commercial Lines reserves were increased by $60 million and Personal
Lines reserves were decreased by $60 million.
43
<PAGE> 45
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. INSURANCE CLAIMS RESERVES, Continued
In 1995, estimated claims and claim adjustment expenses for claims
arising in prior years included favorable loss development in certain
workers' compensation, general liability and commercial auto lines of
approximately $150 million; however, since the business to which it
relates is subject to premium adjustments on retrospectively rated
policies, the net impact on results of operations is not significant. In
addition, in 1995 estimated claims and claim adjustment expenses for
claims arising in prior years included favorable loss development in
Personal Lines of approximately $60 million.
In 1994, estimated claims and claim adjustment expenses for claims
arising in prior years included favorable loss development in Personal
Lines automobile and homeowners coverage of $100 million, offset by
unfavorable development of $100 million for Commercial Lines asbestos and
environmental claims from 1985 and prior. In addition, in 1994 Commercial
Lines experienced favorable prior year loss development in workers'
compensation, other liability and commercial automobile product lines in
its National Accounts business for post-1985 accident years. This
favorable development amounted to $261 million; however, since the
business to which it relates is subject to premium adjustments on
retrospectively rated policies, the net impact on results of operations
is not significant.
The claims and claim adjustment expense reserves included $2.3 billion
and $806 million for asbestos and environmental related claims net of
reinsurance at December 31, 1996 and 1995, respectively.
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are
not used to estimate such reserves.
For environmental claims, the Company estimates its financial exposure
and establishes reserves based upon an analysis of its historical claim
experience and the facts of the individual underlying claims. The unique
facts presented in each claim are evaluated individually and
collectively. Due consideration is given to the many variables presented
in each claim, as discussed above.
The following factors are evaluated in projecting the ultimate reserve
for asbestos-related claims: available insurance coverage; limits and
deductibles; an analysis of each policyholder's potential liability;
jurisdictional involvement; past and projected future claim activity;
past settlement values of similar claims; allocated claim adjustment
expense; potential role of other insurance, and applicable coverage
defenses, if any. Once the gross ultimate exposure for indemnity and
allocated claim adjustment expense is determined for a policyholder by
policy year, a ceded projection is calculated based on any applicable
facultative and treaty reinsurance. In addition, a similar review is
conducted for asbestos property damage claims. However, due to the
relatively minor claim volume, these reserves have remained at a constant
level.
44
<PAGE> 46
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. INSURANCE CLAIMS RESERVES, Continued
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1996 are the Company's
best estimate of ultimate claims and claim adjustment expenses based upon
known facts and current law. However, the conditions surrounding the
final resolution of these claims continues to change. Currently, it is
not possible to predict changes in the legal and legislative environment
and their impact on the future development of asbestos and environmental
claims. Such development will be affected by future court decisions and
interpretations and changes in Superfund and other legislation. Because
of these future unknowns, additional liabilities may arise for amounts in
excess of the current reserves. These additional amounts, or a range of
these additional amounts, cannot now be reasonably estimated, and 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.
45
<PAGE> 47
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. DEBT
As discussed in note 2, during the first quarter of 1996, TAP entered
into a five-year revolving credit facility, as amended, in the amount of
$2.7 billion with a syndicate of banks. The Credit Facility, which
expires in December 2001, was used to finance in part the purchase of
Aetna P&C. As of April 30, 1996, all borrowings under the Credit Facility
had been repaid in full and the amount of the Credit Facility was
subsequently reduced to $500 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 December 31, 1996, this requirement was exceeded by approximately $2.8
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 December 31, 1996, TAP had $25 million outstanding
under its commercial paper program. The weighted average interest rate on
commercial paper as of December 31, 1996 was 5.64%. 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.
During 1996, the Company completed the following long-term debt
offerings, leaving $750 million available for debt offerings under its
shelf registration statement:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996
----------------------------------------------------------
<S> <C>
6-3/4% Notes due 1999 $ 200
6-1/4% Notes due 1999 200
6-3/4% Notes due 2001 500
6-3/4% Notes due 2006 150
7-3/4% Notes due 2026 200
----------------------------------------------------------
1,250
Debt discount (1)
----------------------------------------------------------
Total $1,249
----------------------------------------------------------
</TABLE>
Aggregate annual maturities on long-term debt obligations are as follows:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996
----------------------------------------------------------
<S> <C>
1997 $ -
1998 -
1999 400
2000 -
2001 500
Thereafter 350
----------------------------------------------------------
Total $1,250
----------------------------------------------------------
</TABLE>
46
<PAGE> 48
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Effective tax rate
Income before federal income taxes $ 487 $551 $210
Statutory tax rate 35% 35% 35%
---------------------------------------------------------------------------------------------------
Expected federal income taxes $ 170 $193 $ 74
Tax effect of:
Nontaxable investment income (86) (68) (62)
Goodwill 12 4 4
Other, net - 3 6
---------------------------------------------------------------------------------------------------
Federal income taxes $ 96 $132 $ 22
---------------------------------------------------------------------------------------------------
Effective tax rate 20% 24% 10%
---------------------------------------------------------------------------------------------------
Composition of federal income taxes
Current expense (benefit):
United States $(102) $155 $(11)
Foreign 2 5 5
---------------------------------------------------------------------------------------------------
Total (100) 160 (6)
---------------------------------------------------------------------------------------------------
Deferred expense (benefit):
United States 196 (28) 28
Foreign - - -
---------------------------------------------------------------------------------------------------
Total 196 (28) 28
---------------------------------------------------------------------------------------------------
Federal income tax expense $ 96 $132 $ 22
---------------------------------------------------------------------------------------------------
</TABLE>
The net deferred tax assets were comprised of the tax effects of
temporary differences related to the following assets and liabilities:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996 1995
------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Claims and claim adjustment expense reserves $1,241 $ 598
Acquisition-related reserves 221 77
Unearned premium reserves 141 42
Employee benefits 87 93
Other 186 80
------------------------------------------------------------------------------------------
Total 1,876 890
------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs 149 70
Investments 103 142
Other 41 28
------------------------------------------------------------------------------------------
Total 293 240
------------------------------------------------------------------------------------------
Net deferred tax asset $1,583 $ 650
------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 49
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. FEDERAL INCOME TAXES, Continued
The Company is a member of a subgroup of companies comprised of TIGI and
its non-life insurance subsidiaries. This subgroup is included in the
consolidated federal income tax return filed by Travelers Group Inc. TIGI
allocates federal income taxes to its subsidiaries on a separate return
basis adjusted for credits and other amounts required by the
consolidation process. Any resulting liability is paid currently to TIGI.
Any credits for losses will be paid by TIGI currently to the extent that
such credits are for tax benefits that have been utilized in the
consolidated federal income tax return. TIGI will reimburse the Company
for any remaining receivable at the end of the federal statutory
carryforward period.
In the event that the consolidated return develops an alternative minimum
tax (AMT), each company with an AMT on a separate company basis will be
allocated a portion of the consolidated AMT. Settlement of the AMT will
be made in the same manner and timing as the regular tax. If the AMT is
available as a credit against the regular tax, each subsidiary remitting
the AMT may establish a receivable from TIGI. The receivable will be paid
as the credit is utilized on the consolidated return or at the end of the
federal statutory carryforward period for operating losses.
The Company has a net deferred tax asset which relates to temporary
differences that are expected to reverse as net ordinary deductions. The
Company will have to generate approximately $4.5 billion of taxable
income, before reversal of these temporary differences, primarily over
the next 10 to 15 years, to realize the deferred tax asset. Management
expects to realize the deferred tax asset based upon its expectation of
future positive taxable income, after the reversal of these deductible
temporary differences, in the consolidated federal income tax return of
Travelers Group Inc. The taxable income of the consolidated return of
Travelers Group Inc., after reversal of the deductible temporary
differences, is expected to be at least $1.5 billion annually. At
December 31, 1996, the Company has no ordinary or capital loss
carryforwards.
9. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY
Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
During 1996, the Company formed the following statutory business trusts
under the laws of the state of Delaware. Each trust exists for the
exclusive purposes of (i) issuing Trust Securities (both common and
preferred) representing undivided beneficial interests in the assets of
the Trust; (ii) investing the gross proceeds of the Trust Securities in
Junior Subordinated Deferrable Interest Debentures (Subordinated
Debentures) of its parent; and (iii) engaging in only those activities
necessary or incidental thereto. These Subordinated Debentures and the
related income effects are eliminated in the consolidated financial
statements. The outstanding Preferred Securities of subsidiary trusts
were as follows:
<TABLE>
<CAPTION>
Liquidation Interest
(at December 31, 1996, in millions) Value Rate
-----------------------------------------------------------------------
<S> <C> <C>
Travelers P&C Capital I $ 800 8.08%
Travelers P&C Capital II 100 8.00%
-----------------------------------------------------------------------
Total $ 900
-----------------------------------------------------------------------
</TABLE>
48
<PAGE> 50
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, Continued
In April 1996, Travelers P&C Capital I, a wholly owned subsidiary trust
of TAP, issued 32 million 8.08% Trust Preferred Securities (TAP I 8.08%
Preferred Securities) with a liquidation preference of $25 per TAP I
8.08% Preferred Security to the public and 989,720 common securities to
TAP, the proceeds of which were invested by Travelers P&C Capital I in
$825 million of 8.08% Junior Subordinated Deferrable Interest Debentures
due 2036 issued by TAP (TAP 8.08% Debentures). The TAP 8.08% Debentures
mature on April 30, 2036 and are redeemable by TAP in whole or in part at
any time after April 30, 2001. Travelers P&C Capital I will use the
proceeds from any such redemption to redeem a like amount of TAP I 8.08%
Preferred Securities and common securities. Distributions on the TAP I
8.08% Preferred Securities and common securities are cumulative and
payable quarterly in arrears.
In May 1996, Travelers P&C Capital II, a wholly owned subsidiary trust of
TAP, issued 4 million 8.00% Trust Preferred Securities (TAP II 8.00%
Preferred Securities; and together with the TAP I 8.08% Preferred
Securities, the TAP Preferred Securities) with a liquidation value of $25
per TAP II 8.00% Preferred Security to the public and 123,720 common
securities to TAP, the proceeds of which were invested by Travelers P&C
Capital II in $103 million of 8.00% Junior Subordinated Deferrable
Interest Debentures issued by TAP (TAP 8.00% Debentures; and together
with the TAP 8.08% Debentures, TAP Debentures). The TAP 8.00% Debentures
mature on May 15, 2036 and are redeemable by TAP in whole or in part at
any time after May 15, 2001. Travelers P&C Capital II will use the
proceeds from any such redemption to redeem a like amount of TAP II 8.00%
Preferred Securities and common securities. Distributions on the TAP II
8.00% Preferred Securities and common securities are cumulative and
payable quarterly in arrears.
TAP has guaranteed, on a subordinated basis, distributions and other
payments due on each series of TAP Preferred Securities. The obligations
of TAP with respect to the TAP Debentures, when considered together with
certain undertakings of TAP with respect to Travelers P&C Capital I and
Travelers P&C Capital II, constitute full and unconditional guarantees by
TAP of Travelers P&C Capital I's and Travelers P&C Capital II's
obligations under the respective TAP Preferred Securities. The TAP
Preferred Securities are classified in the consolidated balance sheet as
"TAP-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debt securities of TAP" at
their liquidation value of $900 million. TAP has the right, at any time,
to defer payments of interest on the TAP Debentures and consequently the
distributions on the TAP Preferred Securities and common securities would
be deferred (though such distributions would continue to accrue with
interest thereon since interest would accrue on the TAP Debentures during
any such extended interest payment period). TAP cannot pay dividends on
its common stock during such deferments. Distributions on the TAP
Preferred Securities have been classified as interest expense in the
consolidated statement of income.
Common Stock
Class A
On April 2, 1996, TAP sold approximately 33 million shares of its Class A
Common Stock to four private investors, including Aetna, for an aggregate
of $525 million. On April 23, 1996, TAP sold in a public offering
approximately 39 million shares of its Class A Common Stock, for net
proceeds of $928 million. On all matters submitted to vote of the TAP
stockholders, holders of Class A Common Stock are entitled to one vote
per share. During 1996, the Company repurchased 406,860 shares of its
Class A Common Stock at an aggregate cost of $13 million.
49
<PAGE> 51
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, Continued
On January 22, 1997, the Company, through its Capital Accumulation Plan
(the Plan), issued 414 thousand shares of the Company's Class A Common
Stock and reissued 502 thousand shares of treasury stock in the form of
restricted stock to participating officers and other key employees. The
restricted stock generally vests after a three-year period. Except under
limited circumstances, the stock cannot be sold or transferred during the
restricted period by the participant, who is required to render service
to the Company during the restricted period. Unearned compensation
expense associated with the restricted stock grants represents the market
value of the Company's common stock at the date of grant and is
recognized as a charge to income ratably over the vesting period.
Class B
In exchange for contributing the outstanding capital stock of The
Travelers Indemnity Company and a capital contribution of approximately
$1.1 billion, TIGI acquired approximately 328 million shares of Class B
Common Stock of TAP. TIGI owns all of the outstanding shares of Class B
Common Stock representing approximately 82% of the economic interest in
TAP. Class B holders are entitled to 10 votes per share on any matter
submitted to vote of the TAP stockholders.
Preferred Stock
In connection with the financing of the acquisition of Aetna P&C,
Travelers Group Inc. purchased from TAP $540 million of Series Z
Preferred Stock of TAP. On April 26, 1996 and May 10, 1996, TAP redeemed
the Series Z Preferred Stock with the proceeds of the public offering of
Class A Common Stock and various Note and Trust Preferred Securities
offerings. Prior to their redemption, TAP paid $4 million of dividends on
the Series Z Preferred Stock.
Dividends
TAP declared dividends (in the form of two quarterly dividends of $0.075
per share each) on its common stock of $60 million ($11 million and $49
million on Class A Common Stock and Class B Common Stock, respectively)
in 1996.
The Company's insurance subsidiaries are currently 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 $647 million in 1997 without prior approval
of the Connecticut Insurance Department.
Statutory Net Income and Surplus
Statutory net income of the Company's insurance subsidiaries was $120
million, which includes $285 million related to the first quarter of
Aetna P&C, for the year ended December 31, 1996. Statutory net income was
$313 million and $67 million for the years ended December 31, 1995 and
1994, respectively.
Statutory capital and surplus of the Company's insurance subsidiaries was
$5.4 billion and $2.4 billion at December 31, 1996 and 1995,
respectively.
50
<PAGE> 52
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. BENEFIT PLANS
Pension Plans
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by Travelers Group Inc. covering the majority of
Travelers Group Inc.'s U.S. employees. Benefits for the qualified plan
are based on an account balance formula. Under this formula, each
employee's accrued benefit can be expressed as an account that is
credited with amounts based upon the employee's pay, length of service
and a specified interest rate, all subject to a minimum benefit level.
This plan is funded in accordance with the Employee Retirement Income
Security Act of 1974 and the Internal Revenue Code.
The Company sponsors a nonqualified, noncontributory defined benefit
pension plan covering the majority of the Company's U.S. employees except
former Aetna P&C employees. Contributions are based on benefits paid. On
April 2, 1996, the Company assumed the obligations of a nonqualified,
noncontributory defined benefit plan covering certain employees who were
former Aetna P&C employees. Benefit accruals ceased as of April 1, 1996.
The Company's share of net pension expense was $17 million, $4 million
and $7 million for 1996, 1995 and 1994, respectively.
Other Benefit Plans
In addition to pension benefits, the Company provides certain health care
and life insurance benefits for retired employees, excluding former Aetna
P&C employees, through a plan sponsored by TIGI. Retirees may elect
certain prepaid health care benefit plans. Life insurance benefits are
generally set at a fixed amount. Beginning January 1, 1996, these plans
were amended to restrict benefit eligibility to retirees and certain
retiree-eligible employees. The cost recognized by the Company for these
benefits represents its allocated share of the total costs of the plan,
net of retiree contributions. The Company's share of the total cost of
the plan for 1996, 1995 and 1994 was $10 million, $14 million and $16
million, respectively.
401(k) Savings Plan
Substantially all employees of the Company are eligible to participate in
a 401(k) savings plan sponsored by Travelers Group Inc. under which a
portion of employee contributions is matched and invested in Series C
Preferred Stock issued by Travelers Group Inc. Effective January 1, 1996,
the Company's matching contribution, for all employees except former
Aetna P&C employees, is 100% of pre-tax contributions up to an annual
maximum of $1,000. Former Aetna P&C employees received a match equal to
100% of their pre-tax contributions up to 5% of salary. Prior to January
1, 1996, the Company matched 50% of the first 5% of pre-tax
contributions, and provided for a variable match based on the
profitability of TIGI and its subsidiaries. The Company's expense was $2
million, $7 million and $8 million in 1996, 1995 and 1994, respectively.
51
<PAGE> 53
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. LEASES
Most leasing functions for TIGI and its subsidiaries are administered by
the Company. Rent expense related to these leases is shared by the
companies on a cost allocation method based generally on estimated usage
by department. Rent expense was $90 million, $61 million and $70 million
in 1996, 1995 and 1994, respectively.
Future minimum annual rentals under noncancellable operating leases are:
<TABLE>
<CAPTION>
(for the year ending December 31, in millions)
--------------------------------------------------------
<S> <C> <C>
1997 $ 88
1998 59
1999 44
2000 29
2001 15
Thereafter 98
--------------------------------------------------------
Total $333
--------------------------------------------------------
</TABLE>
Future sublease rental income of approximately $98 million will partially
offset these commitments.
12. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures contracts, forward contracts and interest rate swaps and caps as
a means of hedging exposure to interest rate and foreign currency risk.
The Company does not hold or issue derivative instruments for trading
purposes. These derivative financial instruments have off-balance-sheet
risk. Financial instruments with off-balance-sheet risk involve, to
varying degrees, elements of credit and market risk in excess of the
amount recognized in the balance sheet. The contract or notional amounts
of these instruments reflect the extent of involvement the Company has in
a particular class of financial instrument. However, the maximum loss of
cash flow associated with these instruments can be less than these
amounts. For forward contracts and interest rate swaps, credit risk is
limited to the amounts calculated to be due the Company on such
contracts. Financial futures contracts have very little credit risk since
organized exchanges are the counterparties.
The Company monitors creditworthiness of counterparties to these
financial instruments by using criteria of acceptable risk that are
consistent with on-balance-sheet financial instruments. The controls
include credit approvals, limits and other monitoring procedures.
The Company may occasionally enter into interest rate swaps in connection
with other financial instruments to provide greater risk diversification
and to better match an asset with a corresponding liability. Under
interest rate swaps, the Company agrees with other parties to exchange,
at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an agreed
notional principal amount. Generally, no cash is exchanged at the outset
of the contract and no principal payments are made by either party. A
single net payment is usually made by one counterparty at each due date.
Swaps are not exchange traded so they are subject to the risk of default
by the counterparty.
52
<PAGE> 54
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS,
Continued
The Company uses exchange traded financial futures to manage its exposure
to changes in interest rates which arise from the need to reinvest
proceeds from the sale or maturity of investments. To hedge against
adverse changes in interest rates, the Company enters long positions in
financial futures contracts which offset asset price changes resulting
from changes in market interest rates until an investment is purchased.
Margin payments are required to enter a futures contract and contract
gains or losses are settled daily in cash. The contract amount of futures
contracts represents the extent of the Company's involvement, but not
future cash requirements, as open positions are typically closed out
prior to the delivery date of the contract.
At December 31, 1996 and 1995, the Company held financial futures
contracts with notional amounts of approximately $522 million and $220
million, respectively, and a deferred loss of $2 million and a deferred
gain of $3 million, respectively. Total gains from financial futures of
$15 million are deferred at December 31, 1996 relating to anticipated
investment purchases expected to occur by the end of the second quarter
of 1997. These deferred gains are reported in other liabilities. At
December 31, 1996 and 1995, the Company's futures contracts had no fair
value because these contracts are marked to market and settled in cash.
At December 31, 1996, the Company held interest rate swaps with notional
amounts of $763 million. The fair value of these financial instruments
was $12 million (gain position) and $13 million (loss position) at
December 31, 1996, which was determined using a discounted cash flow
method. The off-balance-sheet risks of interest rate swaps were not
significant at December 31, 1995.
The off-balance-sheet risks of forward contracts were not significant at
December 31, 1996 and 1995. Financial guarantees are described in note
13.
Fair Value of Financial Instruments
The Company uses various financial instruments in the normal course of
its business. Certain insurance contracts are excluded by Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," and, therefore, are not included in the amounts
discussed.
At December 31, 1996 and 1995, investments in fixed maturities had a fair
value, which equaled carrying value, of $24.4 billion and $10.9 billion,
respectively. See note 4. The carrying values of cash, short-term
securities, mortgage loans, investment income accrued and commercial
paper approximated their fair values.
At December 31, 1996, the carrying value of $1.2 billion of long-term
debt approximated its fair value. Fair value is based upon the average of
the closing bid and asked price at December 31, 1996.
The carrying values of $1.4 billion and $747 million of financial
instruments classified as other assets approximated their fair values at
December 31, 1996 and 1995, respectively. The carrying values of $3.5
billion and $1.4 billion of financial instruments classified as other
liabilities at December 31, 1996 and 1995, respectively, also
approximated their fair values. Fair value is determined using various
methods including discounted cash flows, as appropriate for the various
financial instruments.
53
<PAGE> 55
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance-Sheet Risk
See note 12 and the following, "Guarantees of the Securities of Other
Issuers," for a discussion of financial instruments with
off-balance-sheet risk.
In the normal course of business, the Company issues fixed and variable
rate loan commitments and has unfunded commitments to partnerships. The
off-balance-sheet risks of these financial instruments were not
significant at December 31, 1996 and 1995.
Guarantees of the Securities of Other Issuers
The Company underwrote insurance guaranteeing the securities of other
issuers, primarily corporate and industrial revenue bond issuers. The
aggregate net amount of guarantees of principal and interest for such
securities was approximately $729 million ($8.3 billion before
reinsurance) and $127 million ($1.7 billion before reinsurance) at
December 31, 1996 and 1995, respectively. The scheduled maturities for
these guarantees are $142 million, $250 million, $8 million, $13 million
and $316 million for 1997, 1998, 1999, 2000 and 2001 and thereafter,
respectively.
Reserves for the financial guarantee business, which includes reserves
for defaults, incurred but not reported losses and unearned premiums,
totaled $71 million at December 31, 1996 and were not significant at
December 31, 1995.
Included in the gross amounts are financial guarantees representing the
Company's participation in the Municipal Bond Insurance Association's
guarantee of municipal bond obligations of $7.6 billion and $1.6 billion
at December 31, 1996 and 1995, respectively. The bonds are generally
rated A or above, and the Company's participation has been reinsured.
It is not practicable to estimate a fair value for the Company's
financial guarantees because there is no quoted market price for such
contracts, it is not practicable to reliably estimate the timing and
amount of all future cash flows due to the unique nature of each of these
contracts, and the Company no longer writes such guarantees.
Litigation
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 December 31,
1996, the Company believes, based on information currently available,
that the ultimate resolution of these legal proceedings would not be
likely to have a material adverse effect on its results of operations,
financial condition or liquidity.
54
<PAGE> 56
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. RELATED PARTY TRANSACTIONS
The principal banking functions, including payment of salaries and
expenses, for certain subsidiaries and affiliates of TIGI, including the
Company, are handled by TIC. The Company provides certain administrative
services to TIC. Settlements for these functions between the Company and
its affiliates are made regularly. Investment advisory and management
services and data processing services are provided by affiliated
companies. Charges for these services are shared by the companies on cost
allocation methods based generally on estimated usage by department.
An affiliate maintains a short-term investment pool in which the Company
participates. The positions of each company participating in the pool are
calculated and adjusted daily. At December 31, 1996 and 1995, the pool
totaled approximately $2.9 billion and $2.2 billion, respectively. The
Company's share of the pool amounted to $1.9 billion and $722 million at
December 31, 1996 and 1995, respectively, and is included in short-term
securities in the consolidated balance sheet.
The Company participates in a stock option plan sponsored by Travelers
Group Inc. that provides for the granting of stock options in Travelers
Group Inc. common stock to officers and key employees.
The Company applies APB 25 and related interpretations in accounting for
stock options. Since stock options under the Travelers Group Inc. plans
are issued at fair market value on the date of award, no compensation
cost has been recognized for these awards. FAS 123 provides an
alternative to APB 25 whereby fair values may be ascribed to options
using a valuation model and amortized to compensation cost over the
vesting period of the options.
Had the Company applied FAS 123 in accounting for Travelers Group Inc.
stock options, net income and net income per share would have been the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
(for the year ended December 31, Net Net income Net Net income
in millions, except per share amounts) income per share income per share
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income, as reported $391 $1.05 $419 $1.42
FAS 123 pro forma adjustments, after tax (6) (0.01) (2) -
--------------------------------------------------------------------------------------------------------
Net income, pro forma $385 $1.04 $417 $1.42
--------------------------------------------------------------------------------------------------------
</TABLE>
Most leasing functions for TIGI and its subsidiaries are administered by
the Company. See note 11.
The Company leases new furniture and equipment from a noninsurance
subsidiary of TIGI. The rental expense charged to the Company for this
furniture and equipment was $44 million, $39 million and $26 million in
1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the Company had an investment of $55
million and $34 million, respectively, in bonds of its affiliate,
Commercial Credit Company. This is included in fixed maturities in the
consolidated balance sheet.
The Company participates in reinsurance agreements with TIC and has
participated in reinsurance agreements with TIGI. See note 5.
55
<PAGE> 57
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. RELATED PARTY TRANSACTIONS, Continued
The Company purchases annuities from affiliates to settle certain claims.
Reinsurance recoverables at December 31, 1996 and 1995 included $793
million and $672 million, respectively, related to these annuities.
15. NONCASH FINANCING AND INVESTING ACTIVITIES
Significant noncash financing activities include the transfer of
approximately 328 million shares of Class B Common Stock to TIGI in
exchange for the outstanding capital stock of The Travelers Indemnity
Company in 1996. See note 2.
Significant noncash investing activities include: a) the conversion of
$24 million of convertible preferred stock for $24 million of common
stock in 1996; b) the conversion of $38 million and $23 million of
convertible bonds for $38 million and $23 million of common stock in 1996
and 1995, respectively; c) the conversion of $31 million of convertible
preferred stock for $31 million of convertible bonds in 1995; d) the
receipt of $28 million of shares of common stock distributed by a venture
capital limited partnership in 1994; and e) the acquisition of real
estate through foreclosures of mortgage loans amounting to $14 million,
$13 million and $24 million in 1996, 1995 and 1994, respectively.
56
<PAGE> 58
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
(1996, in millions, except per share amounts) Quarter Quarter Quarter Quarter Total
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $1,152 $2,202 $2,452 $2,391 $8,197
Total expenses 1,027 2,563 2,099 2,021 7,710
--------------------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes 125 (361) 353 370 487
Federal income tax expense (benefit) 27 (145) 106 108 96
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 98 $ (216) $ 247 $ 262 $ 391
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share of common stock $ 0.33 $(0.59) $ 0.62 $ 0.65 $ 1.05
--------------------------------------------------------------------------------------------------------------------------
Common stock price
High N/A $ 28 1/2 $ 29 3/8 $ 36 $ 36
Low N/A $ 26 $ 23 1/8 $ 28 $ 23 1/8
Close N/A $ 28 3/8 $ 27 1/2 $ 35 3/8 $ 35 3/8
Dividends per share of common stock N/A - $0.075 $0.075 $0.150
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
(1995, in millions, except per share amounts) Quarter Quarter Quarter Quarter Total
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $1,162 $1,183 $1,175 $1,049 $4,569
Total expenses 1,072 1,056 1,031 859 4,018
---------------------------------------------------------------------------------------------------------------
Income before federal income taxes 90 127 144 190 551
Federal income tax expense 15 28 34 55 132
---------------------------------------------------------------------------------------------------------------
Net income $ 75 $ 99 $ 110 $ 135 $ 419
---------------------------------------------------------------------------------------------------------------
Net income per share of common stock $ 0.25 $ 0.34 $ 0.37 $ 0.46 $ 1.42
---------------------------------------------------------------------------------------------------------------
</TABLE>
Includes amounts related to Aetna P&C from April 2, 1996, the date of
acquisition.
1996 results include charges of $391 million and $32 million in the
second and fourth quarter, respectively, related to the acquisition of
Aetna P&C. See note 2.
Due to changes in the number of average shares outstanding during 1996,
quarterly earnings per share of common stock do not add to the total for
the year.
Common stock prices for 1995 and for the first quarter of 1996 are not
applicable as shares began trading in April 1996.
57
<PAGE> 59
Independent Auditors' Report
The Board of Directors and Stockholders
Travelers Property Casualty Corp.:
We have audited the accompanying consolidated balance sheets of Travelers
Property Casualty Corp. (formerly Travelers/Aetna Property Casualty Corp.) and
Subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Travelers Property
Casualty Corp. and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations, changes in stockholders' equity and their cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
January 17, 1997
58
<PAGE> 1
Exhibit 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Travelers Property Casualty Corp.:
We consent to incorporation by reference in the Registration Statements on:
- - Form S-3 Nos. 333-2682, 333-2684, and 333-30293; and
- - Form S-8 Nos. 333-07073, 333-07077, 333-10143 and 333-25605.
of Travelers Property Casualty Corp. (formerly Travelers/Aetna Property
Casualty Corp.) of our reports dated January 17, 1997, relating to the
consolidated balance sheets of Travelers Property Casualty Corp. and
Subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996 and the related
financial statement schedules, which reports are incorporated by reference in
the annual report on Form 10-K/A-2 of Travelers Property Casualty Corp. for the
year ended December 31, 1996.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
October 24, 1997
<PAGE> 1
Exhibit 23.02
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Aetna Services, Inc. (formerly Aetna Life and Casualty Company):
We consent to incorporation by reference in the Registration Statements on:
- - Form S-3 Nos. 333-2682, 333-2684, and 333-30293; and
- - Form S-8 Nos. 333-07073, 333-07077, 333-10143 and 333-25605.
of Travelers Property Casualty Corp. (formerly Travelers/Aetna Property Casualty
Corp.) of our report dated February 28, 1996, relating to the combined balance
sheets of The Aetna Casualty and Surety Company and The Standard Fire Insurance
Company and their Subsidiaries as of December 31, 1995 and 1994, and the related
combined statements of income, shareholder's equity and cash flows for each of
the years in the three-year period ended December 31, 1995, which report is
incorporated by reference in the annual report on Form 10-K/A-2 of Travelers
Property Casualty Corp. for the year ended December 31, 1996. Our report refers
to a change to the methods of accounting for certain investments in debt and
equity securities, workers' compensation life table indemnity reserves and
retrospectively rated reinsurance contracts in 1993.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
October 24, 1997
